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How Do We Exit The Bailout?
By JLP | September 22, 2009
I read this in The Economist:
ECONOMIC policymakers across the rich world face two delicate balancing acts over the new few years. The first, involving monetary policy, is being widely discussed and carefully planned by teams of technocrats. Central bankers must keep their balance-sheets big and interest rates low for long enough to prevent deflation setting in, but they also have to be prepared to change things quickly to prevent inflation taking off. The second balancing act, involving fiscal policy, depends on politicians rather than specialists—and has, so far, been shamefully ill-planned.
A couple of paragraphs later we get the meat (emphasis mine)…
To be fair to the politicians, this fiscal balancing act is far harder than the central bankers’ task, for two reasons. First, politicians must not only get the timing of fiscal tightening right, but must also decide on the best ways to cut spending and increase taxes, and the right mix between the two. These decisions involve more goals, more tools and more politics than stabilising prices. Second, politicians lack the credibility that central bankers have built up after two decades of low inflation. The first of these differences is inevitable: decisions about the size of government and its priorities are profoundly political and politicians must answer to voters for their choices. But politicians could go a long way towards building credibility for their fiscal decisions by copying more of the tricks of modern monetary policy.
If we leave the stimulus money out there too long, it will lead to inflation (too many dollars chasing too few goods). If we pull it out too soon, we could go back into decline (not enough dollars to spur growth).
Interesting conundrum…
The article states that these decisions should be made by an independent group and NOT by politicians. I agree. Politicians pander because they want to get re-elected. Politicians (all politicians) don’t want to make the tough decisions.
Topics: Economics | 13 Comments »
September 22nd, 2009 at 12:07 pm
These decisions should be made by the markets somehow. The central banks are no better than the politicians. They may have economic degrees, but they are the biggest reason (of many) that we are in this mess. They failed to control the money supply previously, which created too much easy money and malinvestment.
This will not end pretty. The odds of them pulling the tablecloth off without pulling any dishes off are miniscule. The powers that be will opt for inflation over removing stimulus because they know that we are in a precarious position with so much debt. The consumer needs to retrench and start saving. The Fed and Treasury want to step in where the consumer left off. Plus, inflation reduces the effect of our debt as we pay our debts off with depreciated dollars.
It may be sometime before the inflation sets in as lending and consumption are down, but when it does rear its ugly head, it won’t be pretty.
September 22nd, 2009 at 12:48 pm
Inflation is a ‘wealth-tax’ that takes the same percentage of wealth from everyone, regardless of rich or poor: it does not discriminate — and transfers that wealth directly to the government.
If we have hyperinflation, gold wound shoot into the stratosphere, but our government has banned ownership, and confiscated, gold in the past (1933), wouldn’t surprise me if they did it again.
Fiat currencies have a proven track record of becoming worthless due to political mismanagement, the US dollar will be no different.
The question is: where do you store your wealth if you expect hyperinflation in the future? I’m wary of gold (reasons above), and TIPS or anything vaguely related to US government treasuries. Bonds would absolutely be out of the question as inflation is their worst enemies, so I guessing that leaves international stocks? What else is ‘safe’ from hyperinflation?
September 22nd, 2009 at 8:09 pm
I’m not sure why you are disinclined to use TIPS as a hedge. As blogger “tfb” has pointed out on his website “explorebonds”, bonds and other fixed-income products anticipate “expected” inflation. TIPS are a hedge against “unexpected” inflation. Now, if you are a BLS-doubter type of person, I have no advice other than to buy physical gold (I do draw the line at gold ETFs, as I think they are dicey; there are always gold miner stocks, but they are subject to many exogenous forces, as many operate in unstable countries).
All in all, look into TIPS.
September 22nd, 2009 at 8:11 pm
And what happens if china, Japan and the rest decide they want to take physical position of their gold anticipating the repeat US gov gold grab?
September 22nd, 2009 at 9:40 pm
BG says: “What else is ’safe’ from hyperinflation?”
Land. You buy land.
Inflation is not precisely a tax on everyone (well I suppose it is, but like all taxes it falls heavier on some than others). If your wealth is predominantly measured in dollars, like the balance in a bank account or the dollars in your paycheck, then inflation taxes you directly.
If your wealth is predominantly stuff, then inflation doesn’t directly tax you (although capital gains tax and inheritance tax get you eventually). If you own land and it produces grain, then as dollars get cheap the price of grain goes up. If you own real estate, the price of rent goes up.
It’s not all that coincidental I suppose that the risk of hyperinflation is the response to plummeting property prices. The relationship there is very direct.
Inflation is ultimately better for the ‘big guy’ than the ‘little guy’ since the big guy derives more wealth from tangible stuff and the little guy has only the dollars in the bank and dollars in the paycheck.
Why are stocks a good hedge against inflation (in the long term)? Because they represent fractions of something tangible, something that becomes worth more as dollars get cheap.
September 22nd, 2009 at 9:41 pm
I wish I knew more about the allure of gold/the economics of it. (Anyone have a good tutorial for me?) To me what good is holding a bunch of gold if your people are starving and lack adequate fresh water supplies? At the end of the day, food and water are what we ALL need (and, obviously, the power to run the tractors, etc. that produce the crops.) So in that regard, our country is very fortunate. We as a nation need to start treating water as the precious resource it is and strive to conserve it. Who out there still leaves the water running when they’re brushing their teeth (besides my husband?!!) arggghhhh!!
September 23rd, 2009 at 11:36 am
Stacey: the value of gold is historical. Every nation since the dawn of time has thought gold to be valuable. This is because: it is hard to mine out of the ground (rare), it is shiny & malleable, and it never corrodes.
There is no “real” value to it, except for that everyone seems to universally value it. I’m like you, I don’t want to own gold, because I don’t value it, and if I bought gold, it would only be because I’d hope someone else would value it more later. Perhaps I should just start buying things that I personally value, and ignore everyone else…
I don’t necessarily agree with the “conservation of water” — you can’t “kill” water. We just need to make sure we don’t deplete our water supplies faster than they are refilling. Atlanta was running low for a while, and they had to cut back usage — but now that all their lakes / rivers are full again, there is no need to limit water usage there.
The reason I’m against TIPS is that their payouts are based on government reported inflation numbers — which I think are understated. Bonds are horrible: a 30-year T-bill is going at 4.5% — if we have 1970s/80s type inflation, then those bonds would not be a good bet.
I like the land and stock ideas — anything “real” is impervious to what our government wants to do with their currency. Also, a somewhat risky move, would be to load up on low fixed-rate debt — inflation is great if you have a ton a fixed-rate debt.
September 23rd, 2009 at 10:23 pm
What about all commodities or stocks in commodity-related companies? I am a bit weary of gold because it’s price is based only on how much people are willing to pay for it; nobody really expects any country to return to gold standard. Historically, the prices of gold do go up in periods of high inflation or panic, but they can drop pretty quickly. They don’t simply follow inflation. The current price is just a little higher than in the 80s. Yes, there was high inflation in the 80s, but we didn’t have any deflationary periods. So why then did the price of gold dropped so much in the 90s? If the value of gold is constant while the currencies get devalued, shouldn’t gold always go up but with different speed? I am just wondering, by the way, I really don’t know.
In terms of real collapse and starvation – sure you could sell a fair amount of physical gold (not funds) for maybe a sack of potatoes. I grew up in St Petersburg, Russia (former Leningrad), and I read and heard from older generations about how during the blocade during the Second World War when the city was surrounded and had no lasting supplies of food, people were exchanging some expensive gold watches and jewelry for a loaf of bread or a sack of potatoes on the black market. But other items – expensive china, cloth, etc., were doing about as well. So if you expect a starvation and a total collapse, maybe you should buy a farm and guns? Not me, though, I cannot manage a farm and if I had a gun, I’d shoot my own foot I am so clumsy.
In general, any item someone is willing to pay money for even a TV can be sold during periods of hyper inflation.
Assuming we don’t get total collapse and famine and the markets are still operational, I am thinking about commodities (funds, commodity-related stocks e.g. miners, gas and oil company stocks, water stocks, etc.), international stocks and the US multi-national corporations. I own some of those. One reason I am not getting rid of all of my ESPP stock – my employer does well when dollar is low. OK, this is not the main reason, there are other multi-nationals, main reason I have way too much capital gains there to sell it all at once, so I do it a couple hundred shares at a time… Since it is now above its 2007 level, I sure am happy I haven’t moved all of it into index funds.
Oh yes, and as BG said – low fixed interest debt is great. This is why if I still had a mortgage, I’d not rush paying it off; and if I were to decide to upgrade now, I’d take a mortgage instead of paying the difference in cash.
I don’t know though because while the case for inflation is strong, there are some deflationary forces there as well at least in near term. If I’d known for sure I could retire now….
September 24th, 2009 at 10:19 am
kitty: well said. I’m not making any moves (yet) either, I just want to have a plan in case we enter a hyper-inflationary environment.
September 24th, 2009 at 3:48 pm
To address the posting, I question whether there is anyone sufficiently insulated from politics, with the proper knowledge, to decide when to inject or remove money from the system. Certainly not politicians. Most bankers and academics have as much of a political agenda as politicians do.
To address some of the commenters, a while back someone on the Forbes website suggested liquor mini-bottles as a store of value and exchange medium. Small, storable, and desireable to a large segment of the population. The only downside is that you might consume it before you need it.
September 24th, 2009 at 5:03 pm
Sam) how true, I’d add cigarettes to that list too. I think they’ve gone up faster in price than gold has.
I’d exchange a mini-bottle of liquor for a loaf of bread. There are some online sites that sell gold flakes/dust and silver coins for use as barter-survival money too.
Check out the Zimbabwe $100 TRILLION dollar bill:
http://butnowyouknow.files.wordpress.com/2009/07/zimbabwe_100_trillion_2009_obverse.jpg
You can go on ebay and “buy it now”: 100 of them for $16.99 — lol
September 24th, 2009 at 9:07 pm
@7 BG. I guess we agree about gold; however, I disagree that ‘anything “real” is impervious to what our government wants to do with their currency’– Of course what any multi-national company does/produce is affected by currency rate changes, etc.
I also disagree w/your can’t kill water comment. We’re all on a course of drinking treated “waste” water…it’s just a matter of time. I’m sure the folks in the Western US will be the first to feel the pain. I watched a great show last week, but couldn’t find a link or remember the channel (God knows I tried!!)…so here are some other bits of info for those concerned about conversation & the availability of fresh water.
The first link is a quick video tour of a wastewater treatment plant (yum!):
http://dsc.discovery.com/videos/news-whats-down-the-drain.html
Here’s a link for conserving water around the house:
http://video.nationalgeographic.com/video/player/environment/going-green-environment/green-home-makeover/conserve-water-greenguide.html Personally, I like to use our dehumidifier’s water to water our plants, rather than the bucket of water from the tub idea (since I’m a shower-girl), tho’ their idea was a good one, too. However, I’d use it to wash the floor instead of watering the plants…
Although the article in this link is lengthy, I found it very interesting and it certainly makes a strong case for conserving water:
http://environment.nationalgeographic.com/environment/habitats/water-pressure.html
And that wraps up my public service announcements!
September 24th, 2009 at 9:08 pm
Whoops! I mean “conservation” not conversation, tho’ I guess we’re having that, too!