Did you read the Doug Noland's Credit bubble bulleting this week? The first excerpt explains this job migration and this excerpt was written in 1730!! (Richard Cantillon, excerpt from “Essai sur la nature du commerce en general,” 1730-1734).
The excerpt clearly says why job migrates from a currency inflating country to other countries!! It is for the plain simple reason that the cost of production (PPI) becomes high!! Unfortunately, we tend to think, the analysis is more complex for mystical reasons. The analysis is complex because - the facts are hidden from you! And hence you have to pull all these hidden data and put it in the age old simple economic equation. For example, M3 is not the exact money creation. You need to add all the money created in the wizard land - which is hidden from us because the wizards resist "sunshine". The FCBs, petrodollars are also guess works. The Fed, I hope, must be having all these information - just that they are not sharing with us and instead emit vague statements!! My guess is: The same old principles apply today as well and it will be glaringly obvious after the crash!! The old principle says, boom can be created by fake money and it will result in bust because of ensuing inflation. Today we dont know the amount of fake money that has been created on top of existing money - but one indication that such money creation could have stopped is the inverted yield curve - borrowing short lending long would come to a screeching halt. Although Yen/$ carry trade can happen now - this will be causing inflation in Yen and hence as per classical economics, Japan should be raising interest rates to stop inflation - which stops the carry trade/money creation. We need to get all these data - then we will see that classical economics works just fine!!
In the old days, gold-standard (or pseudo gold std) made sure that the currency values are fixed to the gold - and all that the govt needed to do was vary interest rates to address inflation/deflation. But with the gold standard gone: The govts have only one option - RAISE Rates. Even though there is deflation (and less consumption), PPI can rise just because currency is falling against commodities (this will happen for USD and all currencies that peg to USD)!! This is again simple reasoning and this happened in UK in 1930s as they withdrew from gold std and tried to lower PPI inflation (in the name of preserving the pound value), by keeping high interest rate. I've not seen any argument against this simple set of mechanism - only people ignoring data or not knowing the data. What gold-standard does is it provides "INTEREST RATE stability". It is this stability that is important for economic stability rather than "PRICE STability". Why? If interest rate is stable means maladjustments are correcting quickly and stopping the economic cancer very soon!! Price stability is exactly opposite to interest rate stability. It causes wild swings in interest rates and hence wild swings in maladjustments!! So, you should see the wild swings in interest rates going forward!! The interest rates going up in all nations...
Finally, people think Bernanke can cause hyper-inflation now. In order to do that the CPI has to go from 5 to 6 to 7 and so on and reach 20% or may be more. But when that happens, the interest rates have to go up!! may be it goes to 6% or 7%!! And people think this 7% wont cause defaults instead it will cause people to rush to houses to bid up the value of the houses (as a protection against inflation, says the hyperinflationist). Why will it create defaults and not further nominal house price appreciation like in 1970s? In 1970s, 1929 was a fresh memory of debt problems. So the public did not have much debt and there was no bond bubble (as a matter of fact, the interest rates only rose all the way from depression era low interest rates to the high of 20% etc. How can bond prices rise in such an environment?). However, in 1990s, 1970 is a fresh memory were people think govt always inflates and hence debt can be wiped off and they have taken humongous debt and there have been a huge credit bubble - the previous credit bubble happened only in 1920s!! This probably explains K-Cycle. In all the history of hyperinflation and deflation - one thing is very clear. When govt has printed money and the public does not indulge in the money creation by consuming debts, it always caused hyper-inflation and When public (besides govt) also indulges in money creation by consuming debt, it results in deflation. Why? In the hyper-inflation scenario (1970s), the govt was loaded with debts but not the people!! Which means, there was still scope for reflation!! You can load the people also with debt!! That is exactly what Paul Volcker and Alan G did!! Now both govt and public are loaded with debt and there is no more opportunity to reflate!! This is probably the explanation for K-cycle. All these talk about China, Petro dollars are all smoke and mirrors. They only alter the time when the shit hits the fan -- but the deflation will happen no matter what. |
