Re: Financial topics
Posted: Tue Oct 07, 2008 3:35 pm
From a web site reader:
> You can put anything I write you on the forums if you wish - I
> looked at writing this in there, but there wasn't (or I couldn't
> find) a forum for individual blog posts you've written.
> Anyways...
> I was a bit confused by the last part of the "Markets plummet"
> post, about the inflation vs deflation thing. The gist of what it
> sounded like was that because the US$ is the reserve currency, and
> many other currencies are in bad shape, it can't undergo
> significant inflation. It seems to me that there are two issues
> here - the relative value of the US$ (relative to other
> currencies), and the absolute value of the US$ (how much you can
> buy with a dollar). I think it is quite plausible that, relative
> to the euro (or even a basket of currencies), the dollar could be
> roughly stable, or even appreciate, if the euro and dollar both
> are inflating, or deflating. If one inflates while the other
> deflates, then obviously their relative prices (in the other)
> would change, but you have presented fairly strong arguments that
> BOTH the US and Europe (and much of elsewhere) are economic
> train-wrecks waiting to happen - so BOTH will suffer inflation or
> BOTH suffer deflation. If deflation occurs in the US, then
> arguments for it apply equally (if not better) to the rest of the
> world, so there is no inherent advantage to the US$.
> If the euro is disbanded and Europe returns to a multi-currency
> system not much changes (other than the financial havoc that
> creates) - but it'll be more complicated in terms of comparisons.
> BTW, I'd say that the euro would probably not be disbanded at once
> - rather one country after another would leave it (or be kicked
> out) due to local strains. I think it would end up as a currency
> for a rump of countries - France/Benelux/Germany, or even just
> Germany or France.
> "In the case of Germany's Weimar Republic, which suffered
> hyper-inflation in the 1920s, few people outside of Germany owned
> marks. In the case of Zimbabwe today, no one outside of Zimbabwe
> owns Zimbabwe dollars. But there are huge amounts of dollars
> outside of America -- Europe, China, the Mideast -- and all of
> those holders are as committed to the value and integrity of the
> dollar as America is. Forget about the dollar as an American
> currency. Think of the dollar as a world currency." This seems to
> me kind of self-contradictory: If we think of the US$ as a world
> currency, then there are no people outside the world that own
> US$s, so the whole world is like Zimbabwe - there's no one outside
> the world that owns world currency. Yes, people inside the world
> have a vested interest in maintaining the value of US$s. But then,
> so did people inside Zimbabwe (i.e. they had an interest in
> maintaining the value of their cash), but that didn't stop the
> inflation. In Zimbabwe's case people with good connections or
> influence could buy other currencies with their Zimbabwe currency,
> and so preserve the value of their cash, but they did that after
> the inflation set in - their currency sales did not cause the
> inflation. And average people were unable to do so, and so lost
> that value. In the case of the world currency, everyone is trapped
> (at least those who hold cash) if it inflates - but that won't
> stop inflation. (And a side point - the rest of the world held
> huge amounts of debt issued by the Weimar republic - they had a
> lot of interest in ensuring that those debts were paid back).
> "...there are huge amounts of dollars in countries around the
> world. Even if America no longer had any dollars whatsoever, the
> dollar would still be valuable on international markets as a world
> currency." This seems like an argument AGAINST deflation! If
> deflation starts to rear its head, then the US could pressure
> these holders of US$s to sell. "It's true that America is deeply
> in debt, inasmuch as we owe China, Japan and other foreign
> countries far more money than we can ever pay back. But that's not
> the issue." But it is the issue because the currency is a lot of
> IOUs. As I understand it, most US$ reserves are not held in cash,
> but in US gov't debt - that's the beauty of the system for the US,
> right? First the other countries buy up the extra dollars the US
> puts out to pay for imports, etc., then they use them to buy US
> gov't debt - pays interest - and so they end up funding the
> perennial US gov't deficit. I think even saying that the US can't
> pay back existing debt is ominous, as it's going to keep piling on
> more and more. I personally think it can and will pay them (my
> inflationary solutions) - there are two scenarios I can envision:
> a German scenario and a Russian scenario.
> In the German scenario there is initially significant inflation
> that whittles down the existing debt. Next, a generational crisis
> bloody enough and destructive enough on US soil to make other
> countries forgive some of the debt and forces the US ruling elite
> to step aside or change enough to stop the wholesale robbery of
> the productive economy. Then an austerity era like post-WWII
> Germany when the rest of the debt is dutifully paid off through
> honest economic development and growth. In the Russian scenario
> there is initially significant inflation, reducing the debt load.
> This leads to grinding poverty for most residents, but reinforces
> the power and wealth of the existing
> congressional-military-financial elite leading to the extreme
> income disparities of today's Russia. The rest of the debt is paid
> of through continuing inflation, the wholesale exports of natural
> resources, and remittances sent back by the many Americans working
> overseas. If deflation happens, the scenario I'd see is that the
> debt load will continue to increase both due to gov't borrowing
> and because deflation makes the debt worth more. Eventually the
> government will default on the debt as it becomes insupportable.
> US$ immediately loses it's reserve status, throwing world finance
> into disarray, and suddenly forcing the US to live within its
> means. Not sure of what happens next, but it wouldn't be pretty.
> "And you should take Jim Cramer's advice..." I can't believe
> you're recommending the advice of that shill! Sure, get out of
> the stockmarket, but I don't think anyone really knows if
> inflation or deflation is going to happen. In fact, if Cramer says
> to hold cash, I'd do the opposite! I'm sure that he's saying that
> to help his old hedge fund buddies in some way...