Escape and Fantasy -- Economic Commentary by: Richard Russell

safehaven.com ^ | July 29, 2003 | Richard Russell

[Soren]

Under your second point, does the East Asia hyperinflation occur because they devalue their currencies to maintain their exports?

Under your third point, I agree with the first sentence. My question is this. Could the Fed create inflation if it was hell-bent on doing so in a misguided attempt to prevent deflation? I'm not saying they would re-invigorate the economy, in fact, I'm guessing they would likely destroy the dollar.

[AntiGuv]

Yes, that's correct. As inflation rises in the U.S., the dollar would depreciate and consumer demand would decrease. This would maneuver Japan into an untenable situation where they must devalue the yen in order to maintain their export sector. This would compel U.S. corporations to decrease prices in order to compete with East Asian imports, which would induce U.S. domestic deflation. The ECB can only hold the line on the euro for so long; they would also have to attempt devaluation in such a scenario.

I don't see how the Fed can hyperinflate with abandon because people have to be willing and able to actually spend the dollars. The problem with hyperinflation scenarios in this case is that American consumers cannot sustain the credit expansion required to funnel this liquidity into the economy. Moreover, lending institutions would simply refuse to extend credit to overburdened consumers with intolerable debt loads. That's why I alluded to a personal credit crunch in post #81 above; the Fed must have a conduit for monetary expansion.

In other words, a personal credit crunch would deprive the Fed of its means of injecting further liquidity into the economy before the point of hyperinflation could get reached. If and when the economy slides into deflation, then the entire equation shifts and none of the economic precepts we're all accustomed to will matter anymore. There's no meaningful precedent for deflation within the modern fiat system; Japan's experience doesn't qualify because such a great part of its economy is actually here in the U.S.

[boris]

"Well, I'm much more cynical about the war. If we didn't have a bad economy first, we wouldn't be liberating anyone. The war is a distraction from the real problems which are the economy. War provides the perfect cover for politicians -- 'The economy is a wreak and we have to spend all the money because we're at war, dontcha know.'"

So you are of the faction that believes the U.S. government actually planned and carried out the 9/11 attacks in order to blame the Arabs?

--Boris