Tuesday, December 16, 2008

And, Here's The Inflation

Well, I guess the rate can't be cut much lower than 0.5%, so what's left to do? Fire up the printing presses! Make some of that 'money' out of thin air! From CNNMoney:
...the Fed will likely continue to use its new favorite tool, quantitative easing, "Fed-speak" for pouring new money into the economy.

In addition to lowering rates, the Fed has increased its lending to financial institutions and foreign central banks throughout the year to ease the credit crunch. But when the financial markets exploded into crisis-mode in mid-September, the Fed's reserve of Treasurys to support its lending began to run low. As a result, the central bank began firing up the printing presses, financing drastically increased lending to banks, purchases of corporate debt and bailouts of troubled institutions like AIG.

So, I hope you did invest in gold, or some other commodity that can hold its' value. Your currency isn't going to be worth anything.
"The end result of all of this could be the next major problem: the crisis of confidence in the dollar," said Baumohl. "At some point, foreign investors are not going to come to the table to buy U.S. debt, leading to a dollar decline."

I'm more worried about by purchasing power, although to hear the disciples of FDR, a body blow to my purchasing power is a blessing.

I can't wait to watch the left struggle to explain itself. How is it that the Clinton era was so prosperous under the anti-inflationary eye of Alan Greenspan, and we are to return to prosperity with Obama under an inflationary course?

I get to thinking about my favorite stories of Weimar Germany, hoping it never reaches us. From a nice, short history via PBS:
Pianos, wrote the British historian Adam Fergusson, were bought even by unmusical families. Sellers held back because the Mark was worth less every day. As prices went up, the amounts of currency demanded were greater, and the German Central Bank responded to the demands. Yet the ruling authorities did not see anything wrong. A leading financial newspaper said that the amounts of money in circulation were not excessively high. Dr. Rudolf Havenstein, the president of the Reichsbank (equivalent to the Federal Reserve) told an economics professor that he needed a new suit but wasn't going to buy one until prices came down.

Why did the German government not act to halt the inflation? It was a shaky, fragile government, especially after the assassination. The vengeful French sent their army into the Ruhr to enforce their demands for reparations, and the Germans were powerless to resist. More than inflation, the Germans feared unemployment. In 1919 Communists had tried to take over, and severe unemployment might give the Communists another chance. The great German industrial combines -- Krupp, Thyssen, Farben, Stinnes -- condoned the inflation and survived it well. A cheaper Mark, they reasoned, would make German goods cheap and easy to export, and they needed the export earnings to buy raw materials abroad. Inflation kept everyone working.

So the printing presses ran, and once they began to run, they were hard to stop. The price increases began to be dizzying. Menus in cafes could not be revised quickly enough. A student at Freiburg University ordered a cup of coffee at a cafe. The price on the menu was 5,000 Marks. He had two cups. When the bill came, it was for 14,000 Marks. "If you want to save money," he was told, "and you want two cups of coffee, you should order them both at the same time."

The flight from currency that had begun with the buying of diamonds, gold, country houses, and antiques now extended to minor and almost useless items -- bric-a-brac, soap, hairpins. The law-abiding country crumbled into petty thievery. Copper pipes and brass armatures weren't safe. Gasoline was siphoned from cars. People bought things they didn't need and used them to barter -- a pair of shoes for a shirt, some crockery for coffee. Berlin had a "witches' Sabbath" atmosphere. Prostitutes of both sexes roamed the streets. Cocaine was the fashionable drug. In the cabarets the newly rich and their foreign friends could dance and spend money. Other reports noted that not all the young people had a bad time. Their parents had taught them to work and save, and that was clearly wrong, so they could spend money, enjoy themselves, and flout the old.

The publisher Leopold Ullstein wrote: "People just didn't understand what was happening. All the economic theory they had been taught didn't provide for the phenomenon. There was a feeling of utter dependence on anonymous powers -- almost as a primitive people believed in magic -- that somebody must be in the know, and that this small group of 'somebodies' must be a conspiracy."

When the 1,000-billion Mark note came out, few bothered to collect the change when they spent it. By November 1923, with one dollar equal to one trillion Marks, the breakdown was complete. The currency had lost meaning.

I hope it never comes to this. Perhaps we will only go as far as revisiting the 1970s economy. This crisis has all the markings of history repeating itself, though, by way of willful ignorance of economics, and a mindless scoffing at sound money as 'mere ideology'.

Best be prepared.


varangianguard said...

I think this process is a mite more complex that you are describing it to be. It's also more long-term in nature.

Little snippets from a decade (or administration) du jour, serves mainly to invalidate your assumptions. And Weimar isn't even close to being applicable to our case.

You may not like FDR's choices (some of which even I think were counter-productive, in retrospect), but the response of the government immediately after the 1929 crash were absolutely fatal to the economy. These are the kinds of solutions you propose we try again. Somehow, I find this to be less than palatable as a plan.
My superficial assessment is that the Fed doesn't collectively know its head from a hole in the ground. That's what is going to cost us - again.

Mike Kole said...

Certainly, it's more complex than a mere blog post can address!

Weimar isn't close, yet, in the inflationary terms. I think there is little doubt, though, that we are at the top of the downward spiral. The Fed is telling us that they're just printing the money to cover the nominal cost of things.

I agree that the response of the Hoover Administration was damaging. Worst of it was Smoot-Hawley. This is NOT the kind of thing I propose we do. Maybe you could be more specific with the things I am proposing we do that are akin to Hoover?

Mike Kole said...


What is different so far, between today and 1929, is that many blame the contraction of the money supply in the days following the stock market crash to the subsequent run on banks, hording of money, etc., with the Fed taking arrows for hanving 'sat idly by'.

Today the Fed is not sitting idly by. We are seeing an immediate inflation of the money supply, as though in response to having learned the lesson of past experience.

My opinion of what is happening now is that it is going WAY too far, too soon. And, it is working hard to send psychological signals such as 'we will not let you fail'. Problem is, the coincident psychological signal is, 'you don't have to correct your mistakes'. That's bad policy.

That's what leads me to think that we might experience some short-term gain, but suffer serious long-term disaster. Why should any company address its' legacy costs, for instance, if the automakers are bailed out of addressing them? Why should lenders pay attention to the borrowers ability to pay, if the loans are made up and forgiven? Etc.

varangianguard said...

Weimar is a poor example for several reasons. First, the US government is not as politically weak as was Weimar. Second, the US system has not been subjected to critical economic pressures, such as the direct loss of manufacturing capacity, nor the loss of strategic resource, nor severe monetary penalties. You or I can't tell what the economic system is doing. Experts can't tell. They're still arguing about the causes and decline of the Great Depression.

I was more comparing your solutions to the Coolidge administration, in particular the Coolidge administration's faith in business's capacity to regulate and reform itself without government intervention.

Actually, the hurried, panicky movements by the Fed today are likely exacerbating matters. Perception does matter, and you're right that actions are being taken almost impulsively. It is fear that drives most of us, all too often. Allowing the bailouts is perhaps a pandering to those fears. Fear of job loss, in particular.

This may be a turning point for the US where government decides that it must intervene with a "shock & awe" vehemence, unlike anything before. That should probably be what really keeps Libertarians awake at night.

Mike Kole said...

Now, a few years later... Gold is over $1,500 and silver over $46. We did do the shock & awe stimulus, and it didn't really make things better.

Definitely still not Weimar, but it is reminding me more and more of the 1970s.