Could U.S. Inflate Away Its Debt?
Major market indices rebounded on reports of better-than-expected retail sales in October...but Fed Chairman Ben Bernanke tried quickly to put the brakes on too much enthusiasm by pointing to the sagging dollar -- as gold tested new highs. Meanwhile, gold continued to test new highs against the dollar. How confident are you in the U.S. economy?
Monday's Dow had been ahead more than 143 points before the Fed boss' remarks, but stocks quickly shaved some of their gains following word of Dr. Bernanke's caution.
Dr. Bernanke took pains to reassure nervous markets around the world as well as in America that the Federal Reserve Bank would "ensure" the strength and "financial stability" of the dollar.
In his traditional Delphic style, Chairman Bernanke observed that "It's not obvious to me in any case that there is any large misalignment currently in the U.S. financial system."
"The best approach here if at all possible is to use supervisory and regulatory methods to restrain undue risk-taking and to make sure the system is resilient in case an asset-price bubble bursts in the future," Dr. Bernanke said.
Overseas, China's London-educated chief banking regulator Liu Mingkang forecast no rise in U.S. interest rates for the next year or two.
Liu is quoted by Forbes as observing that "A huge carry trade" that was having a "massive impact on global asset prices … [It] is boosting speculative investment in stock and property markets and will pose new, real and insurmountable risks to the global recovery and particularly to the recovery in emerging markets." More bluntly, Forbes today concluded that Mr. Liu had "implied that the U.S. was purposely inflating away its massive debt."
Mr. Liu is head of the China Banking Regulatory Commission.
How confident are you in the ability of the Obama administration and Fed Chairman Bernanke to plot and navigate a course for our nation's economy?
The U.S.-China Business Council offers a biographical sketch of Mr. Liu, including:
Born in 1946 in Fuzhou, Fujian, Liu graduated in economics from Beijing University. In 1979, Liu began his career when he joined the Bank of China (BOC) Nanjing Branch in Jiangsu. From 1984 to 1987, he was department manager of BOC's London branch; he also pursued an MBA from the City University of London during this time.
In 1987, Liu returned to Nanjing as the general manager of the Bank of China Trust and Consultancy Co. In 1988, he returned to Fuzhou to become deputy general manager of the BOC (Fuzhou) and was promoted in 1992 to BOC general manager, Fujian branch. In 1993, Liu left the bank to become Fujian's vice governor and CCP secretary.
Liu returned to his financial career in 1994 and served as vice governor of the State Development Bank until 1998, at which time he became PBOC vice governor. In August 1999, Liu was shifted to the position of chair of the financial conglomerate, China Everbright Group, a post he held for only a few months. In February 2000, Liu was appointed BOC chair and president. In 2002, he became an alternate member of the 16th CCP [Chinese Communist Party] Central Committee. Liu was appointed as the first CBRC chair in March 2003.
For those of you who speak Mandarin -- or who would just like an opportunity to see and hear Mr. Liu speak, here is a video from earlier this year:
http://topics.treehugger.com/topic/Liu_Mingkang
Reply;
John; While there is practically nothing that I have any confidence in the Obama administration to do other than to line their own pockets, the FED's job is currency stability, and in the last half century, they have done a better job of that on balance than any other central bank of a major industrialized nation IMO. However, just having currency stability will not protect us from having a rapidly growing debt if the government (of any party) spends a lot more than it takes in.
Inflating away the debt seems to me to be a smoke and mirrors parlor trick. I think that the 70's proved that to us. Very high inflation did not relieve the problems of the debt from the three great adventures of the 60's, the war in vietnam, the war on poverty and the space race. Reagan proved that 3% inflation (or less) was possible over a longer term, and after business adjusted to that it worked. However the problem early on in that time frame was that business models had 6% or so of inflation wired in to them, and it was not easy to stop it. That is the biggest issue (again, IMO) of trying to inflate us out of debt. It messes up everyones finiancial model, and make us inflation dependent.
Just some thoughts..
Thanks for your comments, including:
While there is practically nothing that I have any confidence in the Obama administration to do other than to line their own pockets, the FED's job is currency stability, and in the last half century, they have done a better job of that on balance than any other central bank of a major industrialized nation IMO. However, just having currency stability will not protect us from having a rapidly growing debt if the government (of any party) spends a lot more than it takes in.
Should we look at our nation in the way we'd look at a neighbor who keeps spending more than they make?
For starters, can we afford all of the out-of-country expenditures in which our government is currently involved? Are our military activities -- including several ongoing wars -- the largest of these continuing (and growing) expenditures?
Very best wishes,
- John
How is that? In most case I veiw such people with quiet amusement and hope i am still around when it catches up with them. Remeber Lyndon Johnson talking of TV news about his debts? He said something like, "I don't worry about the pluses and the minuses, I just keep it moving (meaning the money)." Then he looked at the camera with that idiotic grin of his.
Too many folk, groups and businesses, both great ans small, have thet as their economis plan. Just keep it moving and hope the minuses never catch up with and pass the pluses. That is why the FED added some code to keep track of what is called "daylight Overdrafts", or where the minuses get ahead of the pluses, but only until they even up at the end of the day. It is not a good idea to ever forget what the float (the amount of minuses that haven't come in yet) are and not spent that money twice. But the answer to your question seems to me to be that the world, or atleast parts of it already look at us like the neighbor that is living too far ahead of their income. And like in a liars poker game, you have to hope that no one calls you on it.
>> How confident are you in the ability of the Obama administration and Fed Chairman Bernanke to plot and navigate a course for our nation's economy? <<
John and all,
Bruce from Central New Jersey
Harold,
I'm not sure debt is a good thing. In fact, the US is in danger of its credit rating being lowered. As far as the 10% vs 25% feared unemployment, is that like the 600,000 jobs the current administration created?
The gov't cannot create jobs or GDP growth unless the government cuts taxes and shrinks itself.
Bob
>> I'm not sure debt is a good thing. In fact, the US is in danger of its credit rating being lowered. As far as the 10% vs 25% feared unemployment, is that like the 600,000 jobs the current administration created? <<
Bob, Harold and all,
Please read my Message #7 above and add to it the following:
If you are a long term thinker and liver as I am, you must know that debt is NEVER a good thing. My parents' generation believed it was a sin to have a mortgage on one's home and struggled, as a first priority, to become debt free ASAP at all costs! In the 1929 -40 era this was not easy but it gave backbone to our people who accepted this challenge.
People who claim to own their home with a mortgage simply do not understand that they do NOT own their home until they have a clear title to it. This means no mortgage. No debt!
Cheers to all . . .
Bruce,
I agree. If however, you must have debt a mortgage is not a bad place to have it. You normally have a appreciating asset. You get tax benefits. You must live somewhere and it beats paying rent. You are leveraging your assets.
Having said that, debt free beats it hands down.
I agree. If however, you must have debt a mortgage is not a bad place to have it. You normally have a appreciating asset.
But have a majority of such assets been _de_preciating for a year or more?
What's to be the fate of folks who find themselves in that position?
John,
That is just a economical cycle many people got caught up in. Some will walk away, some will try a short sale and others will stay until the housing market recovers. There are many horror stories and hope there is help for those.
It has happened before, housing bubble, and it'll happen again.
Ofcourse, the real issue is debt. Even if you owned the house outright, it still would be painfull
>> Even if you owned the house outright, it still would be painfull <<
Not necessarily, if you own to live in and plan to continue doing so. Indeed, you could possibly enjoy a benefit if your assessment dropped and with it your property tax bill.
OTOH, if your self-esteem is tied up in the nominal value of your house (i.e. "bragging rights"), then a softening in its value could be painful.
Best regards, 4merCL
4mer >> >>Indeed, you could possibly enjoy a benefit if your assessment dropped and with it your property tax bill.<<Bev >> Aye, there's the rub! From what I understand, most towns are suffering from a lack of revenue to support basic services like the police, fire and schools - so even if property values go down, rates have to go up to generate roughly the same amount of revenue. <<
Yes, that had occurred to me, and hence my conditional "could possibly" phrasing.
In some places, there is a limitation on how much tax rates may increase from year to year, so the town might need to "tighten its belt" and "swallow" some portion of the revenue decrease.
Also, not all properties in town will decrease uniformly in value. So, if your house is particularly hard hit, relative to the values of other properties in town, you might find yourself paying proportionately less than others as a result in the "paper" decrease in the value of your home.
Pretty much, however it is the proverbial "No Free Lunch". You do it by trashing the value of all dollar denominated assets like your cash value accounts, fixed income securities including all bonds, and many other things like real estete go up so much faster than wages in an inflationary spirial that you are priced out of other things like cars, houses, big busk vacations, you get the idea. So while it may look like the free lunch, and the return to the 7 to 10 % inflation of the 70's may not be possible to avoid, Reagan showed how much better it all is with a stable 3% inflation, and industry has adjusted its finiances to that. The return of huge inflation would make a shambles of the finiancial assumptions in the cash flow and debt maturity of most businesses. It would not be pretty, and might take decades to get everything stable again.
I strongly suggest that everyone think of this as a non-starter, since nothing survives better inside the beltway than a really awful idea.
>> you are priced out of other things like cars, houses, big busk vacations <<
It has been quite a while since my "big busk" went on a vacation <bg>, but it probably was easier to afford then, than now.
Harold:
How are things in Sante Fe?
Was back to Gabrielle's last spring but it was not as good as when you and I were there.
You must be talking tongue in cheek in this thread. Doesn;t sound like the Melnick that wrote that brilliant article that resides in our files Heheheh.
Smoky
