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Guest Post: Fuck The Deficit (Or Will The Deficit End Up Fucking Us?)
Fuck The Deficit (Or Will The Deficit End Up Fucking Us?)
Submitted by Gonzalo Lira
Currently, the United States is conducting one of the most remarkable experiments in fiscal finances in world history.
The
American economy is in a severe recession. Coupled with that—as both
partial cause and partial effect of the recession—the United States'
banking system crashed in the Fall of '08, a crash which in many ways is
still ongoing as I write this, nearly two years later.
American economy is in a severe recession. Coupled with that—as both
partial cause and partial effect of the recession—the United States'
banking system crashed in the Fall of '08, a crash which in many ways is
still ongoing as I write this, nearly two years later.
What
the recession and the concomitant banking crisis have caused are,
essentially, a fall in aggregate demand levels, as well as a fall in
aggregate asset value. In other words, the population is spending less,
and asset values have deteriorated, both nominally and as compared to
any basket of hard commodities.
the recession and the concomitant banking crisis have caused are,
essentially, a fall in aggregate demand levels, as well as a fall in
aggregate asset value. In other words, the population is spending less,
and asset values have deteriorated, both nominally and as compared to
any basket of hard commodities.
These are the
two metrics which the two principal camps of current American
macroeconomic thought consider vital. “Saltwater” economists look to
aggregate demand levels, while “freshwater” economists look to aggregate
asset value—each of these camps view their fetish-object as the
cornerstone for economic growth, development and prosperity. Naturally,
when either of these camps see their juju slide, they freak out. They
declare the economy to be “in crisis”—and further declare that
“something must be done”.
two metrics which the two principal camps of current American
macroeconomic thought consider vital. “Saltwater” economists look to
aggregate demand levels, while “freshwater” economists look to aggregate
asset value—each of these camps view their fetish-object as the
cornerstone for economic growth, development and prosperity. Naturally,
when either of these camps see their juju slide, they freak out. They
declare the economy to be “in crisis”—and further declare that
“something must be done”.
Something has been done: It's called The Deficit.
To
combat the fall in aggregate demand levels, the Federal Government has
embarked on a massive spending program. This spending program has been
financed by debt issued by the Treasury. The way things are looking,
another big spending package is in the offing some time soon—that should
keep the “saltwaters” happy.
combat the fall in aggregate demand levels, the Federal Government has
embarked on a massive spending program. This spending program has been
financed by debt issued by the Treasury. The way things are looking,
another big spending package is in the offing some time soon—that should
keep the “saltwaters” happy.
On the other
hand, to combat the fall in aggregate asset value—and keep the
“freshwaters” happy—the Federal Reserve Board has embarked on an asset
purchase program that is also massive and unprecedented.
hand, to combat the fall in aggregate asset value—and keep the
“freshwaters” happy—the Federal Reserve Board has embarked on an asset
purchase program that is also massive and unprecedented.
Through a
fairly complex scheme that seems to be deliberately opaque, the Fed has
relieved the Too Big To Fail banks of their deteriorated assets, and
given them cash, in an ongoing process. The Too Big To Fail banks have
turned around and used that cash to purchase Treasury bonds—which are
being used to finance this massive Federal Government spending. Whether
there has been collusion between the Treasury, the Fed and the TBTF
banks is for the courts and the historians to decide—but prima facie, it would certainly look so.
fairly complex scheme that seems to be deliberately opaque, the Fed has
relieved the Too Big To Fail banks of their deteriorated assets, and
given them cash, in an ongoing process. The Too Big To Fail banks have
turned around and used that cash to purchase Treasury bonds—which are
being used to finance this massive Federal Government spending. Whether
there has been collusion between the Treasury, the Fed and the TBTF
banks is for the courts and the historians to decide—but prima facie, it would certainly look so.
This
two-sided scheme—more Federal Government spending on the one hand, and
more propping up of asset values on the other—adds up to The Deficit.
two-sided scheme—more Federal Government spending on the one hand, and
more propping up of asset values on the other—adds up to The Deficit.
When
I refer to it as The Deficit (it is too majestic for the lowercase), I
am not referring to a mere fiscal shortfall—I am referring to a policy
mentality. This policy mentality—shared by both “saltwater” and
“freshwater” economists—effectively amounts to a suspension of the
notion of opportunity cost. In the realm of The Deficit, the
macroeconomic policy questions cease to be “either/or”—they become
“both/and”. All policy options can be achieved because—according to the
macroeconomic policy known as The Deficit—the American fiscal shortfall
can never bring the United States to bankruptcy. As Dick Cheney so
memorably phrased it, deficits don’t matter—so The Deficit as a
macroeconomic policy can continue indefinitely.
I refer to it as The Deficit (it is too majestic for the lowercase), I
am not referring to a mere fiscal shortfall—I am referring to a policy
mentality. This policy mentality—shared by both “saltwater” and
“freshwater” economists—effectively amounts to a suspension of the
notion of opportunity cost. In the realm of The Deficit, the
macroeconomic policy questions cease to be “either/or”—they become
“both/and”. All policy options can be achieved because—according to the
macroeconomic policy known as The Deficit—the American fiscal shortfall
can never bring the United States to bankruptcy. As Dick Cheney so
memorably phrased it, deficits don’t matter—so The Deficit as a
macroeconomic policy can continue indefinitely.
In
a historical sense, The Deficit is unprecedented: Never before in world
history has a reserve currency provider gone into this much debt, with a
currency that floats on nothing but air. This is the key issue: The
dollar is a fiat currency. The Roman, French, British, Austro-Hungarian
empires, all of them world-historical empires in their times, all might
have gone way into the red on more than one occasion—but none has ever
done it on a purely fiat currency before.
a historical sense, The Deficit is unprecedented: Never before in world
history has a reserve currency provider gone into this much debt, with a
currency that floats on nothing but air. This is the key issue: The
dollar is a fiat currency. The Roman, French, British, Austro-Hungarian
empires, all of them world-historical empires in their times, all might
have gone way into the red on more than one occasion—but none has ever
done it on a purely fiat currency before.
America is the first to do so (“U!! S!! A!! WE’RE!! NUMBER!! ONE!!”). Hooray.
The Deficit is the policy that the United States is implementing, and it has had several effects:
1.
The most obvious, it has allowed the Federal Government to finance
every last one of its spending programs, in an effort to boost aggregate
demand levels. No need for Obama’s vaunted talk of “tough choices”—the
Federal Government has officially been renamed the Great American Teet.
The most obvious, it has allowed the Federal Government to finance
every last one of its spending programs, in an effort to boost aggregate
demand levels. No need for Obama’s vaunted talk of “tough choices”—the
Federal Government has officially been renamed the Great American Teet.
2.
It has prevented the TBTF banks from acknowledging the plain fact that
they are broke. Indeed, the Fed asset buy-back has effectively kept the
banks solvent in a practical sense—they have money to pay off any of
their liabilities. But more importantly from the Fed's point of view, it
has sustained deteriorated aggregate asset values in the overall
economy, at least on a nominal basis.
It has prevented the TBTF banks from acknowledging the plain fact that
they are broke. Indeed, the Fed asset buy-back has effectively kept the
banks solvent in a practical sense—they have money to pay off any of
their liabilities. But more importantly from the Fed's point of view, it
has sustained deteriorated aggregate asset values in the overall
economy, at least on a nominal basis.
3. It has created a fiscal shortfall of staggering proportions—currently about 100% of GDP, and growing without end.
4.
Finally—and most importantly—it has created the generalized impression
among policy makers that fiscal shortfalls indeed do not matter, and
that liquidity and stimulus simply mustbe provided whenever there is a crisis, the rationale being that the economy is too “fragile” to withstand the “shock”.
Finally—and most importantly—it has created the generalized impression
among policy makers that fiscal shortfalls indeed do not matter, and
that liquidity and stimulus simply mustbe provided whenever there is a crisis, the rationale being that the economy is too “fragile” to withstand the “shock”.
This
is a key effect of this policy, I would argue the most important of all
of the effects: The fact that the fiscal shortfall has crossed the 100%
of GDP mark, and nothing bad has happened has given everyone a false
sense of security—the sky has not fallen, the world has not ended.
is a key effect of this policy, I would argue the most important of all
of the effects: The fact that the fiscal shortfall has crossed the 100%
of GDP mark, and nothing bad has happened has given everyone a false
sense of security—the sky has not fallen, the world has not ended.
Therefore,
as a practical political matter, the people with decision-making
authority in American public policy have effectively said, “Fuck The
Deficit, let’s keep on truckin’.”
as a practical political matter, the people with decision-making
authority in American public policy have effectively said, “Fuck The
Deficit, let’s keep on truckin’.”
But what if
the sky does fall? What if we are simply living in the lull before the
fall? I mean, it can't be that this enormous fiscal shortfall can
continue growing indefinitely, can it? It has to lead to some kind of
ruinous effect, right? Like drinking a bottle of scotch in a single
sitting—you feel good while you're doing it, sure, but you know you’ll
feel like death warmed over soon enough, right?
the sky does fall? What if we are simply living in the lull before the
fall? I mean, it can't be that this enormous fiscal shortfall can
continue growing indefinitely, can it? It has to lead to some kind of
ruinous effect, right? Like drinking a bottle of scotch in a single
sitting—you feel good while you're doing it, sure, but you know you’ll
feel like death warmed over soon enough, right?
I mean, The Deficit will eventually come back and bite us on the ass—right?
Lately, there have been an awful lot of clever people explaining how, in fact, The Deficit will not harm us in the long term.
Very sensible-sounding words, and seemingly-sophisticated arguments, are deployed to make precisely this point. Others further argue
that The Deficit, because of its sheer size, will become its own growth
engine, and hence will grow the economy to such a point that The
Deficit will essentially pay for itself—a bit of financial magic that
almost seems believable.
that The Deficit, because of its sheer size, will become its own growth
engine, and hence will grow the economy to such a point that The
Deficit will essentially pay for itself—a bit of financial magic that
almost seems believable.
And to any talk that
The Deficit and the stealth-monetization going on might lead to
hyperinflation, these clever people are scoffing and saying, in effect,
“Haven’t you heard the news? We got deflation, pal—forget about
inflation, let alone hyperinflation: We gotta spend-spend-spend, in
order to whip that deflationary monkey. After that’s taken care of, and
the economy’s growing again, that’s when we’ll be able to bring down The
Deficit.”
The Deficit and the stealth-monetization going on might lead to
hyperinflation, these clever people are scoffing and saying, in effect,
“Haven’t you heard the news? We got deflation, pal—forget about
inflation, let alone hyperinflation: We gotta spend-spend-spend, in
order to whip that deflationary monkey. After that’s taken care of, and
the economy’s growing again, that’s when we’ll be able to bring down The
Deficit.”
Recently, I had a private
exchange with a financial blogger, about precisely this point. This
blogger—who should have known better—argued that since we were in a
deflationary environment, there were currently no inflationary
pressures, and none in the forseeable future. Therefore, she argued,
since the economy was experiencing a deflationary trough and inflation
highly unlikely, then hyperinflation was an impossibility. Nay, an
absurdity, or so she claimed.
exchange with a financial blogger, about precisely this point. This
blogger—who should have known better—argued that since we were in a
deflationary environment, there were currently no inflationary
pressures, and none in the forseeable future. Therefore, she argued,
since the economy was experiencing a deflationary trough and inflation
highly unlikely, then hyperinflation was an impossibility. Nay, an
absurdity, or so she claimed.
She's clever, but she made a common mistake—she confused inflation with hyperinflation.
Granted,
they do seem to look alike—both of them are essentially money losing
value against wages, commodities and goods-and-services over time.
Commonly—and mistakenly—hyperinflation is viewed as simply
inflation-plus, inflation-XL. After all, the name seems to imply it: Hyper-inflation. Inflation’s big brother. Inflation with an extra bit of kick.
they do seem to look alike—both of them are essentially money losing
value against wages, commodities and goods-and-services over time.
Commonly—and mistakenly—hyperinflation is viewed as simply
inflation-plus, inflation-XL. After all, the name seems to imply it: Hyper-inflation. Inflation’s big brother. Inflation with an extra bit of kick.
This is a dangerous fallacy.
Inflation
is indeed the economy “over-heating”, in Neo-Keynesian parlance—wage
pressures, say, dragging prices up across the economy, or perhaps raw
commodity prices doing the same. Inflation can gallop up to 25% a year,
but still remain a distinct animal from hyperinflation. Ordinarily,
inflation is simply the economy eating up commodities—be it raw
materials or labor—so as to meet demand.
is indeed the economy “over-heating”, in Neo-Keynesian parlance—wage
pressures, say, dragging prices up across the economy, or perhaps raw
commodity prices doing the same. Inflation can gallop up to 25% a year,
but still remain a distinct animal from hyperinflation. Ordinarily,
inflation is simply the economy eating up commodities—be it raw
materials or labor—so as to meet demand.
Hyperinflation,
however, is the loss of faith in money. It is not that prices are
rising because the economy is moving forward—it’s that prices are rising
because nobody believes that money is worth a damn anymore.
however, is the loss of faith in money. It is not that prices are
rising because the economy is moving forward—it’s that prices are rising
because nobody believes that money is worth a damn anymore.
Hyperinflation
is not simply money-printing: Rather, it is when no amount of money
will get you what you want. Zimbabwe-style hyperinflation is an example
of government money-printing run amok. The Zimbabwe example gives us the
mistaken sense that hyperinflation only happens in “disorderly
printing” regimes. But that’s not the case.
is not simply money-printing: Rather, it is when no amount of money
will get you what you want. Zimbabwe-style hyperinflation is an example
of government money-printing run amok. The Zimbabwe example gives us the
mistaken sense that hyperinflation only happens in “disorderly
printing” regimes. But that’s not the case.
Chilean
hyperinflation in 1973 (which led to the September 11 coup), or Weimar
style hyperinflation (which led to you-know-who), are more indicative of
what I’d call “scarcity” hyperinflation: Both are examples of when the
scarcity of basic commodities suddenly and abruptly leads to a complete
loss of faith in money—the belief that no amount of money will get you
what you want or need.
hyperinflation in 1973 (which led to the September 11 coup), or Weimar
style hyperinflation (which led to you-know-who), are more indicative of
what I’d call “scarcity” hyperinflation: Both are examples of when the
scarcity of basic commodities suddenly and abruptly leads to a complete
loss of faith in money—the belief that no amount of money will get you
what you want or need.
That’s hyperinflation.
2008
Deflationists (of which I am a member) argued that after the credit
crisis, there would be a deflationary trough. The reasoning of the 2008
Deflationists was, credit should be considered as part of the money
supply—so when credit contracts sharply, as happened following the
banking crisis in ’08, then that’s the same as if total money supply had
contracted. A constriction in the money supply obviously leads to
deflationary pressures: Less money is available for the same or more
goods. Hence prices fall to meet lowered demand. Hence wages fall as
business incomes fall. Hence less money. Hence downward spiral.
Deflationists (of which I am a member) argued that after the credit
crisis, there would be a deflationary trough. The reasoning of the 2008
Deflationists was, credit should be considered as part of the money
supply—so when credit contracts sharply, as happened following the
banking crisis in ’08, then that’s the same as if total money supply had
contracted. A constriction in the money supply obviously leads to
deflationary pressures: Less money is available for the same or more
goods. Hence prices fall to meet lowered demand. Hence wages fall as
business incomes fall. Hence less money. Hence downward spiral.
As
the 2008 Deflationists predicted, today the U.S. economy is in a
deflationary trough—I am certainly not arguing otherwise: The evidence
is all around, and too obvious.
the 2008 Deflationists predicted, today the U.S. economy is in a
deflationary trough—I am certainly not arguing otherwise: The evidence
is all around, and too obvious.
But what I am
saying is, our current deflation can trip over into hyperinflation at a
moment’s notice. The stumbling block—the thing that could trip us over
from deflation to hyperinflation literally overnight—is The Deficit.
saying is, our current deflation can trip over into hyperinflation at a
moment’s notice. The stumbling block—the thing that could trip us over
from deflation to hyperinflation literally overnight—is The Deficit.
Not just the Federal shortfall itself, but the policy
implicitly embodied by The Deficit: The belief that all you need to do
is throw money at the problem—open up as many liquidity windows as
needed, or expand Federal spending as much as necessary, to prop up
those twin aggregates I mentioned before, aggregate demand and aggregate
asset value.
implicitly embodied by The Deficit: The belief that all you need to do
is throw money at the problem—open up as many liquidity windows as
needed, or expand Federal spending as much as necessary, to prop up
those twin aggregates I mentioned before, aggregate demand and aggregate
asset value.
The pernicious sense among
American macroeconomic policy makers that fiscal shortfalls don’t
matter—and don’t matter especially in a financial or economic crisis—is
what I believe will lead to hyperinflation. Policy makers—who have lost
any fear of providing as much liquidity and stimulus as necessary to
steamroller any problem—will have no compunction about adding to The
Deficit at the next crisis.
American macroeconomic policy makers that fiscal shortfalls don’t
matter—and don’t matter especially in a financial or economic crisis—is
what I believe will lead to hyperinflation. Policy makers—who have lost
any fear of providing as much liquidity and stimulus as necessary to
steamroller any problem—will have no compunction about adding to The
Deficit at the next crisis.
That’s when hyperinflation will kick us in the teeth.
If
I had to make a prediction, I’d say that the immediate trigger for a
hyperinflationary catastrophe will be a sudden and unexpected commodity
spike. It won’t necessarily be big, but it’ll be flashy—enough to cause a
panic.
I had to make a prediction, I’d say that the immediate trigger for a
hyperinflationary catastrophe will be a sudden and unexpected commodity
spike. It won’t necessarily be big, but it’ll be flashy—enough to cause a
panic.
This will be the opening stages of hyperinflation: It will be a market panic, and it’ll be fast.
At
the next panic-inducing crisis, American public-policy makers will once
again turn to The Deficit, providing more liquidity and more
stimulus—and this will make the financial markets realize that the
fiscal shortfall is unsustainable: It will be obvious that all those
Treasuries cannot be repaid—or if they are ever to be repaid, it will be
done by the Fed via surreptitious monetization. In other words, a
dollar with lesser value.
the next panic-inducing crisis, American public-policy makers will once
again turn to The Deficit, providing more liquidity and more
stimulus—and this will make the financial markets realize that the
fiscal shortfall is unsustainable: It will be obvious that all those
Treasuries cannot be repaid—or if they are ever to be repaid, it will be
done by the Fed via surreptitious monetization. In other words, a
dollar with lesser value.
Thus, everyone will
want to be the first to get out of the dollar—and everyone will want to
be the first out the door all at once.
want to be the first to get out of the dollar—and everyone will want to
be the first out the door all at once.
Markets
turn on a dime, and they are not rational in the short term—they’re
rational like a herd of thundering buffaloes hopped up on crystal meth.
turn on a dime, and they are not rational in the short term—they’re
rational like a herd of thundering buffaloes hopped up on crystal meth.
As
everyone gets out of the dollar in the financial markets, there’ll be a
cascading effect, as everyone—both Wall Street sophisticates and Main
Street naifs—try getting out of their dollars, and into hard assets:
Gold, land, food, whatever.
everyone gets out of the dollar in the financial markets, there’ll be a
cascading effect, as everyone—both Wall Street sophisticates and Main
Street naifs—try getting out of their dollars, and into hard assets:
Gold, land, food, whatever.
In other
words, hyperinflation as I have described it above: A loss of faith in
money. The belief that no amount of money will buy you what you want.
words, hyperinflation as I have described it above: A loss of faith in
money. The belief that no amount of money will buy you what you want.
The
Deficit—that’s the demon’s name. The Deficit. Not, as I have argued,
the fiscal shortfall, but the macroeconomic mentality that fiscal
shortfalls in a reserve fiat currency do not matter. The sense that as
much liquidity and stimulas must be and can be provided to maintain
aggregate demand levels and aggregate asset value.
Deficit—that’s the demon’s name. The Deficit. Not, as I have argued,
the fiscal shortfall, but the macroeconomic mentality that fiscal
shortfalls in a reserve fiat currency do not matter. The sense that as
much liquidity and stimulas must be and can be provided to maintain
aggregate demand levels and aggregate asset value.
Policy
makers are not exactly known for being prescient timers of the
markets—at the next market crisis/panic, they will without hesitation
provide stimulus and liquidity, adding even more to the fiscal
shortfall. But it will be the market’s and the public’s loss of faith
that that fiscal shortfall will ever be repaid that will lead them to
abandon the dollar.
makers are not exactly known for being prescient timers of the
markets—at the next market crisis/panic, they will without hesitation
provide stimulus and liquidity, adding even more to the fiscal
shortfall. But it will be the market’s and the public’s loss of faith
that that fiscal shortfall will ever be repaid that will lead them to
abandon the dollar.
Once they lose faith in
the dollar, hyperinflation will ensue, as public policy officials
continue providing “stimulus” and “liquidity” which the market will
interpret as nothing but worthless paper.
the dollar, hyperinflation will ensue, as public policy officials
continue providing “stimulus” and “liquidity” which the market will
interpret as nothing but worthless paper.
Actions
have effects—it is stupid to think that massive deficit spending of a
fiat currency won’t have consequences. The policy embodied by The
Deficit has brought the U.S. economy to the brink of oblivion—with no
way to pull back from that brink. So at this point, the only question
is, what will finally tip it over, and when will that tip-over happen,
and what will the . So at this point, there are only two questions that
need to be answered: One, when will the economy finally tip over the
brink, and two, what will give us that final push.
have effects—it is stupid to think that massive deficit spending of a
fiat currency won’t have consequences. The policy embodied by The
Deficit has brought the U.S. economy to the brink of oblivion—with no
way to pull back from that brink. So at this point, the only question
is, what will finally tip it over, and when will that tip-over happen,
and what will the . So at this point, there are only two questions that
need to be answered: One, when will the economy finally tip over the
brink, and two, what will give us that final push.
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sorry - any one who claims they are the alpha and omega deserves to be junked on principle.
I agree.
That's why I junked myself.
Ok chill. I've decided that I'm very happy that I lost my job in the initial down turn (as well as my visa and green card processing) because you are all nuts!
I love americans - I have friends that are americans! But ... I don't understand the huge divides in this country.
When I first moved to upstate NY from Montreal - yeah I was shocked. I grew up with Fat Albert and Saturday morning cartoons - I had thought that issue was resolved but it wasn't at all. It was economic segregation 101.
And I'll never forget a walk in New Orleans I took once. It was before Katrina and I was there for a conference. I decided to take the street car down to the garden district and made my way up to the hotel after that. I wanted to walk down Magazine St and see what was happening - I had heard there were a lot of cool shops. I emerged from Magazine and was accosted by a police officer who wanted to know if I was OK. She told me not many tourists entered into that part of town.
You should all start talking to each other.
I know most people on this sight hate unions. But my dad was a union organizer and I think at a time when unions were necessary - when people were being hurt. Do I think some unions have to much power today - yep absolutely. Can I tell you stories about my dad's union involvement - yes.
Crime? It is a boogeyman. I have travelled a fair amount and feel pretty comfortable walking around in any downtown area in the states even after dark (of course you need to be smart).
I'm not sure where we will end up but I do love (most) Americans.
And another shameless plug - any one like fishing:
http://arkadaba.blogspot.com/2010/08/my-brother-in-laws-latest-fishing.html?spref=fb
I'm sticking with him if it hits the fan
Arkadaba
http://arkadaba.blogspot.com/
come around NYC and hang around a large construction site for one day. betya a silver dollar you'll lose any sort of hope that you have these have resemblence whatsoever to the union stories of your pop. why am i willing to risk parting with a silver dollar? because i've heard those stories. and i've been around union shops in NYC for more than one day & one day's all you need. these ain't your father's unions ark...not any more.
Arkadaba
i like your fishing pictures very much. nice touch including them here for all to see. i just got a picture of a young boy 8 - 10 yrs old across the street at the "kids only" fishing pond. he had three trout. he was so happy and his father was too. he had blood all over him and grin from ear to ear. love taking pictures of fishermen. my father made me learn how to fish out of a rowboat, but A N C H O R E D. didn't like to caught the fish back then, thought it hurt them, really hated being anchored too. but i am glad my father included this at a young age.
RELAX – Hyperinflation is going to be NO Problem.
See the Federal Reserve will monitor the hyperinflation rate over night, while you sleep, and in the morning shoot pixel trillions of dollars into your assigned smart phone. Then, you can run down to the baker or butcher and with a bank transfer smart phone app, you can scan your pixel trillions into the baker or butcher’s account!
What could go wrong?
thanks man, I needed that!
"What could go wrong?"
One drops his/her Ipood in the toilet.
The MaxiPad gets drenched in a flood.
The HFTs frontrun the $pixels before they ever reach the now mentally challenged "smartphone"
I have warned: we have both inflation and deflation at work. That doesn't mean one cancels the other or makes it any milder. Quite the opposite. What it means is that as assets and incomes deflate, the fixed costs of living and doing business inflates, squeezing every drop from margins and diminishing both employment levels and quality of life. The fastest way to economic suicide.
If workers don't have any bargaining power and salaries don't rise and consumers shun debt where will the hyper-supply of money come from? Or will the hyper inflation occur mostly amongst the moneyed classes, int'l'banks and corporations as they divest their trillions currently sitting on the sidelines?..Seems to me average folks don't have a hell of a lot money left to unload and that any further QEing would simply go straight to the big players as did the last one.
Collapsing supply. Not runaway demand.
Unlike Zimbabwe there are plenty of suppliers and manufacturers willin to fill supply.
However, obtaining the base commodity to do the manufacturing with could prove problematic; or getting the food to the table would even be a worse base commodity nightmare.
Domestic suppliers and manufacturers? Hardly. That stuff's all been shut down, the factories torn up, and shipped to China. Remember?
And the American engineering talent needed to rebuild all of that stuff in a relatively short period of time doesn't exist either. Remember, we outsourced that overseas as well.
I understand, but the supply chains just wouldn't go away. They would be looking to fill orders for less money in a world slowdown; the devalued dollar and the need to fill orders to make money would balance the inflation/deflation arm wrestle for a time.
However, a sinking dollar and scarce commodities seem to be the ingredients for hyperinflation, Zambabwe had no supply chain and supportive infrastructure.
You don't quite get it. You're correct about shrinking consumer incomes and assets. Less to spend, deflation in real estate and even retirement assets. Everything you own deflates. But the fixed costs of living and doing business go up because of reckless fed policy aimed at debasing the dollar, driving up the cost of everything backed by paper: all raw materials, transaction costs, consumer credit, insurance, imports and of course taxes. When the dollar shrinks cost of imports rises. We're living in a totally import dependent economy. There's also international competition for raw materials. The value of foreign currencies rises relative to the dollar. Unfortunately, since we've dismantled our manufacturing and industrial might we have nothing much to offer that's cheap and can be exported. Only a few large multinationals benefit from doing business abroad. Which, of course, worsens our employment/income deflation. Voila.
I agree with everything you say, but the outcome of dismantling the manufacturing and engineering base is not deflation, but rather, inflation. If America has to start exporting much of its very limited production, in order to afford basic imports such as energy, then, obviously, domestic production will become incredibly expensive to domestic citizens. This is the scenario which ultimately touched off the Weimar Republic hyperinflation, to wit: exports for repayment of war reparations left Germans impoverished, but corporations themselves were immensley profitable.
We agree. It's part of what's been wrong with our economic policies since the 1980s. Outsourcing everything was suicide in the long run.
Where will the money come from?
The banks are hypotheically sitting on hundreds of billions. If they should choose to loan (can't right now, it's all tied up in 10-year and 30-years), by offering less than 20% rates on credit cards and increasing limits, people would spend.
This great saving wave isn't being started by people saying, "Gee. I should save more." It's started by people saying, "Gee, my credit limit was $7,000. Now it's $350. And if I use it one more time, the interest rate on the balance of $5,800 goes from 8% to 29.9%. I'm going to cut that sucker up."
The Chinese? Their money is tied up in 3-month T-bills. If they don't roll over, they could buy a couple trillion in dollar-denominated assets. That'd help the U.S. You say they bought oil?
The Saudis? Their palaces are already packed with gold. 3/4 of their colleges are Koran colleges. Interest not allowed. Yet they hold heathen T-bills and T-bonds. Lots of money spent on commercial real estate. Little on factories or science education/research. Iran is spending a lot on science/engineering research. I hear Israel is going to help them decide to build twice as much nuclear research in separation plants soon.
We do have food. But not enough to balance trade. And with the U.S. brain drain beginning, the slope is increasing. Guns? Possible. Mercenaries with tanks and aircraft? Been doing that.
WW3, anybody? Get your popcorn. Gusts of wind and temperatures expected to hit 3,500 F today. Mostly cloudy, with cooling into 2014.
You've actually stated WHY hyper-inflation WILL occur. As noted, it's about failed confidence, not in the amount of the currency that's available.
Sure, in the short-term QEII will pad the players' pockets, but in the end it'll be worthless paper, as the masses turn their backs on all of it. Consider the new generation, you think they'd have any respect for a dollar system that lashes massive debt on their backs and disallows them from upgrading their ipods?
The dollar expands, contracts, or blows completely up: deflation; inflation; "hyper-inflation," which is really a misnomer, as the same result could happen as deflation could also wipe out the dollar (or any fiat currency).
Here is some cute AP propaganda straight off the presses and now splashed all over Yahoo.
Thrifty Consumers are Preventing an Economic Recovery:
http://finance.yahoo.com/news/Economic-recovery-falls-to-apf-3296423844....
I have no idea what to say at this point.
You are not required to say anything.
You are required to spend.
Should you find that you are, how shall we put it, "a little short".
Then you are required to borrow and spend.
Simples.
Well put.
As Dick Cheney so memorably phrased it, deficits don’t matter—so The Deficit as a macroeconomic policy can continue indefinitely.
you know how many peope told me that////do not pay off your home....cash it in And invest in the market.
how did that work out for you.....LOL
Dick Cheney
Bravo ZH, I really enjoyed this article. I agree it's one of the best to date, and I read here every day, so I think that's saying something. I also have found many of the comments thought provoking. The message is quite clear : we are getting very close to the edge, again, and this time we won't be pulled back from it.
This is a very good post, not well written, however the conveyance is brilliant and I'm impressed... Gonzalo provides a reminder of the organic nature of economic events. I was especially please with his definition of "Hyper Inflation" and it's cause. I whole heartedly agree with his forecast which should turn out to be quite the "Black Swan" to the policy making turkeys and a beautiful White Swan for me.... I'm betting that he's right. So far as the timing goes, I suspect that it should begin in the 4Q10, sometime after the mid-term elections..... It's gonna be a lotta fun...... Ciao, Econolicious
I like Talib, but I think this Black Swan stuff is way over-used/mis-applied. I mean, what's happening can be clearly traced to a system that's based on the philosophy of "grow or die," on a finite planet. Saying that we could know/see what the result would be is ludicrous.
Shameful mentioned the impending attack on Iran, that's the market signal for oil to go through the roof and completely fuck everything up. This fuckup is going to be 100% intended.
Meh. In order to rush out of money, you need to get it first. Who's got this stock pile of cash? Answer...no one. They own pieces of paper that are salable FOR dollars. Dumping those to get cash does what? DEFLATES assets and increases the value of cash. Interest rates go throught the roof. No, sorry, your definition of hyper inflation is rubbish.
Exactly... well stated.
And way down at the bottom of this thread is this little note.
The aircraft activity around Moffett Field has kicked up this evening...
Is somebody planning do something?
Bomb the illegals in California?
Terrorists will destroy the fed and thier records before we ever see them ................
Amazing. Months ago I warned of "inflation amidst deflation". The seed was planted in 2008 then watered and fertilized in 2009. It's coming into flower now, more and more people are seeing it. But most are still baffled because it doesn't jibe with the common wisdom and textbook economics. The heresy will become religion soon enough.
The U.S. dollar is the tallest midget among global currencies, (attribution to Klye Bass). So my problem with this deep thinker blogger is: what fiat currecy do you like better than the nuclear arsenal U.S. dollar? Swiss Franc? Don't make me laugh. Brazil? Maybe in 20 years. The WHOLE fiat currency system is a swindle. The end game is the U.S. and China split the world and our standards of living meet in the middle. Except the favored political class. They will live like kings...
I tried to find a chart showing what the US dollar had been doing over the past ten years but couldn't find one with horizontal and vertical axis labelled properly. But in general it has been sucking. For the past decade the trend has been down. However, starting in 2008, the dollar soared as an apparent flight to safety play - but I think we are reverting now. By the beginning of next year I would bet the DXY will be in the low 70s once again.
Do German states issue bonds?
That might get you into a strong currency when the Euro implodes and the new Deutchmark is born....... ?
"In other words, hyperinflation as I have described it above: A loss of faith in money. The belief that no amount of money will buy you what you want. "
How does this happen when the overwhelming majority of Americans owe their debt in FRNs? Thank goodness we can pay off our debt in gold... oh, wait...
If debt is FRN-based, then by clicking one's heels together and no longer believing in the FRN will make your debt go away!
"Thus, everyone will want to be the first to get out of the dollar—and everyone will want to be the first out the door all at once.
Markets turn on a dime, and they are not rational in the short term—they’re rational like a herd of thundering buffaloes hopped up on crystal meth." I loved the article, but that's a bogus statement. It's UTTERLY rational for markets to panic. If you know that your currency is worthless, you should as quickly as possible get rid of it. Sure, not everyone will be first, most will probably lose out, but that was going to happen ANYWAY. What, should peopl exit the dollar in an "orderly fashion"? Should a person wait because it's "rational" when that just means the next guy can get out before you and with more? I hate it when it's claimed that market panics are "irrational"--quite the opposite, if one actually employed some thinking.Are we in the early stages of this new deflation to hyperinflation now? Wheat up 30 cents yesterday, limit up 60 cents today, and 50 cents tonight. Sounds like the very scenario Lira described in this article.
Atomizer. You must have hit Wellington's trip wire.
On the subject of tenancy on those deeds. Not only is there a tenant. There is also nothing to rent. The legal descriptions have been curiously changed, and a TWP is supposed to be recognized for a 'township'.
Too boot. They begin at a 'point' (a mathematical abstraction), meander about in hypo-land, returning back at the 'point', without ever bothering to mention that the meander never enclosed something substantial, like some cloth, or some land on the planet Earth, or anything else.
Incidentally. Older transfers of land did describe this fully.
"Nobel Prize-winning economist Joseph E. Stiglitz said the U.S. economy faces an “anemic recovery” and the government will need to enact another round of “better designed” stimulus measures.
The Obama administration took “a big gamble and it doesn’t look like it’s paying off,” Stiglitz told Bloomberg TV in an interview in Sydney yesterday. “The recovery is so weak that it is not strong enough to generate new jobs for the new entrants in the labor force, let alone to find jobs for the 15 million Americans who would like a job and can’t get one.”"
http://www.bloomberg.com/news/2010-08-05/stiglitz-says-anemic-u-s-recove...
I think hyperinflation comes from the FX markets more than anything. As long as an economy can produce most of what it needs internally, a soveraign government can force people within an economy to use the money. When a country has been de-industrialized and gutted as a civilization, then it is up to other countries to decide whether they want to take the money or not. This was the lesson of Weimar. A good thing to look for is the coming dollar support operation aroudn the Iran war. It reminds me of the dollar support operation conducted in 1973 after the Bilderberg Group met in Sweden to decide on a 400% price increase in oil. They "crude"-ly staged the Yom Kippur War and the fake OPEC business to mask their speculative activities.
A similar oil price spike taking us to somewhere from 300-400 in oil could be the shock that destroys the Dollar for good rather than saving it by mopping up all the spare bucks out there like they think it will. Look for a knife in the back from the City, as this is the role the British oligarchs traditionally play in times of crisis. Beggar-thy-neighbor and export the depression.
+1
"Thus, everyone will want to be the first to get out of the dollar—and everyone will want to be the first out the door all at once.
Markets turn on a dime, and they are not rational in the short term—they’re rational like a herd of thundering buffaloes hopped up on crystal meth." I loved the article, but that's a bogus statement. It's UTTERLY rational for markets to panic. If you know that your currency is worthless, you should as quickly as possible get rid of it. Sure, not everyone will be first, most will probably lose out, but that was going to happen ANYWAY. What, should peopl exit the dollar in an "orderly fashion"? Should a person wait because it's "rational" when that just means the next guy can get out before you and with more? I hate it when it's claimed that market panics are "irrational"--quite the opposite, if one actually employed some thinking.So deficits don't matter?
If that is the case, why didn't Hank the *ank just organise for everyone to stop paying income Tax -or better still a full refund. That might have been fairer (since the wealthy don't pay taxes). Everyone could have cleared off their C/C debts and mortgage arrears, the banks could have had cashflow, n'evvathang, n'evvathang.
We would still have been in the same godawful mess waiting for armageddon, but we would have had some ointment before the real pain. Plus there might have been a chance to slowly puncture the financial alchemy bubbles.
This IS a war. The funniest thing I ever read was 'the end of history'. End? We are in the biggest series of events since the Industrial Revolution, pity that -at the moment- most folks can't see the forest for the all trees in the way.
Food, Water, Gold, Land.
Honest to goodness, I believe the no income tax thing is coming.
did you guys really read all this long post and tons of comments. ?
Do you have any times left for trading or reaserching fundamentals or technicals ?
or just short the S&P ?
Exactly!!!
Doomers and end-of-the-world prognosticators dont actually make money. But sometimes they get a good audience and sell newsletters - if they can be scary enough!!
In general, the more people trade the more they lose, especially in the new world of a frontrunning, totally gamed market
The way I see it - for most folks - the markets exist so you can buy and sell things. Right?
So - you need o figure out what merchandise you want to buy , the valuation etc - and buy it when the price is right. The markets still let you do that right?
By the way - for those willing to actually do some work - there are LOTS of opportunities in specific equities etc.
So why all this angst about markets being manipulated? If you want to play in the intra-day, sub 5 millisecond trading markets with the pros - well - dont go into a pro-football game wering your shorts and flip-flops and complain that the big guy with a metal helmet ran into you .hehehe.
My contention until proven wrong is that presently a long short strategey will beat 95% of the daytraders easily and save a lot of time.
Most tarders shouldn't go into a rigged game with a tuxedo on thinking they know more than the big boys and the algos.
I don't want to play the markets everyday. I have a different job that I enjoy more than trading.
Probably a good strategy rather than wasting time studying technicals and fundamentals.
If one has conviction that the system is broken, and the shit will hit the fan eventually in the stock market, why not go in long short unleveraged and forget trading against the HFTs.
Long short, see you in a couple of years.
I take some comfort in the fact that Dick Cheney will go down in history as saying "Deficits don't matter" and thus the biggest douche in history. As this post fairly clearly states, Deficits DO matter, a lot.
Oh, and I liked this tidbit on the wiki about him...
Honest to god - I first read this as Dick Cheney was OUTWITTED by his ventricular device!!!!
Interesting SP500 chart ...
http://stockmarket618.wordpress.com
Actually - I think all this hand wringing and heartburn about rigged markets and manipulation etc etc - is really by people who are too lazy to do any real analysis and work. Because if you do you'll find lots of stuff that is reasonably priced.
But its a lot easier and fun ( for a while) to complain about the govt, the Fed, the manipulation etc etc.
By the way - if you dont have excess capital that you can afford to lose - forget about investing altogether . get a job - or start a business.
You need to be able to take risk ( ie. Lose Money) - in order to invest.
"What the recession and the concomitant banking crisis have caused are, essentially, a fall in aggregate demand levels, as well as a fall in aggregate asset value. In other words, the population is spending less, and asset values have deteriorated, both nominally and as compared to any basket of hard commodities."
This is simply not true. When the history books are written, the real cause of the fall in aggregate demand will be the same as it was in Japan, that is, an aging population that did not reproduce in sufficient numbers to fuel the Ponzi. That is the real issue here and it is generational. The fact that this is occurring at the very time that we have exhausted our credit only makes matters worse, but the real issue is a dearth of young, freshly minted consumers. Hell, one could even make the argument that in a society obsessed with homosexuality and actively euthanizing the unborn that it is MORE THAN generational, that in fact we are committing societal suicide. We are in the middle of the perfect storm and when the eyewall passes over there's gonna be some carnage.
Think about it this way....
For simplicity....let's suppose all means to credit and asset valuations were in a box whose total was $1000....
The credit portion which was 60% was removed....and the asset valuation portion declined by 50%....
So what is left now is actual cash...a minimal amount of credit....and the resulting valuations....
...........................................
The debt portion based on total credit and asset valuations was 100% before ...and is 100% after....
.........................................
What does this mean ?
Debt destruction WILL HAPPEN.....
And is highly deflationary...
So the next question....
What "Fed head" would print such an insane amount of currency blatantly for all world creditors to see ? What are the odds of this occurring ?
Can you imagine what the labels would be in the WSJ and every news media ?
..................................................
Another issue at hand ...
Probably the most significant deciding factor of where to next will be a couple hundred million angry Chinese being paid $3 per day....
And the huge numbers of smart young people all over the world that did not "get included" in the "Princeton Harvard Yale Club"....
Watch what happens.....
.
There are certainly a lot of details like that to take into consideration.I read and understand the entire article and I really enjoyed it to be honest.
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