Posted on 12/28/2008 10:42:49 PM PST by Freedom_Is_Not_Free
The only quibble I have with Mr. Janszen here is semantics, the word “stagflation.” That word was coined when government and academic “economists” were totally bumfuddled by the Carter inflation that was so obviously accompanied by declining output. For Keynesian and other “economists” inflation is a synonym for expansion and the words are often used interchangeably. Those folks are zero-sum thinkers and cannot conceive of an actual increase in wealth in the economy of the world. That is why they insist that there must be inflation all the time or the economy is stagnant at best. The number they prefer is about 3%. They would like a higher number than that but the people get agitated at higher rates and there is labor unrest, big strikes and such. Keynesians disbelieve the evidence of their senses altogether and truly believe that there is no more wealth in the world than there was in 1700. They just know that societies and individuals can only get richer by impoverishing others. Thus the abject poverty in Africa is truly a result of Americans (and Europeanss) stealing the wealth of the world. Europeans are not tagged with that crime because they are trying to “share their wealth” by socialism.
OK, I’ve read enough of these theories of “end of the dollar as the reserve currency” to demand an answer to the following question:
OK, if the dollar is no longer the world’s reserve currency, then what is?
And don’t tell me “gold.”
This can easily be translated for the layman as "catastrophic fall in the standard of living".
Which (tin foil hat mode) has been the goal of communists and socialists all along.
"The capitalists will sell us the rope we will hang them with" = "offshoring of capital and means of production" (including that for military infrastructure).
NO cheers, unfortunately.
Except in countries subject to Sharia law. :-)
Cheers!
Carbon Credit Certificates issued by a newly minted UN agency. The bills will feature a picture of Algore and will be known as Goregorands.
//s
Sorry, that’s a cop-out. There will need to be a currency to replace the dollar if it is no longer the world reserve currency.
The world financial system will not function without a reserve currency. The central bankers of the world know this, the Arab oil kingdoms know this, the ChiComs know this. There’s no way out of the requirement for a reserve currency in the world.
So, here’s the choices:
1. The dollar.
2. The Euro.
3. The Yen.
4. The Yuan.
Of all of these, only 1 and 2 are liquid enough to be contenders. The Yen isn’t quite there yet, and the Yuan has serious issues.
OK, so let’s talk about the Euro: As everyone suddenly discovered this October, while the US banking system is pretty screwed up, the banks in the EU are more screwed up, more highly leveraged. Further, everyone discovered the Achilles Hell of the Euro: the Euro is a currency without a single sovereign behind it. It has a dozen or more sovereigns behind it — and when the crap hits the fan, all of the sovereign treasuries behind the Euro go running back inside their own borders, protecting their own interest first and screwing their neighbors in the process.
The Euro is, therefore, now out of the running for being a reserve currency. No one can trust the Euro or the EU member nations any more. And quite frankly, whatever ill befalls the US will blow up Germany rather hard, which will cause the foundation of the Euro to totter. As you said, foreign countries selling goods into the US are going to suffer. Well, the Germans are the biggest exporters in the world, and they depend critically upon exports to the US.
I read the German business press (in German) and here’s the executive summary of what they’re saying amongst themselves:
“We’re so screwed.”
As to the Yuan: Ain’t gonna happen. No even remotely in the running for reasons that no one really trusts the ChiCom’s accounting. They’re flat-out lying about what is going on inside their own banks, their government plays a unified game with fiscal and monetary policy, and games both to maximize their exports to the US, not to maintain a stable currency. Their currency is currently a soft peg to the US dollar, which previously exported inflation to the US. As a result of the collapse in US demand, they’re devaluing their currency against the US dollar in attempts to make their goods cheaper here to stimulate demand. To their dismay, it ain’t working.
The reason why consumer demand is collapsing is that the US consumer is tapped out. No complicated theories needed. 70% of US GDP depends on consumer demand. Well, no money in consumers’ pockets, no demand. This autumn, banks taught the US consumer that there is a very real difference between cash and credit, and the US consumer has none of the former and depended on the latter. Credit is being pulled out of the consumer’s reach with increasing speed and thoroughness, which means that the consumer is going to have to pay down his debts before he can start spending again. Given how fast debt was increased from 2000 to now, that will take years of enforced saving to accomplish.
That’s why cars, houses, crap from China, you name it — nothing is selling. The credit-financed consumption party is over.
Now, if the Fed allows inflation to get out of control (and it won’t until and unless the banks start lending all the cash on their balance sheets), the Chinese might well say “Hey... you’re trying to inflate your way out of paying your debt to us...”
And that would be a valid complaint. What they would do first is quit buying NEW debt before they go dumping the debt they currently hold. This would cause interest rates to go up on Treasury debt before we’d see an explosion in inflation, because the Treasury still has to find someone to sell that paper to. Absent the ChiCom’s buying program with their surplus of dollars, the interest rate will have to go up to attract money out of other asset classes to buy US debt. If there is inflation at this point or seen into the foreseeable future, the interest rate at auction will go up to some rate above what the rate of expected inflation is, and other lines of credit will have to go up based on spreads over benchmark Treasury rates; the increase in interest rates would choke off more debt being issued, and would result in more money being put into Treasuries instead of other forms of debt (a reversal of what Bernanke is trying today by gutting Treasury yields). The economy slows down more, and inflation is checked.
So let’s take this one more step: the ChiCom’s not only stop buying new debt, they start dumping existing debt. Now interest rates go up like a homesick angel - because the face value of existing Treasuries starts to go down as a result of the market being flooded with Treasury paper (eg, look at auto company bonds, paying over 40%). The US economy now really tanks - as in, we’re WISHING we had a Dust Bowl, because it would look better than what we have as a result of 20%+ Treasury yields.
OK, so what happens to China then? They collapse. Completely. Their economy is based on exporting crap to us, and if the interest rates go up like a rocket, the US economy just packs it in and we’re in a situation where we simply cannot afford anything made in China (or anywhere else, for that matter). The Chinese are already seeing domestic civil unrest and riots due to how the economic slowdown has hit them already. Let’s say that not only are toy exports to the US cut by 50% in 2008, but by 2009 (or 2010), there are almost no toy (or any other) export to the US. The US trade imbalance with China levels out because we’re unable to buy anything from them. What happens to China?
They’re toast, along with us.
So if they’re thinking this all the way through, they’re going to think for a sec before they dump their T’s at the market.
Another thing I think that people are not factoring in on China is how much of their domestic economy was based on the run-up to the Olympics. To us, this sounds completely silly. In their economy, the amount of building, primping, etc for the Olympics was absurd and a significant component of their economic growth. As soon as the Olympics were over, their economy started downhill - fast.
The only way I see inflation getting out of hand is that if the banks decide that they’re going to forego the interest being paid on reserves by the Fed and actually start lending money. Right now, banks are not lending - all the money that the Fed is “printing” is ending up on bank balance sheets - and there it is staying. So while it looks like the Fed is running the presses non-stop, the money hasn’t actually made it into the economy as of yet, where it could chase goods and services.
If the banks were to start to lend as a whole too quickly, Bernanke can do a couple of things to pull out huge wads of liquidity from the banking system literally overnight:
1. Call back the debt swaps he’s made.
2. Raise reserve requirements.
Right there, without even touching interest rates, huge swathes of liquidity come out of the banking system.
Guys like Janszen might be right. But for him to be right, the Chinese have to have to be ready to commit economic suicide. I don’t think that they’re quite ready to do that.
Very nice analysis.
My economic prediction is that you get the worst of both worlds, goods inflation and asset deflation.
You get the helicopter drop, goods inflation followed by high interest rates which kills asset value.
Ahhh. This paragraph could accurately be called “Keynesian Economics in One Lesson”!
Good show!
CA....
RE post 26, great analysis.
Finance men generally get their "economics" training that way and all of the government "economists " are actually financial advisors with MBAs who never had to take more than a survey course in Economics plus maybe a specifically Keynesian intro. Finance men do NOT understand Economics or what von Mises called "Human Action." Finance men are hard biased toward Pro-Action and "Expert" control of the levers and dials of the Economy. They are at best Peter Principle fools and at worse connivers in capturing the whole economy for the ruler.
I hope your reply was tongue in cheek.
This “blogger” happens to have been right in his predictions so far. If you are waiting for the Wall Street Journal or CNBC or the MSM or the US Government or Bernanke or Paulson to reveal timely, accurate information, you will wait forever. Those sources have been completely wrong about this liquidity crisis. You need to learn who has been right about predicting deleveraging and economic collapse, and who has been dead wrong. I guess you can go on listening to the same folks who didn’t warn people that the stock market crash was going to cost you a 40% drop in your 401(k).
You are welcome. I don’t post many articles anymore. Mostly I am just preaching to the choir while the diehard Freepyannas who can’t see the problems with the economy, ignore any warnings.
I posted this article just as food for thought. The inflation/deflation debate is unknowable at this time. There are many, like you, who just don’t think it is possible for the government to reflate because they don’t have the capacity to turn the entire market. They are all in the “deflation” camp. There are others, who believe that a determined US government that just keeps printing and printing, can stimulate inflation before true deflation takes hold.
Since I don’t know, I just study these articles and post the ones I think have some value for the knowledgeable people here to consider. It is just food for thought. If I knew the answer, I would be poised to make a financial killing. I’m just muddling through this $64 trillion “inflation/deflation” debate.
If everyone else in the world no longer wants dollars, given economies everywhere heading rapidly into the dumpster, what makes you think Americans will want them?
My point on this scenario is, as you say, if it comes to pass, the result of all this governmental action to strait-lace the markets according to their dictates will result in a destruction of the currency itself. That is my point.
The dollar is at a point where it has very little lassitude for forgiving the abuse it has received over the past 6+ decades. The dollar has, over this span of time, lost 91% of it's 1933 value.
If you inflate the money during a deflationary cycle, the net effect will be to knock the stuffing out what will become essentially worthless specie.
So you have a scenario where (1) the value of the money isn't there, and that's compounded by (2) people not spending it because they don't believe in it. (Never mind that many won't have it in the first place.) Given that, where's the impetus to fire up the engines of inflation?
As another poster stated, the printing presses are running full time today, but that is having no effect, as banks are simply putting the stuff on their books. If trillions are immediately repatriated, where will that money go? Further, during the process of "repatriation", how will those debts be settled to the satisfaction of those trying to liquidate their positions vis a vis Treasury obligations?
If that type of dumping occurs, you will first see the country declare bankruptcy (did you know the US of A is a private corporation? That little bit of legerdemain occurred during Reagan's first term).
Essentially, for the first time in history, the debtor is going to try and dictate the terms of resolution to the lender.
Guess how that one is going to turn out?
CA....
Today, Freedom, we’re all muddling. We’re all with you on that!
I, for one, always enjoy good posts like this that spawn hearty, and sometimes heated, debate on the subject matter. This particular subject is at once current and dicey, and it most assuredly affects us all.
Whenever you see something that’s good, don’t be shy! Post it! There’ll always be guys around like me that will appreciate it.
A very happy holiday season to you and yours.
CA....
(By the way, did anyone out there ever find out who got that $2 trillion the Fed supposedly “lent” out a couple of months back? Just curious...)
That picture sums it up.
But what are we going to do after all those nice foreigners who were financing our profligate consumerism decide to get out, panic selling Treasuries and exchanging out of dollars.
The value of Treasuries and dollars will be driven downward. Those of us, such as myself, who have been in T-bills and cash, smiling as all around us lost value, will get our turn at the wailng wall if we don't reallocate. Treasuries will reverse their 25 years of fairly steadily increasing value, with their imputed interest rates starting to climb again. The cost of imported goods and energy will go up.
We are in a Treasury and Dollar bubble right now, as of this last summer. That bubble won't last as long as the bubble built on unsound real estate mortgage debt. It too will pass, likely with some financial violence.
After a point, the current rulers of China, Russia and various OPEC countries, when there is sufficient unrest within their nations that threatens their rule, will cease to be friends of the dollar. Once one of them starts to head for the exits, the others, even Japan, must rush for the exits as well, or face near certain financial ruin and government collapse.
We will revert to a world without such a reserve, or we will not.
I also believe that you are likely correct that no other currency, whether an existing one or some newly constructed one, is likely to be able to step into the role of such a reserve currency.
So either the dollar stands, or we revert.
And further I pretty much agree with your analysis of the situation with China. If we cannot put the current house of financial cards back together, their economy is toast.
We seem to disagree only on which outcome is more likely, the continuation or collapse of the current system.
You seem to be presuming that the political and financial leaders of the world have some ability to choose whether this happens, and since they won't want to see their economies collapse, they will choose to keep the present financial system running.
Eric Janszen is figuring that we, including our leaders, have run out of room to keep the present financial system running.
Actually, if my memory is correct, Eric made a similar call for a collapse after the dot-com bubble burst. He did not anticipate the mortgage debg and housing bubble.
I am rather confident that sooner or later, the current financial system will collapse, and that as we all seem to agree, that will be ugly. I think I know what will happen, but I cannot be certain of when it will happen. My current estimate is that most likely the collapse will be in the next year or two, on the demise of an aborted Dollar/Treasury bubble. But I am open to the possibility that I am off by one bubble. I seriously doubt that I am off by more than one bubble; which is to say I am confident that the worlds current financial system (dollar as the reserve currency, Americans borrow and spend, upcoming nations lend and sell) will collapse within the next ten years.
By this time next year, I'll wager that you agree on this.
In my view (not one shared by many others) the essential value of the dollar is in the tax collections of the IRS. It is these taxes which pay the interest on the Treasuries which can be reliable converted to and from dollars.
So long as the IRS remains solidly in business, Treasury interest will be paid and the dollar will have some (likely fading) value.
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