Posted on 12/04/2011 8:33:58 PM PST by Comparative Advantage
“go to the safety of the U.S. dollar and U.S. Treasurys because it’s the tallest small midget in the room.”
I thought that Robert Reich was a ‘tall small midget’. Forget the midgets, buy gold.
What’s going on here (”the action”) folks:
Their is a POLARITY or divergence (an analyist last week used the word “paradox”....I prefer POLARITY)
Polarity, between household debt contraction (which is govt. resistance), and a real psychopathy of the Federal Governments (euro also), RICO players, and the cast of SO CALLED ‘banking”.
This psychopathy, is what to watch carefully. At the same time the “resistance” (consumer contraction) is forcing downward REAL market pressure, govt.-RICO is maintaining high (very high in comparison) pensions and salaries compensations.
This IS a psychopathy, as the govt-RICO players have no sympathy, but lip-service, to the resulting unemployed. And many who are employed are being thown bones compared to govt.-RICO compensation standards.
Watch the REAL employment numbers (which they tried to fake last week)
Look up the word “Arbeitsziehungslager”, and the momentum conditions that brought this about in history.
(there) ie. There is
The government was piling up debt and selling bonds just fine before the crisis that required the FED intervention. The FED wasn’t buying government treasuries then, but it didn’t stop congress from piling up the debt. And a gold standard won’t either.
It is, however, subject to its own issues. A commodity-based currency faces the prospects of someone cornering that commodity. Imagine a diamond- or silver-based currency ... then consider DeBeers or Hughes.
Nature might intervene too. Say someone scores a mother lode of gold, for sake of discussion doubling the world gold reserves - and the whole mine is owned by one person ... that would kinda screw up the economy in a hurry.
In a twist, I'd contend that we don't have so much a fiat currency insofar as the gov't prints money on a whim, we have a debt-based currency which is - as nobody has discussed - the only viable format for the virtual currency which we really have. What money do you have? ah, but how much is physical (presidential portraits included) vs. how much is an IOU in a digital ledger at the bank, which [insert chain of events here] is registered as an IOU to the Federal Reserve? So long as you want to use "plastic" as your practical currency, we MUST carry trillions in debt.
It's a long jump for a currency from virtual IOUs to gold, only to find that's not much more stable either.
Gee the Roman Empire only survived 400 years on the Gold std..
Uh...OK.
The Roman Empire was also an EMPIRE, which thought nothing about killing people until the survivors submitted to total domination.
In an environment where prices generally trended down borrowing would be focused to a greater degree on investment than consumption. There will be investment in new production so long as there remains a competitive marketplace. Those who refuse to invest in production will find themselves displaced by more productive competitors able to offer consumers lower prices. Furthermore an inflationary environment 'rewards' the spendthrift by reducing the cost of his consumption at the expense of the saver.
As evidenced by the drag of debt on our economy today borrowing for consumption is far out of whack with debt accrued for capital investment.
That's an interesting theory.
Are you likely to borrow $1 million to build a factory if you must cut your prices 3% each year? If your loan payments increase in cost 3% each year?
Gold Standard Fans: Roubini is a lunatic and hack!
I'm more likely to use $1 million from current earnings to build that factory than I am to borrow, and I'm more likely to only borrow in such an environment if I expect a higher than 3% return. The result is that savings are more carefully (and productively) allocated.
I don't share your assumption inducing the squandering of savings on increasingly marginal projects is in the best interest of wealth creation.
Are you less likely to borrow to fund consumption when your borrowing costs increase 3% each year? Are you more likely to save when your purchasing power increases 3% each year? What builds wealth, savings, or consumption?
LOL! That's not the question.
I'm more likely to only borrow in such an environment if I expect a higher than 3% return.
How high would your return have to be?
Are you less likely to borrow to fund consumption when your borrowing costs increase 3% each year?
I'm less likely to borrow to fund anything. Like new investment in manufacturing plants.
Are you more likely to save when your purchasing power increases 3% each year?
I am less likely to purchase. What happens to productively allocated savings when demand collapses? What happens to employment?
I'm sorry the world doesn't fit in the frame you're trying to construct. There are more ways to do things than your loaded question suggests
How high would your return have to be?
Sufficient to cover the debt, and superior to alternative investments.
I'm less likely to borrow to fund anything. Like new investment in manufacturing plants.
'Easy finance' more often than not encourages reckless finance. Do you think we need more or less Solyndra's?
I am less likely to purchase. What happens to productively allocated savings when demand collapses? What happens to employment?
'Demand' we can't afford is demand we don't need. That's the biggest problem with the world economy right now. What builds wealth - savings, or consumption? Demand built on savings is sustainable. Demand pyramided on debt is the core of the boom-bust cycle.
If you think companies will borrow in such an environment to expand production, knowing that their interest burden will increase, year after year, while their prices will drop, year after year, you're even more confused.
Production builds wealth.
So the Soviet Union must have been producing massive amounts of wealth under the five year plans, eh?
Who cares if anyone actually wants a 5lbs nail, Stalin says make 100,000 tons of nails, and this is the quickest way...
Production in and of itself doesn't guarantee wealth because there is no guarantee people want what you're producing. If they don't, you're actually destroying wealth by committing resources to less desired uses.
Inflation punishes saves, and thereby encourages higher consumption, which reduces wealth (which is simply desired, but unconsumed, production).
If you think production will increase if prices across the board are guaranteed to drop 3% a year, every year, you're confused.
Computer prices dropped faster than that, yet production, contrary to your understanding, increased every year. It seems the world as it stands doesn't fit your understanding. Check your premises.
They were.
Who cares if anyone actually wants a 5lbs nail, Stalin says make 100,000 tons of nails, and this is the quickest way...
100,000 tons of nails is a lot of wealth.
Production in and of itself doesn't guarantee wealth because there is no guarantee people want what you're producing. If they don't, you're actually destroying wealth by committing resources to less desired uses.
I understand your confusion now. 100,000 tons of nails is a lot of wealth, but Stalin should have sold the iron and coal he wasted to make the nails instead. He could have used the proceeds to buy 200,000 tons of nails.
In his case, the coal and iron ore represented more wealth than the nails he produced. Production. Of ore and coal.
Computer prices dropped faster than that, yet production, contrary to your understanding, increased every year.
Did computer prices drop because of deflation or because of improvements in technology?
You should check your premises.
Has home building increased or decreased since prices have dropped?
Will you buy a new house if you know the price will drop 3% a year, forever? Will the bank give you a mortgage?
Holy smokes, I've found a Soviet propagandist Freeper?!
While their people starved the bureaucrats struggled to meet Stalin's arbitrary (as they were not rooted in supply and demand) needs any way they could. The 5lbs nails that no one could use is just one example. For GDP counters like Krugman it might be perceived as wealth, but to society it was a drain.
100,000 tons of nails is a lot of wealth.
Not if you don't have any use for a 5lbs nail it isn't, it is a waste of all the resources and effort squandered creating them.
Did computer prices drop because of deflation or because of improvements in technology?
Doesn't matter, you said, "If you think production will increase if prices across the board are guaranteed to drop 3% a year, every year, you're confused.". People will invest when they perceive an imbalance of supply and demand sufficient to create a profit, whether prices are rising or dropping.
Has home building increased or decreased since prices have dropped?
Decreased, because of oversupply, yet even house building hasn't stopped. In fact, even in this environment people still see an opportunity to profit by investing in the creation of new housing units.
Will you buy a new house if you know the price will drop 3% a year, forever? Will the bank give you a mortgage?
Sure, I bought a house last February in fact, and I'll have it paid off in less than 7 years, after which time I'll still have a roof over my family's head (provided I keep up with ~$200/mo property taxes). The house has utility to me, and the bank providing the mortgage knew the price of the house wasn't dropping to zero because it has utility to others as well.
Where?
For GDP counters like Krugman it might be perceived as wealth, but to society it was a drain.
Because the wealth inputs were larger than the wealth outputs. Duh.
Not if you don't have any use for a 5lbs nail it isn't, it is a waste of all the resources and effort squandered creating them.
As I said, the ore wealth and coal wealth were larger than the nail wealth. Each of the three was wealth.
Doesn't matter, you said, "If you think production will increase if prices across the board are guaranteed to drop 3% a year, every year, you're confused.".
Absolutely matters.
Will Government Motors borrow money, build new plants and increase production if every car sells for 3% less next year. 3% less the next, 3% less the year after that?
Will people buy more cars or fewer, if they know the price will drop next year and the year after and the year after that?
Will their profitability increase or decrease in that scenario? Dividends increase or decrease? What about employee headcount? Employee salaries?
Absolutely matters.
Then how do you explain the increasing production of computers, and continued investment in producing computers, when prices fall more than 3% year after year? What have they figured out that you haven't yet?
Will Government Motors borrow money, build new plants and increase production if every car sells for 3% less next year. 3% less the next, 3% less the year after that?
Government Motors is a bad example as the company still has massive over capacity thanks to a government orchestrated 'bankruptcy' that protected the unions and screwed their investors/owners. But Ford is an example of a company that continued to make investments in raising productive capacity even as it brought down the price of cars to something nearly everyone could afford. Henry Ford got rich by reducing the price of a car, not increasing it.
Will people buy more cars or fewer, if they know the price will drop next year and the year after and the year after that?
More, because more people can afford them when the price drops, same as with computers: "A total of 500 million computers, from desktop PCs to laptops and smartphones, were shipped in 2009. The accountancy group Deloitte predicts that will rise to 1.1 billion in 2014... Sales of PCs are still expected to rise 15 per cent over last year."
Will their profitability increase or decrease in that scenario? Dividends increase or decrease? What about employee headcount? Employee salaries?
Last time I checked Apple is making a profit, and the price of products they've introduced as little as 2 years ago have fallen in half. Profits go to companies who make things people want at costs that are less than the prices they're willing to pay. Besides, a nominal reduction in dividends or salaries doesn't matter if purchasing power of money is increasing. Right now we have stagnating wages and rising prices with central planners trying to set interest rates.
Employee headcount may well decrease as more capital equipment is introduced. But this is a misguided concern. This is how labor is freed up to be applied to entirely new lines of production by entrepreneurs. If 90% of the country was still on the farm we wouldn't have enough people left over to provide the plethora of goods and services we enjoy today. This is the natural course of free market economies.
A monetary environment that doesn't punish savings, that doesn't encourage debt for consumption, and that rewards savers with increased purchasing power leads to more capital accumulation, increased capital investment, and rising standards of living.
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