1-Jul-10 News -- World economy in deflationary spiral

[vincecate]

How do you move a billion $ invested in Treasuries into solar panels or your mattress?

None of my friends have a billion dollars, at least that I know about, but if you have a billion dollars I recommend you buy a really nice yacht, convert it so you can at least move slowly on solar/electric, and load it up with food storage. Then you can keep a safe distance from trouble.

I would never recommend storing cash anyplace. I think the chances of hyperinflation ruining the value of cash are too high to make that reasonable. I mean that people with money in treasuries should take it out and buy things that will be useful in really hard times, like when the US has to operate on a much smaller amount of oil than it does now and things from China are expensive.

[Guest]

How do you move a billion $ invested in Treasuries into solar panels or your mattress?

You mention only two of the many places that were mentioned where the billions can go. Sure, the mattress and solar panels are not enough. But when you start considering the (I repeat) MYRIAD number of places it can go, it's not as far fetched as you seem to think.

Yes it is. Where can you invest a billion $ that's safer than Treasuries, even with inflation?

[thomasglee]

Yes it is. Where can you invest a billion $ that's safer than Treasuries, even with inflation?

First of all, you asked where would they move it and not where would they invest it. Secondly, you're assuming that if somebody gets out of treasuries, they're just going to turn around and invest it. We don't know that...

Lastly, as mentioned, there are a myriad of places to put it - even in terms of investment. They may decide a foreign currency is safer, or gold, silver, etc. Or they may invest in overseas markets that are more receptive to investment and less taxing. It would not be the first time in history that money from one nation moved to another or to many.

[vincecate]

Yes it is. Where can you invest a billion $ that's safer than Treasuries, even with inflation?

Treasuries are paying lower interest than the real rate of inflation, so it is a guaranteed loss every year. Do you really want to call that "safe"?

If hyperinflation happens then treasuries will drop in value even faster than cash. The further out the due date the more they will drop, since there will be more time for hyperinflation to destroy the value of money before the treasury can be turned in for money and converted to something else.

[Higgenbotham]

So after fiat currencies are collapsed, why would gold do me no good? If you mean food supply and guns are more important, I agree. But if you mean that gold and silver coins would be of no use at all, I am confused and ask why?

It's because for some period under such a scenario, almost certainly for the rest of our lives, civilization will cease to exist. There will be no storage of anything, just day to day survival, and that implies barter at best.

Many many countries have had hyperinflation. Most of them get through surprisingly well really. Some with only a very modest increase in crime.

Now this will be the first time a world reserve currency has had hyperinflation, so it will be different, and much worse. I doubt that most places will have a "breakdown of civilization" and even those that do I doubt it would be even a year long. I think the best locations are where the fewest people live off of government money. If paper money fails the various governments can not support nearly the number of people they currently support. It will be a very bad year.

This is a key question because it affects the degree to which governments will work to prevent such an outcome.

The day China consumes more, relies less on exports, and accumulates far fewer dollars as a result can't come soon enough. There's a certain mutually-assured-destruction quality to our current relationship--Larry Summers calls it the "balance of financial terror"--in which one false move by either side could bring down both economies, and probably the entire global financial system, too. This makes dialogue a necessity. But what it really does is make you pine for a way back from the edge.

As The Atlantic's James Fallows has pointed out, even if both sides behave responsibly, there's the persistent risk of miscalculation--or maybe a rumor that triggers a bond market sell-off China didn't intend. During the cold war, the hotline Kennedy and Khrushchev established was genuinely stabilizing, but it would have been far more stabilizing had the United States and Soviet Union stopped training thousands of nuclear warheads at one another. If, to stick with the analogy, the U.S.­-China relationship is only in the early 1960s, then it's going to be a long couple of decades indeed.

http://www.tnr.com/article/economy/peki ... r?page=0,0

Third item on my list on page 1:

"International political realities"

In my opinion, this article does a nice job of describing what some of those realities entail.

[OLD1953]

Since you are arguing the idea of a worldwide hyperinflation, you've still got to figure out how two things happen.

1) Circulation of vast sums of currency without consumer borrowing

2) Collapse of production while that currency is circulating.

I'm just not seeing that mechanism in place.

For the US (not discussing Europe which is a totally different system) it's nearly impossible to keep huge deficits in place for periods longer than two years. Demands for more spending are met with higher taxes. And it simply doesn't matter which party you elect, they'll both do the same things. The Dems will tend more to soak the wealthy, the Repubs will tend to soak the middle class (in the name of Tax Fairness, LOL), but that's our future as far as I can tell from looking at the past.

Now, after WWIII, hyperinflation of dollars is an entirely different subject. Most (maybe all?) historical hyperinflations took place shortly after a war, and generally on the losing side, though sometimes on the winning side or even both.

WWIII starts, it's bets off. Otherwise, I've got to class it as highly unlikely.

However, whether you expect inflation or deflation, in such uncertain times as these, the sensible thing to do is pay off your debts and be ready to ride out economic storms. On consideration of where to invest that might be safer - it would seem to me that even in extreme cases, states would be unlikely to repudiate their bonds, and even if regional monies were issued, they'd very likely be willing to redeem in that regional money. Something to consider, if you are going the paper investment route.

[vincecate]

Since you are arguing the idea of a worldwide hyperinflation, you've still got to figure out how two things happen.

1) Circulation of vast sums of currency without consumer borrowing

2) Collapse of production while that currency is circulating.

I'm just not seeing that mechanism in place.

The government spending money is how new money gets into the economy in hyperinflation. The reason for hyperinflation is that the government deficit is out of control and people won't loan the government more money, so it has to print to pay bills. It is not like they print money and look for something to do with it, it is that the only way they can get money to pay their obligations is by printing new money.

The bond markets for the hyperinflation currency always collapse, but collapse of production is not necessarily part of hyperinflation, as far as I know. What do you mean?

For the US (not discussing Europe which is a totally different system) it's nearly impossible to keep huge deficits in place for periods longer than two years. Demands for more spending are met with higher taxes. And it simply doesn't matter which party you elect, they'll both do the same things. The Dems will tend more to soak the wealthy, the Repubs will tend to soak the middle class (in the name of Tax Fairness, LOL), but that's our future as far as I can tell from looking at the past.

They need to increase taxes by 50% and it just can not be done.

However, whether you expect inflation or deflation, in such uncertain times as these, the sensible thing to do is pay off your debts and be ready to ride out economic storms.

It is good to be careful with your money; however, if money is about to become worthless I don't think paying down debts should be a top priority.

[OLD1953]

Then how is Japan still trucking along? By the metrics discussed here, Japan would have collapsed long ago.

Consider what will happen in the case of sovereign defaults in Europe. That destruction of capital will cause the remaining capital to flee Europe, and that will be an even greater deflationary pressure on the US. If the Euro dies, same thing.

Long time ago I had an argument with a guy about taxes and the GDP. I said flatly that the level of the top tax rate had nothing to do with GDP growth whatsoever. He swore it had to, quoted tons of logic at me. So we graphed it. The graphs show utterly clearly, there is no relationship whatsoever. You have periods of both rises and falls in the GDP under all tax regimes and they are of similar size and frequency. (discarding the recent insanity as an outlier, most likely - that's never going to be the poster child for anything economic anyhow) Yet he still swears there has to be a relationship. This is beginning to remind me of that situation.

Money is an idea, an abstraction that represents a measure of what things are worth. Since it isn't tied to anything, there is an assumption that we can influence this idea just by changing a parameter or two, such as how much of it there is. Yet demand for money, like anything, can hit bottlenecks and cease to flow. We've hit a bottleneck. Until that clog is cleared, you can stuff money into one end of the pipe as hard as you please, the other end is just going to keep a fairly constant flow.

[vincecate]

Then how is Japan still trucking along? By the metrics discussed here, Japan would have collapsed long ago.

Hyperinflation only comes if the government can not borrow money and has to print it. In Japan people have a strong tradition of saving and that saving went to the government. So they have not yet been forced to print money to where they get hyperinflation.

But American's don't save enough to cover the US government. If the other central banks stop buying US treasuries then the US will have to print money. I think it is already started it is just that the Fed is buying mortgages and paying interest on bank reserves and also banks buying treasuries, so people are not yet counting this as the same as the Fed buying treasuries.

http://pair.offshore.ai/38yearcycle/#japan
http://pair.offshore.ai/38yearcycle/#moneylaundering

[Tom Acre]

Japan staved off collapse by hitching a ride on our credit/consumption orgy. In fact, their trade policies during the '90s and 00's were quite focused and well executed.

The days of easy credit, ever increasing equity and elevated markets are over, over, over!

'53's point about production is valid, "supply of goods and services" would be another way to say it.

At least 3/5ths of what the Federal Gov't spends is merely a transfer of money, goods, and services from taxpayers to potential voters. Most of the rest goes to defense and debt service. Under these conditions, wage/price controls and rationing seems a more likely hazard than hyperinflation.

The Fed has probably at the very least exhausted the limits of its fiscal and legal options, and due to the political climate, will likely fall under closer scrutiny going forward.

Considering current conditions, significant inflation is unlikely and hyperinflation isn't worth consideration.