Commonly-accepted wisdom says that we can inflate our way out of our debt crisis.
***
But as I have previously noted, UBS economist Paul Donovan has demonstrated that governments can't inflate their way out of debt traps, saying:
The
problem with the idea of governments inflating their way out of a debt
burden is that it does not work. Absent episodes of hyper-inflation, it
is a strategy that has never worked.
It
is a commonplace on the right that we're going to have enormous
inflation, not because Ben Bernanke will make an error in the timing of
withdrawing liquidity, but because the government is going to try to
print its way out of all this debt.
Joe Weisenthal notes that it doesn't quite work this way:
As this chart shows, instances of declining debt-to-GDP
rarely coincide with periods of inflation. If it did If it did, we'd
see more dots in the lower right-hand quadrant.
The
bad news for central bankers is that creating currency isn't like, say,
diluting shareholders in a company. You're always rolling your debt,
and the market's response to an inflationary strategy is (not
surprisingly) higher interest rates. It's a treadmill, and it's
extremely hard to get ahead.
Inflating
your way out of debt works if you're planning to run a pretty sizeable
budget surplus--big enough that you won't have to roll your debt over.
Otherwise, your debt starts to march upward even faster, as old notes
come due, and you have to roll them at ruinous interest rates.
Hyperinflation might wipe out that debt, but also your tax base.
Analysis shows even a sizable hike in CPI won't do much for companies or households that owe money.
Analysis
released by Leverage World, a publication of debt research firm Garman
Research, showed that companies that have issued debt at a coupon rate
of 8%, as is typical for non-investment grade issuers, would have to
see inflation hit 23% to inflate away the amount of debt they owe in
5.5 years. That’s the average amount of time that investors would have
to hold such debt to compensate for the risk of default.
But
investors would refuse to do so under such a scenario, Chris Garman,
principal in the research firm, noted—not with yields on such debt
currently running at 18%.
As Mr. Garman put it in the publication, inflation at that level “would crush the appeal of an 8% coupon.”
And while issuers would have to roll over their debt, they would find it impossible to do so. As he put it in an interview with Financial Week, “They’re staring down the barrel of an 18% coupon.”
Investment
grade companies are in better shape. The same can’t be said for other
public—or government—borrowers. Indeed, overall debt levels for the
private and public sectors now run at roughly 3.5 times nominal GDP.
That compares with 1.5 times from 1945 to 1980 and in the early 1920s.
To
return to that level, Mr. Garman estimated that inflation would have to
rise to around 12% or GDP increase by 75% over the next five years.
Either scenario, he said, is hardly likely to materialize.
At a
more realistic level of 3% real GDP growth and 2% inflation, Mr. Garman
said, it would take 15 years before the overall U.S. debt level fell
back under 1.7 times nominal GDP.
“There has been some talk of a rise in inflation as a panacea for distress and default,” he wrote in his report.
His analysis shows that such expectations vastly underestimate what’s required.
Prominent economist Michael Hudson wrote in February:
The
United States cannot “inflate its way out of debt,” because this would
collapse the dollar and end its dreams of global empire by forcing
foreign countries to go their own way. There is too little
manufacturing to make the economy more “competitive,” given its high
housing costs, transportation, debt and tax overhead. The economy has
hit a debt wall and is falling into Negative Equity, where it may
remain for as far as the eye can see until there is a debt write-down...
The
Obama-Geithner plan to restart the Bubble Economy’s debt growth so as
to inflate asset prices by enough to pay off the debt overhang out of
new “capital gains” cannot possibly work. But that is the only trick
these ponies know...
The global economy is falling into depression, and cannot recover until debts are written down.
Instead of taking steps to do this, the government is doing just the
opposite. It is proposing to take bad debts onto the public-sector
balance sheet, printing new Treasury bonds to give the banks – bonds
whose interest charges will have to be paid by taxing labor and
industry...
The economy may be dead by the time saner economic understanding penetrates the public consciousness.
In the mean time, bad private-sector debt will be shifted onto the
government’s balance sheet. Interest and amortization currently owed to
the banks will be replaced by obligations to the U.S. Treasury. It is
paying off the gamblers and billionaires by supporting the value of
bank loans, investments and derivative gambles, leaving the Treasury in
debt. Taxes will be levied to make up the bad debts with which the
government now is stuck. The “real” economy will pay Wall Street – and
will be paying for decades.
What
I hear more and more, both from bankers and from economists, is that
the only way to end our financial crisis is through inflation. Their
argument is that high inflation would reduce the real level of debt,
allowing indebted households and banks to deleverage faster and with
less pain...
The advocates of such a strategy are not marginal
and cranky academics. They include some of the most influential US
economists...
The best outcome would be a simple double-dip
recession. A two-year period of moderately high inflation might reduce
the real value of debt by some 10 per cent. But there is also a
downside. The benefit would be reduced, or possibly eliminated, by
higher interest rates payable on loans, higher default rates and a
further increase in bad debts. I would be very surprised if the balance
of those factors were positive.
In any case, this is not the most
likely scenario. A policy to raise inflation could, if successful,
trigger serious problems in the bond markets. Inflation is a transfer
of wealth from creditors to debtors – essentially from China to the US.
A rise in US inflation could easily lead to a pull-out of global
investors from US bond markets. This would almost certainly trigger a
crash in the dollar’s real effective exchange rate, which in turn would
add further inflationary pressure...
The central bank would
eventually have to raise nominal rates aggressively to bring back
stability. It would end up with the very opposite of what the advocates
of a high inflation policy hope for. Real interest rates would not be
significantly negative, but extremely positive...
Stimulating
inflation is another dirty, quick-fix strategy, like so many of the
bank rescue packages currently in operation ... it would solve no
problems and create new ones.
Inflationists
make two mistakes when it comes to government debt. The first is in
assuming government debt is more important than consumer debt. (It will
be after consumer debt is defaulted away, but it's not right now.) The
second is that it's not so easy to inflate government debt away
either...
Inflationists act as if unfunded liability costs and
interest on the national debt stay constant. Also ignored is the loss
of jobs and rising defaults that will occur while this "inflating away"
takes place. Tax receipts will not rise enough to cover rising interest
given a state of rampant overcapacity and global wage arbitrage.
Yet in spite of these obvious difficulties, the mantra is repeated day in and day out.
Inflating
debt away only stands a chance in an environment where there is a
sustainable ability and willingness of consumers and businesses to take
on debt, asset prices rise, government spending is controlled, and
interest on accumulated debt is not onerous. Those conditions are now
severely lacking on every front.
Some have suggested that the country could just "inflate its way" out of its fiscal ditch.
The idea: Pursue policies that boost prices and wages and erode the value of the currency.
The
United States would owe the same amount of actual dollars to its
creditors -- but the debt becomes easier to pay off because the dollar
becomes less valuable.
That's hardly a good plan, say a bevy of debt experts and economists.
"Many countries have tried this and they've all failed," said Mark Zandi, chief economist at Moody's Economy.com.
It's
true that inflation could reduce a small portion of U.S. debt. The
International Monetary Fund (IMF) estimates that in advanced economies
less thana quarter of the anticipated growth in the debt-to-GDP ratio would be reduced by inflation.
But
the mother lode of the country's looming debt burden would remain and
the negative effects of inflation could create a whole new set of
problems.
For starters, a lot of government spending is tied to
inflation. So when inflation rises, so do government obligations, said
Donald Marron, a former acting director of the Congressional Budget
Office (CBO), in testimony before the Senate Budget Committee.
"[W]e
have an enormous number of spending programs, Social Security being the
most obvious, that are indexed. If inflation goes up, there's a
one-for-one increase in our spending. And that's also true in many of
the payment rates in Medicare and other programs," he said.
Inflation
would also make future U.S. debt more expensive, because inflation
tends to push up interest rates. And the Treasury will have to
refinance $5 trillion worth of short-term debt between now and 2015.
"[The
debt's] value could go down for a couple of years because of surprise
inflation. But then ... the market's going to charge you a premium
interest rate and say 'you fooled us once but this time we're going to
charge you a much higher rate on your three-year bonds,'" Marron said.
The
Treasury is increasing the average term of its debt issuance so it can
lock in rates for a longer time and reduce the risk of a sudden spike
in borrowing costs. But moving that average higher won't happen
overnight. And, in any case, short-term debt will always be part of the
mix.
Another potential concern: Treasury inflation-protected
securities (TIPS), which have maturities of 5, 10 and 20 years. They
make up less than 10% of U.S. debt outstanding currently, but the
Government Accountability Office has recommended Treasury offer more
TIPSas part of its strategy to lengthen the average maturity on U.S. debt.
The higher inflation goes, of course, the more the Treasury will owe on its TIPS.
Just
last week, the CBO noted that interest paid on U.S. debt had risen 39%
during the first five months of this fiscal year relative to the same
period a year ago. "That increase is largely a result of adjustments
for inflation to indexed securities, which were negative early last
year," according to the agency's monthly budget review.
What's
more, the knock-on effects of inflation are not pretty. A recent report
from the IMF outlined some of them: reduced economic growth, increased
social and political stress and added strain on the poor -- whose
incomes aren't likely to keep pace with the increase in food prices and
other basics. That, in turn, could increase pressure on the government
to provide aid -- aid which would need to keep pace with inflation.
If We Can't Inflate Our Way Out of the Problem, What CAN We Do?
So if we can't inflate our way out of this mess, what should we do?
The above-quoted CNN article says:
So where does that leave lawmakers? Facing tough choices.
Deficit
hawks and market experts have been calling on lawmakers to come up with
a strategy to stabilize the growth in U.S. debt, which would be
implemented only after the economy recovers more fully.
The idea
is to signal to the markets that the country is serious about getting
its longer term debt under control so that the burden of paying it back
doesn't consume an ever-increasing share of the federal budget.
The recommended exit strategies are pretty basic, if unpopular: tax increases and spending cuts.
But why raise taxes and cut essential services when we can stop unnecessary wars and unnecessary interest costs instead?
If we did these things, we wouldn't have to raise taxes or cut core services to the American people.
Stopping all wars which are not absolutely essential for the protection of the United States from massive and imminent attack is crucial.
And abolishing the central bank (or putting it within the Treasury
department) and taking over the money and credit creation functions
from the private banks may be an important part of the solution to our
debt trap. See this, this, this, this, and these:
Great comment by the egg buyer above...thanks George for providing an article full of depth.....and ending your missive with alternative solutions to the root cause of our economic problems....our other problem is getting the masses of this american-idol zombie nation to awaken to this to this issue, understand who the men behind the curtain are....grow some balls....find some initiative to foster resolve.....and most importantly.....to act.....you ended the article with "this, this and this"......but you left out this...
So if I understand your hypothesis of our downfall it seems to be "oil". The use of or overuse of has created suburbia, ghost malls and apparently overcapacity of some sort? What is this overcapacity created yo usay by the consumption of domestic oil supplies. You state we used 1/3 of domestic supply to win WWII and still had enough left apparently to create overcapacity. Did little men jump out of the oil barrels and build these malls or was it perhaps easy credit causing a misallocation, not the oil boogeyman..
Put the pipe down Hunter S. before a little straw man carries you away...
I think GBT means it is not sustainable because it requires huge fossil fuel inputs to maintain. Post Peak-Oil, net oil exports will decline much quicker than the actual decline rate due to export-land model.
When the exports begin to really dry up, shortages are apt to occur.
Yes. Yes. Feel free to disagree but it's not exactly a new concept and I'm hardly the first person to have made the argument. See the graph of GDP vs. Oil Production? Any questions? Credit is not real. Oil is.
that tremendous number of debt-financed billionaires that are a direct result of the largest fraud and Ponzi-Tontine scheme in history: take back their ill-gotten gains and looters' booty, and return it to the masses.
How does anyone, government or citizen figure out a way out of this mess when the "figures" cannot be trusted? The masters of deception, the Fed, Treasury and Obama have legalized this fraud by changing the FASB accouting rules, as one example, so I don't see how anyone can offer a solution when the "facts" used to develop a course of action are really mythology.
Make all off-the books OTC derivative transactions (with all their iterations) retroactively illegal (oh, well... too, bad...). Find and prosecute the thieves, restore the loot and allow the dollar refunding (per Christopher Story) to take place, transparently.
Lots of crooks go to jail. Lots of predators are shamed. Capitalism gets a black eye.
And, Wall Street has to prove it's ethics for decades before anyone buys in without DD again.
But two generations worth of mayhem and some wars can be avoided.
I'm sorry, but even though inflation will not get us out of this crisis, does not mean it will not be done anyways. History of monetary crisis shows us the end game is inflation and even hyperinflation, the deflationist argument rests on, essentially, "this time it's different".
The solutions are actually hiding in plain sight, but nobody wants to face them.
We first have to admit that we committed the same fool mistakes we made in the 1920s leading up to the depression. Through a combination of greed and arrogance and foolish government policy we learned once again what is the dark side of unfettered free-market capitalism combined with permissive government policy.
In the second place we would have to take the pain and let deflation rear its head and have its way with the economy. Deflation is the proverbial forrest fire of darwinian capitalism which destroys and creates by clearing fresh ground for a better tomorrow. But of course that would mean that a mountain of loans and obligations based on inflated and unsustainable asset prices would collapse. Creditors would get hurt and that, my friends, is politically unacceptable to our current Administration, Congress and the powers behind them. Wall Street firms would have to shut their doors, but new nimble firms would rise up fast in the rubble if given the opportunity. The bright side we would be working off the huge overcapacity in many sectors, resetting prices to affordability in relation to incomes and wages and favoring savings over spending. And the stage would be set for a brighter future, a new mega cycle that would favor the most fit given the new reality. That scenario would spell long term vitality rather than preserving and resurecting that which already stinks of rot and death.
Just as the Depression set the stage for the best part of the American century, a cathartic deflation now would assure a bright and vital future not just for the US but for the global economy. Preserving a musty status quo ante is the unfortunate order of the day for our current political system. And that road leads to the one inescapable solution: detonate the inflation I-Bomb to try and erase the debt-follies and deals gone bad while preserving the political power and influence of those who presided over the disaster.
Not to get picky here, but upwards to 70 million people died leading up to the "best part of the American century." I'd sign up for your proposed "cathartic deflation now to assure a bright and vital future" idea, presuming you're just looking after the best interest of my kids, as long as when the meat grinder starts, it consumes from the top 1% uber rich down to the lower class this time.
Every time a deflationist explains what an inflationist thinks, I cringe. I’m an inflationist and their representations never fit my views. Maybe if they truly understood what I see, they’d also become inflationists.
Deflation is what we need to correct the excesses. The problem is that the ones with the money do not want to write down their assets and since they are in power, they are making sure they can exchange their crappy assets for fresh dollars. And the 1st ones to get those fresh dollars usually win.
That is what is happening out here right now. It’s still deflation because demand has not gone down that much YET and supply is still there. Zirp probably gave companies another 2 years of respite.
We know that Pimco was used to buy up the treasuries (in exchange for MBS). We know that Blackrock is now being used… We are now starting to see the stealth usage of QE. The Fed is buying the treasuries.
We know that it usually takes 12 or more months to see the effects of Fed changes so we can assume that QE effects will be starting soon. At the same exact time that companies cannot refinance at lower rates.
So now is my question… What happens when most debt is replaced with fresh dollars and capacity starts to dwindle? Won’t we have the same amount of dollars for less stuff?
Up to now my take is that deflationists want to believe in a fair quickly self-correcting world while inflationists believe insanity will prevail.
I agree. But. All I'm saying is that in very select markets there will be a complete 'flushing down the toilet' of prices (and an exit to reinvest profits) and the lucky ones with a bunch of dollars will put fresh capital to work by cleaning out inventory (some inventory will just get steamrolled to avoid paying tax).
As soon as the washout is complete a rapid markup followed by new lending - the bastard banksters set sail after this happens - will set the scenario you discuss in motion.
The best part of the American century not so coincidentally coincided with the fact that we were the world's leading oil exporter (almost everyone forgets that) and the world's leading lender. Those days are done and gone and they are never coming back. We used up a full 1/3 of our oil reserves to fight and win WWII. The other third we used creating what James Howard Kunstler accurately refers to as the worst misallocation of resources in modern history: Suburbia. Without draining 250 million years of oil reserves in the span of a few short decades, there never would have have been any overcapacity to begin with. Modern agriculture, megacities, the fuel-intensive transportation grid, along with virtually everything else we see around us is nothing more than a short-lived abberation. In fact we're already witnessing the decline. Ghost malls, see-through office buildings, and the emergence of a permanent "unemployed class" are examples. Next to go will be the big box stores and the container ships from China, followed by China itself. Suburbia will quickly follow. And soon, no more than ten years out, max, but more likely within the next five years all U.S. oil production will be militarized. It will have to be. At that point it's goodbye auto and airline industry. We'll likely invade Venezuela--even their crummy-ass sour crude will be of vital strategic importance--ditto Mexico in the form of a "military partnership" so that we can drain the last dregs of Cantarell. And as for Iraq, forget it. We aint never leaving. Not till Mesopotamia is bone dry. There is no way out of this imminent decline short of war, and we are already employing that strategy. But even war is just a temporary delay of the inevitable. The truth is there is no way out that preserves our current "standard of living," which should really be called a standard of parasitism since it revolves around strip-mining every resource on earth in the insane quest to convert it all to profit.
Tough to find a good link to show exactly when this stopped being true, but it's pretty much common knowledge. US was world's top oil exporter for many decades.
"In the early 1950’s, geophysicist M. King Hubbert developed a predictive model for forecasting oil production decline curves. In 1956, he estimated that U.S. oil production would peak in 1972. At the time, the U.S. was the world’s largest exporter of oil and production continued to rise. Hubbert was thought to be another false prophet. But others failed to consider what Hubbert clearly recognized - while oil production was rising, reserves were declining. U.S. oil production eventually peaked in 1970 and has since declined steadily."
A programmed government default would likely include negotiating lower interest and extended paybacks sort of like a bankruptcy proceeding. Bond holders would be limited to rolling over only a partial amount at reduced interest. While new debt issuance would be under more favorable conditions (at least for a while)
I think it's more like musical chairs. When those circling the chairs realize there's a huge discrepancy between available chairs and bodies wanting a chair (like 30:1, 40:1, or as Wall Street investment banks would like it 60:1), someone is gonna step out of line and stop the music. I think musical chairs is a great analogy for the amount of leverage we should accept as a society. If the music ever stops, which it inevitably will, what ratio of chairs to bodies is acceptable?
Only a cock-eyed optimist born of an idealist, by the name of Polly Anna, wearing rose-colored glasses, and high on meth would even conceive of these two possibilities ever happening.
"Stopping all wars which are not absolutely essential for the protection of the United States from massive and imminent attack is crucial.
And abolishing the central bank and taking over the money and credit creation functions from the private banks may be an important part of the solution to our debt trap".
These are my thoughts exactly. But when will opacity be exposed?
I believe that politics will be the controlling factor here and I haven't seen any will to move away from the status quo and indeed 40% of Americans believe that we need more gov spending (ala health care) and unfettered give aways to move every segment of society.
At the same time that we will be clinging to an ever rising stock market the government will:
"You're always rolling your debt, and the market's response to an inflationary strategy is (not surprisingly) higher interest rates."
That's assuming that there really is a "market" buying your debt, and not your own central bank, operating secretly through innumerable and untraceable proxies.
What the hell does a "market" have to do with any of this?
There is no "market" when you have someone that can create infinite money, and in secret no less.
Well, they can and they can't. To keep the scam going, they have to exercise some moderation. Otherwise there would just be a flight to other currencies or commodities and the whole pyramid would collapse.
The fed might want some inflation, but they don't want hyperinflation as this would be suicidal for them. The dollar is their power, so they're not going to destroy it.
In a real and transparent market, yes, of course they would. But there's no real way for anyone outside of their own little inner circle to know whether they are exercising any moderation or not.
They have INFINITE MONEY and nearly infinite methods for obfuscation.
Or we could hand the keys of the US Trust Territories to our debtors. Guam -- say good morning to your new Chinese landlord. We'll give the Virgin Islands to Europe (they spend most of the winter there already -- might as well own the place.) Who wants Puerto Rico? And who will clear me of $4 trillion for American Samoa?
There are at least 2 fundamental problems with your Debt:GDP vs Inflation chart
- The data does not indicate a time when the government attempted to inflate its way out of debt, just a comparison of the 2 at all times. If you take a Keynesian approach, you would increase spending in a recession (presumably when inflation is low as are receipts, meaning debt goes up) and decrease the spending (or at least growth in spending) when the economy is growing (presumably with higher inflation and less need for debt). The chart then would confuse cause and effect
- Another problem is the definition of government debt. As the government has moved more and more debt off balance sheet (via GSEs, unfunded liabilities, guarantees, etc), the definition of debt should be adjusted. I doubt that is the case here
The rest may or may not be true (I'd certainly argue that entitlements are a much bigger drag than is your bugaboo M-I complex). But I think your initial chart at least does not prove your point
Entitlements and the military-industrial complex are two sides of the same coin: the welfare-warfare state. The idea is to have a massive leviathan state that abolishes all downside, uncertainty, or threats (real or imagined) from the world and coddles us to protect us from the big bad world.
Welfare is just warfare against the ordinary downsides of domestic life.
Anonymous: Invade Venezuela, then sell it off in pieces.
Hmm… Given the performance of the USA military/industrial/political complex since the sixties against various small, third world countries defended by disorganized militias consisting of kids in head bands armed with old Russian surplus AK47s…
Still, I guess El Presidente Of The USA For Life Hugo Chávez would probably do no worse a job than the current incumbent and alternatives.
Anonymous: Invade Venezuela, then sell it off in pieces.
Hmm… Given the performance of the USA military/industrial/political complex since the sixties against various small, third world countries defended by disorganized militias consisting of kids in head bands armed with old Russian surplus AK47s…
Still, I guess El Presidente Of The USA For Life Hugo Chávez would probably do no worse a job than the current incumbent and alternatives.
You can absolutely inflate your way out of debt. You can't inflate your way into growth or increased prosperity.
And this is the maddening part about mish, name once instance where a hyperinflation has occurred that is NOT the result of government debt? It's one thing for the central bank to purchase private debt. That money had already been created through the fractional reserve process. Stemming the bank run and buying private debt is matching real cash with checkbook entries. The checkbook entries had already created the increased money supply.
When the central bank purchases government debt, it is simply printing new money to a liability which HAS NOT at that point cause an increase in the money supply. It is when the central bank purchases government directly that is the cause of a hyperinflation.
Great comment by the egg buyer above...thanks George for providing an article full of depth.....and ending your missive with alternative solutions to the root cause of our economic problems....our other problem is getting the masses of this american-idol zombie nation to awaken to this to this issue, understand who the men behind the curtain are....grow some balls....find some initiative to foster resolve.....and most importantly.....to act.....you ended the article with "this, this and this"......but you left out this...
http://www.swarmusa.com/vb4/
a vision is but an idea...to live it requires action.
Howard Roark
GBT,
So if I understand your hypothesis of our downfall it seems to be "oil". The use of or overuse of has created suburbia, ghost malls and apparently overcapacity of some sort? What is this overcapacity created yo usay by the consumption of domestic oil supplies. You state we used 1/3 of domestic supply to win WWII and still had enough left apparently to create overcapacity. Did little men jump out of the oil barrels and build these malls or was it perhaps easy credit causing a misallocation, not the oil boogeyman..
Put the pipe down Hunter S. before a little straw man carries you away...
I think GBT means it is not sustainable because it requires huge fossil fuel inputs to maintain. Post Peak-Oil, net oil exports will decline much quicker than the actual decline rate due to export-land model.
When the exports begin to really dry up, shortages are apt to occur.
Yes. Yes. Feel free to disagree but it's not exactly a new concept and I'm hardly the first person to have made the argument. See the graph of GDP vs. Oil Production? Any questions? Credit is not real. Oil is.
You simply destroy the "investment" banks within the system - they hold large amounts of money/debt and do nothing constructive with the capital.
When Lehman collapsed it increased the value of the dollar as the remaining dollars were worth more and your purchasing power increased.
How much debt does Goldman hold ?
Easier said than done.
The answer is very simple and elegant:
that tremendous number of debt-financed billionaires that are a direct result of the largest fraud and Ponzi-Tontine scheme in history: take back their ill-gotten gains and looters' booty, and return it to the masses.
Any questions?
Ah yes -- more redistribution to "the masses." Those in Washington are trying hard to make that more of a reality. Keep voting for them.
Help me understand your use of "Tontine" by which I understand a contract between a group with the pot inuring to the survivor.
How does anyone, government or citizen figure out a way out of this mess when the "figures" cannot be trusted? The masters of deception, the Fed, Treasury and Obama have legalized this fraud by changing the FASB accouting rules, as one example, so I don't see how anyone can offer a solution when the "facts" used to develop a course of action are really mythology.
Sell. California. to. the. Chinese.
Make all off-the books OTC derivative transactions (with all their iterations) retroactively illegal (oh, well... too, bad...). Find and prosecute the thieves, restore the loot and allow the dollar refunding (per Christopher Story) to take place, transparently.
Lots of crooks go to jail. Lots of predators are shamed. Capitalism gets a black eye.
And, Wall Street has to prove it's ethics for decades before anyone buys in without DD again.
But two generations worth of mayhem and some wars can be avoided.
Just sayin'....
I'm sorry, but even though inflation will not get us out of this crisis, does not mean it will not be done anyways. History of monetary crisis shows us the end game is inflation and even hyperinflation, the deflationist argument rests on, essentially, "this time it's different".
The solutions are actually hiding in plain sight, but nobody wants to face them.
We first have to admit that we committed the same fool mistakes we made in the 1920s leading up to the depression. Through a combination of greed and arrogance and foolish government policy we learned once again what is the dark side of unfettered free-market capitalism combined with permissive government policy.
In the second place we would have to take the pain and let deflation rear its head and have its way with the economy. Deflation is the proverbial forrest fire of darwinian capitalism which destroys and creates by clearing fresh ground for a better tomorrow. But of course that would mean that a mountain of loans and obligations based on inflated and unsustainable asset prices would collapse. Creditors would get hurt and that, my friends, is politically unacceptable to our current Administration, Congress and the powers behind them. Wall Street firms would have to shut their doors, but new nimble firms would rise up fast in the rubble if given the opportunity. The bright side we would be working off the huge overcapacity in many sectors, resetting prices to affordability in relation to incomes and wages and favoring savings over spending. And the stage would be set for a brighter future, a new mega cycle that would favor the most fit given the new reality. That scenario would spell long term vitality rather than preserving and resurecting that which already stinks of rot and death.
Just as the Depression set the stage for the best part of the American century, a cathartic deflation now would assure a bright and vital future not just for the US but for the global economy. Preserving a musty status quo ante is the unfortunate order of the day for our current political system. And that road leads to the one inescapable solution: detonate the inflation I-Bomb to try and erase the debt-follies and deals gone bad while preserving the political power and influence of those who presided over the disaster.
Not to get picky here, but upwards to 70 million people died leading up to the "best part of the American century." I'd sign up for your proposed "cathartic deflation now to assure a bright and vital future" idea, presuming you're just looking after the best interest of my kids, as long as when the meat grinder starts, it consumes from the top 1% uber rich down to the lower class this time.
Every time a deflationist explains what an inflationist thinks, I cringe. I’m an inflationist and their representations never fit my views. Maybe if they truly understood what I see, they’d also become inflationists.
Deflation is what we need to correct the excesses. The problem is that the ones with the money do not want to write down their assets and since they are in power, they are making sure they can exchange their crappy assets for fresh dollars. And the 1st ones to get those fresh dollars usually win.
That is what is happening out here right now. It’s still deflation because demand has not gone down that much YET and supply is still there. Zirp probably gave companies another 2 years of respite.
We know that Pimco was used to buy up the treasuries (in exchange for MBS). We know that Blackrock is now being used… We are now starting to see the stealth usage of QE. The Fed is buying the treasuries.
We know that it usually takes 12 or more months to see the effects of Fed changes so we can assume that QE effects will be starting soon. At the same exact time that companies cannot refinance at lower rates.
So now is my question… What happens when most debt is replaced with fresh dollars and capacity starts to dwindle? Won’t we have the same amount of dollars for less stuff?
Up to now my take is that deflationists want to believe in a fair quickly self-correcting world while inflationists believe insanity will prevail.
I agree. But. All I'm saying is that in very select markets there will be a complete 'flushing down the toilet' of prices (and an exit to reinvest profits) and the lucky ones with a bunch of dollars will put fresh capital to work by cleaning out inventory (some inventory will just get steamrolled to avoid paying tax).
As soon as the washout is complete a rapid markup followed by new lending - the bastard banksters set sail after this happens - will set the scenario you discuss in motion.
Process won't take long.
The best part of the American century not so coincidentally coincided with the fact that we were the world's leading oil exporter (almost everyone forgets that) and the world's leading lender. Those days are done and gone and they are never coming back. We used up a full 1/3 of our oil reserves to fight and win WWII. The other third we used creating what James Howard Kunstler accurately refers to as the worst misallocation of resources in modern history: Suburbia. Without draining 250 million years of oil reserves in the span of a few short decades, there never would have have been any overcapacity to begin with. Modern agriculture, megacities, the fuel-intensive transportation grid, along with virtually everything else we see around us is nothing more than a short-lived abberation. In fact we're already witnessing the decline. Ghost malls, see-through office buildings, and the emergence of a permanent "unemployed class" are examples. Next to go will be the big box stores and the container ships from China, followed by China itself. Suburbia will quickly follow. And soon, no more than ten years out, max, but more likely within the next five years all U.S. oil production will be militarized. It will have to be. At that point it's goodbye auto and airline industry. We'll likely invade Venezuela--even their crummy-ass sour crude will be of vital strategic importance--ditto Mexico in the form of a "military partnership" so that we can drain the last dregs of Cantarell. And as for Iraq, forget it. We aint never leaving. Not till Mesopotamia is bone dry. There is no way out of this imminent decline short of war, and we are already employing that strategy. But even war is just a temporary delay of the inevitable. The truth is there is no way out that preserves our current "standard of living," which should really be called a standard of parasitism since it revolves around strip-mining every resource on earth in the insane quest to convert it all to profit.
I didn't know the U.S. used to be the world's top oil exporter. Can you provide a link?
Tough to find a good link to show exactly when this stopped being true, but it's pretty much common knowledge. US was world's top oil exporter for many decades.
"In the early 1950’s, geophysicist M. King Hubbert developed a predictive model for forecasting oil production decline curves. In 1956, he estimated that U.S. oil production would peak in 1972. At the time, the U.S. was the world’s largest exporter of oil and production continued to rise. Hubbert was thought to be another false prophet. But others failed to consider what Hubbert clearly recognized - while oil production was rising, reserves were declining. U.S. oil production eventually peaked in 1970 and has since declined steadily."
http://sabino.biz/newsletter-2005q2.htm
Did some quick searches and couldn't find verification either.
Here is a link to U.S. oil import history from 1910
http://tonto.eia.doe.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MCRIMUS2&f=A
My bad. I should have said producer not exporter.
http://www.theoildrum.com/node/5969
++1000
A programmed government default would likely include negotiating lower interest and extended paybacks sort of like a bankruptcy proceeding. Bond holders would be limited to rolling over only a partial amount at reduced interest. While new debt issuance would be under more favorable conditions (at least for a while)
No problem.
Its like guy juggling balls and they just keep adding more balls, sooner or later one of them are going to fall, and then the show will be over.
I think it's more like musical chairs. When those circling the chairs realize there's a huge discrepancy between available chairs and bodies wanting a chair (like 30:1, 40:1, or as Wall Street investment banks would like it 60:1), someone is gonna step out of line and stop the music. I think musical chairs is a great analogy for the amount of leverage we should accept as a society. If the music ever stops, which it inevitably will, what ratio of chairs to bodies is acceptable?
how about peaceful resistance ala ghandi? millions of people in the street demanding a end to this madness, all in peaceful civil disobedience.
Because the Death Star lacks the compassion of the British Empire.
Only a cock-eyed optimist born of an idealist, by the name of Polly Anna, wearing rose-colored glasses, and high on meth would even conceive of these two possibilities ever happening.
"Stopping all wars which are not absolutely essential for the protection of the United States from massive and imminent attack is crucial.
And abolishing the central bank and taking over the money and credit creation functions from the private banks may be an important part of the solution to our debt trap".
What massive and imminent attack? We can stop the wars or they will stop us. We can disarm in the face of no enemies or die a thousand deaths.
I do expect a bank holiday in the next couple of years, with an instant devaluation.
This will happen after the games become too transparent to stomach or handwave away.
These are my thoughts exactly. But when will opacity be exposed?
I believe that politics will be the controlling factor here and I haven't seen any will to move away from the status quo and indeed 40% of Americans believe that we need more gov spending (ala health care) and unfettered give aways to move every segment of society.
At the same time that we will be clinging to an ever rising stock market the government will:
push for green house (read co2) reductions
push for reclassification of illegal aliens
redefinition to having poor classification idexed
pass health care registration
QE II and maybe III
From the excerpt in the article above:
"You're always rolling your debt, and the market's response to an inflationary strategy is (not surprisingly) higher interest rates."
That's assuming that there really is a "market" buying your debt, and not your own central bank, operating secretly through innumerable and untraceable proxies.
What the hell does a "market" have to do with any of this?
There is no "market" when you have someone that can create infinite money, and in secret no less.
Well, they can and they can't. To keep the scam going, they have to exercise some moderation. Otherwise there would just be a flight to other currencies or commodities and the whole pyramid would collapse.
The fed might want some inflation, but they don't want hyperinflation as this would be suicidal for them. The dollar is their power, so they're not going to destroy it.
"they have to exercise some moderation"
In a real and transparent market, yes, of course they would. But there's no real way for anyone outside of their own little inner circle to know whether they are exercising any moderation or not.
They have INFINITE MONEY and nearly infinite methods for obfuscation.
Rusty is correct and you, Dark Helmet, are wrong.
Can you name the hundreds of new categories of credit derivatives created in the last month or so?
Didn't think so....
Or we could hand the keys of the US Trust Territories to our debtors. Guam -- say good morning to your new Chinese landlord. We'll give the Virgin Islands to Europe (they spend most of the winter there already -- might as well own the place.) Who wants Puerto Rico? And who will clear me of $4 trillion for American Samoa?
There are at least 2 fundamental problems with your Debt:GDP vs Inflation chart
- The data does not indicate a time when the government attempted to inflate its way out of debt, just a comparison of the 2 at all times. If you take a Keynesian approach, you would increase spending in a recession (presumably when inflation is low as are receipts, meaning debt goes up) and decrease the spending (or at least growth in spending) when the economy is growing (presumably with higher inflation and less need for debt). The chart then would confuse cause and effect
- Another problem is the definition of government debt. As the government has moved more and more debt off balance sheet (via GSEs, unfunded liabilities, guarantees, etc), the definition of debt should be adjusted. I doubt that is the case here
The rest may or may not be true (I'd certainly argue that entitlements are a much bigger drag than is your bugaboo M-I complex). But I think your initial chart at least does not prove your point
Entitlements and the military-industrial complex are two sides of the same coin: the welfare-warfare state. The idea is to have a massive leviathan state that abolishes all downside, uncertainty, or threats (real or imagined) from the world and coddles us to protect us from the big bad world.
Welfare is just warfare against the ordinary downsides of domestic life.
Invade Venezuela, then sell it off in pieces.
Anonymous: Invade Venezuela, then sell it off in pieces.
Hmm… Given the performance of the USA military/industrial/political complex since the sixties against various small, third world countries defended by disorganized militias consisting of kids in head bands armed with old Russian surplus AK47s…
Still, I guess El Presidente Of The USA For Life Hugo Chávez would probably do no worse a job than the current incumbent and alternatives.
Stephen Heyer
Anonymous: Invade Venezuela, then sell it off in pieces.
Hmm… Given the performance of the USA military/industrial/political complex since the sixties against various small, third world countries defended by disorganized militias consisting of kids in head bands armed with old Russian surplus AK47s…
Still, I guess El Presidente Of The USA For Life Hugo Chávez would probably do no worse a job than the current incumbent and alternatives.
Stephen Heyer
You can absolutely inflate your way out of debt. You can't inflate your way into growth or increased prosperity.
And this is the maddening part about mish, name once instance where a hyperinflation has occurred that is NOT the result of government debt? It's one thing for the central bank to purchase private debt. That money had already been created through the fractional reserve process. Stemming the bank run and buying private debt is matching real cash with checkbook entries. The checkbook entries had already created the increased money supply.
When the central bank purchases government debt, it is simply printing new money to a liability which HAS NOT at that point cause an increase in the money supply. It is when the central bank purchases government directly that is the cause of a hyperinflation.
Maybe there is no possible combination of things that can save us. Sometimes complex systems just have to collapse then be rebuilt. Got gold?
Wow, you are the cut-and-paste king.
"Stopping all wars which are not absolutely essential for the protection of the United States from massive and imminent attack is crucial."
It's un-American to attack the military-industrial complex to save the Country that it's defending against the external evil-doers.
In that case, Obama's reckless spending is even more criminal.
????
Better load all your AR 15 magazines anyway, just in case.
I thought a third way to resolve this debt problem was USD Devaluation. Am I wrong?