JCC

The Economic Trifecta: Inflation, Devaluation, High Interest

Steve - I appreciate your intelligent argument. I agree that the danger of inflation is not eminent, but it is certainly possible upon recovery. You are correct that it could be avoided with an L shaped recovery. I submit that it is also possible with a U shaped recovery, depending upon the economic policies used at that time.

Currently monetary velocity has slown to a crawl, which if anything is a deflactionary factor. When velocity increases, then we must very carefully manage the monetary supply to avoid significant inflation. This might be difficult but it can be done.


On May 31 10:29 AM Steven Hansen wrote:

> "First the attribution of the quote was wrong. It was Laurel and
> Hardy, not the Three Stouges.' - Dave Wrixon
>
> Your are right. i was so concerned about getting the phrase correct
> that i did not realize the attribute was to the wrong people.
>
> Let me be clear on the point of inflation - i do not see this as
> an eminent problem. but if i would have written one year ago about
> fears of deflation, what would you have thought?
>
> you cannot keep taking different drugs and not expect a reaction
> between the drugs. the fed is conducting monetary policy on the foundation
> of computer models. if anyone has some statistical information relating
> to similar economic conditions from the past, please share it.<br/>
>
> i find it interesting that the punters believe
> - we are exiting the worst global economic situation since the great
> depression,
> - the government can spend money like there is no tomorrow,
> - the fed can massively expand the money supply,
> - that we can destroy massive amounts of wealth,
> - the boomers are exiting stage right,
> - we can dramatically increase our taxation,
> - the whole world can engage in QE
> and you can predict the outcome. not one swinging dick can say what
> will happen next.
>
> i remain convinced that when a recovery occurs - there will be inflation.
> however, if this is a L shaped recovery, i would agree inflation
> most likely is not a concern.

The Economic Trifecta: Inflation, Devaluation, High Interest

We exited World War 2 with debt being the quivalent of 120% of GDP. At that time, similar to today, many were crying about eminent out of control inflation. It did not happen!!

The Bank of Japan made huge debt purchases between 1997 and 2003. Many predicted run away inflation. What happened - Prices fell.

You reported a lot of interesting data, and it is generally a good article. But like many, the article fails to predict based upon factual analysis. Maybe we will have hyper-inflation, but it is by no means necessary, not is it a a foregone conclusion. Proper handling of the economy can avoid an inflationary conclusion.

Furthermore, in the short term a major worry is deflation.

U.S. Government's Economic View - From Gloomy to Optimistic

On Apr 19 11:43 AM rennert wrote: "I thought the market and the financial tv stations are talking suddenly as if everything is fine and wonderful. They even shut Robbini up. I guess they stuffed a big sock into his voice box."
----------------------...

First of all it is Roubini and not Robbini. Secondly, he has reported multiple times that he agrees with the Geithner plan. They did not stick a sock in his mouth. Following are three Roubini quotes:

"In my view, the Geithner plan can work for those banks that are going to be found after the stress test to be solvent. They still have toxic assets. You have to buy them. That is a good plan. But if some banks are found to be insolvent beyond pale, then that plan doesn't work because then the write-down implies insolvency. For those banks, I'm still of the view that you would rather take them over, rather than keep them as zombie banks, clean them up and sell them back to the current sector."

Secondly Dr. Roubini states:
"There’s still some pain ahead. We’re going to lose $3.6 trillion when all is said and done. The nation’s banking system is essentially insolvent. And even if all the government intervention works perfectly, there’s so much to repair that the recession will not end this year. Even in 2010, economic growth will be far from robust. And the nation’s unemployment rate, which will remain high after the recession recedes, may peak at 11 to 12 percent."

Thirdly from Dr. Roubini:
"The worst of the credit crisis is behind us. Roubini says the economy is beginning to heal from last fall’s market tumble and the financial system crisis, in large part because of aggressive government fiscal and monetary policy. "

I mostly agree with Dr. Roubini. In addition, we have multiple investment opportunities as we recover from this world wide financial crisis:
1. Selectively invest in stronger banks - Some of them are amazingly good deals, even today. With the government actions that were required to thaw the financial markets, banks have capital at a very low price. Many will will continue to sky-rocket for some time.
2. Energy should start to recover, and since exploration and development have stopped, the resulting recovery will provide great opportunities. The world needs energy.
3. Asia is already recovering, and will recover much faster than the rest of the world.

For the rest, a lot of damage has occurred and will take quite a while to recover. But recovery is happening, providing that the world continues it's efforts to stimulate. James West, you are correct it is a fish market. It's time to go fishing.

As History Repeats Itself, Time to Buy Gold and Silver

You have a point that history repeats itself, but you need be careful on the version of history to which you are comparing. Additional historical points are listed below:

"Prior to the start of the Depression, Hoover's first Treasury Secretary, Andrew Mellon, had proposed, and saw enacted, numerous tax cuts, which cut the top income tax rate from 73% to 24%."

"Hoover's stance on the economy was based largely on volunteerism. From before his entry to the presidency, he was a proponent of the concept that public-private cooperation was the way to achieve high long-term growth. Hoover feared that too much intervention or coercion by the government would destroy individuality and self-reliance, which he considered to be important American values."

Sound familiar - These poilicies resulted in 36% unemployment. Economic activism under Roosevelt decreased unemployment to 15% by 1937 using fiscal stimulus of ~3.5% of GNP. Worries about budget deficits stopped the spending and in 1937 and we went back into the depression.

"M2 monetary supply shrank by 1/3rd from 1929 to 1933. One reason why the Federal Reserve did not act to limit the decline of the money supply was regulation. At that time the amount of credit the Federal Reserve could issue was limited by laws which required partial gold backing of that credit."

Fiscal stimulus of ~40% of GNP occurred when we were in WW2. That 40% finally pulled us out of recession.

"Frantic attempts to shore up the economies of individual nations through protectionist policies, such as the 1930 U.S. Smoot-Hawley Tariff Act and retaliatory tariffs in other countries, exacerbated the collapse in global trade.".

Most of the historical comparisons that we read are intended to support a viewpoint. Therefore the authors filter history to support their philosophy.

Look at the points itemized above, add others and you will reach the conclusion that you need to take a longer and more inclusive view of the situation - then and now.If you do this, you will come to a very different conclusion.