You seem obsessed with this topic, but I question the quality of your sources and analysis. Of course if there were an exponential rise in money supply or similar absent a different fiscal, monetary and regulatory climate then this would be deeply alarming. But I feel you're making a meta-version of the same mistake many economists did, of over-extrapolating from a short trend. Massive policy changes inevitably result in discontinuities of quantitative data, so it's a mistake to apply the trend which obtained up to the discontinuity to the new discontinuity.
To take an oft-used metaphor, suppose the economy is a car or truck and money supply is one part of the steering system. If you notice you're heading for a crash, well you're going to spin the wheel hard or slam on the brakes - there's your discontinuity. The path of the car, on the other hand (which is GDP), will change more slowly. And once you've observed that the new course takes you out of immediate danger, you can then moderate the control system which you had drastically changed. In other words, slamming on the brakes (or accelerating out of danger, or swerving - adjust your metaphor to taste) does not in itself damage the car, but aims to substantially alter its vector.
In the bigger picture, addressing the question of whether the US economy will be in the toilet or at least near to it for years to come, of course it will. Just as the unpleasant effects of a hangover can often go on longer than the drinking party which induced it, so it will take time to unwind and recover from the serious structural imbalances of recent years. Obviously, I have a more sanguine view of this process than you do, as I believe it will still be possible for opportunity and growth to take place in the US. If you find my view dangerously laid-back, I guess the appropriate thing for you would be to invest heavily in defense contractors and raw materials.
You assume US can just slam on the brakes and the brakes would stop the car completely. When in fact, with the massive amount of baby boomers retiring/draining SS and medicare, the disappearance of our manufacturing sectors, the increasing commodity (food, oil) prices, and the need to pay back 100T+ debt owed to foreign countries and to ourselves, I suggest that it is impossible.
"massive amount of baby boomers retiring/draining SS and medicare"
This is deflationary, at least in asset markets. Retiring baby boomers = pulling their money out of the stock market = falling stock prices.
"the disappearance of our manufacturing sectors"
Deflationary in consumer markets, inflation in asset markets, at least to the extent that it results in job losses and concentration of wealth among a professional/capitalist class. Wealthy people tend to spend a lower fraction of their income.
"the increasing commodity (food, oil) prices,"
This is an effect, not a cause. Saying that higher prices cause inflation (while somewhat true...see wage/price spiral) is circular reasoning.
"the need to pay back 100T+ debt owed to foreign countries and to ourselves"
Deflationary. Debt increases the money supply; paying back that debt reduces it. This is a large part of why the Fed's actions haven't triggered inflation: they're compensating for destruction of money as homeowners default in droves.
I was talking more about the economy with my list.
As far as deflation is concerned, there's deflation in things we want (houses, cars, luxury items), and inflation in things we need (food, oil, gas, utilities).
That's a pretty link, but one that suffers badly from a lack of sourcing or context. The 'about' page says 'all debt clocks are updated constantly to the most precise calculations using complex formulas and exacting standards, and are verified from multiple sources.'
A pity that these exacting standards do not apply to the grammar on that page, which is a poor indicator for the quality of the (secret) formulas. As for the multiple sources, this may be true, but I am skeptical of a website with no names attached and registered in secret through domainsbyproxy.com, a GoDaddy spinoff which seems to provide registration services for a disproportionate number of GOP-friendly websites.
Not, mind you, that alarmist number vomit is the sole preserve of the GOP. One could find plenty of Democrats willing to scream with equal horror about the idea of $644 trillion in outstanding derivatives, without pausing to consider the global scope, long temporal horizon, or purely notional value of such a figure.
I'm sorry to be a pompous prick in response to what is probably a sincere desire to highlight issues you believe to be important. But I think to discuss them most effectively, you need to hone your arguments and your sources. I know it's hard to strike a balance between the dramatic statistic which highlights the urgency of an issue and the demands of accuracy, which can obscure that urgency with a mass of contextual and qualifying data.
You're not being a pompous prick at all; in fact, your arguments are thorough and to the point. And I do admit I am using dramatic statistics, but it is because I am trying to present evidence to an audience unfamiliar to the area of topic.
And the statistics are dramatic ....well...because they are. That's how bad things are.
I think an old saying really applies here. If you owe the rest of the world $1 million, it's your problem. If you owe the rest of the world $100 trillion, it's their problem.
Derivatives, overall, are a zero-sum game. Unless by some miracle of improbability all the liabilities fall on the US side, there is no way it's going to add up to 200T, unless US companies have been incredibly foolish - and I think the foolishness has been reasonably evenly spread around.
Oh, come now. What you say is correct and this is a big problem for the US, even more so for Europe, but that's a fiscal matter, not a monetary one. Indeed, if your hyperinflation scenario were to come true, one of the silver linings would be that we'd inflate away much of our external debt.
But really, we both know the Fed is tinkering with monetary policy in response to the recent financial crisis, not in response to the upcoming demographic one. Unless you want to go all tinfoil hat and say they provoked the former in order to deal with the latter by stealth :)
I feel you're shifting the goalposts a little with this post, although it is an interesting issue in its own right.
As an interesting (as in "odd") exercise, go to the root node of the blog (http://angloaustria.blogspot.com/) and notice the phrase "Curse of Maturin Towers".
After asking yourself "WTF does that mean?", do a Google search for the aforementioned phrase (http://www.google.com/#hl=en&q=Curse+of+Maturin+Towers); hmm, no useful results (that is, we could not find a definition).
Well, the blog is authored by one 'Jack Maturin'. And referring to one's residence as '(Lastname) Towers' is a popular comic trope among Brits. 'Curse of Maturin Towers' has all the romance and implied danger of a Sherlock Holmes story, but stems from his rueful discovery that a confident prediction has turned out completely wrong shortly after he made it.
An American would mention Murphy's Law, without meaning to imply there was ever a legislator named Murphy who went around causing things to fail.
This "flying up impossibly at the last minute" is a feature of graphs of national debt (http://images.google.com/images?q=national+debt), but it's also a feature of graphs of US furniture sales.
I'm not saying the US dollar is fine. I'm just tired of people using this kind of graph to try to make a point.
I am sure we'll see increased inflation, will it go as high as it did in the 70s-80s maybe. But this article is claiming the sky is falling. Oooh look scary charts, never mind what velocity of money is or how it works, or that the Fed can increase AND decrease the money supply, just look at those scary charts!
You believe the same Fed that gave bankers billions of dollars and is actively working against congress to be audited, is going to 'decrease the money supply', ignore our huge debt and save us all?
You are drinking alot of government kool-aid. Keep watching CNBC.
I am not saying inflation should not be a serious concern, however the article fails to mention that the Fed changed the rules so they can now pay interest on these reserves. That's a massive change in law and policy and is the Fed's primary answer to articles like this one, so it's weird the author completely misses that point.
Here's what FRB NY's Dudley said this week - from Reuters article:
"Dudley argued that the Fed's large and growing balance sheet is nothing that prevents the Fed from controlling inflation once the economy corrects. 'It is not the case that our expanded balance sheet will inevitably prove inflationary,' he said.
Specifically, Dudley said the Fed's new ability to pay interest on excess reserves is a critical tool it uses to keep banks from lending these reserves and thereby creating new credit and boosting inflation. 'Thus, through the IOER rate (interest on excess reserves), the Federal Reserve can effectively retain control of monetary policy,' he said, noting that the Fed can increase the IOER rate if banks begin to find it more profitable to lend these reserves."
The Fed now pays interest on reserves (new as of last fall). When the Fed wants to pull that money out, it can (1) raise the interest rate on reserves, thus encouraging banks to hold the reserves and (2) sell the assets it bought to raise the monetary base.
Looking at, for example, the current yield on treasuries shows very little inflation expectations.
Of course, in the case of a true doomsday situation, gold will also inflate - people will be desperate, and increasing amounts of gold required to get anywhere. Without a functioning economy, everything is scarce => expensive.
I have a gun. You have gold. Which do you think is more valuable?
Force trumps money, currency, and metal. In a true doomsday situation, the guy with the gun will always have more in the bank than the guy with the gold.
i think the point here is that for the first time in quite a while the dollar has a legitimate _chance_ at hitting a doomsday scenario. whether or not that happens remains to be seen, but the odds are greater than they have been historically.
keep in mind that during the depression we were on the gold standard, thus there was none of the inflationary/deflationary risk of a fiat currency..
"keep in mind that during the depression we were on the gold standard, thus there was none of the inflationary/deflationary risk of a fiat currency"
Sure there was. Gold as currency is just as susceptible to instability as anything else, as a simple thought experiment can show.
Consider that the supply of gold, though growing, grows extremely slowly. The supply of goods and services which are exchanged in economic transactions (and for which currency acts as a proxy), however, goes through great spurts of growth which the supply of gold cannot hope to match. Thus, a gold standard during such a spurt can only lead to widespread deflation (as would any currency which failed to keep pace with the quantity of goods and services it must stand in for).
I really don't know why people harbor this mystical belief that a shiny piece of metal is somehow immune to well-understood economic principles.
"i think the point here is that for the first time in quite a while the dollar has a legitimate _chance_ at hitting a doomsday scenario. whether or not that happens remains to be seen, but the odds are greater than they have been historically."
The odd thing is that for most of that time period, there were always folks saying that we not only had a chance of hitting the doomsday scenario, it was virtually certain. The first time I encountered people saying that the Fed was destroying the money supply and we would all be doomed to hyperinflation and a survivalist existence, it was 1991 and I was 10 years old (it probably would've been earlier, but my dad wouldn't let me read his newsletters before then). And folks were certain it would happen by the end of Clinton's first year in office...no wait, by 1997...no, at the Millenium...no, by 2005...no, by fall of 2006...no, 2007 will surely be it...YES, finally it's 2008 and the world's falling apart, except it's going to get a lot worse by 2010!
Kinda like the boy who cried wolf.
"keep in mind that during the depression we were on the gold standard, thus there was none of the inflationary/deflationary risk of a fiat currency.."
Then why did it deflate so much from 1929-1932, or inflate so much from 1932-1937?
Gold was the transmission mechanism for international deflation during the Great Depression. Recovery started in country after country roughly six months after abandoning the gold standard. Countries which depreciated/unpegged their currencies recovered much faster.
Large sample regressions with graphs, detailed timelines and other supporting data in Eichengreen's Golden Fetters.
I just hear it everywhere. I'm sure the whole world has too much at stake if US Dollar loses its value. The economy might stagflate for a while, but I believe it will eventually recover. After all, USA is the largest economy in the world.
Worked for AIG, it's just that the acquirer (the United States government) got a majority ownership stake. I don't see a reason that the same couldn't hold true on the nation-state level.
I think an economy is a region with a 'scope' that depends on the discussion at hand. You could speak about the ecnomy of Colombia in isolation, or you could look at the economy of Latin America as a whole. When comparing you'd compare Latin America as a whole with for instance North America, Europe or Asia.
It is common to compare the US economy vs the EU economy or all of Asia, not to compare the economy of Germany with Texas.
Usually regions that can be lumped together share a border.
To make the comparision more fair I think if you wish to compare 'apples with apples' as much as possible probably the inclusion of the NAFTA region would be more appropriate when comparing with the EU.
Technically US states are sovereign too :) ...and really, if you looked at the US states as separate economies you'd see many glaring dichotomies that would make you wonder how it can be considered a single economic entity.
No, Europe's not a country, but it behaves like one for trade and currency purposes and has no internal tariffs. Nor can Germany (for example) impose a tariff separately from the EU. So in this context, the EU might as well be a country.
Technically the USA isn't a country but an agglomeration (federation) of states.
Originally the EU was fully called the European Economic Community, the goal was to form a single economy. Whether or not it is a single country is not an issue here, the OP spoke about 'economy', not about 'country'.
Does it absolutely have to be a country to be relevant? The EU share the same currency. I don't know for sure, but I can't quite think of a reason why economies absolutely have to be countries.
Maybe I'm just a hopeless optimist, but I have to believe in bouncing back. Sure, times are rough right now but people are more resilient than they are getting credit for right now.
Well, and bear with me here, but have you considered the idea that "bouncing back" isn't the optimistic solution? Say what you will about politics the reality is both President Obama and former President Bush signed us up for a hail mary play largely based on the idea that people should never have to act responsibly. That they can sign a deal that's obviously too good to be true and borrow 10 times their projected earnings because the Government WILL ALWAYS be able to bail them out.
That's both sides of the political spectrum endorsing irresponsibility
But you can't live like that. Government != God meaning that misconception can't last forever. Following that logic it means our society learns this lesson now or by some miracle gets by only to have the next generations face a collapse and learn it. Maybe it's time to feel some pain now so our Children and Grandchildren get the message that the Government can't always bail you out.
The OP made a point of mentioning the potential effects of fractional reserve banking, but apparently "forgot" to mention that the Fed can raise reserve requirements any time it wants to reduce the effects the OP is concerned about.
To take an oft-used metaphor, suppose the economy is a car or truck and money supply is one part of the steering system. If you notice you're heading for a crash, well you're going to spin the wheel hard or slam on the brakes - there's your discontinuity. The path of the car, on the other hand (which is GDP), will change more slowly. And once you've observed that the new course takes you out of immediate danger, you can then moderate the control system which you had drastically changed. In other words, slamming on the brakes (or accelerating out of danger, or swerving - adjust your metaphor to taste) does not in itself damage the car, but aims to substantially alter its vector.
In the bigger picture, addressing the question of whether the US economy will be in the toilet or at least near to it for years to come, of course it will. Just as the unpleasant effects of a hangover can often go on longer than the drinking party which induced it, so it will take time to unwind and recover from the serious structural imbalances of recent years. Obviously, I have a more sanguine view of this process than you do, as I believe it will still be possible for opportunity and growth to take place in the US. If you find my view dangerously laid-back, I guess the appropriate thing for you would be to invest heavily in defense contractors and raw materials.