Quote:
Originally Posted by sailaway21
So now the Fed has become the supreme Keynesian unemployment vs. growth Philips-curve tinkerer. Until this totally mistaken policy is changed, we can have ten more reregulation plans that will not fix the real problem.
|
It all comes down to one basic misunderstanding.
Phase 1 - If there are a group of people and they are trading with one another with $xx's (some currency) and trade becomes vigorous, they may start to drive up asset prices to some small degree. Corn they've grown, clothing they've made, all the rest, may become slightly more expensive due to demand, but not much, and it levels off given some static population size and static amount of money per capita.
Phase 2 - During a debt bubble credit is too easy and people are able to borrow enough money to drive the price of assets up. If one person is able to borrow into creation as much money as another person who is actually working for their money, the person who borrowed money into existence begins to compete with earned money and marginalizes (to some degree) the person who is making an honest living. The money will have to be repaid, however, at some point. The person who borrowed money also starts to act as pressure on prices, because now there is much more money in the economy, so prices start to rise. This can turn into a debt bubble if rates are too easy because honest work doesn't pay anymore, the only way to get ahead is to out-borrow the next guy. People who are working for their money essentially can't even compete with borrowed money anymore, and you end up enslaving workers to a banking class and a general quiet discontent that is only sated by more and increasing amounts of borrowing.
Phase 3 - The debt bubble pops because at some point the debt is so high that it simply isn't sustainable, savings rates are just too low, debt service is so high nobody can afford to even make payments on their debt much less borrow even more, etc, etc, and you get deflation. Deflation is the destruction of debt, debt inflation in reverse as defaults increase and the whole house of cards collapses in on itself. Borrowers freak out because all the stuff (stock, homes, cars, whatever ...) that they paid top $xx for suddenly lose price, people stop buying, unemployment increases, and we all have first hand experience of what can happen. Quiet discontent becomes a little more vocal as people lose the last crutch they had and are left with nothing but debt service.
Phase 4 - Here is where they finally screw it all up ....
If the powers that be would just let the deflation continue until the debt unwinds (which can take a long time and be very painful) then everything would eventually work itself out. As deflation continues, people who are working get pay cuts, etc, but those cuts are LESS than the deflationary price decreases, so their salaries are actually increasing (if they can keep a job). Prices fall, everyone with savings suddenly becomes rich, and people with debt pay the piper and have to service their debt with increasingly expensive money and all the rest, demand continues to drop, etc, until at some point it all hits bottom and people start working and borrowing again. Bleak if you are a borrower, terrific if you saved up money for your retirement and have cash in your pocket, tragic for everyone involved, but not as bad as it could be (be thankful at this point because you haven't lost everything yet ...)
What happens though, and they are doing it now, is that some of the powers that be start to believe 2 important things, 1 that is correct (albeit dishonest), and 1 that is incorrect -
- Correct - They start to believe that if they devalue the currency then they will make it easier for borrowers to pay off debt at the expense of savers, which is completely true, however unethical it may be. The benefits of this are debatable, but if you have most of the people in the country listed as borrowers and very few savers, obviously it is going to be the politically expedient thing to do, and you piss off the least number of people (though some would argue that you piss off the ones who could actually solve your problem).
- Incorrect - They also start to believe that by artificially increasing prices by devaluing the currency people will just start to go out and buy stuff again. This is naive and shows a complete disconnect inside of human brains everywhere because it is essentially the same thing as saying that if you are running out of gasoline in your car that you can reach up and push the needle on the instrument panel up so it makes it look like you have more gasoline and somehow that's going to get you to your destination and everyone in the car is now going to be happy because there is plenty of gasoline to make the trip. The real mistake here is to confuse demand driven price increases which are due to active borrowing by legitimately charged up consumers and employers with artificial price increases that are brought about by simply diluting the whiskey before you serve it up at the bar, i.e. currency devaluation.
The end result of all of this non-sense will be the greatest game of "Who wants to be a millionaire" ever played. Once upon a time being a millionaire meant something, but now over the past decade as the government used easy rates to increase the amount of money chasing goods and services anyone with a home has been able to become a millionaire simply by owning something. Now that the government has started to "fight deflation" by devaluing the currency they are going to artificially prop up the price of housing, cars, and everything else, they have lost touch with the actual mechanisms that create real economy and have decided to live in a delusion wherein all they have to do is tinker with rates, buttons, and buy the right amount of bad paper and eventually they will get what they want, forgetting completely that actual demand comes from willing buyers of real goods and services. When it is all said and done, the result may be that not only will you have the decreasing economic output, higher unemployment, and decreased demand that you would have during a deflation, but you will also destroy investor/saver trust in the currency as a store of value and you will end up with decreasing economic output, higher unemployment, decrease demand
AND A RUN ON THE CURRENCY as people lose faith not only in the economy but also in the currency. The final effect may be that people simply lose faith in pretty much everything - they start by losing faith in markets and asset prices when the deflation starts, move on to losing faith in the economy as unemployment increases, and finally lose faith completely when they can't even count on the currency as a way to save money to get through the hard times - the tempest spins up, and they panic, and you end up with Trop's "Great Depression II" scenario, except this time you've got runaway price inflation.
Intentional currency devaluation is a whore's solution to a lack of committed interest i.e. if a little screwing around didn't get you a marriage proposal the problem isn't that you shouldn't have been screwing around in the first place, it is instead that you didn't screw around ENOUGH to keep everyone's interest. The reason it sells so well is that people are dumb enough to believe that being a "millionaire" is what is important instead of realizing that what they really wanted was purchasing power, because who really cares about having a million $xx if that's only half as much as you need to purchase a 1980 Honda motorcycle. We are all about to be re-educated on the merits of scarcity as the overwhelming ingredient in faith, but I fear not before we are witness to one of the greatest (and for some the most entertaining) shows in the history of human civilization.