Wednesday, March 23, 2005

Waiting For The Big Wave!

Waiting for the big wave

Katy Delay is a freelance columnist in economics and government, and maintains a blog at Link.

By all logic, this nation should be in deep water right about now. In the 1980s, wise kahunas foretold a watery day of reckoning within the following two or three decades if nothing were done to counteract the scourge of chronic inflation that has proceeded unhampered since the early 20th Century.

We all note that indeed nothing has been done. On the contrary, the waves of increasing prices haven't let up for a moment, growing at a rate of at least 2-3% a year since 1900. So, since the dollar is now falling on the international marketplace, should we begin preparing for the crashing Big Wave as predicted? History says there will be retribution in the long run; but there are at least four elements of our modern economy that might explain the stealth with which it is approaching.

One of those is the extent of the recent technology boom. The discovery of electronics is the equivalent of the wheel in its significance to the economy. Computers and high-speed communications have brought productivity not only to an all time high, but frankly to another cosmic level; and through this factor alone, general prices should have decreased several points, just as they did back in the 1800s during the industrial revolution. (By the way, contrary to popular opinion, natural, gradual price deflation enriches everyone equitably and indiscriminately, by increasing our purchasing power. As prices decrease, relative or "real" wealth – i.e. our ability to raise our standard of living and save for the future – increases.)

Yet this hasn't happened. Why? Because the expected price decreases have been offset every year by a lowering of the dollar's value through "out of thin air" credit creation and currency inflating that camouflages improper price increases. Both the wasted cost devaluation and the parallel dollar debasement can remain invisible for years – at least until people wake up, as they are beginning to do.

But you will say, "Then why doesn't the CPI (consumer price index) reflect this inflating theft properly?" This is the second reason for our Big Wave's invisibility: economic statistics are misleading and inaccurate, to the point where one wonders just how naive economists must think we are. The dirty little secret is that they have always had difficulty measuring even something as "simple" as true output, or gross domestic product (GDP); and more complicated economic variables such as what I call "IEI," for "inflating embezzlement index" (the amount of hot-air credit in our economy) remain even more elusive. Believe it or not, the experts are just estimating the figures, hoping to possess the right data to start with (like the M1 and M2 aggregates you've heard of) and praying – or in some cases assuming with the hubris typical of far too many in the scientific community – that it is not garbage in, garbage out. IEI has proven to be particularly quixotic. No economist has come anywhere near accuracy, except perhaps Edward C. Harwood of the American Institute for Economic Research; and even AIER admits to having difficulty since the 1970s, given the arduous and all but impossible underlying statistics-gathering involved.

So let's have some fun conjecturing: How much purchasing power might we really be losing on an annual basis, above the 3% the Fed has already admitted to? If our measurement of GDP were more in tune with reality, we just might find that real national wealth should have increased by something on the order of – just to take a wild guess based on the contribution of new technologies in my personal life – some 7 to 10% per year since 1980. This should bring about a lowering of CPI (remember, lowering of prices is the equivalent of an increase of the populace's wealth) of at least a few percentage points a year, say 2%, to be modest. That, added to the 3% so-called "inflation" rate we are seeing in our CPI basket of prices, makes a total of 5% a year, or 100% of our wealth confiscated over a 20 year period, at the very minimum; and that's based on these GDP estimates alone. The punch line is that no one can certify that this is incorrect. Do you suppose this is one explanation why our dollar can't get no respect these days?

A third element that may be contributing to this exquisite prolongation of our Big Wave's dénouement is that the US is perceived as a bastion of economic strength compared to every other nation in the world. We're called the "world's tallest midget." Based on that, billions of our "good-as-gold" dollars, stocks, and US bonds and assets are being held as the safest investments. To top it off, the dollar is also used as a substitute money by foreign citizens of less financially secure countries. For example, no one is really certain just how many of our dollar bills are hidden in the coffers of the likes of Saddam Hussein, or held by Russian mafiosi, ready to pay for that chalet in the Swiss alps or a mansion on the Cote d'Azur. The money simply changes hands, never returning to its berth.

More recently, however, these dollars are buying less and less, and the bonds are decreasing in worth, so our fiscal rogues and central bankers are wont to diversify. By way of illustration, a recent Columbian street gang bust turned up a suitcase full of euros. Now, this alone does not constitute a direct challenge to the dollar's esteemed status (it may simply be a reflection of evolving European drug preferences); but one thing is certain: the dollar is no longer the only game in town.

If the drug lords and OPEC are already getting skittish, what will happen when the world's central bankers decide to act upon the realization that the dollar is not as good as gold, releasing a tidal wave of currency and bonds that will head home for lack of takers? The Fed will have to get the excess cash off the American streets in order to avoid pandemonium (imagine the scene: too many greenbacks chasing too few goods, and Greenspan in pursuit at the rear) they will also have to increase Fed rates further, which may slow the American economy and force prices to move erratically. But wait: the Fed has led us to believe that they have prices under control. They will be in a quandary. I wish I could be a fly on the wall of their boardroom when it happens.

But you can't be in two places at once, so I prefer to perch under this huge wave's crest, hoping to catch another good ride when the devil's plans play out. It's sad: if only all of humanity – not just the bankers, the US government and the smart speculators – could ride at the pinnacle of this technological progress that is holding us afloat today. Instead, the usual losers will remain clustered in herds along its flanks, trying to go about their business of competing sportsmanlike for the small swells, though increasingly unnerved by the moody seas and disrupting gulps of salt water. Like our Asian friends, their short memories will not allow them to conceive of the tsunami that may be about to bowl them ashore – or maybe even tumble us all asunder.

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