One of the best books about inflation is The Great Wave, by David Hackett Fischer. I read it with admiration when it was first published in 1996 and I have been re-reading it now inflation is back.I have experienced only too much of the recent history of inflation over the past 60 years.For most of that time I've been reporting on it as a financial journalist. I share Fischer's belief that the best way to study inflation is to study its history. Theoretical economic models do not tell the whole story.
Karl Marx analysed the French Revolution, primarily in terms of class conflict. Yet inflation was a potent revolutionary influence. As Fischer writes: 'From 1789-99 every twist and turn of fortune in the French Revolution was closely tied to movement of prices.'
The French Revolution is usually thought to have begun on July 14, 1789, the day the Paris mob stormed the Bastille. Fischer provides a graph that shows July 14 was also the day on which bread prices peaked in Paris.
Inflation destroyed King Louis XVI, the constitutional monarchy, the Jacobin dictatorship and the Directorate. It brought Napoleon to power, just as the German inflation of the Twenties helped to bring Hitler to power in 1933.
In Britain today the extraordinary swing against Gordon Brown's Government has happened as the price of energy and food are rising and the price of houses falling.
There are parallels between the present inflationary situation and the great inflation that started in the mid-Sixties and ended in the mid-Nineties.
In the Sixties, America was pouring troops and money into Vietnam. When President John F. Kennedy was assassinated, there were only a few thousand Americans in Vietnam. By the time President Lyndon B. Johnson retired in January 1969, there were about 500,000.
President Johnson is praised for his expansion of the American services. Yet he expanded social expenditure and fought a war in South-East Asia without raising taxes to pay for them.
In the past seven years, President George W. Bush has fought wars in Iraq and Afghanistan while cutting taxes. Both wartime presidents have financed their wars by borrowing.
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Showing posts with label inflation. Show all posts
Showing posts with label inflation. Show all posts
Nov 17, 2008
On G-20 and GM: Economics, Politics and Social Stability
November 17, 2008
By George Friedman
The G-20 met last Saturday. Afterward, the group issued a meaningless statement and decided to meet again in March 2009, or perhaps later. Clearly, the urgency of October is gone. First, the perception of imminent collapse is past. Politicians are superb seismographs for detecting impending disaster, and these politicians did not act as if they were running out of time. Second, the United States will have a new president in March, and nothing can be done until he defines his policy.
Given the sense in Europe that this financial crisis marked the end of U.S. economic supremacy, it is ironic that the Europeans are waiting on the Americans. One would think they would be using their newfound ascendancy to define the new international system. But the fact is that for all the shouting, little has changed in the international order. The crisis has receded sufficiently that nothing more needs to be done immediately beyond “cooperation,” and nothing can be done until the United States defines what will be done. We feel that our view that the international system received fatal blows Aug. 8, when Russia and Georgia went to war, and Oct. 11, when the G-7 meeting ended without a single integrated solution, remains unchallenged. Now, it is every country for itself.
From Financial Crisis to Cyclical Recession
The financial crisis has been mitigated, if not solved. The problem now is that we are in a cyclical recession, and that every country is trying to figure out how to cope with the recession. Unlike the past two recessions, this one is more global than local. But unlike the 1970s, when recession was global, this one is not accompanied by soaring inflation and interest rates.
All recessions have different dynamics, but all have one thing in common: They impose punishment and discipline on economies run wild. This is happening around the world.
China, for example, faces a serious problem. China is an export-oriented economy whose primary market is the United States. As the United States goes into recession, demand for Chinese goods declines. Chinese businesses have always operated on very tight — sometimes invisible — profit margins designed to emphasize cash flow and to pay off debts to banks. As U.S. demand contracts, many Chinese firms find themselves in untenable positions, without room to decrease prices, lacking operating reserves and insufficiently capitalized. Recessions are designed to cull the weak from the herd, and a huge swath of the Chinese economy is ripe for the culling.
If the world were all about economics, culling is what the Chinese would do. But the world is more complex than that. A culling would lead to massive unemployment. Many Chinese employees live on Third World wages; indeed, the vast majority of Chinese have incomes of less than $1,000 a year. To them, unemployment doesn’t mean problems with their 401k. It means malnutrition and desperation — neither of which is unknown in 20th century Chinese history, including the Communist period. The Chinese government is rightly worried about the social and political consequences of rational economic policies: They might work in the long run, but only if you live that long.
Economic Restructuring vs. Stability
The Chinese have therefore prepared a massive stimulus package that is more of a development program to make up for declining U.S. demand. It aims to keep businesses from failing and spilling millions of angry and hungry workers into the street. For the Chinese, the economic problem creates a much larger and more serious issue. It is also an issue that must be solved quickly, and the amount of time needed outstrips the amount of time available.
This is not only a Chinese problem. Wherever there is an economic downturn, politicians must decide whether society — and their own political futures — can withstand the rigors recessions impose. Recessions occur when, as is inevitable, inefficiencies and irrationalities build up in the financial and economic system. The resulting economic downturn imposes a harsh discipline that destroys the inefficient, encourages everyone to become more efficient, and opens the doors to new businesses using new technologies and business models. The year 2001 smashed the technology sector in the United States, opening the door for Google Inc.
The business cycle works well, but the human costs can be daunting. The collapse of inefficient businesses leaves workers without jobs, investors without money and society less stable than before. The pain needed to rectify China’s economy would be enormous, with devastating consequences for hundreds of millions of Chinese, and probably would lead to social chaos. Beijing is prepared to accept a high degree of economic inefficiency to avoid, or at least postpone, the reckoning. The reckoning always comes, but for most of us, later is better than sooner. Economic rationality takes a back seat to social necessity and political common sense.
Every country in the world is looking inward at the impact of the recession on its economy and measuring its resources. Countries are deciding whether they have the ability to prop up business that should fail, what the social consequences of business failure would be, and whether they should try to use their resources to avoid the immediate pain of recession. This is why the G-20 ended in meaningless platitudes.
Each country is also trying to answer the question of how much pain it — and its regime — can endure. The more pain imposed, the healthier countries will emerge economically — unless of course the pain kills them. Ultimately, the rationality of economics and the reality of society frequently diverge.
Recession and the U.S. Auto Industry
For the United States, this choice has been posed in stark terms with regard to the dilemma of whether the U.S. government should use its resources to rescue the American auto industry. The American auto industry was once the centerpiece of the U.S. economy. That hasn’t been true for a generation, as other industries and services have supplanted it and other countries’ auto industries have surpassed it. Nevertheless, the U.S. auto industry remains important. It might drain the U.S. economy by losing vast amounts of money and destroying the equity held by its investors, but it employs large numbers of people. Perhaps more important, it purchases supplies from literally thousands of U.S. companies.
There can be endless discussions of why the U.S. auto industry is in such trouble. The answer lies not in one place but in many, from the decisions and makeup of management to the unions that control much of the workforce, and from the cost structure inherent in producing cars in the American economy to a simple systemic inability to produce outstanding vehicles. There might be varying degrees of truth to all or some of this, but the fact remains that each of the U.S. carmakers is on the verge of financial collapse.
This is what recessions are supposed to do. As in China and everywhere else, recessions reveal weak businesses and destroy them, freeing up resources for new enterprises. This recession has hit the auto industry hard, and it is unlikely that it is going to survive. The ultimate reason is the same one that destroyed the U.S. steel industry a generation ago: Given U.S. cost structures, producing commodity products is best left to countries with lower wage rates, while more expensive U.S. labor is deployed in more specialized products requiring greater expertise. Thus, there is still steel production in the United States, but it is specialty steel production, not commodity steel. Similarly, there will be specialty auto production in the United States, but commodity auto production will come from other countries.
That sounds easy, but the transition actually will be a bloodletting. Current employees of both the automakers and suppliers will be devastated. Institutions that have lent money to the automakers will suffer massive or total losses. Pensioners might lose pensions and health care benefits, and an entire region of the United States — the industrial Midwest — will be devastated. Something stronger will grow eventually, but not in time for many of the current employees, shareholders and creditors.
Here the economic answer, cull, meets the social answer, stabilize. Policymakers have a decision to make. If the automakers fail now, their drain on the economy will end; the pain will be shorter, if more intense; and new industries would emerge more quickly. But though their drain on the economy would end, the impact of the automakers’ failure on the economy would be seismic. Unemployment would surge, as would bankruptcies of many auto suppliers. Defaults on loans would hit the credit markets. In the Midwest, home prices would plummet and foreclosures would skyrocket. And heaven only knows what the impact on equity markets would be.
In the U.S. case, the healthful purgative of a recession could potentially put the patient in a coma. Few if any believe the U.S. auto industry can survive in its current form. But there is an emerging consensus in Washington that the auto industry must not be allowed to fail now. The argument for spending money on the auto industry is not to save it, but to postpone its failure until a less devastating and inconvenient time. In other words, fearing the social and political consequences of a recession working itself through to its logical conclusion, Washington — like Beijing — wants to spend money it probably won’t recover to postpone the failure. Indeed, governments around the world are considering what failures to tolerate, what failures to postpone, and how much to spend on the latter. General Motors is merely the American case in point.
The Recession in Context
The people arguing for postponement aren’t foolish. The financial system is still working its way through a massive crisis that had little to do with the auto industry. Some traction appears to be occurring; certainly there was no crisis atmosphere at the G-20 meeting. The economy is in recession, but in spite of the inevitable claims that we have never seen anything like this one before, we have. There is always some variable that swings to an extreme — this time, it is consumer spending — but we are still well within the framework of recent recessions.
Consider the equity markets, which we regard as a long-term measure of the market’s evaluation of the state of the economy. In January 2000, the S&P 500 peaked at 1,455. This was the top of the market. In July 2002, 18 months later, the S&P bottomed out at 935. Over the next five years it rose to 1,519 in July 2007, the height for this cycle. It fell from this point until Nov. 12, 2008, when it closed at 852.30. This past Friday, it was at 873.29.
We do not know what the market will do in the future. There are people much smarter than we are who claim to know that. What we do know is what it has done. And what it has done this time — so far — is almost exactly what it did last time, except that in 2000-2002 it took 18 months to do it, while this time it was done in about 16 and a half months (assuming it bottomed out Nov. 12). But even if the market didn’t bottom out then, and it falls to 775, for example, it will have lost 50 percent of its value from the peak. This would be more than in 2000-2002, but not unprecedented.
The point we are making here is that if we regard the equity markets as a long-term seismograph of the economy, then so far, despite all the storm and stress, the markets — and therefore the economy — remain within the general pattern of the 2000-2002 market at the 2001 recession. That recession certainly was unpleasant, what with the devastation of the tech sector, but the economy survived. At the same time, however, it is clear that things are balanced on a knife’s edge. Another hundred points’ fall on the S&P, and the markets will be telling us that the world is in a very different place indeed.
A massive bankruptcy in the automotive sector could certainly set the stage for an economic renaissance in the next generation. But at this particular moment in time (it’s no coincidence that the crisis in the U.S. automotive industry comes as we enter a recession), a wave of bankruptcies would dramatically deepen the recession. This probably would be reflected by the destruction of trillions more in net worth in the equity markets.
There is a powerful counterargument to bailing out the U.S. auto industry. This argument holds that the auto industry is a drain on the U.S. economy, that it will never be globally competitive, and that if it is dragged back from the edge, no one will then say it is time to push it to the edge and over. The next time it will be on the brink will be during the next recession, and the same argument to save it will be used. In due course, the United States, like China, will be so terrified of the social and political consequences of business failure that it will maintain Chinese-like state owned enterprises, full of employees and generation-old plants and business models. Clearly, short-run solutions can easily become long-term albatrosses.
The only possible solution would be a bailout followed by a Washington-administered restructuring of the auto industry. This causes us to imagine a collaboration between the auto industry’s current management and Washington administrators that would finally put Detroit on a path to where it can compete with Toyota. Frankly, the mind boggles at this. But boggle though we might, hitting the economy with another massive financial default, a wave of bankruptcies, massive unemployment surges and another blow to housing prices boggles our mind even more.
The geopolitical problem confronting the world at the moment is that it has been forced to offer massive support to the global financial system with sovereign wealth — e.g., via taxes and currency printing presses. The world might just have squeaked through that crisis. Now, the world is in an inevitable recession and businesses are on the brink of failure. A wave of massive business failures on top of the financial crisis might well move the global system to a very different place. Therefore, each nation, by itself and indifferent to others, is in the process of figuring out how to postpone these failures to a more opportune time — or to never. This will build in long-term inefficiencies to the global economy, but right now everyone will be quite content with that.
Thus the financial crisis became a recession, and the recession triggered bankruptcies. And because no one wants bankruptcies right now, everyone who can is using taxpayer dollars to protect the taxpayer from the consequences of mismanagement. And the last thing any one cared about was the G-20 concept for the future of the economic system.
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Nov 9, 2008
China announces $585 billion economic stimulus plan
China's government announced plans today for an estimated $585 billion in spending and stimulus measures to shore up its weakening economy and counter the effects of the global financial crisis.
The massive stimulus plan would include tax cuts, a loosening of credit and government spending on a wide range of projects, including construction of low-income housing, transportation systems and the development of rural infrastructure, the official new China News Agency said.
Analysts welcomed the larger-than-expected stimulus package, which represents about one-sixth of China's overall annual economic output. They said the spending would help businesses, bolster demand for commodities and lift consumption -- which would, in turn, give a boost to a world economy that is faltering.
With the U.S., Japan and much of Europe in a deep downturn, China's role looms ever larger as it has been a major driver of global economic growth in recent years.
In the last five years, China's economy has expanded by double digits, but the annual growth rate slowed sharply to 9% in the third quarter amid weakening exports and a sagging real estate market. Some analysts have predicted that growth would fall much lower next year, a prospect that worries Chinese officials because of the threat of rising joblessness and the risk of social instability.
"This broad-based fiscal stimulus program will emerge as the government's front line of defense against an excessive economic slowdown," said Jing Ulrich, managing director of China equities at JP Morgan in Hong Kong. Ulrich called Beijing's efforts to upgrade infrastructure, develop the countryside and undertake social welfare projects as China's version of a New Deal.
With $2 trillion in foreign reserves and a healthy budget surplus, China has the ability to adopt an aggressive fiscal policy.
"This pro-growth policy response will help translate the balance-sheet strength of the economy into economic growth resilience," said Qing Wang, an analyst at Morgan Stanley in Beijing.
The stimulus package comes as China's president, Hu Jintao, prepares to travel to Washington for a Nov. 15 economic summit with world leaders, including President Bush. Over the weekend, Hu talked with President-elect Barack Obama by telephone about the global financial crisis, among other issues, the New China News Agency said.
In recent weeks, Beijing has announced a number of measures aimed at boosting economic growth, including interest-rate cuts, tax rebates for exporters and reduced reserve requirements for banks so more money could be made available for lending. China also indicated plans to use substantial funds for various infrastructure and rural-development projects.
It wasn't clear how much of the previously budgeted monies were included in the latest stimulus package. The announcement today said China would spend about $58.6 billion in the current quarter, with additional funds to be used over the next two years to finance programs in 10 major areas, including projects related to water, electricity, technological innovation and rebuilding from disasters such as the May 12 earthquake.
Ulrich said Beijing has huge infrastructure projects planned to 2020.
"Despite the weakening economy and slowing tax revenue in recent months," she said, "the government has every political incentive to boost spending in priority programs."
Technorati Tags: chinese bail-out boost economy plan in China financial crisis
Brazil's Lula Urges 'Global Solutions'
G-20 Session Stresses Developing Nations' Role in Solving Crisis
SAO PAULO, Brazil, Nov. 8 -- Brazilian President Luiz Inácio Lula da Silva told international finance ministers Saturday that developing countries must be given a greater role in finding solutions to the world's financial crisis.
"This is a global crisis and demands global solutions," Lula said in opening remarks at a meeting of the Group of 20, an organization of major industrialized and developing nations. "The crisis started in advanced economies. It is a result of the blind belief in the market's self-regulation capacity and, by and large, of the lack of control of the activities of financial agents."
During the two-day gathering in Sao Paulo, officials are expected to discuss how the economic downturn has affected their countries and how governments can coordinate responses and stimulus efforts. Lula called on the group to come up with proposals for "substantial change of the world's financial architecture," saying the global credit crunch is hurting the world's poor.
Brazil and many other developing countries want to be included in meetings of the largest industrial nations, where the recent crisis originated. The G-20 began in 1999 during the Asian financial crisis, but the group's meetings, notwithstanding the emergency session in Washington scheduled for this week, have not included presidents and prime ministers.
Brazilian Finance Minister Guido Mantega said Saturday that his country refused to be "mere coffee drinkers" on the sidelines of the richer nations' meetings.
Many developing countries want to restructure organizations such as the International Monetary Fund and the World Bank to give the nations more of a voice in decision making, said Jenilee Guebert, a senior researcher with the G20 Research Group at the University of Toronto.
"Right now, the emerging economies essentially have no voice within the IMF-World Bank system," she said. "They want to be included. They want a bigger role in the international system. . . . We live in a globalized world, and they just feel that seven countries or eight countries shouldn't be representing the whole world."
Canadian Finance Minister James M. Flaherty said the countries are also discussing further interest rate cuts, Bloomberg reported. "The U.K. made a fairly dramatic rate drop this week, and there's more discussion here about that subject," Flaherty said.
Emerging economies have suffered during the crisis as investment funds fled for safer places, stock markets tumbled and local currencies lost value against the U.S. dollar. With the tightening of international credit markets, companies in emerging markets have had difficulty getting loans. In Latin America, falling commodity prices have hit particularly hard because of a dependence on exporting oil, minerals and agricultural products.
"Many developing countries are moving into a new danger zone," the World Bank said in a recent paper. "With this latest financial crisis, growth is slowing and is likely to weaken even more sharply. Developing-country exports to developed countries are falling, capital is being withdrawn from emerging markets, and short-term credit is drying up."
Lula said his main concern was the impact of the crisis on trade, fearing that rich countries will reduce imports.
"Brazil believes countries must avoid the temptation of resorting to financial and trade protectionism as a mechanism to overcome the crisis," he said.
The International Monetary Fund said last week that growth in the advanced economies would contract next year for the first time since World War II.
The United States is represented at the G-20 summit by David H. McCormick, undersecretary for international affairs at the Treasury Department, and Federal Reserve Chairman Ben S. Bernanke.
McCormick said in a statement that Lula "presented a constructive overview of the challenges we face and the need for developed and developing nations to work together in addressing those challenges."
Oct 30, 2008
Looming Large on the Horizon
If you think that the current economic crisis is something that has never happened in history before, you may be wrong! After the collapse of the agriculture sector in Zimbabwe in 2000, the inflation in that country skyrocketed to 231 million percent a year! Just think about it - 231 000 000%! Unemployment went up to 80% and a third of country’s population left it.
Let`s now have a look at the photos that you may not be able to see anywhere else in the world.
Here is a boy getting change in 200 000 dollar notes!
One 200 000 dollar note equals less than $0.10 cents.
December 22nd, a new note of 500 000 dollars introduced to the market!
Next - 750 000 dollars.
January - new note of 10 million dollars.
This US $10 dollar note is 10 times worth more than the 10 million dollars Zimbabwe note.
A case worth 65 billion Zimbabwe dollars which equals to $2000 US dollars.
This guy is going to a supermarket. The exchange rate is 25 million Zimbabwe dollars for 1 US dollar.
This mountain of cash is worth $100.
50 Million note is then introduced!
Next is 250 million dollars note!
Sorry, how much is this t-shirt?
- It`s cheap, only about 3 billion dollars!
May - a note of 500 million dollars is introduced!
June - note worth 25 and 50 billion are printed.
And finally - 100 billion dollars note!
What can you buy for it? Well, these 3 eggs for example.
That's how people went to restaurants!
And the bills:
In August, the government devalued Zimbabwe dollar by removing 10 zeros from notes.
However, inflation kept going up and in September for this amount of cash you could only buy 4 tomatoes.
And for this - some bread.
And then it started again: 20 000 dollars note in September.
50 000 a couple of weeks ago!
They`ve got a pretty good chance of hitting billion dollar notes again by the end of this year!
- instead of just printing up more money this wouldn’t happen.
syrena (guest) Yesterday: 5:42 am
haha miket…
u really do not know much about life! u are still on the safe ground, as i see.
we, everybody white, in europe, have enormous inflation not long time ago.
our asses works more than 16 h every day.MikeT (guest) Yesterday: 6:35 am
Your asses sit under a TREE all day. Us white Europeans have been there and watched you.
jogleason (guest) Yesterday: 8:09 am
Show me an organization,town, city or country run by black people that isnt corrupt. That is their culture.
mikel (guest) Yesterday: 9:42 am
As always, this must be the fault of the US. It always is. And stupid people will always believe it.
Qatar Boy (guest) Yesterday: 10:31 am
This is amazing. I wander if they had a trillion note - with a speed our gov is handing out right now they may as well print a trillion dollar one.
Cheers,
Amar
De verdad os creeis que hay inflaccion??? - Page 2 - Burbuja Econ (guest) Yesterday: 10:39 am
[...] Inflaci
Ella (guest) Yesterday: 4:08 pm
Oh my gosh…that’s really sad and funny at the same time.
daisy (guest) Yesterday: 5:53 pm
Isn’t socialism wonderful?
[...] tells banks to start using that money on homes Home prices still falling amid gloomy forecast What the real crisis is like Evil Wall Street Exports Boomed With `Fools’ Born to Buy Debt Another plunge in home prices [...]
mouse209 (guest) Today: 9 hours ago
Basically they are printing “annual currency”. A new dollar - a new picture -a new year. They need a barter-type non-currency system (e.g. 1bundle of wheat=3eggs… or…1week of work=1live chicken). imho
[...] retirada daqui (via Incentives [...]
From breadbasket to basket case (guest) Today: 5 hours ago
The stronger the political centre, the more pervasive the level of incompetence.
See what happens when a country is taken over by leaders who know nothing about economics. JFK, LBJ, Nixon, Ford, Carter, Reagan, Bush I, Clinton, Bush II, Clinton II, Obama, McCain, etc….
Ron Paul is the only candidate who knew anything about economics. And the media made sure he got minimal treatment because the corporate sponsors want to keep the borrowing in place so that all the position holders can keep living well whilst creating nothing to society.
In the US, the UK, Spain, and many other countries, structural reform is not possible - the idiot complex is in charge and support is given to clueless showmen like Show-Bama.Can we have a more politically correct interpretation of events ? I mean what about the feminist perspective ? Are the giraffes on the currency representative of the various sexual orientations ? And how many currency notes does it take to pay for a lazy useless feminist academic in a job in a posh university in Zimbabwe ? What about the planet ? Are the newspapers able to voice concern over the fact that Sarah Palin might become President of the United States, and that she might tell feminists to start behaving like real women instead of masters of absurdity ? Perish the thought, that such critical concerns are not relevant in the ordinary lives of the inhabitants !! Where is the sexual revolution ? Where are the young women and their contraceptives and their liberation revolution and their pop music ? Where is the fashion industry to express the importance of triviality in everyday life ? What about celebrations for the Marxist achievements of the regime ? What about university studies to extrapolate the new dimensions to living in such as profoundly expressive and stimulating society ? What about celebrations of the pride that has been recovered from colonialism - and the fact that male domination is positively circumcised ?
Jam Kam (guest) Today: 2 hours ago
There is nothing funny about anyhting going on in Zimbabwe. Talk politics, talk economics…. What’s happening there is absolutely surreal.
war (guest) Today: 18 seconds ago
jogleason (guest) Yesterday: 8:09 am. “Show me an organization,town, city or country run by black people that isnt corrupt. That is their culture.”
Right. ‘Cos there’s no corruption in the US or Europe is there? Oh wait, yes there is.
The American Government just robbed the US taxpayers of 850 billion dollars and gave all that money to their buddies in the banks who are already turning all that loot into fat bonuses for their top boys. Think of all the schools, hospitals, they could have built with that.
The same is happening all across Europe.
Western Governments are the kings of corruption. They just rely on a population of morons to not notice, that’s all.
Technorati Tags: inflation depression bail-out financial crisis
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