Mish: Instead of having dinner with those that caused the problem and have no idea how to fix it, the powers that be should have instead sat down with the top 20 economic bloggers as to what to do. We have been warning about these problems for years.
Volcker, for his part, says the current crisis has its roots in the lack of restraint inherent in the highly leveraged system that evolved, one in which winners were rewarded exorbitantly but the inverse didn't seem to hold.
"The first panacea for a mismanaged nation is inflation of the currency; the second is war."
-- Ernest Hemingway, Esquire magazine, September 1935
"Price stability is something which is essential for the poorest and the most vulnerable of our citizens. They cannot protect themselves against inflation. It is extremely important that we understand that moderation today is necessary if we want to deliver price stability in the medium term."
- European Central Bank president Jean-Claude Trichet, April 2008
inflation worries?
We should always be worried about inflation. That's what political entities do. Inflation tends to be popular, at least at first. How many instances of deliberate deflation can you find in history. It almost never happens. That's why we need a commodity based standard. That's why the framers of the U.S. Constitution wrote that no State could make anything other than gold or silver legal tender in payment of debts. It wa not so the Central government could use paper money instead. There was no central bank when the constitution was written. But they remembered the worthless continental currency.
Inflation tends to cheapen the quality of goods produced because it puts buyers at a disadvantage. They feel the need to get rid of the money before prices go up. Great progress was made in the U.S. in the period after the Civil War up to the turn of the century even though there were exteded periods of deflation as the greenbacks were withdrawn from circulation. We need not fear hoarding. Give people an atmosphere of secure normalcy and they will save only a prudent portion to prepare for their own futures. It is the panics and crashes that come after the phoney credit booms that push people into hoarding mode. Normal people do not hoard. They live. Those few that do hoard are a little sick maybe but this is their business and we should give them an outlet that benefits society as a whole.
I hear the same
I hear the same kind of news from friends overseas. Inflation is getting to be noticeable, and people are starting to talk about it. Most say that they actually know what is happening. They say that their governments are bailing out us for some undisclosed reciprocation deals. People aren't happy. It feels like pretty soon there could be some consequences for those governments from their people and their own investors. Others say that consequences aren't really in the pipe, but more and more people are exchanging their under-matress dollars for euros and other currencies. Things are heating up. On the markets and swap-meets, money changers getting impatient and offer lower and lower rates for USD, because they are inundated with supply. Once the rates fall precipitously, the panic like exchanges will begin, as happened with other currencies before. A country can unload their under mattress saving literally over month. Turkey has about 200 Bln. Italy has more than that. Russians are said to have over 800 bln dollars under their mattresses. France has little. Arabic countries have unknown amounts. Where all this cash is going to end up?
Where is the cash going?
I don't believe in todays world that the paper cash is the biggest problem just yet. Maybe in Zimbabwe but not yet for the U.S. $. Our paper bills are still quite lovely. No fish or animals on there yet. The credit situation has gotten out of hand and this is what the banking authorities are trying desparately to paper over, if you'll pardon the expression. I am not of the opinion that we have reached the point of hyperinflation, runaway inflation or even galloping inflation yet. I could be wrong. That's why I have a nice cache of coins with our American Republican ideal images like Miss Liberty and the Eagle. But I believe there may be enough international deflationary forces still in play to keep things in check a bit longer. There are still plenty of Chinese and Indians willing to work for even lower wages if needed. I think the Chinese are even outsourcing to Viet-Nam because labor is cheaper there. Rapid technological innovation also contributes to falling costs. So the end is not yet but no thanks to our monetary authorities and politicians.