Inglorious Investor
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Chris,
First, I’d like to say that, like you, I am by no means certain as to the future. And anyone who claims they can predict what will happen is naive or just full of it.
That said, one mistake people often make is to look at the economy as a homogenous whole. But from what I see, there is something of a bifurcation taking place in the US. Partly, this because the economy is being restructured. There are those who are going along for the ride, and there are those who are being left behind. For example, I predicted years ago that, due to cheap labor, cheap real estate and abundant energy, the US South could very well be the epicenter of a manufacturing renaissance. However, I did not foresee a 1960’s or 1970’s type of manufacturing sector, but rather a tighter, leaner, high-tech approach that relied far less on human labor. This kind of change requires new skills and technologies that are part of the adjustment.
As for money, while so many people talk about deflation, you must be careful about what kind of “deflation” you mean. Debt deflation? Price deflation? Asset deflation? Wage deflation? Now that we are passed the GFC, where is the deflation in any of these? Don’t look at averages, like average income, because these figures can include those who are not working, thereby driving down the average.
The money that the Fed prints to monetize US government debt is not really where the inflation comes from on the government side. It comes from the government in the form of debt issuance. And they have no intention of ever paying that back. All they care about is paying the interest. And they now even do that with borrowed money. If the US did not issue its own currency and service its debt in that currency, then deflation would be an assured outcome. But the US does “print” its own currency, and that currency is still the most widely used reserve currency, backed by the strongest military. They can never repay the debt, but they can try to inflate it away in cooperation with other nations (many of whom by the way are in worse shape than the US).
Inflation is the only major tool they have. It’s a fundamental part of the banking system and the economy. Inflation is the source of bank profits and a huge generator of hidden taxes for the government. As long as they can manage the decline in the value of dollar without upsetting the other stakeholders (e.g. the bond market) they will severely devalue the dollar for many years in order to keep the debt service manageable.
I believe that the main reason we are seeing the recent energy boom in the US is because it’s something of a last-ditch attempt to spur the economy, attract capital to the US, and shore up the dollar (relative to other currencies). It also can relieve pressure on the military to control the flow of foreign oil. Furthermore, it might signal the beginning of the end of the petrodollar regime.
If we look at US assets, stocks, housing, oil, natural gas are all rising. This could result in an economy that grinds higher and perhaps goes through a cyclical boom period. That’s not to say that everything will be fine. The overriding theme here is that we’ve collectively spent too much of our future income. So even with very high inflation in wages, most people will still be falling behind. And the government will be hunting down every dime and imposing higher taxes and more of them. We could see a money paradox. Workers earns a lot more money, but are still poorer than we were before. So any economic boom would be a bit of an illusion, but if they can manage, it, they can achieve a slow burn economy where the reality sets in over a long period of time of financial repression.
Sorry if this seems a bit rambling and disjointed. It’s late and I’m not really editing my thoughts. Just keep in mind that the government and the banks LOATHE monetary deflation. We had a deflationary episode in 2008-09. It looks lik that may have caught them off-guard. But now they are going to fight tooth-and-claw to prevent another such episode. They are printing and printing, adding more and more fuel in the hopes that soon the economy will catch fire
. I think that if your job is pretty secure and you have lots of savings, that is actually the last thing you would want. But barring an all-out collapse, it looks like it’s already baked in the cake. I mean, you gotta think that, even if the end game is total collapse, we could go through several more economic fits and spurts. Given all the oil and gas in North America, I see no reason why that could not happen in the world’s largest and most advance economy.One must be careful when reading charts. From what I see, growth RATES in M1, M2 and M3 may be flat or declining, but they are still POSITIVE. This means all three money metrics are expanding, not contracting. Thus, there is no deflation in these three money aggregates.
There is now enough “money” in the system to cause a massive inflationary crack-up if the banks open up the money spigots. We’ve dealt with cost-push inflation in consumer prices for many years. While incomes, on average, stagnated and velocity declined. That’s stagflation.
But North America now has an abundant supply of oil and gas. Energy is THE fundamental input for, well, everything. Including the economy. So, if energy can become “cheap” relative to incomes, this, combined with technological advances that increase productivity (and there are huge advances in tech coming to market) could drive a huge economic boom, as incomes play catchup to prices.
The deflationary pressures would still be there as debts are paid down, but flooding the real economy with money would go a long way to making those debts easier to service. Those with savings could be decimated. Sacrificial lambs, as it were, for the greater good. Which in this case could mean staving off wide-spread revolts.
Not a prediction, but a potential scenario.
Do you think it’s just coincidence that suddenly the US is becoming more energy independent? The oil and gas has always been there in places like North Dakota, the Barnett et al, and I’m guessing the US geological survey knew it all along. It’s just now (barely) economical to extract it. While, the boom could be short lived, it could have a massive impact.
So the energy is there. The “money” is there. The people are getting fed up. Let the money flow, let wages rise, let debts be paid down with devalued money. And in ten years a 2 million dollar bungalow in the burbs will be commonplace, gold will be $20,000 per ounce, and Wal-Mart workers will be earning $80,000 per year.
Possible? I dunno. Look at what happened from the late Sixties through the Seventies. And some used to cal that The Great Inflation. Sounds quaint today. But that’s the game. In fact, that’s the only game they got.
