Are we at the start of the Greater Depression?
October 1, 2010 2:04 PM   Subscribe

Is it just me, or are we at the start of the Greater Depression? Please either convince me I'm just paranoid, OR help me plan a reasonable course of action.

Everything I read seems to indicate the dollar is about finished as a global reserve currency, and is currently backed by no precious metals of any kind. Because we've shipped our productive capacity overseas this leaves us in a position similar to third world countries, with no means of buying the things we can't make ourselves, without hard currency.

If this happens, all of our savings and 401k plans will be for naught.

We used to have the trust of the world because we had good regulation of our industries and finance, which has been dismantled. This makes investing in the US less attractive because of the higher risk premium.

We used to have the largest reserves of oil in the world, and we now import most of our oil. We're optimized as a society to work with underpriced fuel in single vehicle cars, which is unsustainable.

We used to have the largest gold reserves, and they backed our currency... but no more.

We used to be the worlds largest creditor, but now are the worlds largest debtor.

I readily admit it could be self selection bias working its magic in my choice of reading material, etc... or not. In fact, I hope that's it... and I can just relax a few orders of magnitude.

What does the hive mind think?

If we are where I suspect, how do you convince your family members to take heed and start to prepare for the worst? What course of action are you planning?
posted by MikeWarot to Work & Money (39 answers total) 18 users marked this as a favorite
 
No, we're not. We are having some employment problems, certainly. But the economy has been growing steadily if not slowly. Employment is recovering more slowly than we'd like.
posted by Ironmouth at 2:07 PM on October 1, 2010 [7 favorites]


The dollar hasn't been backed by gold since 1972, so I'm not sure why you think that has anything to do with the present situation.
posted by dfriedman at 2:10 PM on October 1, 2010 [3 favorites]


Many economists (plus the govt) now suggest that the recession is over. They do say though that the job market may take some 5 years to recover.
posted by Postroad at 2:11 PM on October 1, 2010


Lots of countries out there have much weaker economies than ours and their citizens live fine, comfortable lives.
posted by floam at 2:11 PM on October 1, 2010 [4 favorites]


If we're not the reserve currency of the world, then the only thing backing our money is the promise of some future good from the US government, which is at unsustainable levels of debt.

The Federal Reserve is creating money to "lend" to banks which then "invest" in US Treasuries... making a profit for the banks, while hiding the inflation for a while.

Without some solid backing... eventually everyone is going to decide not to trust the dollar... and then it goes the way of Zimbabwe.

I hope I'm wrong.
posted by MikeWarot at 2:14 PM on October 1, 2010


Hopefully there will be answers from people who much more than me, but in my personal freaking out over the topic, it seemed interesting that if you look at the national debt as a percentage of GDP, the United States curenntly has only the 47th largest debt in the world.
posted by the jam at 2:18 PM on October 1, 2010


There are no gold backed currencies in the world.
posted by JPD at 2:19 PM on October 1, 2010 [11 favorites]


All of these are complaints about how the United States economy is less dominant than it used to be. But almost every one of them could also be said about every other contemporary major economy. If you look at Europe and Japan, neither feature economies backed by gold, both are net importers of petroleum, both run large deficits, and neither sport a global reserve currency.
And all that has been true for a long time for them and for the United States (aside from the reserve currency issue.)

On preview:

If we're not the reserve currency of the world, then the only thing backing our money is the promise of some future good from the US government, which is at unsustainable levels of debt.

I think you're confusing this with an argument about the gold standard. Even if the dollar is the reserve currency of the world, it still relies on the expectation that the United States will back it in the future.
posted by gabrielsamoza at 2:20 PM on October 1, 2010 [1 favorite]


ETA - we had the worlds largest current accound surplus (aka biggest creditor) at the beginning of the great depression.

We used to have the trust of the world because we had good regulation of our industries and finance, which has been dismantled. This makes investing in the US less attractive because of the higher risk premium.


I will never be able to convince you of this, but I would point out to you that for all of its tremendous fuckups (oh lord have there been many of them) the US regulatory regime is still just about the best in the world. The US is still a huge recipient of net foreign investment. Additionally if the Dollar really is dead (not that I agree with you) expect that number to increase dramatically.
posted by JPD at 2:22 PM on October 1, 2010


oh also we still have the worlds largest gold reserve - not that I think its material but if you are gonna go on a rant at least have your facts straight.

http://en.wikipedia.org/wiki/Gold_reserve
posted by JPD at 2:23 PM on October 1, 2010 [1 favorite]


Perhaps, your pesky human commentators have forgotten the First Rule of Acquisition, to wit:
"Once you have their money, you never give it back."
posted by phoebus at 2:27 PM on October 1, 2010 [2 favorites]


I think that pretty much all money today is based on trust. At the end of the day, money (euro, dollar, yen, whatever) is just a scrap of paper that other people accept in exchange for stuff. And there are a whole lot of countries out there that neither back their currency with metals nor are THE reserve currency of the world. And they do alright, with a lot less in the way of intrinsic assets than we have.

Fact is, we are the third-largest country in the world in terms of sheer population. We're the largest single-country economy. It's not like the rest of the world will wake up one day and decide to turn us into 300 million pariahs. They like us buying their stuff too much.

I humbly suggest you read, watch, or listen to something else. Despite the talk of paranoia promoters who stand to make some money from you buying gold or whatever, we'll be OK.
posted by SuperNova at 2:30 PM on October 1, 2010 [2 favorites]


If you had purchased stock, say, in Coca-Cola in 1929, and held onto it for 25 years, would you have been in good or bad shape as a result?
posted by Houstonian at 2:39 PM on October 1, 2010


Well, many of the largest bailout recipients basically took the money and doubled down on ultra-risky investments, or frittered it away on bonuses. Between actual transfers of dollars and guarantees, the government has squandered about $2 trillion since the meltdown happened.

The finance sector still represents an enormously disproportionate part of our economy and the so-called financial regulation reform bill does not really address the problems that led to the meltdown in any significant way.

So, while we might not be headed for the Great Depression vol. 2, the financial sector has destroyed an enormous amount of wealth, the government rewarded them with your money, and the basic conditions for it to all happen again still exist.
posted by r_nebblesworthII at 2:43 PM on October 1, 2010 [1 favorite]


Very few people realize the role of land speculation in the hyperinflation of the Weimar Republic, and it was basically land speculation that brought on the present situation.

On the other hand, if money disappeared from the economy overnight, there would still be the same amount of wealth in the country. Your shoes wouldn't suddenly disappear off your feet, for example. However, your individual purchasing power would be gone, so you'd have a problem buying new shoes. But since money is just a form of counting, I doubt that at national level that that problem couldn't be solved if the relevant authorities wanted to solve it.
posted by tel3path at 2:44 PM on October 1, 2010


I don't understand why everyone thinks gold is this magical material. It's value is determined by the exact same market mechanisms as all other currencies, and is also subject to the same speculative pressures.

Everyone who's buying into this apocolyptic worry at $1300/oz is going to be quite surprised when it falls back to $800.
posted by hwyengr at 2:50 PM on October 1, 2010 [3 favorites]


Is it just me, or are we at the start of the Greater Depression? Please either convince me I'm just paranoid, OR help me plan a reasonable course of action.

Well, there is a lot of uncertainty and deflationary pressure in the system right now. So what you're perceiving perhaps isn't wrong but just misguided.

Of course global deflationary pressure is manifesting itself as inflation stateside. But most of the global metrics that I track (JOC, BDI) are still showing massive deflationary pressure globally. We expect this to continue for perhaps 12 to 18 months. Quantivative Easing Part 2 beckons, so if we believe this to be true (I do) we can plan accordingly.


Everything I read seems to indicate the dollar is about finished as a global reserve currency, and is currently backed by no precious metals of any kind. Because we've shipped our productive capacity overseas this leaves us in a position similar to third world countries, with no means of buying the things we can't make ourselves, without hard currency.

True fact: someday the US Dollar will NO LONGER be the worlds reserve currency. But that doesn't mean its the end of America, any more than when Britain lost the crown the British Isles submerged into the sea.

Once upon a time, Pound Sterling was the world's reserve currency. Took some thirty years or so for that transition to take place (of course America did indeed plot and plan and push for this overthrow to happen, and started this process off during WWI). Undoubtedly the transition away from dollars will happen faster. And about a year ago I wrote a research paper saying not only would it be faster this time around, but it would be with America's help and blessing ('cause, you see, it probably will be inevitable at some point but if America can help choose they can influence, so clearly when the writings on the wall America will choose ...) - but still, life will go on.


If this happens, all of our savings and 401k plans will be for naught.

How so? Any assets that generate the bulk of their revenue in US dollars would probably do just fine. Anything generating revenue denominated in a foreign currency would undoubtedly see some near term volatility, but upside strength as the dollar collapses (30% YOY - ha you ain't seen nothing yet!). Assets that depend upon US dollar strength, exporters, will get whacked. But I'm sure (I hope?) you're properly diversified - so what's the problem?



We used to have the trust of the world because we had good regulation of our industries and finance, which has been dismantled. This makes investing in the US less attractive because of the higher risk premium.

Less attractive because of the higher risk premium? Hey my contrarian soul reads that are more attractive as the US economy is faster to adapt and change. Eurosclerosis is a well acknowledged economic fact (but hold that thought, as things change sometime and they might be changing now, I wrote some research about six months ago that said this may not be true any longer, see some of Chancellor Agnela Merkel's speeches for clues to what I'm citing here, but hey still lets assume the post WWII experience is still true …)


We used to have the largest reserves of oil in the world, and we now import most of our oil. We're optimized as a society to work with underpriced fuel in single vehicle cars, which is unsustainable.

Sure, we import oil. Everyone is aware of this and everyone (those higher beings with a social conscience that is) is adapting, purchasing fuel efficient vehicles.


We used to have the largest gold reserves, and they backed our currency... but no more.

JPD covered this one.


We used to be the worlds largest creditor, but now are the worlds largest debtor.

Yeh, the scale of the debt is bad. End of the world bad? Well, we've been at 100% of GDP before - of course there was a righteous reason (WWII) then, no excuse now. But is this the end of America? Well, I don't know, and neither does anyone else reading Metafilter, in spite of how much they might try to convince you to the contrary. So don't worry about the debt so much.


I readily admit it could be self selection bias working its magic in my choice of reading material, etc... or not. In fact, I hope that's it... and I can just relax a few orders of magnitude.

What does the hive mind think?

If we are where I suspect, how do you convince your family members to take heed and start to prepare for the worst? What course of action are you planning?


No, you're fine dude. These are uncertain times. We're all feeling it. But don't fret - prepare. What I've done isn't anything different from what I've done in the past.
  • I live debt free.
  • I try to invest at least 25% of my disposable income into cash flow generating assets.
  • I cut cost relentlessly, but Mrs Mutant & I still enjoy life; Tate Modern, The Globe, trips, treats, don't pinch pennies when personal happiness counts.
  • I keep busy; left banking about two years ago, now making my living teaching finance and selling market commentary to Tier 1 Investment Banks and these certainly are historic times!
  • I live relatively not absolutely; as long as we're safe / warm / comfortable I seriously don't care if the 'hood looks like shit.
  • And Houstonian makes an excellent point; you've gotta think long term.
I remember back in in the early 90's when I was working in New York on a US Government Securities trading desk. I'd just gotten an order from sales, and actually had the audacity to debate placing the trade, citing to my boss "these uncertain times".

His face got red with disbelief at the thought of someone declining a customer commission. "Just buy the fucking bonds" he said, shouting at no one in particular as he stalked off the floor "When have times never been uncertain?"

Indeed.
posted by Mutant at 3:22 PM on October 1, 2010 [130 favorites]


We used to be the worlds largest creditor, but now are the worlds largest debtor.

There's an old saying that goes, "If you owe the bank $100, you have a problem. But if you owe the bank $1 million, the bank has a problem. And a new business partner. You."

We're a huge debtor. Regardless of whether you think that's a good thing or not, it means somebody thinks we're good for it. In fact, not only do they think we're good for it, they think we're the safest place on the planet to store their money.

Nobody fooled the Chinese into buying Treasury bonds. They're not stupid. They think they can get their money back. With interest.

Or they think they can influence our politics. But that's a different question.
posted by Cool Papa Bell at 3:22 PM on October 1, 2010 [7 favorites]


I'm anything but an economist, but the US is going to continue to have a large population of people capable of creating interesting shit, and interested in trading it for other interesting shit, for a long time. Money is the abstraction layer for trading interesting shit, and needs some management, but if it got too fucked up people would just find another currency.
posted by These Premises Are Alarmed at 3:28 PM on October 1, 2010 [2 favorites]


The earliest proponents of the ideas that worry you so much were a tight circle of extremist ultraconservatives centered around Gary North, who believe that the US government is essentially illegitimate for any number of reasons. North and his fellow travelers in the right-libertarian circle invest in precious metals almost exclusively, and have a vested interest in inflating any financial crisis, and weakening the position of the government as a matter of principle. These ideas diffused through libertarian circles to the point where their underlying foundation is often obscure, but worth keeping in mind.
posted by StrikeTheViol at 4:16 PM on October 1, 2010 [4 favorites]


Well, your 401(k) and other illiquid savings shouldn't be in US currency, anyway; what they *should* be in is up for debate, but currency is a surefire losing bet.

My own vision of a true "depression hedge" is a small amount of arable land with a good water source, away from the coasts, and the knowledge of how to farm vegetables, chickens, goats and bees.
posted by endless_forms at 4:23 PM on October 1, 2010 [1 favorite]


If the Depression ever comes, just cut out electronics from your life and you'll do just fine.

What was your phone bill like this month? Cable? Internet? Lose those, and how much do you save? A bundle, I'll bet. How about ditching the electrical bill too while you're at it? Cha-ching!
posted by Sys Rq at 5:26 PM on October 1, 2010


(Which is all to say: Even if there is a new Depression, it will be FAR from "Greater" than that last one.)
posted by Sys Rq at 5:27 PM on October 1, 2010


Gold backed currencies? Did you just step off a time machine from the 19th century? Currency is just like any other commdoity. It has value and it bought and sold on open markets. Nothing has any kind of intrinsic worth. All things bow down to market prices. Even gold does. Heck, imagine if there's a physics discovery tomorrow that makes turning lead into gold possible and done cheaply. Any gold backed currency would collapse and entire economies would vanish overnight. Do you really want to bet against advances in science, even if they're far-fetched? Or lets say tomorrow its found out that gold can be used to cure cancer. Suddenly gold doubles or triples in value. Now you're dealing with destabilizing deflation. This obsession with elements backing up currency is practically Aristotelian!

Frankly, it sounds like you've been reading too many conservative news sources. Currency backed by precious metals is meaningless and is a throwback to the past which only serves the needs of, you guessed it, gold traders and right wing ideologues looking to snare in some voters. A lot of people have gotten rich and will win offices off your fears.

As far as today being a new great depression? Are you kidding me? Unemployment hit 25% in 1933. We've flattened out at 10%, which is actually typical if you look at European capitalist democracies. Congratulations, you're French.

You're in a recession and they seem to come around every 20 years. No one has been able to crack how to stop it. If anything, its part of how everyday capitalism works (boom and busts). You'll probably live to see two more depending on your age. I can't tell you what will happen tomorrow but if you look at everything that has happened in the past 18 months, its obvious that the worst is behind us and the collapse into cannibalism might have been a little overplayed.
posted by damn dirty ape at 10:15 PM on October 1, 2010 [5 favorites]


For what it's worth, the common claim (on both left and right) that America has shipped its manufacturing overseas is more or less bullshit. Yes, factory workers are a smaller share of the workforce and manufacturing is a smaller share of the economy than 50 years ago, but the United States is still the world's largest manufacturer.
posted by nasreddin at 10:28 PM on October 1, 2010


Damn dirty ape is 100% correct. The US has some debt and demographic problems that will need to be worked on. But we are nowhere near a great depression. Our economy is much more varied, we have better safety nets, there is (hopefully) no drought/dustbowl thing happening, Hoover has been dead for 50 years, etc. I mean, for god's sake, literally trillions of dollars of wealth have disappeared in the last 2 years or so, and unemployment only jumped 5 points, GDP only dropped a percent or two. All that fabulous money that was being made in financial services and real estate disappeared, and the rest of the economy stepped up and almost broke even. That's not a sign of an impending depression.

Another thing to consider: deflation is the problem. You see it as lower prices, and a higher value of the dollar against all the other currencies. Deflation seems like a good thing, but it really, really isn't. When the public gets the idea that if they just wait around a little bit longer to buy something the price will go down even further, it starts to feed on itself. That's how you get a depression. A little inflation is good for an economy. It lubricates the flow of money because it incentivizes holders of money to do something constructive with it. Spend it now, or that thing will be more expensive next year. Invest in something that adds value to the economy, because sitting on cash loses you a couple percent every year.

US corporations are sitting on over a trillion dollars in cash right now. There's your recession right there. They got spooked and started belt-tightening and hording. Spooked by people with political axes to grind who tried their damndest to convince everyone that the future was uncertain. And look who it (probably) will benefit in election time. Happens every time a certain party is in the minority.

The real uncertainty was 2008, 2009. Banks literally weren't lending. To anyone. To themselves even. That's mostly ironed out now.

He's also right about gold. NOTHING has intrinsic value. We only value things because we believe they will be valuable to us either to consume or to trade for something else. You can't actually do very much with gold- it makes nice jewelry and stereo connectors, but shitty tools and bullets. The only reason gold prices are up is because a bunch of people are convinced it is going to keep going up. Say, that's a bubble! There is a reason people are buying advertising to try and sell you gold: they have a lot of gold and would prefer your dollars at today's prices. If gold really was such a solid investment, nobody would be selling it.

It is kind of funny, and possibly expositive of something, that so many of the so-called free market people would gladly have our currency pegged to something other than its market value. In truth, the value of the dollar is about as free market as you can get. There is nothing or nobody telling us what it is worth- except the billion or so people who use it as a currency.
posted by gjc at 6:45 AM on October 2, 2010


Thank you nasreddin! Absolutely correct.

What the complainers are conveniently forgetting is that historically, manufacturing wasn't (and isn't) that great of a job to have. Better paid than Starbucks, perhaps, but only in the short term. If you account for plant closures and moves and strikes and all that, I bet it starts to even out.

And the only reason manufacturing is at all desirable now is that because the unions, who those complainers hate more than life itself, made it that way.
posted by gjc at 6:50 AM on October 2, 2010


People citing 10% unemployment are conveniently leaving out all the government manipulation inherent in that figure, U-6 is closer to 17%, close to double the rate prior to 2008.

So the answer is probably not, "we're on the precipice of a new Great Depression", but more like "this is an ongoing Great Recession with no clear path back to broad growth in the economy". Some people in this thread seem to be saying "its all in your head, everything is fine", and that is not the case.
posted by T.D. Strange at 10:32 AM on October 2, 2010


And look who it (probably) will benefit in election time. Happens every time a certain party is in the minority..

Well- post Reagan, let us say. Back in '32 it got Roosevelt elected. House and senate both were Democratic until well after the war. Even in the seventies the republicans couldn't catch a break.
posted by IndigoJones at 10:33 AM on October 2, 2010


Own assets.
posted by Protocols of the Elders of Sockpuppetry at 10:43 AM on October 2, 2010


I would be more worried about resource depletion and the resultant wars, environmental degradation and the rise to new forms of power that the millitary-industrial-political complex is managing.

But hey, that's me.
posted by lalochezia at 2:28 PM on October 2, 2010 [1 favorite]


ka9dgx, nice to see you here.

I really don't think we're in another Great Depression. The breadth is just as global this time around, but the depth is quite less substantial. The term the Great Recession has gained some currency and I think that's right.

Krugman and some other liberal economists are particularly worried about a deflationary period of quite different character. The example most often given is Japan's Lost Decade following their own run-in with the liquidity trap that has prevented that government from doing more Keynesian stimlus and other things to get the economy growing properly again (all in the face of some grim demographics -- a population much more aged as a percentage than any other developed country). Another example is the 1870s Long Depression (which was known for a long time as a "Great Depression" until the one we now know came along).

These are not such catastrophic outcomes as you suggest. They are difficult times, though, to be sure, and unlike anything in living memory of almost everyone. Since the characteristics of the US economy you point out have really been in place for some time already, I would discount them as proximate causes.

The history of the US GDP shows that we have continued, at least prior to the current crisis, to grow our economy. This has not, however, been a prosperity that has been equally shared. We have income disparity that is starting to approach third world levels. It's pretty scary how easily the public has supported tax policies that have increased the burden on themselves, to the benefit of a very small class of people who have made out like bandits. The people in the lower ranks of income who feel they are not making it as easily as their parents are right. The reason they have been told for a generation, primarily foreign competition, is wrong, or at least not nearly as much of a factor as they think.
posted by dhartung at 6:38 PM on October 2, 2010 [2 favorites]


Well, so far I've fact checked about Gold reserves... we do have the largest reserves at around 8000 tons of the stuff, which is about 1/4 of all the gold in reserve worldwide. In 1950 we had about 2/3 of all the worlds reserves... this is a severe drop, but I do stand corrected.

I'm surprised people think that having something backstop a currency is such an antiquated notion. I look to the examples of the German Mark in the 1920s and more recently Zimbabwe as examples as to what happens when a country issues currency without restraint, as we currently seem set to do with QE2 (Quantitative Easing... in other words printing money to pay our debts)

As far as manufacturing, thanks to Unions in the 1970s it was possible to have a job in that sector, and to raise a family on a single income... this is no longer the case.

Many of the tools and equipment required to make things are no longer manufactured in the US, many of the specialty high technology materials are made in the US, and there are still big incentives to arbitrage labor costs and offshore what's left.

A single 1964 quarter is now worth almost $4.00 melt value. This indicates to me that the inflation has removed 15/16 of the value of a dollar in the last 46 years. How long before the rest is removed?

Thanks for the responses so far.
posted by MikeWarot at 7:53 PM on October 2, 2010


A single 1964 quarter is now worth almost $4.00 melt value. This indicates to me that the inflation has removed 15/16 of the value of a dollar in the last 46 years. How long before the rest is removed?

Was a quarter, even in 1964, ever intended to convey its 25 cents by its value in metal? The US, for example, issued steel pennies at one point during World War II, due to copper shortages. Does the fact that a hundred dollar bill is worth considerably more than the paper it is printed on mean our currency is stronger?
posted by Comrade_robot at 6:58 AM on October 3, 2010


A single 1964 quarter is now worth almost $4.00 melt value. This indicates to me that the inflation has removed 15/16 of the value of a dollar in the last 46 years.

On March 27, 1980 the price of silver went from $21.62 to $10.80. Your quarter would have bought twice as much silver as it did the day before, but not twice as much bread or gasoline or, well, damn near anything else. Trying to use the markets as a hard and fast indicator of the value is kind of like asking a hyperactive child to manage your investment portfolio.
posted by Kid Charlemagne at 9:39 AM on October 3, 2010


[few comments removed - AskMe is for problems to be solved, not for soapboxing on your topic of choice. Please limit comments to answers or help in finding an answer, this goes for the OP and the commenters.]
posted by jessamyn (staff) at 9:06 PM on October 3, 2010


Ok Mike, nobody disagrees (at least no credible economists that is) that having something backing currency is a bad idea. Its how the system works now. But here's the rub - it doesn't matter whether its bullion or bits backing your currency if you don't have the will to adhere to the rules. This fact eludes many who argue passionately for a return to the gold standard and, in fact history backs me on this.

On April 5, 1933, President Roosevelt signed Executive Order 6102, which required Americans to surrender their gold to the US Government for a payment of $20.67 per ounce. There you go, US dollar backed by gold, what could go wrong?

Well, the money supply was fixed - the US Government couldn't print more dollars as rapidly as needed, since the dollar was backed by gold - so just one year later Roosevelt increased the price of gold to $35 a ounce, or a devaluation of almost 70%.

As I said, doesn't really matter what backs the currency as the system can easily be manipulated either way, if the national will isn't there.

You mention the German Mark (Weimar) and Zimbabwean examples of hyperinflation, but I'm curious why you didn't mention other instances that we're fully aware of? Turkey, Soviet Georgia in the early 90's or even America after The Korean War (Parsson, 1974, covers this little known episode more than adequately in Dying of Money: Lessons of the Great German and American Inflations).

But lets leave Zimbabwe out of this - its a falsehood to claim their hyperinflation was caused by poor monetary policy; I debunked this in an FPP about one year ago. The simple truth is a bunch of people got control of the Central Bank and enriched themselves, at the cost of many Zimbabwean lives. Hyperinflation there had precisely NOTHING in common with other examples of hyperinflation.

Turkey of course is an interesting example but I was in Istanbul during the hyperinflation, and it only seemed to impact those who had exposure to non lira denominated goods and services. Imports, in other words. I'm not trying to minimise the suffering, but people still lived their lives - they just had to watch every penny and constantly scramble to make sure they didn't fall behind. I'm pretty frugal, so I'm not sure these are bad habits to acquire, even in the best of times.

If you start to look across all these disparate episodes you'll see that inflation - hyperinflation - is more complex than a country issuing currency without restraint. Cagan, P., (1956), The Monetary Dynamics of Hyperinflation , has a good discussion of the causes of hyperinflation.

There are two fundamental drivers of inflation - monetary and price.

What we're seeing now is a rapid expansion of the money supply - monetary inflation - but, curiously, we're not seeing this manifest as price inflation.

Nobody is really sure what's happening, but my theory is the evaporation of the Shadow Banking System took $12T to $14T of liquidity out of the system and the expanding money supply is simply filling this gap.

Regardless, we have seen economic episodes where sharp increases in the money supply don't necessarily manifest as price inflation.

You see to progress to price inflation the money has to circulate, something we all know isn't happening now. It could in the future, very easily, so one has to be on guard. But that's really a matter for Treasury to handle. There really is nothing anyone of us can do, other than position assets appropriately. Hopefully you've got some inflation hedges in your portfolio? Clearly there is inflation coming; the timing is the open question but we most certainly will see an increase in inflation and sooner rather than later. Its just a question of how much and how fast; will it go hyper, in other words? Yes, it could easily so once again you've got to be prepared.

In terms of your queries regarding manufacturing, the United States has moved up the value chain. Lots of basic manufacturing is done off shore, with final integration accomplished in America. I'm not really sure what the question is, but should all manufacturing take place on shore local prices would skyrocket, and other economies depending upon these jobs would crater. Nascent middle classes in developing nations would probably be seriously damaged if not wiped out, and global trade would suffer. So what would be accomplished other than protecting an industry?

Your points regarding the value of silver in a US quarter are noted (I actually walk about with a couple ounces of silver and a kruggerand to show folks what inflation has done to our money) but once again the long term historical perspective is warranted - in Dickens time the current day equivalent of £33 (Britain hadn't decimalised yet) would purchase a man either an ounce of gold or a good suit in London.

Today you certainly can't get a good suit made in London for that much money. In fact I get mine tailor made in Bombay and even there they cost about £90 when I purchase more than one with a bunch of shirts thrown in as well, and that is after a morning of haggling. But with the price of gold at about £830 today you can clearly get a suit for an ounce gold.

Under certain circumstances gold is a store of value, it preserves purchasing power, nothing more. As Kid Charlemagne points out upthread, there are circumstances when you can get caught on the wrong side so you've gotta be careful.
posted by Mutant at 1:26 AM on October 4, 2010 [7 favorites]


Would you rather live in the UK in 1910 or in 2010?

Relative decline of a nation is very different from absolute decline!
posted by miyabo at 9:31 AM on October 4, 2010


>German Mark in the 1920s and more recently Zimbabwe as examples as to what happens when a country issues currency without restraint,

One country was hobbled by WWI debt, unpopular government, and hoarding and the other was a corruption nightmare. Both are extreme examples in history and not common occurrences.

>As far as manufacturing, thanks to Unions in the 1970s it was possible to have a job in that sector, and to raise a family on a single income... this is no longer the case.

That has nothing to do with how currency is backed up nor with inflation. Wages dropped in manufacturing because foreign manufacturing can do the same job a lot cheaper. It would be foolish to make your widgets in the US when you're paying $15-$25 an hour for labor when in Asia you're paying between .50 to 1 dollar an hour. The US has migrated over to a service economy, which provides more cushy jobs that are far superior to slaving over a lathe or hot plastic injection machine 14 hours a day. Not to mention how the typical western lifestyle is only possible through third-world labor and what protectionist laws in the big western economies would do to these poorer countries. Economic collapse and more Islamic extremism would be the first things.

Also, the US went through a demographics change since the 1970s. Women were suddenly entering the workforce. As supplies of labor outstripped demand, real wages eventually well. Now most middle-class families require two working adults.

In both cass you're advocating a protectionist approach, and historically, that's been shown to be sub-optimial. We protect corn with up to 3.5 billion in subsidies annually, which has led to an excess of corn, HFCS everywhere, mandated ethanol gas, sugar price inflation, poor diets, and a bigger tax bill. Thats the fruits of protectionism.

How backing up currency to an element is going to fix any of the above problems is beyond me. If anything, regulation of mortages and bank investments seems to be the wise choice as predatory loaning caused this mess. The right-wing demagogues have done a good job turning a "lets start fixing lending and other predatory practices" talk into a "Lets get gold back in the game and get rid of social security to cut taxes" talk. In fact, they've done a damn good job. Playing up fears to buy gold has send gold prices soaring in the last two years. $700 dollars for an ounce in Oct 08 to $1300 today. Your solution to our booms and busts is, a product going through it own boom right now and its only a matter of time until that bubble bursts. Pegging your economy to that seems more than a bit foolish.
posted by damn dirty ape at 10:53 AM on October 4, 2010


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