Reasons Unbeknownst

Matt (a former co-worker) writes:

Many seemingly credible arguments are out there that say inflation is inevitable. There are also people who say deflation is coming. Please tell me if I am seeing this correctly, specifically as to why “experts” cannot even agree as to which direction these two diametrically opposite possibilities our economy will take.

The main things that are on the side of the scale of deflation are declining home prices and the credit contraction. The main thing on the side of inflation is all the money the Fed has been printing to support our noble and rational war in Iraq (yeah right) as well as stimulating our economy and bailing out these finance companies, among other things that the Fed dilutes our dollars for by printing more monopoly money.

Were are basically weighing two very heavy weights against each other on the scale. Given the uncertainties in these weights, some people think more mass is on the side of deflation, and others on inflation. In any case, we know that it is going to tip to one side or the other, since given two large, more or less random weights, it is highly unlikely that they will closely balance each other out.

This is how I see the situation (though I am personally more convinced of the inflationary argument). Is this roughly correct? Or am I totally misguided?

My reply:

Our Fed chairman Ben Bernanke in the article above jokes about dropping money from helicopters to prevent deflation. Hence the nickname “Helicopter Ben” the bigger picture as I see it is that when people start hoarding money after a credit bubble pops neither the banks nor government can force people to spend to boost the economy.

I imagine in the near future we’ll see rates cut to zero followed by a series of stimulus checks. I don’t think people realize how much money the government would have to create to counter the Trillions lost as housing declines approach 50% in places like California. It’s going to get ugly but this needed to happen after a Credit bubble of this size.

There are bigger issues at play here, namely the deflationary force of exponential technological growth and resulting automation on all sorts of jobs. People like to place all of the blame on globalization but it’s only part of the cause. This country is going to be a lot more humble in ten years but hopefully our economy will no longer be run entirely on debt and dreams of real estate tycoonery. People are going to actually have to do something productive again.

On my list of people I admire to the right if you click on the two black and white pictures you will learn about the economists who basically laid out the school of thought that predicted this mess we’re in.

The real issue here is “too big to fail”. We can choose moderate socialism and keep the system alive or we can choose to let Fannie, Freddie, et. al. fail at which point we’ll have full blown Socialism.

When you peel back all of the layers of the onion, you’re left with two competing philosophies. Wealth redistribution with all of it’s consequences vs. accountability. The irony of modern life is that accountability is now seen as a relic of our idealism. I don’t think that’s necessarily a bad thing. In a Democracy, wealth re-distribution may be the only way to ensure productivity growth.

Unnecessary taxation is a violation of law enforced by law according to Bastiat. In a Republic that’s one thing. In a Democracy it’s an entirely different can of worms.

As far as inflation vs. deflation, my thinking, summarized, is simply that the Austrian School of economics is the only school which gets notion of credit bubble collapse. Simplified, there is no free lunch, hence my deflation call.

Any self respecting believer in Moore’s law will be hard pressed to justify sustainable money printing based inflation. I’m not banking on oil pricing staying this high much longer.

Image by Sokwanele – Zimbabwe on Flickr.

Of all of the sports genres that have been released for game consoles and PCs, driving stands alone as the only one with inputs similar enough to the real world that it can serve as a training tool. Real race car drivers use the high end simulators as training aids, some of them even race us mere mortals over the Internet.

At the very high end of driving simulators, iRacing is at the top of the heap. I was lucky enough to get an invite to test it out prior to its public release and today, while racing online, I was dropped into a race with Dale Earnhardt Jr., a guy who uses iRacing as a training tool for his weekend job in real race cars. He’s number 3 below (randomly assigned but kind of sad), I’m 11.

So here’s how it went down…
Before the race at Lime Rock Park I was watching him in the warmup session, hounding some poor amateur. Driving hard but in control has a certain look to it and it was apparent in his style.

So we’re all sitting on the grid and Dale Jr., in his southern accent says, “Good luck guys”. He apparently has iRacing’s voice chat figured out. The lights went green but I couldn’t keep up as Dale and the fast guys drove off into the more talented distance. I was battling another car but at some point I lost control in turn one, slid into the grass and backed my car into a barrier. I got back on track but I was in now in last place and struggling to put in 1:06 laps due to suspension-damage related under-steer.

Dale Jr. was putting in low 1:04 second laps pretty consistently and I was about two to three seconds per lap slower (all due to my damaged car of course!). I realized he was going to lap me before the end of the race.

Sure enough, after a few laps, I saw a spec in my mirror and it started getting bigger quick, Dale Jr. had unsurprisingly taken the lead. I started to compensate for the under-steer and managed to get my lap times into the 1:05s but he just kept closing the gap.

At this point you should know that accidentally taking out a professional race car driver is probably the most horribly embarrassing thing that can happen in our weird little world. So I started planning for the inevitable…

As we approached the big dip right before the final turn I veered hard right and braked hard enough that he knew he could pass before the straight. I jumped on the gas and followed him onto the straight but he had too much momentum for me to even consider drafting.

So he gets back on his mic and says to me “Thank you”. What a courteous guy. I’m normally too focused on driving to exchange pleasantries but I think the guy has coordination to spare. (Damage below is from backing into the barrier).

iRacing is not cheap compared to most driving simulators but it’s good enough that real race car drivers are showing up online and battling with the less-rich-than-talented set. iRacing will be launched publicly some time near the end of this summer.

Granted, that wasn’t exactly a duel as the title implies, but I can’t imagine any other sport where you can actually match wits with the best in the world. Oh yeah, forgot to add, Dale Jr. won the race.

Update: Here’s a clip from Unamental of iRacing from the same track. It’s starting to get to the point where it looks like TV footage.

Update 2: Adding a longer clip for Barry:

This pretty much sums up the sate of our economy. Spin is not something you do without a lot of practice but the Treasury hired a guy with morals to do the job of someone who is employed to spin. Nervousness is excusable. But an inability to warp the truth with that job title is simply preposterous.

If you’re into Schadenfreude click the play button.



Now here is this guy’s boss. He knows how to spin. Paulson isn’t stupid, he knew this was coming but he was hired because he can stare into a camera and say what needs to be said without blinking, flinching, etc. This speech was given right before the collapse.