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
Let's think about it..2
Let me repost part of May 6 2008 article "I Swear I Can't Make This Up" by Adrian Burridge,
originally sought on Safehaven.com ( http://www.safehaven.com/article-10185.htm ).
Why? Because it proves what I have been pointing out in original "Let's think about.." post, and that was that United States is not different from Zimbabwe, except that it exports it's inflation to Zimbabwe, while Zimbabwe keeps their inflation home.
The time for inflation export is running out. When food riots strike, most inflation importers will worry about staying in power, thus appeasing not their speculators and manufacturers, but their hungry young males.
This is when we will have a chance to taste what inflation really is, as we will be forced to live out our own inflation that Bernanke is so eager to create hoping like a witched beast that someone else will suffer with it. Don't you know Ben, you shouldn't dig a hole for another fellow, for you may fall in it yourself.
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The first quarter monetary policy update from Dr. G. Gono, the Governor of the Reserve Bank of Zimbabwe COMMENDS his peers, the world over. Referring to the United States and the United Kingdom. Dated April 30th, 2008. Pages 8 through 12 - Point 1.14 to 1.29.
http://www.rbz.co.zw/pdfs/2008%20MPS/AprilMPS2008.pdf
Permit to quote. (I especially like his use of bolding - I added bolding where he did).
"1.14 Equally also, our thrust has been founded on our unwavering belief that extraordinary circumstances must be confronted through extraordinary interventions and not through half baked or even wholesale 16th century economic dogmas that have been long discarded in their founding countries.
1.15 As Monetary Authorities, we have been humbled and have taken heart in the realization that some leading Central 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 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.
1.22 Here in Zimbabwe we had our near-bank failures a few years ago and we responded by providing the affected Banks with the Troubled Bank Fund (TBF) for which we were heavily criticized even by some multi-lateral institutions who today are silent when the Central Banks of UK and USA are going the same way and doing the same thing under very similar circumstances thereby continuing the unfortunate hypocrisy that what's good for goose is not good for the gander.
1.26 As Monetary Authorities, we commend those of our peers, the world over, who have now seen the light on the need for the adoption of flexible and practical interventions and support to key sectors of the economy when faced with unusual circumstances.
1.27 Of course, in the short term such interventions are without doubt inflationary but in the medium to long-term they trigger and propel economic growth and development that everyone craves for".
Let's think about it
I've read that article too, and I disagreed with it.
The tactical assumptions are correct, but the grand outcome is completely wrong. True, it is the result of inflation, that in some regions people have trouble buying food. The author correctly anticipates that people will not like starvation and may revolt. And then the author makes a ridiculous conclusion that these riots, if come true, may stop inflation.
This incorrect follow-through, shows us that the author either doesn't understand the source of well-being of America, or wishes to conceal the coming complications.
The reason Americans live better than folks that live in Zimbabwe, is because America prints money like there's no tomorrow, however, it exports most of the inflation abroad. Zimbabwe, on the contrary, is forced to suffer from their own printing.
What do you see when you look at the dollar index? You see belittled ridiculous movement of fractions of a point, when we should see a drop-down-dead movement. Why is it so? Because, the measurement is taken against other "currencies". Those other, so-called "currencies" are just as fake, fiat and counterfeit as our dollar. And they too, are being inflated non-stop by their governments. Here lies the reason for American well-being: We inflate faster, then others, thus constantly are having hot new money that weren't priced-in in general prices yet, but we suffer less from resulting inflation than all others, who suffer more even though they benefit (print) less.
Why is it so? Because our currency is de-facto the reserve currency of the world. Why isn't Zimbabwean currency a reserve currency then? Because, everybody knows that whoever prints reserve currency, can benefit from inflation handsomely, and so the issuer of the reserve currency is chosen with explicit hope that the issuer will be honest and will not use the obvious opportunity to steal through inflation. Which is exactly what we immediately started to do since our currency become the reserve one. You've got to admit, if you look at other actions of FDR, his thieving little nature, can you not see why he was hell bent on achieving this reserve status?
Anyway, the situation is that we need to inflate faster and faster now. For us to have no suffering, others must have most of the consequences. So, while say, China inflates their currency less than us, they will likely suffer more in food riots, while we may only notice that our gas has become "really unaffordable" $4.50 a gallon, while most continue to pay $150 for "needed" cable service.
These riots, if continued, will stop the inflation abroad, as their governments will fall back to keep the power. This will remove the pink glasses once and for all, and we will feel the results of our own inflations first hand, as foreign currencies appreciate and our dollar falls in earnest, compensating for the years of lying.
We won't be able to stop the inflation, however. For one, of course, because we have a long way to go. You've got to first loose the fat, before you can actually carry a banner or riot. Secondly, if we stop inflating, then we will have to default on promises to seniors. While inflation will eat away from those payments (precisely why we have to inflate, - to screw the elders), it is better than to have no checks coming in at all. So, seniors will actually vote for any measures that are designed directly to keep checks coming, while only vaguely promising to deal with inflation. And not the other way around. Every measure voted for will increase the budget just this last time, because then we "will start fighting inflation".
So, while there might be food riots overseas, this will only accelerate the inflation and it's consequences in United States.
Thought about it
We are not exporting inflation any more. That game is over unless the dollar appreciates again mightily. Admittedly, the dollar's exclusive status as the world's reserve currency is going the way of the British pound but that dog still buys things. The all powerful boomers are not going to stand for hyperinflation and they will call the tune at the ballot box for the foreseeable future. Nickel and dime inflation, probably. Hyperinflation, not any time soon. If I am wrong, well, that's why I hold a fair portion of my savings in traditional monetary assets.
food/starvation
I saw an article today that made the point that food riots could eventually put a brake on the inflation process. This rings true to me because at this stage of the long economic cycle, inflation of currency and credit does not benefit the masses of people, especially the middle classes in the developed countries. Credit inflation was winked at when many people were acquiring assets and paying in rising wages denominated in cheapening dollars. The game continued for several generations although the leverage got greater and greater. This corresponded to the diminishing of bank deposits required to be held against loans made. Recently, required reserves have become a joke with huge amounts of low quality loans made outside the regulated banking system entirely. Backing up many of the loans are questionable derivitive instruments, the various swaps and obligations waiting to be tested. The discipline of savings deposits, not to mention silver and gold, are long gone.
Why can't the cheaters continue to acquire real goods with fake money? Maybe they can for a bit longer. But credit expansion requires confidence which is hanging on by a thread. Just like you can only add so much salt to a given amount of water before it wont hold any more and the salt precipitates out, I believe we are at or very near the point where rebuilding the inverted credit pyramid is not possible. They may be able to get away with unlimited money creation in Zimbabwe but I fail to see how this process benefits a majority of people in developed countries. It benefits big debtors and lying governments. The many wage earners and recipients of government payments, not to mention our foreign creditors, get no benefit. Hyperinflation isn't going to happen unless we are determined to have war and revolution. Our older demographic which will control the ballot box is not going to want this. Also, their most recent economic problem experience was inflation, not credit crunch. They already have theirs. This is not the "greatest generation". This is a very greedy, but relatively well educated group in general.