Faith Based Economics

I spent the afternoon with a former banker friend of mine.

He was one of those guys that you would see on the TV all the time back in the 80s and even in the 90s. He had this great office with a power view from the top floor of the building that had his banks name on it. We were talking about the future and the future of the dollar of course.

But first, here is a Mark Fiore Cartoon animation.

There seems to be at least two views, one is a view that sees that deflation is inevitable.

Here is Michael Shedlock's view:

The Case for Deflation:

To understand the case for deflation we must turn back the hands of time.The year is 1914. WWI was breaking out in Europe and the US stayed out of it for three years. As a result of being a "safe haven" gold poured into the United States and US gold reserves rose 64% as Europe exchanged its gold for American goods.

By the time the US entered the war much of Europe was ravaged. The US escaped unharmed. After the war ended the US trade surplus remained high and allies began repaying their war debts.The US experienced rapid credit expansion as a result of the surge in gold reserves. Between 1914 and 1920 the US doubled its expansion of credit. During those war years, investment in machinery and equipment rose by 205% and the value of durable goods output increased in excess of 250%

This surge in capacity led to general oversupply of goods by 1926. During the second half of the "roaring 20's" credit expanded at moderate rate but the damage had already been done. The economy was no longer able to profitably invest in equipment so increasing amounts of money poured into the stock markets. The bubble finally burst in 1929 when profit growth (earnings) could not keep pace with rising stock market valuations. Share prices plunged, credit contracted, and bankruptcies proliferated.

Now leap to the present situation:

"Wrong-Way Greenspan"

We are now in period of what might be called "pseudo-inflation" since it is an unsustainable mirage. Inflation is there alright. How can one deny the expansion of credit, absurd home prices, a re-inflated stock market bubble, and irrational exuberance in properties exhibited by "flipping houses"? Greenspan and the FED fueled this boom by attempting to defeat the deflationary business cycle. All this did was fuel an enormous expanse of credit that went into property values just as happened in the late 1980's in Japan.

The hopes of this FED was that 1% interest rates would fuel a jobs boom. It did, but NOT where the FED wanted it. There was a jobs boom but it was in China not the US.

Here are the top 10 reasons he sees deflation:

1) Enormous consumer debt 2) Falling wages 3) Global wage arbitrage 4) Credit expansion that can not be maintained 5) Mal-investments 6) Over capacity 7) A world-wide housing bubble 8) A re-inflated stock market bubble 9) The normal business cycle 10) Past history

And here is his scenario:

Wages continue to fall due to outsourcing, mergers, and wage arbitrage

Home prices level off then fall sharply

Home equity loans stagnate as result of stagnating home prices

Home building stalls because affordability finally starts to matter

Trade jobs fall with falling home starts

Expansion of Walmarts, Home Depots, ect. stops with the slowdown of new home subdivisions

Retail expansion peaks and stalls

Consumer sales slow with the slowing economy

Bankruptcies increase

Consumer lending based on rising home prices falls flat

Credit growth declines

The US goes into a recession

Layoffs in the financial sector increase

Layoffs in the real estate sector increase

Credit is destroyed in more bankruptcies

Deflation is finally recognized in hindsight

Hyper-inflationists throw in the towel

This is not a pretty scenario.

Then there is this story by Edith M. Lederer which sees a declining dollar which should mean inflation. Here the dollar declines in value because of international pressures and from the loss of US petrodollar hegemony.

Associated Press
Wednesday January 26, 3:47 pm
By Edith M. Lederer,

DAVOS, Switzerland (AP) -- China has lost faith in the stability of the U.S. dollar and its first priority is to broaden the exchange rate for its currency from the dollar to a more flexible basket of currencies, a top Chinese economist said Wednesday at the World Economic Forum.

At a standing-room only session focusing on the world's fastest-growing economy, Fan Gang, director of the National Economic Research Institute at the China Reform Foundation, said the issue for China isn't whether to devalue the yuan but "to limit it from the U.S. dollar."But he stressed that the Chinese government is under no pressure to revalue its currency.

China's exchange rate policies restrict the value of the yuan to a narrow band around 8.28 yuan, pegged to $1. Critics argue that the yuan is undervalued, making China's exports cheaper overseas and giving its manufacturers an unfair advantage. Beijing has been under pressure from its trading partners, especially the United States, to relax controls on its currency.

"The U.S. dollar is no longer -- in our opinion is no longer -- (seen) as a stable currency, and is devaluating all the time, and that's putting troubles all the time," Fan said, speaking in English."So the real issue is how to change the regime from a U.S. dollar pegging ... to a more manageable ... reference ... say Euros, yen, dollars -- those kind of more diversified systems," he said."

If you do this, in the beginning you have some kind of initial shock," Fan said. "You have to deal with some devaluation pressures."

Now as the banker and I talked, he seemed to come in on the side of Mr. Mish, and the need to hold cash, probably as Euros. I suggested that if the market is priced right now, a declining dollar would result in a higher market and perhaps even higher real estate values. I would also borrow lots of money if I didn't need it and leverage it to buy these equities.

Pretty much opposite strategies.

Both scenarios and parts of each are totally plausible.

It depends on what you believe, and your faith in the system.

But we should not lose sight of what State Senator Ferguson says in the comments leading up to the AP article.

Finally, bye-bye to America, if the Neo-cons surrounding Bush, talk him into considering such a scenario as an act of war. The itchy nuclear trigger-fingers that Russia will have over their sense of impending loss of sales of their oil and natural gas reserves will be obvious.I've been saying for years - watch China in regard to petro-dollars. That's the #1 economic indicator as a prelude to a new world war.

Economic analysis kind of goes out the window when a real war starts.

China is going around the world doing the American thing setting up oil purchase arrangements with Venezuela, with Canada, and with Iran..

The US is using its military in the Middle East doing the Empire thing.

If both countries came together to bring about an advanced solar hydrogen economy, we could avoid war, depression, and a probable die off of world population.

Instead of racing around the globe finding the last drops of oil to protect the petro-dollar, we could be waging peace and defending the planet.

Instead of worrying about our investments, we could be feeding and powering the world in a sustainable and humane fashion.

Instead of worrying about the future of money,

We should be worrying about the future, period.


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