interest article on China, the Fed, and the dollar
secondrepublic
Posts: 2,619 ✭✭✭
This kind of thing is going to be significantly dollar-negative if indeed it's true and it continues:
China has 'canceled US credit card': lawmaker
WASHINGTON (AFP) - China, wary of the troubled US economy, has already "canceled America's credit card" by cutting down purchases of debt, a US congressman said Thursday.
China has the world's largest foreign reserves, believed to be mostly in dollars, along with around 800 billion dollars in US Treasury bonds, more than any other country.
But Treasury Department data shows that investors in China have sharply curtailed their purchases of bonds in January and February.
Representative Mark Kirk, a member of the House Appropriations Committee and co-chair of a group of lawmakers promoting relations with Beijing, said China had "very legitimate" concerns about its investments.
"It would appear, quietly and with deference and politeness, that China has canceled America's credit card," Kirk told the Committee of 100, a Chinese-American group.
"I'm not sure too many people on Capitol Hill realize that this is now happening," he said.
The Republican lawmaker said that China was justified in concerns about returns from finance giants Fannie Mae and Freddie Mac, which were bailed out by the US government due to the financial crisis.
Kirk said he was the first member of Congress to tour the Bureau of Public Debt, which trades bonds, and was alarmed at how much debt was being bought by the US Federal Reserve due to absence of foreign investors.
"There will come a time where the lack of Chinese participation may have a significant impact," Kirk said.
"We should track that, because up until last month they were the number one provider of currency to the United States and now they're gone."
With China's economy also hit by the global economic crisis, Premier Wen Jiabao has openly voiced concern about the status of his country's investments in the United States.
China has also floated replacing the dollar as the key international currency with a basket of units bringing in the euro, sterling and yen.
Link to article.
China has 'canceled US credit card': lawmaker
WASHINGTON (AFP) - China, wary of the troubled US economy, has already "canceled America's credit card" by cutting down purchases of debt, a US congressman said Thursday.
China has the world's largest foreign reserves, believed to be mostly in dollars, along with around 800 billion dollars in US Treasury bonds, more than any other country.
But Treasury Department data shows that investors in China have sharply curtailed their purchases of bonds in January and February.
Representative Mark Kirk, a member of the House Appropriations Committee and co-chair of a group of lawmakers promoting relations with Beijing, said China had "very legitimate" concerns about its investments.
"It would appear, quietly and with deference and politeness, that China has canceled America's credit card," Kirk told the Committee of 100, a Chinese-American group.
"I'm not sure too many people on Capitol Hill realize that this is now happening," he said.
The Republican lawmaker said that China was justified in concerns about returns from finance giants Fannie Mae and Freddie Mac, which were bailed out by the US government due to the financial crisis.
Kirk said he was the first member of Congress to tour the Bureau of Public Debt, which trades bonds, and was alarmed at how much debt was being bought by the US Federal Reserve due to absence of foreign investors.
"There will come a time where the lack of Chinese participation may have a significant impact," Kirk said.
"We should track that, because up until last month they were the number one provider of currency to the United States and now they're gone."
With China's economy also hit by the global economic crisis, Premier Wen Jiabao has openly voiced concern about the status of his country's investments in the United States.
China has also floated replacing the dollar as the key international currency with a basket of units bringing in the euro, sterling and yen.
Link to article.
"Men who had never shown any ability to make or increase fortunes for themselves abounded in brilliant plans for creating and increasing wealth for the country at large." Fiat Money Inflation in France, Andrew Dickson White (1912)
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Comments
1. China has less excess money to spend. They are not exporting(selling) as much and therfore dont have the extra cash. 1000's of factories have been closed.
2. The extra money China does have is being spent domestically. They have announced a $500 billion stimulus package.
The bottom like is that they simply dont have the extreme surplus of money that they did a year ago. This is why Chinese investments in US debt are down. China needs the USA probably more than the USA needs China. They wont bite the hand that feeds them.
Knowledge is the enemy of fear
<< <i>I would expect those 5-15% inflation rates for a few years, Then after about a 2-300% cummulative we should level off with Hamburger at $10 a pound and gold around $3000. Something similar to the 1974-1981 period. Then things will settle down and the bankers can start the game over at a different level. Of course the fixed income group will get the screws but thats expected. >>
Who is going to be able to pay $10 for a hamburger? Do you see wages increasing?
Knowledge is the enemy of fear
Just to chime in..... Do I see wages increasing?...... not enough...... just the usual 0-3%.
What it does mean is the standard of living, for many, will continue to drop.
********************
Silver is the mortar that binds the bricks of loyalty.
Who is going to be able to pay $10 for a hamburger? Do you see wages increasing?
The same people who were buying $4 gas just a year ago or so and would have paid $5, $6 gas if necessary to commute and go about their lives. People also have to eat and after steak comes hamburger, and then finally soy "meat." The prices of all will go up (also chicken, fish, eggs, milk, etc.). And if protein is still in your diet, you will purchase one of them. Soy prices will be rising just as fast as hamburger. The food crisis is only just beginning as 2006-early 2008 showed. And now that the world is pumping fiat like mad, there is only one logical longer term outcome for food prices....up. The US has experienced generally declining food prices for the past 30 years probably because we exported our inflation overseas. But pendulums eventually swing the other way when major change occurs.
roadrunner
<< <i>China is spending less as is the rest of the world. The US govt/Treasury/Fed will pick up the slack by monetizing the trillions in debt being created. The effect in creating future inflation is the same.
Who is going to be able to pay $10 for a hamburger? Do you see wages increasing?
The same people who were buying $4 gas just a year ago or so and would have paid $5, $6 gas if necessary to commute and go about their lives. People also have to eat and after steak comes hamburger, and then finally soy "meat." The prices of all will go up (also chicken, fish, eggs, milk, etc.). And if protein is still in your diet, you will purchase one of them. Soy prices will be rising just as fast as hamburger. The food crisis is only just beginning as 2006-early 2008 showed. And now that the world is pumping fiat like mad, there is only one logical longer term outcome for food prices....up. The US has experienced generally declining food prices for the past 30 years probably because we exported our inflation overseas. But pendulums eventually swing the other way when major change occurs.
roadrunner >>
My point was, if prices for a simple hamburger go to $10, then the prices of everything else will be 10x higher. If wages do not increase, the these prices will be unsustainable. Just as $4 gasoline was unsustainable. If by chance these inflated prices are sustained and wages do not increase, then there will be millions of dead people. And since I think this is unlikely, I believe the hyperinflation story is unlikely.
BTW--The yield on the USA 10-yr is almost exactly the same as the 10-yr German (european) bond. High yields have a way of attracting money.
Knowledge is the enemy of fear
$4 gas was VERY sustainable. All the big talk on "alternative" fuels, and homeland drilling scared OPEC into dropping the crude prices. Notice how nobody talks about those things anymore?
<< <i>
<< <i>I would expect those 5-15% inflation rates for a few years, Then after about a 2-300% cummulative we should level off with Hamburger at $10 a pound and gold around $3000. Something similar to the 1974-1981 period. Then things will settle down and the bankers can start the game over at a different level. Of course the fixed income group will get the screws but thats expected. >>
Who is going to be able to pay $10 for a hamburger? Do you see wages increasing? >>
I keep hearing these projections or reports about high inflation. Like Cohodk, I agree that a key point is when U. S. wage inflation starts occuring. Until then, inflation hasn't bloomed. Anecdotally, a lot of folks are experiencing wage freezes, even wage rollbacks or unpaid days off--that isn't a recipe for current inflation.
China getting out of buying our debt, as well as getting out of our dollars will simply be a catalyst for other foreign holders of both to do likewise. When the world no longer wants our currency (as much as they have for the past 5 decades) what makes you think that these dollars will continue to depreciate at only 4% per year? Its supply and demand at its most basic. The world will soon demand far less of our dollars, inflating domestic supply, and thus driving up prices of goods/services. Sounds like a recipe for inflation to me!
<< <i>You don't need rising wages to have inflation. After Iceland's currency collapsed last year, they experienced increasing unemployment as well as double-digit inflation.. All the stuff they imported became much more expensive after their currency fell. The same thing could happen here. You don't need rising wages to cause it. >>
Iceland is not a reserve currency. If there is massive inflation, there will be massive death. This is why it will not happen.
Knowledge is the enemy of fear
Excuse me for being cynical.
I knew it would happen.
<< <i> Iceland is not a reserve currency. If there is massive inflation, there will be massive death. This is why it will not happen. >>
Who is talking about "massive" inflation?
What I'm talking about is the effect of us falling off the pedestal as the world's reserve currency. That could easily happen, and it would likely be inflationary. Regardless of whether wages were going up, down, or sideways. In effect, it would reduce our real standard of living across the board.
I think massive inflation would be 20+%. Some here think we will see 100 or even 1000%.
The dollar is not going to die. People need to look at what is happening in the rest of the world, not just what they see on TV or read in some blog.
We NEED some inflation and I hope we get some. But it will not be "runaway" or "hyper".
Right now we have excess capacity for everything from car production, food production, gasoline production. We can meet any demand shock. So unless demand exceeds supply, we will not have much inflation.
Knowledge is the enemy of fear
<< <i>They think that they can legislate energy prices. I have news for them. Food requires energy, and once they discover that green energy is more expensive and less efficient than coal, petrol, and nuclear - there will be a big, expensive push to get back to where we already are in terms of energy. Of course, by then the BRIC countries will have made maximum use of our indifference and ignorance on the subject of energy. After Al Gore makes a few billion $$ in hyping his own green interests, are there any bets out there that he'll be big back into oil?
Excuse me for being cynical. >>
Right now oil and gas costs are all being subsidized, the real costs for fossil fuels are not being charged.
If you take the cost per barrel, subtract what the governement gives to big oil, add in the cost of wars and security costs, add in the costs for oil spills, etc...
Not to mention that eventually the world WILL run out of oil. What will we do then?
I think that America's best hope in the future will be to curb the alternative energy market with OUR technologies and then export that technology, infastructure. We would break our dependence on oil and at the same time increase our exports and create wealth for our country.
The focus shouldn't necesarraly be on effeciency in terms of producing the most product for the least amount of cash, the focus should be effeciency in terms of producing the most energy, sustainably, cleanly, for the least amount of cash. The plant is not the most effecient at converting sunlight into energy, but it is the best at converting that sunlight into energy SUSTAINABLY and cheaply (in terms of energy consumed).
<< <i>My point was, if prices for a simple hamburger go to $10, then the prices of everything else will be 10x higher. If wages do not increase, the these prices will be unsustainable. Just as $4 gasoline was unsustainable. If by chance these inflated prices are sustained and wages do not increase, then there will be millions of dead people. And since I think this is unlikely, I believe the hyperinflation story is unlikely. >>
The 1970s style inlfation was not hyperinflation and the coming inflation probably won't be either. Everything will be 4 to 5 times current level in 5-8 years which is not hyperanything. The ones who get screwed are the ones with the fixed pensions and the money in the bank or in bonds, they might double up in 7 years while everything goes up 400% and then have to pay taxes on thier "gains" . Wages will go up but not as much as costs and what isn't offset by increased technology will be covered by a decrease in the standard of living. Any idea how much technology has decreased production aand other costs in the last 40 Years??? Huge. But all its done is offset some of the inflation which would be much higher if not for increased productivity due to technology.
America will adjust, less eating out, more homecooking, less steak more potatoes, more buses/subways and less BMWs. Higher prices with less wages might be unsustainable in a closed system but the net effect is that the steak and the BMWs go to China (or elsewhere) while we get the hamburger and ride the buses. Dollars might be harder to earn on a US job but when the dollar tanks the worlds farm produce will not be coming into US ports but will be shipping out.
shadowstats.com cpi
Effective average real wages peaked in 1972 and have been falling ever since. No luck yet in finding a nominal wage chart from the 1970's. One reference I found graphed average wages from 1968 to 1980 as growing from 6-8% each and every year, and then eventually dropping to a more steady 2-3% level for the remainder of the 1980's and 1990's.
REAL WAGES
1964-2004
Average Weekly Earnings (in 1982 constant dollars)
For all private nonfarm workers :
Year Real $ Change
1964 302.52
1965 310.46 2.62%
1966 312.83 0.76%
1967 311.30 -0.49%
1968 315.37 1.31%
1969 316.93 0.49%
1970 312.94 -1.26%
1971 318.05 1.63%
1972 331.59 4.26%
1973 331.39 -0.06%
1974 314.94 -4.96%
1975 305.16 -3.11%
1976 309.61 1.46%
1977 310.99 0.45%
1978 310.41 -0.19%
1979 298.87 -3.72%
1980 281.27 -5.89%
1981 277.35 -1.39%
1982 272.74 -1.66%
1983 277.50 1.75%
1984 279.22 0.62%
1985 276.23 -1.07%
1986 276.11 -0.04%
1987 272.88 -1.17%
1988 270.32 -0.94%
1989 267.27 -1.13%
1990 262.43 -1.81%
1991 258.34 -1.56%
1992 257.95 -0.15%
1993 258.12 0.07%
1994 259.97 0.72%
1995 258.43 -0.59%
1996 259.58 0.44%
1997 265.22 2.17%
1998 271.87 2.51%
1999 274.64 1.02%
2000 275.62 0.36%
2001 275.38 -0.09%
2002 278.91 1.28%
2003 279.94 0.37%
2004 277.57 -0.84%
Source: U.S. Bureau of Labor Statistics
roadrunner
If that isnt hyperinflation, then I dont know what is. Thats 50-100% per year. Lets put those numbers into context.
At 5x, the average house wll be $900,000
Taxes on that house $18,000-36,000
Monthly electric bill $600
The ave car $100,000
Tax to purchase that car $8000
An oil change $150.
A trip to the dentist $500
Cost to submit a coin to PCGS $150
Cost of a haircut $75, for our wives $500.
So unless the average wage goes to $100 per hour, these prices will NEVER be acheived. No one will afford a house or a car. And we will all walk around will long hair and no teeth.
Also, there is no way these prices could be acheived without similar prices in the rest of the world. The USA would have ZERO foreign visitors.
So lets expand on this a bit further, suppose the USA is relugated to 2nd tier status such as Australia. As we raise interest rates to combat inflation, the dollar looks EXTREMELY attractive.
Look, I dont know how this massive debt bubble is going to be resolved. In many ways we are in worse financial shape than during the depression. At least in 1929 we were fiscally responsible and the banks were in good shape. But what I do know is when making a prediction one needs to look at the consequences of that prediction, and if they are unlikely, then the prediction is most likely wrong.
Unless you see people making $100 per hour or all of our capacity to produce anything is destroyed, we will not have anything close to 20% inflation, let alone 50-100%.
Knowledge is the enemy of fear
<< <i>I would expect those 5-15% inflation rates for a few years, Then after about a 2-300% cummulative we should level off with Hamburger at $10 a pound and gold around $3000. Something similar to the 1974-1981 period. Then things will settle down and the bankers can start the game over at a different level. Of course the fixed income group will get the screws but thats expected. >>
I don't disagree but this time it will be greatly foreshortened.
Is this how we create equality between the haves and the have nots? The savers lose all their money while the debtors lose all their debt?
If this is the case then I dont know why anyone is still living in the USA.
Knowledge is the enemy of fear
Maybe 'cause we don't know anyone in Costa Rica?
<< <i>Who is going to bail out the savers?
Is this how we create equality between the haves and the have nots? The savers lose all their money while the debtors lose all their debt?
If this is the case then I dont know why anyone is still living in the USA. >>
Inflation by it's very nature punishes "savers" and rewards debtors. There is a distinction between savers and investors, but the concept is the same.
If you save your money at a bank or even a CD and have high inflation rates, you lose purchasing power every year.
The US is a nation of debtors and one of the best, and about the only forseeable, ways out of this mess will be inflation.
I wasn't around in the 70's but from what I've heard and read, they had real inflation rates of 10 - 20% a month in some months. The reason may be different this time around, but the results will end up the same. People's wages didn't increase in porportion to their expenses back then either. The standard of living dropped for most lower and middle class people.
The same will happen again, it's just a matter of timing.
The country has changed as non-European immigration surges have changed the core beliefs of how "things should work".
Americans voted for exactly what they are getting...Socialism. They like it and are excited about the prospect of not working as hard...
yet getting a basket of entitlements. Who's going to pay? Who cares...they dont teach that in schools anymore so all the avergae
person hears is "you cant have"...blah blah blah....vote out the naysayers and vote in "empathy"..
"Obama's gonna pay my mortgage" she daid...and everyone nodded approvingly.
Loves me some shiny!
<< <i>"If this is the case then I dont know why anyone is still living in the USA."
Maybe 'cause we don't know anyone in Costa Rica? >>
Everyone keeps saying that our way of life will be destroyed. So why live here? You dont need to know anyone to move. Or is it about misery loving company?
ajbauman,
The 70's inflation was caused by supply constraints due to heavy demand from an up and coming baby boom generation and scarce energy. This recession is caused by excess credit and slowing demand. These situations are nearly mirror opposites. So expecting an opposite reaction may be prudent.
Knowledge is the enemy of fear
The best population the bleed dry with my hand out is right here....good ol USA....
Stop pulling the cart....jump in...go for the home run......the "permanent disability" check
From each according to his means...to each according to their needs
Sounds simple enough...except those still pulling the cart are also loading up on guns and ammo
Loves me some shiny!
I don't think we have a $10-$15 hamburger or a $100 haircut in our near future but I can certainly see key commodities, various asset classes, etc. tripling in price from here. The stock market won't be one of them, nor will bonds. A tripling of the silver price for example would have little effect on the rest of the economy. It's a tiny market that could easily go up 5X to 10X and not affect much else other than the people who own it. The same can't be said for cutting the value of the dollar by 1/5 to 1/10th or multiplying the price of oil by 10X. What won't happen is an across the board tripling or quadrupling of every item out there (cars, appliances, homes, golf clubs, etc.). An across the board price increase of say 30-100% over 3-7 years would be something more realistic. We experienced stagflation once before and only specific asset classes were highly affected. Rare coins happened to be one such asset.
roadrunner
Agree, particularly some commodities but which ones? Construction materials should slowly gain from their hammered state of now as things move more towards some stability but whose steel ours (X) or China's, whose concrete (RMIX) ours or China's, whose industrial metals? Hummmm all these questions. This brief wave of economic evolution has certainly taken all the weak hands out as there seems to be a lack of capital flowing to small business right now; hopefully that will change soon. And...talk about commodities, agri is gonna be a monster pretty soon...not sure when but we all know it's coming and it might even be a year or two but it is a good time to get into position. It would be interesting to see how many small (less than 100M) companies have become inert. As much as I hate to give my nod to our current economic policies, they will certainly change the landscape and the markets needed to be changed so yeah, we got change and be it good or bad, it's what we got. Sure as heck shook up the markets.
"The stock market won't be one of them."
Man, I donno about this one. There is so much play in the market right now...50 cent stocks going up to a buk and a half in two weeks...stocks that went from 4 buks to bkrpt and right back out and then to .017 and back up to .05 in a day...hey, 3X ain't that bad. There is a lot of activity out there and just nibbling off 10K of a .02 stock or 1k of a 50 cent stock doesn't hurt at all. I've been bottom feeding but I sat and watched F go from a buk and a half to 5 buks plus in three weeks and, as stated, 3X ain't bad...this stuff is happening all over the place. This is one of those periods where those that want to play can be very well paid for correct bets and a little patience.
"We experienced stagflation once before and only specific asset classes were highly affected. Rare coins happened to be one such asset."
Agreed and agreed. But...back in October I considered the fate of my coin collection and realized that if I kept it for just a few more months that I was gonna have to keep it for a 5 year hold because the market was gonna go flat. Not sure if I'm right or wrong because my stuff seems to be very stable, flat but stable or stagnant, depending on your orientation.
Onward
Agreed. Many individual stocks, esp those in single digits can easily triple from here. But what I should have said was that I don't see the main indexes tripling such as 20,000 Dow or 2000 S+P or 5000 Nasdaq. There are a lot of slower, bulkier, and generally inert players in the entire market. But it doesn't mean a company such as DRYS can't quadruple as it's already done, and then do it again. Is that going to happen to Berkshire Hathaway, Exxon-Mobil, Goldman Sachs, Google, IBM, etc? I highly doubt it. The swift boats will tend to spin circles around the larger companies.
Coins didn't come out of the 1970's unscathed. They took a nice hit in the 1974-1975 period. That was the same time when gold took a 50% whallop. What I should have said is when this economy shifts towards rising interest rates and more obvious inflation, then assets like coins should out perform.
roadrunner
<< <i>One can source all inflation back to the FED's policies of printing/creating too much money/credit. The printing presses were in high speed during the 1960's to fund the Great Society as well as the Vietnam war. And they never really slowed down. The follow on recessions were caused by pulling back the punchbowl a bit and by rising interest rates. The same methods have been repeated multiple times through the past 96 years.
I don't think we have a $10-$15 hamburger or a $100 haircut in our near future but I can certainly see key commodities, various asset classes, etc. tripling in price from here. The stock market won't be one of them, nor will bonds. A tripling of the silver price for example would have little effect on the rest of the economy. It's a tiny market that could easily go up 5X to 10X and not affect much else other than the people who own it. The same can't be said for cutting the value of the dollar by 1/5 to 1/10th or multiplying the price of oil by 10X. What won't happen is an across the board tripling or quadrupling of every item out there (cars, appliances, homes, golf clubs, etc.). An across the board price increase of say 30-100% over 3-7 years would be something more realistic. We experienced stagflation once before and only specific asset classes were highly affected. Rare coins happened to be one such asset.
roadrunner >>
This inflation scenerio I can buy into.
While the FED may have the printing presses going full tilt, we also have probably the largest credit withdrawal ever. Credit cards, lines of credit, home equity lines, mortgages, commercial paper, ect are undergoing a massive restructuring. It will be quite some time before credit--to the consumer--will be expanding.
Visa and Mastercard both reported that debit transactions exceeded credit in the latest quarter. I see this that the consumer has either maxed their credit cards, or are training themselves to only spend money they actually have. Both are good for the long term viability of the economy, but will not help pull us out of this hole near term.
Knowledge is the enemy of fear
"Is that going to happen to Berkshire Hathaway, Exxon-Mobil, Goldman Sachs, Google, IBM,... I highly doubt it."
Yes, but maybe we can glean something from all of this. My take on our current situation: A whole is the sum of it's parts as the DJIA is a sum of the 30 stocks. The whole is severely constrained and bound at this time, seemingly from a lack of cash or investment capital or opportunity of for what ever reason. The item to note here is that the whole will only be changed by change in the parts and it is the parts that must get healthy before the whole can show strength. The plays right now and the evolution that is taking place right now is the sorting out of the parts that are healthy and the shedding of the parts that are not; simple evolution w/o the BS...but we are not there yet, we do not know what is healthy and what is not and it will take a little time to see which of the little parts survive before we get a clearer picture of how the larger whole is shaping up but there are bright spots...little guys here and there that are recovering and showing strength. Right now it is a crap shoot to guess which big parts are gonna come out of this and they certainly won't be like they were; not possible. But, there is a lot of play in those little parts right now and as they emerge things will evolve to a higher state. So, right now we're playing $2 stocks...maybe in a year we will be playing $40 stocks and maybe in a few years we can dip our toes back into some serious dividend paying stuff that spits out cash like a pachinko machine drops those little metal balls but for right now, the focus needs to be on the parts, not the whole. The whole and the large parts are an abberation right now...at least to me.
It will be the smaller entities that must show strength before the larger ones will prosper. All this throwing fiat at those that can't fail is not going to make the biggies healthy; it may keep them alive but it won't make them healthy, it will not stimulate growth, it will not take us to the next level, it will do nothing but allow this situation to persist a little longer so it is only by the Fords and US Steel and Alcoa and Coke and Southwest Air becoming healthy that the larger dogs can get into a serious hunt for growth. It is only by the US consumer becoming healthy that the credit markets can get healthy, not by the govt. strapping the banks on to the machine and telling them to lend money...ain't gonna happen and it ain't gonna work The consumer has to believe that he can make rent/mortgage, that he can make the car payment, that he can feed and clothe himself and his, it is only when the little parts begin to emerge as healthy that the next group up the food chain can begin to prosper. The only way the little guy can prosper is to save and work like his life depends on it...so yes, he can only survive if he stays strapped to the machine for right now but if he survives then areas will begin to prosper like housing, automobiles, hotels, airfares, etc. and then we're back in the game and we will have a clearer picture of where we're going. Seems like a cruel fate for a population once deemed as the most prosperous in the world but at least for the moment, such is the hand that is being dealt.
The more these little guys are taxed, the more the small parts are taxed, the more of their profits and incomes are siphoned off as fees, tolls, license costs, permits, and the phalanx of little nicks and cuts and all the predation that is directed at these smaller parts, the longer it will take for the smaller parts to emerge...it's really not that complicated. Edited to add that as income and growth are decreasing, taxes and fees are increasing...it's becoming more like a zero sum game and growth is going to be very slow for the larger parts.
JMHO
Desperate Times and Desperate Measures
Under the guise of saving the economy, the U.S. government has committed itself to spending so much money that GDP growth is inevitable.
This is not a new strategy. It has been a few times before in U.S. history. Just take a look over the past 150 years. The last few times U.S. government spending reached these levels (as a percentage of GDP), the consequences, which were always the same, followed close behind.
In 1861, the Union printed more money, borrowed everything it could, and spent it all to fight back the “rebels.” Inflation between 1861 and 1865 ended up at 117% for the period. That’s 16.7% on an annualized basis.
In 1917, President Woodrow Wilson aggressively emptied the government coffers in World War I. Prices increased 126% between 1917 and 1918. That’s 50.3% annual rate.
In the 1940’s we went through it again. The U.S. involvement in World War II forced another surge in government spending. This time the prices rose 108% between 1941 and 1945. That works out to a 15.7% annual rate of inflation.
Then in the 1960’s, during the quest for the “Great Society” amidst the Vietnam War, the U.S. government stepped up spending in a big way. The end result was the “lost decade” of the 70’s and stagflation which followed.
See a pattern here?
On the flip side, Cliff Droke penned an article today comparing today's stock market recovery to that of 1975. The 1974-1975 bust in gold during that recession is one of the time frames that we've been comparing the 2008-2009 breakdown against. Gold resumed it's rise by late 1976 and then proceeded to run for 3+ years.
roadrunner
Most of your scenarios had a common thread...huge amounts of spending (and borrowing) for war. The cost of the IRAQ war and the Neverending "war on terror" already had us destined toward inflation. Having lived through the inflation created by the Vietnam war I saw what was coming. This is what prompted me to buy gold heavy in 2005. The 2006-08 gold run was a result and the stock/housing crash of 2008 just provided a correction. Now we have a spending orgy that has never been seen in my lifetime that will add topping to the inflation cake that even the 70s didn't see. I hope Im wrong but I invest with my head not with my heart and it tells me we have some big time inflation coming.
Yup. All related to war, which is what I wrote in thr hyperinflation thread a few weeks ago.
I dont think the current Iraq or Afganistan war spending comes anything to comparison to the spending during the Civil War, WW1 or WW2 when compared to GDP.
After the Civil War we had deflation that lasted for 20 years.
After WW1 we had deflation immediately following then a little inflation in the 20's and massive deflation in the early 30s. Or almost 20 year of deflation.
We did have a wee little bit of deflation just after the end of WW2, but then the Korean war started.
Only after we left the gold standard has deflation not corrected excess inflation.
Knowledge is the enemy of fear
Deflation would have corrected any excess inflation if our govt was true to the spending within our means. Spending got totally out of control in the 1960's while still on a gold standard. Our govt and FED decided that they were going into a deficits don't matter mode never to look back. The money supply over the past 45 years has never contracted even month to month except for minute bits in at most 2 or 3 months....it has only grown in over 99% of all the months over that time period. It's impossible to correct monetary excess when you never stop inflating the money supply, esp. with being on a 10% tear year over year since 1995.
If one looks at the entire 19th century and up to just before the FED was established (>100 yrs), that was an entire period of very slight price deflation when taken as a whole. The dollar had more buying power in the early 1900's than it did in 1800. The various panics and deflations of the 19th century were caused by excessive liquidity from the banks that was eventually yanked back, and nothing at all to do with gold backing the money supply. In 1812-1818, 1861-1865, and 1916-1919 for example (and the panics that followed) the govt/states either left the gold standard or just ignored it. So the problem wasn't the gold standard but the bankers, just as it is today. The gold standard didn't prevent the bankers from cheating on the money supply or lying about how much gold they had on hand to back the paper they circulated. The gold standard didn't hinder real industrial growth either. Today, same game, different century.
The deflation after WW1 (1920-1921) was a deflation that generally hurt the farmers more than anyone else. The cause was due to the FED pulling back the punchbowl very quickly to restore the inflated prices to normal after ignoring the gold standard from 1916-1919 and inflating the money supply. By 1921 they succeeded in restoring the price of a good cigar from 10c to 5c. Bully for them! But they temporarily killed the farmers in the process.
We did have periods of actual deflation from 1920-21, 1930's, and 1957-1958. But it's been 50 years since the last one because the FED has become an expert on producing inflation. Declining stock and asset prices such as homes is not deflation no more than increasing stock and asset prices is inflation. Deflation is generally when your dollar buys a lot more consumables, products, and services than it ever could before. As long as you are making the same salary you did before, your income should be going further than ever before.
When the prices or cost of all these generally fall in unison, I'll agree we're in a deflation: fish, chicken, beef, deli meats, milk, produce, cereals, cookies, pasta sauce, juices, cheeses, frozen foods, big Macs and Whoppers, condiments, coffee, cans of soup, chocolate, magazines, gum, wrapped candy, ice cream, clothing detergents and bleach, household cleaning solutions, education, health care products, toilet paper, prescriptions, taxes, cell phones, phone services, cable TV packages, credit card fees, ATM fees, cigarettes, electricity, gas, heating oil, auto's, USPS stamps-fees, automobile repair services, plumbers and electrical services, life and auto insurance, personal hygiene items, movie tickets, tools, home improvement supplies, lawnmowers, bicycles, toys, baby products and accesories, flowers, eye glasses, haircuts and salons, dry-cleaning, hardcover books, gift or special occasion cards, costume jewelry and woman's acccesories like pocket books and shoes, makeup, sneakers, good quality linens, etc. One can buy many of these food items in bulk and save some, but if you don't want 10 loaves of bread at once, it will cost you more than last year. My wife tossed in a bunch of these items stating that they cost her more this year than last. And don't forget the downsizing of the food packaging that has been ever-present over the past 30 years. That orig 8 oz can of Tuna Fish from 35 years ago is now only 5 oz.
In my area, the vast majority of the above cost items have increased over the last year or are about the same. No sign of deflation yet. A recession, sure. Cheaper prices and a dollar that goes on forever? Not yet. Sure, trips to Disney are down, airfare, gas temporarily to 2006 levels, hotel stays, special deals in restaurants, car prices, and others. Most people don't spend the bulk of their annual income on airfare, hotels, and restaurants. If they do, they might be coin dealers.
roadrunner
<< <i>While the FED may have the printing presses going full tilt, we also have probably the largest credit withdrawal ever. Credit cards, lines of credit, home equity lines, mortgages, commercial paper, ect are undergoing a massive restructuring. It will be quite some time before credit--to the consumer--will be expanding. >>
But it doesn't even really have to expand... it just needs to stop contracting and stabilize... Which I'm not going to say it can't contract further, but it would appear to me that most of the damage has been done.
<< <i>
<< <i>I would expect those 5-15% inflation rates for a few years, Then after about a 2-300% cummulative we should level off with Hamburger at $10 a pound and gold around $3000. Something similar to the 1974-1981 period. Then things will settle down and the bankers can start the game over at a different level. Of course the fixed income group will get the screws but thats expected. >>
Who is going to be able to pay $10 for a hamburger? Do you see wages increasing? >>
Well put, Dave!
Inflation during the 70's averaged 7.4%. Hardly hyperinflation. The cumulative effect may have been 100%, but this was spread over a decades time. I think we can handle it. Also, during the 70's there was not an "across the board" increase in prices. Wages were relatively stagnant so as people spent more on gasoline, they spent less on other items which lead to no price increases.
The 70's inflation was caused by supply shocks and the elimination of price controls. Unfortunately, the only thing we have in short supply today is financial responsibility.
Knowledge is the enemy of fear
<< <i>The supply of dollars is increasing, and the demand for dollars is decreasing. This leads to inflation. >>
I dont think the demand for dollars is decreasing. I could link to several stories on Bloomberg.com that show and expain how countries around the globe are gobbling up dollars. Demand may have waned a bit since Oct, but it is still very strong.
The 10yr yield on US treasuries is nearly the same now as the 10yr Bund (german). Europe is more screwed up than we are. The greenback is still very attactive relative to out peers. As the economy looks like it is improving, demand for dollars will weaken, but if it looks like we will relapse, the demand will increase. The US dollar likes turmoil and recession.
Knowledge is the enemy of fear
I can understand demand for actual notes that can be spent immediately anywhere in the world. But I can't see demand for key strokes or other credit entries that are not quickly convertible to cash. That begs the question, what happens when everyone decides they need more cash on hand and start emptying the banks? In that situation key strokes and computer entries won't be of much help except maybe sending mortgage payment to your bank.
Assuming 100 MILL families in the US, and approx 1/3 of the FRN's being found in the US ($250 BILL) that would mean about $2500 per family. Doesn't seem like all that much. Interesting is that if we spread out the 8133 tons supposedly in storage at Fort Knox among those same 100 MILL families, it would work out to be 2.6 ounces of gold per family....the same approx value as the $2500 in FRN's.
roadrunner
<< <i>I dont think the demand for dollars is decreasing. I could link to several stories on Bloomberg.com that show and expain how countries around the globe are gobbling up dollars. Demand may have waned a bit since Oct, but it is still very strong.
The 10yr yield on US treasuries is nearly the same now as the 10yr Bund (german). Europe is more screwed up than we are. The greenback is still very attactive relative to out peers. As the economy looks like it is improving, demand for dollars will weaken, but if it looks like we will relapse, the demand will increase. The US dollar likes turmoil and recession. >>
China has stopped buying our debt, they don't want any more dollars, and they were one of the biggest customers. I can't imagine that any other countries aren't too far behind.
A burial plot in America has never been cheaper.
Buy now, rest later.
cohodk, you've just put your finger on the thing that's being mentioned by Bernake - the Fed is expanding the govt's balance sheet.
Lot's can happen as a result, but who's going to be pulling the strings? When a corporation issues more stock, the existing share values are diluted - this seems to be the same thing.
Although the total value of all shares is the same, the distribution of the value depends upon where the new shares go. In our case, the new shares are being given to banks, defunct corporations, new government initiatives, etc.
The rules of the game keep changing as the new shares are deployed.
I knew it would happen.