Tuesday, November 11, 2008

Inflation, Deflation, & Bretton Woods II

It has been painful to watch and participate in this market. Given the election sideshow that has finally concluded, we can turn to the economic problems we face.

First off, I want to give you an example of how badly these bailout ideas are turning out. AIG has increased the size of its bailout in less than two months from $85 billion to $125 billion. Remember my projection of costs for bailouts being 2-3 times larger than estimated by the government? It seems like it is coming true.

Banks are starting to renegotiate bad loans that they have made. This should have happened anyways, but now they are being forced to do so by the government that just handed them $250 billion. If things keep going the way they are going though, it will not really matter. Wells Fargo, said that it would take at least 2 years to liquidate all of Wachovia's bad assets. That could mean 2 years of selling pressure on good assets to make up for the bad assets that are being sold in "illiquid" markets.

There are 2 alternatives that policy makers could choose:
1. Inflate the money supply and "stimulate" growth by propping up asset values.
2. Let the market deflate to a natural, non-leveraged state

Alternative 1, monetary inflation is the most likely step that the Obama administration will take because nearly all of his advisors, Warren Buffet included, are Keynesian economists. They think that government spending will "stimulate" the economy out of a recession. This has been the source of the problem we face. Inflation in prices and money supply wipes out purchasing power and hurts those with fixed incomes immensely.

Alternative 2: Deflation is what is currently going on. Creditors can not lend because their capital has been destroyed by bad investments or loans. The money supply therefore will probably show declines in the future. Prices will decline as purchasing power increases. The recent rise in the dollar has occurred because foreign currencies are printing more money relative to their currencies than we are.

What could happen is a mix of the two. If the government decides to spend to "stimulate" we could get economic and monetary contraction mixed with increasing government spending as a percentage of GDP. This is the hyperinflationary depression scenario that is scary to envision.

Bretton Woods II

This brings me to Bretton Woods II. The push towards global regulation and government is forming in the way of Bretton Woods II. It seems that central banks are attempting to reposition currencies in order to bring about some parity between the Euro, Dollar, and Yen. This would make it easier to transition from sovereign currencies to a single world currency. It sounds crazy, but this is how the Euro was formed. The Franc, Pound, and Lira were all benchmarked to the Mark and brought to relative parity before the Euro took over the Eurozone. Unfortunately, this causes inequities when economies have different policies. Ireland couldn't respond to their overheated economy with their own monetary and fiscal policy because they were locked to the European Central Bank's monetary policy for the whole of the EU. Do we really want to give up our fiscal sovereignty to a global governing body that would be easily corrupted? Look at the UN. What a joke.

There used to be a global currency. It was called gold, maybe we should return to it and get rid of the "I'm smarter than you, therefore I'm god" people that are trying to run our lives and steal our liberties. I for one, won't have it. People need to push back against this craziness, otherwise we will lose even more freedoms.

3 comments:

Robert J Miller said...

I like your clear and concise explanations of the alternatives. Based on what you said, I vote for deflation. I'm adding your blog to our blog's sidebar. Also, be sure to do these things: http://www.pardontheinformation.com/2008/09/setting-up-new-blog-three-must-do-tasks.html

Mark Herpel said...

It won't be deflation, Big Ben said he'd rather fly around in a chopper and drop money rather than has deflation.

Further I'm not using some global BS currency, it's gold and silver or nothing that resembles any global UN money, SCREW that.

If anything, currency should go local NOT global, enslaving the masses. Wow that makes me mad.

Mark

Mark Herpel said...

Sorry, I also mean to say, 'good post' easy to understand and detailed. Thanks.
Mark