Tag Archives: deflation

Competitive Devaluation

This morning, the Swiss National Bank intervened dramatically to push down the Swiss Franc vs other currencies.

It seems pretty clear that the Chicoms are set to try to devalue their currency, specially against the dollar and the euro.

Milton Friedman notwithstanding, these moves make it clear that the dominant threat on the minds of central bankers is DEFLATION.  Competitive devaluation scenarios are particularly and extremely tough on fiat currency economies, which, sadly, takes in the entire planet at the moment.

Sportsfans, you simply cannot sustain a fiat currency in an environment of deflation.  This produces breadlines, economic paralysis and coma, and eventually death.

Take the situation to your heart, and understand why this is so:

Suppose you grasp in the very center of your bones that the currency you hold is virtually certain to be worth more in a month than it is worth today.  Will you go out tomorrow and spend your currency?  If you are rational, you will spend this appreciating currency only if you absolutely MUST spend it.

Now, multiply this folk wisdom, this common sense, across four billion souls, and behold!

Everything comes to a halt.  Nothing moves.

Central bankers around the world are quite right to be terrified pale at the prospect of global deflation.  They will be strung up from the nearest telephone poles.

Why is this different in an environment of commodity-backed currency?  One’s currency cannot rapidly appreciate when it is a stand-in for a tangible commodity, unless, somehow, inexplicably, the tangible commodity is somehow becoming much more scarce than previously, or, the sovereign decrees that it takes less currency to buy the commodity than previously.

Only fiat currencies, or economies with diabolical sovereigns, are exposed to deflation.

Yes, we have a global asset bubble.  But, we would never have been able to blow up the asset bubble without fiat currencies.

Folks, human beings cannot get along with the discipline of tangible values.  Our brains don’t work that way.

Hoard your currency.  Lend it to the trustworthy, because they will pay you back with more valuable currency than you lent.  Make sure you have tangible assets pledged for your loans.

Be prepared to defend your property.

How will we know when it is over?

The great unwinding can’t be fully realized without a lot of bloodletting. In the long run, the agony will produce new growth and new prosperity. But it ain’t going to be any picnic.

It appears to me that GM is going to be forced to declare bankruptcy within 30 days. It will be a big mistake for the fedgov to try to prevent this from happening. Does President Obama want to try his hand at running GM? God, I hope he isn’t that stupid. I frankly don’t know whether McCain is that stupid, he has a tendency to come out with some outlandish stances on things.

But, to channel John the Divine a little bit, I think the demise of GM and Ford will be one of the signs that the hellish nightmare is starting to end. When CNBC is off the air and that same place on the dial hosts a channel all about how to convert dryer lint into overalls, and the best way to get your rutabagas to pollenate, that will be one of the signs that the unwinding has reached at least the halfway point.

Man, there’s going to be a lot of unemployment! This is going to greatly befuddle the ratsocrats, because the big corps won’t be the agents of increasing employment. They’ll be forced to liberally fertilize small business, or start their own WPA.

If they go with a WPA, I have a couple of pet projects: we need a new national power grid, and we need a nuke plant for every half million people. We could also have a go at building that 40 square miles of PVs in the Utah desert.

I have been pounding the table about inflation, the money supply, and the evilness of fiat currencies. I am starting to wonder, I confess, whether the fierce scale of asset destruction might actually be enough to soak up the invented cash. Some smart people think we’re going to have deflation. I horselaughed this, but i have tried and tried, and i just can’t find any meaningful way to analyze it. You can get pretty good data about money supply growth, but gauging the wiping out of assets i have found to be impossible.

I think the timescale of the great unwinding is measured in decades. Japan’s torture commenced in the 80s, and they’re still suffering.