Who’s Afraid Of A Falling Dollar?

This guest post was submitted by Joe Gagnon, a senior fellow at the Peterson Institute for International Economics.  Joe is an expert on international economics has spent a great deal of time studying the effects of exchange rate depreciation.  Even if the dollar depreciates sharply in the near term, he argues that is unlikely to have adverse effects – primarily because inflation will stay low.

Pundits and policymakers around the world are wringing their hands over the possibility of further declines in the foreign exchange value of the dollar.  Predicting exchange rates is notoriously difficult; there is almost as much chance of the dollar rising next year as of it declining.  But if the dollar were to fall further, should we be concerned?

A lower dollar is good news for US exporters and foreign importers and bad news for foreign exporters and US importers.  However, if policymakers respond appropriately, there is no reason to fear overall harm either to the US economy or to foreign economies.  Indeed, a lower dollar could jumpstart the long-overdue rebalancing of the global economy away from excessive US trade deficits and foreign reliance on export-led growth, putting the world on track for a more sustainable expansion.

The fear in economies that are appreciating against the United States is that a falling dollar will choke off exports and hobble economic recoveries.  The correct response is to ease monetary policy and temporarily delay fiscal contraction.  As I explain here, even in economies with short-term interest rates near zero, there is plenty of scope for central banks to stimulate aggregate demand, and doing so will help to limit the extent to which the dollar falls. 

For the United States, the benefits of a falling dollar are obvious: stronger exports and a faster recovery.  The fear is that a falling dollar would be inflationary.  However, as I have shown in two recent papers, even very large currency depreciations in developed economies have no effect on inflation unless they are caused by policies that attempt to hold an economy’s unemployment rate below its equilibrium level.  With US unemployment currently at 10 percent, there is no chance that inflation will rise in the near term.  Whether inflation rises in the longer run will depend on whether US monetary and fiscal policy stimulus is withdrawn appropriately as the economy recovers (and tighter macroeconomic policies would tend to support the dollar).  Many believe that US policymakers erred in not withdrawing stimulus soon enough in 2003-05, but policymakers now seem to be keenly aware of this mistake and have expressed their determination not to repeat it.  Only time will tell, but my own view is that the Federal Reserve, at least, will not allow runaway inflation.

For economies that peg their currencies to the dollar (notably China) the costs and benefits of a falling dollar are the same as those facing the United States and so is the policy dilemma:  how fast to tighten macroeconomic policy as the economy recovers?  These economies differ on several dimensions, including financial market development and capital controls, strength of economic ties to the United States, and prospects for economic slack and inflation.  These differences will determine the appropriate policy stance.  To some extent these economies have forfeited the freedom to adjust monetary policy, but they retain the option of adjusting the levels of their dollar pegs.  In some cases, a further decline in the dollar may represent an opportune moment to move to a floating exchange rate.   

By Joseph E. Gagnon

205 responses to “Who’s Afraid Of A Falling Dollar?

  1. I note the careful restriction of the universe of discourse to “developed economies” here. Otherwise one of the usual suspects like Zimbabwe would provide an immediate refutation since policies there (insofar as they exist) clearly don’t even pay lip service to holding unemployment below any sanely defined equilibrium. This restriction implies there must be some fundamental characteristic of developed economies that differentiate them from the rest.

    It would also be useful if the article gave an estimate of the equilibrium unemployment level in the US. Given the emphasis on the need to avoid keeping the stimulus going too long, I have an uneasy feeling the author may consider it to be pretty close to the current level. It is quite possible that a few million unemployed might disagree.

  2. If the dollar continues to fall, is there a point where people who own our debt start to feel that their investment is declining and they will no longer invest and start redeaming their bonds.

    In a way that is starting to happen as I understand that China is converting to shorter term bonds which gives them a faster opt out.

  3. Things like this seem to just talk about the same old facade of bloodless numbers completely abstracted from the real economy and real people, albeit perhaps of great interest to the parasite class.

    The baseline for any real policy has to be the creation of real jobs in America. If a policy doesn’t do that, it’s worthless, destructive, and offensive, even if it does make for more nicely “balanced” exchange rates. (Of course I have no idea how oil fiend America, utterly committed to consuming at a level where it has to import two thirds of its supply, is supposed to fix its trade deficit on any fundamental level, but that’s too concrete a matter for most establishment commentary).

    As the evidence of the last several decades proves, financialization and globalization have only destroyed real jobs, security, and quality of life in America, and have generated only the purely malevolent pathology of extreme wealth concentration.

    From any human point of view the failure is absolute. Everything finance capitalism ever claimed has been proven to be a lie.

    So when the G20 focus only on “how will this help balance the exchange rate and the trade deficit?”, with all of it defined only in terms of money sloshing around among governments and big financial entities, none of it having anything to do whatsoever with the well-being of actual people anywhere, whose position will only continue to erode, we see the absolute moral failure and bad faith of this “leadership” as well.

    So whenever we hear talk of pulling back on fiscal stimulus, we should see it in the real world context.

    The one thing and the only thing the American government should now be doing is using stimulus, vastly more of it than the meager amount so far, with whatever backstop was needed to strengthen community banks, credit unions and such, to rebuild a real economy in America.

    Every cent should always have gone to that, and not one cent to Wall Street bailouts, loan facilities, quantitative easing, and all the other different names they have for purely vandalistic looting.

  4. Utter and absolute B*S* for the following merits:

    1.) A falling dollar is theft of an individual by his or hers’ own government. “Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process.” ~ Alan Greenspan 1966 (before he went off the deep end).

    2.) Mexico’s Peso crisis 1994, Argentina’s Peso Crisis: Both caused debt and soaring deficits

    3.) Every Fiat currency always reverts to the value of 0

    4.) You do NOT understand what inflation is. Inflation is the increase in the supply of money. Precisely what we have today. As it increases in size it’s value decreases. If you have a trillion dollars of 100’s in a warehouse and you print another trillion you don’t have 2 trillion bucks you have effectively de-valued the 100’s into 50’s. CPI: The BLS backs out gas and food. NO CONSUMER CAN DO THAT. Thanks Dick Nixon! The cost of fuel and food and all necessary items are today more costly.

    Gagnon: You fail to understand the difference between a weak dollar and insolvent. Let me explain this like you are in 4th grade: When you take in 2 trillion a year, and spend 4 trillion a year and you have to counterfeit most of that 2 trillion dollar deficit – YOU ARE INSOLVENT!

    It amazes me how people with advanced education can not understand simple math. No wonder why we are where we are today.

  5. PS

    GDP………….14 trillion baked 30% with imputations & Hedonics
    Debt…………12 trillion
    Social Security.18 trillion
    Medicare A……37 trillion
    Medicare B……37 trillion
    Medicare D……16 trillion
    TARP/TALP/PPIP..11-22 trillion
    2 Wars………. 2 trillion

  6. PPS: Unemployment is NOT 10% it is 22%, go to Shadow Statistics, you obviously have no clue what:

    1.) The Birth Death Model is
    2.) What the Seasonal Adjustment is
    3.) That there are U3 and U6 categories

    Amazing what they do not teach kids in school today.

  7. +1, very, very well said Russ!

  8. It’s somewhat natural that Simon would choose colleagues to post on the site. But if “Baseline” just becomes a sounding board for the Peterson Institute, or a way to spread “link love”, I think it shows a great degree of disrespect to the readers of “Baseline”.

    There are many institutes and think tanks, and many people looking for a sounding board. Let’s see if we can show some originality and diversity (diverse sources and ideas) shall we??

  9. Afterthought:

    BY DR G GONO
    GOVERNOR
    RESERVE BANK OF ZIMBABWE

    http://www.rbz.co.zw/pdfs/2008%20MPS/AprilMPS2008.pdf

    1.15 As Monetary Authorities, we have been humbled and have taken heart in the realization that some leading Central 9 Banks, including those in the USA and the UK, are now not just talking of, but also actually implementing flexible and pragmatic central bank support programmes where these are deemed necessary in their National interests.

    1.16 That is precisely the path that we began over 4 years ago in pursuit of our own national interest and we have not wavered on that critical path despite the untold misunderstanding, vilification and demonization we have endured from across the political divide.

    Or

    Dinner for one in Zimbabwe, 1.2 billion

    Z$ 1,243,255,000.00

  10. > economy’s unemployment rate below its equilibrium level

    no doubt, the equilibrium unemployment rate doesn’t include Mr. Gagnon’s own job

  11. +1. True!

    Now, in addition to having an economy function without consumers (70% of GDP) we are beefing up the 30% side of the GDP contributers (“government”) and to finance that we print money and tax the living sh*t out of everyone and pass on the debt ball and chain to babies not yet born and to our little children.

    Let us say you have $100,000.00 in the bank and we make it worth $25,000.00 by weakening the dollar. To say that is okay is really admitting the utter truth that one is a m*ron who understands nothing about economics.

  12. Dear ozajh,

    Thanks for your insightful comments.

    1. The track record of central banks and governments is critical in determining how the economy evolves. All the developed economies (with the possible exception of Iceland) and many emerging economies have demonstrated a history of relatively sound monetary and fiscal policies, with low and stable inflation. (By “relatively” I mean in comparison with the disastrous policies seen in Zimbabwe now and Argentina and other places not too long ago.) This track record means that inflation in the US is very stable, responding mainly to unemployment and then only slowly.

    2. I think unemployment is the #1, #2, and #3 economic problem in the US today. I am certain that the equilibrium level is less than 7% and fairly sure that it is less than 6%.

  13. I have no doubt that Mr Gagnon is right in saying that the currency depreciation is beneficial for an uncompetitive economy such as USA is today.

    However, I don’t understand the low inflation argument. If foreign sellers wish to keep their profits at current level, they have to increase prices. Also you have strong faith that the fiscal deficit will just disappear.

    Another issue is with the bond markets. To my understanding the Fed has been active there and interpreting the bond markets is possible only when Fed is inactive there.

  14. The same arguments apply to the dollar that apply to the stock market. Yes, some investors may lose patience and sell if it keeps falling, and that will push it down further. But other investors will recognize a bargain and step in to buy.

    BTW, the maturity of bonds is not a relevant factor if the concern is about the exchange rate. All foreign holders of dollar bonds lose equally when the dollar falls, regardless of maturity.

  15. When economists talk about resolving trade deficits and export driven growth and fiscal responsibility and monetary mandarins keeping inflation under control by timing our delicate mechanisms of money creation, there is always a subtext underneath the BS: let’s confiscate the wealth of those in the middle class who still have any, and promise future salvation to those staggering around in the darkness hoping to find a job.

    The idea that further trashing the dollar is actually a good thing, that it will produce anything but more bubbles and bigger crashes and more grotesque bailouts is just the kind of thinking that got us where we are today, on the brink of social collapse.

    Don’t cry for us, Argentina. We’re on our way to becoming you.

  16. Not if the bonds aren’t paid at maturity. The Chinese I’m afraid are a little more pragmatic than you Mr. Gagnon.

  17. There we go again: “sustainable expansion.” This seems to be stuck in people’s heads as necessary, like financial “innovation.”

    The bio blurb here is curious:

    http://www.iie.com/staff/author_bio.cfm?author_id=653

    “…taught at the University of California’s Haas School of Business…”

    It’s the UC Berkeley Haas School of business. Any reason not to say the name “Berkeley”?

    What did he do between 1987 and 1990, and 1991-1997? Full time job at the Federal Reserve?

    http://www.federalreserve.gov/research/staff/gagnonjosephe.htm

  18. I don’t understand this criticism of currency depreciation. European nations (before euro) depreciated currency often during recessions leading to a new growth and somewhat fair income equality. US consumer will lose purchasing power, but that will only encourage the purchase of domestic goods.

  19. There have been a number of emotionalistic replies to this article.

    Isn’t the basic reality that the US economy needs lower wages and a lower fx rate to be competitive in world trade?

  20. Unemployment is NOT the #1,#2 and #3 economic problem in the United States Gagnon.

    DEBT and a de-valued dollar and a massive deficit are. Reality check: The US is insolvent.

  21. Gagnon, you just don’t get it. We take in 2 trillion and spend 4 trillion and we can no longer borrow the difference.

    Insolvent is as insolvent does.

    The US will either debase the dollar to pay the difference or bondholders will get shafted.

    A or B.

  22. This blog usually consists of super posts. Ted, I agree, this isn’t just substandard, it is utter trash. I can buy cable and watch re-runs of Dennis Kneale if I want to see trash like this.

    Simon, I’m disappointed. Stuff like this is why we are where we are today.

  23. For about the millionth time, devaluation is how economies repair bad debt structures. It is the natural mechanism for restoring trade balance – advocating a strong dollar policy and debt reduction simultaneously is like economic psychosis.

    It is unfortunate that the US is suffering from such deep structural problems that the dollar needs to decline in order to achieve equillibrium. But the answer is not to artificially prop up a weak dollar. The answer is to let the dollar devalue as needed, and fix the structural problems.

  24. Harminder Singh

    Leaving aside the economic aspects, allowing the dollar to depreciate is a shrewd political move, because now, the currencies of other developing countries (e.g. Brazil, Indonesia, etc) are also strengthening against the yuan.

    This has led to more countries complaining about China’s currency peg, not just the USA. Hopefully, this rising crescendo of complaints will encourage China to allow the yuan to appreciate, since it needs these large developing countries as markets for its exports and as a source of commodities.

  25. You advocate lowering a workers wages? How will he service his current debt? If he stops servicing his debt how will that impact the lender.

  26. If by “debase”, you mean restore the natural price level trajectory… which would mean achieving nominal GDP growth of ~5-6% over the next two years (to get price levels back onto their long term trajectory), then yes.

    The very best way to ensure that we default is by sticking to a strong dollar as long as we possibly can… to sustain import consumption, depress exports, deflate price levels (which effectively increases the price of debt), and keep unemployment >10% (which costs the federal government in three ways – lower tax revenue, higher transfer payments for unemployment, and lower economic multiplier).

  27. I agree that the only way out is to devalue and then re-denominate the dollar.

    Advocating a weaker dollar and saying all will be super is not the same as the solution.

  28. You are impolite.

    Also, most (if not all) hyperinflation scenarios can be traced to external obligations denominated in foreign currencies. Mexico. Argentina. And, of course, Weimar Germany.

    Zimbabwe is a case of corruption so naked that it defies comparison. Even comparing it to the US is the height of silliness, since the US spent the last year with NEGATIVE YoY price changes.

    Please consider showing a bit of grace before indulging in personal attacks.

  29. If by debase I mean: Do precisely what Mexico did. Harp on a strong dollar policy while the Fiat currency goes from a value of .04 cents into the negative.

    If by debase I mean: Insist we will not re-value the currency and then turn around the same day and say re-value it by saying, bring us 100,000.00 old dollars and we will give you one new one.

    It will happen. This is the ONLY way out. All 4,800 Fiat currencies have gone this route, the ONLY difference is none had this massive debt load and other than maybe the great Roman empire none were a reserve currency.

  30. If foreign sellers raise their prices they will lose customers, so their profits fall no matter what they do. Experience shows that they raise prices a little but not nearly as much as the depreciation. This is true everywhere and not just in the US.

    In the near term loose monetary and fiscal policy are what is needed. You are right that these policies will eventually need to be reversed. I believe they probably will be, but no one can be sure what the future holds.

  31. Impolite?

    No. When I’m impolite you’d know it.

    You are being mugged, you go say thank you to the mugger. NOT ME!

    Tell me the difference between Zimbabwe corruption and the massive corruption that blew up the economy (think subprime loans, and then the wave coming in now (Alt-A’s NINJA’s (no income no job no). Go watch PBS Frontline “Warning” go watch the movie about naked short selling. Go watch House of Cards about the tripple a ratings. Go learn about mark to fantasy accounting.

    You can be polite to thieves – I’m not.

    Writing an article saying I’m going to rob your money out of the bank you wouldn’t stand for. Putting lipstick on the pig and calling it a weak dollar and saying it is good for the economy tricks people.

  32. When you say “further trashing”, there is a bit of disingenuousness there.

    The trashing was _already done_ over the last 15 to 25 years, by an excessive dollar valuation that subsidized excess imports and overconsumption. Over that time, we incurred debt – which, btw, INCLUDES foreign holdings of our currency.

    That overconsumption (by keeping our precious dollar strong) is what so weakened the currency (in combination with many structural problems). We are simply dealing with the consequences of that right now.

    At the international level, there are two ways of dealing with the consequences:

    1) Devalue, restore balance, reduce consumption, increase exports, and earn our way out.

    This is the honest path. It basically means work harder and consume less.

    2) Tighten rates to keep the dollar (and consumption) high as long as we can so we can, in the process strangling our economy in order to try to convince China and others not to dump our dollars. But China and others recognize that if we do this, we’ll simply end up defaulting directly (rather than partially defaulting through currency adjustment) – which means they’re going to shift out of dollars (or, perhaps, shift into shorter term notes).

  33. Yes, RA, you are correct…

  34. You fail to distinguish between _real_ and _nominal_ wages.

    Most US debt (other than adjustable rate debt, which is a disaster) is denominated in dollars. Devaluation will raise nominal wages (particularly in export and import-substituting sectors), while at the same time increasing prices of imports and import-reliant goods.

    The net effect is an increase in nominal wages, a reduction in the real wage, and an even larger reduction in the real value of debt.

    If you were to cut through the illusion that separates real and nominal value, you would see the inherent contradiction in your positions.

  35. This is a well-taken point. Some have argued that China is keeping the dollar-yuan link in order to force the Yuan down against the basket of other currencies (even as its level of trade with non-US partners rises). Indeed, the EU and China’s regional neighbors are now complaining the loudest.

  36. It may or may not be morally right to encourage DEBT. It is more than likely that you believe the kind of debt you call DEBT is unconscionably WRONG. I may or may not agree with you (as it happens I disagree, but that is irrelevant). But one should not confuse a moral imperative with the way the world works. The fact that a solution is, by your values, immoral, does not mean that it won’t work.

    I think liberals have an unfortunate tendency to assume that strident conservatives are knaves or fools. More than likely, most are neither: they are just incapable of perceiving something that ‘shouldn’t be’. It’s a fundamental psychological process we all have, which is, in this case, running riot.

  37. Lets assume a hypothetical scenario where everyone tries to devalue their currency. What would happen?

  38. In a fiat currency system with floating rates, competitive devaluation can only be achieved through worldwide nominal price increases. (e.g. Inflation) This, in combination with abandoning the gold standard, is precisely what finally saved the world from the Great Depression.

    If, however, you are stuck in a gold standard system, devaluation is zero sum… competitive devaluation is truly a beggar-thy-neighbor problem, which results in no net-increase in price levels, but lots price instability (which can increase the risk premia, decrease money velocity, and cause price decreases). Kindleberger, among others, argued this caused/made worse the Great Depression.

    This is something to think about when the anti-fiat-currency, hard-money fanatics begin to proselytize loudly.

  39. You write:

    “All 4,800 Fiat currencies have gone this route”

    This is like saying:

    “All prior governments that have existed have failed. Therefore, we should have no governments.”

    Brilliant.

  40. If you are advocating devaluing the dollar a la FDR you aren’t thinking about the difference between then and now.

    Now we IMPORT 2/3rds of our oil. Most from Canada. Doing that with a weak dollar is only going to exacerbate the problem.

    You don’t get it. Real and nominal wages means nothing.

  41. “With US unemployment currently at 10 percent, there is no chance that inflation will rise in the near term. ”

    Will Mr. Gagnon (or someone else who knows) please explain WHY the unemployment rate is the dominant input to the inflation function? What about the price of raw materials, such as oil? As the dollar weakens, the energy component of everything will rise in price. Won’t that affect inflation?

    I just don’t get Gagnon’s argument on this point.

  42. In one breath you write:

    “we print money and tax the living sh*t out of everyone”

    In the other breath:

    “Real and nominal wages means nothing”

    You cannot argue both points at the same time – they contradict each other.

    ———-

    Oil… you do realize that keeping interest rates high to maintain a “strong dollar” so we can buy cheap oil is a massive tax on all debt holders (including homeowners) to subsidize oil consumption?

  43. Price of raw materials should rise, but I suppose they don’t have a significant enough impact.

  44. The pragmatist

    You have it sideways. Inflation is not the growth in money supply, but increases in prices and wages. This can be caused by many things, including an increase in money supply.

    So lets look at Money supply. M2, the broadest measure of money supply still published grew by only 1.8% from January through October. Such growth is certainly not going to be a major cause of inflation.

  45. Robbed by A Pig Wearing Lipstick

    “No one in this world, so far as I know -and I have searched the records for years, and employed agents to help me – has ever lost money by underestimating the intelligence of the great masses of the plain people.” ~ H.L. Mencken

    Each and everyday I’m amazed by the sad amount of truth held within this statement.

    I’ve totally shunned TV, I have no cable, no dish, I’ve deleted every mainstream news source from my iGoogle RSS reader and I am now weeding out what I once considered to be the best 25 economic blogs.

    Lets visit the many ways that we are being robbed by the pig wearing lipstick.

    Confusion and sexing up the ugly:

    Today, on a blog I used to hold in high esteem was an article entitled “Who’s Afraid Of a Falling Dollar?”

    Me.

    That’s who.

    First we need to take the lipstick off the falling dollar pig and understand what it means. If you have $100,000.00 in your account and the dollar falls in value that $100,000.00 might buy you only $25,000.00 worth of assets.

    Would you put your money in a bank that offered you a falling balance?

    The incredible part about the article is that it was written by a senior fellow at an institute that is trying to save Social Security.

    Sorry Grandma, your $500.00 Social Security check that used to buy you a month’s tuna caught by Japanese fishermen had a really bad fall and now you’ll have to eat saltines all month long. No more tuna for you.

    “A lower dollar is good news for US exporters and foreign importers and bad news for foreign exporters and US importers.”

    Really?

    Well bad news here. We import 2/3rds of our oil. Sorry, when you fill up your SUV with your falling dollar you are now on the cusp of bankruptcy because that dollar had a bad fall and only buys 1/4 the amount of gas it used to. When you go to the store and purchase food that has been shipped a minimum of 1,500 miles and farmed in a petrochemical dependent way your going to be in the same line as Grandma buying saltines.

    Bon appetit mon ami(e).

    Confusion and sexing up inflation:

    “The fear is that a falling dollar would be inflationary.” Right here I am reassured that the author must a.) be Keysnian b.) have taught economics and c.) has worked for the “Federal” (a very private bank) Reserve.

    Or, d.) all of the above.

    Inflation is defined as the size of the monetary supply. The Keynesian economists have convoluted this. The bottom line is if you have a trillion in 100’s and you create another trillion bucks while you have 2 trillion the reality is that the 2 trillion has a value of 1 trillion. Your 100’s are worth 50. Your dollar fell.

    Hard.

    He then quotes two recent “Fed” papers. Well, I have short funny video for you. Here is the Chairman of the Fed who got it 100% wrong.

    “I don’t buy your premise.”

    “We’ve never had a decline of houses in a nationwide basis.”

    Oh, I thought you studied the great depression? Just what the heck happened from 1920 to 1945?

    Confusion and sexing up unemployment:

    “With US unemployment currently at 10 percent, there is no chance that inflation will rise in the near term.”

    Really?

    First if you go to http://www.shadowstats.com and pay John Williams 89 bucks he will show you that unemployment is at 22%. He corrects the BLS’s Birth Death Model, their Seasonal Adjustment and even is kind enough to count the U3 and the U6 numbers and add them up into one nice percentage.

    Something the BLS seems challenged by.

    And by what economic model is unemployment a factor in inflation? Zimbabwe had an unemployment rate north of 90% and here is a copy copy of a dinner receipt. Dinner for one: 1.2 billion.

    I suppose that isn’t inflation even by a Keynesian perspective?

    I could go on for hours.

    “Articles” like these contribute to the success of the robberies and gives validity to Mencken’s pathetic realization.

    Worse, when go blogs publish bad smart readers get confused by qualifications and titles and prestigious think tank associations. Comments like: “Zimbabwe is a case of corruption so naked that it defies comparison. Even comparing it to the US is the height of silliness, since the US spent the last year with NEGATIVE YoY price changes.”

    Corruption so naked that it defies comparison?

    Really?

    Well maybe we should consider this. The unregulated derivative market is now 55 times the size of all the world’s GDPs 600 trillion in total. According to Table 3 (from our Treasury) 200 trillion of this toxic mess reside here in US banks. Tyler over at ZeroHedge pegs ran a piece pegging it at 1,600 trillion. The subprime mess was 1.5 trillion. It blew up the economy. We now have wave two of the Alt-A and Option Arms rolling to shore. Another 1.5 trillion. A lot of this consists of NINJA loans. Those are no income, no jobs, no documentation. I suppose putting down you make 100k when you don’t have a job doesn’t defy corruption?

    Or maybe we want to discuss the stellar way these loans are given AAA ratings?

    Naked Short Selling is another great topic while we are on the Bernie Madoff Zimbabwe discussion.

    Or we could discuss how we hang those out to dry for uttering regulation and over site.

    Defies comparison?

    Yeah.

    The bottom line is that we have become numb to what “experts” and reporters tell us.

    A recent piece in Bloomberg discussing raising the debt limit is proof. “Tactics such as tapping federal retirement funds would free up roughly $150 billion – about the same amount as the interest payments that come due on Dec. 31.”

    As one fellow blogger that I have the utmost respect for put it “Did you catch the bit in boldface about ‘tapping’ federal retirement funds for short-term cash flow? Sounds so casual, so innocent, don’t it? Think about it, though. Unlike private pension funds, whose trustees have a fiduciary duty under the ERISA Act to safeguard the interest of beneficiaries, fedgov pension funds are mere slush funds for politicians to grab at will. Under the sordid conflicts of interest which are tolerated within our imperial government, the managers of Social Security and federal retirement funds subserviently hand over their reserves to our insolvent government in ad hoc, ‘we’ll pay you back when we can afford to’ transactions. In a private-sector pension fund, such malfeasance would land them straight in jail.

    But then, government is all about granting itself the right to commit acts which are illegal for its subjects — such as the Federal Reserve’s 96-year-long currency counterfeiting operation. When the sovereign itself is dishonest, openly bilking its own pensioners, it is idle to talk of ‘reform.’ Organized crime is not amenable to reform. Either you end it, or you trust your security to the nebulous notion of ‘honour among thieves.’ Good luck with that!”

  46. Links/Facts/Sources:

    Bernake got housing wrong http://www.youtube.com/watch?v=HQ79Pt2GNJo

    Housing has fallen in the US http://www.ritholtz.com/blog/wp-content/uploads/2008/12/case-shiller-chart-updated.png

    1.2 billion dollar dinner for one receipt http://www.investmentpostcards.com/wp-content/uploads/2008/06/zim-1.jpg

    600 trillion dollar shadow banking derivatives http://www.netcastdaily.com/broadcast/fsn2009-1024-3a.asx

    Another 1.5 trillion dollars in wave 2 of the real estate mess coming to shore now http://www.cbsnews.com/video/watch/?id=4668112n

    AAA Ratings of subprime investments http://www.cnbc.com/id/15840232?video=1145392808&play=1

    What happens to those who want to regulate and oversee the massive derivative market http://www.pbs.org/wgbh/pages/frontline/warning/view/

  47. Mr. Gagnon —

    Thank you for the thoughtful article.

    I am curious what you think of David Malpass’s WSJ piece giving his answer to your question.

    His argument is summarized by this quote:

    Some weak-dollar advocates believe that American workers will eventually get cheap enough in foreign-currency terms to win manufacturing jobs back. In practice, however, capital outflows overwhelm the trade flows, causing more job losses than cheap real wages create.

    In other words, any gains from a weaker dollar are more than offset by the loss of foreign direct investment, especially from the point of view of the working class.

    I would be very curious to hear your response to this argument. Thank you!

  48. Something interesting. As Bloomberg reports (link below), just a couple days ago the Federal Reserve has decided to prohibit banks from charging overdraft fees on ATM machines without letting the customer decide/know first. The reason??? Fed research showed the fees weren’t popular with consumers. So how many YEARS have we had these fees???? And the Federal Reserve has figured out in late 2009 (coincidentally the same year legislation is being considered to limit the Federal Reserve’s regulating powers) that ATM overdraft charges are unpopular with consumers.

    Could this POSSIBLY be an attempt by Bernanke and company to APPEAR to have the small depositors’ (voters’) best interests at heart, when in most years they could care less what happens to small depositors (voters)??? YOU BE THE JUDGE.
    http://www.bloomberg.com/apps/news?pid=20601087&sid=a0DnUwBPR66Y&pos=4

  49. Doc at the Radar Station

    “Will Mr. Gagnon (or someone else who knows) please explain WHY the unemployment rate is the dominant input to the inflation function? What about the price of raw materials, such as oil? As the dollar weakens, the energy component of everything will rise in price. Won’t that affect inflation?” – Al

    Wage inflation reflects ability to bargain for wage increases with employers. The higher the unemployment rate the more the power of workers to bargain is diluted. Wage inflation is “stickier”, see this great post by Steve Randy Waldman:

    Asset inflation, price inflation, and the great moderation http://www.interfluidity.com/posts/1256656346.shtml

    “This tale of two inflations helps to explain how we arrived at the unequal, credit-centric economy we have today. Central bankers are notoriously allergic to “wage pressure” as a harbinger of rising prices. Wages have two distressing properties: First, they are sticky. They represent repeated and persistent cash flows that cannot be downward adjusted en masse except during a serious crisis or dislocation. Second, a substantial fraction of wages goes to lower quintiles of the income distribution, who have a high marginal propensity to consume. Central bankers are not evil scrooges — they have nothing against consumption by poor people. But funding that consumption by wages limits the effectiveness of monetary policy. They’d prefer that the marginal dollar bound for consumption flow from a more malleable source.”

  50. Austrian economics and economist like Dr. Ron Paul, Md and Congressman, Peter Schiff, and Jim Puplava define inflation as the increase in the money supply. More money, the money is worth less.

    Keynesian economist define it as higher prices for goods and services.

    This fellow believes that a high unemployment rate will keep wages low and keep prices down.

    What he fails to either understand or impart is that you can and will have high prices which result from a currency crisis.

    A falling dollar value will result in higher oil prices since unlike the 1930s we no longer are the world’s Saudi Arabia. It also does not take into account peak oil.

  51. Neither did Zimbabwe which had a 94% unemployment and over 11,000% inflation.

    Mexico had huge unemployment, as did Russia, Argentina and other countries.

  52. “It may or may not be morally right to encourage DEBT. It is more than likely that you believe the kind of debt you call DEBT is unconscionably WRONG. I may or may not agree with you (as it happens I disagree, but that is irrelevant). But one should not confuse a moral imperative with the way the world works. The fact that a solution is, by your values, immoral, does not mean that it won’t work.

    I think liberals have an unfortunate tendency to assume that strident conservatives are knaves or fools.”

    I am not a liberal.

    Putting our children and our children’s children into the slavery of debt is, by any definition immoral.

    Debt to make money or buy a home I do, for the record agree with. Debt for a bread and circus empire that calls itself a democracy I can’t agree with.

  53. “You write:

    “All 4,800 Fiat currencies have gone this route”

    This is like saying:

    “All prior governments that have existed have failed. Therefore, we should have no governments.”

    Brilliant.”

    You are confusing government with currencies. You might want to read what our Constitution says about money.

  54. Gagnon is basing his cause-effect claims and predictions on economic First Principles (of the neo-liberal school). In this theoretical world, there is such a thing as an “equilibrium level of unemployment”, which gets argued about by neo-liberal scholars like monks used to argue about how many angels can dance on the head of a pin. In this theoretical world, finance (the largest economic sector on the globe) plays no part in currency values, interest rates, production, consumption, trade, or employment – it only moves capital around efficiently without affecting it. And so on. This approach is about as useful in figuring out what the outcome (on the buying power of the dollar, the demand for Treasuries, market interest rates, or the level of unemployment) will be in the future because of Quantitative Easing, changing the Fed Funds Rate, tripling the fiscal deficit, or anything else, as the General Theory of Relativity and String Theory are in figuring out the path that will be traveled by specific snowflakes in a blizzard.

  55. There are 2 definitions of inflation. Austrian and Keynesian.

    This is a never before tried experiment. CPI backs out food and gas, you and I can’t do that. It also uses other methods to finesse inflation rates such as substitution. Think Mercedes vs Hugo.

  56. “BS: let’s confiscate the wealth of those in the middle class who still have any, and promise future salvation to those staggering around in the darkness hoping to find a job.”

    +1 good post!

  57. “Oil… you do realize that keeping interest rates high to maintain a “strong dollar” so we can buy cheap oil is a massive tax on all debt holders (including homeowners) to subsidize oil consumption?”

    We are at 0% interest. The yield on the long bond is at record lows.

    Every oil field is in decline. Many like Cantarell have exceeded the most pessimistic predictions. Oil will cost at least 70-80 a barrel to get to the hard to get oil.

    The weaker our dollar the more expensive oil will be. We are facing 2 major challenges: The easy to get oil is a thing of the past and the value of the currency.

    We can look back at the 1930’s and say devalue and re denominate – and we will have to do that to shed the debt. But one thing we need to appreciate is in the 1930s we were the Saudi Arabia of the world. Today we are not. If we have a Zimbabwe dollar oil will cost a fortune.

    Farming is, as you know, a very petrochemically intensive undertaking. A very weak dollar could mean very high food prices and cause hunger and starvation.

    The USDX is testing the 75 level, there is no support below 71 – just how low are we going to let it go?

    Also, the dollar is now being compared against no less than 22 other nations with hurting currencies. That masks the fall. Compare it to gold and I hear the “Houston we have a problem” transmission.

  58. “In one breath you write:

    “we print money and tax the living sh*t out of everyone”

    In the other breath:

    “Real and nominal wages means nothing”

    You cannot argue both points at the same time – they contradict each other.”

    It is NOT a contradiction. Wages are how I saw it was time to get out of real estate and how I was able to foresee the bubble. Flat wages and increased mortgage amounts and increased home prices spelled “pop” despite what Ben Bernake et al said or thought.

    The bottom line is we work from January until September for the government. If that isn’t getting the life taxed out of you what is?

    The bottom line is that wages according to many studies have fallen for the past 30 years. http://mwhodges.home.att.net/family_a.htm

    You can use real or nominal wages but the adjusted for inflation wages are a farce. How deep down the rabbit hole do you want to go here? Inflation during Nixon’s reign of disaster backed out food and gas. Inflation x inflation. Can you or any American family back out gas and food from their budget?

    Right now it is the only two things that many American families buy. So some genius can say we won’t have inflation if we have a weak dollar and be technically correct while families go broke buying gas and food.

    Worse they use substitution so steak gets replaced with hot dogs. In the case of GDP they use a deflator that isn’t close to the inflation rate.

    For statistics I use John Williams of Shadow Statistics.

    He gets it.

  59. “In the near term loose monetary and fiscal policy are what is needed. You are right that these policies will eventually need to be reversed.”

    Maybe you should read I.O.U.S.A. page 53 or 56 if I recall. If I recall from a year ago those were the David Walker pages.

    My take is that we have and have had loose monetary and fiscal policies. One of those pages pegged the national debt at 12 trillion and the unfunded obligations SS Medicare A and D at 11 (now 12) trillion and 59 trillion respectively.

    Those numbers didn’t even account for the 11-22 trillion in TARP, TALP, PPIP and the rest of the cash for trash.

    Or are we referring to the “Feds” loose fiscal policies. Perhaps taking in 2 trillion a year and spending 4 trillion a year isn’t loose enough.

    They are raising the debt ceiling as we talk.

    And just what is going to rein in this disaster of debt? Are we going to pay off our debt? Balance our budget? Manufacture and not be the worlds largest debtor nation?

    Come on!

    If your intent is to say in this “article” look folks the only way out is to debase Uncle Buck and re-denominate it to shed the massive debt that we will NEVER repay otherwise then come out and say it.

    Knock off the lipstick on the pig routine.

  60. Word Russ. From my unwashed pedestrian perspective, I do not comprehend how trillions of dollars of debt, monsterous deficits, a depreciating dollar, NO manufacturing base, wildly underrecorded unemployment numbers, stagnant wages, entrenched expanding increases in core costofliving expenses, and real harsh horrorshow suffering of America’s poor and middleclass can in anyway be pimped as tolerable, let alone “good” news. On top of that we have two or three neverending costly bloody wars and excuses of wanton profiteering, oil reserves peaking, global warming, and the gop in the US determined to stompout any life and hope there may be for the 99.5% of Amerika that is not superrich or predatorclass. Things make look rosey for the predatorclass PONZI operators reinflating debt and pretending it is value, – but for the rest of Amerika – the world and our lives are wildly uncertain, and rife with very palpable struggles and turmoil.

    It seems as though there are two wildly divergent accounting systems, two disperate legals systems, and two entirely opposing worlds we inhabit. The predatorclass applauds the pimping and bruting of irredeemable debt PONZI schemes and gleans imponderable profits, while the rest of us unwashed masses are gutted, savaged, ignored, and scorned.

    Have you no shame Simon, have you no shame!!!

  61. This set of comments is rather different from the norm, isn’t it…

    What I fail to understand is how someone can simultaneously believe that:
    A) The economy has gone off the rails, with high unemployment masked by dodgy reporting;
    B) Oil prices are going to ruin us;
    C) We are not globally competitive;
    D) We should have a strong dollar.

    It would seem to me that if you believe A, B, and C, you should want a weak dollar all the more. It is, after all, the only possible way to fix the first three issues.

    One of the hallmarks of kleptocracies (think Argentina during the junta) is manipulation to maintain a HIGH exchange rate. This lets insiders convert domestic earnings into foreign assets attractively, and hollows out the domestic middle class (whose employers are priced out of the export market and substituted out of the domestic market).

    Coming back into balance means lowering the rate and destroying the demand for imports…and yes, that means Japanese tuna is increasingly expensive, as is Saudi crude. If one is particularly concerned about oil, I would suggest taxing it immediately to reduce reliance and effectively nationalize the downstream part of the supply chain (just as the Gulf states nationalized the upstream business in the early postwar era).

    As StatsGuy pointed out well upthread, whatever got our economy to this terrible state has already happened. The decision today is whether we accept that outrageous mistakes were made and move forward as competitively as possible or refuse to admit what we have done to ourselves and carry on. No glory in being stubborn when lives are on the line; better to recognize our diminished circumstances and invest to improve them.

  62. Clifford Nelson

    I don’t know if you saw Bob Herbert’s column today, but it seems we have two economies now: (1) the “elite” and (2) everyone else. The low unemployment rate in economy “1” is pushing at least some prices higher (and it seems like we do have overall inflation of about 2%). Further, many firms that service economy “2” are failing and causing production and supply to be impacted. I see a lot of empty stores fronts around.

    In addition, as you mention, a much weaker dollar impacts domestic commodity prices because of foreign demand pushing prices higher, and imported commodities are re-prices. Similarly, goods used in manufacturing are likewise effected also causing upward price pressure. I guess my question is could these issues drive inflation independent of weak US demand and employment.

  63. We need world trade like we need more STDs. All this one world idiocy has brought us to the brink of collapse. Now we should all consume less (of everything but economic bull$hit) and work harder? The people who are still working have three jobs already. They can’t pay their credit card bills. While the bankers who destroyed the dollar get bailed out, and the politicians who continue destroying it get paid off, and the academics who want to devalue it further enjoy tenured sinecures, they join in a chorus of lets all work harder and maximize world trade and save Africa. What we ought to do is close the borders, bring back the factories and the soldiers, nationalize the banks, incarcerate the thieves and shysters, hold a new constitutional convention and start over with sound money. What we probably will do is quadruple the price of gasoline, save the mortgages of all the swindlers, validate the cdos in all the hedge funds and destroy the savings of two generations.

  64. What saved the World from the Great Depression was World War II.

  65. Yes, these neo-liberals ignore the 97% of capital flows attributable to finance, and focus on the 3% occasioned by trade. Don’t forget about saving Africa. That’s what all this trade is for.

  66. Don’t forget Africa!

  67. This idea of America being globally competitive is ridiculous. Should we compete on wage rates with China and Viet Nam? Should we maintain an Army for the purpose of permitting Saudi Arabia to blackmail us? Should we expect to survive by exporting grain and farm machinery? Our country is potentially self sufficient. Globalization is a scam benefitting our financial oligarcy and those who toady to it. The answer to economics is politics. It is that simple.

  68. I too would be very curious to hear the response.

    My own suspicion is that Mssr. Malpass has his causation backwards. He cites, for example, Britain’s desire to devalue the Pound as driving Britain’s decline. Rather, it was Britain’s relative decline (as other countries recovered from post-WWII and it over-consumed due to its overvalued pound) which drove devaluation.

    When the Brits tried to hold the Pound’s value (e.g. defend the peg) they got burned. That’s how Soros made his first billion.

    http://en.wikipedia.org/wiki/Black_Wednesday

    The current carry trades are the slow-motion version of Black Wednesday. Traders are betting that the dollar must fall even further because of the trade deficit. If the US were to defend the peg (by holding interest rates above the Taylor Rate, and enduring even higher deflation, unemployment, tax revenue loss, etc.) then we are merely delaying and worsening the inevitable.

    The faster the US gets the devaluation over with, the faster expectations of future devaluation end, the faster capital stops fleeing the US.

    But I too wish to hear Mr. Gagnon’s response.

  69. No, it wasn’t… The Great Depression consisted of two depressions, actually… The first one ended ~1933… And it ended largely after the abandonment of the gold standard and devaluation/price reflation.

    http://fabiusmaximus.files.wordpress.com/2009/03/gold.png?w=717&h=469 (originally via brad delong)

    The second Depression in the US started in 1937 when the US decided to resume a tight monetary stance… Christina Romer discusses this in detail. You can reasonably say this one ended due to the buildup to WWII (including Lend/Lease), which involved a massive monetary (and fiscal) expansion – and lots of inflation.

  70. WWII.

    And if you want to know what created the Great Depression Google Alan Greenspan and the cure was misdiagnosed as the disease and 1966 Ayan Rand article.

    Not much has changed from the 1930s to now.

    Christine Romer says? Ben Bernake said there would be no housing crisis in 2007. Summers didn’t want Bixly ro regulate the derivatives that blew up the economy.

    Christine Romer says. Ha, ha, ha, ha. Another economic professor. And how many of these economic professors saw this crash coming?????????????

    0

  71. “The faster the US gets the devaluation over with, the faster expectations of future devaluation end, the faster capital stops fleeing the US.”

    Devaluation is NOT a the same as having a weak dollar as this article advocates.

    While I do agree 100% that devaluation is necessary and the ONLY way to shed this debt – funded and un-funded, I’m not certain how things will be when it is re-valued with a new currency. Oil is the big factor.

  72. Your unwashed pedestrian perspective is a heck of a lot smarter than 99.99999999% of the economist and professors – none of which saw this thing until it ran them, their students and their clients over.

    Simon – you have no shame. People with big titles toss big terms around and misslead people who go to blogs instead of listening to Dennis Kneale and the rest of the CNBC the recession is over cheerleaders.

    And what do you do? Post some lipstick on a pig article. Quite a disservice to your readers and I for one do NOT appreciate it. Miss information is the main reason we wound up with over 100 trillion in debt and why right now we are raising the debt ceiling.

  73. What I fail to understand is how someone can simultaneously believe that:

    A) The economy has gone off the rails, with high unemployment masked by dodgy reporting;

    22% is more than 2x the articles 10%. Google U3 U6 Birth Death Model and Seasonal Adjustment. If you call 10% good reporting or if you call the BLS figures good reporting then I can’t help you.

    B) Oil prices are going to ruin us;

    When oil hit 140 a barrel did wages go up? No. Did we have demand destruction? Yes, did asset prices fall? Yes. Did the market tank? Yes. With China and India coming online oil demand and prices is a huge factor. We have reached peak oil. Even BP reports indicate that demand will continue to outstrip supply. Every major field is in decline. The IEA just got dinged for it’s reporting of supplies. Oil, barring some amazing energy invention/battery technology is a MAJOR issue. Oil is in everything. Food especially.

    C) We are not globally competitive;

    America at 24 bucks an hour and Asia at 1. 24 to 1. Yeah, that is NOT globally competitive. Worse just about every country and citizen has a better balance sheet than the US and it’s citizens. Also no globally competitive. And oh by the way, savings rate is not the amount American’s put in their bank account.

    D) We should have a strong dollar.”

    We don’t. Our dollar is down to about .04 cents of buying power. This article advocates letting it get weaker. Just how weak do you want it to go? The USDX is dropping below the 75 support below that there is resistance at 71 and below 71 it is bunjie jumping without the bunjie chord.

    If the article stated the truth: That we must debase and devalue the dollar and reissue it then I would be in total agreement with concern only over the rest of the world players and how oil imports will be a factor.

    But that is NOT what the article said. A weak dollar robs you. I suspect the Fed thinks letting it go into a controlled prolonged dive until it reaches -0 is a good idea. Peter Schiff thinks that is the plan. He also thinks it is a rotten idea. So do I!

    I hope all you folks that advocate a weak dollar being a good thing don’t have your life savings in dollars and don’t need dollars to exist.

  74. Perhaps the time is right for you to get back on those meds.

  75. Clearly even many consciously well-intentioned people are ideologically brainwashed on behalf of and/or emotionally invested in globalization.

    “Emotionalistic replies”? No more so than in the case of pro-“free trade” emotionalism.

    But here again we see the forensic fraud wherein the advocate of the status quo takes the SQ, no matter how radical it is, and represents it as the natural, rational, non-political baseline, and claims that all ideas counter to the SQ have to be judged artificial, irrational, politicized in proportion to the extent that they advocate change from the SQ.

    Never mind that the SQ itself may be radical, wrongheaded, and harmful, and the change advocated may represent a more rational, moderate, and equitable path.

    In this case (1) globalization is a proven fraud and failure with regard to how it would allegedly benefit any but the richest Americans (let alone all Americans), and (2) America does not need it anyway for anything that’s really worth doing.

    All the real solutions to our problems – political, social, economic, food and energy and other resources – run concurrently with unwinding the empire.

    That means unwinding the trade empire, the permanent imperial war which has been brand-named the Global War on Terror, and the domestic militarization which has built up in tandem with the foreign war.

    Those are the evils which afflict us, or more accurately three parts of one evil, and restoring the country means liberating it from this horrendously wrong path.

  76. You cannot destroy a safe-haven and have it too. Or perhaps you can?

    The US is in a lousy spot A and needs to go to a better spot B. For that you have to be able to define where B lies and then how to get there.

    If the US defines point B to be similar to point A, for instance in terms of oil consumption, then you will find yourself going round and around in circles.

    Looking for a good B it is of little long term use, if you just cannibalize jobs, which is all what basically happens when devaluing. Protecting you own local jobs, no matter how attractive that sounds, might leave your grandchildren out in the coldest of winters. More than ever we all need to think about what the good jobs could be created on a worldwide basis and then let these good jobs trickle down to the best workers… and I have no reason to doubt that the Americans would not be among the best.

    Then of course, when and if you have been able to visualize a good point B where you want to go, there remains the question of how to get there, since you want to avoid a long and tortuous voyage that might tear apart the fabrics of your society.

    So indeed this is a major challenge for any country and for its leaders. Is the US up to it?, well that, as a foreigner, is not for me to say… although I need to comment that I do not find the existence of burgeoning opinion building enterprises, with business models that feed on the confrontation among the citizens, to be something particularly us

  77. The problem re getting to point B is indeed beset with a number of difficulties. The two major difficulties?
    1a. many people claim to want the future fixed and not be like the 2006 finance scene yet they also want our dollar to be
    1b. continuing unchanged as a global reserve currency with undisturbed value.
    2a. Wall St and Washington want our dollar to continue unchanged as our domestic unit of exchange and
    2b. continue as our national store of wealth and at the same time
    2c. continue as an inexhaustible source of funds continually replenished by the world using dollars as a store of wealth. All to be done to do tap this source is virtually print dollar bills!

    Seems we must face the inconvenient fact that the US dollar must return to being our US national currency alone. This will allow us to wrestle our domestic problem without concurrently having to bear the conflicting demands of the global currency load.
    The world’s reserve currency is not a private US problem so let the world fix it! Short term separate the existing function as a ‘International dollar’ and tel the IMF, it’s your baby.

    Immediately we will hear claims that this won’t work but may I suggest this is the TBTF crowd and their apparatchiks demanding we all shoulder their problem and continue providing their magic money source.
    OK it will be difficult but who said it would be easy? All the dumb economists and their bank buddies screwed this thing and every fix path will be difficult. Seems as if inaction and jawboning delays fixing and allows the system to further deteriorate.

    Question: People who have profited from this debacle seem to be very loud denouncing any facing of facts which in any way touches their cache. Are they only interested in profiting while the rest of us slide deeper down the slope?

    I would like to see immediately:
    A.Restore separation of investment banking and commercial banks. It seemed easy to combine them so splitting them will be a breeze?
    B.Prepare to immediately handle investment TBTF bank failures
    C.Restore Mark-to-Market and ensure off balance sheet black holes be in public view.
    D.Declare the first TBTF investment bank bust and dismantle. Watch how quickly the rest get their act cleaned up.
    E. Derivative contracts not enforceable unless the instrument is previously approved by ??? and each contract registered with ??? This will give a clear view of all exposures. No one to be liable or benefit from unregistered or unapproved instruments.
    F. All stock market deals to be done in public (no dark pools) No special arrangements to advantage the big computer dealers while us 401K’ers and private citizens mistakenly expect an even field for all.
    G. Note names of the thieves and crooks who are screaming foul! Have the FBI, CIA and Marines handle them.

    No I don’t want a medal. But I would like StatsGuy et al tidy this up without any watering down so that Mr. Geithner can get busy on some real All-America fixes.

    What important stuff have I missed?

  78. “Seems we must face the inconvenient fact that the US dollar must return to being our US national currency alone. This will allow us to wrestle our domestic problem without concurrently having to bear the conflicting demands of the global currency load. The world’s reserve currency is not a private US problem so let the world fix it! Short term separate the existing function as a ‘International dollar’ and tell the IMF, it’s your baby.”

    Does this mean that USA’s problem is that the world trusts the dollar too much so that you would prefer relinquishing this “advantage” and have your Fed instead build up reserves in whatever international currency the IMF comes up with? If I was an American I am not sure I would agree with that.

  79. What important stuff have I missed?

    A couple, like for instance…where would the jobs come from?

  80. For a country that is importing 70% of its liquid fuel supply persistent dollar decline will be catastrophic. There will be no re-balancing of trade deficit, as increases in exports will be more than offset by increases in nominal imports. In a long run, US must re-industrialize or it will become another part of latin america. But for this to occur, there needs to be some time of relative tranquility. I personally think that precipitous dollar decline may very well finally light the fuse here. The last stronghold of working class are the truckers and the transportation workers. Dollar decline, coupled with continuing economic weakness, will decimate them. Think transportation strikes, blocked roads and railroads, disruptions in supply of essentials.

  81. Perhaps the United States could lead the world in giving up an “addiction” to oil.

    Why doesn’t the United States stimulate its economy by funding renewable energy innovation and technology? Lead by creating a new energy paradigm for the next generation.

  82. Brain” I don’t know who that was directed at, but for the record, I’m still on the red pill – and just seeing the blue pill causes a severe reaction.

    This article is a blue pill. What it is doing in a red pill bottle I don’t know. It is Simon’s Rx. One that will be removed from my RSS reader.

    I can pay for cable and watch Dennis Kneale re-runs if I want to see utter *$(#

  83. Joe Gagnon writes “if policy makers respond appropriately, there is no reason to fear (a devaluation) will cause overall harm either to the US economy or to foreign economies.”

    I can’t help feeling the “policy” referred to needs to embrace more than economic policy.

    Economic growth is driven by finance and industry. But in North America and Europe we are dealing with over-industrialization. Consider the environmental degradation caused, for example, by:

    – industrial farming
    – industrial fishing
    – industrial forestry
    – industrial cattle farming
    – the container ship industry transporting manufactured goods all over the world
    – economies dependent on automobile production

    The planet cannot sustain this pace of unlimited industrialization. I am not opposed to economic and industrial development. But we need to find a smarter way to do things. It is more than just trillions in debt (based on future ability to pay) that we are leaving to succeeding generations. George Soros memorably puts it this way: The planet is going to cook.

    I really like the idea of North America leading the world in a new energy paradigm. But what we have in Canada are the Alberta tar sands that they United States views as its new source of oil.

    It might be very helpful if the United States stopped focusing on the Alberta tar sands and took leadership on renewable oil.

    As for carbon-trading. My worry is it’s just another way to game the system to maintain the status quo.

  84. typo should read:

    took leadership on renewable energy

  85. A feasible technological path, i think, is fairly clear. The country needs a second wave of electrification, because there are more ways of producing electricity thsn there there are ways of producing liquid fuels. As far as what will produce electricity, I am all for renewables, and their part in the mix should be incresing, even if it means some subsidies. But the realistic technologies which can maintain the country for the time being are oil, gas, coal and nuclear, which which must be used to buy time
    at least.

    As far as cooking the planet. I am a physicist, and I have no patience for global warming theories. It seems like nature will debunk them for us anyway, as we seem to be entering a cooling period, which may actually become a serious problem, because it seems we have a coincidence of a natural cooling cycle due to oceanic circulation and suddenly quiescent sun. I would not worry about cooking the planet, though I do worry about general pollution.

    More broadly, western civilization in its present form can not be extended to 6 billion people. Morally, this is not a fault of western civilization. Its emergence was a miracle, given that human civilization persisted for millenia building stone monuments to non-existent gods. Asians are trying to copy the western civilization, but they can not succeed without the next step in technological advancement. This is the central fallacy of globalization. Bringing global prosperity has been presented as a political problem alone, but it is also a technological problem. What is happening now is that prosperity, which can be extended with present methods to perhaps 30% of planet population is being redistributed worldwide. If left unattended, it will produce a global latin american society with 30% haves and 70% in abject poverty scheming to rip the throat out of this 30%. Severely oppressive global police state, full of “terrorists”. The trick here is to maintain social cohesion while evolving the technology. If there is a country that can do this, this country will lead the world, and I want the US to be this country.

    This means, development of US energy resources (natural gas for instance), industrial policy, contrary to the wisdom of economists whatever protectionism is necessary to maintain social cohesion, de-financialization of the economy, as financialization is just another form of socialism, except in free market clothing, and re-industrialization with industries that can meet the energy challenge.

    When I was a kid in Poland, I was stunned to learn that comrade Lenin once defined socialism as “the power of the soviets and the electrification”. He had the second one right, and it seems like we have gone full circle. I want that electrification to come from the US, not some wicked socialism that will emerge out of spreading misery.

  86. Good point Per.
    Let us get the financial mess cleared away and we will get the jobs.
    There’s nothing we Americans can’t lick.

  87. You’ve got “globalization”, “imperialism”, Global War on Terror, “permanent imperial war”, “domestic militarization”, the “three parts of one evil”, plus a couple other ills, all conjured up in response to a suggestion that the US needs lower wages and a lower fx rate to be competitive in global trade — something that has been apparent for decades in terms of trade imbalances and a disappearing US manufacturing base.
    And I said all that without becoming emotional…

  88. Mirek you write: “I am a physicist, and I have no patience for global warming theories.”

    My first cousin is a conservation biologist. He has taught at Cambridge and has a tenure track position at a Canadian university. I’ve asked him about competing theories on global warming. He says it is not as catastrophic as predicted in popular culture. But he says as a scientist his training is to look at the facts objectively and there is global warming.

    I live in Canada and the Northwest Passage in the high Arctic is thawing. There are predictions that the Northwest Passage could be open for large parts of the summer in as little as 15 years to shipping.

    Arctic Sovereignty is becoming a major international issue. Oil exploration on the Arctic seabed is seen as having real potential. Canada, America, Russia, Denmark (and other countries?) are all claiming “a piece of this pie.”

    See here for a news story on Arctic Sovereignty and global warming.

  89. Econ
    For Americans to sum up the courage to do what is necessary will mean replacing the corrupt Congress effectively captured by lobbyists for every sector of the economy including Wall St, Big Pharma….That will be “where the rubber hits the road”.

  90. New industries, just like they always do, and old industries benefited by a falling dollar. As far as an international currency, let the Europeans handle it. Personally, I would love to see England lead the battle against Muslim extremists and other burdens America is always assumed will carry. England commentators always love to throw stones from the sidelines at America. Let them see what happens when America focuses on improving itself. Does anyone know how many new British soldiers are going to help American soldiers on the next troop ramp-up???? Is anyone saying Brown is “dawdling”??? Not even up for discussion is it??? Wonder to think what if we had taken a half-ass attitude when Churchill asked for USA’s help.

  91. It has been great reading all the debate my post stirred up. Before I move on, here are answers to 2 of the more interesting questions readers raised.

    1. Doesn’t a falling dollar raise commodity prices and thus US inflation?

    Raw materials compose about 5-10% of the cost of consumer purchases; labor composes about 65-70%; and capital about 20-25%. Traditionally, commodity prices rise about 75% of any decline in the dollar. Even for a very large dollar fall of 20-30% the overall inflation rate will rise around 1 or 2% for one year and then fall back to its previous rate. No theory here–just facts.

    2. Won’t a falling dollar scare away foreign capital and thus reduce the investment in new factories needed to employ more Americans?

    StatsGuy is correct that Malpass has the causality backwards. Our trade deficit is caused by all the foreign capital flooding into the US, mostly to buy Treasury bonds, which has held the dollar above the level that would balance exports and imports. A lower dollar does go hand-in-hand with less total capital inflow. BUT, it almost surely means more FDI as foreigners set up factories in America to take advantage of cheaper costs. With less money coming in to buy Treasury bonds, it means higher interest rates in the long run, but hopefully more saving by US households.

  92. Mirek writes: “More broadly, western civilization in its present form cannot be extended to 6 billion people.” Yes, it does not matter whether you call it peak oil or global warming the fact is that all roads leads to the same Rome… there is a need for something drastically new… which does not imply it has to be something drastically bitter.

    And of course as a son of a polish soldier liberated by American soldiers from a concentration camp I also include myself among those wishing the US would be leading us towards something new… but I am sad to say this latter does not looks so easy.

    But whatever the new, sell it as a wide door to a bright new future and not as an escape route, and, whatever you do, do it fast and do not procrastinate since procrastination will certainly consume the America that is or at least the America we wishfully hope is.

  93. Clifford Nelson

    Thank you very much for your thoughts!
    Best,

  94. Your inflation analysis reminds me of a scientist sitting in his bathtub looking at some test tubes while the bathtub is rolling around on a storm in the middle of the oceans.
    As a foreigner living in the USA for 8 years I have observed it closely and stress tested the American taxpayers willingness to pay up as well as the existing social cohesiveness, both necessary to hard-work yourselves out of the problem and, unfortunately, I have seen too serious lackings on both fronts.
    Also though you might have advantages to attract FDI most of that FDI will feel highly uncomfortable with the idea of participating in paying all those bills left behind by the old economy.
    Therefore I hope you concentrate all your efforts on building the new economy and do not waste too much on trying to settle the accounts and the pending bills. You still have a window of opportunity given to you freely by the fact that there are no other alternatives to the dollar out there, but if you miss that window of opportunity it will all be so much more difficult, and the America we all hoped for might exist no more.

  95. For a pretty thorough debunking of the claim that the biggest, current threat to the U.S. economy is the possibility of rampant inflation, I highly recommend Scott Sumner’s blog “The Money Illusion.” I’ve just begun reading this blog, and while some of the posts can be a little too technical for those without a solid background in economics (like me), overall I really enjoy it. Particularly interesting was this recent post:

    http://blogsandwikis.bentley.edu/themoneyillusion/?p=2865

    I think the facts brought up in point three of this post pose a serious problem for those arguing U.S. dollars should be backed by gold. It is my understanding that the point of backing up U.S. dollars with gold is to ensure price stability. The kinds of external factors described in point three of this post seem to indicate that using gold to ensure price stability may not be such a great idea. Also, to use a historical example, there was that whole episode of rampant inflation in the Spanish Empire after the Conquistadors pillaged South America…It’s true governments that use fiat money sometimes abuse their power and create inflation, but the same thing can happen with currencies backed by tangible assets like gold. I agree with StatsGuy, right now we need to start worrying about correcting the severe imbalances of the last twenty-five to thirty years. One way to do that is through a moderate amount of inflation. Scott Summers has recommended something along the lines of 4-6%. Paul Krugman, who is much more liberal that Summers, seems to agree with this overall approach.

    http://krugman.blogs.nytimes.com/2009/11/13/its-the-stupidity-economy/

    Liberal or conservative, I think we should all be able to agree that now is not the time to start with the gold fetishes.

  96. And before I move on let me point out once again your disguising your pig which is going to rob everyone blind with gobs of lipstick.

    “Raw materials compose about 5-10% of the cost of consumer purchases; ”

    That bogus figure in no way shape or form factors in oil or the oil used in the petrochemically intensive farming and transportation of food.

    Let me spell this out like you are in forth grade: THE CONSUMER CAN NO BACK OUT GAS AND OR FOOD FROM HIS/HER BUDGET LIKE CPI (thanks to Nixon) BACKS OUT FOOD AND GAS FROM THE INFLATION GAUGE YOU USE.

    You lipstick wearing pig is going to leave folks freezing to death. I suppose you think I’m strupid enough to believe that consumers heat their home in the northeast with free solar panels??????????????????

    And your a senior fellow for a think tank that wants to save Social Security and raise awareness. I wish you were alive when Pete’s Dad owned the open 24 hour diner and told him to deposit 100 bucks in your bank and he’d have 25 bucks tomorrow.

    You should not teach! You should not write!

  97. Maybe I’m wrong, but I think the CPI does include energy and food costs in it’s calculations. I think the measure you’re referring to is core inflation. That definitely does not include energy and food prices.

  98. According to this website the CPI does include energy and food prices in its most frequently cited calculations.

    http://www.bls.gov/cpi/cpifaq.htm

    If I recall correctly there was a good deal of debate in the early to mid 1990s about what to include in the CPI. I think the compromise was to come up with several different measures, “core inflation,” being the measure that excludes energy and food prices. It depends on the media outlet, but generally I think when you here about an increasing CPI level these days this includes energy and food prices. But I could be wrong…I think it really depends on the media outlet.

  99. I’m not advocating a gold standard.

    Every currency ever had inflation. In the old days they clipped coins, changed what they were made of and or issued notes on many claims.

    The bottom line is that when you have to counterfeit the difference of what you take in and what you pay out because the cumulation of revenue and borrowing doesn’t cover your obligations YOU ARE INSOLVENT.

    When you are insolvent there are TWO WAYS OUT.

    Pay your debt (and paying it with money you printed to bail out banks is smoke and mirrors).

    OR

    Default.

    A OR B.

    When you can’t do A there is one choice.

    As a former airline captain I look closely at the gauges, the gauges that these pigs wearing lipstick rely on are not reading accurately. Thinking you can nosedive into the ground and call it a controlled crash won’t work.

    It is B.

    Not pretty. It is an ugly pig. It is what happens when you allow politicians to borrow and spend. David Walker who this guy works for said it best, our biggest deficit is a leadership deficit.

    My question to David is where is HIS leadership? Why is he paying people who dress pigs up with lipstick? A weak dollar is NOT the answer.

  100. And I said the US doesn’t need to be part of global trade to the extent that it requires all that.

    The people did not benefit from it and never will. Only an ever-shrinking group of elites did. The people’s position has been steadily undermined since the early 70s. Globalization was part of the attack.

    So you’re talking about trying to prop up a failed, fraudulent policy.

  101. Inflation:

    http://www.chrismartenson.com/crashcourse/chapter-16-fuzzy-numbers

    and

    http://www.chrismartenson.com/crashcourse/chapter-10-inflation

    And oh by the way, one of Buffett’s first big 1960s investors emailed me Chris’s videos.

    Core backs it out. But. And this is a huge but there is a little know secret called substitution. You, when you had a strong dollar bought steak. Now when things are bad that same consumer with his WEAK dollar can only afford canned beanie weenies. So they substitute steak for beanie weenies and say inflation is only up a little.

    Second, that inflation is NOT higher prices. That is Keynesian stupidity. The think I like best is Keynesian’s know they are wrong and their answer is we’ll be dead when it all blows up.

    Well, this is the utter garbage we fed our brilliant economists and none of them saw 2008 or the real estate bubble.

    This is why Marc Faber and Jim Rogers saw it. This is why Peter Schiff saw it. This is why Chris Martenson saw it. This is why Jim Puplava saw it.

    You could listen to Ben he said this in 2005 (and look at the gold ticker then – we ALREADY HAVE A WEAK DOLLAR.) Soon Moms Dads and 5 year olds will work 3 jobs to pay this debt and devalued weak dollar.

    You could listen to Romer and her husband. Her husband called the recession how many months after the fact. Tell me, is NBER calling it over now that we are in a depression? 22% unemployment.

    Amazing.

    And I though Dennis Kneale on CNBC was the only (fill in the blank).

    Put your money where you want as long as you can sleep at night. Listen to who you want. But when I see pigs being dressed up as babes it really bothers me. When I see experts working for sound tanks applying the lipstick I am left in utter dismay. When I see this toilet paper being touted as art on what was a fine blog I am utterly disappointed.

  102. Well then, I guess I don’t see where your disagreement with StatsGuy and, to a lesser extent, Dr. Gagnon is. You seem to agree we must default (when the amount of debt owed is several orders of magnitude larger than the total value of all goods and services produced by the economy in a given year then I don’t see how there can be any other option), the only question then is how do we go about doing it. I think one way is through a moderate amount of inflation (I believe StatsGuy is also in favor of this, but I don’t want to go putting words in his/her mouth). As you so thoroughly document above, the major source of our debt seems to be the entitlements of medicare and medicaid. I don’t think anyone here is arguing that these structural problems need to be fixed. In fact, StatsGuy had an extremely informative post a few months back ago about some possible ways to go about fixing medicare and medicaid:

    https://baselinescenario.com/2009/09/02/healthcare-rationing-is-good/

    Maybe I’m just a little dense, but I don’t really seem to get what your overall concern is. No, fixing our structural problems is not going to be easy. I don’t think Dr. Gagnon is saying that the ONLY thing we need to do to solve our debt problem is to devalue our currency. That is merely one of many, many, many actions we are going to have to take to get out of this crisis. Or is it your position that what is necessary is a tighter monetary policy? Unless that is what you are trying to argue I think you, StatsGuy, and Dr. Gagnon are probably a lot closer to agreeing on the right way to proceed than you think.

  103. YOU REALLY WANT TO KNOW MORE THAN WHAT THEY TELL YOU. THE GAUGE IS NOT AS IMPORTANT AS WHO THAT GAUGE MEASURE THINGS.

    nflation:

    http://www.chrismartenson.com/crashcourse/chapter-16-fuzzy-numbers

    and

    http://www.chrismartenson.com/crashcourse/chapter-10-inflation

    And oh by the way, one of Buffett’s first big 1960s investors emailed me Chris’s videos.

    Core backs it out. But. And this is a huge but there is a little know secret called substitution. You, when you had a strong dollar bought steak. Now when things are bad that same consumer with his WEAK dollar can only afford canned beanie weenies. So they substitute steak for beanie weenies and say inflation is only up a little.

  104. Who should be how.

    Also you might want to watch Chris’s videos on GDP. You own a home and they say, well you’d pay 5k a month in rent. Even though you don’t pay rent they DO add it to GDP.

    GDP and inflation are as baked as Ken Lay’s books.

    You can fly your plane or drive your car and believe that you have a full tank, when your car runs out of gas and the realization that the gauge was busted sinks in it might not be a pretty sight if it is raining and night and cold and you have a little one in the car.

    Best of luck folks, this site has been removed from my RSS reader. Deleted like CNBC’s. Gosh, I can still hear Maria’s voice. Ughh,.

  105. Imagine if the stimulus had been

    1. Of a serious size;

    2. rationally planned.

    Instead we get half-assed reactionary “policy” like Cash for Clunkers and the housebuyers tax credit.

    And then there’s something like this:

    http://www.nytimes.com/2009/11/15/business/economy/15gret.html?_r=1&ref=business

    Clearly we’re never going to solve anything with the same policies that got us into this mess, nor with the same politics.

  106. Grr…

    “I don’t think anyone here is arguing that these structural problems need to be fixed.”

    That should read:

    “I don’t think anyone here is arguing that these structural problems don’t need to be fixed.”

  107. End of Dollar As International Reserve Currency: Implications For U.S.

    http://www.gresham.ac.uk/printtranscript.asp?EventId=260

  108. What he is not able to understand, or really does not want to understand, is that the most likely candidate to replace the Dollar as a reserve currency if the Dollar defaults is the Dollar II, since as long as the US can hold together as a nation there are really no other options out there.

  109. Maybe. But I truly didn’t read it this way.

    My take is that the Fed wants the value to go to 0 but not overnight just a slow gradual easy descent.

    That is impossible. It will NEVER happen. Past 71 on the UDSDX it will cliff dive at some point below 71.

    This article advocates sitting on our hands and that crashing into a mountain while sitting on our hands is a good thing.

    Lipstick on a pig.

    He wants to write that the buck should be devalued and revalued then write that. Don’t dress up a pig and tell me it is a hot date. I’m not a helmet wearing challenged person and I resent being talked to like I’m stup*d. A weak dollar is NOT a good thing. And to be honest I’m not sure with 70% of the oil coming from outside our borders that this will work.

    This administration and everyone dating back to Carter has failed us with energy. T Boone Pickens is right, this could have helped our economy and instead we tossed 11-24 trillion at the banks which are still insolvent.

    Fed mentality. Political will. Not going to do it.

  110. Maybe, but I wouldn’t be surprised to see a BRIC basket. Brazil, Russia, India and China.

    Jim Chanos might strongly disagree on the C in the BRIC.

    Who knows. The world has gone to the dogs, it is a race to the bottom, but one thing is for sure, Nixon declared force majure in 1971 and since Vietnam and the butter and bullets mentality we are the worlds biggest debtor. If we BK the worlds biggest creditor? I don’t know.

  111. We have the example of stagflation in the 70ies that clearly shows that inflation and unemployment can coexist at the same time.

  112. “get price levels back onto their long term trajectory”

    This always confuses me. I know that in this universe, nothing is infinite. Energy, resources, etc… only in the theoretical scenarios of math (and by extension economics) can something grow infinitely. However, this “long term trajectory” always seems to involve growth at a percentage rate which implies two things:

    1) its growth is exponential. Take a look at what happens to things that grow in an exponential fashion (bacteria, viruses, animal populations) to get a hard lesson in the results of such growth.

    2) its trajectory is up towards infinity. A tremendous lie to tell ourselves, seeing as the planet has limited resources, limiting the number of people it can support. This limits the amount of work that can be done and therefore the size economies can grow to.

    Is this really the trajectory that economists believe the world can always sustain? It always seems like they talk about it that way. Is there any modicum of reality that sneaks in to these thoughts to impose a ceiling? If so, where is that ceiling?

  113. Hey folks, check out this photo. Greenspan found a place where his unique talents are still in high demand. This is a story from Andrew Corsello of GQ magazine. Just click the link and scroll down. http://www.gq.com/entertainment/books/200911/ayn-rand-dick-books-fountainhead

  114. Excuse me, that is not a photo, but an illustration, by John Ritter.

  115. NKlein,

    Those are helpful links; Sumner posted a more complete version of his ideas here:

    http://blogsandwikis.bentley.edu/themoneyillusion/?p=2810

  116. Thanks Russ, the same old same old, or as Captain Renault said,

    <youtube=http://www.youtube.com/watch?v=-Gf8NK1WAOc]

    (Hat tip to Uwe Reinhardt for the great link.)

  117. [http://www.youtube.com/watch?v=-Gf8NK1WAOc]

  118. “Hyper Inflation”

    http://www.financialsense.com/fsn/main.html

    Part 1 John Williams at or about the 22, 23 minute mark. For anyone touting GDP as a savior you might want to really take a listen to this with an open mind.

  119. Nicely put.

    Two things Simon is grossly missing:

    1. What are we going to export? What do we manufacture, and how long would it take to get up to speed, and at what prices would we be able to export those goods and services.

    2. What is going to happen when fuel pushes the prices of our goods up? To compensate, other costs (SUCH AS LABOR) will have to come down even more.

  120. Totally agree on this point.

    If you are counting people who want to work full-time, and either aren’t working or are only working part-time, regardless of how long they have been unemployed, then 22% is the accurate picture.

    22% – or more than 1 out of every 5 “working people” are out of work.

    I’m sure a weaker dollar will help. LOL.

    The only thing a weaker dollar will do for these folks is…well, nothing…except if they have savings, in which case, they will be scr*wed. I’m sure they’ll all be sending Simon, James, and StatsGuy thank you notes.

    How is it that supposidly intelligent people are so darn clueless.

  121. [video:http://www.youtube.com/watch?v=baXNLHj8xlQ&feature=player_embedded%5D

    2 minute point, a must listen. I’m sure the late AR is making AG buy gold and he isn’t doing it for fear of a collapsing dollar.

  122. Davos
    What action plan re savings should mom and pop follow to retain some value in their savings and avoid/minimize the inflation proposed to scam the people?

    By scamming I mean that not paying your debts except by less worth paper currency. I think there should be a plan which nails debt to the debtors starting with TBTF banks, while the plan safeguards purchasing power of our savings.

    Now what exactly are you saying is the correct path for us?

  123. If the US government devalues the dollar then the price of oil will rise and make it economically feasible to invest in renewable energy projects. And the best way to address the global warming problem is by influencing investments to flow into renewable energy projects….by using greed in a productive manner. This also is the best argument for breaking up the TBTF institutions and reining in their outrageous salaries. Doing that would channel more intelligent people into careers that are a more productive use of their intellect. What benefit does society gain from the investment-casino games played by Goldman Sachs?

    This reminds me of an interview I saw where David Letterman was asking Pres. Clinton to explain the economic crisis and Pres. Clinton said that government did not influence the flow of capital into useful investments like renewable energy so global funds sought out their profits in the real estate bubble.

  124. Gagnon –

    You write that falling currencies actually results in lower bond yields in one of your linked papers. At the same time praising “developed” economies for their insightful and prescient financial rulers. I believe you have such a fundamental misunderstanding of economics that you cannot possibly make any sense which is what is causing confusion here.

    You need to understand is economics is about people and *their* decisions. Your “macroeconomical decisions” are based on the idea that you can make a persons rational decision so unappealing that they will do what you want them to do instead of what they should do as an individual.

    In response arguing that your actions aren’t really hurting the people as bad as they think isn’t an argument at all. Stop forcing people to do what you want them to do and allow them to make their own decisions. Economics then becomes a study of what people do, not what we can force them to do.

  125. To make it more plain. Gagnon controls the value of your property (dollars) and he controls the measuring stick used to measure your economic well being.

    He is arguing that taking away your money is increasing your well being as he measures it. I’m pretty sure put this simply no one would ever trust Gagnon with this power.

    I want the government to stop interfering with the market. I know economics. I can predict what a rational market will do. I cannot predict what the government will do with control over my money.

  126. Well China is pushing for a new international reserve currency and with good reason. With all of the US debt that China holds it can’t be happy to see the US devaluing that debt. Don’t know where I read it but someone reported that when Geithner visited China they posed very detailed questions about how the US was going to finance it’s new healthcare plan. Now that’s exactly how a creditor acts when it’s concerned about a debtor’s ability to make good on their payments.

    If the US fails to split up TBTF’s and effectively regulate derivatives then history will simply repeat itself. After the next financial meltdown the US won’t be able to TARP it’s way out of the mess because by then China will have turned off the credit faucet by finding a new international reserve currency.

    From FT.com / Asia-Pacific: “In an essay posted on the People’s Bank of China’s website, Zhou Xiaochuan, the central bank’s governor, said the goal would be to create a reserve currency “that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies”. http://www.ft.com/cms/s/0/7851925a-17a2-11de-8c9d-0000779fd2ac.html?nclick_check=1

  127. My earlier post resulted in no response!
    ‘Davos
    What action plan re savings should mom and pop follow to retain some value in their savings and avoid/minimize the inflation proposed to scam the people?

    By scamming I mean that not paying your debts except by less worth paper currency. I think there should be a plan which nails debt to the debtors starting with TBTF banks, while the plan safeguards purchasing power of our savings.

    Now what exactly are you saying is the correct path for us?’

    So continuing critiques re who said or meant what and apparent agreement that inflation to resolve debt by debasing the dollar. Result will be that anyone holding dollar savings will be robbed! Is that the best this bunch of clever people can suggest?

  128. You think?

  129. It is not just English commentators that enjoy complaining about the United States.

  130. Well the scam if that is what you want to call it has, for all practical purposes, already occurred… although some hold that they keep going at it. And since public debt is clearly debt nailed to the taxpayer debtors, the real question is whether this generation will take care of it, netting it out against taxes paid or inflation suffered, or whether you prefer sticking it to future generations. (If meanwhile you want to try to recover any stolen goods that is ok, do it, but this will do little to solve the overall problem).

    Debasing it immediately going the route of an Argentinean type proposal or a German one if that makes it more digestible, or taking the longer inflation route so that it does not hurt so much depends on you. Myself thinking of some of the consequences of the Versailles treaty reparation bills presented to Germany feel inclined to pull out the teeth with a swift move. Especially while the US, as I believe I said before here, has a window of undisputed credibility that allows it to do things other cannot.

    As a true friend of the USA I would not like to see it go into a long period of adjustments that can tear away at its already delicate social fabric, and so I would prefer anything that allows you to go out and sing “Oh what a beautiful morning!” even knowing yourself to be somewhat poorer. Do not mortgage your kids! If so remember also that they might send you to a well deserved “ättestupa”.

  131. Hello Mark:

    Mark wrote: “I know economics”.

    To which I would add: After reading both your posts you certainly do. I’m at a toss up between which is best, predicting rational markets or the measuring stick sunk in the well.

    Awesome read, many thanks

  132. 3-D hits the nail on the head with the old exponential growth argument. Growth for it’s own sake is not logical – it increase pressures on input resources as well as pressure on the environment. In a twenty-year period, for GDP to grow at 3.5%, economic output must double; to reach 5.5% growth (!) economic output would have to nearly triple; and even 2% growth means a fifty percent increase over the present.

    2% growth may represent sustainable investing in actual physical assets that make the world a better place to live in. Trying to grow faster than that, IMO, begins to creep into areas that provide revenue, but in the earth’s cost/benefit analysis, are not worth doing when balanced against the utility provided. And, at some point, even the cost /benefit calculated from the perspective of a developed country does not provide utility, but produces bubbles.

  133. Hello NotaBanker:

    I’m not a certified financial planner, and even like some of my best friends who have their broker licenses and don’t practice I don’t even have that.

    I can tell you what I have faith in and you can run it by a good financial planner. Chris Marteson recommends one on his site that gets how things work, I have FaceBook friends who are financial planners who I have told flat out my beliefs and they look at me like I have 3 heads. Of course I told them this when gold was 200 an ounce.

    I have faith in the 4 G’s. G(* religious edit as not to insult anyone agnostic/atheist)d, Gold, Guns and the Government is and will continue to scr*w it up.

    Last night, as posted in the video above, even Alan Greenspan is buying gold bars.

    Silver will likely work, I believe in it to.

    Most of all, my family stays stocked for 3-6 months. We buy a cow locally and split it with 2 friends. My kids has chickens, my wife has a great garden.

    By intent or by shear stupidity (barring some revolutionary battery invention or energy invention or some ugly plague or some horrific war) we are on course to fly into the mountain at full speed and debase our currency. It will wipe away the debt. It will be re-valued. It will be painful. Painful isn’t even a term that defines it.

    I got out of real estate in 2004, then again in 2007, I emptied my 401k’s IRA’s, paid down debt and put my faith where it belongs.

    As the smartest person I know explained: It is NOT a matter of peak oil or peak any resource, it is a matter of population. The sad truth is we have a system that isn’t sustainable, a system that will harm us.

    I don’t know if you watched Dr. Albert Bartlett (who this guy supports) but he said 2 things, one our solutions create more problems and 2 the biggest problem mankind faces is that it does not understand exponential math. You can Google him and math and watch his videos. When we talk 7 billion (round numbers) and we think about the economy which is selling the earth’s resources we can see that this can’t go on forever.

    Creating money, which is what the fractional banking system does, what QE does, aids and abeds in this insane way of living.

    Take care, and get good adice before you invest, I’m just a guy who reads no less than 3 hours a day, doesn’t watch TV and just got lucky and got good direction on what to learn up on.

    PS Once you see the picture for what it is you will see it is like looking at a stereogram, the Bernanke/Gagnon smudge on the top disappears and the truth below comes into focus like a laser.

  134. Hello Rob:

    3-D nails it!

    Exponential growth videos for anyone interested. Dr. Chris Martenson, who I blogged for – for about a year

    http://www.chrismartenson.com/crashcourse/chapter-4-compounding-problem

    http://www.chrismartenson.com/crashcourse/chapter-3-exponential-growth

    Dr. Al Bartlett (who one of Buffett’s billionaire big 1960 investors turned me onto in addition to Chris)

  135. One last thing before I go over to departure:

    Simon: Feel free to run my “Robbed Blind by a Lipstick Wearing Pig” article.

    ZeroHedge, The Burning Platform, and Nate Marten’s Economic Edge all put the article up. Today I’ll likely submit it to a few other fine blogs.

    Just for the record, CNBC had a memo leaked about how guests should respond. I find that as sickening as seeing good blogs go bad. I respect blogs for helping folks see through the CNBC fog, when I see that fog on a super blog it is beyond saddening.

    http://www.ritholtz.com/blog/2009/11/internal-cnbc-guest-memo-leaked/

    Richard Ambrose is the author of some amusing financial humor. He is the original author of The Lloyds Prayer that was widely circulated without proper attribution last week (my apologies, Richard!)

    His most recent work takes a poke at one of my favorite CNBC curmudgeons, Mark Haines:

    How To Be An Agreeable Guest Of Mark Haines on CNBC:
    Each trading morning, CNBC’s anchor agrarian has two
    guests he asks one simple question: “So, What Do You Think Of The Market?”

    If you are chosen, you¹ll only have 20 seconds to answer so practice
    practice practice!; Here¹s how to make sure you get it right!

    “Good Morning Mark! I’m (pick ONE)

    a) Very Bullish
    b) Bullish
    c) Bullish But A little Cautious (Use ONLY if market is currently down)

    on the markets here because we believe (pick TWO)

    a) interest rates are going to stay low,
    b) there is real growth in the GDP,
    c) the rally is still intact,

    And (pick ONE)

    a) stocks are a great value at current levels.
    b) the market will continue to go higher from here.
    c) stocks are undervalued at these levels.

    We¹re bullish on (pick up to THREE)

    a) Technology
    b) Energy and Commodities
    c) Blue Chip Industrials
    d) (Insert Stock Names You Already Own At Lower Prices)

    Mark will make some short meaningless comment signaling your time is up, then repeat your name and firm; SMILE and remember to reply:

    “Thank you for having me on.”

    Amusing stuff, Richard. Thanks!

    Take care!

  136. If you look at the Fed’s balance sheet (and can make any sense of it) the supply of money practically doubled over late ’08, early ’09.

    That’s not an insignificant increase!

  137. Has anyone considered the possibility that the standard of living we are trying to support in this country (especially in relation to the rest of the world) is the root of the problem?

    In a global sense, the U.S. is acting the way that WallSt. is acting domestically. Suck up all the resources and use them for whatever we think is a good thing to have (defined by consumer markets). This sounds very similar to the creation of financial instruments on Wall St. do fill the demand for things to invest in.

    The constant growth paradigm is unavoidable as long as we rely on fractional-reserve banking to supply money for social/human “growth”.

    Basically Wall St investors found out they’ve put a lot of money into something that looked attractive, but had a lot of smoke and mirrors invloved. That’s the basic situation the country is in; we all want the highest tech playthings, don’t want to work very much, and have become accustomed to “work” being performed behind an office desk.

    Making some kind of marketable products is essential to our economic health in relation to the rest of the world. This is a difficult requirement to square with environmental goals, and the depletion of much of America’s resources during twentieth century boom times leaves us with less internal productive capacity in some respects. We have certainly thrown away the work ethic for the lottery ethic.

  138. ** Beginning of Rant **

    This is the last comment I am going to devote to responding to gold-enthusiast anti-fiat-currency paranoia… save to note that if you can predict what a rational market will do, you must be amazingly wealthy – you are a living violation of the Efficient Market Hypothesis. I, certainly, make no pretense at such divine powers.

    However, your argument that “government is taking your money away” presumes that money has some exogenous value which would be steady IF ONLY the Fed just never did anything. In fact, the value of money changes dramatically (relative to a basket of goods/services) without the Fed doing anything. AND THIS WOULD STILL BE TRUE IF WE WERE ON A GOLD STANDARD.

    The (ideal) purpose of the Fed is to STABILIZE the expected value trajectory of money relative to goods and services. (If the Fed had done that in November of 08, we would not currently have 10.2% unemployment.) In many ways, your concept of stealing is incomplete:

    To the extent that the economy deviates from a fixed monetary trajectory which was built into expectations (such as decisions to take a 30 year mortgage), a deviation in _either direction_ can be considered “theft”.

    Deflation could be thought of as the people who currently hold dollar-assets stealing from those currently holding goods/labor/assets. Morally, Deflation or off-trajectory disinflation is just as objectionable as off-trajectory inflation. (Worse yet is extreme volatility!)

    But Deflation is not just immoral in that sense, it’s also pernicious in destroying net national wealth and causing great misery due to unemployment and unused capacity.

    So while _you_ prefer deflation (perhaps because it benefits you), please do not argue that it is in any way more moral or just than inflation.

    The moral thing to do would be to commit to a fixed price trajectory, and STABILIZE expected nominal prices – and in the current environment, this would require at least ~7-8% nominal GDP growth for a couple years, and ~4-5% nominal price growth to remain consistent with the semi-official trajectory of 2% inflation (and, vis-a-vis scott sumner at money illusion, inflation targets are a poor-man’s alternative to NGDP targets… and he also has some creative suggestions for using markets to improve the Fed’s accuracy so they don’t make huge blunders like July through December of 08).

    Doing so would almost certainly require devaluation in the current environment, and though you can complain this would decrease your purchasing power to buy imports for your consumption… THAT IS THE POINT.

    And now I’m done.

    Hard Currency Fanatics are like Ayn Randers… There’s no sense arguing about reality.

    (And for the record, I used to be an Ayn Rander until I realized her reality, her books, and her personal life, had no place for children.)

    ** End of Rant **

  139. Sorry to pour cold water on Russ’s comment.

    Too many urban and suburban areas in the US have regulatory growth policies designed to stop and punish growth, mostly done in the name of the environment or social justice. Once the jobs that are being destroyed now are gone, it will be very difficult to bring them back. This is particularly true for manufacturing jobs which correlate with higher levels of pollution, noise, traffic, etc. Until the US wakes up and radically alters the regulatory nightmare it’s elites have created, the unemployment picture will not get substantially better. There are just way too many difficult, conflicting and time consuming requirements for new businesses to to be competitive. The regulators have erected just too many barriers to entry.

  140. The “fraud” is pretending that the US can exist in a protectionist wonderland with its workers being paid more than they are worth in comparison to chinese, Indians, etc.
    If you want higher taxes on the rich and to stop the corporate looters, more power to you. But protectionist wonderlands have been tried before and it has always ended in disaster.

  141. The “vested interests” are quite effective and I wonder what is ever going to stop them?

    If they can gut a reform effort on something as neccesary and obvious as health care and finance, then what about the cumulative effect of the array other less publicized issues….

  142. Rob Denehey, I’ll second your opinion on consumer markets.

    In Vancouver, where I live, there is a building boom and about 50% of the land fill is debris from demolished buildings. It is cheaper to throw away sometimes perfectly good construction materials rather than recycle (eg, tonnes and tonnes of wood, concrete, bricks, glass, gypsum, wiring). While restaurants, grocers, homes send tonnes and tonnes of wasted food to land fills. Untold volumes of used electronics. Graveyards of decommissioned ships, contaminated with PBCs, that are toxic too break (so we send them for recycling to India where there are no workplace safety standards).

    North Americans and Europeans do not need to live this way. But our modern economies evolved this way. It’s another variation on rent collection.

  143. What kind of “standard of living” is it that gives you herds of obese people, including children, with a type 2 diabetes epidemic to boot?

    Considering the “progress” of health care and financial reform, what would happen if a bill came forward to reform the processed food industry?

  144. These decommissioned ships are carcinagenic. But they are also “treasure troves” of steel. Some ships are sent to India where poor people working in bare feet (no safety boots, let alone a shred of environmental or workplace laws) create huge profits for “off shore” recycling companies. It’s a moral outrage.

  145. The fraud is in assuming we need to be in competition with the Chinese. You assume globalization and then picture things in terms of protectionism and the American worker’s “worth” relative to free trade barbarism.

    I don’t assume participation in this global competition in the first place, so I don’t have to assume protectionism vs. it. As degraded as our resources are, we still have economic options, which depend upon our political actions.

    What value the Chinese place upon themselves is for them to work out. I hope to join like-minded people in finding a way for Americans to place a human value on themselves and their freedom.

  146. You’re thinking of an outdated concept of manufacturing. Even if we got rid of all those regulations you find so nasty and went back to the wholesale poisoning of the air, water, and soil (for the non-rich only, of course – they’re not human, right?), America no longer has access to the affordable, plentiful oil which fuelled that infrastructure.

    America can, must, and will acheive its restoration, but at a more decentralized, far less industrially intensive level. (As must all the world.)

  147. Considering that most of the evaporated GDP was on borrowed money I think you are spot on.

    9 billion dollars was BORROWED and turned in for coffee at Starbucks in 2007 or 2008. This article by Jim Quinn, who is a Ivy League comptroller for a school who didn’t squander it’s money on CDOs wrote this. http://seekingalpha.com/article/103202-the-shallowest-generation. It is about one of the best reads. http://seekingalpha.com/article/103202-the-shallowest-generation

  148. Rant all you want. Even Greenspan – who blew the bubble of all times – is out buying gold bars.

    All Fiat currencies go to a value of 0.

  149. If the efficient market hypothesis worked, we wouldn’t have this crisis. If the efficient market hypothesis worked, Goldman Sachs wouldn’t be making the profits that it currently is.

  150. Fiat currency paranoia?

    http://www.youtube.com/watchv=baXNLHj8xlQ&feature=player_embedded

    Catch the 1:56 minute point.

    Then consider doing some real accounting here: “Hyper Inflation”

    http://www.financialsense.com/fsn/main.html

    Part 1 John Williams at or about the 22, 23 minute mark.

  151. PS: “In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

    This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth.” ~ Alan Greenspan 1966

    http://www.constitution.org/mon/greenspan_gold.htm

    Put your “money” wherever you can sleep at night

  152. I am no defender of the strong EMH, but Goldman Sach’s success is no evidence of the EMH’s failure…

    Goldman has extensive privileged access to information (and, arguably, influence over political outcomes). It also has faster access to markets, and cheap government-provided capital. These are systemic advantages that allow it to extract rents. They are not evidence that (given the same amount of information/speed/resources as everyone else) Goldman is vastly smarter than all other market participants.

    The author claimed to predict rational markets… That’s rather super-human. If they are rational, they are in equillibrium, and therefore quite hard to predict with consistent success. Well beyond my meager abilities.

    The degree of direct self-contradiction (and outright hostility to Mr. Gagnon and other commenters) defies standards for decent discourse. I am done directly replying directly to that sort of nonsense.

  153. OK repeated descriptions of the problem may give some folk a thrill but it is hardly a demonstration of intellect. This is just re-restating the obvious.

    What ideas re an individual’s prudent deployment of cash savings other than bank accounts result from all this awareness of the problem’s dimensions?

    What are you doing?

  154. To clarify my point, 3% growth can only be achieved by inventing new things to make – despite their minimal true utility in furthering human progress – we need to keep making things and selling them. When one market is saturated, you create a new one or transform the old one with technology.

    That’s in the real economy. I think the financial economy runs in parallel ways [after all the fundamentals are driven by the real economy]. The supply of investment funds created by all of this “growth” can only be absorbed by the financial markets using similar techniques – new kinds of investments based on new kinds of “assets”.

    I know this is a very macro view, but I think getting bogged down in details on this blog is not going to get anyone anywhere – no one can know the embedded assumptions in each poster’s mind.

  155. Agoraphobic Kleptomaniac

    “You are confusing government with currencies. You might want to read what our Constitution says about money.”

    The original constitutional stance has as much importance on monitary policy as looking to the original constitution for direction on civil rights and humans as property.

    Where exactly does the constitution cover international banks and corporations anyway?

  156. Hi StatsGuy,
    I see many people who did not cause the problem, do not consume excessively and love their kids.

    Do you have a suggestion, personal good practice applicable to my last question?

  157. If you really believe the worst imaginings of folks on these blogs are going to come true, I think a survivalist, off-the-grid, as self-sustainable as possible lifestyle should be your goal – Kind of like DavosSherman only more so!

  158. Thanks Rob,
    What are you doing re cash savings investment? I presume you do not solve the problem by spending every cracker?

  159. Cash per se is not a prudent deployment of fund and neither is gold but since ordinary markets could break down some cash and some gold make up a prudent little portfolio. Does it not mean you are going to lose a lot… absolutely! But prudence is more related to what is left over than to what is lost.

    See a kid that has got the potential of making much better with a degree if only he could afford it? Sign him up, as his manager, and get a cut of his future earnings above a level!

  160. I’m not a banker. either. But, if currencies start to fail or shift value rapidly, there’s no telling where it will end. Maybe gold is the place to be. It’s pretty tangible, and there’s a limited supply… It may be one of the things that retains value – like physical commodities that people need. It would probably be great for the farmers as long as the distribution system to get goods to market doesn’t breakdown.

    I, personally am not changing my behavior – My 401(K) is mostly in treasuries – no return, but who’s got a better reputation for paying their bills (lol)! I’m no longer contributing to it.

    The say ETF’s that diversify in global currencies or other assets might be a good alternative to holding dollars; BUT, the latest buzz is that ETF’s may be the next bubble, as everyone is trying to find the best place and they may be driving that market higher that it’s equilibrium point…

  161. Well I’ll be! Niall Ferguson and Paul Krugman actually agree on something. What is it that would bring these two pundits from extreme opposite ends of the political spectrum (and who can’t stand each other to boot) together you ask? Both think the dollar is too strong compared to the renminbi. Shocking.

    Krugman:

    http://www.nytimes.com/2009/11/16/opinion/16krugman.html?ref=opinion

    Ferguson:

    http://www.nytimes.com/2009/11/16/opinion/16ferguson.html?pagewanted=1

  162. If I had that kind of special insight, I too would be rich… Always be skeptical of people declaring too loudly that one asset class or another is dead. Most have an interests that align with their prognostications. Always doubt those who were “proven” correct by one year’s claims, especially if they sell themselves on cable tv.

    This is not an investor website (if you want that, go to seekingalpha), and I shouldn’t be doing this. But you mentioned kids, which is my sucker point. If you’re really all in cash, and you have kids, be aware that for long term investments cash is just another asset class – which Warren Buffet noted when he declared “all in” with his personal funds a year ago (and was lambasted as a fool when the S&P went under 700). Never invest (or divest) out of fear…. Ever. Diversify (slowly). Set asset allocation targets appropriate to your timeline, and periodically rebalance. Stick to your timeline, avoid panic. Don’t get greedy, or succumb to regret. (rebalancing is hard – I only partly rebalanced earlier this year because I simply chickened out, but I’m glad I did that much).

    When Mr. Gagnon notes that the dollar may fall, but is unlikely to collapse (unless we fight devaluation to the bitter end by trying to hold an interest rate peg) – he is being honest. The US trade deficit has already closed slightly. Oil stocks are bulging and demand has shown more elasticity than previously thought. Savings have increased. World oil production is well under short/medium run capacity, and long run costs are unpredictable – but at about $70 it becomes cost effective to tap high marginal cost resources like the vast Canadian Oil Sands and perhaps US Shale (http://www.eia.doe.gov/oiaf/aeo/otheranalysis/aeo_2009analysispapers/eosp.html). (Which is an environmental disaster – pray we’re smart enough to shift our energy structure before that.) And, the US is sitting on a huge natural gas supply, which seems to get bigger every time we poke around. In spite of the many visible reasons the dollar _must_ collapse, there are many reasons why it may prove more resilient than expected. (Frankly, I’m more afraid of holding Euro assets over a 10+ year timeline.)

    At some point, all of the pundits (including Goldman Sachs) will declare the dollar dead and waves of panic may wash through the air… The carry trades will peak. Then Goldman will sell its foreign assets, buy dollars, and wait for the massive short squeeze on the dollar.

    Or maybe not… In the long run, the developing world will grow faster than the US just due to catch-up and their currencies will probably rise naturally.

    If I were sitting all in cash, had kids, had a decent emergency reserve, a longish time horizon, and no short term debt, I would probably wait for a dip (especially after the last week) and start to _slowly_ (over a year) shift money into other asset classes – possibly a mix of low fee global and US funds to start. If there’s a big dip, buy a little faster (an pop some Tums to keep your stomach steady). If assets rise, slow down. When you hit your target, stop. Rebalance a few times a year (treating your investment cash as just another asset). If you see a particular asset or asset class go on sale but think it’s still fundamentally sound (and is not being hyped), buy a little of it (_little_). Don’t spend too much time watching it.

    As Yoda would say… “Fear, Greed, Regret… the Dark Side of the markets they are.”

    Then sleep well, stay healthy, kiss your kids good night, and remember what’s important.

  163. StatsGuy, your comments about Ayn Rand are spot on. I first read Ayn Rand when I was a senior in high school and I was hooked. Now that I teach high school kids for a living I see how monstrously divorced from reality her philosophy is.

  164. Also, one minor point. In Krugman’s article I just posted he cites a paper stating the U.S. trade deficit is poised to substantially increase again in the near future. In your investor advice post you say the deficit has closed slightly. So I guess the point is debatable. I don’t really have enough expertise to judge who’s right though.

  165. China buys the bonds because it is better than holding dollars, they pay a little interest. If China thinks the dollar is worthless they can simply stop taking them as payment for their exports. Their economy will sink like a lead cannon ball. This is why they will not float their exchange rate. The moment they refuse to take dollars for exported goods the US will begin a new industrial era rebuilding all the manufacturing that where sourced out to China. There would be some pain but people would stop buying some much crap for a while.
    They are doing exactly what Geithner and Bernanke are doing, talking the talk but not walking the walk.

  166. Young Economist

    If china floats their currency, US economy will get crash because the liquidity will drop massively and surely, interest rate will increase uncontrollably from capital outflow. People are talking about dollar carry trade but how can dollar carry trade if there is no support from Chinese government to inject money into treasury bills. If there is floating renminbi, dollar crisis (maybe other currencies too) will occur like emerging countries; that is the large drop in currency and larger capital outflow. Maybe EURO and other currencies will also face the currency crises because now the dollar is overvalued to renminbi but undervalued to other major currencies but US cannot solve the trade deficit because of the fix exchange rate against renminbi; therefore, US dollar face overshoot devaluation against other currencies currently.

    However, if there is no change in renminbi value, US economy will gradually decline with the drop in employment and wage. We can expect when there is no trade barrier with no much difference in productivity (now we are in the same technology and knowledge age), the wage of US and China will be the same at the end or we can see the large drop in US employment and the large increase in China employment until wage in both countries are the same.

    Maybe trade protection can save US employment in short term and can save the world in short term but no one like it.

  167. “People are talking about dollar carry trade but how can dollar carry trade if there is no support from Chinese government to inject money into treasury bills.”

    We take in 2 trillion, we spend 4 trillion. Look at the TICs, What China et al doesn’t buy Ben Bernake buys from the primary dealers.

    Quantitative Easing AKA counterfeiting AKA the only other crime listed in the Constitution.

  168. Household Food Security in the United States, 2008

    In 2008, 49.1 million people lived in food-insecure households (table 1A).

    That is a record!

    http://www.washingtonpost.com/wp-srv/nation/documents/usda_report_household_food_security_2008.pdf?sid=ST2009111601621

    This report is yet one more reason why I despise this article. If advocating higher prices for food and oil isn’t the definition of absolute and utter stupidity – then what is.

    Gagnon, go tell some starving single mom and her starving single little children that their dollar being weaker is okay even if they can no longer afford that peanut butter they were eating for dinner.

    Real life, reality, real people can’t pull a Dick Nixon and back out food and gas from their meager budgets.

    Pathetic. Absolutely pathetic.

  169. Thanks StatGuy, I appreciate your comments.

  170. @DavosSherman

    The inability of low income households to afford the increased price of food and oil that will in all likelihood result from further declines in the value of the U.S. dollar is by far the best argument against devaluation. However, if, as you stated at the beginning of this thread, your primary concern is the debt burden of the United States then I don’t really see how you can support a high dollar/tight monetary policy. These policies make debt harder to pay off. Actually, forgive my obtuseness but I’m not really sure what policies you’re supporting in this thread. In one post you state you are not in favor of the gold standard, but in another you complain that all fiat currencies revert to a value of zero. You express concern about peak oil while simultaneously advocating a policy that will further subsidize the consumption of oil. For practically the entirety of the baby boom generation the U.S. economy has been far too dependent on consumer spending. We are now seeing the terrible consequences of this trend. If the United States is to remain a viable, competitive country it has to begin to shift away from an economy driven by consumer spending toward one powered by investment. A weaker dollar should facilitate investment. At the risk of repeating what has already been said in this thread: a strong dollar ARTIFICIALY subsidizes consumption at the expense of investment. You are absolutely right in saying the shift away from consumption is going to be painful. But the answer is not to continue blindly subsidizing consumption. We can no longer afford to do this. Again, you are correct that people at the bottom of the income ladder are going to be the ones to suffer the most from this correction. This is terribly unfair. But the way to address this inequity is not to further subsidize oil consumption, but to try to find creative ways to mitigate the inevitable pain those who did the least to get us into this mess are going to feel as we try to claw ourselves out of this abyss of debt. One possible solution is means tested, targeted subsidizes to replace the income lost to higher commodity prices. But overall I don’t get the feeling you are all that interested in solutions. You seem to just want to howl at the wind about how terrible government is and how @$#% we all are. There is certainly a time and place for this. There is a time to every purpose under heaven. But, like Pete Seeger, Peter, Paul, & Mary, and the Byrds say, sometimes you gotta turn the page. There are still solutions…I swear it’s not too late.

  171. NKlein:

    The dollar is worth maybe .04 cents today. How much weaker do you propose we should go?

    I’m outraged by the situation. The problem is more people should be outraged. Instead they listen to people who tell them bad is good.

    In fact, after reading Gagnon’s article I wrote an article that no less than 4 of the top financial blogs ran.

    You can read it here to get what my thrust/point is, nothing is laid out in a hard to understand or follow way:

    Zero Hedge: Robbed Blind By A Lipstick Wearing Pig
    http://www.zerohedge.com/article/guest-post-robbed-blind-lipstick-wearing-pig

    Nathan’s Economic Edge: http://economicedge.blogspot.com/2009/11/davos-guest-article-robbed-blind-by.html

    Financial Sense University Editorials: Robbed Blind By A Lipstick Wearing Pig
    http://www.financialsense.com/fsu/editorials/okst/2009/1116.html

    The Burning Platform: Robbed Blind By A Lipstick Wearing Pighttp://theburningplatform.com/groups/quinns-daily-dose-of-reality/discussions/robbed-blind-by-a-lipstick-wearing-pig

    I’m 100% sure this is the Great Depression II and these id*ots are exacerbating it when they should be admitting to it and forging a path out.

    Gagnon’s article was NOT we should debase and revalue the dollar get out of debt and move on article you elude to. A weak dollar and starting over are vastly different.

    The only point I’m making is that I found Gagnon’s article pathetic. To see bright people accept bad as good only makes the world worse.

    Gagnon isn’t the only one paving the way for this, Krugman is tripping over his Nobel heals touting a weak dollar isn’t d-day.

    B*S!

    Dumb down the masses and then scr*w them and their kids to keep the bread and circus going another day. Borrow, Print, Spend your way to bubble prosperity. Yeah, dar* right I’m upset, you should be also.

    NKlein: There is no solution. When you are approaching a cliff there are solutions, when you fly off the cliff it is too late. The only thing to make it better would be to hire people who knew what they were doing to fix it so we don’t crash so hard and so we get out of GDII faster. These folks are instead trying to cover up how bad it is and making the impact harder and the recovery longer.

    Peter Shciff, Ron Paul, Rand Paul, Jim Puplava, Jim Rogers, Marc Faber, and many of the owners of the better blogs could all form a team better then the dumb and dumbest team that we have now.

    In truth, believe who you want. Within 6-9 months (I expect MUCH sooner you will see exactly what I was talking about.

    Exactly. I saw the crash of 2008, and I see the one coming in 2009/2010. Unless someone comes out with an energy invention or some miracle battery invention this thing is baked in the cake.

  172. “The dollar is worth maybe .04 cents today.”

    I’m sorry, but I don’t know what this means. There are lots of ways to measure inflation. Is there a specific metric are you referring to here? Most serious economists I read use TIPS spreads or various long-term bond yields to gauge inflation expectations. According to these measures inflation does not appear to be much of a threat in the near future, but I’d be willing to consider other measurements that say otherwise if you have any suggestions. If I had to sum up your basic argument for this thread it would have to be: “Everyone start stockpiling guns, gold, and food because a collapse is imminent, we just can’t see it because the government is cooking the books so inflation and unemployment aren’t reflected in the official statistics (oh, and by the way, for the low, low price of $89 you can buy a subscription to this website that will give you the real deal on the statistics the government doesn’t want you to know about).” But the fact is, there are plenty of market-based measurements indicating deflation is the thing to fear right now, not inflation. Is the government manipulating these measures too? Actually, I think the government is being quite honest by creating multiple measures of inflation like the CPI (which does include food and gas prices by the way) and core inflation. Same goes for the different measures of unemployment. That U6 unemployment is pushing 20% is hardly a secret, it was on the front page of the New York Times just last week. Frankly, I find your overall mindset to be a bit paranoid to say the least. Do you want the doomsday scenarios predicted by the commentators on your post at zerohedge to come true? If tomorrow the United States suddenly announced it was defaulting on all of its obligations to medicare, to social security, to FDIC insured depositors, to foreign creditors, etc…there certainly would be a good chance that gangs of armed vigilantes start roaming the streets. Then it really wouldn’t matter much what precious metal you choose to back up your new currency with would it? As this is not likely to occur, please come back in 6-9 months, and, if I am still alive and have an internet connection, I will gladly eat my words. Almost makes you want to keep this blog on your R.S.S. feeder, no?

  173. NKlein:

    My advice has always been invest so you can sleep at night.

    I sleep fine. I paid taxes out the preverbal and grew to hate the word capitol gains. Other than the taxes I didn’t lose any money in 2008.

    I don’t plan on losing in 2009/2010.

    As for the .04 cents, the quickest one I can put my hand on would be Ron Paul’s book “End the Fed.”

    I don’t define inflation and deflation as you do so I can’t debate that. Prices I pay for food and gas are up.

    I’m certain the next 20 years are NOT going to look like the past. The government did a phenomenal job with Katrina also.

    Best of luck!

  174. You should know better than publish an article like this. Clearly, you must be a big Obama supporter. The falling dollar will be met with anger from other countries. This is nothin more than an attempt to export our depression to outer countries. They will retaliate by devaluing their currency. Then, the great currency crisis will be in full swing. That will lead to the greatest depression. Obama, you will go down in history as a total failure.

  175. I do believe there will be GDII.

    You know, when I was a kid there was an ice storm that knocked out power for a week. My Dad was totally unprepared.

    NKlien: Even if you think the government won’t Katrina this what is the harm if you are prepared to weather an economic Katrina for a few months?

  176. The pragmatist

    The feds balance sheet is irrelevant to inflation. Inflation can be caused by money in circulation, money not in circulation does not cause inflation. That is why M2 is meaningful.

    The fact that M2 has only gone up slightly in the face of massive deficit spending by the government clearly shows that the supply of money is a very complex matter thatis influenced by a myriad of factors. It is a mistake to oversimplify it.

  177. The pragmatist

    If other countries, through their central banks had not intervened in the currency market the dollar would have been weaker years ago. Trade deficits would have forced the dollar down. The world enjoyed exporting to the US and we took it, even though that emant we were letting them desttoy our economy. If other countries get mad at us because the dollar is weak just let them be mad.

  178. I’m a twenty-five year old teacher in NYC. I have nothing to invest. In fact, I have debt. When I do start to invest I will probably balance my investments between index funds, tax-free municipal bonds, and maybe some specific tech stocks. I’m way too scared of getting burned to invest any significant amount of money in commodities like oil or gold. As I live in a big, northern city I’m not too worried about extreme weather conditions. If the fabric of society starts to break down and there are food riots, well then I suppose I’ll just have to pray. I doubt I could get out of NYC fast enough and in any case I don’t really have any place to go. But I really don’t think anything like that is going to happen. Maybe it’s because I’m just a silly, young optimist.

    I’m not saying oil and food prices aren’t a problem. I agree that many of the current measures of inflation understate the problems low-income households face paying for basic necessities. But I don’t think the answer is to continue to subsidize the consumption of oil. If you think the only way out of Great Depression version 2.0 is some miraculous, new energy technology, then you should support a monetary policy that makes oil more expensive. With cheap oil there are no incentives to make the kinds of investment necessary to end our dependence on oil.

    And I’m not saying (nor do I think Dr. Gagnon was saying) that adjusting our exchange rate is all we need to do to fix our many problems. There’s plenty of research out there that says if market forces prevailed and we had a free-floating exchange rate, the renminbi would appreciate as much as 20% against the dollar. Not only would that would create a great many manufacturing jobs in the United States, but it would also do a lot to reduce U.S. debt levels (in 2006 the U.S.’s current account deficit was as high as 7% of GDP).

    But you know what, even if we woke up tomorrow to find the renminbi/dollar peg was a thing of the past we would still have many, many, many problems. In fact, fixing trade imbalances is pretty far down on my list of important issues that need to be resolved. My top four priorities are, in no particular order: reforming health care, reforming the financial system, reforming the education system, and creating a sustainable energy policy to address the threat of global warming. Will we be able to accomplish these things? I don’t know. I certainly can’t predict the future (which is what Mark was claiming when he said he can predict what a rational market will do. That’s an absurd statement). I know StatsGuy has written quite eloquently on most of these topics before, so I have a lot of faith in him. I also know that, at least in theory, a weaker U.S. dollar makes accomplishing these goals easier, not harder.

    That’s all I’m going to write on this topic. I enjoyed reading your posts and I hope you reconsider unsubscribing to this blog. I like reading other people’s points of view, even if I think they’re a bit paranoid/crazy. I’m really no expert, so maybe I’m the one that’s crazy. In any case, come back in 6-9 months, and if I’m wrong (and still in one piece) I’ll gladly eat humble pie.

  179. With all this discussion and gloom over oil … and airline companies in trouble due to fuel prices. Maybe that is why Warren Buffet took over a railway. It will be too expensive to fly so people will take trains.

  180. Oh, I’ll take a peek back as well, and heck – I’ve had humble pie before.

    I was born in NYC. If I were in your shoes I’d have a “go bag” and some stuff stored in a cabin in the Adirondacks or the Catskills. You might want to tune into or visit Gery Celente.

    Maybe instead of paper or gold some supplies just in case would be prudent – you can always eat them or ebay them later.

    I strongly believe we need to cut our dependency on oil, live sustainably and knock off the pollution.

    I strongly believe in peak oil and peak every resource.

    If you watch http://www.videosift.com/video/A-Crude-Awakening-The-Oil-Crash-full-film (probably the best watch I have had in the past 5 years) I don’t know if you will come away with higher prices as what prevents AGW or reduces our dependency. You might, you might not. Europe was built around mass transit, our society sadly wasn’t.

    We will, very soon have higher prices irregardless, the IEA was busted this past week for cooking the reserves as to prevent panic investing in oil.

    Every economic indicator, our cockpit of gauges are all jacked, as an ex-airline captain I think this is insanity, using bogus gauges to plan a flight.

    Good luck with that!

    On a positive; we have a guy in the White House who has a super guiding principle: Let no crisis go un-wasted.

    Yet, this crisis went wasted (unless you are part of GS)

    We could have created jobs building high speed trains, more public transportation, solar plants, solar technology, wind and so on. It might have created the bubble Bernanke was looking for.

    And what did we do?

    Gave the banks 11-22 trillion and poured oil into the road infrastructure stimulus and gave billions to frogs living by Nancy and told people who were unemployed to go into debt.

    Call me crazy but I think that wasn’t the best thing we could have done.

    It takes 5,500 barrels of liquid asphalt (think oil intensive here) to pave 1 mile of road. So at a time when oil was pushing $140 a barrel what type of stimulus do our geniuses come up with? Something that further taxes the demand on oil and is because of oil very expensive to begin with.

    Call me nuts.

    Oh, you might get a chuckle out of this seashell inflation story. I red it in the book “Lizard Brains” please check out page 94-97, like the above movie this read is quite a gem. http://books.google.com/books?id=_W-XIOOf_mYC&pg=PA95&lpg=PA95&dq=seashells+%2Bgold+%2Bminers&source=bl&ots=11UaNhBlXU&sig=72AKhAAAxgntyBtvY_fLGDAj0d4&hl=en&ei=G-ZxSrPzGYbKtgfNyZ2NBA&sa=X&oi=book_result&ct=result&resnum=6#v=onepage&q=shells&f=false

    I respect your job, I taught for a year and it was probably one of the most rewarding things I have ever done. I can tell you are and will continue to be a great teacher.

    All the best.

  181. I think it will also reduce his coal delivery cost, or put another way, keep money in BRKA/B.

    Cap and Trade will be a huge hit to his consumers, many will no doubt have to scale back.

  182. Cap and trade! That is indeed something to be discussed here because it is also a financial issue.

    As a protestant of an older kind intuitively I feel that if something is a sin it is sin and you should not have the possibility of squeezing yourself by it by being able to buy yourself an indulgency, a carbon emissions permit, from someone who swears to behave and not sin in your name. Besides the system presents all the weaknesses of our current financial regulations, in that it presumes that “carbon rating agencies” will not be captured by special interests.

    I just know that if our environmental problems are as serious many hold them to be, then they should receive serious answers like a carbon tax and not just be fiddled around with, like with cap and trade, just because some see a great business potential in them, somewhat like that of securitized subprime mortgages. And this goes for other solutions as well, like the hybrid cars. A world full of ordinary combustion cars or a world full of hybrid cars is in both cases a world with too many cars.

  183. Yup. Cap and Trade will do nothing but make the middle class poorer and Al Gore and GS richer.

    I’ve read a lot on AGW and when it just got cooler the new name for it Climate Change.

    I myself don’t want to go there. But we need to do something immediately, the pollution we emit IS scientifically proven to be killing us and our kid’s planet.

    Cap and Trade and whatever you want to call AGW/Climate Change/pollution/recourse depletion will be Katrina 3.

  184. DavosSherman, I found your anger depressing. But you said you are a former airline pilot so it is understandable. The fuel-intensive airline industry is in constant trouble.

    Talk about innovation and a new paradigm. Maybe in a new paradigm they could re-invent helium airships that are are genuinely AAA-rated for safety.

  185. Yes Per, my suspicion is cap and trade is another way to game the system and maintain the status quo.

  186. Tippy, to be clear about it, I sincerely do not believe that most of those who are actively in favor of Cap & Trade, do so in order to maintain any status quo but, if the system so allows it, why should they not be allowed to game it?

    These shady areas where good intentions are confused with opportunities are indeed hard to manage, and require a very healthy dose of questioning, and most of all of true understanding of the dangers of any automatic solidarity.

  187. Any hope for the re-invention of helium airships that are genuinely AAA-rated for safety?

  188. Hello Tippy Golden:

    Well, news flash: People are soon going to be so angry that they will be carrying pitchforks and torches – so consider my anger to be a hand warmer.

    When politicians say the reality: “President Barack Obama gave his sternest warning yet about the need to contain rising U.S. deficits, saying on Wednesday that if government debt were to pile up too much, it could lead to a double-dip recession.” Link http://www.reuters.com/article/marketsNews/idUSN188108620091118

    And then they turn around and ram health care through it tells me that a.) they are trying to destroy the dollar or b.) they are so stupid that they should wear helmets.

    I mean really, if you are in a hole STOP DIGGING!

    Again: 4G’s, God, Gold, Guns and the Government will Katrina it.

    By the way, as I write this the dollar is breaking through the 75 support on it’s way to test the 71 level, below 71 there is not bungee chord.

  189. PS I think an algae made jet fuel is the answer – but again the geniuses decided to put money in oil intensive road stimulus instead of solving problems and really stimulating the economy.

    Oh well, we get what we vote for, all 534 of them. Ron Paul I excluded because he gets it.

  190. Actually, I believe helium airships have a pretty decent safety record.

  191. Whose work I believe in:

  192. And just for the record: I blogged for CM for just uner a year and I agree with everything he says, but I’m not optimistic (at the end where he says) I believe this is a problem not a predicament.

    But ONLY because of the mistakes I see being made over and over and over again right now. If President Obama and Congress would step up the the plate instead of eating off the lobbyist plate and if we’d can the morons (Summers, Romer, Bernanke, Geithner and the rest) then yes.

    This is why I’m so po’d. Stupid is doing the same thing over and over again and hoping for a different better result.

    Insanity is wasting your last resources doing the same thing over and over again and thinking there will be more resources to eventually do the same thing and fix it.

  193. And just for the record: I blogged for CM for just uner a year and I agree with everything he says, but I’m not optimistic (at the end where he says) I believe this is a problem not a predicament.

    But ONLY because of the mistakes I see being made over and over and over again right now. If President Obama and Congress would step up the the plate instead of eating off the lobbyist plate and if we’d can the m*r*ns (Summers, Romer, Bernanke, Geithner and the rest) then yes.

    This is why I’m so p*o’d. St*pid is doing the same thing over and over again and hoping for a different better result.

    Ins*nity is wasting your last resources doing the same thing over and over again and thinking there will be more resources to eventually do the same thing and fix it.

  194. I thought algae was suppose to be a new source for protein or whatever. I’d opt for helium airships before more fuel-intensive carbon-emitting passenger jets.

    Nasa could do this. Jump start new infrastructure and engineering for low-emission air travel. But they are still absorbed in sending space ships to Mars.

  195. Stats Guy and Davos:

    Re: algae for oil and helium airships.

    I thought algae was suppose to be a new source for protein or whatever. I’d opt for helium airships before more fuel-intensive carbon-emitting passenger jets.

    NASA could do this. Jump start new infrastructure and engineering for low-emission air travel. But they are still absorbed in sending space ships to Mars.

    Any hope NASA might some new things to do with all that funding it gets?

  196. Hey, I’m for anything that works and is clean. I was under the impression, perhaps incorrectly? that algae was clean.

    I am in 100% agreement with you that we are absorbed in other projects that are of a lesser priority.

    Sick, we spend millions to bomb the moon?

    I sincerely think that future generations will look back at us like we look back at the most primitive life forms and shake their head’s in disbelief.

  197. Let us pray you are right. That would be very broadminded of them.

  198. You are kidding right? I think the CEO’s of C, BAC, GS, AIG, GM, WM, MS, and all the other theifs are counting you being polite.
    You think that we don’t suffer from a “case of corruption so naked that it difies comparison?” Where have you been. In real terms the corruption perpetrated by these people and our government redefine corruption.

  199. One guy that gets it.

    http://www.creditwritedowns.com/2009/11/steve-keen-debt-and-the-economy-how-do-we-pay-for-all-of-this.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+creditwritedowns+(Credit+Writedowns)&utm_content=Google+Feedfetcher

    **** Stars.

    And for the record, after reading Minsky’s work especially the Pimco summary I was under the impression he was Austrian. I stand corrected.

  200. Davos for Treasury Secretary!!!

  201. Brian,
    You discredited yourself with comment.

  202. Davos,
    I do disagree with your critisim of Simon for allowing this post for the following reason. Your counterpoints prove the article invalid. So if it were not for the article your points may not be heard.

  203. Hello:
    I am a partner on a small process equipment manufacturer’s rep firm in the northeast. Though not an economist, I am a sales engineer with a feet-on-the-street perspective, developed over many years of conducting business. I see Mr. Gagnon’s piece as a narrow, be it purely economic, view of one aspect of “the falling dollar”. Almost a sanitary perspective, that seems to assume all surrounding global free market premises / forces are in place and at work, in perfect economic equilibrium. The reality is that the so called “global market” is anything but free. Our government is now considering law that will encumber our power producing utilities with major financial penalties for every pound of CO2 emitted, while China and India are not even included as participants in the process??? Our manufacturing base is saddled (and rightly so) with the costs associated with being good stewards of our environment, yet we allow import of toxic lipstick, toxic dry wall and other cheaply manufactured products from competing countries (yes, state sponsored companies, i. e., COMPETING COUNTRIES), using state sponsored labor, without the operating costs associated with meeting the requirements of the equivalent of our OSHA and EPA regulated manufacturing practices. I’m not a “protectionist” but I do believe we need to infuse a little “nationalism” in our government’s approach to the global economy, and develop trade policies to rightly level the playing field, if we are to have any chance of reversing the outsourcing of our manufacturing base, which has always been the source of the economic, political and military strength of the United States. As the world becomes more economically capable, it is inevitable that the global standard of living will eventually become more even. I only hope it is achieved more by steadily raising the world’s and less by drastically lowering ours.