Previous posts in this discussion:
PostBring Back the Gold Standard? (Tor Guimaraes, USA, 09/30/19 7:12 am)
John Eipper asked if I advocate a return to "hard money." Regarding fiat currency, John wrote, "The biggest danger of fiat currency is inflation. [Yet] the US, and indeed most of the world, does not suffer from this problem to any significant degree."
I would be much happier if today the US had a much higher interest rate than we have had for the last several years because that would have indicated that we had some inflation. In line with what John and José Ignacio Soler mentioned, our Fed has historically shown that they know how to fight inflation. What they don't seem to know how to control is deflation and stagflation, which is the problem today. Fiat money, not enough regulations, and the need to fight a losing battle with deflation is what is killing us today.
In my last post I recognized that the Fed has done some good in some situations in the past but injecting huge amounts of credit to resuscitate the economy via speculative investment, without specifically targeting constructive investment to produce decent-paying jobs, will only create larger and larger boom-and-bust financial crises. There is too much debt and not enough assets in the system but nominal inflation is not an issue. However, because of the huge amounts pumped into the economy, the prices of some assets in some sectors targeted by speculators have exploded. Such "focused" inflation will exist until the prices crash down as the bubbles burst.
I never advocated a return to pegging the dollar to gold or other valuable commodities (which is not a bad idea); I've advocated rather that the Fed has been out of control with QE with no end in sight. That is not going to end well for our nation and the world since we are the reserve currency. When the next crash comes, then perhaps everyone might wish we never left the gold peg.
JE comments: Tor Guimaraes and I should sit down with a latte and hash out an understanding. My confusion for now: Tor wishes we had higher interest rates, because this is what central banks do to control inflation. Isn't that putting the cart before the horse? As long as inflation is minimal, aren't low, low interest rates in everybody's interest? The new WAIS HQ purchased last fall (it's lovely...come visit) couldn't have been bought if we had to pay, say, 9 or 10% for a mortgage.
Other than retirees living off a savings account, is there anyone who benefits from high interest rates?
Pensions, Interest Rates, and Taxation (from Robert Schenck)
(John Eipper, USA
10/01/19 4:35 AM)
Robert Schenck, MD writes:
John, your logic on interest rates looks good from my vantage point.
I am however worried about future encroachments in speeding up government
taxing of pension funds withdrawals. The wish to grab out retirement money
quicker (over a ten-year period vs. over a remaining lifetime expectancy) is SCARY!
JE comments: I met Bob Schenck in the summer of 2018 at Chicago's legendary Wrigley Field, and this February he sent a post about flying on the Concorde.
Bob, could you walk us through Uncle Sam's requirements on retirement funds and taxation? What does the ten-year rule mean in practical terms?
- The Next Recession (Tor Guimaraes, USA 10/01/19 4:26 PM)
John E and I sitting down with lattes won't do the trick; I need something much stronger.
What I stated in my post of September 30th was: "I would be much happier if today the US had a much higher interest rate than we have had for the last several years because that would have indicated that we had some inflation... [because] our Fed has historically shown that they know how to fight inflation. What they don't seem to know how to control is deflation and stagflation, which is the problem today."
Of course everybody likes to borrow cheap money. That is good as long as you can pay it back and low interest rates clearly help. The problem now is that the economy is not doing well as some people claim and the Fed keeps pumping cheap money into it so it does not crash. The cheap money is being used for financial engineering like massive risk-taking in derivatives, companies are buying back their own stock because they don't see increased demand for their products and services so they can't open new plants, buy machinery, and hire people. As we discussed before, the total amount of debt is already staggering and much can't be paid back, so when the next crash comes (and it is near) we have 2008 all over again, except much worse given all the details I mentioned in earlier posts.
JE comments: Maybe some double espresso, Tor? (!) I pray and trust you're exaggerating when you predict that the next recession will be worse than the last. Aren't there safeguards in place (such as reserve requirements) to at least keep the Too Bigs to Fail from failing again?
Tor, do you think the sky will fall this fall? With the political uncertainty in the US, together with the traditional role of October as the bringer of hard times, might it be (gulp) soon?
See below. The US has never gone more than 10 years without at least a minor recession. Gulp again: we're overdue.
Facing Impeachment, Will Trump Pay Attention to the Economy?
(Tor Guimaraes, USA
10/02/19 2:29 PM)
John Eipper asked me, "Do you think the sky will fall this fall [recession]? With the political uncertainty in the US, together with the traditional role of October as the bringer of hard times, might it be soon?"
A brilliant economist once said that markets can remain irrational longer than you can remain solvent. It is wise to accept such wisdom. I have no idea when the next crash will occur. I only know that, as I said earlier, people who think our economy is doing well don't understand that without the Fed pumping increasing amounts of money into the banking system, the economy would have collapsed by now. That is not sustainable and soon everything will crash. I also know that given what they are doing with much of the free money (risky speculating), the more they pump the bigger the crash will be.
Future crashes have no dates. I was guessing that Trump will bully the Fed into more free money at least until he got re-elected. Now he is getting impeached instead. Trumpsters in the Senate possibly won't dethrone him but he can't win the next election. So now I am guessing the next President will face the crash.
JE comments: Tor Guimaraes reminds me: it's time to add "US Elections 2020" to the WAIS menu. Check out our lengthy discussions for '08, '12, and '16 (waisworld.org). Someday historians will thank us for our insight. Sadly, this cycle we'll have to go it alone without Randy Black asking the hard questions. I miss Randy every day.
- The Next Recession (Tor Guimaraes, USA 10/01/19 4:26 PM)