Wednesday, March 19, 2014
Living Like Parasites
Putin said of America, "They are living like parasites off the global economy and their monopoly of the dollar."
Putin understands something that few do.
Imagine half the dollars are outside the USA and half are in. Then imagine $1 trillion new dollars are made and owned by the USA. No real new value is made when this new $1 trillion in money is created. Eventually all the existing money will be reduced in value because of this new money. Half of this stolen value comes from reducing the value of the money outside the USA. So in effect the USA has sucked $500 billion out of the rest of the world. Living like parasites is a good description.
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Hi Vincent. (You visited me when my blog was new.)
ReplyDeleteNot to contradict anything in your post, but I must add to it a concern of my own. A nation's money is like its flag, but more than just a symbol. A nation allowing the value of its money to inflate away... it is like dragging the flag through the mud. It is not good. It is not good for the nation whose flag it is.
When I was young, people used to make fun of Italy because their money was worth so little. I don't want that to happen to my country. I don't think the leaders of my country want it to happen, either. I think they just don't know how to fix things right.
"A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury. After that, the majority always votes for the candidate promising the most benefits with the result the democracy collapses because of the loose fiscal policy ensuing, always to be followed by a dictatorship, then a monarchy." - source muddled
DeleteThe problem is deeper than just the politicians not knowing what to do. The incentives are for them to promise voters things so that they get enough voters to get elected. The structure of the constitution as a republic and not just democracy has slowed the usual process, but the USA seems nearing the trouble point.
Actually, we Americans get an even better deal than you realize.
ReplyDeleteI am happy to inflate away the value of T-bonds owned by the commie Chinese, so I care little about inflation in that regard.
What really tickles me is that we print an international reserve currency. We print money, give it to people offshore, and they give us back goods and services.
I like that deal. Who cares how much money we print when we get a deal like that?
That is what that little punk Putin is sniveling about.
The best part is that foreigners trade the money around, and never give it back to us.
This is Fat City.
It is another way to say the same thing. It is a win for the US while it lasts. The problem comes when people outside no longer want to hold dollars or US bonds. Then all the money comes back to the US as they buy up tangible things (factories, land, ships, gold) and prices shoot up in the US. When the deal ends and the US can no longer print money and get stuff from China, the US will hurt big time, with hyperinflation and a broke government.
DeleteVincent what do you think of this Steve Roth comment:
ReplyDelete"An extra point of inflation (okay, an extra "unexpected" point, as if there is any other kind) transfers tens or hundreds of billions of dollars in buying power from creditors to debtors. i.e. From banks to the bottom 60 or 80% of households.
It transfers that much every year. Permanently. (All without a single dollar being transferred between accounts.)
Bottom line: the Fed is run by creditors."
http://economistsview.typepad.com/timduy/2014/03/that-train-left-the-station.html#comment-6a00d83451b33869e201a3fcd9c427970b
Printing money to buy bonds and lower interest rates helps some people and hurts others. Speculators (like Vince buying options) get great deals when interest rates are low. Retirement funds soon become underfunded when interest rates are near zero. The Fed works to help the speculators. Don't fight the Fed.
Delete"Speculators (like Vince buying options) get great deals when interest rates are low." ... nominal rates or real rates... inflation low makes real rates higher.
DeleteHere's how I read Roth (put your tinfoil cap on, 'cause we're gonna get conspiracy nutty): The Fed will never allow high inflation, or even inflation above target (the target is a cap, not an average, though they may claim otherwise) because it's controlled by creditors, and inflation above expectations (like 3% for example) cuts deeply into their real returns. :D
If someone was controlling the Fed they could make lots of money off of every little thing the Fed said no matter if things went up or down (stocks, bonds, interest rates, etc).
DeleteI was going to run my (Roth's?) [conspiracy] theory past Sumner, when I saw this:
Deletehttp://pragcap.com/who-is-the-alpha-bank/comment-page-1#comment-171235
Benjamin: "Americans get an even better deal than you realize."
ReplyDeleteBenjamin, you have insufficient respect for economic forces.
Vincent: "... democracy collapses because of the loose fiscal policy ensuing, always to be followed by a dictatorship, then a monarchy."
Vincent, I have this brief quote from The Lessons of History by Will and Ariel Durant, which fits quite well with the sequence-of-governments part of your quote.
"The problem is deeper than just the politicians not knowing what to do."
I am not convinced, Vincent. Economic forces are massively important, as Hayek understated.
Okay, let's say dollar depreciates...US exports will start to surge, sopping up a lot of dollars. I confess that will mean we have to work instead of just printing money, but many people like it when US factories open up....
ReplyDeleteYes, foreigners can buy US real estate. Then what? Can they let those assets rot? If they invest their money they should try to improve their assets.
If a US company buys an office building in Bavaria, do you feel we are somehow controlling the Germans, or have influence there? Or...are we a bit extended, fearful they will somehow harm our asset unless we are nice?
A foreign firm buying an operating company faces certain risks. Like everyone quitting. They better be nice.
Putin is right to snivel. Americans are getting a great deal, and it will stay great for many decades, and even when it unwinds, I see no pain...
The downside of the dollar-as-international-reserve is that it probably has played a role in hollowing out the US industrial base, and creating a US upper class of financiers and lawyers...a dollar decline might reverse that...
In hyperinflation the local currency is so nearly worthless that foreigners buy up assets at really cheap real prices. So the locals are losing real assets for little in return. You can look at the history of hyperinflation. All the local assets that can move leave for foreign soil in exchange for pieces of paper that are soon worthless. It is not good for locals.
DeleteYes, printing lots of money that the world accepts probably has played a role in hollowing out US production. When Spain was taking lots of gold from the new world it hallowed out their productive capacity. When the gold stopped coming things were not good for Spain. Things will not be good for the US when the money printed stops being accepted.
Eventually the US will find some sort of productive work and become a good world citizen again. But in the transition will be painful and take many years.
DeleteBenjamin, you are one of the people I always wished would come over here and mix it up with Vincent.... because I was doing a terrible job. Good fun!
ReplyDeleteYes, welcome Benjamin!
DeleteI would rather just visit Vincent and down a pina colada...the FOMC talks about inflayion monomaniacly...sometimes more than 500 times per meeting and these are not all-day events...they regard any inflation rate above 1.5 percent as TEOTWAWKI...sohow hyperinflation?
DeleteFirst you have to understand that no central bank ever wanted hyperinflation, yet it happens all the time. Right now I think we have Venezuela, Argentina, Eukraine, North Korea, and Syria. So something happens where the central banks lose control of the situation.
DeleteThe central government always spending much more than they get in taxes and gets the central bank to buy their bonds. At some point other bond holders decide they want out. But the faster other bond holders get out the faster the central bank has to buy bonds. But the faster the central bank is making money and buying bonds, the more bondholders there are who want to get out. So you get a death spiral that works through the national debt and throws out new cash for the whole debt. This flood of cash starts prices going up. And now the faster prices go up the faster people want to get rid of their cash. The central bank can't fix things even though inflation is above 1.5%.
If you don't like any of my "many explanations for hyperinflation" do you have one you like better?
Vincent, your hyperinflation explanation completely omits private debt. Central banks "lose control of the situation" when there is so much private debt that private creditors become, as a group, a competitor of the central bank, able to undermine central bank policy by the sheer volume of their activity.
DeleteHyperinflation? Check out Divisa's edtimates of money supply...gojng down...
DeleteBtw did you know the underworld has 60,000 suitcases full of $1 million in cash each and still no inflation?
Hey Vincent, it occurs to me that we already have a metallic commodity based monetary system: nickles:
ReplyDeletehttp://web.hbr.org/email/archive/dailystat.php?date=022712
That's why reserve notes and electronic Fed deposits are liabilities of them Fed: they are literally IOUs to let you know how much in nickles the Fed owes you. Other coins... the accounting is a little different, but basically you can trade them at par for nickles. :D
You can bet they will change soon. That article says they are working on it.
DeleteAnother one from Sadowski you might like:
ReplyDeletehttp://www.themoneyillusion.com/?p=26507&cpage=1#comment-327151
Mark got back to you:
Deletehttp://www.themoneyillusion.com/?p=26507#comment-327427
... and more examples from Mark:
Deletehttp://www.themoneyillusion.com/?p=26507#comment-327532
Marcus on this too:
Deletehttp://thefaintofheart.wordpress.com/2014/04/01/while-yellen-speaks-of-the-suffering-economy-feldstein-is-worried-about-future-inflation/
and Sumner:
http://www.themoneyillusion.com/?p=26514
http://www.themoneyillusion.com/?p=26507#comment-327639
Delete"Vince Cate,
DeleteOut of the 69 historic cases of high public debtcoupled with high inflation that I’ve looked at, I can only find four cases where deficits exceeded 40% of revenue, and they all involve the UK: 1917-18, 1942 and 1947.
And even Japan has never run deficits that large in recent years. According to the IMF’s Historic Public Finance dataset the largest deficit was 34.6% of revenue in 2009. According to the IMF World Economic Outlook (WEO) it was 30.1% of revenue last year and is projected to fall to 20.4% of revenue this year and to 16.8% of revenue the next. Similarly, the US deficit peaked at 37.1% of revenue in 2009, was only 17.5% of revenue last year, is projected to fall to 14.1% this year and to 11.6% the next. Furthermore, the IMF WEO projects that gross general government debt as a percent of GDP will start *falling* in Japan this year and in the US next year."
http://thefaintofheart.wordpress.com/2014/04/04/there-was-nothing-solid-about-the-employment-report-its-the-same-old-same/
ReplyDeleteVincent, here's a fresh take on hyperinflation from physicist/engineer Jason Smith, who's a proponent of something he calls "Information Transfer Economics." His blog is filled with numerical models and fitting of data, etc.
ReplyDeletehttp://informationtransfereconomics.blogspot.com/2013/09/hyperinflation.html
Interesting, I will take a look.
DeleteI have been on a sailboat cruising from Anguilla, St Marten, St Barts, Montserrat, Guadelupe, Les Saintes, and Dominica from Apr 1st to now. As I catch up on work I get to play hyperinflation economist again. :-)
Sounds like fun!
Delete