Wednesday, February 11, 2009

Deflation, inflation, distress

The Contrarian Investor gives a lucid explanation of the potential consequences of deflation.

In Australia (as in the UK, as I think I showed here), the nation owes more money than it has in savings, so it depends on foreign investment.

If interest rates fall, foreign capital will go away to where it can earn more. This reduces the demand for our currency and makes it cheaper. So goods we sell to foreigners get cheaper, and things they sell us get more expensive. They buy more from us, we buy less from them (or they have to cut their prices so we can afford their stuff). More money comes into our economy; all well again.

  • What if , thanks to decades of spending lots without earning much (and borrowing the difference), we no longer make things foreigners want?
Then we become "distressed gentlemen". As the money runs low, we run up accounts at the tailor and the wine merchant, and write IOUs which we hope will not be presented to us soon. Maybe we begin to cut a few luxuries, but old habits die hard, not to mention ingrained addictions.
  • What if they sell us things we can't do without, and won't cut their prices?
The money runs out. Unless we are Royalty, and too dangerous to dun, eventually the bailiffs must arrive. In the modern world, the sovereign wealth funds, perhaps.

What can they take? In Australia, there are mineral deposits the Chinese will want, thinks the Contrarian Investor. Here in the UK, maybe some remaining profitable businesses and valuable technical expertise, maybe patents and secret technologies. And it's not only the Chinese that have been lending us their surpluses. We have other creditors.

Then, as the laden carts depart and the keys of the mansion are handed to the new owners, the decayed gentry become vagrants and vagabonds.

Unless we are too dangerous to dun. Perhaps America is; can we be so? And what if our creditors are not certain of our might? Uncertainty can trigger inappropriate actions. There is a Chinese saying, I believe: fear a weak enemy. Catastrophe can be avoided, but unless our leaders are tough with us now, we will learn a harder way later.

But if the master has become poor, what of his servants?

What if, like me, you're not one whose power and social status protects him from the worst effects? Do you believe that democratic societies can do the right thing? If not, this is a time for individuals to make their own quiet plans and preparations.


Nick Drew said...

Fine post, Sackers - sums up a great deal of your writings over a couple of years

sobers said...

Spot on analysis. I don't think there will be a sudden descent into anarchy, just a low decline that we hardly notice. But each year we will be slightly poorer, have to work slightly harder, pay slighty more tax. And it will continue indefinitely, unless the govt reduce tax/bureaucracy on manufacturing business, in which case we may (just may) manage to rekindle some of our manufacturing base.

Anonymous said...

"...unless our leaders are tough with us now, we will learn a harder way later..."


And they are not being tough, are they? They are betting the farm, and many times the farm, on keeping the merry-go-round turning for a bit longer; presumably, until the general election can be put off no longer.

When the real crunch comes, it will be hard beyond experience of anyone born since the last war.

I don't know what the outcome will be, but nothing good I am sure.

Buy gold now, and hide it away - you're going to need it.

TBR said...

We're fucked. The curent govrenment would rather take us all down than do the sensible thing.

Which is seriously cut public spending and maitain tax so as to start paying off the public debt.

Sackerson said...

Thank you, gentlemen, I value your opinions. I look forward to moving from elegy to lyric.

archivist said...

Undoubted a post deserving of the usual diplomatic response: "You spoke well".

[High praise indeed!]

Sackerson said...

Thank you, Archivist; are you new here?

Paddington said...

To my mind, the fundamental problem, as always throughout history, is that we have too many people for too few resources. With automation, we have too many people for too few good jobs, except for the highly technical jobs, where we paradoxically have a shortage of talent.