These things are far more complicated than you might think - or be willing to admit.
Our Monetary base (at current levels), is roughly 15% of GDP. We are currently buying government debt with printed money at a rate of 2.5% of GDP/year. The sum of all our bank accounts (M2) is roughly 65% of GDP.
In Japan, the monetary base is roughly 25% of GDP. The Japanese are currently buying government debt with printed money at a rate of 5% of GDP/year. The sum of all Japanese bank accounts (M2) is roughly 160% of GDP.
Through all of that, Japan has not seen significant inflation for 15 years, indeed, they have seen significant deflation.
With the latest crisis, the savings rate in the US has risen to 5%. Assuming half of the savings end up in bank accounts, M2 will have to grow by 4%/year without generating any increase in nominal GDP at all (which would cause general deflation). Generating that amount of M2 growth would require that the monetary base keep growing significantly as well - though that isn't an easy prediction.
In short, it is completely possible that monetary aggregates continue to grow substantially for years with almost no inflation, and very limited economic growth. Of course, that isn't certain, but its foolish to predict one way or the other without reasonable arguments.
Obama's deficits may constitute such an argument, but then Japan has been running a government budget deficit of 5-10% of GDP for 20 years. Their gross domestic debt is 200% of GDP.
Ok, Art Laffer is predicting that our economy, given the huge expansion of the money supply due to the bailouts, the massive spending plans Obama has and that most of the spending will add to the deficit, that the economy will look like the 1970's and early 80's - high inflation, high interest rates and a stagnant economy.
So looking back on the 1970s through 1982, what investment performed best over that period?
Obama's deficits may constitute such an argument, but then Japan has been running a government budget deficit of 5-10% of GDP for 20 years. Their gross domestic debt is 200% of GDP.
Yes, but Japan pays only 2% on long-term government bonds, so they only need 4% of GDP per year to pay interest. If the yield of 10-year US bonds stays at 4% where it is now (good luck with that), they will have to pay 4% of GDP for interest already as they reach 100% debt/GDP.
Further, the Japanese reaction to the crisis was completely different from todays American policy. They needed 10 years to finally agree to fill up the commercial banks with excess reserves. Before that, they "spread the wealth around" by steadily increasing the fiscal deficit over the years.
Today, the US policy is to flood the market instantly with both fiscal expansion and monetary expansion. Meanwhile, the major banks, now de facto government-owned, have purged their balance sheets from most toxic assets, so the can start again selling those ABS, MBS and what else. This time, the asset that is securitized will be unicorns ;-)
Should I invest in clean coal technology?
ReplyDeleteInvest in something that holds its value more than the dollar. Like computers, or lottery tickets, or ice cream cones on a hot summer day.
ReplyDeleteSkills.
ReplyDeleteCertain skills are never worth zero, and even the ones that are worthless in certain situations can't be stolen.
Hi Captain,
ReplyDeleteThese things are far more complicated than you might think - or be willing to admit.
Our Monetary base (at current levels), is roughly 15% of GDP. We are currently buying government debt with printed money at a rate of 2.5% of GDP/year. The sum of all our bank accounts (M2) is roughly 65% of GDP.
In Japan, the monetary base is roughly 25% of GDP. The Japanese are currently buying government debt with printed money at a rate of 5% of GDP/year. The sum of all Japanese bank accounts (M2) is roughly 160% of GDP.
Through all of that, Japan has not seen significant inflation for 15 years, indeed, they have seen significant deflation.
With the latest crisis, the savings rate in the US has risen to 5%. Assuming half of the savings end up in bank accounts, M2 will have to grow by 4%/year without generating any increase in nominal GDP at all (which would cause general deflation). Generating that amount of M2 growth would require that the monetary base keep growing significantly as well - though that isn't an easy prediction.
In short, it is completely possible that monetary aggregates continue to grow substantially for years with almost no inflation, and very limited economic growth. Of course, that isn't certain, but its foolish to predict one way or the other without reasonable arguments.
Obama's deficits may constitute such an argument, but then Japan has been running a government budget deficit of 5-10% of GDP for 20 years. Their gross domestic debt is 200% of GDP.
James
Ok, Art Laffer is predicting that our economy, given the huge expansion of the money supply due to the bailouts, the massive spending plans Obama has and that most of the spending will add to the deficit, that the economy will look like the 1970's and early 80's - high inflation, high interest rates and a stagnant economy.
ReplyDeleteSo looking back on the 1970s through 1982, what investment performed best over that period?
Obama's deficits may constitute such an argument, but then Japan has been running a government budget deficit of 5-10% of GDP for 20 years. Their gross domestic debt is 200% of GDP.
ReplyDeleteYes, but Japan pays only 2% on long-term government bonds, so they only need 4% of GDP per year to pay interest. If the yield of 10-year US bonds stays at 4% where it is now (good luck with that), they will have to pay 4% of GDP for interest already as they reach 100% debt/GDP.
Further, the Japanese reaction to the crisis was completely different from todays American policy. They needed 10 years to finally agree to fill up the commercial banks with excess reserves. Before that, they "spread the wealth around" by steadily increasing the fiscal deficit over the years.
Today, the US policy is to flood the market instantly with both fiscal expansion and monetary expansion. Meanwhile, the major banks, now de facto government-owned, have purged their balance sheets from most toxic assets, so the can start again selling those ABS, MBS and what else. This time, the asset that is securitized will be unicorns ;-)