JLak wrote:Higgenbotham wrote:
I suppose that is theoretically possible as the Fed may not recognize the process as being complete and may at the time of completion be buying government debt in exchange for newly created dollars. If that's the case, then I think you're right, as you stated, a vicious cycle leads to hyperinflation and government failure. But I think we have to take this a step at a time. The process of private market debt deflation is likely to be a very long one and during that process our institutions will undergo changes that will likely make it impossible to hyperinflate. The mechanism by which that happens, my guess anyway, is that state (as in US states such as Texas, etc.) or private forms of money will be introduced and compete side by side with Federal Reserve Notes. Another possibility, which is already happening to a limited extent through Everbank, is depositors will be able to readily switch their accounts into more stable foreign currencies should a particular central bank get out of control. A third possibility between now and then is, since many fear the outcome you are describing, there will be restrictions placed on the Fed that prevent it from hyperinflating, or the Fed may be abolished entirely.
Generally speakng, the large currency blocks such as the EU and the US are running into trouble partly because one centralized economic policy and currency cannot fit the needs of a highly diverse area. At the same time, the new technologies make it feasible to create and administer alternative currencies that meet the needs of particular geographic areas. I don't think it'll be too long before the lighbulb goes on inside some desperate state government that this is the solution to their problem. Once that happens, the floodgates will (can is probably the better word here) open and the revolution will (can) be in full swing. As long as that alternative exists, it seems to me that a coup in the traditional sense can be headed off through this means.
http://www.cbsnews.com/8301-503544_162- ... 03544.html
Somebody is beginning to think in this direction, but it doesn't seem that gold and silver coins would be the right solution. One of the Strauss and Howe scenarios was that a governor would lay claim to Federal tax monies (page 272). My guess is this is very likely, along with a plan to establish an alternative digital fiat currency that would promise to be strictly limited in terms of inflation and tailored to the needs of the particular state instead of the crooks on Wall Street.
So, you say the dollar will be replaced, but you expect it to hold and increase its value up until that day. I'm not saying that you're wrong, but I'm just not so sure things will go smoothly. Future expectation drives present value.
I do think there's a quantitative answer here somewhere that will give the best guess possible as to the bounds of rational expectation, but quite frankly I'm not smart enough to figure out all the variables. I'm somewhat convinced that Bernanke understands the full situation better than anyone else, but his job is to stabilize the banks, not to inform the people. Therefore, I implore members of this forum to think through it a bit more and break the situation down instead of holding to dogma with broad generalizations.
Thank you all for making this forum what it is. -JLak
JLak, if you're still out there, this is a piece from your post back in April that I didn't have time to respond to.
"So, you say the dollar will be replaced, but you expect it to hold and increase its value up until that day."
Not replaced near term, but the monopoly could be challenged through a threat of secession or through electronic alternatives (or through other means) if the Fed/US government don't get their act together. The rest of the world is challenging the dollar by being more fiscally responsible than Washington and refusing to go along with more stimulus. Contrary to logic, that will probably boost the value of the dollar for the rest of this year as European growth prospects dim in the near term while Europe takes the lead in getting its act together. In my view, that won't make a near term challenge to the dollar less likely, though, because everyone will still understand the longer term implications of irresponsibility. Longer term, my guess is there will be local economic zones with their own currencies, possibly regional currencies, national currencies, and a world reserve currency. I believe every local economic zone will have a balance of trade accounted for in their own currency and the currencies between local zones and on each geographic level will be electronically interchangeable. I believe Central Banking will be abolished and the parameters like interest rates, money supply, etc., will be set by the free market or by intelligent machines where there is no market. How exactly we get from the next year or two to there I don't know.
"Future expectation drives present value."
Somewhat true depending. Expectations/sentiment against the dollar have been very negative for 6 years. I don't have the figures to prove that though. Yet very little has changed pricewise in 6 years.
http://futures.tradingcharts.com/chart/US/M
In order for expectations/sentiment to influence price, more actors have to increase their negative sentiment toward the dollar and/or have the means to follow through in the marketplace. If a credible dollar alternative is introduced that people have the ability and desire to use, yes, I agree you are right that it will drop the value of the dollar. But as an alternative is adopted by a small percentage of former dollar holders, I believe the Fed/government will get scared and act responsibly to try to maintain their monopoly. In fact, I think that will happen even if there is a "credible threat" of an alternative, to borrow a phrase from Bernanke himself, which would be the antithesis of his helicopter drop threat.
Reading some of the above link at mises.org about the Third Century inflation in the Roman Empire brought up the Roman history that had formed the basis for some of my thoughts. Although the details are different, the fundamental backdrop looks similar to the era of Diocletian/Constantine, where the inflation stabilized for a few decades:
Caracalla had also debased the gold coinage. Under Augustus this circulated at 45 coins to a pound of gold. Caracalla made it 50 to a pound of gold. Within 20 years after him it was circulating at 72 to a pound of gold, reduced to 60 at the end of the century by Diocletian, only to be raised again to 72 by Constantine. So even the gold coinage was in fact inflated — debased.
Now, in one sense, Constantine's reform began the reversal of the process: the gold coinage was sufficiently large that it began to take hold and to circulate more freely. However, the silver coinage failed and, what was worse, at no time in this period did the central government try to control the token coinage. The result was that token coinage was being minted not only by the imperial mints, but also by the mints of cities. In other words, if a city couldn't pay its costs or pay the salaries of its employees, it simply struck up some token coinage and issued that.
By the late 3rd century we also begin to have the massive appearance of what numismatists call counterfeits. I would say it would be called credit money today. People need small change, and they simply go and manufacture it. All of this of course meant that the amount of token coinage in circulation was uncontrolled and increasingly massive.
The token coinage, imperial or otherwise, didn't do so well in the late 3rd century. How accessible any alternative currency is and how well it can perform will be important to any thesis that alternative currencies will force the Feds to hold the value of the dollar. I think with the advent of the new technologies, the present holds better prospects for alternative currencies.
I don't know how any of this can be quantified, but if you want to start with some basis for doing so I'll try to understand how it's possible. Generally, it could be thought of semi-quantitatively as: When an empire expands its territory or sphere of influence, there tends to be inflation. To what extent is a stabilization or contraction of an empire's territory or sphere of influence the termination or exact reverse of an expansion and, if it is, for how long can the empire maintain this lack of expansion before there is a discontinuity of some kind?
As a recent example since these original posts were made, we can look at what Europe has been willing to do to keep their marginal members in the Euro and maybe austerity comes into the picture where it wouldn't have otherwise as the lesser of evils (versus contracting the sphere of influence of the Euro). It can work the other way too:
However, the Baltic nations represent a special case – they could have dropped their pegs, but haven't done so. They would rather suffer a severe deflationary contraction than give up their link to the euro. The reason for this is found in their history.
http://www.acting-man.com/?p=2673
Maybe a little Generational Dynamics at work.
While the periphery breaks down rather slowly at first, the capital cities of the hegemon should collapse suddenly and violently.