What do you think is going to happen with the economy?
Disaster.
What do you mean by disaster?
Depression, unemployment, reduction in living standards, banks going bust, hundreds of thousands not being able to pay their mortgages. Perhaps even the breakdown of the state.
Where?
Just about everywhere in the Western/developed world.
Why do you think that?
Because of government deficits, government debts, private debts and money printing.
And why should that lead to disaster?
Because eventually people will stop lending to the government. At which point the government will be unable to pay it’s bills. At which point it will have to stop spending money on things like pensions, health, education, defence. At which point you’re going to get riots.
What from old people, sickies and children?
More from people who thought they might need the state at some point in the future.
Anyway, can’t they just print the money they need?
Well, they’re already doing that. But money printing eventually leads to inflation. Inflation dislocates the economy. It becomes impossible to plan because you no longer know how much you can buy for and how much you can sell for. At that point you no longer know what activities are profitable and what unprofitable.
But there’s been plenty of printing in the last few years and very little inflation. Hey, look at Japan.
Maybe. There’s been plenty of inflation in assets such as houses, shares and precious metals. Indeed, according to Jesse Columbo there’s hardly an asset class out there that isn’t currently in a bubble. And bubbles eventually pop.
Do they? I give you Japan again.
Yes, they’ve been printing money and keeping it all together for 25 years. But there’s been no growth.
And anyway they are getting ever more desperate. At time of writing they are considering helicopter money. This is part of a progression from low interest rates to no interest rates to negative interest rates.
So, they will have negative interest rates and then they will have ever-more negative interest rates and where Japan goes we will follow.
Yes, but… oh I don’t know. It just doesn’t sound right.
Where the Japanese lead we follow. Perhaps not so neatly.
Good.
Then that will be the end of Government which cannot operate without plunder, and if there is no plunder left to be had,and it cannot borrow and print its wages, it must die.
You forgot the thing no one talks about that gives money some value- you have to use it to pay taxes. Sine men with guns will take you away if you don’t have a certain amount of it, it still has a value.
That and convenience are it, though.
staghounds
I’m not so sure about that taxes thing. I just read a piece (sorry: forget where) which said that the Roman Imperial government, once upon a particular time, (a) hyper-inflated its currency, and then (b) refused to accept this currency in payment of taxes. It instead demanded payment in kind.
Brian – I think this is what you refer to: http://www.fff.org/explore-freedom/article/economic-ideas-ancient-romans-went-rule-law-corrupting-inflation-price-controls/
Interesting observations, but I don’t think precious metals are in a bubble at all. If anything official intervention is pushing the prices way below what would be set in an unmolested market.
Silver is the most interesting, it is getting used (unlike gold) and there is less being discovered.
It is used in electronic devices, washing machines in fact anything that uses printed circuits. It is also used in solar panels, a growing market.
None of this is going to end well IMHO
(Further to Brian Micklethwait, October 8, 2016 at 12:52 pm.)
Throughout history, hyper-inflating governments have tried to compel their subjects not to retaliate in kind by paying taxes in the money they were duped or compelled to take from that government, The French revolutionaries tried to avoid accepting their own worthless assignats and mandats as tax payments. I’ve a notion (like you, I cannot recall the article) that in Venezuela today the government seeks to extract something more valuable than its own currency from such citizens as still have anything.
The Roman Empire never really recovered from the mega-inflation of the 3rd century. The payments to soldiers were never either revised or abolished, so they became pocket money, with their rations (annonae) becoming their true salary, and the quinquennial donatives the way they got their hands on real money. The gold coinage was restored to some stability (that mattered to the very wealthy and well-connected) but the silver was never stable again. Etc., etc., etc.
Yes, recursive borrowing leads to hyperinflation, which immediately precedes panic. But there is an international aspect that had not existed prior to the recent globalization. If you happen to reside in the US or UK (post-Brexit) your economy is stronger than all the rest, so troubles abroad precede trouble at home because it leads to inbound money to your island/subcontinent, buoying the critical purchase of government bonds, supporting your government’s printing of paper, extending the timespan far beyond what it would be if the whole wide world weren’t doing the same thing, altogether now. In the past, if you abused the privilege of printing paper, your country’s money would seek better investments abroad, hastening hypertrouble, but now, as long as you’re the best bet on the global board, your game can continue longer. Perhaps the elites know this and so support globalization quite apart from its freedom aspect?
For most of my life there have been warnings about a coming monetary collapse, and it hasn’t happened (although I was born too late for the great depression). The real estate bubble broke but its effects were fairly short term and sensible people (who lived within their means) rode it out. China’s market collapsed recently, now it’s back. Brexit didn’t do any lasting damage, like everyone predicted. I read recently that the real tumble will come when oil is no longer priced in US dollars, but then I read something else that said this will have no lasting effect.
Who knows? Maybe we got something that works.
For an economic system to be stable in the long term it has to be dynamic in the short.
Trying to build a stable system by controlling it, like the Communists try, leads to disaster because there is no mechanism in the system to bring it back when it inevitably veers off.
The modern system is long-term stable, and only gives the appearance of instability because it swings wildly in all directions in the short term. Each swing, as Dom notes, is self-returning and of little long-term harm.
If you try to “control” the system, to prevent asset bubbles ever happening for example, you actually make the overall system less stable. You’d think Libertarians would get this.
Define works? The SU worked for nearly a century – until it did not (of course it also stopped working early on for those whom it killed or just impoverished, but that’s an aside). The current economic system in the West does not kill (not for the most part), but it does impoverish all of us. Not to the same extent that the SU did, but it still does.
Another point is that just because the Great Depression is too far to remember for most of us, does not mean that it may not happen again – regardless, when it did/would/will happen, was it/will it be part of the system working or stopping to work? And, definitions aside, do we want to get there, and if not – is it preventable?
Chester Draws has it exactly backward. The ostensible purpose of the Federal Reserve was to eliminate the “business cycle”, but the ultimate effect is to keep kicking that can down the road until the inevitable, pent-up correction, which will be horrendous. The function of business cycles is precisely to permit those short-term corrections you laud. Our current system suppresses them, preventing the necessary small, quick corrections.
Asset bubbles (not the same thing as business cycles) are caused by excessive credit, which is precisely what the Fed (and all other central banks) encourages. We are sacrificing long-term stability to suppress necessary corrections. Sooner or later all those monetary chickens will come home to roost, and when they do the “Great Recession” of 2008-10 will seem like a picnic.
If hyperinflation is obviously inevitable, then why are precious metals down substantially? Gold is at $1,258, down from $1,800 four years ago. Silver is at $17.30, down from $44 five years ago. This is a serious question. (Especially for me: I bought 160 oz of silver at $31.)
We’re all waiting for the other monetary shoe to drop. I’ve been waiting since 2008, when the U.S. “Monetary Base” doubled in a few months (from $848B in September 2008, to $1.67T in December; it’s since grown to $3.82T). (Per data from FRED – “Federal Reserve Economic Data”, a service of the St. Louis Fed.)
To me, it seems like an old “Road Runner” cartoon, where Wile E. Coyote runs thirty feet off the edge of a cliff, and somehow doesn’t fall till he looks down.
Asset bubbles are one thing. What happens to goods and services? Why are commodity prices static?
And it’s scary to think that there may be no safe haven. The dollar, the euro, the pound, the yen, the renminbi – all very bubbly.
@Rich Rostrom
This has me confused too. One currency can be in a bubble, but all of them at the same time? Better get out of cash into assets, but then assets are in a bubble too? If everything is in a bubble, then nothing is in a bubble, right?
Answers welcomed.
If all the money that has been “printed” in the US were fully liquid, and if there were anywhere safer to put one’s money, the regular sales of US Gov’t bonds would start to fail, resulting in much higher interest rates, inflation in the US would be unignorable, and the price of gold would be restored to understandable levels commensurate with that inflation.
Because the US is still the world’s safe haven, world money keeps buying enough of those Treasury Bonds to keep their effective interest rates artificially low (aided by Fed purchases of unbought Treasury notes, which would normally undercut confidence in those bonds, but enough foreign capital and recycled printed money [recycled through the markets] keeps buying them to keep confidence from crashing). Banking rules keep much of the money (not the part that is washed through the stock exchanges and ends up fortifying the bond sales) from being liquid, so the inflationary consequence of much of those trillions is forestalled. Lots of wheels within wheels to keeps this teetering system from falling overboard. (Janet Yellen probably takes a lot of digestive aids.)
This confidence scheme tends to work less and less well over time, as happens to every artificial intrusion in markets, so the printing has to constantly increase over time, which is why “this will end badly” is often heard. But when? The game is now global, with all countries frantically but cautiously (!!!) printing, so there is no alternative to the US safe haven, so we are “safer” than the rest, and the time to reckoning for the US is extended far longer than usual. The folks running these games are admittedly pretty smart, and they are aided in keeping public confidence from crashing by a complicit media, so… how long they can continue to beat the odds?
No one knows. That depends ultimately on the gullibility of the public, and the fact that the public is quite abysmally educated about things economic, means that traditional connections between the price of gold and insane government practices have been severed. It will now take something catastrophic to trigger a return to “reality”, a fate to be both feared and hoped for, in equal measure. Bubbles do burst, no matter how carefully one attempts to regulate the pressures involved.
“It will now take something catastrophic to trigger a return to “reality”, a fate to be both feared and hoped for…”
Indeed. The fear is Venezuela but the hope is that wasteful activities will cease and productive ones begin. But it seems to me that they can avoid catastrophe. Like the Japanese they can keep this game going for decades.
Dom, no we don’t “got something that works”. As I understand it, TARP was the response to the crumbling of the system that would have turned the US into Argintina within a week.
Rich Rostrom wrote,
“If hyperinflation is obviously inevitable, then why are precious metals down substantially? Gold is at $1,258, down from $1,800 four years ago.”
And I bought gold at $350/oz for years. It’s not in a bubble you say? Gold and silver are goods like everything else. The current price of gold is, for the most part, based on two things, supply and demand. Demand for gold is down from 4yrs ago because when the price of, tulip bulbs say, shoot up (no pun intended), then there will be some buyers who add to this just because of the upward momentum. Gold is no different. You don’t really think that gold is worth $1258/oz do you? WTF for?
I tend to agree with the blogger Radio Free NJ. (He’s well worth reading by the way.) He reckons there will be a collapse, but the aftermath won’t be like Mad Max. Rather things just about everywhere will end up like contemporary Brazil or Honduras. I think he knows what he’s talking about too, as he used to be something on Wall Street.
In the meantime, the big question is how long the politicians and central banks can keep the game going, to which the answer might be: longer than we think.
Economically, the Soviet Union had probably failed by the 1930s: industrial production there was lower in 1936 than it had been in 1913. But that did not stop it from staggering on until 1991. And it might have lasted a lot longer, had it not been in a ruinously expensive arms race with the United States.
And that’s exactly what the elites are counting on. With them at the top of the heap. What good is being wealthy, if the proles, the middle class, can get to enjoy many of the same goods and services they have?
where can I find blogger Radio Free NJ. google cant find such a person..
Not many businessmen think having a large pool of impoverished customers is better than a large pool of affluent ones. And whilst no one cares about the proles, everyone who wants to make or keep money cares about the middle class. No, it is ‘Governmentalist’ thinking that is responsible for the global Ponzi scheme, not ‘envy’. That and decades of absurd Keynesian axioms being taught in schools, but I repeat myself.
We do have a link option in the comments, you know 😉
Yes, Google certainly can find such a person.
Myno’s comment at 6:23 AM is exactly right.
What good is being wealthy, if the proles, the middle class, can get to enjoy many of the same goods and services they have?
Well, yes and no. Most* people in the developed world can afford a car. You can buy a runnable second-hand motor for a not a lot of money. Now if you want a really nice car…
Much the same can be said of oh so many things.
*Caveats noted – in, say, London the price of parking at your own gaff can be prohibitive etc.
“Better get out of cash into assets, but then assets are in a bubble too? . . . Answers welcomed.”
USA-centric answers:
1. Non-productive rural land. Productive ag land is overpriced, but nonfarm rural land is underpriced.
2. Ammunition. Durable, high value/mass, very volatile pricing. A friend buys it by the pallet during dips, sells to gun stores and shooters during the frequent politics-driven shortages. Over the last five years, has spent $70,000, sold for $160,000. Price cycle similar to gold – high during unease. Expect lots of unease.
3. Lutefisk. There has never been a lutefisk bubble. Ever.
I think a large part of this is due to manipulation of the price of gold and silver in the futures markets. Time and again, the price has been slammed down by huge sales of gold futures, which would make no sense if anyone was seriously trying either to unwind a long position or short sell the market. The authorities claim there is no evidence of market manipulation, but it is plainly happening, so one must assume they do not want to find it.
Precious metals are the canary in the mine when it comes to the QE and currency manipulation which central banks have been engaging in since 2008. The central banks do not want any witnesses to their financial crimes, hence gold and silver, the awkward squad, have to be silenced. It will keep on working until the day it stops, and then gold will quickly be $10,000 an ounce, and we’ll all have a good laugh at Janet Yellen as she is dragged out of the Fed and guillotined.
If you are arguing with yourself, then you are also the winner! How did it feel to win?
I hadn’t realised that Twickenham was in Japan!
Slartibartfarst,
It explains the very easy transition Eddie Jones has had as England Rugby coach…
Zimbabwe won’t accept its own money.
Japan is interesting,
Its taxes and Welfare State spending are still lower than ours – but it was so much better (lower) in the 1960s.
The Economist magazine says that Japanese manufacturing is recovering – every other source I can find says that Japanese industrial output continues to quietly decline.
Still at least Japan is a peaceful society.
When places such as New York and California bust (and bust they will) the streets will run with blood.
The Japanese would rather be a society of old people (still having to work in their 80s) rather than a Third World society of mass violence (looting, burning, murder) – which will be the likely fate of many other countries.
Because Japan is both ethnically homogenous and possesses high social capital, duh.
How many nations are not ethnically homogenous and yet possess high social capital?
Switzerland? They fail the first point.
US at any point in the past century?
Other than my own country of Singapore, I can’t think of any others. And even I fear our social capital may not be enough in times of real difficulty.
embutler, “Radio Free NJ“