Despite Inflation, The Social Fabric Remains Intact

If you read enough you can find persuasive arguments for both deflation and inflation. We've have clearly had an asset price deflation and people like Mish are convinced there will be a debt deflation, which would be bad. One bit of clarity about deflation is that prices coming down for certain types of items like computers and TVs due to efficiency and innovation is not really deflation. I'm pretty sure that cheaper TVs are not included when discussing deflation.

The case for inflation seems to be more of a looming threat as opposed to right here right now. The actual definition of inflation is an increase in the money supply, which we would expect to result in higher prices (more money chasing the same amount of goods). The numbers can be spun however the end user wants, but while money has been printed and some debt monetized there does not appear to be more money hitting the street in the form of lending, which might be why despite the many months of zero interest rates and quantitative easing we have not seen higher prices work their way into the government's inflation data. Point taken about the G manipulating the data but I think that data would at the very least capture the direction and trend even if not the magnitude.

If you read Peter Schiff or others like him they really pound the table with words like collapse and destruction in such a way as to make you think the end is nigh, as in tomorrow or the next day. The US has had these same types of systemic threats or problems for years and they have not torn the social fabric, nor had the sort of widespread damage and panic that some tell us we should expect.

Given the dollar's role in the world it would seem very unlikely that there will ever be a violent dislocation. The damage to the dollar has been meaningful this decade but has not caused martial law, the collapse of our government or a complete breakdown of the country's infrastructure.

The US has become an increasingly less attractive investment destination and this trend will probably continue, but it is not reverting to a third world country. The hyperbolic commentary from the various Schiffians does a great job of making the bear case and explaining the problems (and to be clear there are a lot of problems), but I think the magnitude they call for is incorrect. Zimbabwe played almost no role in the world economic order when its problems started. It is right to expect headwinds galore in the US but not the USD going to zero. I actually read something yesterday that asked why the dollar can't go to zero.

The investment implication is simple and been repeated here often: more foreign exposure added slowly over time.

Comments

[Joseph L. S...:]

The US government is comprised of a self-serving clique and the economy does not currently provide opportunities for all. Yet, like Roger, I must respectfully disagree with some of those whose comments I value most highly on SA. I do not share the belief that America is going to hell in a handbasket.

Times of retraction lead to introspection, and that’s a good thing. But just as things were never as joyous as we might have believed during “the good times” neither are things as bleak as many say now that we are in a not-so-good place. Neither will last forever. The pendulum swings both directions.

Our opinions are formed by our experiences and upbringing and I accept that my experiences may not be typical. While I have seen the shortsightedness and frivolity of many, I have also had the honor, my entire working life, of working for, working alongside, and commanding some of the finest Americans of this or any generation. The American Soldiers, Sailors, Marines, Airmen and Coast Guardsmen that I know are as honorable, ethical, serious, hardworking and generous as any who have gone before. They give me hope and confidence in the future of this nation.

If many of our fellow citizens have became lazy, complacent, and looking for the next government program that will give them something for nothing, others are seeking something greater than themselves and finding it in duty to country.

The generation of statesmen who returned from WWII who believed in something greater than themselves had seen, firsthand, reason enough to keep America from becoming less than its promise. In the intervening years, we lost many of those statesmen as mere politicians chose to run for office.

But a whole new generation of young American men and women have been to war and seen the ugly alternatives to a vibrant, tolerant and just nation. I believe their social consciousness has been raised to the same degree as the previous generation of statesmen. These are the men and women who will come to replace the politicians of today.

If you doubt the resolve of these young people, just stand in any airport that welcomes them home from overseas, as I have.

Or read this story by Army Reserve Chaplain Jim Higgins, who was pastor of a Methodist church in Georgia, before deploying to Iraq. He writes of a thousand soldiers seeing a movie courtesy of MWR (Morale, Welfare and Recreation) at Camp Anaconda in Iraq in 2007. (The full story and verification of its accuracy may be found at www.truthorfiction.com...)

For those who have never been to one, every military theater worldwide, whether in an air-conditioned facility in America or a GP Large tent in Afghanistan, precedes the movie with the playing of our National Anthem as those of us in attendance stand at respectful attention. In this instance, a thousand soldiers were standing at attention but the recording stopped. They continued to stand at attention.

The music started again, but stopped again. Then one of them started singing quietly. A few others joined in. Then the chorus rose as all 1000 troops joined in to complete the Anthem. Chaplain Higgins writes, " I wanted you to know what kind of Soldiers are serving you here."

I have personally witnessed scores of acts of patriotism, courage, fortitude and humor and toughness in the face of adversity. Those who disparage Americans may have had different experiences. I have seen both sides and I say: God bless any nation that can still produce young people like these.

Nov 04 10:25 AM

[LongTermTrader:]

I have to agree with you Roger. Schiff's predictions of total destruction of the US economy was over the top. And wrong.

However, I still think our greatest threat of another collapse is low interest rates, caused by China throwing money at us.

Where is China getting that money?

Because we outsourced all our manufacturing to them. In the lfong term, unless there are incentives to companies to located in the USA, then this will continue to destroy our country.

There really has been class warfare in the past 30 years by the Free Traders.

And the middle class has lost. And will continue to lose.

If you don't make over $380K a year in income, your a** is grass, and the Republicans are a John Deere Mower and they will cut you down to size.

You are just a peasant to these people. They don't care about you. Or your job. They will outsource your job, throw you out on the street and pocket the money in their pocket.

Nov 04 10:38 AM

[Pat C:]

Joesph L. S..., I am a Vietnam veteran and also served in Berlin when it was occupied. Quite frankly, I feel like a fool. Patriotism, courage and fortitude is for the sucker sheeple this current crises has shown that clearly. Our political leaders and the business elite could care less. Yep I just typed this - I'm really pissed off.

Nov 04 10:40 AM

[richjoy403:]

I have noticed CNBC gives Peter Schiff airtime on an almost daily basis now (he seems incapable of acknowledging good economic news); could it be that they are reacting to their critics who say they are cheerleaders for the market? I tend to agree CNBC tends to go overboard on up days, but there must be more reasoned voices than Schiff's. (In fact, for the benefit of those CNBC critics, it could be observed that CNBC is purposefully using Schiff to put their case in a negative light.)

So, thanks Roger for another good article...yes, we have economic problems; but our world is not ending. Yes, I too am moving more investments off-shore, but I also continue to invest at home.

Nov 04 10:45 AM

[chap08:]

Pat C, you're no fool. You've just been led by them.


On Nov 04 10:40 AM Pat C wrote:

> Joesph L. S..., I am a Vietnam veteran and also served in Berlin
> when it was occupied. Quite frankly, I feel like a fool. Patriotism,
> courage and fortitude is for the sucker sheeple this current crises
> has shown that clearly. Our political leaders and the business elite
> could care less. Yep I just typed this - I'm really pissed off.

Nov 04 11:17 AM

[chap08:]

Roger, I share your doubts about Schiff and co. but for slightly different reasons.

Where Schiff is right is in pointing up some of our errors over recent years. The truth is that we have been on an unsustainable path. Consistently large trade and budget deficits are unsustainable. An economy based on increasing consumer debt and declining savings is unsustainable. We have not fixed these things. We may have side stepped a depression (temporarily or not, you decide) but we have not fixed our fundamental problems.

We will not have truly averted disaster until we have fixed these issues. Doing that will be painful. This means lower living standards for a number of years. It means drastic cuts in government spending, and even after doing that, we might not be able to avoid tax rises. It will take a massive effort to drag an unwilling America through this process.

For that reason, I have no problem with the doom sayers having their say. Far better that, than the problems are ignored - because the problems are real. I happen to disagree with Schiff on the remedies, but I share a desire to highlight the problems

Nov 04 11:38 AM

[thiazole:]

You and I really agree on how this problem will be resolved (weaker dollar creating more demand for US goods overseas, causing a huge demand for US labor, and less demand for imports, allowing the trade deficit to reverse, but also lowering the standard of living here). Proof that this is what occurs after a period of major debt is what happened in the 1950 after WWII. research.stlouisfed.or.../
Do a comparison chart with national debt to GDP ratio, and you see that the two are strongly related (during nonrecessionary times, of course). These people who are claiming that the solution to high debt is economic devistation and deflation (ie, making the debt/GDP ratio even HIGHER) really make no sense and are just fear mongers.


On Nov 04 11:38 AM chap08 wrote:

> Roger, I share your doubts about Schiff and co. but for slightly
> different reasons.
>
> Where Schiff is right is in pointing up some of our errors over recent
> years. The truth is that we have been on an unsustainable path. Consistently
> large trade and budget deficits are unsustainable. An economy based
> on increasing consumer debt and declining savings is unsustainable.
> We have not fixed these things. We may have side stepped a depression
> (temporarily or not, you decide) but we have not fixed our fundamental
> problems.
>
> We will not have truly averted disaster until we have fixed these
> issues. Doing that will be painful. This means lower living standards
> for a number of years. It means drastic cuts in government spending,
> and even after doing that, we might not be able to avoid tax rises.
> It will take a massive effort to drag an unwilling America through
> this process.
>
> For that reason, I have no problem with the doom sayers having their
> say. Far better that, than the problems are ignored - because the
> problems are real. I happen to disagree with Schiff on the remedies,
> but I share a desire to highlight the problems

Nov 04 12:28 PM

[Al-USA:]

If you think the social fabric will remain intact, you don't know what has come before.

What we have here is, fundamentally, a crisis of capitalism, or, a crisis of over-production. This means that consumption levels that were previously driving economic production were a direct result from having a large portion of the populace, relative to now, earning enough money so that some were able to save what they felt was prudent and still consume enough to absorb their nation's productive capacity.

This is obvious to the serious strategists of capital, and it should also be obvious to you, the "little" investor and predominant reader, so that you're not taken up and swept away by all the propaganda talk of "green shoots", or that Chinese growth will avert a world-wide depression, etc....

The policies and practices that led to the present crisis can be traced back to the coming to power of Margaret Thatcher in Britain in 1979 and the election of Ronald Reagan in 1980. Their dual victories led to a repudiation of the managed capitalism advocated by John Maynard Keynes and the introduction of the free-market “fundamentalism” of Milton Friedman.

However, this change itself occurred as a response by powerful sections of the ruling class in Britain and the United States to an already far-advanced crisis of the capitalist system. If you recall, or care to reference, as far back as 1967, there were growing indications that the mechanisms devised by Keynes to stabilize and rebuild capitalism in the aftermath of World War II were breaking down.

The system of dollar-gold convertibility adopted at the Bretton Woods Conference of 1944, came under increasing pressure and eventually broke down as a result of three inter-related factors:

1) The first was the gradual erosion in the course of the 1950s and 1960s of the dominant economic position that the United States had enjoyed in the aftermath of the Second World War.

2) The second was a general decline in the rate of profit in the mid-1960s that placed considerable pressure on American, European and Japanese corporations and intensified global competitive pressures.

3) Finally, the militancy of the working class, throughout the world, frustrated efforts by the capitalist class to find a way out of the crisis through reduction in wages and benefits of the working class. What is now called "restructuring".

The three factors above, or advanced crisis of the capitalist system, were eventually resolved by three events that signaled the beginning of a successful counter-offensive by the ruling class against the previous decades' concessions won by the masses of the working/middle class. This also planted the "seeds" which directly lead to the present crisis of over-production now some 30 years later.

1) The counter-offensive began with the appointment by President Carter, a Democrat, of Paul Volcker as chairman of the Federal Reserve. Volcker immediately set about to break the back of working class militancy by raising interest rates to unprecedented levels, thus provoking a severe recession and driving up unemployment.

2) The second event was the announcement by Chrysler that it would shut down a major production facility in Detroit, the famous Dodge Main plant in Hamtramck that employed several thousand workers. This decision was accepted by the UAW bureaucracy by deciding to grant Chrysler major concessions on wages and work rules. Thus began a pattern of union-management "collaboration" that cleared the way for subsequent attacks on the jobs, wages, working conditions, and benefits of all sections of the American working/middle class.

3) Finally, Reagans' accession to the presidency in January 1981 accelerated and intensified the war on the working/middle class that Carter had begun in 1979 with the appointment of Paul Volcker. The defining event of the Reagan presidency—the firing of 11,000 striking air traffic controllers, members of PATCO—sent a signal to all corporations that strike-breaking and union-busting was legitimate and would enjoy the support of the government.

However, Reagan’s destruction of PATCO would not have succeeded had he not received the support of the AFL-CIO bureaucracy, which opposed any action in defense of the victimized air traffic controllers. In the years that followed, the AFL-CIO bureaucracy sanctioned a wave of government and corporate strikebreaking following the pattern of union-management "collaboration"

In practice, the alliance of the trade union bureaucracy with the Democratic Party kept the mass movement within the confines of capitalist politics and capitalist economics. This provided the ruling class with an opportunity to reverse its retreats of the previous decades and go on the offensive. In summary, under conditions in which social conflict is suppressed, by the temporary (going on 3 decades now) emasculation of the labor movement in the USA, wealth accumulation increased rapidly among the upper classes resulting in extreme levels of social inequality which has now led us to the present crisis of over-production and another still unfolding, in my opinion, Greater Depression...

Get your shorts ready because, from here on, the "easy" money will once again be made on the downside.

Nov 04 01:37 PM

[The Geoffster:]

There is a big difference between the similar debt to GDP ratios during WW2 and now. WW2 debt was 80% defense spending. After the war, defense expenditures were pared significantly. Today, much of our debt supports social welfare expenditures. These costs will only increase with Obama Care and Baby Boomer social security and medicare payments. We can neither export nor tax our way out of this debt and we are piling more on every day. When you include unfunded liabilities, it is evident that something has to give. We do not have the political will to make the tough choices. They will be made for us.


On Nov 04 12:28 PM thiazole wrote:

> You and I really agree on how this problem will be resolved (weaker
> dollar creating more demand for US goods overseas, causing a huge
> demand for US labor, and less demand for imports, allowing the trade
> deficit to reverse, but also lowering the standard of living here).
> Proof that this is what occurs after a period of major debt is what
> happened in the 1950 after WWII. research.stlouisfed.or.../
>
> Do a comparison chart with national debt to GDP ratio, and you see
> that the two are strongly related (during nonrecessionary times,
> of course). These people who are claiming that the solution to high
> debt is economic devistation and deflation (ie, making the debt/GDP
> ratio even HIGHER) really make no sense and are just fear mongers.
>

Nov 04 08:05 PM