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Tuesday, March 16, 2010

Ready to Ignite

Imagine pouring a tanker truck worth of gasoline into a swimming pool. Now imagine throwing a lighted match into the pool. The difference between that analogy, and our current monetary situation, is that no one has thrown in the lighted match yet. Prof. Palmer of the UWO explains:

But with all the potential liquidity that is out there, the current situation is most likely an unstable equilibrium. As people regain even a smidgeon of confidence, and/or as people come to experience higher interest rates, and/or as people come to expect higher rates of inflation, we will not want to hold such humongous money balances.

And as we start converting our monetary assets into other assets, velocity will increase and so will aggregate demand. As Siklos and many others have warned, with all the liquidity already in the system, a rapidly increasing velocity will unleash gi-normous inflationary pressures in the next year or so.

Posted by Richard Anderson on March 16, 2010 | Permalink

Comments

I think we're not as bad off as the states. We didn't do quantitative easing for one thing.

Posted by: Cytotoxic | 2010-03-16 10:03:51 AM


I wonder where Shane is today? I'm curious as to what he thinks of the efforts of central banks around the world to be so "flexible" with the money supply. As far as I can tell, all this flexibility has earned us is the right to sit on a time bomb.

Posted by: Dennis | 2010-03-16 11:04:40 AM


I detect a lot of "probablys" in the good professor's article, and his language is highly qualified. Certainly the swimming pool full of gasoline, full of bleak and doomsaying certitude, is not his analogy. He doesn't sound too sure of himself, and let's remember this is one man's opinion. According to another celebrity economist, we'd be close to $200 a barrel for oil by now. (Trading today at $81.50.)

Banks consider more than just the "velocity of money" when deciding whether to hike rates. They know that unemployment is high, the economic recovery is still fragile, and that people simply could not afford significant rate hikes. People who might otherwise buy a house will opt to keep renting. Those thinking of opening a business will sit tight and wait. They'd be pricing themselves out of reach, and as their willingness to extend toxic debt and mortgages demonstrate, banks are acutely sensitive to a drop in the number of customers.

In fact, upon second reading, it becomes clear that this article is a thought exercise. Even if its observations and conclusions are accurate, it does provide two potential solutions and casts about for others. It is intended to stimulate discussion, not serve as a grim and dire warning. It also makes no recommendation concerning the gold standard or other "Austrian" practices.

By the way. If you "Austrian" types truly believed in what you were saying, you'd refuse all the benefits of the "inflationary" model of managing an economy. That means you don't use any portion of public resources, utilities, or infrastructure paid for with "inflation-generated" money, insist on paying full price for your own health care, and live more or less off the grid. It's not enough to manage your investments in the "Austrian" manner; you have to fully live the part, or you're being hypocrites.

Posted by: Shane Matthews | 2010-03-16 12:53:16 PM


Shane could you please expand on the last paragraph of your post. I'm not sure I understand the hypocrite claim.

Posted by: Liberty | 2010-03-16 1:02:25 PM


It's like this, Liberty:

1. Publius & Co. maintain that it is counterproductive, destructive, and morally and ethically wrong to use inflation as a means of managing the economy, arguing that it inevitably leads to massive economic ruin. Which, if it gets totally out of hand, it can; but we're a ways away from there still.

2. If the government increases the money supply too far out of sync with the amount of available goods and services that back the value of its currency, that currency becomes devalued, and its real purchasing power declines. More currency and bonds are therefore issued to compensate for the inevitable rise in prices (inflation).

3. Some of that borrowed money is spent on infrastructure that everyone, including self-styled "Austrians," uses. Whether the government manages its economy well or not in a given year, the people do derive measurable benefits from much of that spending.

So my point is that if they want to be up-front about their beliefs, they should not use those services, as they then become participants in the economic ruin they preach is inevitable. It's not a direct link, but it is food for thought--society and economics have become far more complex and interdependent (and globalized) than they were at the time the traits of Austrian economics were established.

Posted by: Shane Matthews | 2010-03-16 2:17:19 PM


So Shane is saying that Publius and Co. should not use stuff they are force and will be forced to pay for? That's a special kind of stupid. That's Shane stupid. And when Publius is a feudal lord and you one of his serfs because he bought up gold and stuff and you didn't, that will be karma.

Posted by: Cytotoxic | 2010-03-16 10:27:28 PM



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