lance sjogren

A Depression and Recovery in Internet Time

patio said:

"His conclusion was that fiscal and monetary was entirely impotent- velocity delines regardless. That is exactly what we have seen so far, and I expect will continue. Companies and people struggle to re-pay debt, with harder to earn dollars, savings rise, consumption plummets.
What about current fiscal policy can force lenders to lend, and borrowers both WANT and are ABLE to borrow?
Governments cannot possibly spend their way out of a debt-induced depression, it will only make things ultimately worse."


What you say makes a lot of sense to me. In fact, even though I believe the dollar is going to devalue bigtime over the coming years, I'm not at all sure that will lead to generalized inflation. If unemployment is high, I can't see wages rising much even if the dollar is being devalued by the government. If wages don't rise, things like real estate won't go up in price, since the only way people could more easily afford to buy homes is if their wages go up.

However, one big question is: If the government (for the purists- the Fed, the government's unaccountable Frankenstinian monetary wing) drastically expands the money supply, then were is all that extra money going to go?

Well, I guess the most positive aspect is that some will wind up as wages of those funded by the stimulus programs, the people building bridges, etc. Hopefully that will mitigate the rising unemployment rate somewhat.

But what about the rest of the new flood of dollars? What happens to them?


My guess is we will see a mixed bag of deflation remaining in some sectors and inflation occurring in others. I believe for example real estate will remain depressed in price, while commodities will go back up.

A Depression and Recovery in Internet Time

Smarty:

Excellent rebuttal to the article.

Furthermore, in the game of chicken that you point out the author of the article believes is the foundation for the global economic future:


Contrary to the author's claim, I think the holders of US dollars know full well that there is a huge risk of massive devaluation of the dollar.

And holders of US dollars know that the only way to keep the dollar afloat is if EVERYONE continues to treat the dollar as a gold standard.

But, the reality is, they all have a vested interest in doing the exact opposite. If the dollar is destined to collapse, as I believe it is, those who dump their dollars first will come out the best.

So I would not be surprised if the collapse of the dollar, instead of being a gradual devaluation of 10-15% per year over the next 5-7 years, may happen almost instantaneously. In other words, a global run on the bank to pull out of US dollars.

A Depression and Recovery in Internet Time

I fail to see the logic in this guy's contentions.

Yes we are flooding the world with dollars and the world is sopping them up.

The dollar is a temporary safe haven while the turmoil is underway. Hedge funds and others that have to unwind derivatives must do so in US dollars, hence they need dollars once now.

Once this financial turmoil abates, why would people want to continue to hold US dollars?

Also consider, China has bought up a huge amount of US dollars. Right now China is caught in the economic downturn just like the US. China, however, has money in the bank to spend on stimulus. Why would China not redeem its US Treasuries in order to fund domestic consumption and infrastructure work to offset the dropoff in their exports caused by the recession in the developed countries?

I think the reason financial gurus are so consistently wrong is that they need to exercise their hifalutin education by making things far more complicated than they are.

The more dollars there are, the less they are worth.

This is about as close as you can get in the world of economics to a fundamental law of physics like gravity.