I've been diving into literature, media, history, and all things political-economic to better understand and anticipate the uniqueness of our present economic crisis. Before I share with you some of those details, allow me a brief proviso: I'm not a doomsdayer or Chicken Little by any stretch; I'm a rather optimistic guy. As the adage goes, I expect the best and prepare for the worst.
Of the information I've digested from all sources, two pieces stand out. Crash Proof by Schiff and The Collapse of the Dollar And How to Profit From It by Turk and Rubino. What's clear is that a sober review of the not-so-distant past, circa 1929, reveals some interesting clues. Now, we Americans generally have a sense of history that goes all the way back to, perhaps, yesterday's lunch. Credit due in large part to the US public education system, few Americans can even place Hoover and FDR in the right century, much less recognize that they were at the helm during the greatest economic crisis in history (see also VP-elect Joe Biden's giving credit to FDR for his comments on TV in 1929).
The gist of these two books is this: the federal government's response to this crisis amounts to a sort of spend-your-way-out-of-debt inflationary policy that gives no credit to lessons learned in the aftermath of '29. The drunken sailor bailout strategy will feign economic security but ultimately aid and abet the coming free-fall of the US dollar. In the words of Yogi Berra, "This is like deja vu all over again."
Three things are clear. First, the obvious: the federal government (i.e. The Fed, Congress, US Treasury Dept, etc) are either galactically stupid or scandalously hiding vital information from the American public concerning the true status of the US economy. Second, the multiple bailouts are not loans from the US Treasury, rather they are giveaways of newly printed dollars. Last, with trillions of new treasury notes in circulation, it's only a matter of time before the dollar is so over-inflated that a crash is unavoidable.
Here's the one key difference between then and now. In 1929, the US dollar was tagged to gold in reserve with the treasury. Nowadays, the dollar is free-floating and backed only by the "full faith and credit of the United States." Inspires confidence doesn't it?
More to come...
Subscribe to:
Post Comments (Atom)
Posts
Nixon did a horrible disservice to the country when he got rid of the gold standard. I do agree with you there.
ReplyDeleteA reasonable reading of the recent bailouts suggests a simple rule: if a firm is on the verge of collapse and its ties to the financial system will lead to a cascade of chaos, the firm will be saved. A bankruptcy will be permitted only if the failure can be contained.
Assuming the level of chaos is sufficiently high, this dichotomy is probably consistent with the mandate of the Federal Reserve. The rescue of A.I.G., however, raises some major challenges.
One is where to draw the line. A.I.G. was an insurance company, not a bank or a broker dealer, so the Fed had no special relationship with A.I.G. Presumably, if a very large airline or automaker had been involved in the C.D.S. market, the same reasoning that led to the rescue would apply.
A second challenge comes with defining the acceptable level of chaos. We will never be able to find out what would have happened if A.I.G. had been allowed to fail. Furthermore, there are some reasons to believe that even if A.I.G. continues to operate, the fundamental stress in the financial system will remain. If the rescue does not mark a turning point, the bailout may be viewed quite differently down the road.
Should the government intervene if it merely postpones an inevitable adjustment? Creditor runs can make adjustment too fast; blanket bailouts can make adjustment too slow. Has the Fed found the speed that is just right?
Third, now that A.I.G. has been lent to, how will regulation have to be adjusted? Surely the Fed cannot be called upon to provide backstop financing whenever a large member of the financial system runs into trouble. How does it prevent a replay of this scenario, and can it be done without stifling innovation?