Friday, September 19, 2003

America; Hyper-Inflation/Hyper-Deflation?

Deflation Blog

Prudent Bear
Steven Roach

I came across this article months ago, but it has recently caused some new interest and concern to me. After reading much new and very reasonable material, in agreement with my own views, about real world economics, I have started to wonder how serious the rest of the Fed insiders and others may be taking Bernanke's remarks about possibly using crude printing as a way out of our future mess. This is something we all should be considering seriously, if for no more than the sake of understanding theorizing about it.

Say we do go the route of Argentina, as one of the three possible courses Paul Krugman has mapped out in his new book? What might the possible outcomes be? Surely not that of Argentina? Just think about it. America experiences a massive currency attack by the rest of the entire world,[I'm making this very brief] possibly started by China ridding herself of U.S. Treasury bonds and bills, etc. Japan sees this and follows suit, then the Europeans, then the rest of the world. How's your world now Bush?[Will they crude print as Bernanke has alluded?] So the dollar declines viciously fast and inflation takes off followed by hyper-inflation requiring hyper-deflation by the wonderful IMF?

Has anyone considered that this may not even be possible by a country the size and importance of the U.S.? Even if all the above happens, can the rest of the world, or will the rest of the world have the capacity to absorb, or will they allow the flood of exports from America to enter their countries? Just think of the real capacity we have to flood the rest of the world. I don't believe we can have hyper-inflation. Yes, we can have inflation, but hyper-inflation seems out of the question to me. I don't believe the rest of the world could or would allow it.

This still leaves me very disturbed about Bernanke's crude printing remarks below, yet, would we be punished as smaller countries are, for using crude printing? Is it possible, by our shear size, to get away with crude printing, since most of our external debt is denominated in dollars, and we can't hyper-inflate? Or, am I thinking crazy? I don't think so..........

"Remarks by Governor Ben S. Bernanke

Deflation: Making Sure "It" Doesn't Happen Here

Ben Bernanke

The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject's oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.

What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation." Article Link: Ben Bernanke

Paul Krugman interview of his new book "The Great Unraveling; Losing Our Way In the New Economy" is here.

No comments: