Mar 17th 2011, 10:48 by Buttonwood
LET us start with a few headlines from the latest report of John Williams at Shadow Government Statistics. "United States Nears Hyperinflationary Great Depression", "High Risk of Ultimate Dollar Disaster Beginning to Unfold in Months Ahead, 2014 Remains the Outside Timing for Same" and "Major Economic Series Suggest Formal Depression in Place".
This 66-page report is full of such apocalyptic stuff, including the obligatory paragraph that goes with such doom-mongering that
In terms of survival on a day-to-day basis, US-based individuals should be building a store of goods in preparation for a man-made disaster, much as they would for a natural disaster such as an earthquake. Economic activity probably would devolve to a barter system, but such could take months to become fully functional.
This is the kind of stuff that will cause many people (including, I suspect, most of my colleagues) to dismiss Mr Williams as a crank. So why devote any space to him at all?
The answer is that the rest of the report contains some quite detailed and interesting analysis. Mr Williams maintains a site that attempts to keep statistical data in the form they had before governments altered or abolished them; for example M3 money supply in the US. The report has a number of graphs showing that industrial production, retail sales, employment, and housing starts are still well below their peaks. The sections of the report that deal with the data are calm and analytical.
So how about the underlying thesis? Best to let Mr Williams speak for himself here.
The current US financial markets, financial system and economy remain highly unstable and increasingly vulnerable to unexpected shocks. At the same time, the Federal Reserve and the federal government are dedicated to preventing systemic collapse and broad price deflation. To prevent any economic collapse - as has been seen in official activities in recent years - they will create and spend whatever money is needed, including the deliberate debasement of the US dollar with the intent of increasing domestic inflation.
That first sentence is pretty much the message of the Smithers note in yesterday's post. And the second sentence is unarguable. It is the third that gives one pause.
Here again, for anyone who has studied monetary history, Mr Williams's thesis is certainly possible. There have been lots of cases of paper money systems collapsing in hyperinflation (the French assignats of the 1790s, the American confederacy, the Weimar republic and so on). It is conventional to assume that modern central bankers, with their degrees and mathematical equations, will avoid this problem. But those bankers have been surprised by so many things already, from the fragility of the financial system to the soundness of the housing market, that our confidence in their wisdom should at least be shaken.
We know that rapid money creation has in the past led to hyperinflation; the monetary base has been expanded rapidly. We know that hyperinflation has tended to follow episodes when central banks have funded fiscal deficits; the Fed and the Bank of England have been buying government bonds. Gold has been a harbinger of inflation in the past; it has risen consistently for a decade. Central bankers have good reasons to explain why these actions will not cause a problem, and are indeed necessary, but the road to hell is paved with good intentions.
And yet. There is something about the certainty of Mr Williams's claims that is offputting. Why 2014 as a deadline for collapse? Hyperinflation is not the only possible outcome. We have had paper money for 40 years, and while we have had lots of asset bubbles, there has not been a steady acceleration in consumer inflation (with each decade having a higher rate) that might have been predicted in the 1970s. Japan has expanded the money supply, run massive deficits, and still not yet generated as much inflation as its politicians would like. Mr Williams' own data shows that the broad money measure (M3) is still falling at an annual rate, and credit growth is dismal. His explanation that
If the pace of decline in the economy is faster than the pace of decline in the money supply times velocity, then that circumstance is inflationary, even with declining money growth.
is not convincing. Even if you think that GDP numbers are overstated, it is hard to believe that activity is declining so sharply that real M3 is growing significantly.
And this collapse in the dollar stuff ignores the fact that other currencies have lots of problems; the yen (clearly); the euro (wiith peripheral countries); and sterling (Britain has as big a debt problem as the US). So why should the dollar lose reserve currency status imminently? (I agree in the long term, there is a threat, but this could take decades as the Chinese renminbi becomes convertible.)
So while there is a risk of Mr Williams's apocalypse, we need a lot more evidence first; that commodity prices are feeding through into higher wages, that broad money supply growth is accelerating, that inflation expectations are going up sharply in the bond market, and so on.
Those blaring headlines detract from Mr Williams's case. As someone once said "I wish I was as sure of anything as that man is of everything."
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Not that I agree with Mr. Williams, but anything "is" possible. Inflation, deflation, high unemployment for years. It all depends upon the confidence of both investors and consumers.
Wall Street owns our politician, and with the Wall Street banks becoming "bank holding companies" it seems they have a firm grip on the Fed via "To Big To Fail". So Wall Street will write our laws - to bad Elizabeth Warren - decide thier own tax code, and not have to worry about failing.
Other people call it the "Bernanke put", as that sounds pleasant and reminds them of the good times under the Greenspan put.
Regards
I was weirded out when I started to read this post because I also look at that site for graphs and the like. My reaction: he's one of a legion who take a set of facts and then fit them to a world view so he comes out with an answer that's opposite to what the facts say. We should admit there is something attractive in apocalyptic promises, in the idea of "revelation," and of course in the quasi or bluntly religious import of end times and judgement day. It's as though people want to say, "Prepare to meet they maker" but they dress it up with economic talk-talk.
To go at this another way, I could take a bunch of facts about the movement of the planets and of objects observable on earth and derive that gravity exists. Or I could take a similar set of facts - not a complete set but a material subset - and come to the opposite conclusion, that there is a force which rises up and which lifts all things up as they float. One could compile enough facts and silly arguments - as in the ground rises to meet a thrown rock - that you could never be convinced the force pulls you down toward the center of mass. (There are actually crackpot theories, mostly about special relativity, that do exactly this sort of nonsense.) When one says "anything is possible," that's then taken as license to believe in nonsense. Monkeys can't actually fly out your butt, but one can say the words so what is "possible" is the statement not the actuality.
BTW, mentioning the Confederacy's monetary collapse as evidence made me laugh out loud. I assume that was your intent.
Yeah, um, why have you devoted space to this? If I want to hear crazy people talk I can turn on the radio or Fox News.
It fascinates me now we educate so many people about "economy" and simply cannot detach it from money. We have used a monetary system for hundreds of years now, it is crude and outdated, but persists as corporatism enslaves the world.
The average man cannot grow up without this unquestionable faith in money and it is this that amuses me and distresses me at the same time. No one stood to think that creation of Private Property and Currency and running them parallel would create the biggest inequities the world has ever seen.
40% of the worlds wealth is owned by less than 1% of the population and our "economic system" is okay with this.
Hundreds of thousands of children die in places like Africa from illnesses every YEAR which we can cure for under $10.
I invite you all the question the monetary system and it's true efficiency. As automation takes over and unemployment continues to increase in the world how is our "economy" coped for this? It simply isn't, a monetary system requires cyclical consumption, it is a greedy pig that continues to eat more and more in the name of profit. Which is of course, not even real, it is in fact printer paper. And we are happy to spend lives over this. Imagine the amount of crime in the world derived from lack of money and therefore resources in some shape or form.
It is as simple as this, we have millions of people employed around the world that simply transfer money ( stocks and such ) and actually contribute no tangible productivity in reality, and get immensely rich. We are living in an economic paradigm where the rich get richer and the poor stay poor, I find it confusing when people wish to build a world of equality.
For anyone interested in solutions I would ask you type Zeitgeist into Google and go from there!
Start to wake up people!
I'm looking forward to God making monkeys fly out of athiest butts in order to prove he exists. I think it would be the best way for him to prove his existence don't you?
Try to imagine it... Dawkins up on stage talking about militant atheism when... !POP! out fly's a monkey... anything is possible mathematically right :)? Wait... I just realized something... God already made a monkey fly out of a butt... his name is Richard Dawkins... ;^D.
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