There will be a slow, grinding, downward adjustment of all dollar prices

The National Investor/The American Spectator ^ | 2001 | Jude Wanniski

[A. Pole]

In 1995, I predicted that inflation's days were numbered. A year later I warned of a new, more exotic enemy-deflation.

Throughout the boom and bust of the late 1990s and the new millennium, I detailed this foe's attacks as it stomped its way through Asia, Russia, Brazil and the U.S. farm and energy economies, and later as it crashed into Wall Street and Silicon Valley. Now it ravages global telecommunications companies and capsizes every Third World economy that counts its debt in dollars, from Argentina to Zimbabwe.

[arete]

If inflation can be caused by the government printing too much money, can't deflation be checked by simply printing more money?

Easy money induced bubbles and deflations are a matched set. If you take the bubble, you take the trouble.

Richard W.

[Fractal Trader]

Isn't that the purpose of non-collectable coins like Krugerrands and those Canadian coins - I forget what they are called - to have low commissions/transaction fees?

There are tax advantages in bullion sales and they do have open markets, but if you look at the buy/sell spreads, you will see an implicit sales commission which may vary from 5 to 20 per cent. On top of that, you have to pay carrying costs such as insurance (which is at least an implicit cost), storage, shipping costs, and the like.

I firmly believe that you can do better by investing in paper surrogates. The lure of physical gold, in my opinion, is not worth the transaction costs.

[jwh_Denver]

This is the first thing I ever read that makes me actually want to buy gold without feeling like I've also been sold a tinfoil hat.

That is the way gold is perceived now. An old relic of the past. But on the other hand if you really get into learning the fundamentals about gold you will see why gold is going to go up.

[B-Chan]

As I understand it, the problem with acute global deflation is that there is less money all around. As banks go under, the "money" they create goes up in smoke; this leaves companies stuck with inventories stacked to the rafters, a surplus of supply that drives prices down below margin, forcing them to dump excess inventory at a loss, leadiing to production cutbacks, leading to layoffs, leading to consumers with no money to spend, even on suddenly-cheap goods. (In the Depression, oranges rotted on railway sidings even as people starved.)No money = no consumer spending = no retail orders = no factory production = layoffs = more consumers with no money. A liquidity trap is created sucking down employers, creating even more unemployment, and further lessening demand -- a vicious cycle.

The end result in the Thirties was a mass of surplus productive capacity -- factories sitting idle due to lack of orders. Public works pump-priming helped, but could only do so much; there are only so many dams and bridges to be built. The Depression ended when World War II arrived, creating a sudden and massive burst of demand for war materiél. Deficit financing pumped billions of dollars into the econonmy as the government placed massive orders for tanks, aircraft, ships, and the raw materials needed to construct them. Based on these orders and the demand created by the defense emergency, the nation's idle productive capacity suddenly found itself with more demand than it could handle, allowing its leaders to borrow against guaranteed future income to finance war plant construction -- and to pay the millions of heretofore-idle workers who surged into the new factories to build the weapons that won the war.

The difference today is that 1) our country has almost no surplus productive capacity and 2 ) there isn't going to be another war on the scale of World War II. Assuming that we are in fact entering a deflationary period, how will the cycle be broken this time?

[arete]

By Jove, I think that you got it nailed. WWII also lead to forced sacrifices (rationing) and that meant pent-up demand after the war ended. The often missed point is that sacrifices had to be made and today that idea in not politically acceptable.

Richard W.

[Chemist_Geek]

How do people with IQ's over 130 have problems having children?

Lack of opportunity. Having children, as you know, requires the active cooperation of at least one member of the other major gender, and that cooperation is more difficult to come by for persons with IQ > 130 than for the average person.

[Starwind]

our country has almost no surplus productive capacity

What do you mean? Our factories are 25% idle.

[A. Pole]

Any evidence of how well a burgeoning 100-IQ population can feed & shelter itself when it can't afford the necessities of life?

The Darwinian selection does not care if people with the average intelligence can "afford" to have children or what standard of living they have or how to they manage to survive. Only thing counts how MANY of them are in the next generation.

People who are affluent, happy, educated and have less than 2plus children from the point of natural selection are as good as dinosaurs.

[A. Pole]

Stimulus for what -- two Starbucks on every block instead of just one?

It would not be bad. To work at Starbuck is OK. Pay is low but the environment is plesant. And people from the neighborhood could have decent coffee with a snack, could meet, talk and have a good time.

If you go to some parts of Greece or Italy you will see that the local economy runs on coffees and cafes. Everyone is there the whole day. Beats standing on assembly line or shuffling the papers in the cubicle. And a bonus you do not need this bloody SUV to get somewhere else.

[arete]

It would not be bad. To work at Starbuck is OK. Pay is low but the environment is plesant. And people from the neighborhood could have decent coffee with a snack, could meet, talk and have a good time.

We're getting there. We are totally dependent on tourism where I live. Nothing is produced in a real sense -- just money changes hands. They call it an industry.

Richard W.

[A. Pole]

We're getting there.

If we got the Mediterranean Sea and weather around, I would not mind.

We are totally dependent on tourism where I live. Nothing is produced in a real sense -- just money changes hands. They call it an industry.

You mean services? Baklava with that coffee?

[bert]

Hold for later

[AdamSelene235]

Deflation isn't the problem being combatted by dropping the foreign exchange value of the Dollar so much as the problem is that the U.S. was arbitrarily propping up the foreign exchange value of the Dollar for DECADES to help aid Japan and Europe and the Middle-East. Well, we can find another way to help Japan, while the Middle-East and old Europe can just deal with a realistically valued Dollar.

Do you even believe this stuff yourself?

[justshutupandtakeit]

I will have to read the whole thing later.

But it promises to be useless when he says things like "tax cuts will be deflationary." Ridiculous. Tax cuts cannot be deflationary but must be the opposite.

[Southack]

Congrats. I've never seen anyone get economic history so totally wrong, and manage the feat of getting cause and effect so wrong.

Your comment that the U.S. has "no surplus manufacturing capacity" was particularly laughable.

I see no reason to engage you further. You have no hope.

[Southack]

We've just devalued the Dollar by 25% against foreign currencies such as the Euro even as localized *deflation* is hitting us here domesticly, yet you have difficulty accepting my explanation that the foreign exchange rate and domestic inflation are two unique beasts (even though I've been posting to you that these *precise* things would happen for the past several months in a row).

Go figure.

[AdamSelene235]

We've just devalued the Dollar by 25% against foreign currencies such as the Euro even as localize

No "we" didn't do that deliberately. It is a side effect of actions which started in 1995. .

posting to you that these *precise* things would happen for the past several months in a row).

When's oil going to drop? The trust I'm holding is going nuts apparently in anticipation of higher oil prices.

[justshutupandtakeit]

His own figures demostrate the futility of his wishes.

If there really is the amount of gold he claims that would work out to 0.0048 per ounce per person. Or about a $1.67 per person at today's prices. How could that provide a money supply for a world economy to function must less grow?

Since he claims that the supply grows each yr. by <2% how does he expect to have an expanding economy since not all of that would go into the MS? How many tons of gold goes into jewelry each yr.?

Mundell is very bright but I would be surprised if Jude is giving an accurate jist of his meaning. What he claims about the benefit of a GS for 3d World nations is simply not supported by any evidence. History shows just the opposite.

[Southack]

As I've said all along, oil will drop over the next 3 to 6 months due to Nigeria ending their strike, Venezuela coming back on line, and Iraq finally getting to sell its oil without limitations.

If you are holding BPT, PWI, or PVX (or any other oil&gas stock), then you are probably seeing good gains due to the price of natural gas and its future trend (all new power plants use it and it can't really be imported from further away than Canada).

[Southack]

"No "we" didn't do that deliberately. It is a side effect of actions which started in 1995."

That wouldn't explain why the Dollar rallied against the Euro in 2001 and fell in 2003. Guess again.