All Glory to Freemarkets
I posted a really long reply to an excellent blog by Freemarkets about stagflation and I know how people tend to forget about really good blog posts after a while and I spent a lot of time posting my reply, so I thought I would start another blog post with my reply and 2 rules.
1) If you like my reply enough to rec it, you should rec his blog too.
2) If you want to reply to my post, do so in his blog post because he's already got a bunch of good replies there.
The topic is important and I as a poster am not.
The discussion needs to continue and it's better if you enhance the replies there.
OK, now my reply!
Excellent post and I'd like to add a bit.
The decline in housing prices is only the first straw and that decline is being propped by our government right now.
The real problem is debt, joblessness and production.
Housing prices are being propped for a very good reason. Any further decline in housing prices is likely to lead to a mass of mortgage holders to simply walk away from their mortgages. There are plenty of people willing to walk away now, but they are willing to stay in their homes if they can live there without mortgage payments for a while. The government is allowing them to do just that.
The big problem is debt. Government policy has forced the average person to substitute more and more debt in place of financial growth. They do this because of the hidden tax called inflation. As long as the inflation machine keeps running it lessons their debt burden over time and they can take on more debt. They have to take on more debt because the only way they can keep up their lifestyle in a global marketplace is to borrow. The value of their productivity in relation to the global marketplace is not worth the wage that they command for it. The wage that they command for it is so high because a high portion of it is spent by their government before that wage even hits their hands. While they may not see more and more taken out of their paychecks year over year, the government itself survives on debt and that makes the same dollars that the wage is paid in, worth less today than it was yesterday.
Most of you have heard me use the word "unsustainable" over and over again. Once I notice something that is unsustainable in the marketplace, that is my "Stone cold lock" and I will invest in something to take advantage of something that I know can't hold true and I've made a lot of my money doing that very thing.
I posted a reply in Betapeg's blog a day or so ago that stated, "without inflation there would be know deflation." His reply was "what's your point?"
Here's my point. When you force the consumer to take on more and more debt, they are much more vulnerable to a market correction than if you leave the market alone. The market is cyclical even when you leave it alone. The Beta on the market increases with manipulation of the market. When you force the highs higher, eventually the market will counter by making the lows lower.
So now you have a consumer that is much more vulnerable to a market correction because you manipulated the market and a market that eventually has to correct even more than normal because you manipulated the market. Does anybody think that this will end well?
Eventually you have 1 bad choice and 2 worse choices. The bad choice is in the eye of the beholder.
In the world that makes sense, the bad choice is deflation and the 2 worse choices are stagflation and hyperinflation. In the world of politicians, the bad choice is stagflation and the 2 worse choices are deflation and hyperinflation.
I'll start with hyperinflation since I think it's the worse overall choice. At some point as a politician, you'll realize that manipulating the market no longer works and you decide to manipulate it more and faster. that will work for a short period of time and you'll decide to manipulate even more and even faster once it fails. Eventually you won't be able to manipulate it long enough or fast enough and the market will take away your ability to do so because it will no longer accept your money. Even if you are willing to accept deflation at this point to devalue your money below 3rd world status, the market will take a long time to gain confidence enough to allow you to control your own currency.
I believe that deflation is the right answer, but only if you take the opportunity to stop manipulating the market and spend within your means once you deflate. Even if we did deflate, people are going to be crying out in pain and no politician will be willing to take the fiscal measures necessary.
Which leaves us with stagflation. The more tolerable choice for politicians. it's being sold in our political circles right now as a China killer. While our money is worth less, our consumers will buy less. China cannot afford less than a 9% domestic growth rate and it's not going to happen if we buy less with weaker dollars.
The problem is that there are other emerging markets ready to take up the slack, but I'm willing to bet that issue is not being brought up in political circles. Everyone knows that job creation is the number one priority right now and China makes itself an easy target for political aides to sell an agenda to their boss. They just have to sell that jobs lost there are created back here.
Last, lets talk about jobs. If you want jobs, you have to produce more than you consume. It's that simple. While you can substitute inflation or debt for a while, eventually you have to pay the price for the deception. Government spending erodes production. All debt, consumer, corporate, and government debt erodes production. Any gain from production is lessoned by a weaker dollar or the cost of interest. Corporations with too much debt are easy to red thumb, but for some reason, people think that government debt is different.
So my best guess is that although I really do think that we have enough politicians that are stupid enough to try hyperinflation, our underpaid political aides are smart enough to sell stagflation, because even though they know it won't work, they have a longer job security than if they sold deflation.
It still is the same main issue as when Obama was elected, it's about jobs.
One day he'll do something about it.