inflation, deflation, and playing it safe

[jtollison78]

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also I want to point out that a trade deficit is not a bad thing. It is pretty normal for growing economies to have a trade deficit, as there is not enough saving in the country to equal investments, so investment funds are supplied by foreigners who would rather invest in a growing US economy than a stagnant Japanese one for example.

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I don't live in the US and don't hear the same rhetoric you do, so I'm wondering what measure are you referring to when you describe USA as "a growing economy"? You mean increasing GDP?

In 2005, The US Treasury Secretary John Snow said that "Our economy is growing and expanding. Creating jobs and disposable income which shows up in our demand for imports." (paraphrased).

This is bollocks. The imports have been paid for in the form of IOUs to Asia. America isn't producing enough to hope to pay these IOUs in the future. At some point, the Asian central bankers will have to cash in those bonds and investments in America, but the Dollar will be toilet paper by then. They'll probably have to just buy whatever American products they can find (or American companies) and then ship them to Asia. This would cause imported goods to be super-expensive (The US manufacturing base won't be able to make the products US consumers want), and domestically manufactured goods to shoot up in price causing runaway inflation.

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Thanks for the supporting explanatory posts. I was mostly interested in understanding the tools available to hedge against these possibilities, so I wasn't sure if I wanted to start from scratch and try to build a case when mine and Ahnuld's viewpoints were obviously so far apart.

As for the local rhetoric, I'm pretty sure the talking heads are still talking goldilocks economy. They announce new jobs, without explaining what part of those are retail, or what part has been created through the job life cycle assumptions. Or, to annonce low core inflation without mentioning hedonic adjustments or volotility adjustments.


Ahnuld, Again, I suggest that if it is this simple, it would have been done before. Economics is not a brand new discipline, and we have had a number of significant failures in the modern era. Defending against deflation is not straightforward. The Fed cannot force private entities to make loans, and if they turn to monotizing debt they have to figure out how to distribute the money, even while they are losing a large degree of confidence from anyone paying attention. On the other side, inflationists also suggest that there is no way to pay off our rather outlandish levels of debt without inflation, so capping the money supply would require an explicit default.

I make this point in addition to Kimchi's point about our presently recieving goods from China at a steep discount. China, who has not been allowing their currency to float as you suggest, and who by doing so is gaining a competitive advantage what it comes to selling goods. This is leading to a further hollowing out in our manufactoring sector and ensuring that new jobs are lower paying ones. Some of this global wage arbitrage may be unavoidable, but I suspect that some of it is measured and aggresive economic action. I believe linkages within industries create a non-linearity that free market people often fail to account for which will make this trend hard to reverse once it is sufficiently established(already?). I want to be clear, In general, I like free markets, but what China has been doing(Like what Japan did 20 years ago) is not completely free. And more than that, I think there may be some information problems that need to be resolved before free trade can occur between nations that are legally, culturally, or economically far apart.

I'm sure this leaves any number of holes between our 2 viewpoints(and may have created more than a few). If you're honestly interested and want to go further, I will, but I've been sort of busy lately, so if I don't reply immediately, I might still get back later.


And still, what I'm really interested in is finding some numbers that let me easily assess how various combinations of assets have done over moderately long periods that include the 20's, 70's, and can hopefully be easily considered during periods of much higher inflation. (even if many assets are showing a much higher corrolation with the stock market than they previously have)

John

[kimchi]

You mentioned about the Chinese Yuan being pegged to the dollar at an unrealistic level.

The US government has been publicly pressuring the Chinese government to make the Yuan appreciate in value for reasons you mentioned in the above post.

Since the container ships return from the US to China practically empty, the Chinese are forced to be the biggest buyer of US treasury securities. China are also the biggest supplier of cheap goods to The US. If the Yuan was allowed to appreciate, the prices of these goods would skyrocket (especially since the purchasing power of the dollar abroad is sinking) and this would probably cause a deep recession in The US.

Even though George W probably doesn't know it, I'm sure the US government privately doesn't want the Chinese to remove their currency peg. I've been living in Asia for almost 5 years and I think this is a cultural stoke of genius on behalf of The US goverment (hence George isn't fully involved). Asian governments don't like to be told what to do, so I believe there is some reverse psychology going on here.

If The US government really wanted the Chinese to remove their currency peg, the correct course of action would be to publicly demand they keep it.

Asians and especially the Chinese government have to try to keep face without necessarily being logical.

[Mr. Now]

Food for thought:

http://bigpicture.typepad.com/commen...ion_adjus.html

[ahnuld]

Why do you assume service level jobs are worse than manufacturing? If anything they are better for us as they tend to pay higher. Service jobs/education is our comparative advantage in the world so it makes sense that we are losing manufacturing and gaining highly skilled employment.

[edtost]

ahnuld,

you seem like an otherwise smart college kid who believes a little too much in what they taught you in econ 101.

[ahnuld]

perhaps, but I cant find any flaw in their reasoning and history proves this stuff im taught correct so why would I not believe it all?

[Mr. Now]

ahnuld,

Here is some history for you, which is a proven repeater:

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Thomas Jefferson's Warning To America : "I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs." Written by Jefferson in a letter to the Secretary of the Treasury Albert Gallatin (1802).


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[gonebroke2]

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Why do you assume service level jobs are worse than manufacturing? If anything they are better for us as they tend to pay higher. Service jobs/education is our comparative advantage in the world so it makes sense that we are losing manufacturing and gaining highly skilled employment.

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A lot of people think that outsourcing is only affecting the manufacturing sector. I think they are wrong. A ton of highly paid service jobs are exported to China and India. I am referring to jobs in the computer, medical, biotech, and financial sectors. PhD's in biotech firms are losing their jobs to someone in India who is getting paid 20 cents on the dollar. Radiology charts are now being sent to India to be read by doctors over there. Citigroup just laid off 17000+ U.S. employees and will go to India to replace them. The list goes on and on. The only way to prevent a massive recession in the USA is if tariffs are slapped on goods and services. If someone in India charges 20 cents on the dollar to read a Radiology chart, then there needs to be a tariff of 80 cents to make up the difference. A lot of people think tariffs will send us into a depression, but they are wrong. Tariffs did not cause the great depression, the Federal Reserve caused it by cutting off the money supply.

[ahnuld]

Mr. Now,

While I agree with what he wrote in principle, we have come along way and learned alot about inflation and the role of central banks since that time. While im sure mistakes will happen again, I also feel the relative stability in developed countires economies since the work of milton friedman is no coincidence.

[ahnuld]

gonebroke, you are wrong in almost everything you wrote. If we are constantly losing jobs, why is unemployment near an all time low? Why are living standards continuing to rise? Why are the world's living standards continuing to rise? All tarrifs do is retard trade and economic developement. By forcing people to do something which they are worse at, rather than the thing they are best at, the entire economy (worldwide) suffers. I think the low cost wages in india and China are incredible for the american economy. It provides cheap goods as a poster alluded to here earlier. And that isnt a problem. America isnt dependant on china. If china switches its policies the next lowest wage country will take its place. Personally I feel that when China and India climb to a high enough level to reject these jobs and produce more skilled work, (like Japan did), Africa will be the next zone to benefit from globalisation.