Wednesday, Apr 01, 2009
Hyper-inflation or hyper-deflation?
Antal E. Fekete via Market Oracle: The Marginal Productivity of Debt, Why Obama's Stimulus Package Is Doomed to Failure
I hesitated to post this because it is too apocalyptic. However, I believe it has something intelligent to add to the inflation vs deflation debate. It concerns the cost of holding debt. If you have a profitable business taking on debt to expand can be profitable. But there is a point where more debt is no longer profitable. That point has now been reached; we are "eating our seed corn". More debt now actually harms the economy. Growing government intervention causes debt to grow. The only profitable investment speculation now is goverment bonds. Money printed is needed to pay off debt and does not go into circulation. Money printed during quantitative easing (buying up government bonds) causes the economy to contract; a vicious circle causing asset and commodity prices to fall-deflation
7 Comments
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1. uncle tom said...
OK, this writer is utterly obsessed by one economic metric, and seems to overlook the fact that the Americans are not the only people on this planet who consume commodities.
US hyper-inflation? - possible but not likely, comfortable sub 10% inflation more likely, but uncomfortable 10 - 25% inflation is quite possible.
Hyper - deflation? - no chance; moderate deflation - possible for a brief period, but not likely.
Runaway inflation looks much more likely in the UK..
2. 51ck-6-51x said...
While I tend to disagree with this guy's economic thought, he is a great lateral thinker and should not be simply dismissed (his book on Linear Algebra is good and approaches the subject in a fresh light).
His lecture notes on his Hexagonal Model of Capital Markets
3. mountain goat said...
51ck-6-51x - thanks for the link. Fekete has a very abrasive style, probably from being laughed off the platform at academic meetings by the Keynesian mob (as someone who works in the academic world, believe me, I know how closed minded many academics are). But generally if I look beyond his rant I usually find some profound thoughts that, as you say, can't be easily dismissed.
4. Weebobby_getdoon said...
just how hugh hendry sees this playing out
deflation
keep your job and wage and your gonna be laughing
5. last_days_of_disco said...
Just started reading this and the statement "Indeed, the higher the ratio, the more successful entrepreneurs are in increasing productivity, which is the only valid justification for going into debt in the first place."
This guy has his head screwed on and it is not turned by the hand waving arguments of Keyensens. The only reason you take on debt is if it can enable you to make more money in the end. Clearly this whole crisis is rooted in ignoring this very basic and simple principle.
I am not saying he is 100% right, but that line made me sit up and take notice.
6. mountain goat said...
@Weebobby_getdoon - yes keep your job
Any links to hugh hendry?
7. kruador said...
Keynes' theory is straightforwardly trickle-up. Increased government spending puts more money in the hands of workers, they spend money on things, businesses have income so can continue to pay workers or can employ more workers. *Someone* has to swim against the tide, otherwise everyone cutting back causes consumer spending to drop, so business has to cut back or cut workers, causing a drop in consumer spending, and so on round we go.
The part of Keynes that is forgotten is that government is supposed to swim against the tide in boom times too, raising taxes and cutting spending to pay down the debts incurred in the last recession. That's the bit that the governments weren't doing. Indeed, they were deficit-spending since about 2001/2, when the minor recession *should* have occurred. Instead, the continued boom led to continued overconfidence eventually resulting in meltdown.
Keynes' further point was that this tends to be self-correcting because tax revenues drop as consumer spending and employment drop, and rise as consumer spending and employment rise. Problems occur when governments - and they all do it - start spending without funding their spending commitments. I don't doubt that a lot of government spending was required since 1997 as a lot of infrastructure was in a poor state, and many public sector workers substantially underpaid, but more of it should have been supported through higher taxes. Mr Brown made the right Keynesian noises at the beginning - 'balanced across the business cycle' - but he, and Blair, were never willing to tell people that if they want these services, they have to pay for them.