Is Inflation Dead?

The last nails are being driven into the coffin. The smell of the death is pervasive. I have traveled a torturous path to get to this funeral, and I cannot believe I am here. In fact, this all may be a dream or an illusion. I was not allowed to see the body of my friend Inflation – maybe something else died.

I was invited because I have known Inflation since I was born. We had some rough times during her binges in the late 70’s and early 80’s. I thought she had everything under control. Here one second, gone the next. Life is short.

There is a theory……

An economy which does not expand is unstable using our existing monetary tools.

But it is hard to envision how the economy can grow in the short and medium term. For one, there is the unwinding of all this leverage – that should take some time to clear out of the system. And then there is the debt. US debt including government, commercial, and personal is higher than any point in history. We may have stretched debt to the point of resistance to further economic growth. And the last straw is the baby boomers. This is a large demographic which is nearing the end of its credit consumption days – and will soon be an economic drag.

America is in economic contraction. Using traditional tools, the Fed lowered interest rates and the Government stimulated the economy. But this time the problems are bigger, and the economy is not reacting to normal recessionary busting tools. Even at zero interest credit lines, the economy keeps contracting. No amount of printing press monetary expansion is working. Now our new government is planning massive stimulus packages which rival the size of previous government budgets.

Inflationary pressures usually disappear during economic contraction – especially severe ones. The demands for commodities reduce. Additionally we have monetary evaporation from housing and credit and ugly financial instruments of destruction. Inflation seems to have been replaced with deflation.

Using this much stimulus, liquidity and low interest rates - at some point the economy should light up like a firecracker. The acceleration should be so rapid it will be impossible to contain growth and inflation will initiate. This inflation should be massive and uncontrollable. The Fed will have to raise interest rates but they will be too late – hyper-inflation will set in. Higher interest rates rip the legs out from under the economy and we are back to a recession.

The Fed tries to telegraph its thoughts and I am drawn to two particular paragraphs in the Federal Open Market Committee’s statement of 12/16/08:

Meanwhile, inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

Is the Fed trying to create an economic foundation to prevent inflation and develop a predictable economic environment?

Deflationary Economic Growth?

What happens if you replace all the high interest debt in America with very, very low interest debt? I raise this question because of certain other statements in the Fed’s 12/16/08 release:

As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.

Based on the Fed’s statements, it seems they intend to re-package existing credit in America using Japanese type low interest rates all while consuming its own debt. This creates interesting observations and consequences:

• It may be difficult to have inflation. If inflation happened, the market value of the low interest debt / bonds would diminish – evaporating capital. And what about the treasury holdings in the banks? Mark-to-market should force a write-down.
• The government is monetizing its own debt. It does not matter if the Chinese or any Sovereign Fund buys debt or not. It will be consumed within America. The Fed is isolating America from the monetary imbalances of the past which relied on foreign purchase of debt. They are re-writing the rules, and the outcome is unpredictable.
• The Fed and Treasury are creating debt which costs nothing to maintain. Remember interest rates are effectively zero. They appear to want to replace all instruments of debt – government, commercial, and consumer. And if interest rates are zero, the only inflation you have is called deflation as you are consuming yourself. There is no such thing as free money.
• The US budget does not have to allocate money to service the debt as the interest rate is zero. The Fed is giving Treasury a debt holiday.
• The Fed appears to want to create low interest rates in the “longer” term. Is this five, seven, ten or 30 years? With this massive amount of debt, whatever period they choose will be the length of time deflation will run because they cannot allow inflation to happen while this low interest rate debt / bonds are active.
• As interest rates approach zero, the only reason a lender lends is that he is being paid back in dollars which will be worth more in the future than what they are today. The lenders must have a guarantee that inflation will not happen. The Fed is telegraphing this now. This is positive reinforcement for deflation.
• In unstable deflation, the lenders will be reluctant to lend as there is a risk the borrower will be under water within the life of the loan. In a stable deflation environment, the lender can structure the loan so that it will never be under water.
• The dollar would replace the yen as the carry trade currency. This will create a whole different dynamic for the dollar and there will be many consequences.

Is it possible there can be a deflationary economic expansion? It has never happened before. Surely enough liquidity exists for expansion. Maybe the Fed is trying to put the economy into a deflationary coma until the excesses are relieved. I am unable to think of ways that a deflating consumer based economy can expand.

Whatever the Fed is doing is ignoring conventional economic theory and the effects are unproven. When the Fed takes unorthodox actions such as these, we can begin to understand the severity of this crisis. We should also understand that the outcome is unknown.

What about Currency Debasement?

It seems that no one would want dollars based on the deflationary scenario above. Hell, the American dollar will be based on even more smoke and mirrors then before.

I do recognize that Japanese Yen remained strong through the same kind of upheaval. And the Japanese are priming their economy now also and their exchange rate is strengthening against the dollar. If we follow this path, what is the exit strategy? The Japanese have not discovered one.

All countries are priming and deficit spending, but not to the degree of the USA. The theory is that currencies are valued relative to each other - the Fed would have to be banking on America being the strongest economy for this debasement strategy to work.

Then there is the paradox. You do not want inflation but when the dollar devalues against the value of currencies and commodities – you have inflation in certain areas. Will assets deflate and consumables inflate?

Back to the Funeral

Really I am wondering who or what is in the coffin. Everyone is saying Inflation is not dead. Something sure stinks.

Disclosure: None

Comments

[Asbytec:]

Man, good questions.

We're in a catch 22. Asset prices wont stabilize until banks lend. And banks won't lend (borrowers won't borrow) until prices stabilize. Everyone, including other banks are credit rsk.

I do not know if QE will work or not, and you're right...no exit strategy. There probably isn't one in the textbooks. But, the alternative is depression, eh? I really don't know which is worse. I guess we'll all find out in 5, 10, or 30 years.

As long as the markets are volatile, the dollar carry should not materialize. It worries me a bit, but I take comfort in that thought.

I believe you are right about putting the banking system into a coma until a recovery is feasible. It doesn't seem to respond to those pupil flash light tests, Dr Bernanke. Keep it on life support.

Ah, hell...we might have to pull the plug at some point. Maybe come up with a new banking system and currency based on value, not debt. If we can just get the congress to sign the papers and pull the plug.

I am not sure of the dynamics of the dollar during deflation, but it appears it should remain strong. Maybe those bonds will actually be worth something soon. Just a little hunch-back at the office...

Anyway, interesting article. Thanks.

2008 Dec 19 08:43 AM

[investor88:]

The issues are complex but it sure doesn't oesn't sound cheery backdrop for the investor what with references to the coffin.

2008 Dec 19 09:36 AM

[derryl:]

I'm pretty sure that in the past Banksters have been able to manipulate our money and finance system to generate gains for themselves. But I'm beginning to wonder if ANYBODY knows how our money system can be made to serve the long term interests of the economy as a whole. It's one thing to game the system for some limited personal gain. It's another thing entirely to make the system "work".

My doubt applies not just to fiat money and not just to central bank fiat money but to ANY kind of money including gold or 100% reserve gold-backed currencies or hard currencies generally. Milton Friedman said the Fed should be replaced with a laptop computer that annually increases money supply by 2% come hell or high water. I think he's onto something. Warren Mosler's "Soft Currency Economics" is the closest I've seen to a workable monetary system.

Economics is not a zero sum game but money is, at least the kinds of money we've been experimenting with. Classical economic and trade theory (Smith and Ricardo) explains how economic specialization and trade makes EVERYBODY richer in economic goods. That is an "expanding sum" scenario. History has proven these theories to be true. The world is vastly richer today than it was 200 years ago.

But the world is vastly more in debt than it was 200 years ago. There is a serious disjunct here. How can "the world" get in debt to itself?

The most perfect values-exchange system is barter. Asbytec suggests a money system based on value and I think that's right. You trade value for value. In an expanding sum economy, 100 years ago I trade you a pair of shoes for a coat. Today I trade you 10 pairs of shoes for 10 coats, because technology has made both of us more productive.

The problem is thinking up some money system that reliably preserves exchange values and facilitates and encourages economic exchanges in an expanding sum economic scenario.

Smith was right about free enterprise. I am highly motivated to be productive and innovative if I expect to profit from my efforts. In an expanding sum economy everybody can get materially richer, but how can everybody profit IN MONEY?

If money is a universal repository of value (that describes the way we use money today) then we trade economic goods for money. I don't want to trade you 10 pairs of shoes for 10 coats, I want to sell my shoes for money so I can buy other stuff.

Being in the shoemaking business, I use money to buy premises and equipment, materials and labor to produce shoes. The money I spend is my Costs. I don't need all those shoes. The only reason I'm in this business is to make Profits from selling the shoes. If, all in, it costs me $10 to make a pair of shoes, then to make 10% profit I must Price my shoes at $11 per pair.

The trouble is, for every $10 I put INTO the economy as my Costs, I must extract $11 OUT of the economy as my Prices. The $10 I spent becomes the earned incomes of everybody I paid the money to. Where does the extra dollar come from so I can make profit? Every other producer is in the same boat as me, putting $10 into the economy and needing $11 out.

For this system to work every producer needs to be steadily increasing the amount of money he has. I will spend some of my profits back into the economy as personal consumption but I also want to reinvest in future rounds of profitable shoe production and save some money for the future. Everybody I paid my Costs to will also spend some of their income and invest some and save some.

EVERYBODY wants to take more money out of the system than they put in. Everybody wants to "profit" from their contribution to production. (NB, sorry for all the CAPITALS!, but this is what I sound like when I talk)

Free enterprise economics really is an expanding sum system where everybody profits. But money is a numbers game and you can't get more numbers out of a system than the number you put in. If all us producers collectively put $1000 of money into the system, then $1000 is all the money that is available to pay our prices. We need there to be $1100 in the system to make our 10% profits.

The quantity of money does not automatically increase just because our economic goods production increased. There needs to be an external source of new money to put in the system, or else it remains a zero sum numbers game. Some of us will collect enough to make profits, others will not even recover the money they spent as Costs to break even.

Where does the new money come from? In our system it comes in first as business debt to finance production, then later as the number imbalance increases it comes in as consumer debt. That's where we are now.

In our system money is created and issued by the banking system as debt. If we had a government fiat money system the money would be issued as non-debt money, but then why bother producing if the government is just going to give everybody money to buy your stuff?

Hard currency is a fixed-supply money system. If the country has 1000 ounces of gold that's all the "money" that exists in the system. It doesn't matter if this is 1000 "dollars" or 1000 "ounces". The point is there are only 1000 units of money and it's not possible for the economy to be profitable IN MONEY.

Indeed, as Rothbard points out, in a hard currency, productively expanding economy your goods are steadily worth LESS money, not more. 100 years ago a pair of shoes or a coat was 'worth' one dollar. Today, 10 times more productive, each pair of shoes or coat is only 'worth' 10 cents of fixed quantity hard currency.

Business productivity is self-defeating in a fixed quantity money system. You get LESS money for your goods, not more, as you increase the supply of goods relative to the fixed supply of money. The system generates positive economic profits but negative monetary profits.

This might work for awhile in a primitive economy where most people live by peasant agriculture with some barter and don't use money. Or it works in Rome where you conquer and take gold from other countries and thus increase Rome's money supply at the expense of the rest of the world.

But as we see by the steady increase of debt over the past 200 years, in an "all money" economy the amount of money has to steadily increase to keep it monetarily profitable. Our money is issued as debt, so to increase money we must increase debt, as we have done.

Economy-wide monetary profit can only exist if there is monetary inflation. If business can only exist with monetary profit then the economy depends on steady money supply inflation, as Friedman said.

This erodes savings, but offering interest rates on savings above money supply inflation is a Ponzi promise to get more money out of the system than the amount of money that exists in the system. I think the idea of a 'positive return' on a monetary 'investment' is arithmetically impossible. Nobody can give everybody more numbers out than the amount of numbers that was put in. Promising to do so is a scam that allows some to profit at the expense of others by obfuscating the arithmetic.

If the economy is getting more productive then as long as your savings are inflation adjusted you can buy more goods in the future with your savings if the goods supply growth exceeds the money supply growth. I think that's the best we can hope for. I think it's time we give Mosler another read.

2008 Dec 19 11:17 AM

[John Lounsbury:]

Steve Hanson - - -

Outstanding presentation of the dichotomous quandry in which we find ourselves. Actually, dichotomy is an oversimplification, as you imply with your questions, which point out we have little knowledge of the dimensions of the future. We are outside the box, not merely thinking outside the box, but living outside the box. It is a worry to me that we are living outside the box without thinking everything through.

In a recent SA article (Our Economic Crisis: The Grand Experiment) I referred to the current direction of monetary and fiscal policy as an unscientific experiment. You have defined the some of the questions (potential hypotheses) of this experiment in great detail. Your input and further discussion may help get this experiment on a better footing from the scientific method point of view.

2008 Dec 19 11:24 AM

[John Lounsbury:]

The link is:
seekingalpha.com/artic...

2008 Dec 19 11:26 AM

[John Lounsbury:]

derryl - - -

You write some great naratives.

You have touched some of my key concepts (most admittedly stolen from much wiser thinkers). I'll list some:

1. Some degree of inflation is needed for economic growth. (from Friedman)

2. Deflation squeezes out investment and consumption. Your dollar will be worth tomorrow. Why invest or spend it on anything today?

3. Debt taken on for creation of means of production of things of utility is good debt. (if the business plan is valid)

4 Debt taken on for the purpose of financing financial paper (still more debt) is bad debt. (Ponzi)

5. A society that uses its capital primarily for consumption rather than investing for increased productivity consumes itself.

Derryl, I think you might want to expand your essay to be more explicit about labor. The shoemaker's $10 of expense to make a pair of shoes includes his own labor. So when he sells for $11, he has $1 profit plus reimbursement to himself for his own labor. I would be interested to hear your thoughts on how you would modify your discussion.

Finally, derryl, keep up your great commenter contributions.

2008 Dec 19 11:58 AM

[BlackyBlack:]

My problem with the induced coma idea is that there is no way of inducing a coma without killing the patient. It's kinda a bad analogy that way.

If the idea is to slow everything down so that the banks have time to writedown all of their bad debts, then the real risk to the economy is that it will collapse in the interim. Economies, unlike some patients, can't be starved of cash flow. They will simple collapse. Here's where the analogy may work: it would be like trying to resuscitate a body that's been dead for months. It's just not possible in our physical universe.

It sounds to me like they are stalling and just papering over the problems until it won't work anymore. In the meantime the real economy is actually dying, bit by bit. It may be too late to avert the collapse. Instead they may be trying to figure out how to not make it collapse until at least the spring, when it's not really their problem anymore.

2008 Dec 19 12:54 PM

[FreeMktAdvo...:]

"Is it possible there can be a deflationary economic expansion? It has never happened before."

This research paper from the Fed of Minneapolis seems to show that not all historic episodes of deflation are correlated with negative growth and definitely not depression. Curious on your thoughts...

ideas.repec.org/a/aea/...

2008 Dec 19 01:09 PM

[derryl:]

jlounsbury59,
Thanks for the encouragement! I always expect to be slammed as a long winded blowhard for my long comments. But these are complex issues that need more than 2 paragraphs to lay out. And yes, none of this is original thinking. Like you, I read "the masters" and any understanding I have comes from their ideas. I'm refining my understanding by reading people like Mr. Hansen on this site. This is a great forum for learning from each other, isn't it!

I've been in small business for 30 years so that's the basis of my economic and financial thinking. In the shoemaker scenario I'm thinking in terms of small business where the profits are basically the owner's investment return, management salary and labor income all rolled into one. The $10 costs is the amount of money the shoemaker pays out to everybody else. The shoemaker has no income until he sells a pair of shoes for $11, recovering the $10 he paid out plus his $1 of "profit".

It is not possible for the shoemaker to pay himself any wages, salary or return at all until he has profit. He already owned the $10 in the first place. If he pays himself out of that $10 he is merely consuming his capital and he will not last in business, unless this capital consumption is temporary and the capital is replaced out of near-future profits.

I have a feeling your question comes from the standard 'explanation' of financial arithmetic you read in financial economics textbooks when they try to say where the money comes from to pay interest on loans of bank-debt money which is the quintessential zero sum system. Here's a typical example (from Economics of the Canadian Financial System by Shearer, Chant and Bond),

"It is logical to ask: what of the interest of the loan? Because the business must pay more than it has borrowed, will not the net effect of the extension and repayment of the loan be to reduce the money supply? To the extent that the bank makes a profit on the loan and does not distribute that profit as dividends to its shareholders, any payment received by the bank tends to reduce the money supply. The bank debits the relevant demand deposit. However, any payment by the bank tends to expand the money supply. The bank credits the relevant demand deposit. Thus the receipt of interest tends to reduce the money supply. However, the payment of wages, salaries and other expenses, and the payment of dividends out of profits, will offset this."

The bank's interest is its "profit" and the bank can spend that money back into the economy where the borrower can collect it and hand it back to the bank as repayment of principal. The loan created the principal and repayment eliminates that principal amount so there is no new net money in the system from the loan cycle of creation-distribution-...

Ideally, this kind of banking system is a zero sum system of creating then uncreating then recreating money in ways that serve the values-exchange interests of the economy. It should be non-inflationary, as long as it only finances production and not consumption.

But if anybody in this system withholds any money as long term savings, there will not be enough money left in the system for the "recollection" part of the cycle. If anybody in the system uses money for purposes other than paying the business's prices then there will not be enough money available for the business to break even and make profit.

Admittedly, our financial system tries to recirculate savings by tying the total amount of loans on the left side of the bank balance sheet to the total of the bank's capital and customer deposits on the right side (A = K +L), but any money held outside the banking system and not quickly recirculated and used for consumption of goods whose production was financed by the original loan, will result in a net deficit of money available for recollection and loan repayment by the borrower.

Obviously not all money is used to consume this business's products by paying his prices. In the real world this system depends on the ongoing creation of new loans, which means ever-increasing debt to the borrowers.

I think there are psychological limits to the total amount of debt humans can tolerate. We get to this point then we pull back and everybody tries to suck money out of the system to payout their debts, and the circulating money supply crashes and you get massive bankruptcies when lots of people end up with excess savings and lots of other people end up not being able to collect enough of the now reduced circulating money supply to repay their principal.

This is the business cycle, and expanding savings by some people are only possible with expanding bankruptcies and writedowns of unpayable debts by other people. Money is a zero sum numbers system so any money taken out of circulation as savings reduces the amount of money left circulating in the system and when everybody is in repayment mode not enough new loans are being taken out to recycle these savings.

The system gets cash-starved and businesses and their suppliers and employees and shareholders go broke. Some people got ahead of the numbers game, but only because others lost out. Our money system is a zero sum game and it only ever functions smoothly for a little while before, as David Merkel regularly explains, debt service costs (interest payments) become unsustainable.

One further note:
Our bank-debt money system is not a true zero sum system. If I borrow $1 million and spend it as my costs of producing a run of goods, everybody I paid now "owns" their part of that $1 million. Those people do not owe the million to the bank. I do. If I default and have no salable assets the bank simply writes off my loan as a bad debt. So $1 million of debt is written out of the system and $1 million of "owned" money now exists in the system.

Every bank writeoff of unrepayable loan principal adds this kind of "owned" money to the system. Over time this adds up to a lot of money.

2008 Dec 19 01:22 PM

[derryl:]

I guess you can't use dashes in these comments. Above should read

creation distribution recollection repayment, as the loan cycle.

2008 Dec 19 01:26 PM

[Socialism c...:]

It's really not that hard to figure out:
1) There is no such thing as "monetizing your own debt" -- that only means making future generations pay. Often, it catches up sooner than you think it will!
2) There MUST be inflation due to the enormous debt levels -- inflating is the only way out of the debt.

2008 Dec 19 01:28 PM

[John Lounsbury:]

Thanks, derryl.

You did not discuss the relationships between growth, retiring debt by monetizing, increasing the monetary base and inflation , but Socialism can not compete added enough to round out the discussion.

I think we've covered most of the bases and I'm signing off for today.

2008 Dec 19 02:50 PM

[Tom Lindmark:]

It's an interesting piece with some good thoughts. One problem I have with your analysis is that while interest rates may be zero on a nominal basis, in a deflationary environment they can be punishing on a real basis. That's the reason that expansion in a deflationary period is rare indeed.

2008 Dec 19 03:56 PM

[fran:]

HAND and JL59--

superb job on both your writings on subject. anyone with queries on "what is going on in the world", willing/able to think, will be helped.

if i were younger, i'd attempt to get myself a small working farm in Amish country to wait out the period of COMA[with a good stand of wood fuel].

absent that,have a good cash reserve[keep the job if possible], own things[commodities, fuels, land. in the end, the worse we may have is an ancient barter system or a new barter paradigm based upon who knows[??]. but we'll still need "things", if we're still here.


signed: GERRY MANDER
On Dec 19 11:26 AM jlounsbury59 wrote:

> The link is:
> seekingalpha.com/artic...

2008 Dec 19 05:05 PM

[Steven Hansen:]

John, asbytec, investor, derryl, blacky, freemktadvocate, socialism, tom, fran

Thank you for your input. before i wrote this article, i tried to find a theory which could describe how to expand an economy and deflate it at the same time. Japan actually has meager growth but it would not be a model i would emulate.

i did find one article that i did find interesting from the sf-fed:

www.frbsf.org/educatio...

in this article, it alluded to currency manipulation as one way out of a deflationary event.

many mainstream economists for some reason cannot grasp what is going on. the fed does but has run out of conventional weapons. there are so many forces in play that the outcome is uncertain. for the first time in my lifetime - i am not willing to guess what tomorrow will bring.

derryl and john - thank you for expanding this discussion. it is hard to add to your analysis, and it is commenters like you which sometimes makes the comments better than the article.

asbeytec - the carry trade will develop after the players begin to believe the interest rates in america will be low for many years in the future. when i used the yen for carrytrade, my horizon was 18 months, each player has a different horizon and a different need.

blacky - they are stalling looking for some evidence of what will work to get things back on track. they are trying to keep the baby alive.

socialism - yes, inflating is one way out of this crisis. but debasing the dollar is the other way. if you simply eat the debt, the currency is worth less. in the end, inflating or debasing brings you to the same spot.

tom - i agree.

steven hansen

2008 Dec 19 07:41 PM

[Hmm?!:]

Actually, I thought it was becoming quite clear.

45% of US treasuries are held abroad. Mainly Japan and China, selling the U.S. goods and then buying treasuries so we could keep buying their goods.

The only way out is delation meaning we can no longer afford the Trillion dollar trade deficit of foreign goods and everything in our world gets very expensive again. The worlds resources will now be cheaper to everyone else and their standard of living will now finally improve. Meanwhile ours will be lower for a generation until the debt is cleared.

2008 Dec 20 01:40 AM

[patio:]

I just want to add my thanks to the author, and excellent comments contributors. I think many of us here are in the same or similar boats- we are the few who are aware( the average Joe is clueless about economics, and the degree of the problem ) but who are befuddled, looking for guidance, as history cannot provide as many clues as we would like. I luckily went to cash 13 mnths ago, but my nest egg isn't large, but large enough to want to protect. I still have my job, my wife doesn't, we're mid 50's. If I lose my job, I doubt I'll find anything remotely close in income.
If and when there is a discernible turning point out of deflation, like everyone here I want to get out of cash, and into "inflation' vehicles, whatever those may be ( stash food, liquor, gold ??? ).
These forums give commnets on what to look for, and what these vehicles may be.
It's a scary world right now, but we have this community, and you guys are awesome- I start my day here every morning.

2008 Dec 20 09:20 AM

[Moon Kil Woong:]

LOL Steven, I have seen you on blogs tons of times but never knew who you were. Anyway, here's a few comments.

1) I have no idea what the Fed or Treaury is doing. As far as I can tell they are fighting fires and defeating every stimulus with a delationary action. Perhaps it's to prevent what tends to happen in deflation "money hoardsing" and what happens with over stimulus, "asset hoarding". So far the Fed seems to be good at hoarding somewhat good debt by increasing it's balance sheet and dumping money into the system while they create overseas panic by putting squeezes on the dollar by buying up as many dollars as it can. This can't go on forever.

2) You are right by making interest rates lower they give themselves a reprieve from paying high interest rates on their massive debt burden, however, this works against them because instead of being able to balance it so that the burden becomes less of GDP the US is liable to use this benefit to just inflate the deficit that much more. Thus the next bubble becomes the biggest and most dangerous of all, a US treasury bubble. Basically, the government spends so much and dumps so many dollars onto the market (hopefully it takes a while) that when people start demanding higher interest the government can't find anyone else to fund their debt load.

It's not a solution, and not a good solution by the government. But it is the most plausable cause and effect given current facts. That's why I'm cash but not treasuries right now. I'm waiting for the silly silly US buying binge. Since the consumer won't do it the US government will try. Try and succeed until they don't. Then owning anything will be better than money. Give it a few years. The idea will grow on you.

2008 Dec 20 09:21 AM