Maggie's Farm

Well, I'd say a shift in political sensibilities will lead to any party seizing what they want.

I've said many times that if Bush hadn't been so profligate, there would be little or no justification for Obama's ridiculous spending spree. But rhetorically, he gets to back it up by pointing to years of Republican overspending.

Now we're at a point where something has to be done...
I agree that the Republicans seem to have the upper hand in the 'how do we get there from here' debate, by eschewing taxes. In the long run, however, taxes will be on the table unless something truly amazing happens.

Politically, it's just a question of what pushes either party over the edge.

In the meantime, there is no value in saving. Low interest rates are a deliberate attempt, by the Fed and the government it is funding, to shift wealth. The problem is, it's not shifting the way either one of them believed it would. It never does.

So now they may seek to 'tax' savings with negative interest rates. This is going to be a truly regressive 'tax'.

This is a misguided belief central to Keynesians. Market signals could also be lost in inflationary economies, but Keynesians don't seem to worry about this. Instead, they claim a certain level of inflation is "good".

Instead, I'd argue that there is a range of deflation and inflation, somewhere between -2.5% and 2.5%, which is 'good'. Keynesians reject this out of hand on the basis of their deflationary fears.

As Schumpeter pointed out regarding deflationary spirals - they are sometimes needed to reset prices. It never occurs to people that perhaps the deflation exists because the inflation was fueled by excessive behaviors.

There are no signals being "lost". There are merely behaviors which are taking place which have created a negative price signal. At some point, all deflations reverse themselves. It's merely a question of whether you're willing to let things take their natural course or whether you're seeking to control things you cannot control.

The Depression was bad because the Fed raised rates too far, too fast. Their initial inclination was correct, just poorly executed. However, no matter what they chose to do, they would not have avoided a Depression. At best, they'd have wound up in a situation very similar to what we're experiencing right now. Which, since I lived through the 1970's, is not very different from that era. I'm just waiting for the inflation. Inflation in the 1970's took quite a while to really take off.

The period from 1965-1970 saw a slow steady climb to about 6% (which, by the way, we've already seen in the US - briefly in 2008 in the official statistics, but regularly now in the shadow statistics which are more accurate for the average American). Then they moderated for 2 years before really taking off from 1973-1981.

When you consider that we've been in a deflationary economy for at least 3 years, and yet we've still had some inflation - you have to ask yourself what is going on? We are, currently, going through a de facto inflationary spiral.

The question of why it hasn't been worse is easily answered. First, as I mentioned, we're in a deflationary economy - consumption is way off, as it should be after bingeing for far too long. Secondly, we're a reserve currency. When the Fed creates credit (cash is created), other nations are forced to purchase dollars to keep their reserves intact. This limits the impact of inflation in the US and has allowed the dollar to be "the prettiest horse in the glue factory" for several years.

However, China is now doing direct swaps with other currencies, in order to avoid having to purchase dollars. So is Iran. At some point, other nations will start doing the same thing. Why denominate all trades in dollars when direct swaps are easier? You can increase reserves in more stable currencies rather than purchasing one you're less and less reliant on.

We may see some deflation, assuming the Fed does the right thing and stops issuing credit. But that's unlikely. So inflation remains the most likely outcome in the long run. And then we'll have to wonder what the endgame is.

I'm not a conspiracy theorist - so I'm not saying this is planned in any way, shape or form (though some certainly will). I think people in positions of power are reacting in a fashion they consider normal given the circumstances. But it doesn't take much training to see how misguided this all is.

I really don't know where to start.
I didn't say Keynes didn't care about inflation. Keynesians rarely do, however. Spending much time on something you're seeking (as you point out some level is "essential" for a growing economy - which I'd disagree with wholeheartedly...nothing of the sort is true unless you're a Keynesian) means you spend less time worrying about its deleterious effects. Sorry - but that is the truth. Krugman is really a classic example of this, though he so frequently talks over himself, it's impossible to really know where he truly stands on the issue.

I will point out that the economy has grown many times during periods of mild deflation. I have no reason to address any concerns you believe exist when history provides enough examples for my point of view to be valid.

An inflationary collapse will lead to unemployment, too - did you forget the 1970's? Oh wait...the illusion of growth made people think things were good, right? That explains why "the misery index" was so high under a Democratic Congress and White House in the late 1970s.

I don't remember anywhere writing that I am seeking a deflationary spiral, did I? I'm just not worried about one if it occurs. Mainly because deflation benefits more people than inflation. Sure, more people are out of work (although the 1970s would argue both are equally bad...just that the wealthy are better off in an inflationary spiral), but at least the cost of living isn't becoming more oppressive.

I think you're confusing economic collapse with monetary crises. The two don't always occur hand-in-hand, though many Keynesians believe they do, or at least that a monetary collapse necessitates an economic collapse. Humans are funny. They find a way to keep doing business if their unit of exchange is suddenly useless. I know that in the media business, barter was actually quite a large industry during the inflationary 1970s.

The damage was "contained"? Really? Interesting viewpoint. I'm wondering where it's "contained" now? Europe? I suppose you'll say that has nothing to do with what happened or is happening here? What about oil prices, which spiked? I suppose you were on board with Obama castigating the evil speculators during that period of time - what about now that oil is declining in price (primarily due to reduced economic activity related to excessive debt, which is related to excessive monetization).

I'll tell you what - when the chickens come to roost, as they inevitably will - you can come toss me a note about how wonderful the current approach is working. If things clear up, as you seem to think this is all well contained now, then I'll toss you a note. But I really doubt Keynesians are going to win the day. The collapse of the housing market has not been contained - only delayed briefly as focus has shifted. In fact, I'm still amazed that people are building or expanding homes. Why would that happen, when there is a glut of available housing, and prices for existing homes are barely budging? Oh yeah - easy money. It solves everything. Until it doesn't anymore. So move into negative interest rates to keep people spending. Good idea.

As for zero interest being a 'lost signal' - I'm not sure what you mean. I'm not arguing a classical viewpoint, so that doesn't stand. Zero interest rates are a signal. The problem isn't whether it's a signal or not. It's whether people are paying attention to the signal now, or later. Ever run a red light?
More importantly - ever come to an intersection with a broken light? I have. It's amazing how drivers often sort it out without an accident, isn't it? The problem is, when you wind up having those rare accidents, people complain "the light was out". Yes it was. But weren't you paying attention?

I see that I am being attacked by a gold bug and a Keynesian, so I feel confident in my position.

Um, conciliatory?

I'm opposed to the Fed - and I've actually written a post or two about this if you're willing to go back and take a look.

On the other hand, I am willing to work with the tools provided, which in this case is a central bank.

You have to remember something about money. A gold standard can be removed, as it frequently has been over the course of history, by governments which promise easy wealth creation.

While I support a gold standard, I don't agree with the gold bugs who claim that "all fiat currencies have failed". This is true, but so have all gold standards. The nature of each failure is different - but it is failure all the same.

As a result, there are ways to manage a central bank in such a fashion that a gold standard can be maintained - in fact, the US did it for many years and did it relatively well.

The problem, for both gold and fiat, is the nature of currency crises. Both standards can suffer currency crises, though fiat currencies tend to have fewer, larger crises. Fiat crises tend to grow with each one, until the system falls apart.

Gold crises are more frequent and typically very natural, based on the availability of gold and its ability to move to parts of the economy which require more of it.

I prefer a gold standard, but I recognize there are moments in time (such as the Civil War) when forms of fiat currency can provide a much needed boost to a moribund economy.

I am reminded of Ithaca, which implemented its own local currency back in the 70's and 80's. That currency (Hours) still exists today. It didn't solve all the region's problems, but it did reinvigorate the region to a degree.

In the end, local currencies are what kept the US moving during its earliest years, and those currencies were all typically backed by gold. If the local banks had shipped out too much gold, and there was a run on the bank, there was a currency crisis. Sometimes these crises went national.

There is no easy answer or solution to the problem we face. I would say that reverting to a gold standard is a good idea, but in doing so we all have to accept that along with its many benefits, it will bring along great pain over a short period of time.

I'm willing to accept this - but most people I am familiar with are not.

I recognize fraud. I'm not discussing that. There was plenty of monetary fraud taking place during periods of gold as the standard.

So there is no false dichotomy. If anything there is an over-reliance by gold-bugs on the supposed curative values of gold. It's not a cure-all. It could do quite a bit of good today, and I do agree there has been a massive amount of fraud over the last few years, in financial circles. So it's not a question of ignoring it.

The issue is one which Mayer Amschel Rothschild stated clearly: "Let me issue and control a Nation's money and I care not who makes its laws".
John Law proved this during the Mississippi Bubble.

There is a place for both formats. But like anything in life, it's an issue of management vs. control. People who like to control things usually find they don't get the results they seek. People who are flexible but manage things as they occur tend to have more positive outcomes.

The idea that debt money cannot but go broke is incorrect. If the money is backed by productive capacity and the development of real markets, then the reserves themselves only represent future productive value which is being created based on the debt issued.

The problem of reserve/fiat currency is one of overreliance on printing more as a 'fix' to issues of insolvency when productive capacity related to loans is NOT increased or improved. This can lead to a monetary crisis even if denominated in gold.

The difference is that with gold, the lack of market creation or increased productivity leads to a shrinking of the economy back to manageable levels, where a fiat currency is printed in an attempt to keep an economy at its present level and avoid economic decline (a political solution to an economic problem - it never works in reality, but can provide an illusion of working over periods of time).

I read the two articles, but they aren't anything I haven't heard before.

You've taken portions of what I wrote, chosen to ignore key points (much like Zachriel has, as well) and sought to pursue an agenda which isn't too distant from my particular viewpoint, but overly biased in favor of viewpoints which have some legitimacy. Not, however, enough to make the entire point you think you're making, nor enough to discount mine.

I have ignored nothing, and I haven't discussed fraud because while it's a part of the problem (MF Global and PFG today, not to mention the various Ponzis which have come to light over the past few years) it isn't THE problem, but merely a symptom of a larger issue altogether.

I also didn't say an economy based on gold couldn't grow. Merely that, at times when gold has become scarce or unavailable, economic growth can stagnate and there are solutions beyond sticking to gold which can work. The problem isn't fiat currency in all its forms, it's how fiat currency is utilized and made permanent by politicians to pursue their goals of increased power.

Local currencies, many fiat, have worked to help relieve short term problems. Fiat currencies, in all its forms, is not a 'bad thing'. There are some formats which have been successful.

Perhaps this will help add some perspective to both my post and my viewpoint:
http://www.zerohedge.com/contributed/2012-07-09/big-banks-are-amateurs-when-it-comes-manipulating-interest-rates