Air Bernanke
Tracer Graves writes:
You obviously feel we are heading for economic disaster. What kind of window of time to you think things have before everything just collapses? Contrarily, what kind of economic indicators would it take for you to reconsider your fears? at what point in time?
I don’t know that things will “collapse”. I think telling you where my savings is might be instructive in terms of my outlook.
Most of my small retirement investment is still in S+P index funds. I have some positions in foreign gold and metals mining companies that I hope will hedge against the worst. They have turned out to be very profitable investments thus far. I still view a total collapse as unlikely, but possible.
I believe that the massive cash injections were a mistake. I believe that we will pay for them through inflation and malinvestment. The worst case scenario is a runaway feedback loop of prince and wage inflation combined with massive government spending and currency rebasing that is a hallmark of foreign hyperinflation scenarios.
Looking at US historical scenarios when government creation of money has been high, which has generally been the post-war periods:
Jan 1917 through Jan 1920 — 64.96% inflation
(Sorry I don’t have monetary base data before 1918 handy)
Jan 1946 through Jan 1949 — 31.87% inflation
Jan 1979 through Jan 1983 — 43.19% inflation
And then we have today:
The US government has never slammed the money supply like this before. No one really knows what the result will be. It might be a few years of high inflation where our money loses 20% to 50% of its value… or it might be worse. Bernanke is confident that he can “pull back in time” to prevent serious inflation, but the bottom line is that he doesn’t know. It’s all an experiment. We are literally betting the future of the economy on one man’s egotistical drive to test the theory that the great depression could have been prevented. This was always Bernanke’s theory, and he views himself as gifted with an opportunity to establish his historical legacy by proving that he was right.
Regarding the sleezebag Krugman
I see that he is already hedging his bets. He is writing himself an easy out when the economy goes belly up despite the massive spending: “The government didn’t do enough because of republican scare tactics.” Give me a break. If anything, this is a big vote of no confidence in the future of the economy.
I think your question should be: At what point does Keynesianism become discredited? If you can always fall back on arguing that you just didn’t print quite enough money to “stimulate” the economy, then you have an unfalsifiable theory. Every failure is a failure of resolve, not a failure of theory. That’s bullshit and I think even Krugman knows it.
But to be honest, I think there is fear. I think people are willing to follow his ilk only to a certain extent. The failure of resolve is justified by the failure of his theories to produce results. Ultimately any theory is only as useful as it is at predicting results.
So to get back to your question: When a while has gone by, and there isn’t big inflation. If there isn’t a massive bubble getting ready to pop again. If the world doesn’t abandon the USD in favor of IMF SDRs or something else. If Bernanke tries to pull back and is able to. As for how long a while is… I can’t tell you. It’s less than 5 years though. I think I told someone a year or two in another thread. By then it should be obvious what sort of direction we are heading in.
We are in a airplane with the engines off, doing a zoom dive to get speed… if we pull out of it and the engines start back up with no ill effects, then the Keynesians can celebrate and I will have to reevaluate. If we have inflation ranging from severe (>5%/year) to hyper (>20%/year)… then I’ll have been right in all the worst ways.
But right now the plane has only started to accelerate out of our stall. It’s too soon to know if Bernanke should have learned that the proper stall recovery procedure is to ease off, not slam the stick forward.