The people who are saying this stimulus bill will work are the same people who said there was no housing bubble.
This stimulus legislation is an empty gesture/package. It’s too small to make a difference given the magnity/gravitude of the situation and the deficit left in its wake will only contribute to the decline of the dollar.
Local hero Rich Toscano recently chimed in with a great (but flawed in my opinion (because of China)) article that got me thinking. If the only thing that really matters is foreign perception of dollar weakness in this whole mess then it make sense to focus my prognosticating on the global mind-games that must be going on right now. So here are some thoughts on how this plays out:
Governments and central banks around the world are delaying the inevitable devaluation of their currencies for as long as possible. If they’re the last currency standing then there is a chance that they become the world’s next reserve currency. This allows them to buy time by sticking other countries with the bill.
When the next reserve currency emerges, dollar, yuan, or otherwise, the central bank in charge of it will no longer have to constantly worry about flight to other currencies. This is when I think hyperinflation really becomes a possibility. This is also when I think it will make sense to buy real estate and maybe gold.
I used to think that hyperinflation was paradoxical. If the economy is cratering, how is it that wages can go up? I have a new theory on this. Zimbabwe’s economy is currently suffering from hyperinflation. It is based on production of things needed for survival. Our economy largely consists of jobs and products designed to accommodate wants. In an economy based on needs production has to continue or people die. In an economy based on wants production can fall until it becomes an economy based on needs.
A wants based economy creates service sector jobs. A needs based economy is largely automated (with the exception of 3rd world countries). If my theory is correct then job losses now should gather steam until they’re worse than during the great depression. This is the case because back in the 30s we were a country of farmers without robots. People kept their jobs because those jobs (literally) put food on the table. Now we’re a country of accountants, mortgage brokers, and life coaches.
Hyperinflation will not happen in the US unless and until:
a> We either lose reserve currency status due to a lack of fiscal discipline
b> Or we remain the reserve currency but our bought time runs out.
c> And we become a needs based economy (it’s hard to imagine how painful this would be).
So what happens next? Here’s my best guess:
2009 – People really start to understand that it is different this time. The stimulus package fails and job losses mount. Home prices continue to decline because rents decline and price to rent ratio reversion to mean works its inevitable magic. States like California begin to face insolvency, increasing the burden on the Federal government (including the Treasury).
2010 – Government failures in large European needs-based economies. We’ll be in nearly as bad shape but people don’t expect much from the government here in the US so the outrage will be a bit less severe. Those governments will respond by printing money and mailing stimulus checks to their citizens thus destroying their currencies and credit ratings. The Euro breaks down.
2011 – US vs. China showdown. The country with the happiest citizens wins the reserve currency war. China isn’t a democracy but they’re worried about social unrest just like we are. Democracy and accelerating change are mutually exclusive. I give the edge to China’s currency here.
2012 – The end of deflation. Buy land. The US begins its transition to a needs based economy. Productivity growth means that wealth redistribution is going to be massive. Out of necessity. The Republicans were right up until about 1990. They’re still right about free markets but they’re dead wrong on redistribution.
If you’re wondering why most economists didn’t see this coming it’s all explained right here on Economist’s View.