Where did all the wealth go? To our kids.(business.theatlantic.com)
business.theatlantic.com
Where did all the wealth go? To our kids.
http://business.theatlantic.com/2009/03/where_did_all_the_wealth_go_to_our_kids.php
11 comments
"Because the future earnings of GE, and for that matter most U.S. corporations, are essentially the same today as they were two years ago.."
Are they?
Are they?
Certainly not. The current earnings of the S&P 500 are down about 70% from 18 months ago. Obviously the market expects earnings to bounce back, since on a current basis, with the P/E of the S&P 500 about 28, stocks are a bad investment if you think things will continue. A dollar of earnings today is worth more than any future earnings, and near-term (five years or so), I think we can expect earnings to be less than they were eighteen months ago, so I don't think that the children have necessarily made out -- it's some combination of wealth destruction and wealth that was never really there.
Exactly. Significant amounts of wealth were never there (e.g Madoff, Stanford), and significant amounts of wealth were destroyed due to the fact that people/businesses made plans & investments that were based on a perception of reality that is now known to have been wildly off the mark. Think of all the half-done construction projects that are now sitting idle because they were intended to satisfy demand that no longer exists.
I suppose that 'future earnings' holds a pretty nebulous value. Still, to the writer's point, how long do you think today's children will be working/investing? My bet is that it's more than 5 years. IMO, now would be a good time to start a child's college fund.
The question is really that if you buy stocks now, what is the discount rate necessary to make the current valuations reasonable, and how does that compare to what the boomer generation enjoyed? The theory of the article is that the children who are buying stocks right now are going to enjoy a superior rate of return at the expense of the retirees. I don't think that's true. Corporate profits expanded to an unusually high percentage of economic output in the past decade and a half, and I would expect that to go down. Even if you anticipate that the corporate profit fraction remains constant, and that earnings will be twice their current level in a couple of years, the stock market still would have a 14 P/E ratio, which is historically a bit high. Even at the current depressed valuations, I think that you have to be a pretty big optimist to expect big gains in the market over the next decade or so.
WHAT? This from the generation that just borrowed a trillion dollars from us?!
don't forget the fifty trillion or so to pay their entitlements til (avg) age of death. or the extra three trillion they'll peel off of the stock market when they are forced by law to start liquidating their 401ks faster than we can make contributions to ours.
articles like this are written by people who are still ideologically stuck in the pre-2000 crash world. That wealth didn't go to someone. It is just gone because it was an illusion in the first place.
The fed pumped our system full of credit. Now we act surprised when bad credit starts getting washed out.
Every empire that has tried fiat currency has failed for this very reason. The people in power simply can't keep their sticky mitts off the printing press. It's just too tempting.
Every empire that has tried fiat currency has failed for this very reason. The people in power simply can't keep their sticky mitts off the printing press. It's just too tempting.
Perhaps there was too much currency in the system, but I think the actual, real wealth of many people did decrease too. They were better off than they are now, their wealth physically went down. They don't have things now that they did before. The output of the economy decreased, while the resources stayed roughly the same, so less wealth is being created. This is true even if you completely forget about the existence of money.
right, but by necessity most of the wealth that disappeared was involved in non-productive economic activity. The wealth lost that actually was involved in productivity is a side effect of the massive fluctuations in imaginary wealth.
If it didn't effect the productive portion of the economy we wouldn't even have to worry about the shenanigans of the fed in the first place.
The real effect of this fluctuation is reflected in the fact that america has had an aggregate negative savings rate for the last 10 years. The imaginary wealth made people think that they could spend the real wealth, get returns in imaginary wealth (home valuations for example) and be net ahead.
If it didn't effect the productive portion of the economy we wouldn't even have to worry about the shenanigans of the fed in the first place.
The real effect of this fluctuation is reflected in the fact that america has had an aggregate negative savings rate for the last 10 years. The imaginary wealth made people think that they could spend the real wealth, get returns in imaginary wealth (home valuations for example) and be net ahead.
The amount of wealth in the world is roughly the same, but the perceived value of cash has risen relative to everything else. The "wealth" has gone to the people who happen to be sitting on a lot of cash at the moment while people with lots of Plasma TVs in storage (for example) are finding they're not as wealthy as they thought they were.
I expect our kids are still going to have to work as hard as we did in order to buy those Plasma TVs. Even if they cost less, they'll probably be getting paid less too.
I expect our kids are still going to have to work as hard as we did in order to buy those Plasma TVs. Even if they cost less, they'll probably be getting paid less too.
A lot of this is just wishful optimism, but he's right to point out that deflation is not necessarily bad. I've been quite perplexed at Bernanke's efforts to stop the deflation that brought gas prices around here below $2 for the first time in seemingly forever.
It's the deflationary spiral that's bad. A little drop in price is nice, but when a feedback cycle occurs, it becomes very dangerous.
explain how. has deflation ever destroyed a country? no, not once in history. Inflation has destroyed MANY countries.
The deflation of the Great Depression and the ensuing unemployment resulted in the election of the dictator FDR, the destruction of the old republic, and creation of the modern American civil service mega-state. If you could go back in time, and put yourself at the head of the Federal Reserve in 1930, would do you anything differently?
you've got some reading to do.
America's Great Depression
http://mises.org/rothbard/agd.pdf
I've read it. Rothbard is dead right about the dangers of fractional reserve and the need to avoid inflation in the first place. But he's dead wrong about what to do once the crisis hits. I do not buy his arguments that Hoover's actions after the crisis caused the severity of the downturn. It's very unlikely that Hoover's cajoling was the cause of sticky wages. Right now we are seeing businesses across the economy choose layoffs rather than wage cuts, even in non-union, non-regulated sectors like tech. Furthermore, the major cause of the unemployment was businesses going bankrupt. Businesses went bankrupt because when the money supply shrank they could no longer payoff their debts. The debts were all nominated assuming a much greater money supply. Deflation caused the unemployment.
wow. you're the first person I've run into who has a strong grasp of the facts.
I would argue that debts nominated during a time of a much larger money supply led to businesses that were predicated on artificial demand. when the demand shrunk these businesses went bottom up. The great depression is an almost perfect example of economic latency. Those workers did eventually get assimilated back into productive industry, it just took a long time.
The demand was not artificial. For example, before the crash people bought a lot of cars. After the recovery, people bought even more cars. So why was it necessary to go through 5-10 years where nobody made or bought cars, factories sat idle, and laid off autoworkers went hungry? There are cases in recessions where the unemployment is beneficial. For instance, "financial instruments" have been overproduced, and it would be beneficial for Wall St. workers to be laid off and then find more useful jobs. But a depression is marked by lots of collateral damage - people get laid off in industries simply because of instability in the banking and moneterary system, not because they were not being productive.
Let me ask this question: Imagine a gang of thieves slowly slipped counterfeit bills into the money supply for a long period of time. Eventually, half the money supply was counterfeit bills. The thieves had long traded their counterfeit bills for wine and women. The bills were now evenly distributed across the economy, in every home and business. Suddenly, the crime is discovered. Now no one will except the counterfeit bills. The money supply drops in half. Businesses with debt and wage contracts created before the counterfeit money was discovered start to bleed red ink.
What is the proper policy response to this scenario?
Let me ask this question: Imagine a gang of thieves slowly slipped counterfeit bills into the money supply for a long period of time. Eventually, half the money supply was counterfeit bills. The thieves had long traded their counterfeit bills for wine and women. The bills were now evenly distributed across the economy, in every home and business. Suddenly, the crime is discovered. Now no one will except the counterfeit bills. The money supply drops in half. Businesses with debt and wage contracts created before the counterfeit money was discovered start to bleed red ink.
What is the proper policy response to this scenario?
I am not sure of the answer you are expecting to your question. Or if you expect one at all. Here's my amateur take.
One way is to do nothing and let the chips fall. I imagine this as the economic equivalent of a broken chain in the anchor room of a battleship. Disorderly with lots of collateral damage, wailing, and gnashing of teeth.
There is the Andrew Mellon approach to "liquidate! liquidate! liquidate!" the misallocated capital and redeploy as quickly as possible. This means accepting that some portion of the productive capacity at peak monetary supply was based on phantom demand and it needs to be torn down and converted to something productive that will have real demand going forward. Yes, a whole lot of hard-working folks literally wasted years of their lives. I don't know what the collateral damage would be -- probably nasty. This is actually the function of recessions, and a fierce but orderly unwind with social support for the displaced would seem preferable to the constant terror and confusion of attempting to delay the inevitable liquidation and redeployment.
Another option is the path we are taking (I say 'we' grudgingly because I disagree, but I am a passenger aboard the United States of Titanic). Attempt to keep the monetary base stable, even though half of it is based on phantom demand. 'Legitimately counterfeit' the balance, theoretically giving businesses and individuals enough cover to pay down debts and become net savers again, then wind down the monetary base to equilibrium. This really hasn't worked for Japan. I'm just speculating...without a market incentive to liquidate and redeploy capital don't we just end up with zombie industries serving the same old phantom demand? Everyone has a job building shit nobody needs, and nobody has a job building shit everyone needs. The remaining productive industries get crushed under the tax burden of supporting the zombies, until it all ends in tears and there is nothing left to redeploy anyway ('Ayn Rand Endgame', anyone?).
There is no policy cure for massive fraud and theft. Neither is the tinfoilers' favorite a cure: 'gold-backed non-fractional banking'. There is no magic economic triple antibiotic that will make the owie go away. There is only facing the truth -- you got duped -- excluding those responsible from society, and directing our future efforts to things that actually raise our standard of living (I may be biased, but to me this means technological increments that help us use our limited energy more efficiently).
One way is to do nothing and let the chips fall. I imagine this as the economic equivalent of a broken chain in the anchor room of a battleship. Disorderly with lots of collateral damage, wailing, and gnashing of teeth.
There is the Andrew Mellon approach to "liquidate! liquidate! liquidate!" the misallocated capital and redeploy as quickly as possible. This means accepting that some portion of the productive capacity at peak monetary supply was based on phantom demand and it needs to be torn down and converted to something productive that will have real demand going forward. Yes, a whole lot of hard-working folks literally wasted years of their lives. I don't know what the collateral damage would be -- probably nasty. This is actually the function of recessions, and a fierce but orderly unwind with social support for the displaced would seem preferable to the constant terror and confusion of attempting to delay the inevitable liquidation and redeployment.
Another option is the path we are taking (I say 'we' grudgingly because I disagree, but I am a passenger aboard the United States of Titanic). Attempt to keep the monetary base stable, even though half of it is based on phantom demand. 'Legitimately counterfeit' the balance, theoretically giving businesses and individuals enough cover to pay down debts and become net savers again, then wind down the monetary base to equilibrium. This really hasn't worked for Japan. I'm just speculating...without a market incentive to liquidate and redeploy capital don't we just end up with zombie industries serving the same old phantom demand? Everyone has a job building shit nobody needs, and nobody has a job building shit everyone needs. The remaining productive industries get crushed under the tax burden of supporting the zombies, until it all ends in tears and there is nothing left to redeploy anyway ('Ayn Rand Endgame', anyone?).
There is no policy cure for massive fraud and theft. Neither is the tinfoilers' favorite a cure: 'gold-backed non-fractional banking'. There is no magic economic triple antibiotic that will make the owie go away. There is only facing the truth -- you got duped -- excluding those responsible from society, and directing our future efforts to things that actually raise our standard of living (I may be biased, but to me this means technological increments that help us use our limited energy more efficiently).
There is no policy cure for massive fraud and theft.
this is the best one liner on the economic crisis I've ever seen. Pundits should be paying you to write.
this is the best one liner on the economic crisis I've ever seen. Pundits should be paying you to write.
See my response to nazgulnarsil below.
the greater consumption of cars in the years following the great depression were due to having suppressed demand for all those years.
as for the scenario you seem to be saying that the government needs to step in and take up the role of the counterfeiters. Why should the supply and demand structure from the time of counterfeiting continue on? those demands were artificial and the market met those demands with artificially inflated supply.
Let's say that in the counterfeiting example, the counterfeiters pumped $300 billion a year of counterfeit bills into the economy. The counterfeiters spend all this money on wine and women.
When the counterfeiters are found out, this $300 billion dollars of demand for the vineyard and brothel industry evaporates. That will cause much unemployment. I agree with you that this should be allowed to happen. The workers in those industries must find new jobs that are economically productive. The government should not step in and start printing money to prop the brothels up, as this will simply create zombie industries as Giles noted. (Nor can the Giles recover the lost wealth - the counterfeiters already spent the money, the resources that went into producing the wine and woman have been consumed).
But there is a second cause of unemployment, which is the unnecessary collateral damage caused by the deflation. When half of the money supply evaporates, people's savings to expenses ratio are now at dangerously low levels. So they start reining in expenses. But all expenditures are another person's income, so business revenues fall. In theory, the businesses could drop their wages and prices an equivalent amount, and eventually you would get a pigovian rebalancing effect. But the trouble is sticky labor and, more importantly, debt contracts. When revenues fall, the businesses cannot pay debts, they go bankrupt, people are unemployed, and you get a full fledged deflationary spiral. Millions go unemployed, not because they were not building something people wanted (they were), but simply because contracts rely on a steady money supply, and when money supply drops by 50%, all contracts get shot to hell.
There are two solutions: one, the government could announce that in light of the discovery of the counterfeit bills, all contracts will be redenominated at a 2:1 ratio - thus debt contracts will be cut in half, wage contracts cut in half, NFL salary cap cut in half, leases cut in half, etc. Or, the government could announce a one month window in which people can trade in their counterfeit bills for real ones. This will restore the money supply to the original levels. Either one of these solves the problem instantly and completely avoids the depression. There are no zombie industries, everyone just continues with their productive pursuits. The only unemployed people are at the vineyards and brothels, they must still find new jobs.
Of course, if the government decides to restore the money supply by printing money and giving it to government workers digging ditches, then you will still get massive frictional unemployment, and you'll permanently reallocate resources into useless activities. This is the Keynesian/Obama solution and it's a terrible one.
The problem you, Giles, and the Austrians have is that you do not distinguish the unemployment caused by necessary restructuring ( the brothels and vineyards) from the unemployment caused by a fall in the money supply and the wrecking of contracts. The first cannot and should not be avoided. But you can, and should, prevent the collateral damage that creates a great depression. Until you see the difference between these two types of unemployment, you guys will get killed in debates with the Keynesians, and no one will listen to you. Which is too bad because the Austrians have a lot of great insights, and the Keynesians are awful on a lot of other points.
When the counterfeiters are found out, this $300 billion dollars of demand for the vineyard and brothel industry evaporates. That will cause much unemployment. I agree with you that this should be allowed to happen. The workers in those industries must find new jobs that are economically productive. The government should not step in and start printing money to prop the brothels up, as this will simply create zombie industries as Giles noted. (Nor can the Giles recover the lost wealth - the counterfeiters already spent the money, the resources that went into producing the wine and woman have been consumed).
But there is a second cause of unemployment, which is the unnecessary collateral damage caused by the deflation. When half of the money supply evaporates, people's savings to expenses ratio are now at dangerously low levels. So they start reining in expenses. But all expenditures are another person's income, so business revenues fall. In theory, the businesses could drop their wages and prices an equivalent amount, and eventually you would get a pigovian rebalancing effect. But the trouble is sticky labor and, more importantly, debt contracts. When revenues fall, the businesses cannot pay debts, they go bankrupt, people are unemployed, and you get a full fledged deflationary spiral. Millions go unemployed, not because they were not building something people wanted (they were), but simply because contracts rely on a steady money supply, and when money supply drops by 50%, all contracts get shot to hell.
There are two solutions: one, the government could announce that in light of the discovery of the counterfeit bills, all contracts will be redenominated at a 2:1 ratio - thus debt contracts will be cut in half, wage contracts cut in half, NFL salary cap cut in half, leases cut in half, etc. Or, the government could announce a one month window in which people can trade in their counterfeit bills for real ones. This will restore the money supply to the original levels. Either one of these solves the problem instantly and completely avoids the depression. There are no zombie industries, everyone just continues with their productive pursuits. The only unemployed people are at the vineyards and brothels, they must still find new jobs.
Of course, if the government decides to restore the money supply by printing money and giving it to government workers digging ditches, then you will still get massive frictional unemployment, and you'll permanently reallocate resources into useless activities. This is the Keynesian/Obama solution and it's a terrible one.
The problem you, Giles, and the Austrians have is that you do not distinguish the unemployment caused by necessary restructuring ( the brothels and vineyards) from the unemployment caused by a fall in the money supply and the wrecking of contracts. The first cannot and should not be avoided. But you can, and should, prevent the collateral damage that creates a great depression. Until you see the difference between these two types of unemployment, you guys will get killed in debates with the Keynesians, and no one will listen to you. Which is too bad because the Austrians have a lot of great insights, and the Keynesians are awful on a lot of other points.
I see your point about unemployment, but I'm going to play the devil's advocate for a moment anyway.
I didn't distinguish between causes of unemployment in my post because the market doesn't care. Does it?
"all expenditures are another person's income"; We agree here. It is unlikely that the 1/2 of the economy previously paid for in counterfeit bills was all wine and women. The money they earn is spent and flows into other parts of the economy, creating phantom demand in, effectively, all sectors.
A properly functioning market, by definition, knows how to trim the phantom demand from all sectors immediately and reallocate the remaining capital. This is the path of least collateral damage. Government distortion of the market process (in the form of monetary policy and failure to universally enforce existing laws) prevents market participants from perceiving that which will have value going forward from that which will not; when that happens, the only self-preserving course of action available to an individual investor is to take his or her money and go home until the smoke clears. That disorderly pseudo-market behavior is what really causes most of the deflationary collateral damage, because even the most solid players in the strongest sectors get torched.
Read that again -- compare it to the market behavior the past few months. That is the part of the spiral we're in. Until the government enforces existing laws universally and removes it's monetary distortions from the markets, private capital will stay in the proverbial mattress -- which makes all this Keynesian-vs-Austrian monetary policy talk into just a bunch of masturbation.
I didn't distinguish between causes of unemployment in my post because the market doesn't care. Does it?
"all expenditures are another person's income"; We agree here. It is unlikely that the 1/2 of the economy previously paid for in counterfeit bills was all wine and women. The money they earn is spent and flows into other parts of the economy, creating phantom demand in, effectively, all sectors.
A properly functioning market, by definition, knows how to trim the phantom demand from all sectors immediately and reallocate the remaining capital. This is the path of least collateral damage. Government distortion of the market process (in the form of monetary policy and failure to universally enforce existing laws) prevents market participants from perceiving that which will have value going forward from that which will not; when that happens, the only self-preserving course of action available to an individual investor is to take his or her money and go home until the smoke clears. That disorderly pseudo-market behavior is what really causes most of the deflationary collateral damage, because even the most solid players in the strongest sectors get torched.
Read that again -- compare it to the market behavior the past few months. That is the part of the spiral we're in. Until the government enforces existing laws universally and removes it's monetary distortions from the markets, private capital will stay in the proverbial mattress -- which makes all this Keynesian-vs-Austrian monetary policy talk into just a bunch of masturbation.
* The money they earn is spent and flows into other parts of the economy, creating phantom demand in, effectively, all sectors.*
No, only the money spent near the entry point into the market is distortionary. The counterfeit money that was created five, ten, twenty years ago, acts like any other money. Think of it this way, imagine the counterfeiting had stopped fifty years ago, but the counterfeit bills had remained circulating for all that time. Are they causing distortions? No they are not, at this point they are just like any other bill. Likewise, if you are on a gold standard, it does not matter whether the gold was original stolen from the Incans hundreds a year ago. Once it's in circulation for a while, its origins do not cause distortions.
Or think of it another way. The vineyard and brothel workers spend their counterfeit bills on food, rent, and movies. Let's say the inflation stops. Now, seniors with savings have more money to spend, since they are not losing money to inflation each year. So they spend more on travel and nursing homes. The brothel workers now find jobs on airlines and in nursing homes. What do they spend their wages on? Food, rent, and movies. Thus the demand for food, rent and movies was perfectly real. Only the demand for brothels and vineyards was false.
A properly functioning market, by definition, knows how to trim the phantom demand from all sectors immediately and reallocate the remaining capital. This is the path of least collateral damage.
This is simply not true. Remember, the government already injected itself in the free the market when it declared Federal Reserve Notes as the standard fiat currency across the land. Every market contract is written assuming there are are $10 trillion Federal Reserve Notes in the world. Every entrepreneur assumed $10 trillion in notes when they planned their years production. Thus when the Federal Reserve allows the money to supply to drop in half, it is creating a tsunami sized market cataclysm. Like it or not, the government instituted fiat currency many years ago. It made a promise to the market that it would not allow hyperdeflation or hyperinflation. This is not only a promise, it's also good policy. If you are going to run a fiat currency, you should keep your dollars like gold - make the quantity as stable as possible. The market wrote its contracts based on that promise. The government needs to keep its promise, otherwise it will throw the markets into chaos as every contract gets totally fubarred.
That is the part of the spiral we're in. Until the government enforces existing laws universally and removes it's monetary distortions from the markets, private capital will stay in the proverbial mattress -- which makes all this Keynesian-vs-Austrian monetary policy talk into just a bunch of masturbation.
You are simply wrong on the facts. Much of the private capital as simply evaporated. People refuse to trade their dollars for stocks or bonds because in a massive deflation stocks and bonds are bad bet. Dividends are falling, companies failing, bonds are defaulting.
The basic problem is that there only $2 trillion actual Federal Reserve Notes in the world, but before the crisis there were $100 trillion assets in the world. The is an extraordinaryly high ratio. The only reason this ratio got to this point is through a lot formal asset guarantees ( FDIC, treasuries ) and informal guarantees ( Greenspan put, "too big to fail", government encouragement of 401ks, FreddieMac, subsidized loans for homeowners, being complicit as regulated funds put money into AAA bonds, etc,etc). Essentially, the government was winking and nodding as Wall St. pumped counterfeit bills into the economy. When Lehman failed, the government basically said, "Actually, these counterfeit bills are not tradable for Federal Reserve Notes." Then there was a panic as everyone dumped their money market funds and stocks in order to get their hands on FRN's, treasuries and FDIC insured bank notes. The Federal Reserve saw the panic, realized that this could cause cataclysmic deflation, and started guaranteeing assets.
Now, I do not approve of a lot of the government's policy. The "stimulus" is awful. I think they should also stop propping up zombie banks. Home prices need to fall, GM needs to renegotiate its obligations. What the government should be doing is preventing deflation in the most non-distortionary ways possible, such as back stopping the money market funds, declaring a payroll tax holiday and funding it with printed money, or even just mailing every American some newly printed bills. Or if you want to do a clean reboot of the whole thing once and for all, you could try Plan Moldbug: http://unqualified-reservations.blogspot.com/2009/01/gentle-...
If you were running the Fed, you would you remove the backstop on the money market funds? Why? What do you think would happen if you did?
No, only the money spent near the entry point into the market is distortionary. The counterfeit money that was created five, ten, twenty years ago, acts like any other money. Think of it this way, imagine the counterfeiting had stopped fifty years ago, but the counterfeit bills had remained circulating for all that time. Are they causing distortions? No they are not, at this point they are just like any other bill. Likewise, if you are on a gold standard, it does not matter whether the gold was original stolen from the Incans hundreds a year ago. Once it's in circulation for a while, its origins do not cause distortions.
Or think of it another way. The vineyard and brothel workers spend their counterfeit bills on food, rent, and movies. Let's say the inflation stops. Now, seniors with savings have more money to spend, since they are not losing money to inflation each year. So they spend more on travel and nursing homes. The brothel workers now find jobs on airlines and in nursing homes. What do they spend their wages on? Food, rent, and movies. Thus the demand for food, rent and movies was perfectly real. Only the demand for brothels and vineyards was false.
A properly functioning market, by definition, knows how to trim the phantom demand from all sectors immediately and reallocate the remaining capital. This is the path of least collateral damage.
This is simply not true. Remember, the government already injected itself in the free the market when it declared Federal Reserve Notes as the standard fiat currency across the land. Every market contract is written assuming there are are $10 trillion Federal Reserve Notes in the world. Every entrepreneur assumed $10 trillion in notes when they planned their years production. Thus when the Federal Reserve allows the money to supply to drop in half, it is creating a tsunami sized market cataclysm. Like it or not, the government instituted fiat currency many years ago. It made a promise to the market that it would not allow hyperdeflation or hyperinflation. This is not only a promise, it's also good policy. If you are going to run a fiat currency, you should keep your dollars like gold - make the quantity as stable as possible. The market wrote its contracts based on that promise. The government needs to keep its promise, otherwise it will throw the markets into chaos as every contract gets totally fubarred.
That is the part of the spiral we're in. Until the government enforces existing laws universally and removes it's monetary distortions from the markets, private capital will stay in the proverbial mattress -- which makes all this Keynesian-vs-Austrian monetary policy talk into just a bunch of masturbation.
You are simply wrong on the facts. Much of the private capital as simply evaporated. People refuse to trade their dollars for stocks or bonds because in a massive deflation stocks and bonds are bad bet. Dividends are falling, companies failing, bonds are defaulting.
The basic problem is that there only $2 trillion actual Federal Reserve Notes in the world, but before the crisis there were $100 trillion assets in the world. The is an extraordinaryly high ratio. The only reason this ratio got to this point is through a lot formal asset guarantees ( FDIC, treasuries ) and informal guarantees ( Greenspan put, "too big to fail", government encouragement of 401ks, FreddieMac, subsidized loans for homeowners, being complicit as regulated funds put money into AAA bonds, etc,etc). Essentially, the government was winking and nodding as Wall St. pumped counterfeit bills into the economy. When Lehman failed, the government basically said, "Actually, these counterfeit bills are not tradable for Federal Reserve Notes." Then there was a panic as everyone dumped their money market funds and stocks in order to get their hands on FRN's, treasuries and FDIC insured bank notes. The Federal Reserve saw the panic, realized that this could cause cataclysmic deflation, and started guaranteeing assets.
Now, I do not approve of a lot of the government's policy. The "stimulus" is awful. I think they should also stop propping up zombie banks. Home prices need to fall, GM needs to renegotiate its obligations. What the government should be doing is preventing deflation in the most non-distortionary ways possible, such as back stopping the money market funds, declaring a payroll tax holiday and funding it with printed money, or even just mailing every American some newly printed bills. Or if you want to do a clean reboot of the whole thing once and for all, you could try Plan Moldbug: http://unqualified-reservations.blogspot.com/2009/01/gentle-...
If you were running the Fed, you would you remove the backstop on the money market funds? Why? What do you think would happen if you did?
you're assuming that the government must step in to renominate those debt contracts. consider this: you're an economic agent owed a debt when this happens. Your debtor gives you two options: 1) you hold them to their original contract, they default, you get nothing. OR 2) you renegotiate and at least get some of your money.
part of the problem with the current crisis is indeed "stickiness". That is, people refusing to renegotiate. Why should we reward such behavior?
part of the problem with the current crisis is indeed "stickiness". That is, people refusing to renegotiate. Why should we reward such behavior?
The "stickiness" is not a result of stubbornness, its a result of how the deflation cascades through the economy. Let's make the scenario even more clean. Imagine overnight a virus runs through computers of the banking system, switches the furthest one to a zero in everyone's account, and thus cuts everyone's savings in half.
The next morning, everyone wakes up, realizes that that their savings is much lower, and that they therefore must cut back on expenses. But they won't cut evenly across the board. They will cut spending on cars, hdtv's, and travel. They'll spend roughly the same amount as always on rice, eggs, water, gasoline to get to work, trash pickup, etc. The manufacturing companies respond by laying off millions of workers. Some of the companies go out of business. As the unemployment rate rises, it puts downward pressure on the wages in the sectors that are still producing at full capacity. This results in wages gradually coming down. As wages come down, the price of products come down. As the price of products come down, people now have money for luxuries. Entrepreneurs buy up the factories and restart car production. Eventually the system rebalances. At the end up the reblancing, the structure of production is the exact same as the structure before the crisis. The only difference is that the price of everything from cars to wages will have dropped to 1/2 the original level.
The government can avoid the whole mess, the whole two or three year cycle of unemployment, by just flipping the bit back and restoring everyone's account to the original level. To not do so, and force the economy through wrenching liquidation and layoffs, would be insane.
Ordinarily, I do not believe the government should rewrite contracts. Nor am I a fan of fiat currencies. But we have a world of fiat currency. And in a fiat currency, the government has a responsibility to prevent a hyperinflation or a hyperinflation. And if the government has been complicit for decades while counterfeit bills circulate through the economy, and all the contracts, business plans, personal budgets, etc depend on those counterfeit bills being tradable, 1 for 1, with federal reserve notes, than the government should do the right thing and allow people to trade in their counterfeit notes for FRN's, rather than allowing a catastrophic deflation to tear through the economy.
The next morning, everyone wakes up, realizes that that their savings is much lower, and that they therefore must cut back on expenses. But they won't cut evenly across the board. They will cut spending on cars, hdtv's, and travel. They'll spend roughly the same amount as always on rice, eggs, water, gasoline to get to work, trash pickup, etc. The manufacturing companies respond by laying off millions of workers. Some of the companies go out of business. As the unemployment rate rises, it puts downward pressure on the wages in the sectors that are still producing at full capacity. This results in wages gradually coming down. As wages come down, the price of products come down. As the price of products come down, people now have money for luxuries. Entrepreneurs buy up the factories and restart car production. Eventually the system rebalances. At the end up the reblancing, the structure of production is the exact same as the structure before the crisis. The only difference is that the price of everything from cars to wages will have dropped to 1/2 the original level.
The government can avoid the whole mess, the whole two or three year cycle of unemployment, by just flipping the bit back and restoring everyone's account to the original level. To not do so, and force the economy through wrenching liquidation and layoffs, would be insane.
Ordinarily, I do not believe the government should rewrite contracts. Nor am I a fan of fiat currencies. But we have a world of fiat currency. And in a fiat currency, the government has a responsibility to prevent a hyperinflation or a hyperinflation. And if the government has been complicit for decades while counterfeit bills circulate through the economy, and all the contracts, business plans, personal budgets, etc depend on those counterfeit bills being tradable, 1 for 1, with federal reserve notes, than the government should do the right thing and allow people to trade in their counterfeit notes for FRN's, rather than allowing a catastrophic deflation to tear through the economy.
Deflation didn't bring gas prices down, a decline in economic activity did. A smallish drop there drove a huge drop in oil prices, since auction markets are very sensitive to small changes in supply and demand.
I appreciate the rosy outlook, but this is sheer absurdity. Sure, assets like homes and stocks can be purchased at a lower price for roughly the same actual value as before. But that assumes that a) people still have the money or the fortitude to buy those things and b) that the economy will rebound entirely. Sure the latter is likely true, and the author makes some good points. But as a young investor myself with parents who have lost much, I'm not inclined to be so optimistic about the future.
If nothing else, hopefully this all teaches us to be accountable for our own money and know what we're doing with it.
If nothing else, hopefully this all teaches us to be accountable for our own money and know what we're doing with it.
The Social Security and Medicare systems are simply a means of making a younger generation pay for an older generation's retirement, since both of those systems are pay-as-you-go. Obama amd Congress have signed us, and especially young people, up for the largest debt burden in US history, both in absolute and relative terms. The debt accumulated in World War II doesn't even come close to what's being signed into law these days.
Still, we of the 60's generation are thinking of you. And we when head out to the golf course while you're heading to work to pay for our benefits, I swear we'll wave to you.
Still, we of the 60's generation are thinking of you. And we when head out to the golf course while you're heading to work to pay for our benefits, I swear we'll wave to you.
It's hard to believe this article when some UN groups are pitching out the Dollar is the world's prime currency.
If future generations are indeed richer, the value of what they hold isn't going to be the same.
If future generations are indeed richer, the value of what they hold isn't going to be the same.
"Where's my money, Lebowski?"
That was inappropriate, I'm sorry. The author gave me an impression of attempted optimism, something to help people see good coming of all this crap, but perhaps he focused to much on that and not enough on more dark realities.
That was inappropriate, I'm sorry. The author gave me an impression of attempted optimism, something to help people see good coming of all this crap, but perhaps he focused to much on that and not enough on more dark realities.
It is grossly irresponsible for the baby boom generation to expect Generations X and Y to be saddled with our national debt, our trade debt, and our infrastructure debt -- and the retirement debt created by baby boomers enjoying long retirements supported by future tax increases on their children.
That's one of the most responsible things I've ever heard a member of that generation say.
That's one of the most responsible things I've ever heard a member of that generation say.
Looks like it's the kids who are passing the wealth on to the boomers to me.
If your kids are lucky, they either held off on purchasing a home or were too young to buy in. Otherwise they're probably like me, young and with a mountain of debt and while we're a long way from retirement, most likely there will be no SS benefits for us. Enjoy your retirement boomers!