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Deflation is definitely a scary prospect... it has happened in the past - anybody here old enough to remember the 1930's? This is the picture of a sustained period of deflation. If we had deflation on anything like that scale over the next decade, I cannot imagine how horrendous the consequences would be. Without serious Government intervention, it would probably spell the end of middle class America as we know it.
As Ian said, money is created as a percentage of current reserves. Originally, in the days of the Gold Standard, money was created and lent at the ratio of $1 to $1 worth of gold. Going away from the Gold Standard led to the modern concept of inflation, which barely existed before then. The ratio of money to gold has changed numerous times since then, with the $/gold always increasing. I do not know the exact current ratio, but it makes the gold almost irrelevant. Obviously, there are many things in the 21st Century which have an importance of at least what gold has traditionally had, so this is not in itself such a bad thing. Increasing the ratio of $/gold is something that has been done in the past, so it could just as easily be done in the future. This is all that would be happening if the US government decided to print more dollars, at least if they did it in a controlled fashion.
However, there is a huge issue with the US economy at present that I do not see simply being fixed by increasing money supply. Indeed this issue may prevent other problems with the economy being fixed. It is called Consumer Debt. Anybody who has SpeedTV has seen more adverts recently for Consumer Debt Counselling than they have seen racing. In the go-go '90's most of us spent like jackasses. (No offence to anybody who did, you are not alone.) Hands up everybody here who refinanced their house and "pulled some money out" to pay off credit cards? I don't mean spent that money on home improvements, paid for education, or used the money to buy a car that they will drive for the next ten years. But literally used the money to pay off a credit card bill run up at the Mall, in Restaurants, or on vacations, clothes, or various consumer non-durables? Most of us are guilty to at least some extent, so don't feel too bad.
As long as the economy hummed along, we all got away with it, because our incomes kept increasing. Some were even multiple offenders in the refinancing game.
The trouble is, now Americans have more debt than they can handle. We don't have the capacity to spend our way out of our current economic troubles. Even if the Government printed more money, many people couldn't borrow it, beacuse of their current level of indebtedness.
"... you really cannot underestimate the benefit of green-back's status
as world currency. The fact is U.S. can print dollars at any time, but
if any other country did so, U.S. would have every right to sanction the
offending country." J, I have to disagree with you on your second sentence. Any country that wants to print money can do so, but as Ian said, it's worthless if there's nothing at the back of it. Printing dollars indiscriminately would have consequences no different here than it had in Germany in the 1920's (the money-printing fiasco actually began before Hitler came ot power - it's consequences were among the things that actually helped get him into power). I don't know where you get the idea from that the U.S. would have the RIGHT to sanction any country that decided to go on a money-printing binge of their own currency... the reality is that the market would sanction that country... If Country X's total availability of currency (I don't know the correct term) was worth say, 1% of the U.S.'s, that's all it would ever be worth, without serious economic advance in that country. So, if X went and printed an bunch of their currency, and doubled their money supply, all they would achieve is they would halve the value of their existing currency. Germany in the 1920's wasn't the only place this happened... it was also popular in newly emerging republics, particularly in Africa, in the 1960's. Effectively, de-valuing the currency, as bRAD said.
"If any other country had been running massive trade deficits as the
U.S. has done for the last two decades, it would be in some serious
trouble. Instead, the trade deficit seems to just have the effect of
moderating inflation for the U.S, and if U.S. runs short on the "world
currency", it just prints some more. " I have to disagree with you here too. Most governments operate a deficit. They just borrow to meet the deficit, again partly in anticipation of future inflation. The deficit doesn't moderate inflation - the U.S. has had significant inflation at various times during the 20 years it has had a deficit. I'm not sure exactly whay you mean by "World Currency", I presume you mean reserves of foreign currency... you may remember that in the mid-1990's the U.S. $ was strong against most European currencies, especially the Deutschmark. This was chaotic for importers (and producers) of European cars. The US Government could have bought up Deutschmarks, and weakened the dollar (which would have made things easier for American companies selling abroad), but it elected not to. If they felt there was not enough U.S. dollars in in the market (the dollar was too strong), they would sell some of their reserves of U.S. dollars. They would not print more.
Back to deflation, I heard on the news yesterday that manufacturing costs deflated by, I think, 0.3% in November... the consequences of deflation can be scary. For one thing, think of the mortgages and consumer debt people are carrying. How would they cope with that, if their incomes started to decrease? The first thing most would do is pull money out of the stock market. And we all know where that heads us... In the late 1980's, much of the U.S. had serious deflation in Real Estate costs. Currently, the Construction Industry is at a critical point, and is almost certainly going to experience some deflation in the coming year. Some of this can be attributed to a readjustment of the excesses enjoyed (or endured, depending on where you view this from). But if the deflation is sustained, it will have serious consequences. And, printing money or increasing the money supply probably won't fix it...
posted by 141.154.121...
, Sat, 14 Dec 2002 16:51:20
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