Previous posts in this discussion:
PostAmong Biden's Impossible Challenges, China (Tor Guimaraes, USA, 01/21/21 2:40 pm)
I enjoyed reading Mendo Henriques's latest post (January 20th). As usual, his remarks were quite entertaining, knowledgeable, and wise.
One of his statements triggered some thoughts on what I think the bottom for our beloved nation will be in the immediate future. Mendo stated: "China aspires to world leadership and shows fantastic economic progress. Yet China manipulates its own currency, steals intellectual property, violates WTO commitments, and contributes to American de-industrialization with the help of big US international corporations."
It might be extremely difficult to disagree with these facts, but it is clearly too late for us to do anything constructive (beneficial to us) about it. Our corrupted (not representing the people) government failed to understand and/or care about what global companies are always doing (going after short-term profits) regardless of who is getting screwed in the process (customers, employees, the commons, etc.). Thus, when invited to become the manufacturing center for the world, the Chinese accepted. Currency manipulation is hardly something we can criticize the Chinese for, just as an increasing list of naughty behavior we blame other countries for: civil rights, justice for all, real democracy, poverty, income differential decency, etc. ad nauseam. We have been an increasingly bad world citizen for a few decades. Trump just showed us an extreme.
We must realize that, as I have posted before, our great nation will increasingly clash with China. Their economies are intertwined, and the clash will hurt a lot of businesses and people everywhere. I doubt the American government and the controlling plutocracy will find a peaceful way to coexist with China for a few reasons: their system is presently too successful to change; and our system would have to change too much to compete successfully. Therefore, given the present trends, we are and will be at a major disadvantage.
After the great success of WWII, our big bankers continued to steer the American financial system to their benefit and finally gained complete supremacy over the world economy, culminating many decades later with the destruction of laws providing critical protections to the American people such as the Glass-Steagall Act of 1933. The result has been a series of financial disasters for the American people and the world, such as the 2008 global financial crisis which has been slowly morphing into a second Great Depression. Wall Street is doing great on free money, but Main Street is doing very poorly.
In parallel, while the US corporate interests for the last several decades conveniently assumed that the taste of profits would be too much for the Communist Party to resist, it seems to be smarter than the profit-crazy Western capitalists. The CCP learned to separate their social-political ideology from economics and finance. The results have been explosive, with China, despite some warts, far outperforming in many critical areas beyond anyone's expectation.
Now China is projecting itself as a world leader with a series of trading partnership treaties which clearly clash with the Western nations' historically colonialist philosophy, which include the military approach to dealing with nations disagreeable to US corporate interests. As if all this is not bad enough, as the US economy weakens for a variety of reasons, some nations (China, Russia, Iran, Venezuela) are establishing strategic economic-military partnerships to reduce the vital importance of the US dollar as the main reserve currency, and to nullify US ability to arbitrarily sanction disagreeable nations for whatever reasons.
Changing such a strategic situation is extremely difficult if not impossible. Thus my heart and prayers go for the new President who hopefully will be made aware of such difficult social political economic conditions, will act wisely, and execute solutions well. Godspeed.
JE comments: I'm an amateur at this stuff, but the experiences of post-2008 Quantitative Easing and the 2020-present "stimuli" teach one lesson: if you own the reserve currency, you can print money without significant inflation. Thus the notion of the dollar losing its status is potentially devastating to the US. But Tor, so far we've seen nothing serious to threaten the dollar. When times turn bad, the dollar gets stronger. What can you tell us about efforts otherwise?
Will the World Rid Itself of Dollar Dependency?
(Tor Guimaraes, USA
01/23/21 8:23 AM)
John Eipper asked me on January 21st: "The experiences of post-2008 Quantitative Easing and the 2020-present 'stimuli' teach one lesson: if you own the reserve currency, you can print money without significant inflation. Thus, the notion of the dollar losing its status is potentially devastating to the US. Tor...what can you tell us about efforts otherwise?"
Indeed, despite the incredible abuses by the US government and Fed with close to zero interest rates which enabled stratospheric amounts of borrowing by our government, privileged corporations, and consumers well beyond their ability to pay back, the US dollar still remains the reserve currency for most world business transactions. The only questions are for how much longer. The answers are, like a stock market bubble, no one knows when. But it is coming.
How fast? Very imperceptibly at first, like the breaking of a dam, until it collapses. Because the US dollar is the reserve currency, there is considerable inertia for buyers and sellers to shift. So as long as it remains "not one of the dirtiest shirts" available, it will continue to be used widely. What is different lately is that the increased use of US financial power to sanction and intimidate other nations has motivated other nations to cooperatively work harder to dethrone the dollar. Slowly they are becoming more adept at avoiding dollar dependency.
JE comments: The question is, will any currency supplant the dollar? Not anytime soon. The only rivals I see are the euro and in a longer term, some cryptocurrency of the Bitcoin variety. China's wealth notwithstanding, I cannot envision the day when nervous folks around the world hoard bagfuls of yuan.
Post-Pandemic, Prepare for Inflation
(Cameron Sawyer, Russia
01/24/21 4:18 AM)
John E wrote: "If you own the reserve currency, you can print money without significant inflation." (See Tor Guimaraes, January 23rd.)
This is not necessarily so! What about the Great Inflation of the 1970s, followed by the horror of stagflation?
We avoided inflation following the 2008 crash only because of immense deflationary pressures brought on by a collapse in the velocity of money. Inflation is like a fire--the fuel is money supply, but you still need oxygen and you still need a spark. What we have now is totally different. There is pent-up demand, and when the pandemic is over, this can be released explosively, jacking up the velocity of money, creating all the conditions for a blast of inflation, burning up the gigantic increase in the money supply, which already dwarfs the QE following 2008. We are already seeing asset price inflation, and the condition of the stock markets is another harbinger. We may be in for some dreadful economic times, coming on the heels of this dreadful pandemic.
Thinking we can just print money as we like, to solve any problem--is fatal magical thinking.
JE comments: These fundamentals cannot be disputed. It's been over a generation since the US experienced noticeable inflation, and American memories are famously short. We'll just have to wait and see if theory plays itself out in practice. Fortunately, we have the very competent Janet Yellen in charge at Treasury. But what anti-inflationary tools will she have available, other than convincing the Fed to raise interest rates?
My seat-of-the-pants advice: If you have a mortgage, refinance now. This is what we're working on at WAIS HQ.
Why Was There No Inflation after the 2008 Crisis?
(Sam Abrams, USA
01/25/21 2:56 AM)
In taking issue with John E's contention that we needn't worry now about inflation, Cameron Sawyer wrote, "We avoided inflation following the 2008 crash only because of immense deflationary pressures brought on by a collapse in the velocity of money."
The explanation for how we avoided inflation after the crash and have avoided it for more than a generation is far simpler, I would contend: the revolution of online purchasing has created a buyer's market.
I made this case in response to an "Economic Scene" column in the The New York Times in 1999 regarding the mysterious combination at the time of low unemployment and marginal inflation: https://www.nytimes.com/1999/04/29/opinion/l-inflation-vs-jobs-444944.html
This combination defied the Phillips Curve, which holds that lower unemployment means higher inflation, as more people in the workforce equate greater demand for a finite supply of goods and thus mounting prices. But what the economist A.W. Phillips could not have foreseen in developing his theory in 1958 was our online market. The Internet has indeed changed much in our lives, not the least of which is the mechanics of supply and demand.
What held in 1999 held again in 2008 and stands to hold going forward. What we must nevertheless worry about, as so many have argued, is growing disparity. As I wrote in closing my letter to the Times, "Much as the agricultural revolution counteracted Thomas Malthus's grim prediction of population growth outpacing the food supply, the computer revolution has softened the trade-off posited by A. W. Phillips between inflation and unemployment. This new age of plenty raises a more complex question: How equitable is the access to this growing supply?"
Since 1990, such access has diverged. The Gini coefficient for the United States in 1990 was 0.43 and is today 0.48 (0.0 represents perfect equality while 1.0 represents perfect inequality). And it's for this very reason that President Biden is well justified in pushing his $1.9 trillion coronavirus relief plan. Along with struggling businesses, the disadvantaged among us need substantial help.
JE comments: Sam, congrats (22 years later) on the NYT piece! It makes complete sense that the Internet vastly increased the supply of stuff, which would pressure prices downward. Yet in 2021 the 'Net has already achieved saturation. Wouldn't that be all the more reason to expect inflation this time around? The only pandemic-era variable is the rise in working from home, which has reduced demand for gasoline, transportation, and hygiene products. (I've read that deodorant sales have tanked, although we've probably made up for it by buying more ice cream and alcohol.)
WAIS lets the Gini (coefficient) out of the bottle every couple of years. Is it a good time to revisit it, in light of the Covid culture?
Can the Internet Marketplace Become Saturated? Not Really
(Sam Abrams, USA
01/26/21 4:29 AM)
The beauty of the Internet as a marketplace is that it's quite hard to saturate, so long as the barrier to entry for suppliers remains low. Some suppliers, such as Amazon or Hotels.com, can indeed establish outsize presence. And the Justice Department has to do a better job of preventing behemoths from gobbling up competitors. The impact of, say, Amazon taking over AbeBooks in 2008 or of Avis acquiring Zipcar in 2013 can, no doubt, be significant.
But buyers can still search for lower prices elsewhere and even in new sectors like the one created by Airbnb to challenge the hotel industry. The Internet consequently serves as a multiflex defense against inflation, with the equivalent of unsuspected safeties, cornerbacks, and linebackers, to resort to gridiron terminology, repeatedly plugging holes, launching blitzes, and snaring passes.
Regarding the Gini coefficient, some will contend that growing disparity is not so much of an issue so long as the standard of living improves for everyone. But a wide gap between first class and steerage is never healthy for the ship of state, particularly as it applies to intergenerational mobility.
For more on this topic, I highly recommend a book by Keith Payne called The Broken Ladder: How Inequality Affects the Way We Think, Live, and Die (Viking, 2017). Payne, a professor of psychology and neuroscience at Duke, sheds light on a range of effects of income disparity that have little or nothing to do with access to everyday consumer goods.
Yet right now, of course, amid the pandemic, access to everyday consumer goods is a central issue for countless people across the country and around the world, which takes me back to my original point that we don't have to worry about the potential inflationary effects of the Biden administration's $1.9 trillion coronavirus relief plan. It should be embraced.
JE comments: Excellent points, Sam. I should have qualified my earlier comment. The Internet marketplace is far more saturated than in 1999, but there are always moments of "disruption." Does it still have the power to combat inflation, as it did 20 years ago? Time will tell, but it seems to me the low-hanging e-fruit has already been picked.
- Reflections on the Dollar, Inflation (Tor Guimaraes, USA 01/25/21 3:21 AM)
John E wrote: "If you own the reserve currency, you can print money without significant inflation."
That has been obviously so for many decades under general circumstances.
Also correctly, Cameron Sawyer retorted on January 24th: "This is not necessarily so! What about the Great Inflation of the 1970s [created by sharp increase in oil prices], followed by the horror of stagflation? We avoided inflation following the 2008 crash only because of immense deflationary pressures ... What we have now is totally different. There is pent-up [consumers have little money, only debt] demand, and when the pandemic is over, this can be released explosively, jacking up the velocity of money, creating all the conditions for a blast of inflation... Thinking we can just print money as we like, to solve any problem--is fatal magical thinking."
After carrying the title for many years, I hereby recommend that WAIS pass the highest title for economic pessimism to Cameron Sawyer. I will keep the socio-political pessimism title for now.
John commented on Cameron's post: "It's been over a generation since the US experienced noticeable inflation, and American memories are famously short. We'll just have to wait and see if theory plays itself out in practice. Fortunately, we have the very competent Janet Yellen in charge at Treasury."
I believe John will be very disappointed with the future results: Janet Yellen is just as lost as Powell became. He tried to raise rates slightly to get elbow room to maneuver, but the "drug addicts" reacted very threateningly (with economic collapse). So he joined the party and played along. As I have been saying, inflation has been here for a long time over 2 percent a year, but mostly under the hood aided by government calculations.
"But what anti-inflationary tools will [Yellen] have available, other than convincing the Fed to raise interest rates?"
Well... can she ask the government to make every worker double production at half the pay for a few years? Or go after the trillions stolen by corporate fraud through financial engineering and past Wall Street bubbles to reduce debt by students, consumers, cities, and states. That would really help but if consumers can now afford to buy more freely, inflation will rage.
Earlier John commented: "The question is, will any currency supplant the dollar? ... The only rivals I see are the euro and in a longer term, some cryptocurrency of the Bitcoin variety. China's wealth notwithstanding, I cannot envision the day when nervous folks around the world hoard bagfuls of yuan."
The estimate is that worldwide, about 65 to 85 percent of trade is still done in US dollars, but the percentage of transactions in other national currencies is continuously growing. As I mentioned before, some nations have adopted a basket of major currencies (yuan, yen, euro) to replace the dollar. The dam has started to leak and there is no stopping it. US political financial influence can contain the speed but slowly the dollar reserve status will become insignificant and then, for the foreseeable future, no one currency will have reserve status.
JE comments: Amigo Tor, your economic pessimism still sets a very high bar! What type of certificate should we award to WAISdom's Economic Chicken Little? How about a ceremonial basket of failed currencies: Confederate and Zimbabwean dollars, some Argentine australes, and a few trillion Weimar-era marks.
- Reflections on the Dollar, Inflation (Tor Guimaraes, USA 01/25/21 3:21 AM)
- Can the Internet Marketplace Become Saturated? Not Really (Sam Abrams, USA 01/26/21 4:29 AM)
- Why Was There No Inflation after the 2008 Crisis? (Sam Abrams, USA 01/25/21 2:56 AM)
- Post-Pandemic, Prepare for Inflation (Cameron Sawyer, Russia 01/24/21 4:18 AM)