I am moving more and more to the belief that we will see some substantial inflation in the Western world in the next few years.
Being an optimist, I keep hoping that the leaders at the Federal Reserve can pull off the Fed’s “Great Undoing” and succeed in reducing the excess reserves in the banking system before these reserves turn into loans and spending.
I keep hoping that the federal government will honestly address the issue of its budget deficits which I see increasing the federal debt outstanding by $15 trillion in the next ten years.
I keep hoping that businesses will reduce how much they are leveraged and concentrate more on the production of goods and services rather than on their trading activities.
I keep hoping that consumers will get their balance sheets back in order and begin to live within their means.
I keep hoping…
But, for these things to take place, someone must take responsibility for their actions.
I am not seeing this happening!
All I am seeing are the crybabies that place the blame for their problems on the backs of someone else.
Alan Greenspan and Ben Bernanke did not see (or they did see, depending on which speech you listen to) the looming financial crisis, for no one could (or they could, but could do nothing about it) have recognized the future.
Paul O’Neill, Jack Snow, and Hank Paulson had no idea that such huge deficits would be created during the 2000s and contribute to a decline in the value of the United States dollar of over 40% against other major currencies, for they were all in favor of a ‘strong’ U. S. dollar (whatever that is).
And, the leaders of European nations were not responsible for the current financial disorder in the market for sovereign debt. It is obvious in recent remarks (among others):
Sure, the rating agencies are not to be believed and they always move ‘after-the-fact,’ but where there is smoke, there must be fire.
And what about those people that sell securities short and those that deal in Credit Default Swaps. They are nothing but trouble makers taking advantage of the bad press put out by the sensationalist world media. Greedy bastards!
And, bank managements are not really responsible for any of the trials and tribulations of the past several years. That was obvious in testimony given in Congress this week. All of the emphasis on trading rather than financial intermediation, leverage ratios of 40-to-1, increased assumption of risky assets, and the mis-matching of maturities was just ‘business as usual.’
Families and homeowners were not responsible either.
And, this attitude has existed for the last fifty years.
Moral hazard reigns!
If no one is responsible for what took place over the last fifty years or so, then the way people behaved over the past fifty years or so will be repeated. Why? Because, if no one is responsible then we all have to ‘ante up’ so that those who are hurt by a financial collapse can get bailed out. And, since the music continues to play, the dancing must go on.
This ultimately means that the national government budget deficits will not be reduced. It means that the Fed’s “Great Undoing” will not take place. It means the foundation for price inflation will be in place. It means that consumers, businesses, and other governmental bodies will continue to borrow and leverage up. And, it means that financial innovation will continue to permeate the economy.
The Debt Deflation will be prevented. Another round of Credit Inflation, therefore, seems in store.
There is no indication that attitudes or behavior has changed. “Watch the hips, not the lips!”
Why concentrate on Western countries?
Because, over time, those countries that are disciplined will be the ones that benefit relative to those that do not discipline themselves. In this we see several of the emerging nations becoming relatively stronger as they focus more on the future political alignment of the world rather than on short-run outcomes.
These nations understand that power does not like a vacuum. When a powerful country gives up some of its position, others immediately move in to replace what is lost. And, some of these countries understand that slow and steady win the race and proceed in a disciplined way.
Yesterday, there was a very revealing opinion piece by Gerard Lyons of Standard Chartered Bank in the Financial Times titled “When ‘Made in China’ becomes ‘Paid in renminbi’.” Perhaps the most important line in this piece is the statement that, “Gradualism dictates the Chinese approach to most policy measures.” China thinks in decades and not in years I have been told. And other emerging nations are learning this rule as well.
In the United States and other western countries, economic policy has been focused on the short run. And, by focusing on the short run, outcomes can seem to be the result of random or uncontrollable events. Hence, no one needs to claim responsibility.
However, we are responsible for our actions; for the short run does become the long run and in the longer run success depends upon the acceptance of responsibility and acting with discipline. This is one of the problems that Greece and Portugal and others are having at this time. They are being compared on these terms with other nations, like Germany, and are found wanting. And, they don’t like the implication that they have acted in an irresponsible and undisciplined fashion.
So, cry foul!