255 comments on Monetary Policy and Weaseling Out of Debt
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255 comments on Monetary Policy and Weaseling Out of Debt
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It is pretty much Don Sailorman position also. As an economy illiterate, I think this is an amazing statement by its simplicity and from an ethical standpoint.
Those nations that hold enough dollar reserves to cripple the US would likewise be crippled by such a move. China needs the US market to keep its population employed. Saudi Arabia needs protection now as much as they ever have. That's one reassuring angle on what is a scary subject. If the US sinks, the world will sink too.
It might be interesting to imagine what steps a foreign nation would take to insulate itself from a dollar crash, and then look if anyone is taking those steps.
Then why did the threat of dumping British pounds by the US in 1956 work? I'll tell you why - because the damage done to the US would have been minor in comparison to the damage we would have done to Britain and Britain knew this. Consequently they looked at the table and folded (withdrew from the Suez Canal).
If/when China can take less damage from dumping dollars than the US will take we have the same situation in reverse, with the US being the debt-ridden lackey waiting to be smacked around by a powerful creditor nation willing to risk short term economic pain to inflict their will upon us.
Learn from history or expect to repeat its mistakes.
"The greatest shortcoming of the human race is our inability to understand the exponential function." -- Dr. Albert Bartlett
Into the Grey Zone
GZ-
This is correct, however the import substitution model was in vogue then, or rather, globalization was not as ubiquitous as it is now. If China beggars the US vis-a-vis dollar collapse, it would only be as a last resort, because they would lose their biggest market. So it may happen, but if it does it will be when we are deep at war -the uncertainty of such a strategy ascertains its not something that can be 'tested' easily - its either status quo or all-in. All-in would be nasty beyond belief for the capitalist system
Nate: IMHO, you guys are both looking at this situation from a very USA-centric point of view, i.e. "China is threatening". China has supported the USA economy by buying up a lot of the T-bills. Now China is saying we won't be doing this indefinitely, especially now that you are talking of us taking a 40% haircut on the balance we are holding. Obviously China would like to gradually diversify away from the dollar- there seems to be an assumption in the US media that China should carry the US permanently.
BrianT, you're right. It's short-sighted to anger one of our biggest lenders. China has every reason to continue to only allow a slow appreciation of their currency with respect to the US dollar. By tying their currency to a falling dollar China's exports to the US and other countries won't be threatened. What does threaten China's exports is a lack of quality control resulting from resource depletion. One example, leather gloves from China. It used to be you could use them a few times, now not even once. They produce more and more and by necessity use poorer and poorer quality materials due to resource limitations.
I expect foreign holdings of US dollars will provide a floor for the US stock market, after all, if other foreigners refuse to accept them, where else can you spend them for anything of value?
Americans keep saying the rest of the world can't let US sink.
But the alternatives aren't really pretty for non-American nations either:
1) Pay off all USA's debt through inflation they export to us
2) Keep up the fallacious view of a unipolar world and the problems it brings
3) Destroy our own economies (due to high inflation, tightly coupled dependence to US)
4) Lose the last bits of our remaining economic sovereignty
Remember, US is only 20% of world consumption these days.
The "rest of the world" (remember the rest of 6+ billion of us?) might just barely swim without you - at least for a while.
Not that we want, but maybe the alternative is even worse for us?
This seems to be very difficult for Americans to understand.
Personally I find it really sad that leaders of the great USA are willing to make others pay their debt instead of taking care of their own mess.
And, I'm sorry to say this, the majority of citizens aren't much better either.
Otherwise all Americans would be campaigning against war (against Iraq, against coming Iran war, against militarization of USA), against selling mis-rated securities to Chinese/Japanese/Brits and any attempts at inflating the debt away.
But that's not happening, is it?
But then again, I'm a citizen of a very small country with a budget surplus and among EU's tightest fiscal policies (which went through a really bad depression and came back stronger than ever), so what do I know.
It's tough to be at the top and try to remain an empire forever.
The oil market has held up the exchange rate of the dollar artificially until now. How long will that last? The Euro is starting to replace the dollar in the drug trade also. Ultimately we have to wonder what activities will be available to the United States after the "market clears" on the dollar. The debt is supposedly backed by the "faith and good will (future productivity)" of the people of the country. Since most have become consumers, making money based on trading each other's debts to perform services, what value will be available from the U.S. to the world economy if the dollar tanks? Back to the basics: food production, mining, manufacturing, technology. How well we can compete with the rest of the world that we worked so hard to sell our technology and education to is yet to be seen. The biggest difference from a competition standpoint IMO is that everyone else is willing to live with less junk in their homes and feels secure enough in their politics to let the government manage their commons for them.
Only us United Statesians are dumb enough to buy the junk made in China and call it "value" simply because the price is low, while fighting tooth and nail against useful government along with the fight against too much government (losing both battles due to lack of focus).
"Always Low Prices" philosophy has given us cheap food, bankrupt family farms, worldwide ethical conflicts, McDonald's coffee, and expensive cupholders to put it in. Meanwhile, the government wants to keep our expensive health insurance system (nothing to do with health care), saying "it is not as expensive as you think". Not as expensive as, maybe, an SUV full of diamonds!! (credit to "Funny Times")
As Reverand Billy puts it: "Can We Shop Enough for Africa?"
If China pulls the plug on the dollar, their history shows they can deal with the loss of business from the US the same way they always have: the people go back to the land. Unfortunately for the U.S., the land has been covered with McMansions and people who don't know what land looks like. The transition will come, but it will be much harder for us than for them.
I suspect that the rest of the world might be safer living with a greatly reduced U. S. The transition would be difficult, but you might hope for calm afterwards.
Your government is probably much more responsive to the opinions of its citizen than is ours. In many European countries (and some in other parts of the world as well), if a few tends of thousands take to the streets in a noisy protest, those leading the government quake in their shoes and change their policies.
It isn't like that here in the USA. Here, even protests of a million people get only passing media attention, and are ignored by government leaders. Letters, editorials, petitions, strikes, pickets -- none of it makes any real difference at all.
Even voting makes no real difference. The only votes that really count are the dollar votes that go into the campaign chests or pockets of the politicians, and those mostly come from big corporate interests. Even those don't matter all that much, because differences between political candidates in the US are trivial; in most European countries they could all find a comfortable home in your major center-right parties. There is no truly left wing in the US political scene, and hardly even any true centrist position from a global perspective.
That's the reason why you don't see huge numbers of Americans protesting. Back in the 1960s, many people were still quite naive and idealistic; it was also a different country back then, and activism actually could make a difference, eventually. It is a different country now, and people know it; they are no longer naive, and they know that it truly is a waste of time and effort to protest. Even worse, we know that with the way things are going, today's protester could be redefined as tomorrow's "enemy combatant", rounded up, and never heard from again.
Check out a Matt Taibbi collumn on the Alternet archive about the changes in protets.
Protests were potent in the 60s because the Administration feared them. Since then they have learned to let them be. Let them protest and on Monday they will go back to their day jobs.
And you also have a war protest filled with PETA signs, Rainbow Warriors, Civil Rights protestors...etc...too fractured.
Taibbi paints a picture of 20,000 protesters, all wearing white T-shirts and blue jeans, completely silent, advocating one message, streaming by the White House.
In other words, show them we can organize and stay disciplined in order to be effective (could carry over into using this power to advocate boycotts as well).
Oh for shitz sake, our entire political body sucks from thee teat of unbacked fiat looking for the next unbacked easy play/handout. Placed power fiat positioning. Doners line up to advance the parade. The grand parade is built upon an age/stage of infinite resources, and, once upon a time that began to vanish, thus it's collective suggestive mediated entitlements reverted to ever more talked up wardumbery and placed thee terror restricting outlooks at every possible outlet without ever forwarding the true causes.... Somehow this contractual weans from asskissed interests,(unbacked fiat) and the populace buys into the whole collective flocking greenspun lie. Why? Because that is what happens to a fiat engineered society of servicing the fastrack blipped-up bleeps and charterized squigglies depicting more blips and bleeped contiUnation of the only betterment in the forseeable future. Thus, WHAT = MORE of the same nonsense....Why would the bullshit artists' of this perpetual nothingness kvetchingly demand and jeopardize anything other than their own cherry picked ongoing trained/placed parasitical authority? I certainly would nominate the highest ordered accomplice to the headfedfiatgod to promote all of my fakery extending my fakery... Basicly, all of that nonsensical digital dumbfoundness quantifies the preceding procesessions, reflects itself, and, ultimately accomplishes more exported useful productivity elsewhere (cheap labor) with replacement of worth reliance on ever more useless unbacked fiat in the homelands return. (Ongoing issuance of debt for cheaper labor, which is a grave fiat cause in itself) I imagine it portends and serves the waning daze of infinite unchecked charades of globalized fiat quite swell.
I expect we shall indeed see how long those blips and bleeps are represented on the said fiat turntable timescale without the real deciding factor behind their fakery of bullshitted infinium petrol-dollarium monetarization. A rather brief inconsequential belch in my estimation. And, I can say this very truthfully because I realize what is truly behind those mediated curtains.
Pushing the string is rather fun fiat economix, but unfortunately it all ends up in a wadded mess with grand elected finger pointers trying to extract the last voter vestiages from the fiat knot.
And as far as thee commy commanders of China swinging the newly induced fiated liberated consumerism populace back into the ag fields....Nada. People don't monetarily backtrack very well once the shoveled mammon of fiat is tasted and takes hold of crap consuming minds- (Example us) Thee ungrowth inconvenience is a rather large adjustment from a mindset of sky is the limit back to basemental dirt subsistence. Nope, takes years to swing it generationally....Thus it will take an eventuality of more escalated resource wars. Stupid is what stupid believes, and stupidity can be accelerated by the power of ten once the establishment of honest money and accountability has been removed from the system. What type of institution would promote such an obvious outcome is a better question.
Life is going to get interesting one way or another.
Talk is cheap. Have said me peace, and it is more than time for me to close down my keyboarded personal piehole and open up the eyes and ears.
Enjoy the calm silence in between the drum beats ;O)
Hi Nate,
Enjoy your comments but in this I think possibly you are looking at China through capitalist eyeglasses rather than socialist ones.
I think that population is the problem that China sees as it's greatest threat. If she plays patty cake with capitalists it will be only for as long as it is useful. Devaluing the dollar I think would put a strain on playing that game and it would, if that devaluation went very far, be time for China to change partners or the game itself. China is large and not to long ago was a world in itself.
wideblacksky "Saudi Arabia needs protection now as much as they ever have." Ainst whom other than the USA does Saudi Arabia need protection? Israel?
wideblacksky: "If the US sinks, the world will sink too." The only country that will sink along with the US is Canada. The USA is not the world, and the rest of the world doesn't really need it, and would probably be better off without it.
-
James Gervais
Hope was the last evil to escape Pandora's box.
Yeah, the world can shrug off the loss of nearly 30% of the global GDP with no problems!
I swear where you do come up with this crap?
But that 30% of global GDP was funded by other peoples money. Now you are upset that the creditors may wish to have their capital back. Remember - you get to keep the fancy toaster. They just want their money.
Why is that Americans have such difficulty understanding capitalism?
Since Americans appear to believe they are entitled to a non-negotiable lifestyle which involves consumption of the worlds resources and expecting the rest of the world to pay for this consumption it may be useful to look at the data.
In the above quote "sell your stock" refers to foreign creditors repudiation of the USD. Visit the URL and scroll around for some interesting graphs.
Everyone has different stats....
I will continue to rely on the figure (flawed or not) the global finance sector works with: around 8.5 trillion. The rest of you can have fun throwing around outlandish figures that have no real bearing on reality. 862 trillion dollars ring a bell to anyone???
Ridiculous!
PartyGuy,
Shrug off 30% GDP??? Sorry the cost of your GDP with the wars involved makes little business sense for the rest of the world. Pick up your pink slip. You're fired.
So you're saying that America isn't ripping off the world for a living?
All I see is hard-working non-whites saving their meager money, which their central banks and corporations lend to the US, where we get to spend as we please without any consequences - or any plan to pay off our creditors. Would any pre-Reagan conservative have called that just or sane?
Would you mind explaining your thought process on how my statement was misconstrued in your head into your response? I mean, I never mentioned any of the topics you just brought up!
.....
I would like to write a paper on it.
These are the words of the person you're debunking:
"Since Americans appear to believe they are entitled to a non-negotiable lifestyle which involves consumption of the worlds resources and expecting the rest of the world to pay for this consumption..."
It sounds like you're refuting him in order to prove that everything is great, America will get away with living beyond its means, the world is either grateful for or trapped into accepting our vampirism.
And we've had 7 years of Rove-led coordination of government lies and stats to tell us that everything is great, America will get away with crimes, and the world is either grateful for or trapped into accepting it - all used as part of a long-term plan to create a police state. So no, I don't trust your stats accurately reflect our real condition, anymore than I would trust Leonid Brezhnev's as the USSR rotted from within.
My comment was ONLY that I use debt numbers that the rest of the world does, no the 40 trillion, 60 trillion, or 862 trillion figures commonly toted around here. You have put an entire arguments worth of words in my mouth...a TOD first I am sure!
Are you/they comparing US GDP to total US dollar denominated debt outstanding without adjusting for the fact that a lot of US dollar denominated debt goes for investment into foreign subsidiaries of US corporations or foreign subsidiaries of foreign corporations? And if you are making such an adjustment, can you give me your/their the percentages for:
1) US dollar domestic debt for US domestic investment?
2) US dollar domestic debt for foreign investment?
3) US dollar debt by foreign entity for US investment?
4) US dollar debt by foreign entity for foreign investment?
Thanks.
What you're looking for it's called the "The International Investment Position" which is the difference between what you owe to foreigners and what foreigners owe you. (in short, actually it's also about assets, cash or other stuff. Note that things like defaults and derivatives trading make it impossible to know actually who owes who how much.)
anyway, a few years ago US was down a couple of trillions (2.5 trillion in 2001), since then, considering the deficit it's running i think it got somewhat worse.
http://www.grantspub.com/articles/inflation/
What you aren't getting is that when the money isn't there, it's the creditors who are left holding the bag. And of course it turns out that most of the creditors have sold that debt on anyway, so now the global markets are basically rotten from the inside.
You think it's a coincidence that international markets are following the US markets in lockstep? Imagining that the US economy could sink without taking the global economy along with it strikes me as naive.
The international markets do tend to move up and down together, but it isn't clear who is in the lead and who is following? And it certainly isn't a lockstep at all. In fact, the US markets have lagged behind since 2002.
I think that the US economy will continue above water, with some effort. But in a major economic crisis I think other countries would save themselves by whatever means necessary, including dumping dollars.
"A[ga]inst whom other than the USA does Saudi Arabia need protection?"
Iran.
Saudi Arabia need protection from Saudi Arabia. Like the Buddhist who paid $20 for a $17 pizza and waited, only to be told that change must come from within, Saudi Arabia is waiting and waiting. The American pledge was to the House of Saud, not to the people in Saudi peninsula.
Ummm... maybe, but more likely against the underclass of Saudi Arabia itself, those who are not privileged to receive from the stream of oil money. It's not a democracy, it's a Kingdom that many muslims see as corrupt and addicted to the money and the power that comes from selling the oil. One of bin Laden's purported aims is to topple the Saudi monarchy.
"Ummm... maybe,..."
No, definitely. Without strong opposition in Iraq, Iran is well posed to become a regional hegemon.
"...but more likely against the underclass of Saudi Arabia itself, those who are not privileged to receive from the stream of oil money."
Yes, this is one of Saudi Arabia's many weaknesses.
"One of bin Laden's purported aims is to topple the Saudi monarchy."
Indeed, al Qaeda's primary aim, as stated in their various communications, is the toppling of what its members see as the corrupt governments of the Middle East. After all, those governments stand in the way of the new grand caliphate.
Yes, they would be crippled ... but if we're going to crap on their doorstep(s) by attacking Iran and cause that effect anyway why would they not do it?
The United States does not exist in a perfect vacuum populated on one side by our cruise missiles and on the other by soft targets. The irresponsible, bullying use of our military may have been the only politically acceptable course for the Bush administration, as they lack the sand to confront peak oil, but the effects are the same at the end of the day - we're neither trusted, nor respected, and now China demonstrates that we're not really to be feared all that much, either.
Thank you, neocons, but your (dis)services are no longer required.
Actually, the world, especially China is coming to realize they are exporting hard assets for worthless US paper. They have been selling Sovereign Debt(borrowing) to make products to trade for nothing. On paper, the trade surplus looks good. In reality, they cannot spend that surplus in their own country without converting the US dollars into their own currency, causing the build is US dollar reserves. Now that they are coming to realize they are actually losing money(real wealth) rather than making it, there is a sea-change coming. Sure, the loss of liquidity resulting from stopping the exports will be temporarily painful for them, but better than bleeding to death for no reason. They can quickly convert their industry into providing for domestic needs. For the US it will be catastrophic. As with all scams, once it's discovered, those being scammed stop playing.
To make the trade surplus a little clearer. Say you are China and have a bag of gold coins. On the other side of the table is the US with a bag full of wooden nickles. Even if you are getting 10 wooden nickles for every gold coin you are still losing on the deal. Right now the world is just coming to realize they're just wooden nickles.
I think you need to take a broader perspective.
China's development was prompted largely by US foreign investment. US firms saw the far east in general as an export platform offering an educated and skilled workforce and low costs. Early entry into China also offered the future advantage of being able to sell to the Chinese internal market as it developed.
China benefited from a flow of capital and technology transfer to the point that I believe it is close to a take off point where they can continue to grow based on internal development. This is similar in some ways to the historical pattern of US development which commenced with trade then internalized and continued to grow with relatviely few connections to the international community.
I think there are many nations coming to the conclusion that the US centric international financial system favours the US to the deteriment of all other nation, and that the present world system will decline and be shaped into something else. That "something else" will serve to inhibit unilateral US action and counter the US tendency to reject international agreements at its whim.
For an interesting article on this topic see:
http://www.atimes.com/atimes/China/IH31Ad02.html
I do not ADVOCATE printing money to welsh on our debts. I do, however, think that abruptly and severely increasing rates of inflation are very likely as a response to the economic downturn that will be caused by Peak Oil.
Though I expect both fiscal and monetary policy to fail to restore economic growth, I think expansionary macropolicy will be tried on a huge scale--mainly because the U.S. government and the Fed don't have any other ideas to deal with the problems that will result from Peak Oil.
As I've said several times before, I think deflation is unlikely. (And by the way, deflation would be of no help in dealing with Peak Oil either. What is politically acceptable at this time does not include the measures that will be needed. I think much higher oil prices will change what is politically possible--though when and to what extent I hesitate even to guess.)
Deflation is judged by most to be "unlikely" and perhaps it is. However, it is what is most feared by the Fed, and they have taken huge -- and hugely risky -- steps to sidetrack it after the dot com bust, thus sparking the housing bubble.
However, notice that with the enormous expansion in money supply over the past half dozen years, and the enormous inflation in asset prices, there has been very little inflation in goods and services.
Now, imagine that a few trillion dollars in assets evaporate in a few weeks in a bond bust, and throw in a few trillion more in an accompanying equity bust. Then consider that the Fed would try to flood the market with liquidity, but what if nobody wants it? Remember, this liquidity is in the form of cheap loans, which have to be paid back. Most of those dumping assets are trying to raise cash to pay off debt, not add to the debt they already have.
This is why the Fed is terrified of a liquidity trap gaining too much momentum, because deflation, once started, is extremely difficult to counteract.
Also, keep in mind that the Fed's ability to lower rates is severely restrained by its need to keep the US dollar from collapsing. The current account deficit is a couple billion per day, and international markets are going to demand a higher rate. That is, if they are going to accept ANY rate to loan to the US. After being burned by "toxic financial waste" loaded into the bonds they already hold, why should they want to buy any more?
I think that the Fed is hamstrung, and deflation a very real possibility.
I think yours is the best explanation yet. It took me a few months of self asked questions about "Helicopter Ben" dropping money and you are 100% correct. The book keeping at the end of the day must balance. debt is the "helicopter" money and if nobody wants any.....
In the economist blogs I've been reading, the risk of deflation has been rearing it's ugly head with increasing frequency lately.
It used to be all about inflation, but now with the "market liquidity crunch -> credit liquidity crunch -> insolvency risk -> vix spike -> loan aversion" cycle starting to play out, the deflation risk (think Japan 1990s) is becoming more apparent.
However, I do want to discuss the "there has been very little inflation in goods and services."
That is only true, if one excludes most of the food, most of energy and housing living (ref: CPI or PCEPI).
I think for ordinary people PCEPI is not a very good measure of inflation, as recent years have demonstrated.
I also partially agree with the macroeconomists who say that sticking blindly to any type of cleaned "consumer inflation" measure control measures is foolhardy (of course central banks are doing more than just that, but that is the official line of defense). But I'm no economist, and don't play one online.
I do find interesting various comments that say if credit is not destroyed ("money" can be destroyed as it can be created), oil crunch continues and biofuel booms increases, then the risk of CPI (not to mention headline) inflation increases also.
I'm all for asset deflation and lowish CPI inflation myself.
Destruction of speculative credit without totally damaging the average joe.
But the question remains, is this even theoretically possible in the situation USA (and the 'rest of the world') now finds itself?
I have no idea.
Keep in mind that the usual signals wrt inflation are being confused by the impact of the run up of energy & food prices (and health care also factors in there). In a non-inflationary environment, increases in prices in these sectors would be offset by price decreases in all other sectors (including labor). We're used to thinking about inflation as a more generalized phenomenon, though, so when we see such a mixed bag we get confused.
The fact that wages and housing prices are only stagnant and not really falling to any appreciable extent tells me that there probably is a fairly substantial general rate of inflation underlying everything -- probably far higher than the "official rate", of Shadowstats.com is to be believed.
WNC,
The fact that wages and housing prices are only stagnant and not really falling to any appreciable extent tells me that there probably is a fairly substantial general rate of inflation underlying everything
CNN was on yesterday that housing prices were falling in all but three major cities. Seattle , Portland and I forget the third. I would say it is a matter of momentum.
Remember, this liquidity is in the form of cheap loans, which have to be paid back.
Yes, this is what the FED is currently doing. But have you thought for a moment what they will do if conventional liquidity injection does not work? What about monetizing the debt? I seriously expect them to start buying back US paper, creating cash out of the vacuum.
As for the dollar collapsing - not excluded, but they will make sure the operation is done slowly enough not to cause panic. Our creditors will be pissed off of course, but they have little choice but play the game while trying to minimize their losses... "It is our currency, but it is your problem". Does this ring a bell?
You got it Jim.
Also, keep in mind that the Fed's ability to lower rates is severely restrained by its need to keep the US dollar from collapsing.
It's the art of Removing the Pin from the Balloon Slowly
Deflation is where we are headed. ARM Reset Schedule at the turn of the next year (07-08) is going to be a killer.
MANY MANY MANY more forclosures to come. Debt will HAVE to be written Down/Off. Deflation of Asset Values (with pockets of asset inflation of specific items like milk...).
The shirt sleeve is caught in the cogs and there is NOTHING Benny can do about it.
Hyperinflation after that maybe.
Like the Diver doing a cannonball into the water, Water is initially sucked down with the diver(deflation) then a WHOOOSE up it goes into the air(hyperinflation).
Hey Samsara,
Have you anything one can look at about the ARM Reset Schedule?
I was talking to a hot dog vendor outside of the local Home
Depot yesterday and he looked a bit glum so asked if business had been not up to snuff lately. He replied that it had actually been quite robust. I went on to relate what J. Kunstler had mentioned in his latest, that the Fair food sales in the US were down.T he vendor then, without a pause in slapping mustard about, startled me by saying that, quote: "they have't seen anything yet wait till the ARM's reset"
So let me know more OK, I gotta be up to speed when I go for my next Hot Dog:)
BTW Jims statement The current account deficit is a couple billion per day, and international markets are going to demand a higher rate. That is, if they are going to accept ANY rate to loan to the US. After being burned by "toxic financial waste" loaded into the bonds they already hold, why should they want to buy any more? really makes the sort of sense to me that one can bank on.
------
EDIT, Here is an ARM graph with 6 ARM's.
http://www.bubbleinfo.com/journal/2007/8/22/interpreting-arm-reset-chart...
Prime ARM and sub prime ARM I can get along with but the other four ARM's are a mystery. Any one know what sort of weirdness they can get up to?
I used to work with mortgage backed securities (MBS) and back in 2000 I was terrified of the economy's exposure to ARM resets. (I also got called Mr. Rain on the Parade Deal Killer.) The bloodshed was postponed by the Fed rate cuts, but enventually the axe fell.
Every rate reset from here on out could be another ratchet of the Iron Boot. The Fed is backed into a corner: cut rates and use MBS to pump money into the US or maintain the dollar?
The pessimist could argue that the consumer who is repaying debt and purchasing basic subsistence (i.e. energy and food) will lose in either case and deflation is inevitable. All of the Enterprises that rely upon expanding production/consumption will fold as their capital evaporates or their demand base evaporates.
I doubt it will be as one sided as all of that but the transition away from grow-grow-grow will be unpleasant for the average consumer who really has no concept that they have done anything wrong. Of course this attitude has been cynically planted by those who profit from grow-grow-grow. There is no 'profit' in moderation and enjoying the roses.
- Shunyata
I think it is already clear that the Fed has decided to lower interest rates. I am just waiting for the other shoe to drop now - a major drop in the dollar exchange rates. They can't have it both ways, although they could have avoided the worst of both worlds by standing firm at 5.25%. I must confess that I thought that standing firm is what they would do, and am utterly surprised that they caved in this quick with lower rates.
US$ R.I.P.
Short term I think you are right, hyperinflation is likely in our future. Make sure you've got a good wheelbarrow to carry around the million dollar bills.
Long term, however, I see a major and permanent decline of the US economy as an inevitable consequence of peak oil plus numerous other problems. The US economy is unsustainable as is, and the hyperinflation will do nothing to help.
Once the US economy goes into long-term decline, though, then we may very well see a long deflationary period. Economic decline and deflation do tend to coincide, though not absolutely so.
Note that during the decline of the British Empire, the pound went from $5 to under $2. So to an outside observer, the pound was depreciating more than twice as fast as the dollar, even if it didn't show up in British inflation stats. During that period there were long recessions, one pretty much from the end of WW1 to the start of WW2, without ever having as severe a depression as the US. It used to be said that this lack of volatility was a sign of a senile economy.
So there are ways to greatly reduce the value of a country without it ever being called "hyperinflation".
The US can do that, but it can't exempt itself from the consequences. Hyperinflation of the US money supply will result in a massive decline in the exchange value of the US dollar. That will mean that we can afford to buy far less imported stuff, like oil. Which means that if we pull that particular trigger, the US had better be prepared to live within its means as a newly non-importing nation. I submit that we are patently not so prepared.
It also means that any US allies who depend on the dollar will likely seek to break that dollar connection:
If the Saudis cannot feed themselves due to the drop in the dollar do you honestly think they will support unilateral action by the US that threatens the dollar?
If the American people allow the madman in the Whitehouse to continue to act in violation of your own constitution do not expect any form of sympathy from any other citizens when your empire collapses under its own weight.
The Saudis can barter oil for wheat. It doesn`t matter if the exchange is denominated in dollars or monopoly money. Now whether the House of Sauds has a better option is a different issue. People who buy oil with stuff folks actually want to keep in their wallet.
RobertIn Kyoto
I haven`t escaped from reality. i have a daypass.
robert2734: "The Saudis can barter oil for wheat." But the bargaining is likely to become one sided against them rapidly. One must eat, but one doesn't need to go for a Sunday drive. Most farming equipment is diesel, and diesels will run on many oils.
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James Gervais
Hope was the last evil to escape Pandora's box.
I keep thinking the USA has something more valuable than oil. Farmland and water. Our farmland is depleting but soo is their oil. If you think oil is tough to do without, try food. We waste so much energy, I think we can cut our oil usage in half without any serious lifestyle changes. In any case, only a military blockade which is an act of war by international law will prevent the Saudis from selling oil and buying wheat. Whether the deal is denominated in dollars, euros, monopoly money or shiny beads I can't say.
RobertInYokohama
I haven`t escaped from reality. i have a daypass.
ImSceptical, it would appear to me in todays 'civilisation' that oil IS food...
Nick.
The "arrangement" between the House of Saud and the Govt of the USA was that KSA would transact oil in USD and the USA would provide military protection to the House of Saud.
A move to a barter economy would break that agreement.
I don't see such a move as impossible but it does mean a rupture between the two parties.
To quote Darth Vader, "The Deal has been alterred" The Saudis have a trump card and we have a trump card. Let the dance begin. The only way the Saudis can starve while holding the world's largest reserve of producible oil is if someone blockades her. It would take massive idiots on both sides for the diplomacy to come to this and currently only one party is led by a massive idiot.
RobertInKyoto
I haven`t escaped from reality. i have a daypass.
You are assuming that Idiot is actually leading. I say he is a spokesman for something larger.
Critically thinking about these issues and coming to his own independent solution would literally blow his mind.
The media reassures us that the Arab monarchs are building an oil pipeline to prevent the evil Iranians from blackmailing them by blockading the Straits of Hormuz.
But has anyone mentioned that this pipeline might also stop the US Navy from blackmailing the Arabs by selectively blockading the Straits of Hormuz? Keep an eye on the route.
There are two solutions: Inflation or recession/deflation. I am trying to guess which, because my savings depend on it.
I am guessing the liklihood is inflation. They may try a controlled inflation scenario 15% per annum for example. This may threaten to be runaway and the only way to correct recession/deflation.
In that case I will buy hard goods. What should I buy? Gold? I was thinking of purchasing a mixed bag of useable goods -- rubber tires, bicycle tires, bicycle parts -- stuff that is generally always in demand and shares in resource companies -- oil etc (ones which just pump existing oil fields)
I am hoping for deflation -- this makes my cash position king.
doesnt deflation mean the US defaults on its loans and debts?
I think they will look out for themselves, and inflate..
Oil watcher named Ed
Check out Permian Basin Royalty Trust (PBT) and Sabine Royalty Trust. As of yesterday Permian Basin paid 11%, no debt as of yesterday (haven't checked today). Its a no production cost interest in wonderful old fields in the Permian Basin, they'll deplete, but are unlikely to get plugged out no matter what happens. If the price of oil drops by 50% you'll still get your money back and if it doubles or triples you'll do great. In the mean time, it pays monthly. Same way with Sabine, but I'm not as familiar with them, but Deffeye's site says that's his investment.
I am not a financial adviser or anything similar. Do your own research and check with your accountant as to your personal situation, but I personally think diversification is BS. I'm either going to be an absolute fool or a genius but I want out of the US dollar and that's a commodity. Bob Ebersole
I agree that diversifying out of the US$ is smart. I try to look at in in the context of a volatile future which appears to be on the horizon. In the past month the dollar has strengthened but the longer term trend for the past 5 years has been down.
I am always interested in other peoples opinions on this. Some diversification options I am aware of:
-oil trusts as you noted
-arable farmland
-investment grade diamonds
-gold bullion
-silver bullion
-select foreign currencies (swiss francs are my fave)
Regards,
Gunga
Don't neglect the possibility of a one-two punch: hyperinflation followed by decline/deflation. See my reply to Don S above.
It is a real challenge to navagate through the shoals with that one.