John wrote:
In the Weimar example, Germany was required to pay annual reparations
to France and other countries. Those reparation amounts were
denominated in marks, and so they could be paid simply by printing
more marks, thus creating hyperinflation.
This is not true (
http://en.wikipedia.org/wiki/London_ultimatum). Conversely, I would argue that the US situation is different because we CAN inflate out of foreign debt WITHOUT hyperinflation. Just watch as the combination of the carry trade and quantitative easing wipe out our foreign debt.
Our other unfunded liabilities that Bernanke speaks of, however, are a lot like gold debt and far larger as a fraction of GDP, but the difference is that we owe them to indolents, invalids and geriatrics, while they owed them to militarized states that ended up seizing their industrial lands. In addition, CPI lags well behind base inflation (analogous to 1920s gold price), so maybe we can take care of this too with fairly mild base inflation. On the other hand, if we start selling alternative debt denominations to pay for social programs, we're screwed in exactly the same way.
John wrote:
compare what the US does today to what Germany did in the 1930s, and
compare what China does today to what the US did in the 1930s
Two years ago on your suggestion I read "The Bubble that Broke the World." I recall the author blaming the 1929 crash on the German bond market because we were basically paying their reparations for them as they ran up huge debts in a vicious cycle, this time in more stable currency. The 30s were simple: their government defaulted, failed, and became socialist because it couldn't sell bonds, and the rest of the world wrote off the bond losses in a massive deflation.
I think this scenario roughly encompasses the fears of the average American Tea-Partier today.
Higgenbotham wrote:
I think Bernanke has it dead wrong
This I have to disagree with. When he speaks, think to yourself, "If I were in his position, and my goals were his, what would I say if the exact opposite were true." This is how I came to the belief that the man really is a genius, and truly knows far more about the real situation than any of the pundits. I might amend your statement to read: "I think what Bernanke 'says' is dead wrong."
Higgenbotham wrote:
The lack of liquidity is a symptom of a larger problem and that is that the system is operating at a loss.
I wouldn't say that there is a 'lack' of liquidity:
http://research.stlouisfed.org/fred2/se ... BR?cid=123.
There is, however, a 'fear' of a lack of liquidity based on those losses, and interest rates are too low to provide incentive to lend.
In my understanding, this is really interesting because we're creating an economic bomb that will explode once critical mass is reached. For now, the large excess reserves hold interest rates down, which inhibits lending, which inhibits inflation, which holds asset prices down, which creates losses, which makes the banks respond by holding even more excess reserves. (Japan has been operating like this for 20 years, so I could be wrong about the next part.) It will appear that quantitative easing is only making the situation worse, but once the excess reserves get large enough so that the largest bank can inflate their own balance sheet out of losses, they will release the money. (The rest is pure fantasy) As the other banks follow, there will be madness as investors chase rising asset prices with low call rate money. Treasuries will fall precipitously as dollars flood into risky worldwide markets and the fed will be politically forced to buy them up, throwing even more fuel into the fire in a vicious cycle. Gas, and housing will rise while salaries stay flat and we lose jobs even faster in the great restructuring as Krugman realizes that inflation doesn't create jobs. Working Americans realize that they are better off on the government dole and call for greater entitlement spending. GDP drops as inflation rises. China hastens their inflation to keep pace and maintain dependency. Economists are stunned; Marxists are not. America divides into two factions: Chimerica, and the rebels supported by their former enemies, the oil-rich states of the Middle East and Russia. World war ensues, and eventually an armistice is called and the US is broken up into 4 sovereign states by treaty. (I have to indulge this sort of flapdoodle every once in a while)