...Innovation or Inflation I love this article. I've been saying inflation is the way out. It solves everything, and the credit hit hurts the government's future ability to incur debt. And it places blame in exactly the places I've been putting it, including the excess of optimism that's resulted in a minority of savers owning all the capital assets. The rich are rich because for decades they've been the only ones buying things that create wealth, while everyone else has been squandering theirs on consumption.
Hyperinflation! I need to put new wallpaper up in my home anyway. Might as well use $500 bills - that will be an interesting decor. I think I need to line my bird's cage with $100 bills. I'm thirsty - I'm wheelbarrowing my days wages down to get a 40 ounce from the Circle K.
What a crock of shit. Inflation is cowardly, and redistributive from savers and those on fixed incomes to wage earners, speculators, and banks. And that's if it works. Which it won't, because the banks still have trillions in excess reserves, because they're scared shitless of lending.
I'd bet there's a pareto optimal level of inflation at which new revenue from recovery generally makes up for losses due to inflation. Remember, this is a choice between some debts never getting repaid and many more debts being successfully repaid at lower real value. Besides, inflation's just a money trick -- assets of actual value remain with their owners, and their value in new dollars goes up. It's really just a conversion of old economy dollars to new economy dollars, to match the ability of workers to pay in light of the new, corrected economy. But I'm on the bubble. I have definite principled arguments against it. I'm just thinking it may be the only thing that really works. What if the government gave a two year tax holiday, during which all expenditures were done with printed money, and the budget was actually reduced as well? How many people would object to this? It's an interesting concept.
Inflation always destroys the value of saved money. There's no getting away from that. The only money that should be printed should be to replace money that was physically destroyed. If creditors are going to take a bath in constant dollars for debtors, there's no reason to hurt responsible savers at the same time. As for the some debts never repaid, that's what bankruptcy is for, to get the debts partially repaid at lower real value, which, without inflation, is also lower nominal value. And this way you don't hurt anyone else in the process. Bankruptcy also sends a very strong market signal: don't lend to this guy! This is crucial for preventing the same mistakes in the future. Inflation is a bailout. Lovely, but people don't get paid in assets, they get paid in money (and wages often lag prices, depending on who the first user of the inflationary money is). And if they're on fixed incomes, they don't get raises. And they save in money, especially the poor and lower middle class. The government doesn't have nearly the cash for that. There are only something like 800 billion paper dollars in existence, and the government holds only a very small fraction of that. To the point where they would pretty much have to print up the entire budget. Even if the budget was cut in half, prices would instantly shoot up 125% with more to follow. Think that's good for the economy? I've got some Zimbabwean currency to sell you.
Moderate inflation as a tool for dealing with massive debt overhang is econ. 101 stuff. It doesn't take particular expertise to understand this point, just a willingness not to be paranoiacally fearful of inflation and not to have a goldbug's religious view of money.
Inflation may be one part of the solution. Worldwide reform of how the financial system works is more important.
America -- hell, the world; if it was just America it would be easier -- has a debt problem. Rising debt and eroding confidence have resulted in a major drawback of consumption. No policy change, no revolution, no election is going to restore enough confidence for Americans who are 85% tapped out to begin consuming again. You're staring down at least a decade of malaise. But adjusting the currency so that they are only 50% tapped might do the trick a whole lot sooner. It's not that inflation "always" destroys the value of saved money -- it's that inflation only destroys the value of saved cash. I doubt this represents the bulk of saved wealth. And everything else holds its value. Home prices would go up. Portfolios would go up. Wages would generally follow. What stays the same is credit card balances, mortgage payments, and the utility of everything you already own. I'm not seeing how banks come out ahead in this if the real value of all their outstanding notes stands to be written down. Those serious losses would have to be overcome in order for them to benefit from this. As a plus, the government's credit rating would be wrecked. Deficits would become a thing of the past. And as for the notion that money should never be printed, I believe it's been well established that the Great Depression could have been averted if the money supply had been expanded early to counter the deflation of the day. Finally, there's the Zimbabwe thing. There's a big difference between printing money to inflate and inflating the currency to fund government. I don't necessarily advocate this. But I don't see any other changes on the horizon that are going to restore economic activity. Would you rather we declared war on someone? Canada, maybe?
I had this discussion months ago about industries that create wealth rather than just transfer it. Most here were to dumb to understand.
That would be contingent on having, needing or even wanting one worldwide economy. We don't... we don't, and, eh... we don't.
You can do that by letting the bankrupt go through bankruptcy court. And it doesn't hurt everyone else. It destroys the value of M0 monies immediately, and M1 monies shortly thereafter. Savings accounts, checking accounts, CD's, and accounts receivable. But I bet it represents the bulk of saved wealth for the vast majority of people. As of 2007 the top quintile owned 80% of the wealth in the US. I would be *shocked* if the bottom 80% and especially the bottom 60% had a majority of their wealth in assets that would maintain their real value under inflation. Debatable. I still don't think we've seen the bottom of that market. The bottom 60% own little to no stock. Not everyone gets paid a flexible wage. As long as you don't have an ARM. True, but you're still vastly underestimating the amount of cash and savings most people have. Officially it's not banks that come out ahead, but rather the first users of the inflationary money. But as the Fed (a bank) prints the money and distributes it through its member banks, the first users are, in fact, the banks. It's been this ways pretty much continuously since after FDR made gold-holders the first users in his inflationary scheme (which sure as hell didn't end the depression). So it's a darn good bet the banks will get the money first this time too. Unlikely. No. No. No. No. No. Completely wrong. That's been thoroughly debunked, here and elsewhere. Read Murray Rothbard's America's Great Depression. Finding it is left as an exercise to the reader, but links have been posted before and it's fairly Googleable. It sure looks like the latter is what you were advocating; there's not enough currency in existence even if the government possessed all of it to pay for government in cash, even at only 25% of current budget levels. Have you ever read a word I've posted? Wars only destroy wealth and lives; I'd never advocate one for economic reasons. I'd rather the bad debtors went through bankruptcy, their malinvestments were liquidated, and the creditors forced to take losses, write off the uncollectible debts, and start fresh.
In principle, I'd almost agree with you. A localized economy based on tangible goods and services and direct interpersonal relationships would give us all a lot more control over our own lives. However, in reality, the globalized economy is upon us, whether we want it or not.
We don't have problem with defaults. We have a problem with aggregate consumption due to excess debt. Are you saying the path to restoring consumption involves waiting for a critical mass of consumers to shed their debt through bankruptcy??? Bankruptcies don't hurt everyone else? Which is why you do it through federal budget spending. So that the ones who come out ahead are everyone who would otherwise be paying taxes. Which I understand to currently be mostly the poor and the middle class -- certainly not "the rich." I'll look it up. And I was kidding about the war thing, though it certainly created jobs at the end of the Depression.
Aggregate whatever is a red herring for pleasing statisticians and politicians. We need to get individuals back to consuming sustainably. Consumption as it was in 2007 will not -- should not -- be restored. Credit was too cheap (thanks to the Fed) leading to higher orders of production that were not sustainable by the underlying demand. Since then lots of businesses with unsustainable models have gone under, and the expensive things they produced were bought on consumer credit (also too easily obtainable through refinancing of mortgages and inflated housing values that made it appear to credit card companies that people were not as much a credit risk as they actually were). Contrary to the ideas of Keynesians and most politicians, decreases in consumption do not occur in a vacuum. If consumption has gone down, it's done so for one of two reasons: lack of credit, or unemployment. The former is a good thing, not a bad one - it's part of the correction, and people who are not getting more credit are less likely to default in the future. The latter sucks ass. The way to fix that is to clear out the malinvestments in production so businesses will feel confident that what they make will actually be wanted by consumers at a profitable price, so they start expanding and hiring people again. If you're among those who relies on credit to finance consumption, well, it's now a lot more expensive or unavailable. Your options are drastic cutbacks or liquidation - bankruptcy. Fortunately for the creditors, because of the particularly high capital structure this last time around, many of the products bought on credit are durable, and can actually be resold. As a result, this could in theory have been one of the more mild corrections, but because of the lobbying of the biggest commercial creditors not to have to take losses, we ended up in this bailed out morass. Um, no. How do you think they do? No, then the ones who come out ahead would be the government workers and contractors. With how much the government pays, that's pretty much exclusively the top 20% or so. Especially with the contractors, you're well into the top 10%. And you still can't escape that for every dollar you print this way the country must either go into another dollar of debt (the way it's been done so far, classic, fruitless Keynesianism) or reduce the value of everyone's savings. Even monetizing 1/4 of the budget will produce overnight inflation of 100+% due to expectations - if everyone knows prices will rise, they raise their prices ahead of time. Employees aren't so lucky and wages will rise slower, impoverishing them in the meantime. At the cost of a draft, rationing, few consumer goods being produced, and half a million dead. Wow, what a way to stimulate the economy!
And which do you see happening here? Because I don't see either one. If anything, the problem is too much credit rather than too little, and the unemployment is more of a result than a cause. In credit terms, it sounds a lot more like nobody will borrow than nobody will lend. Do you consider that a lack of credit? It's a good thing if we restructure so that those who are overextended can work off their debt by providing for those who are consuming. But when so many are overextended and nobody is consuming we're a bit "behind the power curve" on that. The question is: Where do you expect consumption to come from? It seems to me that when there's this much debt, we're going to need the creditors to start consuming. We are all tied to the institutions that have to absorb the losses. What if you work for a company that goes bankrupt? I think bankruptcy is an orderly way to discharge individual bad debt, but I don't think that wholesale bankruptcy can be contained to lending institutions. Politically, it will certainly never be permitted to happen. Only if the government started spending more to match the inflation. If the government spends the same amount (or less) while taxing less, then the first users of the inflationary money are really the taxpayers. And I'd love to hear the left complain about how the taxpayers are "the rich." My point about war is that the levels of austerity necessary to effect this correction appear to be extreme. We don't have to endure that particular misery, but if we're planning on taking our misery in small doses, then I think this is going to take a while. For many people, it will be for "the long run" -- the rest of their lives.
Both. With U3 at 9% and U6 at 16%, there are a hell of a lot less people with discretionary income than there were in 2007. Unemployment is obvious. And have you applied for a credit card recently? If you don't get turned down outright, you'll get one with a very low credit limit. Refinancing to get cash out is long over. Yeah, I'd say there's a distinct lack of credit available at the interest rates the Fed is setting. But that's good! I hate to sound like garamet, but ? I've seen nothing of the sort. People *had* too much credit which allowed them to consume beyond their means (especially in real estate), but they sure don't now. Any decrease in borrowing can only be attributed to families knowing they can't pay back any additional debt, but the point is moot since no one can get a loan anyway. From tastes and preferences leading to demand schedules, setting prices, and creating interest rates*, where else? *assuming the Fed doesn't hijack that process, which they always do. They are, at least the ones who are getting paid by their debtors. They and wage earners are the only ones that are consuming. And individual (not business) debtors were over-consuming - that's why they went into debt in the first place. But there's a limit to that, and bailing them out when they hit that and want to keep consuming is a terrible idea. Either you end up in a state where the responsible are perpetually financing the lifestyles of the irresponsible, or you just postpone the day of the financial reckoning for these people. The sooner that is, the less painful it is for all concerned. I was mostly talking about individual bankruptcies here, but the same principle applies. Everyone is not suddenly put out of work in a bankruptcy, especially not a Chapter 11. In case of a Chapter 7, that nearly always means the business was a malinvestment caused by too-cheap credit to begin with, and clearing that away is a necessary part of the correction. The increase in unemployment drives wages down, making it more likely that they will be able to be rehired, albeit not at the same wage. But since demand is down, so are prices. That's because very rich stockholders would be left with nothing, and they lobby their friends in Congress to do something about it. That doesn't make it right, nor does it justify the use of other tools - inflation, war, or asset destruction - to save them. Now, there might be room for reform here, but it's also politically unpalatable - force debtors in default to the lending institutions through bankruptcy court before the lending institutions themselves, but the vast majority of people would see that as picking on the little guy, even though it's a way to possibly shore up the system without a bailout. I mean, jayzus, the idea that even first-time homebuyers in default, with little to no equity, should go back to renting was so unpopular an idea that people were willing to vote 98% of Congress that ran for reelection back into office despite the bailouts! That's really not the case. We have a disconnect here, because I don't see how that's at all possible, short of magically making a fistful of $100 bills appear in people's hands. Describe exactly the process of creating this money, from printing to when it leaves the treasury, and where the differences are to the current processes. It wasn't the austerity of the war that fixed the Depression though, that just hid it by temporarily changing people's tastes and preferences. There was a recession in 1945 which threatened the Depression returning, and it wasn't until the huge rollbacks of government programs and starting to pay down the debt that the economy started booming again 1946. No government and central bank intervention in a crash gets you 1920-1921. The opposite gets you the Great Depression.
No, but I still get solicited quite a bit, so I really don't see that the market has dried up. But I have excellent credit, so I could be the exception. It's one thing to debate inflation vs. shuttered banks due to bankruptcies. Once we get to the point where we agree the banks would never be permitted to fail, is it then okay to compare inflation vs. the bailout instead? Because I'm thinking you've been arguing that allowing bankruptcies to occur is superior to inflation, yet I don't think bankruptcies are really on the table. I don't know if you have to actually print money to inflate, when you could just pencil new balances into government coffers. Does fractional reserve mean we have to print the money??? All of it? Imagine giving inflated money to taxpayers as a refund of their taxes. See how they become the first users of the inflated money? Well, now imagine if you just let taxpayers keep their taxes in the first place, and then funded the same exact same spending with the inflated money instead. Do you see how in that case the taxpayer becomes the de facto first user? The distribution is exactly the same.
Blarg, sorry for the delay. Been a long few days. They're one and the same. Just a question of who gets the money. And with the way inflation's been done historically, there's not even that. If Congress could just stop doing things, the banks would be forced by existing law into bankruptcy. The Treasury can't do that. Only the Fed can. But as a private bank (albeit with government-sponsored monopoly that has no chance of being undone), what incentive do they have to give the government money without getting Treasuries in exchange? They are orthogonal concepts, unless you want the banks to be the first users of the money (which you could force by simply having the Fed stop paying interest on excess reserves and charging a fee instead). Order matters. If you give Joe a million dollars, and he goes and buys out the inventory of the local Best Buy, and then you give Bob a million dollars, there's no electronics left for Bob to buy, so despite having a million dollars, Joe has all the wealth and Bob has nothing. Reverse the order, you get the opposite outcome. Even if Joe does put the electronics up for sale, because there's a million more dollars in the economy (Joe's, not Bob's, yet), Joe can charge more for them. So Bob's million dollars won't buy the whole inventory. Now Bob's got some electronics and zero dollars, and Joe's got some electronics and a million dollars. In this particular case, it's robbing Peter to pay Paul, versus letting Peter keep his money and making Paul the first user of new money. Peter ends up materially poorer either way (just a question of when), but there's at least (in theory) accountability for it when Peter is robbed; inflation is just as much a tax as the income tax, but more insidious, and quite regressive unless you literally find the poorest people and give them the money first. The only other way to actually make Peter better off is to stop funding Paul so much.
