-- Posted Wednesday, 25 June 2008 | Digg This Article
| Source: GoldSeek.com
Rick’s Picks
Wednesday, June 25, 2008
“Phenomenally accurate forecasts”
Yesterday we offered yet another installment of our running dialogue with iTulip founder Eric Janszen concerning whether hyperinflation or deflation is more likely to destroy the U.S economy. We hesitate to call it a debate because we’ve never thought those in the inflationist camp have a leg to stand on. We’ll believe hyperinflation is possible when the appraised value of homes in our neighborhood hit the billion dollar mark and wages rise commensurately.
Below is the concluding portion of our most recent back-and-forth with Eric. He begins with the fantastic notion that the “adjustments” taking place in the economy right now are likely to continue for years. We strongly disagree and see a cataclysm ahead.
Eric: This will go on and on for years and years as living standards decline. Inflation is easier for people to adjust to than you'd think, certainly easier than 25% unemployment and no money around to buy anything as was the policy choice in the 1930s as wealth holders pressured the State to stick to the gold standard which tied the Fed's hands to create inflation. As soon as the US went off the gold standard in 1933 and gold was re-priced, an instantaneous spike in inflation from -10% (deflation) to +15% (inflation) resulted. And that after thousands of banks failed and the banking system had basically cratered. Those who hold fast to the theory that we are going to see commodity and wage price deflation as an outcome of this credit bubble don't seem to understand this part of the history of the last US credit bubble.
A Bubble Like No Other
Rick: History, like statistics, is more often than not a damnable lie, and it is a brazen intellectual lie to suggest that there has ever been a credit bubble even remotely like the one that is now deflating. In fact, never before in history have households operated like hedge funds, borrowing against the inflated equity value of their homes. When you explain to me how price and wage inflation can continue with home values falling and corporate bankruptcies beginning to cascade, then we can return to our debate. Another historical fact working against us is that the U.S. economy was in infinitely better shape when the stock market crashed in 1929. The dollar was sound; household debt was almost non-existent; 30% of U.S. workers were tied to the agricultural economy -- living off the land, so to speak; American's jobs were far less specialized and esoteric -- which is to say, workers actually produced things back then; and, the economy could actually be measured -- in ingots-of-steel-produced and wattage of power generated. Nowadays, we have imbeciles with economics degrees to interpret "productivity" figures in such a way as to reassure us that we are indeed productive. In fact, we are no longer productive enough, even, for a middle class to scrape by without borrowing from foreigners who truly are productive. All of these factors lead inescapably to the conclusion that Second Great Depression will be much worse than the (deflationary) First.
Eric: If I'd been forecasting deflation for years and a Google news search produced 136 times as many results for a search on inflation versus deflation (142,539 vs 1,043), I'd be looking to make some adjustments in my model.
Rick: I don’t model my thinking on what Google tells me the average idiot finds interesting.
Stellar Record?
Eric: The only major adjustment that I've had to make is my forecast on long term interest rates. I expected they'd have turned up by now. Have a friend who is a hedge fund manager running $1B tell me in March he was finally taking huge short positions in long treasuries. He moved into the 10 yr at 3.34% and now it's at 4:16%. Good move. Here's a surprising voice added to the inflation chorus: When asked about the potential for stagflation, a combination of weak growth and high inflation, Greenspan said, "Oh certainly." Greenspan also said, contrary to the opinion of many, that there isn't a commodities bubble building. "Once you get inflation pressure starting to emerge, you don't get bubbles." he said.
Rick: Greenspan's reputation as a political hack and dissembler is sealed forever. He'll be lynched if he's still around in five years. Anyway, I’d be grateful if you would provide me with a bullet-point synopsis of the major economic events that you expect to occur over the next 7-10 years. That will be the easiest way for me to determine whether I may have misunderstood you. Do we perhaps envision the same endgame -- an economy in smoldering ruins, credit markets wrecked for at least a generation, widespread poverty and unemployment to match or exceed the Great Depression, and the U.S. having to rebuild its manufacturing capacity almost from scratch in order to make an honest living in the global marketplace? If that’s stagflation, or hyperinflation, then you needn’t bother to respond.
Penguin Book
Eric: I'm writing a book for Penguin [“The New New Deal”] that explains a tough transition period. The recession that the US is entering in the early part of 2008 is not a typical business cycle recession or even a post bubble recession as occurred in 2001. The collapse of the housing bubble and the energy price shock are the triggers that started a process of major structural change in the US and World economy. When the transition is over in a decade, the US economy will hardly resemble its current form:
* Dependence on foreign borrowing to finance consumption and operate the government will end and reverse
* Dominance of the Finance, Insurance and Real Estate (FIRE) sectors of the economy for economic growth will give way to new productive industries in transportation, energy, and communications
* Trade deficits that started in the early 1980s will reverse and the US will begin to run a trade surplus
* Burden of economic rent extraction in the form of interest on public and Private sector debt will be lifted via a combination of inflation, restructuring, and debt cancellation
* Low national and household savings rates will rise to 1960s levels
* Consumption will decline by half, from 70% of GDP today to 50% of GDP
* Energy intensity, the amount of energy needed to produce a dollar of GDP growth will decline by half, led by conservation initiatives
The US will experience the transition as a series of recessions which, cumulatively, may be as severe as in the 1930s, but inflationary versus deflationary. We are seeing the first of these now.
The New New Deal asks and answers:
How did we get into this mess?
* Why have US financial markets been in turmoil for over a year?
* Why has the dollar weakened over 40% since 2002?
* Why is inflation rising?
* Why is unemployment rising?
* Why are asset prices falling?
How are we going to get resolve our crises?
My publisher doesn't want me sharing the solutions part of the book, but basically the idea is that unlike the old New Deal, this time we unleash markets on the problem, with equity versus debt based financing.
Rick: An interesting list, all of it at least plausible as far as I’m concerned. But I still cannot buy your "soft landing" scenario for real estate, since the housing crash is completely overwhelming political attempts to deal with it. Also, I am skeptical that the U.S. will be able to retool in a mere decade. Remember, America will be looked on as a pariah by global lenders, particularly if we have defaulted on them via inflation. They might still lend to us if we have extremely appealing ideas -- and a workforce to implement those ideas more cheaply than they could be done in, say, India or Thailand. This implies a cut in our standard of living that is almost beyond imagining. Not that it can't happen, only that it would probably take a lot longer than a decade for the U.S. to become globally competitive in manufacturing. Unlike China, we would not have much of a domestic economy to sell into, and so our economy would initially be based mainly on exports. Can we actually do that? The answer had better be yes, or most Americans will be living in relative poverty for generations to come.
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Saving America
We don’t have any easy answers, but we’re hoping to hear from readers with ideas about how to return the U.S. economy to health. The person who submits the best essay on the topic What Will Save America will receive not only a scholarship to the Hidden Pivot seminar, but also unlimited access to post-graduate tutorial sessions held each week during market hours. The value of this package is $1,150, and a week into the competition we’ve received no fewer than 21 submissions, including one that argues that Americans need, more than anything else, to get serious about diet and exercise.
Essays should be 750 words or less and must be received at this e-mail address by no later than July 15. For details about the Hidden Pivot seminar and comments from those who have taken it, click here.
Our own idea about how to save America is to become a global leader in energy. A solution that works for the whole world would be a triumph for Yankee know-how on a par with the invention of the automobile assembly line. To stimulate thought on this topic and others, we will be presenting occasional guest commentaries by people with backgrounds in science and engineering. Economists need not apply. In the meantime, we welcome any contributions at the e-mail address linked above. We’ll print the best of them once the competition has concluded next month.
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Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2008, Rick Ackerman. All Rights Reserved. www.rickackerman.com
-- Posted Wednesday, 25 June 2008 | Digg This Article | Source: GoldSeek.com
