The Economic recover: anyone willing to make a prediction?

[charles brough]

Originally Posted by questor

If trade among countries is to occur, what should be the measure of value? The trade item itself can
have a value depending upon what someone will pay for it, but what is the value of the medium of exchange itself? What sets the value of the Romanian leu for instance? Would you sell your property for this currency? The dollar has been serving the purpose of currency of last resort, but now this is changing. What will become the standard, or store of value that the dozens of world currencies will all accept?

Yes, a good question! The current stimulus packages and bailouts are not over and the amount could easily come to enough to supplant the collapse of credit, then we will have a recovery in which we have credit again but all that new money as well. This means hyper-inflation and serious questions about what will happen to the value of the dollar and the world economy.

[Buffy]

I think we need to get some Econ 101 straight here. There's a just enough knowledge running around in this thread to make it seriously lacking in any relationship to reality....

First of all let's talk about Inflation: by definition, Inflation is "too many dollars chasing too few goods." In a recession/depression, by definition you have too few dollars to support the economy. When markets see a downturn in sales, first prices *decline* and then suppliers exit the market eventually reaching an equilibrium, thus the biggest problem in a recession/depression is actually *deflation*. This is exactly what we're seeing pretty much across the board with the exception of food, for which demand is pretty much constant.

The primary recent exception to this was the period in the late 70's where we experienced something that has since been called "stagflation" where the rate of inflation stayed high while the economy contracted, however this was caused primarily by the combination of the Arab oil embargo and Nixon's price controls followed by the Ford and Carter administration's going overboard in increasing the money supply (by lowering interest rates) that caused a huge incentive to make money by abitraging the spread in market vs. Governmental interest rates that lowered investment and allowed structural inflationary expectations to increase (technically, what's known as an "upward shift in the Phillips Curve").

For those of you who are Peak Oil fans, what we've seen in the last few months is a bit depressing because it does show that the Saudi's were right, the "natural" price of oil right now should probably be $70/bbl, and the run up to twice that was really the bubble caused by the self-reinforcing flight of money from business investments into oil and other commodities. Because this was a market bubble and not a real supply restriction, when demand dropped dramatically, the price dropped incredibly, currently now down almost 60% in just 6 months. This is not to say we don't have long-term problems here, but just to show that the *primary* inflationary pressure in the current recession fixed itself exactly the way it's supposed to and *if* monetary policy is truly rational, we will not end up with stagflation in the short-term.

Hyperinflation though is like Rod McKuen's quote about the nature of his birth: "No one is born a bastard, you have to work at it." Under Keynesian Economics, utilizing Monetary Policy and Government spending, the Government can and should "prime the pump" by spending ahead of growth cycles, but if the government is not careful to predict inflationary pressure and increase interest rates, tax rates and rein in spending once it speeds up, you will get at least some inflation. If you just keep pumping, then the market will notice that there's nothing backing those bucks from taxes to pay for the spending or higher interest rates to slow things down--something that is indeed painful, and some politicians want to avoid like the plague--then you enter a vicious upward cycle that feeds on itself turning into hyperinflation.

Now this is where the Gold Standard comes in. The theory is that if the money supply is pegged to a specific quantity of gold, then there's no way for the government to ever allow the money supply to grow, and therefore by definition at least, you'll never have any inflation let alone hyperinflation. The problem is that that results in virtually every downturn in the economy to become a vicious *downward* cycle, meaning that they all turn into depressions! That's *exactly* the bee in William Jennings Bryan's bonnet in his Cross of Gold Speech that I referenced elsewhere: the lowest rungs of the economic ladder literally starve while the idiots who caused the situation get to hang on to everything they have and whine that "their hands are tied" by the "prudent" economic policy of the Gold Standard.

Great way to start a revolution actually!

But then again, so is runaway Hyperinflation: as I said, you need to be a real bastard to let it happen, and that's why it's almost *always* seen in countries with failed governments like Mugabe's Zimbabwe and Wiemar Germany. You basically need to have a total lack of responsibility and no organized opposition to end up with that sort of situation, and if you check, you'll see that Hyperinflation is *always* limited to a single country because it is all about that single currency.

Hyperinflation has everything to do with a complete failure in the ability of the currency to have any real "value." Hyperinflationary episodes are indeed quite often solved by enforcing a link to a generally accepted (trusted) asset, and thus, something like a Gold Standard can be a *cure* for Hyperinflation.

However using it as a *prophylactic against* hyperinflation is incredibly short-sighted. Justifying it basically means saying that you have no faith in your fellow man. I understand that, but it's not the way you want to go if you want to have better upsides and easier downsides in your economic cycles.

So,

Originally Posted by charles brough

I can well imagine the Romans saying the same thing when inflation was out of control and Diacletian was bureauracrizing government and people were reverting to barter....or Confusian Scholars when paper money hyper-inflation was ruining the Chinese economy.

Really the problem here is you can use any excuse you want to justify actions that promote Hyperinflation, but you're still an idiot if you continue to print money. Conversely, if you argue we must use the Gold Standard as a our only monetary policy, you're really *just* as likely to be lined up against the wall and shot as they Hyperinflationary guy when the revolution comes. At best, you're lucky if you end up like Herbert Hoover.

Originally Posted by questor

If trade among countries is to occur, what should be the measure of value? The trade item itself can
have a value depending upon what someone will pay for it, but what is the value of the medium of exchange itself? What sets the value of the Romanian leu for instance? Would you sell your property for this currency? The dollar has been serving the purpose of currency of last resort, but now this is changing. What will become the standard, or store of value that the dozens of world currencies will all accept?

Now this *is* an interesting question, and here's a really funny answer: most *recent* cases of hyperinflation have been solved by pegging the target country's currency to......the US Dollar!

Now certainly its possible for us to get in a situation where the world loses faith in the dollar--I'm not dumb enough to argue that, in fact the Bush administration *very actively* talked down the value of the dollar over the last four years, resulting in about a 20% drop in its value versus most other currencies (except China which is pegged to the dollar!) in a fairly misguided attempt to increase exports while decimating the US economy through laissez-faire business practices that continued to destroy local manufacturing and off-shoring of whole industries--but it's still the *most* trusted of all currencies. The major risk--as I've noted in other threads--turns out to be if the Chinese *unpeg* the Yuan from the Dollar and stop buying our government bonds, something that is actually becoming *less* likely because their economy is falling in tandem with ours (safety in numbers ya' know).

So, back to questor's question: "What will become the standard, or store of value that the dozens of world currencies will all accept?" The answer is that it is going to continue to be the currency that is *strongest* no matter how *weak* it is. There has been much speculation about movement to the Euro as the standard for denominating Oil, but this issue is rather overstated. The fact of the matter is that Oil is one of the few commodities that is really traded predominantly in a single currency--mostly due to inertia and reduced transaction costs for a commodity that is more widely transported than just about any other--and what really matters are *currency markets*. Currencies have become probably the most heavily traded commodity, and because the "transport" costs are virtually zero the relative value of currencies is arbitraged to death. It is *constantly* measured not only by governmental measures of local purchasing power, but by international banks and traders as well as pundits in the press (see the Big Mac Index).

If the dollar were to fall precipitously in value--that is, hyperinflation--then the markets would discount its value immediately and it would cease to be standard currency for trading *other* goods and services. If it does, it'll be our *own* fault though, and the rest of the world would punish us severely until we got our act together.

But the main thing to remember is that its the *dollar* that will get whacked, and the rest of the world--while suffering from the loss of trade as the US economy deteriorated--who would use....intelligent monetary policy to become the economic leaders of the world.

So,

Originally Posted by charles brough

The current stimulus packages and bailouts are not over and the amount could easily come to enough to supplant the collapse of credit, then we will have a recovery in which we have credit again but all that new money as well. This means hyper-inflation and serious questions about what will happen to the value of the dollar and the world economy.

Yah, we could be bonehead stoopid and let it get out of control, but yes, given the openness of our society--this ain't Zimbabwe pal, especially now that Cheney and the neo-cons are gone--its unlikely that any US government would be allowed to do so.

But note, it would be a self imposed one, it would take quite a bit of effort to make it happen because this is a darned big economy, and until the money expansion actually causes an increase in demand with which to push any inflationary movement *at all*.

In other words, like being a bastard, if we're going to have hyperinflation, we're really going to have to work at it.

Having no faith in anyone at all to do the right thing may be "safe" but you're going to really miss out on that green boom that's coming!

Good luck on your survival wagon!

There will always be dissident voices heard in the land expresing opposition without alternatives, finding fault but never favor, perceiving gloom on every side, and seeking influence without responsibility,
Buffy

[Dutchdivco]

I saw a news show, last week. They were trying to convey the world wide nature of the current financial crises, in 5 min. or less. So, they jumped quickly from reporter to reporter, in Capitals around the world;New York, Paris, London, Berlin, Moscow, etc. All of them had the same story, doom and gloom......Except ! You'll never guess.....BAGDAG!! Seems no one buys a house on credit, in Iraq. (Would you extend credit to someone who might get blown up tomorrow? My speculation, not the reporters.) When someone wants to buy a house, or other large ticket item, they meet at the buyers bank, and transfer the funds there. Reporter also said the Iraq stock exchange had increased in value, 30% over the last 3 mos. (Going from memory here).Seems to me an addiction to credit is the problem, (especially 'easy credit') and NO ONE wants to go thru 'Cold Turkey", Credit is a way of 'creating' additional dollars. Might call them 'future' dollars.Artificially, if I can use that word, stimulates economic activity. Kind of like, "Gee, when I take these little pills, I am SOOO much more productive."If I take MORE pills, I'll be even MORE productive!!" Soon, you are running around, (Speeding your A** off!) and not really producing ANYTHING! But, your doing it very fast. The analogy breaks down, as all do. My point is that Gov'ts at all levels, businesses and individuals got addicted to credit.Stimulas packages are attempts to get credit moving again are like the drug addict who's supply dried up, scrambling to find a new supplier, instead of kicking the habit.For me, "Niether a borrower nor a lender be". is my motto, and while I may at some point, I've looked hard, and haven't found any way, yet, in which the economic crises has effected me or mine. Jim

[Dutchdivco]

Oh, and on the initial question, I see Dow below 4000 w/in 2 years, unemployment and underemployment (i.e. counting those who stop looking, and those who accept part time) going to +25%, same time frame. Cold turkey is VERY unpleasant, thats why people do anything they can to avoid it.It takes a real crises to bring about change. Jim

[Moontanman]

Originally Posted by Dutchdivco

I saw a news show, last week. They were trying to convey the world wide nature of the current financial crises, in 5 min. or less. So, they jumped quickly from reporter to reporter, in Capitals around the world;New York, Paris, London, Berlin, Moscow, etc. All of them had the same story, doom and gloom......Except ! You'll never guess.....BAGDAG!! Seems no one buys a house on credit, in Iraq. (Would you extend credit to someone who might get blown up tomorrow? My speculation, not the reporters.) When someone wants to buy a house, or other large ticket item, they meet at the buyers bank, and transfer the funds there. Reporter also said the Iraq stock exchange had increased in value, 30% over the last 3 mos. (Going from memory here).Seems to me an addiction to credit is the problem, (especially 'easy credit') and NO ONE wants to go thru 'Cold Turkey", Credit is a way of 'creating' additional dollars. Might call them 'future' dollars.Artificially, if I can use that word, stimulates economic activity. Kind of like, "Gee, when I take these little pills, I am SOOO much more productive."If I take MORE pills, I'll be even MORE productive!!" Soon, you are running around, (Speeding your A** off!) and not really producing ANYTHING! But, your doing it very fast. The analogy breaks down, as all do. My point is that Gov'ts at all levels, businesses and individuals got addicted to credit.Stimulas packages are attempts to get credit moving again are like the drug addict who's supply dried up, scrambling to find a new supplier, instead of kicking the habit.For me, "Niether a borrower nor a lender be". is my motto, and while I may at some point, I've looked hard, and haven't found any way, yet, in which the economic crises has effected me or mine. Jim

So you never buy anything on credit? No credit cards, pay cash for cars, housing? No charge accounts at any stores? You are indeed a rare person if you do not have at least one of these things but even then the credit crunch effects you, The people you buy from are affected by the credit crunch and they pass those effects on to you. Credit is not future money its a way of paying for using someone else's money. If there was no credit how would people finance houses, pay $100,000 cash? How would big business get capital to expand, rebuild? Credit is not a drug anymore than the blood in your body is a drug because you need it. go cold turkey off your own blood supply, succeed in that and you can live your life completely without credit too.

[questor]

I want to change my prediction on the recovery. We never did define what was meant by recovery, but perhaps we could use 2006 as a benchmark. I think it may take all of 2009 just to find out the true dimensions of the problem. The recession will be deep and painful for about two years. We will not recover to the 2006 level for possibly 5 years or more. Wherever you were financially in 2006will take maybe 8 years for you to get there again.Your recovery will be slowed by the increased taxes needed to finance the public works proposed by Obama. The fixes proposed by Obama will be a huge wealth transfer to those losing jobs and those who have no jobs. When the government creates jobs, there is no true product that the public needs that couldn't be more cheaply done by the private sector. Who will do these infrastructure repairs such as road and bridge repairs, fired auto workers or people who have lost their job at the bank? The wages paid will first have to be removed from YOUR pocket. This will leave you less to save or fund your retirement plans. If Obama ''spreads the wealth'' as he says, don't forget that YOU will be where the cash comes from. I know that many of you think everything would be ok if the rich were forced to pay more taxes. Good luck!. It won't happen. I think the rich should pay more, but I don't lie to myself that this is the solution. There is just not enough money there. It looks like we will be living under a quasi-socialistic government with an increasing number of businesses being taken over or futilely supported by the taxpayer as they are failing, in order to fund the workers pensions. Do we really think the auto industry will make it as it now exists? Do we really think they will use the bailout money to retool and suddenly offer autos Americans will buy? I think we will learn some hard lesons in reality.
CHEERS!

[Dutchdivco]

No, I never buy anything on credit.Cars; (2) payed cash for each. House; (a mobile home) payed cash for, yes. Pay rent on lot.Charge accounts at stores, Hell, no! The recent housing bubble shows that credit, particularly EASY credit, drove up the price of housing.Even before that, credit drove up the price of housing, so, if more people lived within there means, houses wouldn't cost as much as they do.How would businesses get capital to expand? The old fashioned way; THEY'D EARN IT! Bad analogy (blood), IMHO To return to my earlier, (flawed )analogy.There is food, which sustains us and gives us energy. (Thats paying as you go). Then there is speed.(Credit) Hey, I have all this energy, I'm so productive, and I'm losing weight! In the initial stages, all true.Down the road you see a speed freak skinny as can be, teeth rotted out, malnourished, and there system totally exhausted.The hostile tone of your reply affirms my earlier post; nobody WANTS to quit. They will fight it hard, deny their addiction or the need to quit and only when the pain of continueing becomes unbearable will they change.I'm not saying the current mess won't, at some point, affect me and mine. Just saying it hasn't, so far.Actually, as demand recedes do to lack of credit, I do anticipate all prices will go down, so I might actually pay less for some things in the future. And yes, before we're thru this, I will be affected. Just a lot less than those who are DEPENDENT on credit for their needs.After all, if your not addicted to speed, your not affected when the local dealer gets busted.

[Zythryn]

Originally Posted by Questor

Wherever you were financially in 2006will take maybe 8 years for you to get there again.

You generalize too much once again. I am already ahead of where I was in 2006 and expect to be further ahead each year from now. Now, if you had said 'I expect to be where I was in 2006...' rather than 'Wherever you were...' then that would have held some validity.

Originally Posted by Questor

The fixes proposed by Obama will be a huge wealth transfer to those losing jobs and those who have no jobs.

As opposed to the bail outs already made? Where do you think the bail outs came from? That is right, the Trillion dollars spent so far is coming from every tax payer.

Originally Posted by Questor

It looks like we will be living under a quasi-socialistic government with an increasing number of businesses being taken over or futilely supported by the taxpayer as they are failing, in order to fund the workers pensions.

It looks like?? What do you mean it looks like? The government has already taken partial ownershiip of a number of companies. As for socialism, were we living under a 'quasi-socialist government' under Reagan?

[Dutchdivco]

I, too am ahead of where I was in 2006, and ain't slowin down, yet! Jim

[charles brough]

Originally Posted by Buffy

I think we need to get some Econ 101 straight here. There's a just enough knowledge running around in this thread to make it seriously lacking in any relationship to reality....

First of all let's talk about Inflation: by definition, Inflation is "too many dollars chasing too few goods." In a recession/depression, by definition you have too few dollars to support the economy. When markets see a downturn in sales, first prices *decline* and then suppliers exit the market eventually reaching an equilibrium, thus the biggest problem in a recession/depression is actually *deflation*. This is exactly what we're seeing pretty much across the board with the exception of food, for which demand is pretty much constant.

The primary recent exception to this was the period in the late 70's where we experienced something that has since been called "stagflation" where the rate of inflation stayed high while the economy contracted, however this was caused primarily by the combination of the Arab oil embargo and Nixon's price controls followed by the Ford and Carter administration's going overboard in increasing the money supply (by lowering interest rates) that caused a huge incentive to make money by abitraging the spread in market vs. Governmental interest rates that lowered investment and allowed structural inflationary expectations to increase (technically, what's known as an "upward shift in the Phillips Curve").

For those of you who are Peak Oil fans, what we've seen in the last few months is a bit depressing because it does show that the Saudi's were right, the "natural" price of oil right now should probably be $70/bbl, and the run up to twice that was really the bubble caused by the self-reinforcing flight of money from business investments into oil and other commodities. Because this was a market bubble and not a real supply restriction, when demand dropped dramatically, the price dropped incredibly, currently now down almost 60% in just 6 months. This is not to say we don't have long-term problems here, but just to show that the *primary* inflationary pressure in the current recession fixed itself exactly the way it's supposed to and *if* monetary policy is truly rational, we will not end up with stagflation in the short-term.

Hyperinflation though is like Rod McKuen's quote about the nature of his birth: "No one is born a bastard, you have to work at it." Under Keynesian Economics, utilizing Monetary Policy and Government spending, the Government can and should "prime the pump" by spending ahead of growth cycles, but if the government is not careful to predict inflationary pressure and increase interest rates, tax rates and rein in spending once it speeds up, you will get at least some inflation. If you just keep pumping, then the market will notice that there's nothing backing those bucks from taxes to pay for the spending or higher interest rates to slow things down--something that is indeed painful, and some politicians want to avoid like the plague--then you enter a vicious upward cycle that feeds on itself turning into hyperinflation.

Now this is where the Gold Standard comes in. The theory is that if the money supply is pegged to a specific quantity of gold, then there's no way for the government to ever allow the money supply to grow, and therefore by definition at least, you'll never have any inflation let alone hyperinflation. The problem is that that results in virtually every downturn in the economy to become a vicious *downward* cycle, meaning that they all turn into depressions! That's *exactly* the bee in William Jennings Bryan's bonnet in his Cross of Gold Speech that I referenced elsewhere: the lowest rungs of the economic ladder literally starve while the idiots who caused the situation get to hang on to everything they have and whine that "their hands are tied" by the "prudent" economic policy of the Gold Standard.

Great way to start a revolution actually!

But then again, so is runaway Hyperinflation: as I said, you need to be a real bastard to let it happen, and that's why it's almost *always* seen in countries with failed governments like Mugabe's Zimbabwe and Wiemar Germany. You basically need to have a total lack of responsibility and no organized opposition to end up with that sort of situation, and if you check, you'll see that Hyperinflation is *always* limited to a single country because it is all about that single currency.

Hyperinflation has everything to do with a complete failure in the ability of the currency to have any real "value." Hyperinflationary episodes are indeed quite often solved by enforcing a link to a generally accepted (trusted) asset, and thus, something like a Gold Standard can be a *cure* for Hyperinflation.

However using it as a *prophylactic against* hyperinflation is incredibly short-sighted. Justifying it basically means saying that you have no faith in your fellow man. I understand that, but it's not the way you want to go if you want to have better upsides and easier downsides in your economic cycles.

So,

Really the problem here is you can use any excuse you want to justify actions that promote Hyperinflation, but you're still an idiot if you continue to print money. Conversely, if you argue we must use the Gold Standard as a our only monetary policy, you're really *just* as likely to be lined up against the wall and shot as they Hyperinflationary guy when the revolution comes. At best, you're lucky if you end up like Herbert Hoover.



Now this *is* an interesting question, and here's a really funny answer: most *recent* cases of hyperinflation have been solved by pegging the target country's currency to......the US Dollar!

Now certainly its possible for us to get in a situation where the world loses faith in the dollar--I'm not dumb enough to argue that, in fact the Bush administration *very actively* talked down the value of the dollar over the last four years, resulting in about a 20% drop in its value versus most other currencies (except China which is pegged to the dollar!) in a fairly misguided attempt to increase exports while decimating the US economy through laissez-faire business practices that continued to destroy local manufacturing and off-shoring of whole industries--but it's still the *most* trusted of all currencies. The major risk--as I've noted in other threads--turns out to be if the Chinese *unpeg* the Yuan from the Dollar and stop buying our government bonds, something that is actually becoming *less* likely because their economy is falling in tandem with ours (safety in numbers ya' know).

So, back to questor's question: "What will become the standard, or store of value that the dozens of world currencies will all accept?" The answer is that it is going to continue to be the currency that is *strongest* no matter how *weak* it is. There has been much speculation about movement to the Euro as the standard for denominating Oil, but this issue is rather overstated. The fact of the matter is that Oil is one of the few commodities that is really traded predominantly in a single currency--mostly due to inertia and reduced transaction costs for a commodity that is more widely transported than just about any other--and what really matters are *currency markets*. Currencies have become probably the most heavily traded commodity, and because the "transport" costs are virtually zero the relative value of currencies is arbitraged to death. It is *constantly* measured not only by governmental measures of local purchasing power, but by international banks and traders as well as pundits in the press (see the Big Mac Index).

If the dollar were to fall precipitously in value--that is, hyperinflation--then the markets would discount its value immediately and it would cease to be standard currency for trading *other* goods and services. If it does, it'll be our *own* fault though, and the rest of the world would punish us severely until we got our act together.

But the main thing to remember is that its the *dollar* that will get whacked, and the rest of the world--while suffering from the loss of trade as the US economy deteriorated--who would use....intelligent monetary policy to become the economic leaders of the world.

So,

Yah, we could be bonehead stoopid and let it get out of control, but yes, given the openness of our society--this ain't Zimbabwe pal, especially now that Cheney and the neo-cons are gone--its unlikely that any US government would be allowed to do so.

But note, it would be a self imposed one, it would take quite a bit of effort to make it happen because this is a darned big economy, and until the money expansion actually causes an increase in demand with which to push any inflationary movement *at all*.

In other words, like being a bastard, if we're going to have hyperinflation, we're really going to have to work at it.

Having no faith in anyone at all to do the right thing may be "safe" but you're going to really miss out on that green boom that's coming!

Good luck on your survival wagon!

There will always be dissident voices heard in the land expresing opposition without alternatives, finding fault but never favor, perceiving gloom on every side, and seeking influence without responsibility,
Buffy

WOW!!! Buffy, you really out did yourself there! I apparently inspired you to write a book on your expectations of what the economy will bring in the future. All this will be interesting in a year or two. I hope we can still access it. I am saving the address and assume it will still be good.

Oh, and thanks for Economics I. You seem to know it also . . .