Inflating out of recession.
The house of cards that was built with credit is collapsing by tiers. The global Ponzi scheme, where new credit was paying the interest on past credit, has reached its fatal conclusion. The lenders would like their fiat money back, but they have already had it back in dividends (first come, best served) so there is nothing left.
Credit cards and mortgages were the first to flounder. Then came the bankers and the insurers who had backed them. Faced with massive deleveraging (?) and gaping holes in their accounts, they were saved in extremis by Treasuries and Central Banks rushing to the rescue. The various rescue plans, however, have merely guaranteed past credit. Considering the level of debt it is far too early for a new credit boom, so governments can only shore up the financial institutions and cover the credit they have granted. And when credit is only renewed, the interest paid reduces demand. Falling demand begins with the spending that can be postponed. And so house builders and car makers began to suffer and cried for help. (Kitchen appliances and electronics are made overseas, so the cries are too faint to be heard). Bailing out Wall Street was simply a guarantee of existing loans, a form of insurance for defaults. It represents a huge guarantee but very little actual cash. Whereas bailing out Maine Street needs credit or cash. Notwithstanding Central Banks reducing their discount rates to 0%, the first solution is frozen up for a while, and that leaves the second.
Falling demand leads to business closures and rising unemployment. No one can expect spending to increase in those circumstances. The few who still have income over and above their basic needs will be setting it aside, fearing for their health insurance, their children’s schooling and their pension funds, and worrying that they may be out of work in the near future. When money is short, the reaction is to save, thus making the shortage even greater. Tax rebates are pointless, as they just move existing income from one place to another and back again. Governments are obliged to reduce their expenses (or must borrow to compensate), and the rebates are hoarded as surplus income and lent back to the Treasury. Vast public works would compensate some job losses, but changing from building houses to building bridges is not an overnight event. By the time the projects get going, everything could be at a standstill, as shrinking demand reduces supply and jobs, and less employment reduces demand, and so on.
In fact, other than sprees with a credit card, there are at least two ways to get people to spend. One is to increase their wages and their social benefits. The other is inflation, and the two usually go together. Putting up wages means that more money is circulating in the real economy, but it raises production costs and is passed on to prices. There is more money to spend, and rising prices are an incentive to spend today rather than tomorrow. This is stagflation, considered only marginally better than complete collapse. But the inflation part of the formula has a secondary effect of great importance. Inflation devalues money and, thereby, all the debt that is measured in money is devalued as well.
Inflation accompanies rising wages and cancels debts, allowing a new debt cycle to get under way. The difficulty will be obtaining the higher wages, when they have been static for so long and when unemployment is rising fast. The corporations are not likely to do it, increasing wages goes against the grain. The trade-unions are not about to fight for it, after years of bargaining over wage cuts they have forgotten how. Governments, however, could start with the public sector, thereby obliging the private sector to follow suite. Governments could also legislate on increasing the minimum wage.
It seems that stopping a deflationary recession with inflationary stagnation must be a political choice, an administrative decision for a lesser evil. So far no one has dared. Either those who govern us believe there is an alternative and are waiting for Xmas to bring us the good tidings, or the consequences of inflation frighten them politically. After all, when inflation melts debts like sunshine melts snow, the debtors gain but the creditors lose. Government budgets would be greatly relieved but someone would be paying the bill. The spendthrift gets off and the miser loses his hoard. A difficult point to put across, especially when the problem goes beyond the nation’s savings into the domain of diplomacy and bilateral relations.
Public debt is the accumulation of consecutive budget deficits. The amount of public debt increases regularly with exceptional decreases, and the various debts must be renewed when they reach their pay-back date (the Bush administration has mentioned emitting 3-year bonds, surely that pitfall is too obvious to be allowed). Treasury bonds are held by individuals and institutions, at home and abroad. So that inflation has a domestic and an international effect. Several developed nations, notably the US as Michael Hudson has so well explained, have paid their trade deficits with Treasury bonds. While other developed nations, notably Japan and Germany, as well as the Developing Giants have bought those Treasury bonds with their trade surpluses. National debts have become an integral part of global accounting. Provoking inflation unilaterally might settle things on the home market at a reasonable political price, but the consequences on the world market could be disastrous. Wildly fluctuating currencies can bring trading back to primitive bartering, commodity for commodity. Should this happen to the US dollar, the world’s major currency, most trading would have to stop.
National salvation by inflation was never an easy task. The intermeshing of public debts around the world and the necessity of a concerted global decision make it almost impossible. Nevertheless, the first domino to fall will bring the others down one after the other. At which point, the recession will have taken its toll and the stagnation point will be all the more miserable. Stagflation being an unavoidable phase of the credit cycle, as it cancels debts and allows borrowing to expand again, it would seem more reasonable to stagnate on the crest of the wave rather than in the trough. But then, if logic ruled, the precise workings of credit would be known and its various phases would be predictable, and the whole troublesome cycle might turn out to be unnecessary. Meanwhile, greed and pride are the senseless powers that preside over our destinies.
Credit cards and mortgages were the first to flounder. Then came the bankers and the insurers who had backed them. Faced with massive deleveraging (?) and gaping holes in their accounts, they were saved in extremis by Treasuries and Central Banks rushing to the rescue. The various rescue plans, however, have merely guaranteed past credit. Considering the level of debt it is far too early for a new credit boom, so governments can only shore up the financial institutions and cover the credit they have granted. And when credit is only renewed, the interest paid reduces demand. Falling demand begins with the spending that can be postponed. And so house builders and car makers began to suffer and cried for help. (Kitchen appliances and electronics are made overseas, so the cries are too faint to be heard). Bailing out Wall Street was simply a guarantee of existing loans, a form of insurance for defaults. It represents a huge guarantee but very little actual cash. Whereas bailing out Maine Street needs credit or cash. Notwithstanding Central Banks reducing their discount rates to 0%, the first solution is frozen up for a while, and that leaves the second.
Falling demand leads to business closures and rising unemployment. No one can expect spending to increase in those circumstances. The few who still have income over and above their basic needs will be setting it aside, fearing for their health insurance, their children’s schooling and their pension funds, and worrying that they may be out of work in the near future. When money is short, the reaction is to save, thus making the shortage even greater. Tax rebates are pointless, as they just move existing income from one place to another and back again. Governments are obliged to reduce their expenses (or must borrow to compensate), and the rebates are hoarded as surplus income and lent back to the Treasury. Vast public works would compensate some job losses, but changing from building houses to building bridges is not an overnight event. By the time the projects get going, everything could be at a standstill, as shrinking demand reduces supply and jobs, and less employment reduces demand, and so on.
In fact, other than sprees with a credit card, there are at least two ways to get people to spend. One is to increase their wages and their social benefits. The other is inflation, and the two usually go together. Putting up wages means that more money is circulating in the real economy, but it raises production costs and is passed on to prices. There is more money to spend, and rising prices are an incentive to spend today rather than tomorrow. This is stagflation, considered only marginally better than complete collapse. But the inflation part of the formula has a secondary effect of great importance. Inflation devalues money and, thereby, all the debt that is measured in money is devalued as well.
Inflation accompanies rising wages and cancels debts, allowing a new debt cycle to get under way. The difficulty will be obtaining the higher wages, when they have been static for so long and when unemployment is rising fast. The corporations are not likely to do it, increasing wages goes against the grain. The trade-unions are not about to fight for it, after years of bargaining over wage cuts they have forgotten how. Governments, however, could start with the public sector, thereby obliging the private sector to follow suite. Governments could also legislate on increasing the minimum wage.
It seems that stopping a deflationary recession with inflationary stagnation must be a political choice, an administrative decision for a lesser evil. So far no one has dared. Either those who govern us believe there is an alternative and are waiting for Xmas to bring us the good tidings, or the consequences of inflation frighten them politically. After all, when inflation melts debts like sunshine melts snow, the debtors gain but the creditors lose. Government budgets would be greatly relieved but someone would be paying the bill. The spendthrift gets off and the miser loses his hoard. A difficult point to put across, especially when the problem goes beyond the nation’s savings into the domain of diplomacy and bilateral relations.
Public debt is the accumulation of consecutive budget deficits. The amount of public debt increases regularly with exceptional decreases, and the various debts must be renewed when they reach their pay-back date (the Bush administration has mentioned emitting 3-year bonds, surely that pitfall is too obvious to be allowed). Treasury bonds are held by individuals and institutions, at home and abroad. So that inflation has a domestic and an international effect. Several developed nations, notably the US as Michael Hudson has so well explained, have paid their trade deficits with Treasury bonds. While other developed nations, notably Japan and Germany, as well as the Developing Giants have bought those Treasury bonds with their trade surpluses. National debts have become an integral part of global accounting. Provoking inflation unilaterally might settle things on the home market at a reasonable political price, but the consequences on the world market could be disastrous. Wildly fluctuating currencies can bring trading back to primitive bartering, commodity for commodity. Should this happen to the US dollar, the world’s major currency, most trading would have to stop.
National salvation by inflation was never an easy task. The intermeshing of public debts around the world and the necessity of a concerted global decision make it almost impossible. Nevertheless, the first domino to fall will bring the others down one after the other. At which point, the recession will have taken its toll and the stagnation point will be all the more miserable. Stagflation being an unavoidable phase of the credit cycle, as it cancels debts and allows borrowing to expand again, it would seem more reasonable to stagnate on the crest of the wave rather than in the trough. But then, if logic ruled, the precise workings of credit would be known and its various phases would be predictable, and the whole troublesome cycle might turn out to be unnecessary. Meanwhile, greed and pride are the senseless powers that preside over our destinies.
posted by le Lézard at 7:32 AM
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