Not everyone who reads this blog is a finance guy, and I’d like to say something specifically to the non-finance people who are reading this now.
You are probably watching the political leaders of Europe trying to lie their way to the top and to keep the Euro together. It’s not going to work. The Euro as it is now, is absolutely finished – but it may take a while for the politicians to realize that. They’re not the brightest bunch, and their ambitions for domination of the continent will die hard, so we’ll need to be patient with them.
In the meantime they’ll make all sorts of cataclysmic claims. Ignore them. They’re simply trying to scare people into cowing to them. And to those of us in the capital markets (who are for the most part, the people they’re trying to scare), this is already obvious. I don’t know anyone I respect who still believes the euro is ‘save-able”; at least not as it is. You might still have a Euro currency in name someplace, but it won’t be used by both Greece and Germany.
The ultimate reason for this has been obvious for some time. The only thing that will solve the problems of southern Europe will be cash. Gobs and Gobs and Gobs of printed cash. They can print Euros or Drachma and Lira or whatever. But someone somewhere will eventually print unspeakable amounts of currency, and that will allow those troubled European government to nominally pay their debts. In Greece, and Italy, and probably Spain and Ireland, they are in for inflation. Probably lots of it.
But before you go laughing up your sleeve at the pain and horror that these socialists have once again brought on themselves, you need to keep a very important fact in mind. It’s a fact that even most of the capital markets don’t completely understand yet, so it may give you an advantage to accept it now. And that fact is this:
Inflation, is now a global phenomenon.
We can consistently show economic stats which indicate little or no inflation domestically, and prices will still rise and the living standards will still fall thanks to inflationary policies that have been adopted elsewhere. It can’t be avoided. The CPI and PPI will say that nothing has changed, and our lives will still be worse. And none of the economists looking at the conventional statistics will be able to explain why.
So when you see someone on CNBC telling you there is no inflation, don’t believe him. He/She may be right in terms of how they’re defining it, but unless they think of inflation globally, they aren’t seeing the whole picture. When we reduce the barriers to trade we reduce the effectiveness of the economic statistics that focus only on domestic numbers. And since China and Europe will have highly inflationary policies, we will have some inflation too.
There is an element of the political right who seems to feel differently about it. There are several Presidential candidates out there saying that if we just slash government spending dramatically, then everything will be fine. Over the long term, I think they’re right, but in the near term it won’t prevent a thing. Even if we discount our own fiscal problems, the Europeans and Chinese will give us inflation whether we want the inflation or not. What’s worse is, there really is no going back. The only alternative to higher inflation at this point is high unemployment, and slow economic growth. Pick your poison.
This next bit is a profoundly cynical argument I know, but I wouldn’t be surprised if we’re talking about ‘economic warfare’ in coming years. What I mean is, if our living standard can be lowered by our trading partners, theirs can be lowered by us too. And while the developed world has room to have their living standard fall without creating civil unrest, the Chinese and the emerging world does not. So it’s very easy for me to imagine an economic policy that could be specifically designed to have the inevitable result of toppling an unfriendly foreign government.
Of course, that doesn’t mean we should do it. What comes after may turn out to be far worse, so it may be contrary to American interests. But when the people who watch these things decide that it’s something that we’d like to see happen, it would be very easy to do it. It’s a tool – like a pitching wedge. You only use it when the time is right, but when you know you have it in your bag; there is a little less reason to fear the sand trap.
My point is, the world has changed in meaningful ways since the end of the cold war, and the way we look at economics hasn’t caught up to it yet. But the sooner we accept that, the better off we will be. And since ‘we’ aren’t going to all accept it at the same time, it may give you an advantage to see it today as opposed to a year (or three) from now when the ‘insightful’ academics and major media start thinking about it.
So work it through in your mind a bit. I’m sure you’ll see how this inflation issue can be thought of as a global issue, and a few of the things that something like that means. Remember, my job is to be just a little bit out in front of the pack with these ideas. In this case I assure you, it really is just a very little.
4 comments:
In 1920, the United States was suffering from double digit inflation as the government spent more money than it took in. The deficit financed by the Federal Reserve printing the cash needed. Government spending, even after excluding the previous war spending had grown massively. Taxes had grown with it. The economy was a mess. A new President was in power who rejected calls for more government intervention to stabilize the economy. Instead, spending was cut over the next few years (in real terms) by over a third. Taxes were cut, and regulation were rolled in. With the cut-off of Keynesian style spending, the economy did hit the skids: Double digit unemployment and a GDP that contracted by over 5% in a single year. Inflation turned to deflation (-10%+). The downturn was brutal.. but it was also short. By 1923 the inflation rate was under 2% and unemployment under 5%.
I hope (though in vain) that whomever is in power next will follow a similar course. We will end up with inflation, but not disastrously high. Eventually, spending restraints (no more buying debt with printed dollars) coupled with economic growth will soak up the excess dollars and bring back stability to the dollar. To do so though will be the end of Medicare, Social Security and the rest of the social safety net as we know it today.
Europe of course, can't take such steps. It would collapse their social welfare states overnight. Inflating the Euro (or its successors) won't help either (though they will try). Inflating your currency is simply default by other means. I can't think of a single instance where a nation or empire ended up stronger with less debt throughout history by destroying the value of its money. I can think of several examples where doing so eventually led to first, a collapse in trade, followed by a general collapse of society as a whole.
From the classic era: Emperor Marcus Aurelius, unable to raise enough tax revenue to cover the cost of running the empire cut the content of gold and silver in the coinage. Silver was the standard coinage of purchases in every day life. Silver was now being replaced with bronze and brass coins, with the government insisting the coins had the same value (the 'fiat' money of its day). The result was hyper-inflation, followed by further debasement of the currency (continued through subsequent emperors) and ever increasing taxes.
At the time, Rome was a 'global' economy. You didn't have a potter, blacksmith, and carpenter in every town and village. Instead, products came from all over the empire, manufactured in a particular place that had the resources to make it the best and most affordable. Example: The best pottery came from England and was shipped as far as North Africa. It was cheap enough that even the lowest of peasants could afford resilient dinner and food storage ware. It was better than anywhere else in the empire. If you lived in say Spain, you didn't have a local potter, you bought your pottery from a trader who got it in England.
cont...
When the currency collapsed, so did trade, and society followed soon after. You had entire cities abandoned because without trade, the were no longer viable. Cities in North Africa survived by being a port of trade and manufacturing goods. These cities (often built in arid regions) had no ability to feeds themselves on their own. Food was imported while goods were exported. No trade meant there was nothing to eat. The Crisis of the Third Century was the result of first a currency and then a trade collapse. The society that resulted was very different than what had proceeded it for two centuries: Citizens had less liberty, government was far more brutal and corrupt, and the ability to travel unmolested became impossible as brigands and barbarians roamed the countryside. In the end, 500 years of technology and social progress disappeared into the chaos of the dark ages. As for that great pottery.. Saxon nobleman ate off dinnerware in 650 A.D. that a Roman peasant would have thrown away as trash. When trade died, the skill sets that kept the fires of the industrial kiln going died as well. The knowledge to make fine pottery was lost to history.
Replace the potters of Rome with the multinational companies of today.... The car I drive engine comes from Estonia, its transmission from Japan, the tires from Korea, and it was assembled in Belgium. It is then serviced by a US automaker. What happens when there is no longer a reliable currency to allow the exchange of goods and services? What happens when smaller firms are unable to buy the overseas made components they need to make the products and services marketed here in the USA? We are an economic power, but not an economic island. The cutoff of world trade will be a disaster for us.
You have it all wrong.
XOM, Apple, IBM, Archer-Daniels and Caterpillar all have better looking balance sheets than 4/5th of the countries on the planet.
The problem was not that the roman empire collapsed; these days governments collapse all the time. The problem was that the only people available to fill the Roman power vacuum were illiterate.
My point is, I think you're oversimplifying a little. We've got quite a while before Odoacer and his men attack.
This is a great thesis.
I felt a little silly in a few of my posts here, where I played with the idea that the unification of Gernamny under Bismark helps predict present German political responses to market shocks. As I see it, people react through political institutions influenced by the oral accounts of parents and grandparents. So history actually matters.
Churchill said that, "History shall be kind to me for I intend to write it." He was ahead of his time. Ours is a time of information. Perceptions of how information relates to our collective past creates opportunites poltical "outputs," which, as you observe, may be economic policies directed at other sovereignties - conquest without physical invasion.
So, the "more developed" economies are better equipped for conquest. If you want peace, prepare for war.
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