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 | Monday, November 2, 2009 at 6:40:51 mst
Comment ID: #1
Name: Jasmine
E-mail: uslifemag(at)gmail.com
URL: http://rationaleducation.blogspot.com
Paul,
I had a hoot at the expense of this typo in your post! #2 "cost-of-loving"!!! (I guess one could say that by inflating the currency the political leaders are expressing their cost (charges) of loving their subjects!!). That was too funny for me to pass up.
Jasmine |
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| Monday, November 2, 2009 at 6:48:23 mst
Comment ID: #2
Name: KPO'M
E-mail: ka84796(at)comcast.net
I don't think it's hyperinflation, but clearly the dollar is back on its downward slide after temporarily rebounding last year during the financial crisis. In real terms, the cost of imported goods has increased dramatically over the last 10 years. I'd expect that the dollar will continue a gradual decline, which will eventually translate into higher general prices. |
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| Monday, November 2, 2009 at 7:46:43 mst
Comment ID: #3
Name: Paul Hsieh
E-mail: paul(at)geekpress(dot)com
URL: http://www.geekpress.com
Jasmine: Thanks for catching that (inadvertent) typo! I've fixed it now. |
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| Monday, November 2, 2009 at 8:05:39 mst
Comment ID: #4
Name: softwarenerd
E-mail: softwarenerd(at)gmail.com
I think any prediction about this is *primarily* about how the politics will play out. My guess is that things will be business as usual until voters start to see prices rise, particularly key prices like gas and food. At that point, it is likely that latent fears of high deficits will surface. I assume that this will give some President the political cover to talk about everyone making sacrifices, and this will mean mostly higher taxes. I assume that social-security payouts will become "means tested" where anyone who is (say) above the 75%-ile sees even less receipts than they would otherwise have got. (They're already partly means-tested by being taxable.)
I think predictions are really hard to make, because a country can sometimes go from bad to worse, and sometimes a person with the right political charisma and enough of the right ideas can emerge and convince people to turn things around.
Personally, I don't expect huge rises in the prices of consumption goods in the near future. Credit going to such purchases has seen a huge contraction. |
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| Monday, November 2, 2009 at 8:33:44 mst
Comment ID: #5
Name: Chris L
> 3) Is there some big pot of money out there that the politicians will be tempted to loot in order to buy themselves more time?
Government-owned land like National Parks could be sold. As with looting private pensions, it would only buy time. The fundamental problem with entitlements and the entitlement mentality would remain.
The recent fiscal crisis, triggered most immediately by the housing bubble, merely accelerated the Social Security / Medicare / Perscription Drug day of reckoning.
Increased interest in Ayn Rand is heartening. That, and the general American can-do spirit, are the main sources for long-term optimism.
Short-term predicitions aren't really possible, even for economists - particularly when there is a lot of volatility. The one saying I like is "Anything that can't continue forever, won't."
In the mean time, you may wish to gird any loins you have lying around. |
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| Monday, November 2, 2009 at 9:42:38 mst
Comment ID: #6
Name: Rachel
E-mail: rachelminer(at)mac.com
I'm fascinated to hear what readers say because I'm at a loss to predict as well. My husband and I have been researching the option of buying gold/silver, but that has its own drawbacks. |
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| Monday, November 2, 2009 at 9:53:28 mst
Comment ID: #7
Name: Steve D'Ippolito
Under current circumstances, with the viros calling a lot of the shots, I don't imagine ANY federal land, much less national parks, being sold off. Someone would just "exploit" and "rape" it after all (probably putting more CO2 into the atmosphere in the process). |
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| Monday, November 2, 2009 at 10:17:59 mst
Comment ID: #8
Name: Chris L
Drudge links to a recent article by Roubini, with a different take on troubles looming in the near future. He's worrying not about the dollar's collapse, but rather what would happen when its strength is reasserted.
http://www.ft.com/cms/s/0/9a5b3216-c70b-11de-bb6f-00144feab49a.html
It's probably not possible to be fully protected against any kind of looming economic problem. Distributing your eggs amongst different baskets will help. What will also help in the long-run is for more and more people to follow Rand's advice: "Stop supporting your own destroyers." That's not primarily things like university donations, but more fundamentally the moral support tacitly given to many of our currently-undeserving cultural institutions (media, churches, academia, entertainment, government programs, political parties, etc.) |
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| Monday, November 2, 2009 at 10:33:43 mst
Comment ID: #9
Name: Sajid
I finished reading the McArdle article and I guess I don't have any original insights. However, I do agree with her on the hyperinflation issue in that it has happened too many times before for the Fed to be totally clueless if it starts happening here in America.
McArdle says:
"The first step to hyperinflating would be some sort of radical step to curtail the Fed's power--and that radical step would, as noted above, make it very hard for the government to borrow new money."
I don't see this happening anytime soon as one of the core principles of American political organization is checks and balances. I can see a politician blatantly trying to create something from nothing, but I don't see an economist (even Paul Krugman uses reams of historical data to back up his arguments) resorting to hyperinflation to run the economy.
On Questions (2) and (3) I am more negative, not because the core economic principles are fundamentally unsound (even though they may be) but because the core philosophical principles are unsound. I can see (2) happening because of the renewed interest in Ayn Rand, but especially if Obamacare passes, (3) seems more likely. The correlation between the marginal tax rate and economic growth is well known. Finding a "new pot to loot" is equivalent to taxing the rich more and there comes a point when it is no longer economically viable to do so. There is still a healthy fear of communism and socialism in America so I don't think we will reach that point but I am not very optimistic about social security and Medicare heading in the right direction. The worst case scenario seems to be settling for a 1-2% European sluggish growth rate. Unless of course even that 1% is unsustainable given the entitlement debt burdens taken on by the US government. In that case I have no idea what will happen.
I also want to point out another dangerous scenario. Say that somehow we can afford Medicare and Social Security at the expense of sluggish growth. In such a case we will lose our competitive economic advantage to any nation that decides to use more economically free policies and losing an economic advantage, in todays world, is equivalent to losing a political advantage. |
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| Monday, November 2, 2009 at 11:47:16 mst
Comment ID: #10
Name: SurahAhriman
This has been a topic I've been idly speculating on for a week or so now. I think the sheer volume of wealth destruction that happened in the last year gives the government some leeway in inflating the money supply. If for example, the Fed poofs a trillion, and fractional-reserve banking multiplies that into 10 trillion, you'd bet 10 trillion worth of inflation. But if 5 trillion vanished in roughly the same time frame, that 10 trillion would have a much smaller inflationary impact. |
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| Monday, November 2, 2009 at 12:26:38 mst
Comment ID: #11
Name: Galileo Blogs
E-mail: rayniles(at)rcniles.com
URL: http://galileoblogs.blogspot.com
Hyper-inflation requires a moral failure to go along with its economic preconditions: large government debts and recurring large budget deficits. A good example was the German hyper-inflation that followed World War I. The reparations of the Versailles treaty were a large burden, but could have been paid or re-negotiated by the Germans, given the political will. However, the Germans conceived of hyper-inflation as a way to inflate away their reparations burden. They thought they were "putting one over" on the Allies. However, the Germans only cleverly succeeded in inflicting massive damage to their own economy. (source: "The Ascent of Money" by Niall Ferguson)
Clearly, immorality was also present in the current Zimbabwean hyper-inflation where a vicious dictator attempted to create goods from nothing through the unlimited printing of fiat currency.
The question is: what will be the moral argument that will win the day in the United States? We have the pre-conditions for a large inflation: a large debt and huge recurring budget deficits that add to that debt. Yet, I do not think our debt is so large that we have to "print it away" through inflation. Instead, what is required is a public commitment to reducing government spending in order to shrink our budget deficits. Actual balance will not be necessary as long as the deficit is small enough that our debt will not grow too fast relative to the pace of economic growth. (In other words, the key variable that must stop growing and eventually start shrinking is the debt-to-GDP ratio.)
We are not near the point of no return where the debt itself becomes unsustainably large, but we are moving closer to that day. I do not know exactly when that day will arrive, but another decade of government deficit spending at this rate will, in all likelihood, bring us there.
Having said that, there is still quite a bit of time for a new Reagan or hopefully someone better to come along to slow down the growth of government spending. If that happens, we will not have hyper-inflation. |
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| Monday, November 2, 2009 at 14:17:32 mst
Comment ID: #12
Name: RT
1. "Is it possible that our monetary policies might push us into hyperinflation even if our central bankers don't want it and are trying to avoid it?"
Absolutely, the Fed is as clueless as the rest of us as to the ultimate effects of its actions -- and they know it. That's what makes them so dangerous. All they do is push and prod interet rates up and down, hoping that they will get growth without (too much) inflation; or hoping that they can rein in inflation without hurting growth too much. Yes -- "hope" is pretty much their strategy. Moreover, according to their Keynesian orthodoxy, they are terrified of deflation (believing it can become a vicious spiral from which escape is impossible), while they believe that inflation is "containable" and dealable-with. So they are more likely than not to err on the side of too much inflation going forward. In fact, they've all but explicitly said that that is what their strategy is. How that ultimately plays out is anyone's guess, though. It's also possible that we get continued deflation even if the central bankers don't want it, and are doing everything they can to avoid it.
2. My strong bet is de facto cuts. A big one for social security would be to push back the retirement age (say to 75) which could be phased in over many years; another one would be to tax back benefits above a certain level. Also as you allude they could cut the COLA. But even all that would take some pretty strong political will. Christ, where is Alan Greenspan to fix Social Security when you really need him?? ;p |
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| Monday, November 2, 2009 at 20:00:40 mst
Comment ID: #13
Name: subzero
Answer to question 1: Yes, the dollar can collapse even if the central bankers don't want it and do their best to sustain it. The short reason is that more than half of the existent dollars as used as reserves. If the world transitions to another reserve, there will possibly by hyperinflation. Argument:
The fact that the dollar is the reverse currency entails a risk that no other currency has. There is a higher amount of dollars that can be dump on the market due to a panic. Note that more than half of the dollars are owned by foreigners. So if there is a terrorist attack, a stock market crash, or a debt default, this could weaken the already weak dollar further and trigger a run. Because there are so many dollars out there, there could be a supply shock, where the value of the dollar drops dramatically in a few days. By that point the confidence in the dollar is gone. Then it's all over.
By that point you can expect a temporary return to a barter system which can result in riots, secession, and massive death. |
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| Tuesday, November 3, 2009 at 5:48:03 mst
Comment ID: #14
Name: Daniel Iamoura:PhilosoPhysicist
E-mail: Iamoura(at)ymail.com
URL: http://www.youtube.com/user/GaltsGulchPortal
If anyone else sees the blatant breach of the Law of Causality in all of the above musings; you should e-mail me to book your place at Galt's I-land Gulch this June.
And I mean it.
I $ I |
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| Tuesday, November 3, 2009 at 7:50:38 mst
Comment ID: #15
Name: KPO'M
E-mail: ka84796(at)comcast.net
Along those same lines, the WSJ offers an economic analysis:
http://online.wsj.com/article/SB125720159912223873.html?mod=WSJ_hpp ...
What strikes me is that Geanakoplos' conclusion that increasing leverage increases volatility and leads to bubbles isn't anything new. Austrian economics predicts exactly that. Faith in all those econometric models that the "geniuses" have been putting together for the past 80 years is where the problem lies. |
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| Friday, November 6, 2009 at 3:03:16 mst
Comment ID: #16
Name: Jim May
E-mail: seerak(at)gmail.com
The key to these questions is simply this: for the most part, the Fed and the government are not run by James Taggarts (who would quite happily run the entire works over the cliff).
They are still run largely by those whose greed for the unearned drives them to siphon more and more blood from the host, but who remain dimly aware that killing the host will kill them also. They are caught between the conflict betwen their desire to bleed us, and their desire for the gravy train to continue.
This means that no matter what sort of picture they have of things, their goal is twofold:
a) Whatever is going to happen, must happen slowly enough for people (and themselves) to adapt and prepare. NO DISRUPTIONS. That means no hyperinflation, and no default on bonds.
b) By delaying things as long as possible, they seek to obfuscate causality. The inflation of the 1970's, for example, originated in the 1960's, with government spending on Vietnam and the Great Society welfare expansion; but it's Jimmy Carter who is remembered as the "inflation president".
The reason why they do this is to enable those operating on bad economic theories (like McCardle) to go around telling Austrians that "the data doesn't track you". Oh, it does, Megan, but you have to look at things on the scale of years and decades, and account for all the varying obfuscatory policies (such as deficit financing). The bigger the economy, the larger the scales of time and wealth involved.
In our current situation, the delaying factor is that the bulk of the created money is sitting on bank balance sheets to enable them to appear solvent. Borrowing is another delaying tactic... instead of inflating now, borrow now, and then inflate later when the bonds mature.
Therefore, these are my answers to Paul's questions:
1. No. The sheer volume involved, as well as the dollar's status as the world's reserve currency serve to slow the process down enough that we won't see hyperinflation. Contrary to subzero's point above, the dollar's reserve status is a stabilizing factor, because large dollar holders also stand to lose if the dollar drops precipitously; witness the recent action by a few foreign central banks to support the dollar. The world will not dump dollars willy-nilly. No Disruptions. The flip side, however, is that if the world does move slowly towards a new reserve currency, those reserves will act as a large and deep source of dollars to flood the markets for *years* as they are sold off for other currencies (such as gold).
2. No. Slashing entitlements is not an option. This would require sufficient cultural change, of the sort which would radically improve the overall picture in many more ways than this one, if it happened. Entitlements buy votes.
3. Hell yes. Nationalizing the equivalent of 401(k)'s actually did happen in Argentina, I have heard.
The goal of policy is the "white swan" of a very long, protracted period of inflation, longer and more impoverishing than that of the 1970's. Deep stagflation, with 10% unemployment and inflation, is going to be the "new normal", along with higher taxes and high inflation. America's economic stature in the world will be significantly shrunk, relative to the rest of the world (assuming that they don't follow our lead). All the tricks, from fudging the inflation stats to reduce debt and entitlements by stealth (see www.shadowstats.com for the "real"inflation data) to incremental tax increases will be used, over decades.
The "black swan" is if something breaks loose despite the Fed's efforts. Both hyperinflation and default on government debt (not including entitlements) qualify. Ominously, fudging the numbers (as with the inflation data) increases this risk, because it increases the likelihood of bad economic decisions across the board... which adds to the accumulated error which needs correcting.
The government bond market is the one to watch here... sooner or later, rates *must* rise. Borrowing is the government's chief delaying/obfuscating mechanism and safety valve. A sharp constriction in bond sales forces the government's hand, and to some extent that threat loomed over the last year; the biggest buyer of T-bills since March was the Fed -- with printed dollars.
In summary: both hyperinflation and debt default are cataclysmic "black swans" results, each for their own reasons. Each one ends the gravy train for a long time. |
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