Thursday, September 18, 2008

Inflating thoughts on economy...

I posted this on Dave Justus' thoughts on McCain and the economy -
… and as yet not one commentator (that I have heard or read) has pointed out the long term effect of these multi-billion bail-outs.

Not that anyone wants to know, but until those funds are retrieved the rate of inflation is going to increase. How do I define inflation? It is the decline in the buying power of the dollar; my dollar, US dollar, Aus dollar, British pound whatever.

How can the handouts be retrieved? Well economically it is quite simple, but politically it is very difficult.

You can regain the hand-outs from the direct beneficiaries in exactly the same way as any other loan. The difficulty is that this will impact directly the amount of money available for lending - ostensibly to businesses to make new business but just as likely to the worker down the road so that he can buy that $5000 flat screen tv… The effect is a slow burn on the fuse that the handouts tried to extinguish.

You can regain repayment of the handouts (let’s be honest, that is what they are) by balancing the government’s fiscal budget. To achieve that requires two very bitter political pills - either a cut in government expenditure, or an increase in taxes.

Now, where do Mr McCain and Mr Obama stand on those two matters? I doubt that either will ever say the truth - it would be political suicide.

I have repeated it here because there are thoughts in that which do not apply solely to the McCain (or Obama for that matter) political approach.

Dave and I had a good discussion on the line of thought here with Dave concluding that I was "talking of micro-economic effects".

I did, and still, disagree with him on that point.

In any capitalist (no, make that ANY) economy, the fundamental drivers are the people; he tangata, he tangata, he tangata! Without people to buy goods, what would the economy comprise? Robot driven factories producing very cheap widgets with no one to buy them?

The point is, anything that impacts upon the disposable income of the ordinary Joe has an immediate effect on the economy. That, for one reason, should give great favour to tax cuts from the political wing. There are other counter-vailing impacts from that direction which are not politically acceptable - and so it goes.

What makes me so hot about the likes of these political bailouts is not the use of tax-payers money, or the cause of the bailout.

Effectively, there has been some $180 billion (globally, so I am not nit-picking America here) injected into the money markets. We could rattle off all of the immediate impacts that justify the move. We could prattle all of the political rationale from here to the bank and back.

I have already lived through a period where the international monetary system got itself out of whack. It led to the agreement to drop the gold standard. Most importantly it created an international climate of inflation that ran for some eight or ten years from about 1972. In NZ, we had inflation then "stagflation" (which had nothing to do with the genesis of the deer farming industry) of up to 18% p.a., averaging about 10.5% over the period as I recall the numbers.

What did that mean to me?

Well, my income increase by about 300%. Prices for everything increased by 300%. I was no worse off, right?


The $1,000 I had in savings is now worth something like $300 in "old money".

That is the effect of these "rescue packages" that the politicans are not going to tell you.

Someone is going to pay.

That someone is you and me.

1 comment:

Eugene Tan said...

A voice of sanity, albeit in the wilderness.

I think we agree on this one. With prices jacked up skyhigh, there is no way the prices are coming back down depression or not.

With the rescue package, the relative depreciation of our currencies is evident. US dollar drops but the Sing dollar to the US dollar exchange remains steady. What does that mean? Simply that the Sing dollars dropped too.

We are the victims of other people's greed. We have been sane and careful but still the insanity of the others will fuck us up.

I'm not mad (at all) though I wonder how I can get even.