Friday, December 05, 2008

Your friend, inflation

A couple of pieces on Corrente got me to thinking heretical thoughts. Downright insane thoughts. Here's the first piece:
Why the Village doesn't want to help homeowners, in one sentence

Deflation redistributes wealth from debtors to creditors.
Big Money: Creditor. Homeowners: Debtors. And there you have it.
The other piece is here.
The stimulus package is predicated on the idea that people won’t sit on their money as they did in Japan during their last economic disaster that lasted over a decade. What is there to buttress this belief? Well, we have a culture of retail therapy and that's pretty powerful.

But when people got their $600 tax rebate stimulus check, did they run out to Radio Shack and buy remote controlled cars? No. Most went to pay down existing household debt, evidence the stimulus wouldn’t spur household spending at all.
Which ties in to Krugman's latest:
1. The economy is falling fast. We’ll see what tomorrow’s employment report says, but we could well be losing jobs at a rate of 450,000 or 500,000 a month.

2. Infrastructure spending will take time to get going — a new Goldman Sachs report suggests that projects that are “shovel-ready” are probably only a few tens of billions worth, and that a larger effort would take much of a year to get going. Meanwhile, it’s very questionable how much effect tax rebates will have on consumer demand. So it may be hard for stimulus to get much traction until late 2009...
If anything, Krugman underestimates the job loss. (Update: 533,000 people lost jobs in November. "The unemployment rate would have moved even higher if not for the exodus of 422,000 people from the work force. Economists thought many of those people probably abandoned their job searches out of sheer frustration." The real punch will hit our gut in January, methinks.)

Beyond that, I've been wondering, in my naive way, about where the money is going to come from. The planned stimulus package won't be nearly enough, and it won't occur fast enough to avoid double-digit unemployment. Yet we've already spent (or have committed ourselves to spend) about 1/20th of the world's annual income trying to deal with the current mess. A lot of people are saying that we need to do much more -- we need the equivalent of World War II era spending. WWII was funded with high taxes and high deficits. Politics disallows the former, and we've already gone as far as we can go in terms of deficit spending. And we already have a couple of wars going on, in case you didn't notice.

So what do we do?

A number of countries in similarly horrific circumstances have tasted of the forbidden fruit: Inflation. Print money and give it away at streetcorners, if need be. (Would that action really be more irresponsible than borrowing money from Asia to give the citizenry tax rebate checks?)

The American government must assume the burden of bad real estate debt. Inflation can transform those horribly overpriced properties into underpriced properties. People struggling to make their payments will once more be building equity.

Do I see your knee jerking in reaction to my modest proposal?

Yes, I know that courting inflation risks hyperinflation. I know all about the history of Weimer Germany. I read big thick books about it, I did. I know about the housewives who burned marks in stoves because bank notes were cheaper than firewood. I know that prices doubled every two days. I know that life was hell.

Here's the thing about the worst hyperinflation in history -- the part of the story that they don't tell you:

It ended. It ended real fast.

In Germany, the inflation began in the summer of 1921. It morphed into hyperinflation in December of 1922. A year later, the crisis stopped: The government introduced a new mark, which was secured by German property. The world grunted, shrugged, and said: "Okay, fine."

The world, in fact, soon considered Germany a terrific place to invest. You know all those stories about Prescott Bush helping to fund the Nazis? Actually, Brown Brothers Harriman got involved with Germany by investing in the great recovery of the 1920s. Those investments paid off. They made a ton of money.

Not long after that, the Germans were in a position to cause real trouble.

The problem of hyperinflation is not insoluble. The solution was drastic and harsh, but a solution did exist.

Extreme measures can be avoided; inflation need not give way to hyperinflation. A system of wage/price controls can apply the brakes. This has been done successfully in the past -- the Wassenaar Agreement in the Netherlands in 1982 provides one example.

The American government is acquiring the paper (or control of the companies that hold the paper) on America's "bad" properties. Those assets thus belong to all of us. I suggest that, instead of trying to figure out what the value of that property is, we take whatever measures are necessary to insure that the price on paper reflects actual value.

Let's review: When Germany revalued the mark in 1923, what backed their money?


Gary McGowan said...

A treasure:

Take the time. Watch it.

Anonymous said...

Isn't most 'money' now digital? Digital money smells funny when you burn it.

Have you noticed the US dollar's value being (way) up compared to a year ago? It might mean that, say, your half-room condo you paid $125K for last year now has a value of $100K, but those current $$ will buy as much as the cheaper $$ from a year (and more) ago (or buy more if prices haven't increased). It's very very hard for any of us to distinguish between money and language (language changes constantly, money never).

Weimar German real estate could be valuable when air waves weren't exploitable. People are spending trillions of $$ every day to use the airwaves. They live 'on' something like a phone or a laptop more than they live 'in' anything. That reminds me: last month or so, AT&T changed their billing regime, billing for advance use instead of billing (arrears) for past month's use, and for one month they combined the billing, bailing themselves out with a one-time 10% boost.

What about offering leases for homes like they have/had for autos? Anymore, people don't stay put in a dwelling like they thought they could in Germany (intentionally layered allusion). It's the concept of housing that has to change, and how we 'pay' for housing.

Gary McGowan said...

“got me to thinking heretical thoughts” – Whyso? They are essentially where the “experts” are going.

“When Germany revalued the mark in 1923, what backed their money?” – Two things:

1) What little was left of their physical economy, their ability to produce, after the WWI reparations (intentionally designed to destroy Germany as a nation state) – after they had been stripped of ALL their locomotives and rail, their merchant marine, hundreds of thousands of heads of livestock, essential raw material and industrial regions ceded to France and Poland and the allies, and having to build hundreds of thousands of tons of ships annually and give them away, and I forget what else – all on less than half the caloric intake of food per capita than before the war.

2) The world’s monetary economic system was then the gold standard (that ended around 1972). Financial bubbles were somewhat constrained by having money attached to physical reality.

“The world [sic], in fact, soon considered Germany a terrific place to invest.” – Loot the bits of flesh on the corpse might be more accurate – and that at desperately bargain-basement prices.

“Downright insane thoughts.” Your proposals as a fix? Only insane if you are opposed to reducing the world’s population by about 70-80%, because that’s all the productive physical economy that’s left after the fast approaching “four horsemen” get done with us will support.

But some very highly-placed leaders and their followers don’t consider it insane at all, just Gaia and the second law of econodynamics putting us all back in our place in the animal kingdom so the new feudal leaders can hunt down the endangered species in peace in their new expanded nature reserves.

“wage/price controls” Yeah. “Work makes you free” camps should cover the wages part. And I’m sure the cartels and CEOs will be happy to do their part in sacrificing stockholder value to lower prices. They're not greedy.

Gary McGowan said...

This proposal, from the Vatican today, will be perceived by the financial oligarchy as insane:

"The financial bubble that was maintained until just recently in the United States – that of "subprime" mortgages – was founded on the hope of higher returns and housing values, while underestimating risk. The humanitarian bubble could, analogously, be founded on the hope of higher returns and investment values in countries populated by people full of dignity and wanting to improve their lives. Asia has liquidity, the United States has technology, Europe has heart, ideas, and entrepreneurial initiatives on the small and medium scale. Poor countries have two or three billion candidates for economic progress, who could be the recipients of investment in a long-term perspective."

More... scroll half way down page to "Development and financial crisis. The bubble that will save us"


DarkGravity said...

"we take whatever measures are necessary to insure that the price on paper reflects actual value"

We can't do that. That would be common sense.

Anonymous said...

Churchill discusses the move to issue Germany's currency out of the government rather than borrowing it from the central (international) banks in the early pages of one of his volumes of memoirs on the war.

He states flatly that by doing this, which he said took out the international bankers from their cut of the economic growth, Hitler sealed his doom. (The bankers have always historically taken exception to any move away from debt-based money creation).

So, if Churchill was right, solving this problem with fiat currency, issued by the sovereignty of our nation and people as is our right, without paying the banksters their vig, would mean, I guess, this COUNTRY would have to go. Wait, it already is?


Anonymous said...

There is no solution. It would be nice to think a government had the power to crack down ultra-hard on financial mis-selling, for example, which is everywhere in the UK. You can hardly queue up anywhere without having your vision bombarded with ads for "0% finance guaranteed" and "free" this, that, and the other - provided you sign on the dotted line. But the government can't and wouldn't want to anyway. "Spend, spend, spend" is the advice they give people.

Realistically, I'd say that given the choice between backing huge government debt and huge personal debt, we should back the former. But 'realistically', it's going to be worse than the 1930s.

Those of us who are outside of the ruling elite and who have got some sense of socialist morality are up shit creek without a f*cking paddle. I admire your optimism, Joe, but can't raise any.

Nitpick: hyperinflation was even more severe in Hungary 1946 (at one stage, prices were doubling every 15 hours) than in Germany 1923 and is greater too in Zimbabwe (doubling every 27 hours at the start of last month).


Gary McGowan said...

Be nice

I live less than a day’s drive from China. I am fortunate to have some Chinese acquaintances. I love them as brothers and sisters.

Please permit me to introduce you, that you too may make new friends and pleasurably extend the boundaries of your world-view.

Mr. Gao: (actually, wait before clicking - this is background)

Mr. Gao is a high-ranking Chinese governmental official concerned with finance. I have been pleased to learn that he holds some “Franklin Delano Roosevelt-“ or “American School-“ like views regarding the well-being of humanity, for example on the necessity for a New Bretton Woods conference among leading nations, and on the illusionary value of derivatives, as well as in many other areas. [I must interject that when Mr. Gao speaks of New Bretton Woods, it is of a different intention than the NBW the British Prime Minister speaks of; The PM and his Wurlitzer have entered late and are trying to co-opt the term.]

"But over the years, I believe I learned to be humble. To treat other people nicely. I learned that, from a social point of view, no matter how lowly statured a person you are talking to, as a person, they are the same human being as you are. You have to respect them.”


Anonymous said...

1) Many of your commentators are right. This is clearly the policy of the monetary authorities in the US now and rightly so. Bear in mind that hyperinflation is bad but not 100% guaranteed. Massive recession is 100% guaranteed at this point.

2) The US personal debt situation is bad. But the net debt is owed to foreigners. I personally would prefer a cooperative outcome but I dont think the US cares what its creditors thinks.

3) It wont be as bad as the 30s. But it will be bloody bad. There is more infrastructure around and greater total "wealth". But the change in living standards will be sharp, which will feel painful.

4) Im very concerned about war, and revolution. China in particular seems to be tipping over very quickly. They will either blame their government or the US. So far it is the US.


Anonymous said...

Actually, although many desire it, preventing a further decline in residential property values is the wrong prescription.

We have a massive overhang of houses on the market, at prices that are not affordable to enough people, even with the declines we've seen already.

The classic remedy is for those values to fall sufficiently to 'clear' the excess inventory of houses on the market.

Either people need to gain an average of 50% more income, which is impossible, or those values need to come down as far as necessary. Either that, or the excess of dwelling units need to be destroyed.