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Strategies & Market Trends : Waiting for the big Kahuna -- Ignore unavailable to you. Want to Upgrade?

To: N who wrote (27925)	9/15/1998 1:12:00 PM
From: Tommaso	Respond to of 94695

See any number of texts on money, banking, and economic history. Under the gold standard, countries with trade deficits had to settle their accounts by shipping (or crediting) actual physical gold to countries to which they were in debt. This reduced the gold available for backing paper money issued at a fixed ratio to gold. That in turn forced a contraction in the money supply within the debtor country. This contraction in the money supply forced down prices in the debtor country, and made its goods more competitive, tending to restore the trade balance. It was not possible to continue indefinitely cosuming goods from other countries without exporting an equal amount of goods (in some cases, services). Unfortunately such contractions in the money supply could also dampen economic activity, producing recessions or depressions. The "discipline" of gold was gradually reestablished in the U.S. after the Civil War, and prices generally tended downwards, sometimes moving quickly down in various depressions of 1873, in the 1890s, in 1920-21, and finally the Great Depression of the 1930s. Since the 1970s there has been no connection between gold and the dollar at all, and discipline excapt what the Federal Reserve has been willing to impose on the amount of money created. I am suggesting that not only has there been a great deal of money created in the last two or three years (the broader montary aggregates at times around 11 %), but when the equity book (the bull market) financed by this money growth collapses, the Fed will (in order to forestall a depression) resume doing things that increase the money supply. At some point, the amount of dollars in circulation around the world will begin to "chase" available goods, and prices will rise. As long as there is no large-scale war going on, which gobbles up goods and services at a huge rate, the inflation could be contained by increasing productivity, as it has been during the 1980s and 1990s. But as long as a government has the power to create paper money without limit, there is the chance of starting a pretty large inflation. I have tried to compress into two paragraphs what is only described (with many qualifications and some conrtoversy) in many books. When indebtedness becomes oppressive to a nation's economy, one way out is to bring about inflation, which automatically cuts debt since debt is denominated in fixed units of currency. This is a huge windfall that people who bought houses in the 1950s and 1960s enjoyed. A house could be bought in 1950 for $30,000 using a four or five percent loan, and by the time the mortgage was paid off in 1980 the same house would be worth anywhere from $150,000 on up, depending on location. My parents bought a house in 1947 for $23,000 that last changed hands (three owners later) for over $500,000. Much of that was a consequence of the inflation following the breaking of all ties to the gold standard. This is not an argument in favor of a gold standard, but it is an argument that the U.S. banking system has allowed a huge growth of debt that has made possible a historic stock market bubble, and that the efforts to prevent damage when the bubble collpases are more likely to result in inflation than continued deflation. But the inflation seems some distance ahead. It is possible that a lot of personal bankruptcies, bank failures, etc. might occur in the mean time. My earlier comments expressed my disbelief that the United States could continue to accumulate and consume goods from all over th world indefinitely without some kind of repayment. Since gold is no longer used for such repayment, the only other thing is dollars not backed by gold, and creating such dollars--or dollar bank balances--would reverse the decline in commodity prices, raising prices in the US both because of a world-wide rise in price levels and also because of a decline of the dollar against other currencies. This could result in a doubling of prices in the U.S. over a period of 5-10 years.