Tuesday, August 10, 2010
About That Whole Global Economic Collapse Thingy - Part IV
The Federal Reserve has announced it intends to use its massive real estate holdings to buy our own Treasuries, thereby monetizing our debt. This is seriously bad stuff; so seriously bad that Bernanke swore to congress in 2009 that he'd never do that. Nice to see a man of his word in action, idnit? The New York Times has a decent descriptive piece on it. The risk of a total collapse of the dollar and runaway hyperinflation has increased with this action. It is hard for a bozo like me to assign a number to that risk, but it is certainly higher.
First, Denninger fisks the Federal Open Market Committee minutes and translates them into Redneck (i.e., plain spoken English).
Then The Prudent Investor talks about what it all means.
At the heart of all the economic troubles in the world today - from this to the problems with the Greek economy, the PIIGS, and the Japanese lost quarter century is a conflict of economic visions. Virtually every government on the globe today is following a flavor of Keynesian economics, named for John Maynard Keynes. The alternative view, typified by the Austrian school of economics (often credited to Ludwig Von Mises) is not followed by nations, as a general rule. There are, of course other prominent names on both sides. Milton Friedman did much to discredit Keynesian economics, as did Friedrich Hayek.
Here's what it all comes down to: what's a dollar worth? In Austrian economics, a unit of currency has a backing of some kind; historically this has been a commodity that people value, such as a small amount of gold, or silver, although anything could be used. The disadvantage to this system (in the eyes of politicians - and the history of this idea goes back beyond the Roman Empire) is that the money supply is fixed by the amount of that commodity. In general, that supply never expands as fast as nations want. A physical standard like gold requires fiscal discipline to live within a budget. In "modern" economics, currencies all float with respect to each other. A dollar might trade for .80 Euro today; next week it might trade for 1.0 Euro, or 0.5. The price is an indication of the globally felt trust in that currency.
In all honesty, Keynes did not advocate the fiscal policy practiced in his name today. Yes, he did advocate for government spending during recessionary phases of the business cycle, but he said governments shouldn't do that when times are good. They should pay off their debts when good times bring more revenue.
It's worth noting that China has let it be known that they are working to back the yuan with gold. They announced they own "a mere 1064 tonnes" of gold, sixth in the world and only 1.6% of their holdings. With the trillion dollars they hold, they can buy a lot of the world's gold, and are likely to have a major affect on the price. It seems they see the problems the rest of the world is having with Keynesian economics and want no part of it.
In passing, let me just note the Stupid party passed, and the Stupid president signed, their $26 Billion emergency funding for "teachers' jobs". So the combined stimulus money of over $800 Billion didn't help, but 3.3% of that will?