Hi David.
I haven't read Shilling's "Deflation", so am not aware of his perspective. A few thoughts/comments, and would appreciate your view:
1 - The primary lens through which I prefer to look at today's global economy is that there are financial assets (be they currency, bonds, or equities) that confer "claims" on real assets (e.g. goods and services) that will not be realized. This, because these assets are someone else's debts, and there is simply not the earnings power in the global economy to repay these debts, and thus realize the value of the asset claims.
2 - So therefore, one of two things (or some combination of these two things) must happen: (i) inflation: in which the existing claims are made less onerous to the debtor, with the consequence that their value to the creditor is decreased, or (ii) deflation: in which the creditor retains full value to his claims, but severe stress is put on the debtor to generate the earnings power to pay back his debts. Am I thinking straight here?
3 - In our present situation, I can't help but feel that there will be a tacking against the deflationary headwinds - inflate right, deflate left - inflict pain on the debtor, inflict pain on the creditor - until over a period of many years, the system again becomes solvent. As I'm sure you're aware, there's an ongoing debate if the economic collapse of the 1930's was exacerbated due to an excessive reliance on deflationary policy response. In the late 1920's, nations were extraordinarily slow to appreciate the ramifications of deflation, evidenced most particularly by their defense of their currencies vis-a-vis the gold standard, and how slow they were to realize the benefits of breaking from the gold standard: done first by Great Britain in 1931, then the U.S. in 1933, and finally France in 1934.
BTW, for an excellent overview of Central Bank maneuvers in the 1920's and early 1930's, please see the series of posts from Carol Quigley's 1964 classic Tragedy and Hope: A History of the World in our Time beginning here:
Message 17855776
... the first four posts are good background (really, it is extraordinary reading!), but analysis of the Inflation/Deflation of the early 20th century through to 1947 begins here:
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Some interest parallels between then and now by the way. Quoting Professor Quigley:
"The key to the world situation in the period before 1914 is to be found in the dominant position of Great Britain. This position was more real than apparent."
... today, substitute Great Britain with the U.S.
The apex of the system was to be the Bank for International Settlements in Basle, Switzerland, a private bank owned and controlled by the world’s central bank, in the hands of men like Montagu Norman of the Bank of England, Benjamin Strong of the New York Federal Reserve Board, Charles Rist of the Bank of France, and Hjalmar Schacht of the Reichsbank, sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world.
... and what has changed since the early 20th century?
The commander in chief of the world system of banking control was Montagu Norman, Governor of the Bank of England, who was built up by the private bankers to a position where he was regarded as an oracle of all matters of government and business.
... well, don't even need to point out today's correlate of Montagu Norman.
4 - The primary difference between the 1920's and 1930's and today was that in the 1920's there WAS a gold standard. And since Nixon closed the gold window in the early 70's, we have been operating without a gold standard today. The psychology of operating on a gold standard biased the system, perhaps unnecessarily, to a deflationary policy response. I do not see such a bias today. I think that just as the challenge of the early 1930's was to learn to "loosen" reliance on the gold standard, today's challenge is surely the reverse, to move the system away from the US$ standard towards ... what? This will have to be some managed currency equivalence ... and gold to my mind could well play a role in this rebalancing.
5 - In this rebalancing of global claims on wealth, I cannot see how the US comes out better than China. There is NO way (to my mind) that the Chinese Yuan is revalued downward vis-a-vis the US$. The way I see it, while all countries will encounter the tacking of inflation/deflation to normalize financial asset claims, Japan, China, Taiwan, Korea, etc will face an emphasis on deflationary pressures as their currencies appreciate. The US, OTOH, will inevitable to my mind see an emphasis on inflation. If it doesn't, then things will get real, real ugly. Because if the world demands the U.S. make good on its financial asset claims at today's value parity, our children and grandchildren will be indentured slaves for the next 200 years.
6 - Re: gold as a store of value. I very much agree that gold will not likely be used as a transaction medium like cash. However, it's role as a store of value may be very important, and could easily sustain a rise in the price of gold as people prefer to hold gold over US$ as a store of value. And, to my mind, this is very appropriate because ... well the value of the US$ will necessarily be inflated to lessen its burden on $ debtors.
7 - US equities are NOT the place you want to be. And unlike the 1930's, I personally wouldn't be too big a fan of US$ denominated bonds.
Thoughts? Comments?
TIA.
Glenn :) |
