Scary Alan

Alan Greenspan said this on Meet the Press:

The United States can pay any debt it has because we can always print money to do that. So  there is zero probability of default.

Statements like this are why many fear we are headed toward hyperinflation. But how can one predict with certainty what someone will do in a crisis. I think that debt repudiation is far more likely than hyperinflation. Greenspan is no longer Federal reserve Chairman. What does our current Federal reserve chairman think?

People know that inflation erodes the real value of the government's debt and, therefore, that it is in the interest of the government to create some inflation.

Ben Bernanke also proposed that if all else fails the Federal Reserve could drop money from helicopters. To be fair to Bernanke he was quoting Milton Friedman. However the inflation argument does seem rather strong. Why then do I think it will not happen?

I Am Praying TooI may be an optimist, but hyperinflation would destroy the investments of much of the elite that run our country. Their own self-interest should keep it from happening. The bond market is signaling a continuation of the recession by the lowering of interest rates, even on the recently downgraded treasury bonds. The current stock market prices are signaling a continuation of economic growth by its price to earnings multiple. While it is possible that both are right—that we are headed toward economic collapse with higher corporate profits, this seems unlikely. I smell the plunge protection team. 

Church of the Annuciation, Murom, RussiaThe only good news is the drop in oil prices, which of course is bad news for Russia where I am headed next week. I will probably look for apartments while I am there, you never know. The ruble hit new lows today, almost as low as it was in 2002 when I first went to Russia. We will visit the oldest wooden church in the world. I will study Russian. We will drink vodka. I enjoy visiting my mother-in-law.  She is the perfect mother-in-law. She does not speak English. 

The Solution Is Gold

The Future Is Difficult To Predict Because It Has Not Happened Yet

Usually those that have the kind of views I have think that we will have hyperinflation. I have never felt that way. I think the most likely outcome is moderate inflation in the 10 to 20% range for a few years. Hyperinflation would be so counterproductive that its occurrence seems unlikely.

But as Yogi Berra said, “The future is difficult to predict because it has not happened yet.” What will the government do if current trends continue? At some point the government will be unable to borrow money. Then one of two things will happen. Either the government will default or just print the money to pay off its debt. As bad as default would be it would be preferable to hyperinflation.

I doubt that the government would be stupid enough to let things get that bad. I still think we will have a series of bills/reforms over the next few years that will gradually reduce the deficit. So among the hard money crowd I am what passes for an optimist.

Our Future?

Chris Mack has an interesting article at www.resourceinvestor.com.  I recommend the article. Chris says this:

According to a study of 775 fiat currencies by DollarDaze.org, there is no historical precedence for a fiat currency that has succeeded in holding its value. Twenty percent failed through hyperinflation, 21% were destroyed by war, 12% destroyed by independence, 24% were monetarily reformed, and 23% are still in circulation approaching one of the other outcomes.

Eventually all fiat money systems fail. We have a fiat money system. Here is Wikipedia’s definition:

Fiat money is money that has value only because of government regulation or law.

The term derives from the Latin fiat, meaning “let it be done,” as such money is established by government decree. Where fiat money is used as currency, the term fiat currency is used. Fiat money originated in 11th century China, and its use became widespread during the Yuan and Ming dynasties.

The Nixon Shock of 1971 ended the direct convertibility of the United States dollar to gold. Since then all reserve currencies have been fiat currencies, including the dollar and the euro.

But often the failure is gradual over a long period of time. The most successful fiat currency is the British pound. Here is what Chris said about the pound.

The average life expectancy for a fiat currency is 27 years, with the shortest life span being one month. Founded in 1694, the British pound Sterling is the oldest fiat currency in existence. At a ripe old age of 317 years it must be considered a highly successful fiat currency. However, success is relative. The British pound was defined as 12 ounces of silver, so it’s worth less than 1/200 or 0.5% of its original value. In other words, the most successful long standing currency in existence has lost 99.5% of its value.

How well has the dollar done since Nixon took the US off a partial gold standard in 1971? Chris continues:

The US dollar was taken off of the gold standard in 1971 when it was 1/35th an ounce of gold. At 40 years old, it has already lost 97% of its value. Yet it has lasted longer than the average fiat currency so perhaps its performance should be labeled “better than expected.” The US dollar has fallen by an average 9% annually over this 40 year period when measured against gold. As such, investment advisers may want to readjust their inflation expectations when projecting dollar based investments. The S&P 500 appreciated at 7% over the same 40 year period – not even keeping pace with the decline in purchasing power of the dollar.

I agree with Chris in that I think gold is going up. But I also disagree with him because I think that gradually we will cut the deficit. But while we do so there will be economic troubles. This is because such a huge spending cut/tax increase will have a very negative effect on the economy. The only thing worse that these spending cuts and tax increases is doing nothing—which  seems to be the bi-partisan approach to our crisis. But as the crisis continues the changes will be forced on the government. I predict the death of 1000 cuts.

A Rant & Stockman On the Bush Tax Cuts

A rant from a business owner

The topic under discussion in this old clip from MSNBC is the extention of the Bush tax cuts and the additional cuts Obama got. BTW, the Bush tax cuts are set to expire at the end of 2012. This is a massive tax increase of several trillion dollars. 

Sorry abut the commercial. 

Are We Doomed?

I was reading Charles Hugh Smith's website and these two paragraphs jumped out at me:

If all Republicans suddenly agreed with Paul Krugman and Robert Reich, would Peak Everything be resolved? Would the U.S.A.'s dependence on exponentially rising debt and imported oceans of oil magically go away? Would the consequences of The End of Work vanish? Would the consequences of 72 million (or 79 million counting legal immigrants) Baby Boomers retiring, fully 25% of the entire population, magically disappear?

Now repeat the question for the flip-side of the coin: if Democrats suddenly saw the light about free markets, low taxes, etc., and became die-hard Republicans, would any of these structural problems suddenly go away? No. 

Republican, Democratic and Tea Party Mice? In other words our problems are systemic. The Republican and the Democratic templates are distorting reality—like the Mary Poppins video I posted yesterday. If you were not familiar with the movie, and saw the fake trailer you would be convinced that Mary Poppins was a horror movie.

All templates distort reality—even my libertarian one. Smith called these templates "ideological boxes" in his blog. We are blinded by our assumptions. This is why the Congress is deadlocked. 

I see it in the comments on Facebook when I announce a new blog entry. For example, I was unable to convince a high school friend that a bond redeemed from the Social Security administration, since it reduces the total debt, would allow the government to borrow more money—a pretty obscure topic, I know. He is one of the most intelligent people I know, he got an 800 on the old scale on his math SAT. My 730 was quite respectable, but not in his league. (We will not talk about my written score, there is a reason I have a friend read and edit my longer blog posts. I am Dyslexic.) My inability to communicate with my friend is probably due to the ideological box he is in—that rascal. But thinking about Smith's website post I have to wonder about my own ideological boxes in which I live. What is my friend saying to which I am completely blind? If I am blind, I would not know it would I?

The answer to the question I asked in the title is no—we are not doomed. But it is very clear to me that the difficulty in getting cheap energy, the aging population and the false promises made to us boomers about our retirement, and the cost of our empire will give us an extended period of troubles. This is actually an optimistic view. I expect we will have a series of modest reforms that will kick the can down the road. But there is a cliff down the road. My guess is that we will gradually slow down as we approach the cliff. (Let me add here that I wrote this post on Saturday night before Sunday's budget agreement.) But the process of slowing down will mean the end of Medicare as we know it, it will mean reductions in Social Security. It will mean we will dismantle our empire. It does not matter if these things are good or bad, we do not have the money.

As Ralph Waldo Emerson said "Solvency is maintained by means of a national debt, on the principle, 'If you will not lend me the money, how can I pay you?'" He said this in 1857. 

But are we blinded by our ideological boxes to such an extent that we will go off the cliff? I do not think so, but then again I am an optimist.