Debt Rattle August 21 2017
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Elliott Erwitt Waiting for a Streetcar in Downtown Pittsburgh 1950 • Ron Paul: 50% Stock Market Plunge ‘Conceivable,’ But Not Trump’s Fault (CN
[See the full post at: Debt Rattle August 21 2017]Trump said the Dow was in a bubble at 18,000 but properly at 22,000 because of his magnificence. If the Dow drops 50%, he ought to own it, but of course won’t.
Ilargi –
The voices seem to be rising to a crescendo, warning that “the dollar will soon be worthless.” There are myriad versions of this claim, including warnings of imminent hyperinflation and analyses of currencies being subject to historical cycles, with the dollar getting long in the tooth.
My own view of the dollar is considerably different, having been shaped by TAE through the years. I expect government bond auctions to start failing at some point, un-repayable debt to be defaulted, and a shrinking money supply (and shrinking velocity) to cause the dollar to become increasingly valuable, not increasingly worthless.
I need to know. Is there any room for the “dollar is dying” mantra anywhere in the TAE outlook? If so, how? Aren’t inflation and extreme measures to avoid deflation pretty much behind us by now? Thanks much for any comments you can provide.
The US$ is certainly failing, but as you say, may take an inconvenient path to get there. It’s the nature of history to be cantankerous like that.
I suspect Trump was quite correct, as is his business: stocks are in a bubble; any fool can tell that. But I also suspect that now he placed Sachs’ top IT-market-rigger in the Treasury to continue rigging markets because they believe, as Bernanke and Greenspan that “we have a device called a printing press…” and can cause inflation and a lower dollar at will. So Bennie, Yellen how’d that work out for you? But that’s the reason Trump is confident the Dow will rise. Contrary to common opinion stocks definitely and wildly rise in an inflationary dollar drop as savers hide: the best performing stock markets are those with the worst economies of all, Zimbabwe and Venezuela. In real purchasing power terms, they do not keep up, although they are a place for the wealthy to lose less money as the 99% return to picking garbage on the streets of the stone age.
But that’s a theory on why Trump believes he’s responsible for the stock market high (he rigged it, like the last 5 Presidents), and why he doesn’t have to worry about it falling (he’s printing buckets of money and handing it to insider pals, like the last 5 Presidents).
However, I’m not so sure Diogenes isn’t right, and DJT is wrong. If inflation were in the offing, wouldn’t it have happened by now? They could get inflation by handing money directly to the people, but which the people would use to pay off their debts (shrinking the money supply), a contradiction. Also they could have paid off every mortgage in America for like $10T, and they spent an audited $23T just in TARP1 alone and helped no homeowner yet, and in fact INCREASED the debt. Does that look like they wish to let the people free if it hasn’t happened already?
I have a feeling this is a case of fighting the last war, or neglecting an underlying premise, like the difference between a debt-based vs. equity-based system, so they flip the boat left when they should have leaned right. Capsize.
Diogenes,
As we’ve written all the time, the crux/clincher is in dollar-denominated debt outside of the US. People, companies, governments who hold that debt will need dollars to pay it off. And when margin calls come, and/or interest rates rise, they will all want those dollars. All fiat currencies are under pressure, if not under threat, but all this means it won’t be the first to go.
Ilargi,
Yes, the dollar is the cleanest dirty shirt, and sinking currencies will have to be exchanged for rising dollars (relatively speaking) to service dollar-denominated international debts. But default and deflation make the dollar stronger, so I’m still not clear as to why the dollar is thought to be “under pressure.” It looks to me like the Fed’s efforts to apply “pressure” are running out of steam (ha!). What mechanism, specifically, will finally cause the dollar to finally fail?
I could be completely misguided, but from where I sit, the dollar serving as the international reserve currency is as close to the “Globalism” dream as the New World Order freaks will ever get. I expect the dollar’s reign in that regard to remain intact going forward. We could introduce SDR’s and Bitcoin into the discussion, but for the time being, let’s please leave those Pandora’s boxes shut.
Dr. Diablo,
You wrote, “They could get inflation by handing money directly to the people, but which the people would use to pay off their debts (shrinking the money supply), a contradiction.”
But then, once debts were paid off, people could borrow to the sky again and re-inflate the money supply.
With helicopter money, I’m never sure who “they” are supposed to be. If “they” are government, the money comes from sale of bonds, increasing the national debt. That means that free money handouts are encumbrances on future taxpayers, a socialist sort of scheme where “the needy” being redistributed to include anybody with onerous debts (including the rich).
If “they” refers to the Federal Reserve, then I have a question. Can the Fed create money out of thin air and never require any of it, including interest, to ever be repaid? If so, then hyperinflation could come by way of a ledger entry literally overnight. If not, then the Fed would only be increasing the overall debt level, and would be lending into an environment of suddenly increased credit risk.
I’m just not getting why the dollar is thought to be on the doorstep of failure. If anything is on the doorstep of failure, it’s un-repayable debts.
Yes, definitely. But clearly it’s also impossible to have an ever-more common good become ever-more valuable. The break would not be here, or in the debt; as you point out, the contradiction is that they’re not printing, but borrowing. Presently, any decrease in debt is deflation, a decrease in the money supply. That makes our present monetary system act somewhat differently than previous ones.
As the economy fails or there is economic pressure, people will attempt to break free by economizing and paying off debts, while a second group will default entirely under the pressure, again reducing money supply and adding pressure to their now naked creditors. This is an enormous demand for money.
However, if I were any other nation, I would be desperate to get clear of the sinking ship of black hole deflation. If Vietnam trades with China, they can exchange like normal actors building young economies, free of the crushing spiral by avoiding the US$ which is still demanded in so many worldwide contracts. Yet no one wants the contradiction of the world’s reserve currency, which would strengthen their exchange rate and crush their industry. Not even China.
Nevertheless, as international contracts try to avoid the troubles of the US$, they will ring-fence the U.S. in trade and imports. When the U.S. can’t import necessary goods, as they have inadequate industry at home, they would be forced to exchange externally in another way, regardless of their own internal inflation/deflation. We have seen several nations have internal/external currency situations which are unhealthy, and worse, the sickness is stable and lingering. In our case, however, it can still be remedied with default/restructuring of external obligations. How can that happen? Well, we may owe it, but since 1979 we were never going to pay it, a child could tell that. In fact, we told them in our white papers and the quote “It may be our currency but it’s your problem.” And with one of the world’s most active militaries, I doubt anyone will try to invade and collect the $20T from us, so again we will be ring-fenced and embargoed, our external assets confiscated in default. But that’s what happens when you act like a dummy and go bankrupt.
When that happens, industry will expand and sales will drop to fill the trade deficit, we will default on any social obligation we can get away with, and go to par on imports. –Believe it or not, we almost are already, if we cut useless spending and driving and exported slightly more oil. You can see the motions of the present insiders to get industry advanced and pipelines built before the walls go up.
So is that inflation or deflation? Outsiders won’t take U.S. dollars, and will no longer use them for international contracts — or will call them I-Dollars as opposed to Domestic Dollars as a legal expedience. External dollars may or may not be adequate to close out existing external contracts, I don’t know. All I can say is the problem will be made smaller and smaller as the US$ footprint gets smaller, even within the U.S. I imagine like other deadbeat nations, the internal currency will be terrible and inflationary as the government issues money, crushes demand to have something to export, wrecks industry to favor monopolies, then demands scarce goods and what little money normal people have will gravitate to cryptos, Amazon cards, and the like. Surely Argentina and Brazil use the same borrow-money-into-existence plan that we do, yet they have inflation.
Later, after the import/export balance is stabilized, to solve the internal/external currency problem, they would return to a single currency of some sort. In any case, this isn’t necessarily inflationary or deflationary, it just winds down the footprint until it’s manageable then rotates into a different, less dysfunctional system, which is disruptive.
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