Letters to Tom (5)

From: Thomas
To: Patrick
Sent: Sun, 19 Oct 2008 4:02 pm
Subject: Re: Cheer up???
Pat,

As usual I can't hold on to the economic ship you describe since I'm not an economist (as you obviously are). But... I refuse to let go and drawn. With that in mind, let me give this economy stuff a go.

Inflation? Are you saying as in "inflation" of national economies? I think what you might be referring to is deflation. I don't know, Pat. I don't think inflation is what it used to be.

Aren't you forgetting about the drastic decrease in the price of oil recently? Russia and China - both economies almost wholly dependent on (fictional?) petro-dollars - are right now tittering on the edge. And why is that? You're right that the dollar is weak but what is also clear is that no matter what happens too many countries are dependent on that dollar - no matter what form that dollar has. A bit ironic, perhaps, that all the G8 leaders are going to meet to discuss how to deal with this problem (notice they don't use the term G8 anymore - since Russia isn’t invited.) What do you think they're going to talk
about? How Russia and China are going to burn (real) cash to fuel their winters?

What "real" cash, Pat? There is no such thing as cash in this crisis. It is truly about trust - as in: whom do you trust? (The west or...?)

What is so interesting about this crisis (to me) is the fact that it has never been more obvious that the money being put into the system right now ($700b in the US) is truly monopoly money - as in Monopoly the game! It is not even referred to as "cash". Well, I guess some refer to it as that but... The dippy Bush referred to it the other day as "capital" - it is clearly not that. Isn't it really liquidity? No? Wait. Isn't it really anything more than a Bookie guaranteeing his store?

To me the real question is how much more production can America afford to lose through this crisis? Will GM buy Chrysler? Can America really sustain itself by having a majority service economy? And on top of that afford all this wacky Wall Street krapp?

I recently thought about an old econ101 term that I haven't heard in years. What ever happened to M3? The crisis is really stirring up 200 or so years of capitalism - that part the hedge fund guy got right. But couldn't this crisis also be changing economics as well?

Ah, what do I know?

t


Funny you mention M3. All the monetary numbers M1-M3 used to be published regularly. They were removed from being published a few short years ago. They are simply mind-boggling and I guess the Fed did not see the point. Lets just say over 85% of the "currency" in dollars is outside of the US.

Anyway, remember the later 90's? We had something they were talking about there called the "Goldie lox economy" where unemployment dropped into the 4% range (where previously the Fed used to think under 6% would start to cause inflation to rise) but inflation was stagnant or non existent. I mean there was just no noticeable inflation until after 2001. And yes, typical inflation assumes rising prices, commodities usually start the rise then prices go up and people demand higher wages etc.

Strange thing is during the housing boom / bubble, housing prices skyrocketed and I kept saying, where is the rise in income to sustain the rise in prices? Well it was not there and never appeared, hence the housing bubble burst. We had a very strange time. There was my attitude during the bubble where I asked my friends who talked about their rising house prices and posed this question: Did you house price go up or does it simply take more dollars to buy your house?

Understand the difference? I believed it was the latter and house prices were foretelling a collapse of the dollar. If you remember, during the 70's inflation time, house prices went up with inflation. Those were old and traditional and reliable economic models we all learned from. Today we are in different times. The "Goldie lox economy" followed by the "housing bubble" without underlying income to support it and the current melt down in the credit markets as a separate event from the industrial production etc parts of the economy are all putting traditional models out to rest.

My fear of inflation is a simple one. It assumes the lack in faith of the value of the dollar. I feel by pumping more and more dollars into the banking and credit system we are taking the assumption that there is some kind of intrinsic value of the dollar, which allows us to recklessly print more. I mean, what other country can get away with the kind of national debt and trade deficits we have? None! There is the rub. The globe accepts our trade deficits, budget deficits, consumer debt and other reckless numbers. But with every possible number going bad, what is not to say pumping dollars into the financial system at this point does not have the ability to create the "prefect storm" where no matter how many dollars are put out there, credit remains tight, people horde dollars and nothing moves. Then just like any "asset class" that is horded, at some point people will want to unload. That is the problem, are they going to unload dollars into a dead economy? If we lower interest rates to 1% or .75% or whatever, and the US economy sinks further, who will want to hold dollars?

Anyway, I am just thinking out loud here. I don't have all the technical knowledge to determine the viability of what I am saying. I just feel it in my gut. I feel it in the panic in Washington, the panic in the Fed the panic in the Treasury, the panic on Wall Street, the Panic in London the Panic everywhere you look... I just feel it.

Patrick