Dear Higgie,
Higgenbotham wrote:
> I don't think anything will replace it; there will just be
> complete chaos like I said before. Then over a few decades, a
> computerized system accommodating all the various currencies will
> be implemented. But it's becoming clear that the world will no
> longer likely tolerate what is happening to the dollar. And that's
> a good thing.
This doesn't make any sense to me. Even if you don't want to believe
that we're headed for a world war, or the Singularity, you still can't
possibly have any idea what kind of currency system we're going to
have in a few decades.
I agree with the "chaos" concept, but it bothers me that you
automatically assume that "chaos" means the dollar is going to fall
20-40%. Why not assume that it's other currencies that are going to
fall by 20-40%?
The Reuters article you referenced is a pipe dream. I recall that
Iran said a few years ago that it was going to price oil in other
currencies, and it never happened. And all last year, I was listening
to "experts" on CNBC and Bloomberg TV talk about how people should
invest in developing countries because that's where money is to be
made. But now, with stock markets crashing in developing countries,
it turns out that last year's advice was total crap. People came back
to the U.S. because it's the place with the safest investments.
I look at the "chaos" concept as follows: In both the global financial
and geopolitical areas, world officials have been extremely efficient
at applying band aids that don't solve the problem but keep things
going for a while longer. This is a big difference, in my opinion,
between the world today and the world in the 1930s. I would guess
that the world has gotten better and better at applying band aids in
each century. It's part of globalization, which is possible because
of the steady growth in technology (transportation, communications,
etc.)
However, once "chaos" or "panic" breaks out, in the form of a major
war or major financial crisis, then it's no longer possible to apply
band aids. At that point, the long-term trends take effect, like a
rubber band that's been stretched and now has to snap back. And the
long-term trend at this time is deflation.
People automatically assume that America is "broke," and China "has
all the money," and that China will one day stop buying
U.S. treasuries, and that will cause chaos, and the dollar will fall
20-40%. That doesn't make any sense at all.
First, if China stops buying treasuries, then it will be more
devastating to China's economy than to ours, and will unleash enormous
unrest in China, probably a full scale civil war. Wen Jiaboa would
not disagree with this statement; in fact, he's said as much himself.
** China is 'unsteady, unbalanced, uncoordinated and unsustainable'
** http://www.generationaldynamics.com/cgi ... 22#e070322
Second, if China stops buying treasuries, then it will cause
international trade to collapse, and will be enormously damaging to
other Asian countries, and there will be an enormous worldwide
deflationary shock.
At that point, will the US government "print money" and cause
hyperinflation? Absolutely not.
In a deflationary environment, "printing money" will not cause
hyperinflation. All it will do is partially compensate for the
deflation. Instead of a 50% fall in the CPI, there'll only be a 30%
fall in the CPI.
That's why none of the historic examples of hyperinflation occur in
the 1930s. You can't have hyperinflation after a deflationary shock.
All you can have is less deflation.
I'll say again that I cannot think of a credible scenario where the
dollar falls 20-40% against Asian currencies in the next few years.
What happens in the next couple of decades is anyone's guess, and will
depend on the progress and the outcome of the war.
John
