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There is a battle commencing between the minds of two economic groups… both predicted the current crises, both are filled with intellectual powerhouses. This battle can be summarized as a war between two economic schools: the Austrian vs the post-Keynesian. It’s a war with heroes and legends. The Austrian school’s prized fighter are Peter Schiff, Ron Paul, Jim Rogers and Marc Faber. The post-Keynesian’s have Steven Keen, Mish (who copies Steve) and a number of others. The war is this… will this global financial crises lead to INFLATION or DEFLATION.
An excellent question. though most would say ‘who cares’? Let us examine the end result of each scenario:
INFLATION The value of your money progressively decreases as central banks print enough money to prevent deflation (a contraction in the money and credit supply). Anyone who has a debt will have no problems paying off the nominal value of the debt, as the nominal value of your wage increases over the nominal value of your debt. Example: this year the price of bread is $1… next year the price of bread is $3. I have covered this phenomena in some detail in previous posts, I encourage you to ask me questions if you still want some help understanding the concept of inflation.
DEFLATION The value of your money progressively increases as central banks are unable to print enough money to prevent the contraction in the money and credit supply. If you have a debt, it is almost impossible to pay off the debt as it’s real value increases (nominal value is unchanged) while the nominal value of your wage decreases. Example: the price of bread decreases from $1 to 50 cents in one year. The collapse of lending, increased number of loan defaults, all contribute to a contraction of the supply of money, which makes the individual value of money greater (think the polar opposite of inflation).
In short… INFLATION = good for people with debts. DEFLATION = bad for people with debts.
Now “deflationists” will not contend with the assumption that INFLATION can occur, even hyperinflation like Zimbabwe, but they see it as highly unlikely as the level of money printing would be astronomically high. Furthermore, any attempts to neutralize the effects of deflation with money print would hopelessly collapse as seen with the central bank of Japan in the Asian Financial Crisis. Also, any money that is printed goes directly to creditors and doesn’t touch the local economy to raise the price of everything. Post-Keynesian economists like Steven Keen, a man whom I deeply respect, also contend that there is evidence to suggests that the money print by the central bank precedes the increase in the money supply (M2 to be exact)…. which means that the central banks are printing money in response to bank insolvency. Thus, the increase of $1-2 trillion in the Federal Reserve’s balance sheet was in response to the ‘bank runs’ which took place at the end of last year, rather than an effort to create new money to pump into the local economy.
Inflationists on the other hand say that the government is perfectly willing to go as far as to print our way to hyperinflation. More importantly, that the government is currently pursuing a course that will inevitable lead to hyperinflation. They contend that the government has a course of trading private debt with public debt, these are also known as bailouts and they continue to this day as the government is pursuing a relentless nationalization agenda. This isn’t perceived to be so much of a problem as the price of the debt (i.e. the interest rate) is quite low, thanks to the majority of the debt financed by short terms T-bills (1-3 years bonds). When these bonds are required to be paid off, the government rolls the debt over into new bonds… or simply put, it borrows money to pay off borrowed money. This is somewhat manageable when the economy is in a boom phase, where there is predictable growth that can theoretically outpace the increase in debt. The failure of neoclassical economics for both monetarists and Keynesians was that their models assumed the the economy would be in perpetual growth, which was found to be the case as gravity exists in the economics in the form of finite resources. As the government increasingly swaps more private debt with public debt and simply rolls over the debt repayments, exponential functions take over and the debt servicing on the debt starts to become impossible.
Pretty soon, people who buy the debt (like China and Japan) start to realize that the US is not going to pay back that money with any real value and stop purchasing this debt (they already have btw). This forces the US to start doing something called ‘quantitative easing’, which means that the central bank prints money and buys it’s own bonds. As the money print continues, the government starts to pay creditors the freshly printed money. These creditors want to dispose of this currency either through exchange into their own currency (as most of the creditors are foreigners) or they will spend it on raw materials or even US financial assets. As more US money abounds, the value of this money begins to decrease, even outside the local US economy. As the value of the dollar decreases, the US central bank will be in a trap: the only way to defend the value of the dollar is to raise interest rates, but this will increase the amount of debt the government as to go into to service the existing debt. And, if the interest rates rise, all of a sudden the credit based economy grinds to a halt as no one can pay back their debts. If the central bank chooses to ignore that the value of the money is decreasing and the prices of everything are increasing, entering into hyperinflation will occur more rapidly than anyone predicts as they will eventual ‘turn the corner’ on the exponential curve of the depreciation of the US dollar.
The Japanese example isn’t applicable, the inflationists say, as the nature and origin of Japan’s productive capacity and creditors are completely different to the US. Also there is the tiny little fact that Japan is the largest creditor nation in the world, while the US is the largest debtor nation. This is a striking point between the two schools… the PKs say that the scale of the debt black hole is too enormous for pure money printing to overcome. The Austrians are saying that the money printing is being used to swap the private debt with the public debt, and if this process continues then the value of the currency will collapse.
So… which one is right? The answer is, no one really knows. Some people will say ‘I’m 100% sure this way or that way’, but in reality, we’re all just economic geeks watching the carnage unfold. This is exciting to watch, but painful in reality to the people at the bottom of this gigantic pyramid scheme that we call money and banking.
Personally I’m not interested in the little esoteric arguments between the economic schools… and there are many. I think there’s value in the analysis of the financial system from both schools and both possible scenarios make sense and are plausible. We’ll just have to see what happens. In any case, my advice is to horde faith in God and put your money in assets that will protect you from either scenario, which are precious metals (i.e. gold, silver, platinum).
God bless,
Washo
PS And if you’re a US citizen, support bills like H.R. 1207 ‘The Federal Reserve Transparency Act’ aka ‘Audit the Fed’
Hey guys, for those who weren’t disheartened by my lack of activity on this blog and occasionally check-in, just letting you know that I’m still alive and kicking. Since my last post, the following has happened in my life that has occupied my time:
1) I finished PhD
2) I got married
3) I went on my honeymoon
4) I moved into my new house (we’re renting, in case you were wondering)
5) Adjusting to all of the above
Loads of stuff has happened since the last time we’ve talked… there is so much to comment on, I don’t know where to begin. At least I’ll start by saying that I’ve been invited to contribute to a blog called http://www.aussienomics.com , which is a site devoted to hosting the Austrian school point of view of economics that affect Australia and the world. So I’ll post to let you know that I’ve posted there.
Ok, that’s all for now.
God bless,
Washo
This year’s Federal budget was nothing short of an unmitigated disaster… with a deficit of $50 billion, $200 over the next 4 years. These nominal levels of debt have never happened before in the history of Australia. But we are assured by our fearless leaders and economic experts that the solution to an international credit contraction is deficit spending and that we must ’spend’ our way out of this. I have to restrain myself from calling them names in public… I don’t know what disturbs me more though: 1) The shocking ‘Robin Hood’ budget and it’s ceaseless class warfare OR 2) Nobody seems to care, we’re too busy watching ‘Gossip Girl’. People don’t understand the magnitude of the things going on around them… fine, not my problem.
Here’s my breakdown of the budget:
1) Economic Growth to fall to -0.5 per cent of GDP
This is just a fantasy… only falling by -0.5%!! This is delusional if not morally repugnant. It also happens to be built on an assumption that inflation will average 1.75% next year….
2) Inflation to average 1.75 per cent
This number is also a fantasy. All government stats are worth less than the paper they’re written on. I suggest you do some research on hedonics to understand what I mean.
3) First Home Owners Boost continued for six months
This program is the peak of moral hazards… house prices have already started to collapse, in spite of this recent boost. The extension of this program will not stop house prices from falling… the party is over.
4) Small Business and General Tax Break increased to 50 per cent for order this calendar year
This is one of the few decent moves made by the policy makers… the law of large numbers dictates they had to accidentally get something right. The issue here is that these tax breaks are canceled out by increases in the Medicare Levy.
5) Infrastructure spending to total $22b. $8.5b for road, rail and port. $4.5b on new clean energy initiative
Infrastructure spending is lower than previous government. Contrary to popular believe, infrastructure don’t actually make you any money… it just employs people with borrowed money that each individual has to pay through higher taxes. Unlike this budget, previous governments have spent more on infrastructure with taxpayer/surplus money, not borrowed money like this government. Infrastructure spending in a time of recession is an old Keynesian economic myth… borrowing money to pay myself for remodeling my house, when I’m unemployed, doesn’t somehow save me out of bankruptcy.
6) $5.3b on tertiary education, research and innovation. $2.5b over five years to drive hospital and health workforce refor. $3.2b from Health and Hospitals Fund to modernise hospitals and and improve cancer facilities.
Of course I don’t think that the government shouldn’t be involved in any of these areas… but that’s my libertarian quip. In reality, the government is driving the cost for tertiary education, research and health care higher each year. Each year the government tries to out-do the previous year’s spending on health and education so they can gain political brownie points to look like they’re doing something about these issues. Well they are: making them more expensive. If you’re a health care provider and you knew you were going to get money next year from the government, what would you do? That’s right, costs would mysteriously get higher and there’s no incentive to compete. The only way for health care to become affordable and prices to drop is to privatize them… let health care providers compete for the best services at the lowest cost. Poor providers will lose money due to lack of business… excellent health care providers will be rewarded with better business and more capital.
7) Private health insurance rebate reduced for higher income earners
The government shouldn’t be providing for an insurance rebate or anyone… now higher income earners will have to pay for everyone’s health insurance rebate. No they don’t deserve it, it’s legalized theft based on a Marxist view of class warfare and retribution.
8) Medicare Levy Surcharge increased
This is stupid… you don’t raise taxes and raise ‘levys’ in the middle of a full blown recession, when money is contracting.
9) $731m over five years for paid parental leave scheme
This one has to be one of the worst proposals by the government. Paid maternity leave sounds compassionate, but it will put extreme pressure on businesses who have to employ staff taking maternity leave, while paying both workers. What will this lead to: higher prices for goods and services. The money has to come from somewhere… $731 million over 5 years is nowhere near going to cover the costs, the shortfall will be paid by business and prices will go up. This legislation benefits some and the expense of everyone else. Why should businesses pay for someone who isn’t working? It’s a path to bankruptcy.
So you know that I’m not a monster, I remember the days when a husband could go off to work and earn enough to pay off a mortgage and thrive, while the mother could stay home and take care of the family (if she choose to). Thanks to inflation and the housing bubble and credit expansion, brought to you by the last three governments, this is no longer possible.
10) Pension age increased progressively to 67 years by 2023
Not a popular decision, and not a necessary one if we reduced a lot of our other spending.
11) Single Pensioners to get extra $32.49 per week, couples to get extra $10.14 per week
Yes the government is subsiding death and divorce… well done. Was it so hard to give every pensioner at $32.49/week increase?
12) New $600 a year Carer Supplement for all Carer Payment recipients, plus allowance
Grudgingly in favor of this one. It would be better if families took care of their grandparents rather then getting a carer for them.
13) Extra $650m in funding for border protection
Excellent move… a national defense is a legitimate operation of the government.
These are my broad strokes comments about the budget.
God bless,
Washo
The latest UN Climate Change report, which you can read at http://www.foxnews.com/story/0,2933,510937,00.html, outlines one of the most horrific and pathologically idiotic approaches to deal with carbon dioxide emissions. It consists of essentially ruining the economies of developed nations (which aren’t doing so well lately if you haven’t heard) to pursue a policy of punishing industry through taxes and regulation.
Now this may be great news for countries like China and India, because they can absorb even more of the world’s industry that flees Australia, the UK and the US. People also seem to forget that China is the largest contributor to CO2 emissions in the world, outdoing the US, yet it is exempt from the Kyoto treaty… and China’s projected increases in CO2 emissions will dwarf Australia’s own projected reductions as stated in the Kyoto treaty!
Why then should Australia punish it’s industry (the little that remains), go into debt, increase the tax and regulatory burden if the net effect will be negligible? Well the answer is pretty simple: it’s a political thing. Politicians now ‘get it’ that climate change is a pretty important issue among their constituents, so they need to look like their doing something. The proposals that they unveil, like this totalitarian UN climate report, are like a cartoon mousetrap… a little bit of cheese to lure their victim, they start to nibble and SNAP… welcome to Big Brother. We’re going to tell you how productive you can be, how much CO2 you can emit, how much you can exhale, what you can consume… remember, it’s all for the planet.
Ok, so apart from my ideological opposition to these idiotic proposals there’s a much more relevant point to be made here: they won’t work. If China’s CO2 emissions continue on their projected rate it will make any reduction, on the part of other countries, useless to say the least. Ultimately reducing carbon emissions is treating the symptoms and not the disease. We’re still operating under the Industrial Revolution’s mentality for generating energy: heat coal/oil, boil water and turn a turbine to generate electricity (even nuclear power heats fuel rods to do the same). If you want to reduce carbon dioxide emissions you need to make them irrelevant. Basically we need a new means of generating electricity that is more efficient than traditional means (no not wind or solar, they suck aren’t there yet).
My solution:
1) Scrap all the restrictions on industry for CO2 emissions
2) Give major tax incentives to industries that improve their energy efficiency
3) The ‘E’ prize – the major industrialized nations all chip into a global pool of money, prize money in the order of billions, for the first group to develop an energy source that cheap, clean, efficient and more effective than what’s on the market. Provide funding for research groups who’s stated goal is to win the E prize.
Human beings are more productive when they work under incentive, not fear and intimidation. If we really believe that, then our policies need to reflect that. We need to dispel the notion that we can tax and regulate our way out of an energy crisis that dates back hundreds of years to the industrial revolution. Deal with that and you’ll solve your climate change problems.
I find myself strangely devoid of a subject to discuss on my blog. I have plenty of passion to rant about the economy, politics etc… but you’ve heard it from me before.
What… oh what shall I talk about?
I have few words for this…
President Obama Claus
The ‘kinda State of the Union’ was really amazing. We had the President of United States declare that things are tough, we’ll get better, we’ll restore credit, we’ll cut the deficit, we’ll give everyone free education, we’ll give everyone free healthcare and we’re gonna cure cancer… all in one speech!
All I can say is ‘wow’… how about you pay off everybody’s mortgage while you’re at it. ’Don’t be stupid…’ you might say to me. Well, did you know that the grand total of the ‘Spending Stimulus’ is actually enough to pay something like > 90% of everybody’s mortgages in the United States. And where is the money coming from by the way? Tax rises are the on the way for those productive evil and greedy people earning over $250 000/year. They’ll also let the Bush tax cut expire in a couple of years. But will that be enough to pay off all of this reckless spending? Not even close.
So really… where’s the money coming from? Like I’ve said a million times before: issuing bonds (selling debt) and printing money. Way to go guys… really, superb logic. How about you drastically cut government spending and taxes? How about abandoning programs you can’t afford like Medicare, Medicaid, Social security, bailouts and guarantees? ’No… that would be responsible of us. We can’t afford to do that,’ I hear them cry. Oh man…
Glad I’m not an American… oh wait, they’re doing the same thing here in Australia. Really, pray for your leaders to get it right.
God bless,
Washo
The Queensland Police has just been granted the ability to tap your phone and even read your Facebook mail under new legislation that’s just be approved our government. You want to know the best part, the organization that is established to restrict these powers has been described as a ‘toothless tiger’… essentially unable to prevent the Police from using these powers.
You should know that these sorts of powers should only be given by the approval of a Judge after the Police can show ‘probable cause’ (which means it is more likely than not that a crime is about to be committed). Warrants should not be self-written by the police… look at the effects of the Patriot Act in the United States. I’ve just spent some of the morning trying to find out information about this law and guess what… it is strangely missing. All I have to work off is the original news article: http://www.news.com.au/couriermail/story/0,23739,25084647-952,00.html
This should concern you… it should infuriate you! At least there should be more information for the ordinary person to be able to read this new piece of legistlation (or at least make it easy to find). But if it’s true that the QLD police can write out their own search warrants without the approval of a judge, we are in serious trouble. It means that in the not too distant future you can get a knock on your door by the police to search your home without judicial approval. At that moment you may ask yourself ‘Where did they get the power to do this?”.
The answer is when you choose to ignore the world around you. I beg thee… start speaking.
God bless,
Washo
Hey guys,
In what may become a defining moment in my life to the more patient eye, I have decided to become a greater writer on purpose. One of the keys to great writing is a heck of a lot of practice, which means that the activity on this blog is set to skyrocket as I endeavour to become a prolific and skilled writer. So, if you have any feedback on my writing, expression and flow, please offer your constructive criticism in the form of an encouragement sandwhich (i.e. encouragement on the top, constructive criticism in the middle and encouragement on the bottom of whatever you have to say).
For you Twitter lovers out there, you can find me by searching for @drwasho as I take the twitter universe by storm… which is to say you’ll receive timely commentaries on my bowl movements throughout the course of a day.
Podcast: I’ve recorded my first podcast with my co-host Bulu. This podcast is going to be called ‘The Mule’ and we’re going to try and record it on a weekly basis… which is to say that whever we feel motivated to record something we will. It will run for 15 minutes, we won’t get into much detail about the subject matter or opinions we put forward. What we will do is give our commentary on anything that isn’t ‘Dancing with the Stars’ or ‘Prison Break’, that actually matters to you and your future generations. We’ll also put up links for deeper reading material if you’re that motivated, interested or infuriated at what we’ve just said. I’ll try and put it up on iTunes and of course, we’ll have a link to it on this blog.
Rights and Liberty: Do our rights come from God or from the government? Tell me what you think!
Hey guys, just a quick note…. as you’ve probaby noticed my updates have been few and far between, not for lack of subject material but quite the opposite. There’s so much I want to talk about that I’m going to follow through on my promise last year and get my podcast up and running.
Thankfully it won’t be just me talking, but we’ll have my friend Bulu as the co-host plus we’ll have some guests to talk about stuff. So I’d be really interested to hear what you would like to hear us talk about… other than the obvious stuff I talk about here in my blog.
God bless,
Washo
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