(Graph reproduced by iTulip from NowAndFutures.com)In an extended "Titanic" analogy, Eric Janszen describes what he sees as the government's response to the crisis: "send rescue", "boil the ocean" and if terrified investors refuse to relinquish the security of Treasury bonds, "sink the rafts" by devaluing the currency. Around the world, he sees a policy of inflation and even hyper-inflation. So does chipper doomster Marc Faber, who now thinks we must eventually have 200% inflation in the USA. 1974 - 82, here we come again?
I'm beginning to wonder. First I thought we'd get deflation. Then I thought, no, the govt will always be able to inflate its way out of trouble by printing. Now I'm not so sure. Didn't the Japanese do QE to try and inflate their economy? And spend eyewatering amounts on public works? And what happened? Pretty much nothing, though you could say they actually averted a Depression and had a Lost Decade instead.
ReplyDeleteMy point is this - Japan had savings in 1990, and (I think) still does. We on the other hand are in debt across the board - publically, privately and coporately. Surely if the Japanese couldn't print enough money to start inflation and get the savings being spent, we can never hope to do so? All that will happen is as the presses roll, the money will disappear into repaying debt. As we all know now, debt is money (and vice versa) so if the debt disappears, so does the money.
How much debt is there in the UK? Private debt is now £1.5tn I think. Public debt is set to rise north of £1tn, and if you take into account all the off balance sheet stuff, and public pensions liablities, it must be £2tn. Then theres corporate debt, which I have no fgures for. But we as a nation must be a good £4tn in debt collectively. Thats a lot of printing.
So where does it leave us? If we do end up in some hyperinflationary situation, or get 70s style double digit inflation, I reckon it won't be because of the money printing, it will be because the foreign debt holders take fright and leave, causing a catastrophic fall in the pound, meaning all import prices go through the roof. That for me is the danger, not the actual money printing.
It is possible that the govt undercook the QE and deflation really does get out of hand, and then we face that downward spiral.
Incidentally has any govt ever managed to create inflation on purpose? Rather than accidentally? And has any govt then managed not to let it get out of hand? I suspect not.
After all that theorising I'm still no further forward! Any thoughts?
Very good questions, Sobers. Wish I had the answers, but if the policy of buying the bad stuff from the banks works, they'll be back in business, won't they? If it doesn't, surely the government'll try something else to magic away the debt - maybe even selective default. Note that (presumably as a precaution) the Chinese have switched their bond investments in the US (a) away from Agencies and into Treasuries, and (b) from long-dated to short-dated.
ReplyDeleteOne way or another, debtors will seek to soak creditors. That sounds like default or inflation to me.