Tuesday, April 29, 2008

The Three Little Pigs Global Economy


Decrease of demand in the rich countries will be followed in the near future by scaling back production. We know from practice that just as the economic growth sustains itself, the decline exacerbates itself. Deterioration in demand triggers job cuts, which in its turn leads to further deterioration in demand – the jobless usually don’t have much money to spend. The crisis comes in waves, one after another. And every time that people hope they are over the hardest moments they find that the worst is yet to come.

The less the Americans and the Western Europeans buy, the less the Chinese and the Indians produce. But when the real economy is in depression, the information economies won’t be able to develop, for they are based on processing information about the real economy.
For over dozen years the Western societies have been living to the illusion that it is possible to live from purely financial manipulations and computer programming. Alas, they have to accept that high cost-effectiveness of these marketrs was provided by low payments and technological inferiority in the production sector. And that couldn’t last forever. The production sector no longer can afford high pace of development, this will ultimately result in landslide of prices on raw materials. This is when the energy superpower will have to admit its ultimate weakness: under production crisis, nobody needs the energy.

Back and forth I go on the inflation vs. deflation debate. It never ends. I can say I am very sympathetic to his arguments both as a former computer programmer and as a firm believer in illusion theories.


MAB said...


From a NBER paper by Martin Feldstein:

The large trade and current account deficits of the United States cannot continue indefinitely because doing so would constitute a permanent gift to the U.S. economy. The process that will cause this gift to shrink and that will eventually cause it to reverse is a fall in the dollar. The dollar will fall as private investors and governments become unwilling to accept the risk of increasing amounts of dollars in their portfolios, especially in a context in which they realize that the dollar must fall to reduce the trade imbalance. Although a more competitive dollar is the mechanism that will cause the U.S. trade deficit to decline, the fundamental requirement for a lower trade deficit is an increase in the U.S. national saving rate. So a rise will be driven by higher household savings of the coming years as the two primary forces that depressed savings in recent years are reversed: the exceptionally rapid rise in household wealth and the high level of mortgage refinancing with equity withdrawal.

It's not an illusion, it is a gift. Apparently foreigners believe that it is better to give than receive.

We're an interest only loan or a PIK bond.

Stagflationary Mark said...


I don't understand why more people don't see that.

Further, there is constant talk of the global rebalancing.

If middle class China and middle class America meet in the middle (in order to be balanced), then it seems very likely that our standard of living must fall (unless a billion people will be driving cars cheaply, which seems VERY unlikely).

That implies that our wages cannot keep up with inflation since that's the only way our standard of living can fall. Since the government will do all it can to avoid our wages actually falling in nominal terms, the price of goods must therefore go up long-term.

April 11, 2008
US March import prices rise 2.8 pct vs 1.8 prc rise expected

Import prices rose 2.8 percent in March, which is the largest monthly increase since last November. Economists were predicting a 1.8 percent rise in import prices for March.

While petroleum prices surged again, import prices spiked in large part because of non-petroleum imports, which rose a record 1.1 percent.

Much of this was due to food and feed prices, which rose by 2.5 percent in March and are up 14.0 percent over the last 12 months. That's the largest annual increase since the year ending March 1995.

I continue to think U.S. stagflation long-term is a reasonably safe bet (and why almost my entire portfolio is in TIPS and I-Bonds).

Diversification is a protection against ignorance. It makes very little sense for those who know what they're doing. - Warren Buffett

I sure hope I know what I'm doing. If nothing else, Warren Buffett gave the nod to TIPS a few years ago.

If I end up being ignorant in the end, just imagine how bad everyone else will be doing. The only thing that can ruin me is hyperinflation.