Here is my prognostication on what will happen. There will be short-term inflation on account of QE2. This will put the squeeze on most americans, resulting in an increased drive to clear debt and an increased rate of debt default. Both of which are deflationary. Since inflation can be brought about by quantitative easing OR by debt expansion, and deflation can be brought about by quantitative tightening OR by debt contraction... Because the private debt markets still exceed the public debt and unfunded obligations by at least a factor of three, we'll see a year to two year period of deflation. The stock market will crash, gold will trend slightly downward or flat, and PGMs will go through the bottom (they're in a bubble right now that looks like it's starting to burst).
The question is: How will the government respond. I think it's highly likely that the Fed will respond with QE3... Alternatively, congress will vote to default on the public debt, which I think is highly unlikely. With QE3, considering the money multiplier, we'll finally see that hyperinflation that the tea partiers are (rightly) scared about, will be incredibly painful for anyone who is not really wealthy now. Unfortunately, because of the intermediary deflationary period, academic economists and punditry like Krugman will incessantly make fun of goldbugs like Ron Paul (who is ascending to chair the congressional subcommittee on monetary policy).
So. You have about year to shore up your debts, save some money, and buy nonperishable commodities, formulate an escape plan. Godspeed.
Why would inflation drive people to clear debt? I thought inflation drove people to obtain more debt because debts are in dollars, if dollars are worth less, the debt is also less.
In an inflationary environment it would make sense to borrow dollars to buy goods which increase in price under inflation: stocks, gold, etc.
Congress will never default on the debt. The debt is in dollars and congress has the power to print dollars. We are going to print our way out of debt.
well when you're spending more money on basic necessities, paying off your debt is gonna take a back seat. Bankruptcies and defaults, sir.
"In an inflationary environment it would make sense to borrow dollars to buy goods which increase in price under inflation: stocks, gold, etc."
That is just not so easy when you're spending 90% of your paycheck on food, rent, power... Who will loan you the money knowing you're a default risk?
"Congress will never default on the debt. The debt is in dollars and congress has the power to print dollars. We are going to print our way out of debt."
i agree. The end result is hyperinflation. But I reserve the possibility that congress will come to its senses, do the hard thing, and default.
During the great depression when people had to live with much less, they learned to save. Saving became part of the culture by necessity. Credit was offered by merchants and stores, but not to the extent it is used now.
Then gamification of credit card debt and other debt through "credit card points" and "credit rating" was introduced, and everyone was told that you had to have to have a credit card and a mortgage or you wouldn't have the credit rating to allow you to borrow more money for the car, the new furniture set, etc.
However, if the USD loses significant value (hyper-inflation) and the credit industry tanks, people will have to start saving again, just like the great depression.
We can't print our way out of debt, obviously. The more money is printed, the higher the eventual inflation.
Stocks from companies could fall if their business model relies on buying goods and services from countries whose currency increases in relative value and who sell products and services primarily to countries whose currency decreases in value. When inflation hits, and these companies' stocks fall, it would be a great time for people to invest, however those companies would have to layoff quite a few people, so only the rich and the people from other countries in the world would be able to afford to buy those stocks. When they buy those stocks and they go up, the rich get richer and other countries start buying these companies.
So basically, by the government printing more money like this, they will eventually:
- Raise unemployment.
- Raise the wealth divide between the rich and poor.
- Cause the country to have to convert from becoming a consumer to being a provider, during which there are many failures and many required changes in lifestyle and government. (Instead of bankers, accountants, and lawyers, you have more farmers, miners, and factory workers.)
The wealth divide if significant enough will cause the country to go one of three ways:
1. In a country where the citizens are less aggressive but feel a sense of entitlement (like the U.S.), it may lead to a revolt in the form of Socialism or Communism by the disenfranchised. (Socialism or Communism are bad ideas, but Russia and France are good examples of countries that embraced Communism and Socialism due to wealth divide, so it could certainly happen.) This in turn may kill off any chance that the country will be economically successful in the near future, because there is little incentive to work extremely hard to have an even poorer quality of life than before the change.
2. In countries where the people are more aggressive, a dictator may arise military rule will be established. This is much harder to escape from over time as it leads to a vicious cycle of dictatorships and coups.
3. In countries where the lower-class had already been mostly established (perhaps not to the same degree) and there is less sense of entitlement or aggression, there is a possibility that the country could perhaps convert from a more taxing Socialist government to a more Capitalistic society. Although this transition would not necessarily be smooth while government run services are privatized, eventually the country could become wildly successful due to the superior work-ethic of its citizens.
Here is a question for you: If inflation occurs, why would people want to save money and clear debt? In an inflationary environment, debt is great because you only have to pay it back in future dollars. Likewise, saving money is bad in an inflationary environment because your money is worth less.
Right now we are in a long-term deflationary environment as trillions in fake value are erased from the residential and commercial real estate market.
Even if the Fed gave $1 million checks to every american, it probably wouldn't cause as much inflation as you think because a lot of people would just pay off their mortgages and credit card debts, then save the rest. Right now all of the Fed increasing their balance sheet is just sitting in reserves at banks, not being spent.
In order to really cause inflation, the Fed has to increase the velocity of money changing hands. They haven't been able to do this yet.
PGMs = platinum group metals, i.e. platinum, palladium, rhodium, but not gold or silver.
"If inflation occurs, why would people want to save money and clear debt?"
Because those credit agencies that keep calling are really annoying. Deep down people know that the only way to be secure is to be debt free. Inflation really creates insecurity - you're getting squeezed from under (as in the bottom line to pay for necessities). In that environment, having to make debt payments is scary, ESPECIALLY when the economy is crap and you could lose your job or not get pay raises.
Most people (rightly so) are not interested in taking on new debt during an inflationary period. It's crazy right, economists prescribe inflation as a way to deal with "sticky wages" so that the real cost of employment goes down without having to negotiate wages downward. You cannot at the same time argue that will encourage people to borrow, because debt payments are exercised nominally (and creditors often - punitively or capriciously - rack up the interest rate on top of that) so while more of your salary is going to pay for basic necessities, that debt burden still floats on top of the budget, and possibly gets worse.
The question is: How will the government respond. I think it's highly likely that the Fed will respond with QE3... Alternatively, congress will vote to default on the public debt, which I think is highly unlikely. With QE3, considering the money multiplier, we'll finally see that hyperinflation that the tea partiers are (rightly) scared about, will be incredibly painful for anyone who is not really wealthy now. Unfortunately, because of the intermediary deflationary period, academic economists and punditry like Krugman will incessantly make fun of goldbugs like Ron Paul (who is ascending to chair the congressional subcommittee on monetary policy).
So. You have about year to shore up your debts, save some money, and buy nonperishable commodities, formulate an escape plan. Godspeed.