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Monday, November 10, 2008

All in the same boat

Mish notes that because it's a global crash, everyone is printing money and the relative value of the dollar has not plummeted as many expected:

... Looking ahead, it is quite possible that if all pegs were removed and the Renmimbi allowed to freely float, that the Renmimbi, not the US dollar would crash. Certainly the pound could crash (I think that is likely), and the EU might even break up.


James Higham said...

One would thnk that the printing of money would have already been seen for what it is and yet they seem to cling to the same instincts each time.

Sackerson said...

Inflation will reduce the burden of debtors - State as well as private - and disguise the real drop in property prices. It will reduce the value of cash savings (because interest rates will be kept low for as long as possible). It will harm real wages and pensioners, because of the time lag between price rises and wage increases. Up to a certain limit, one can purchase index-linked certificates to preserve one's savings, but I'm trying to guess what rich people will do to get out of cash if currencies everywhere inflate - buy Van Goghs?

Unknown said...

I've been praying for inflation after the current deleveraging. Not because I want to see all the ills you've listed above, but because it will be better than deflation.
Still, praying for something is not the same as expecting it. I'm still invested for inflation, but a lot of commentators that I respect are predicting a deflationary collapse.
The key question appears to be whether the mountains of bailout cash will leak into the economy as inflation, or whether the bailout cash will disappear in puffs of smoke when it encounters the black holes on the balance sheets of the institutions that it is being syphoned into.

What do you think?

Sackerson said...

Wish I knew, John. Denninger has more than once described the process of diminishing GDP returns on additional credit and says there is a point (fast approaching) where extra money actually has a negative effect. I'm still struggling to understand it, but clearly he thinks he does.

Anonymous said...

Sackerson: "I'm still struggling to understand it, but clearly he thinks he does."

isn't it simply that the government borrows so much that the interest payments on the loans exceed the income of the government? more likely as the risk of lending to the government (whichever gov. ) increases, hence the repayments become more onerous, as their borrowing increases.

Sackerson said...

Maybe that's it, Anon: the higher the burden of interest payments, the less can be spared for stimulating production or repaying principal. Which, I suppose, is a strong incentive to keep interest rates low; which then reduces the attractiveness of lending to the government, so they either have to raise rates and cripple themselves, or go bust. So do you see a Big Bust as the end result?