The following content was originally written on January 10, 2008 and posted in an online forum. Please excuse my somewhat disjointed ramblings since this was originally intended for an internet message board. I simply wanted to revisit my previous thoughts and assess the accuracy of my predictions. So here we go:
Here’s some doom and gloom for ya.
Here’s what I see in the next four years that our next president must deal with.
Stagflation
Alan Greenspan reminds everyone that things aren’t great. He gives us insight into the weird raising of interest rates that occurred toward the end of his career. He tells us that we are already seeing the early signs of stagflation.
Economics.about.com says the following on stagflation:
“But the most important element in the war against inflation was the Federal Reserve Board, which clamped down hard on the money supply beginning in 1979. By refusing to supply all the money an inflation-ravaged economy wanted, the Fed caused interest rates to rise. As a result, consumer spending and business borrowing slowed abruptly. The economy soon fell into a deep recession.”
The problem with today is that the Fed can’t stop printing money. Our tax base is shrinking and we have two wars to pay for, not to mention Social Security and Medicare, so a cure by recession is out of the question. Over the next four years, the status quo (Bernanke and his Keynesian dreamworld utopia) would be to keep rates artificially low to prop up the market. Meanwhile, prices continue to rise for the same reasons they did in the 70′s, including energy and commodity costs. This leads to unemployment. Further, oil prices will continue to rise as long as we maintain a military presence in the Middle East, but more on that later. I just hope that we won’t be drawn into a conflict with Pakistan or Iran.
Our viable candidates have offered us better schools, “energy independence”, and a slew of other non-issues that CANNOT be payed for. None of it will matter when unemployment reaches a new high, the national debt swells faster than ever before, and prices rise as the dollar falls. Our stagflation cannot be cured by recession. Unfortunately, only a severe depression can result since the Fed’s hands are tied and the government needs the money.
The same Keynesian arguments won’t work anymore. Hayek was right. Get used to it. I mean, how could we ever believe a guy that talks about “Keynesian multipliers?” What a load of crap!
MILTON FRIEDMAN:
Stagflation was the end of naive Keynesianism.
You had two things at the same time, which under the Keynesian view would have been impossible.
You had stagnation in the economy, high level of unemployment.
You had inflation, with prices rising rapidly.NARRATOR: When Hayek moved back to his native Austria, he was depressed. The success of mixed economies made his free-market theories, and Hayek himself, seem more irrelevant than ever.
LAURENCE HAYEK, Hayek’s Son: The world was very much a socialist world. His ideas were not fashionable. Nobody seemed to listen to him. Nobody seemed to agree with him. He was alone.
NARRATOR: Hayek found his ideas shunned by the academic world.
FRIEDRICH VON HAYEK (interviewed in 1978): Most of the departments came to dislike me, so much so that I can feel it to the present day, [and] economists very largely tend to treat me as an outsider.
NARRATOR: He was living in a provincial town and stuck in a rut. But the outside world was beginning to change. Skimming the newspaper in his usual restaurant, Hayek read how inflation and unemployment were rising at the same time. There was a new word to describe it: “stagflation.”
So have we taken any lessons from the 1970′s? It appears that haven’t. Tis a shame, but the party in Washington and on Wall Street was more important to the ruling elite than the parties on main street.
China, however, is learning from our mistakes. China has no social security, no guaranteed medical plan, and no pention benefits. They seem more capitalistic than the U.S.! It’s no wonder they are doing so well.
But will they go on the gold standard, untying their currency from our fiat paper?
Some excerpts from Moneyweek:
Dollar collapse: the rise of Asia
On our way to a post-collapse, post-dollar world, Asia will likely transition from a de jure dollar standard to a de facto gold standard. This will happen in stages as the dollar crumbles; Asian countries and consumers will accumulate gold reserves surreptitiously at first, and may eventually formalize the transition through some sort of pension IMF-type arrangement.
Asia has the “second mover advantage” of being privy to all the Western World’s mistakes. They are able to see where profligacy and runaway entitlement programs have led. Their top-down orientation will enable them to rein in expensive entitlement programs or, better yet, curtail young ones before they grow bigger. Not being as mentally and emotionally tied to the workings of empire and the capitalist welfare mentality, Asia will successfully cut the cord faster. In doing so, Asia will also rely on its citizens’ natural propensity to trust precious metals and hoard them as a store of value in the first place….
While Keynesians see the rise of gold as temporary – and will continue to assert their naysayer views as gold rises further – it will soon come to light that the ‘world reserve currency’ idea was the temporary thing, an anachronism of the industrial age…
The world reserve currency concept is tied to the notion of a single all-powerful superpower. That is a 20th-century idea that is going away. It is also tied to the idea of a single economic powerhouse striding atop the rest of the world. That idea is going away too…
Even if China becomes the new manufacturing Boss Hoss of the 21st century, it will not wield the same economic heft as America did in the 20th or Britain did in the 19th. There are too many competitors for that now. To the degree that China’s power comes as a cheap manufacturing destination, it will always be one price cut away from noncompetitiveness with India or the rest of the Asian nations, and eventually the Middle East, South America, Africa, etc… economy of scale is simply no longer the powerhouse edge that it used to be. The agglomeration of industrial and political power seen in the 20th century will likely vanish into the pages of history. The concept of ‘world reserve currency’ may well vanish with it…
Asia could well be the vanguard for a new gold standard because of internal dynamics. China is exemplary in this regard in that Chinese citizens regularly save as much as 40% of their personal income. This is in large part due to the lack of a safety net in China. There is no Social Security, no guaranteed medical care, no pension benefits and so on. Many of China’s less-connected citizens seem as likely to bury their wealth in a shoebox as put it in a bank. This mindset strongly favors a physical, storable asset, like gold.
So maybe we could hear from our candidates about these things? There are serious problems out there, and forgive me for supporting the only wack job [read: Ron Paul] that specifically addresses these concerns and offers a new solution.
As I predicted over a year ago, rates have been kept low and tensions continue in the Middle East and between us and Pakistan. Obama continues to assert, despite the National Intelligence Estimate’s conclusions to the contrary, that Iran is seeking nuclear capabilities. Unemployment continues to rise and Congress, together with the Fed, is pouring money into the financial system with absolutley no regard to inflation. We have seen a slight correction in commodities, but as gold has clearly reversed its downward trend, so will other commodities. Oil has certainly come down in a major way, but this is simply a temporary correction, which always happens when oil prices spike like they did. Commodities are the only asset class whose fundamentals have remained strong throughout this downturn and they will continue to be the best asset class throughout the coming depression. Our leaders, however, must have not seen what I observed because they have ramped up their spending and economically destructive behavior since I wrote this.
Sometimes I feel like I’m eating crazy pills!