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Politics : Ask Michael Burke
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To: valueminded who wrote (65554)8/3/1999 10:59:00 AM
From: Mike M2   of 132070
 
Chris, Will is kind of busy so he asked Mike to reply -g- First we must forget the modern definition of inflation coined by political economists. The classical economists and Austrians defined inflation as an increase of money and credit beyond the supply of available savings and the needs of economic activity. In the 20s the monetary inflation went into the financial markets. In the 60s & 70s the monetary inflation went into goods and services especially tangible goods. The public has been told that the oil shock was the cause of the 70's inflation -not true. In the late 60s foreign central banks could exchange their US dollars for gold and they were doing this at an alarming rate -especially the French in response to the expansion of the US money supply. What did the US do? In 1971 we stopped redeeming US dollars for gold. Wage and price controls were implemented in 1971 long before the Arab oil embargo. I had a nice link explaining all this but the site disappeared. The most damaging booms are the financial asset booms w/out product price inflation because everyone is happy and the Central Banks let them run to extremes. The typical pattern for a post war bear market has been product prices rise and the Fed raises rates to temper the product price inflation causing the boom to bust. THis is not to say that if the Fed did not raise rates there would not be a bust. All busts are the inevitable result of the excesses of the prior boom -at some point debt becomes difficult to service and investments less profitable than anticipated ( look at SE Asia for modern example of this concept) Do not blame crony capitalism for the region had economic growth that was the envy of the world for years in spite of crony capitalism . Yes they had some problems with their system but the SEA bubble was bound to burst due to credit excesses regardless of policies followed. In the 20s there were excesses in international credit and when those flows stopped their economies weakened and trade declined. The US economy was the last of the global economies to peak ( summer of 1929 ). No financial asset bubble has resulted in inflation but always deflation - I expect the same. Yes there are spurts of inflation but these will be temporary. I do expect the dollar to decline and have an inflationary effect on imports but the forces of debt deflation will overpower IMO. For those who argue ( the monetarists) that deflation can be avoided by printing money history does not support this fantasy -it didn't work for the US in the 30s and it hasn't worked in Japan. Central banks can expand the banking systems ability to expand the money supply by creating loans but the commercial banks must be willing and able to makes loans to individuals who are willing and able to take loans. Why would anyone want to borrow in asia when there is excess capacity and real estate is declining. Low rates have been a boom for the carry trade benefitting US financial assets but have done little to help asia- this is a modern example of pushing on a string. BTW the biggest slumps 1837 , 1929 have been the result of private debt liquidation. During the 20s the gov't had a real surplus not a Clinton surplus and reduced the national debt by one third. In the current situation the credit excesses are much greater than the monetary aggregates suggest because the financial sector created more credit in 1998 than the non financial sector ( bank). Remember banks do not have to mark their loans to market but the financial sector does. David Tice has a recent article about the widening of credit spreads check it out. Time fer me Grim power breakfast. HO HO HO MIKE
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