tag:blogger.com,1999:blog-8305505968390768234.post269598795383988057..comments2023-08-10T11:39:24.714-04:00Comments on fdralloveragain: Taxpayer Risk is Uncontainedfdralloveragainhttp://www.blogger.com/profile/03488923148019117760noreply@blogger.comBlogger40125tag:blogger.com,1999:blog-8305505968390768234.post-7092589798003249522009-04-02T17:43:00.000-04:002009-04-02T17:43:00.000-04:00Thanks your encouragements are mutual.Thanks your encouragements are mutual.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8305505968390768234.post-63631005632487843372009-04-02T07:54:00.000-04:002009-04-02T07:54:00.000-04:00Part of the problem is that safety and risk can be...Part of the problem is that safety and risk can be measured in so very many different ways. And some of those ways may be more relevant to a given person than others, for a number of reasons. It's hard to entirely eliminate the subjective nature of risk assessment as a result, because in the end, the measure of risk that's relevant depends on one's goals.<BR/><BR/>There are some activities for which perceived risk and real risk tend to converge nicely, and others where they seem not to. Airline travel in the U.S. seems to fall more into the latter category than the former.<BR/><BR/>In the case of treasuries, I don't really think we have enough information to really say just how risky they really are. In normal times, of course, the risk would have to be very, very low. But these are hardly normal times, and history tends to rhyme more than it repeats.<BR/><BR/>I think we're in for seriously hard economic times, whether we get inflation or deflation.<BR/><BR/><BR/>Oh, and ginandtonic, thanks very much for your very kind words of encouragement!kcbhttps://www.blogger.com/profile/16129427343119498596noreply@blogger.comtag:blogger.com,1999:blog-8305505968390768234.post-965443081655071152009-04-02T07:26:00.000-04:002009-04-02T07:26:00.000-04:00There is a difference between perceived safety and...There is a difference between perceived safety and actual safety. <BR/><BR/>Actual safety is number of safely travelled passengers per trip. Perceived safety is based on accident rates. <BR/><BR/>If you compare actual safety, aircraft travel is far safer than driving.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8305505968390768234.post-31269595116897831732009-04-01T01:27:00.000-04:002009-04-01T01:27:00.000-04:00Arrgh. I really wish there were a way to edit one...Arrgh. I really wish there were a way to edit one's posts, instead of being forced to delete them and reenter them. Ah, well.<BR/><BR/>FDR wrote: "In 2006 there were 535 deaths from 47.1M flying hours of total air travel in the U.S."<BR/><BR/>There's a *reason* I said "flying the airlines" instead of just "flying", but I suppose I should have made myself more clear about that.<BR/><BR/>Flying the airlines in the U.S. is much safer than driving, especially on a per-passenger-mile basis. But flying in total (whether restricted to the U.S. or not) is not: private aircraft have a much higher accident rate than the airlines do, both in terms of aircraft and in terms of passengers.<BR/><BR/>The safety record of U.S. airlines has been rather impressive. For instance, in 2007 there were no deaths due to U.S. airline accidents at all.<BR/><BR/>It wasn't always that way, of course, but I'm talking about now, not 50 years ago.<BR/><BR/>So I think my point stands, but I'm open to being corrected on that.kcbhttps://www.blogger.com/profile/16129427343119498596noreply@blogger.comtag:blogger.com,1999:blog-8305505968390768234.post-4394623996463720522009-04-01T01:23:00.000-04:002009-04-01T01:23:00.000-04:00This comment has been removed by the author.kcbhttps://www.blogger.com/profile/16129427343119498596noreply@blogger.comtag:blogger.com,1999:blog-8305505968390768234.post-61445875446186635902009-03-31T13:05:00.000-04:002009-03-31T13:05:00.000-04:00hey kcb, just wanted to say i enjoy your comments....hey kcb, just wanted to say i enjoy your comments. i have been a follower of FDR since the beginning, but different points of view and healthy debates are what really offer the most education. <BR/><BR/>after your post in response to comments directed towards you from a few people on this blog, i thought you were not going to come back to this blog. glad to see that is not the case.ginandtonicnoreply@blogger.comtag:blogger.com,1999:blog-8305505968390768234.post-85572475548149539702009-03-31T13:03:00.000-04:002009-03-31T13:03:00.000-04:00"Travel by aircraft is an excellent example which ..."Travel by aircraft is an excellent example which illustrates the difference: many are much more comfortable driving than they are flying the airlines, yet driving is much riskier."<BR/><BR/>That's silly airline propaganda.<BR/><BR/>In 2006 there were 535 deaths from 47.1M flying hours of total air travel in the U.S.<BR/><BR/>There were 32,018 auto driver/passenger deaths.<BR/><BR/>To match the two ratios, you only need 2.8B driving hours in total. That equates to each citizen driving only 8 hours per year. <BR/><BR/>If we drive more than 8 hours per year, average, then driving is safer.fdralloveragainhttps://www.blogger.com/profile/03488923148019117760noreply@blogger.comtag:blogger.com,1999:blog-8305505968390768234.post-76526572131797062362009-03-31T10:38:00.000-04:002009-03-31T10:38:00.000-04:00Perceived risk and actual risk aren't necessarily ...Perceived risk and actual risk aren't necessarily the same thing at all. Travel by aircraft is an excellent example which illustrates the difference: many are much more comfortable driving than they are flying the airlines, yet driving is much riskier.<BR/><BR/>Yield is a function of perceived risk, not actual risk.<BR/><BR/>I actually think treasuries are ever so slightly less risky than insured deposits, but I also think the difference is very, very small -- much less than the difference in yields would imply. The difference in risk primarily has to do with the possible inconvenience of getting at your money if the FDIC takes over your banking institution.kcbhttps://www.blogger.com/profile/16129427343119498596noreply@blogger.comtag:blogger.com,1999:blog-8305505968390768234.post-10188677264869595652009-03-30T23:28:00.000-04:002009-03-30T23:28:00.000-04:00by kcb's hypothesis, safest currency to be is the ...by kcb's hypothesis, safest currency to be is the one with highest amount of insured deposit per depositor.<BR/><BR/>by kcb's hypothesis, this currency should also produce the lowest yield because it is the least risky. <BR/><BR/>unfortunately, he can't be right both times.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8305505968390768234.post-71540380746064979572009-03-30T18:35:00.000-04:002009-03-30T18:35:00.000-04:00Indeed, inflation is not the dominant trend at thi...Indeed, inflation is not the dominant trend at this time. <BR/>Deflation will prevail until the banks restart lending to reflate the economy. They however have no incentive to do this at this time as they are currently benefiting from a blank check from the FED. Indeed, they may prefer to let deflation prevail in order to increase the amount you owe them already in real terms.<BR/><BR/>So what to do? Personally I find it ill-advised to invest in either treasury bills or USD. I think the Swiss Frank is looking ok simply due to the fact that the market has not understood the extent of UBS bad credit exposure on the SNB balance sheet and they are currently benefiting from significant save haven inflows allowing them to print CHF to pay off the rubbish.JBhttps://www.blogger.com/profile/00735329577156599970noreply@blogger.comtag:blogger.com,1999:blog-8305505968390768234.post-83953296038863613272009-03-28T05:54:00.000-04:002009-03-28T05:54:00.000-04:00FDR wrote: "Even worse than that, kcb, the US gove...FDR wrote: "Even worse than that, kcb, the US government CAN'T fund the FDIC under our current (unconstitutional) system."<BR/><BR/>As I said, if the government can't fund the FDIC, then it can't pay back the treasuries that were purchased, either.<BR/><BR/>And that means that buy purchasing treasuries, you're burning your money in a fire as surely as if you put it in a bank that you knew was going to fail.<BR/><BR/>In other words, with the FDIC system in place, keeping your money in a fractional reserve bank is *no worse* than keeping it in treasuries, provided you maintain a balance less than the FDIC limit.<BR/><BR/>In fact, I expect that treasuries are even worse, since the yield is less than the interest rate on a typical savings account, no?kcbhttps://www.blogger.com/profile/16129427343119498596noreply@blogger.comtag:blogger.com,1999:blog-8305505968390768234.post-21538658817900362562009-03-28T05:22:00.000-04:002009-03-28T05:22:00.000-04:00This comment has been removed by the author.kcbhttps://www.blogger.com/profile/16129427343119498596noreply@blogger.comtag:blogger.com,1999:blog-8305505968390768234.post-32424201844209949622009-03-28T05:20:00.000-04:002009-03-28T05:20:00.000-04:00I wish there were a way to edit one's comments her...I wish there were a way to edit one's comments here. Maybe I should create an account here on blogspot. Would that enable me to edit my comments?<BR/><BR/>Anyway, it seems that my assertion that the Fed has a reserve rate of zero is incorrect. Apparently the Fed banks are required to maintain a reserve at the same ratio as standard fractional reserve institutions do.<BR/><BR/>So the Fed is indeed limited in terms of how much in the way of T bills it can buy.<BR/><BR/>Of course, the reserve requirement is a matter of law (or so I expect, for if it's not then it's arbitrary and can be changed on a whim), and that's something the government can change if it wants to be able to borrow more money from the Fed.kcbhttp://community.marketwatch.com/kcbnoreply@blogger.comtag:blogger.com,1999:blog-8305505968390768234.post-64342232050897955022009-03-28T04:13:00.000-04:002009-03-28T04:13:00.000-04:00FDR wrote: "The Fed has to finance any payout, at ...FDR wrote: "The Fed has to finance any payout, at interest. That sucks double the currency out that it puts in."<BR/><BR/>I think I may have misunderstood your meaning here in my last reply.<BR/><BR/>I think your statement here implies a gross misunderstanding of what the Fed does in our fiat currency system.<BR/><BR/>(Of course, it's possible that my understanding is incorrect, so I guess we'll see who has the right interpretation)<BR/><BR/>The Fed *is* the money printing machine. When it loans money, that money is created from thin air. Unlike a fractional reserve bank, which requires that a fraction of the total amount it has loaned be on hand in the form of cash deposits, the Fed operates under no such restriction.<BR/><BR/>Normally the Fed creates this money in order to supply fractional reserve institutions, but that's not the only way it can create money. It can create money by lending it to the government, as it's doing when it buys T bills.<BR/><BR/>The Fed's fractional reserve rate is ZERO! There is no way for it to act as the "lender of last resort" otherwise.<BR/><BR/>This is the very nature of a fiat currency. It can grow without bounds, at any rate those who control it want it to grow.<BR/><BR/>So when you say that the Fed must "finance" the loans it makes to the government, that's obviously false on its face. The Fed is a lending institution, *not* a borrowing institution (it can choose to borrow by selling securities, but it is under no obligation to do so)! It has no reserve requirements, so it can lend as much money as it wants.kcbhttp://community.marketwatch.com/kcbnoreply@blogger.comtag:blogger.com,1999:blog-8305505968390768234.post-10656971801107817352009-03-28T03:40:00.000-04:002009-03-28T03:40:00.000-04:00FDR wrote: "Even worse than that, kcb, the US gov...FDR wrote: "Even worse than that, kcb, the US government CAN'T fund the FDIC under our current (unconstitutional) system."<BR/><BR/>The system has been unconstitutional since day one. Nobody in a position to do anything about it cares (or, alternatively, understands), and nobody who cares and understands is in a position to do anything about it. It's been that way for nearly a century.<BR/><BR/>So unconstitutional or not, the system is what it is and is place whether we like it or not. And yes, the U.S. government *can* fund the FDIC -- all it has to do is continue to borrow money from the Fed.<BR/><BR/><BR/>"The Fed has to finance any payout, at interest. That sucks double the currency out that it puts in."<BR/><BR/>Yes, it does, but it does so at a controlled time (the time at which the government pays it back) and at a controlled rate (both of which are determined by the lender), and furthermore you *know* that the only way the government will pay it back is through further borrowing, either directly or indirectly by taxpayers (where do you think the taxpayers get *their* money from?), or by the government itself.<BR/><BR/>This is a debt-based monetary system. It's inflationary by its very nature. Unlike the currency system during the Great Depression, which was tied to gold, this one isn't tied to anything at all. It can inflate forever and at any kind of rate.<BR/><BR/>Deflation under such a system *requires* that loans be paid back faster than they are made. When everybody is in financial trouble (including the government), that *can't* happen.<BR/><BR/>Why? Because the natural result of a debt-based fiat currency system is that everybody eventually owes someone else more than they can pay back. The nature of the system is that there's never enough money in circulation (cash plus current deposits) to pay back what is owed.<BR/><BR/>As I explained before, defaults on loans DO NOT result in deflation in this kind of monetary system, because a default on a loan DOES NOT touch any of the current deposits on hand at any of the banks. And since the size of the money supply is the total of the cash in circulation plus the current deposits, that means the size of the money supply DOES NOT shrink when a loan is defaulted upon.<BR/><BR/><BR/>So the Fed lending the government money will never be deflationary until the economy is strong and the U.S. becomes a producer nation again, because the government will never be able to pay it back otherwise. The government can't tax what isn't made, and a weak economy produces little.<BR/><BR/>So unless the U.S. economy grows strong again, the Fed will always be left with the choice of either lending the government yet more money, forgiving the obligation altogether, or letting the U.S. default.<BR/><BR/>I've explained several times already why the last option isn't going to happen. And we know that the Fed will never forgive the obligation. So that means that we *know* that the Fed will continue to lend for as long as it takes for the U.S. economy to become strong again. Because it's the only way for them to get their money back.<BR/><BR/><BR/>And so, the only deflation we're going to see will be the result of lower demand for goods and services, something which is much less abrupt and deep than currency deflation.<BR/><BR/><BR/>If you can poke any holes in the above, please do so. But I, for one, don't see any.kcbhttp://community.marketwatch.com/kcbnoreply@blogger.comtag:blogger.com,1999:blog-8305505968390768234.post-69192112875468641572009-03-28T01:24:00.000-04:002009-03-28T01:24:00.000-04:00Even worse than that, kcb, the US government CAN'T...Even worse than that, kcb, the US government CAN'T fund the FDIC under our current (unconstitutional) system. <BR/><BR/>The Fed has to finance any payout, at interest. That sucks double the currency out that it puts in.fdralloveragainhttps://www.blogger.com/profile/03488923148019117760noreply@blogger.comtag:blogger.com,1999:blog-8305505968390768234.post-55251796412719803482009-03-27T22:48:00.000-04:002009-03-27T22:48:00.000-04:00T bill yields tells me that people believe the ban...T bill yields tells me that people believe the banks won't make it. I do expect that many banks will fail (perhaps even most of them).<BR/><BR/>The question is whether or not the FDIC will be able to do its job. The T bill yields tell me that many people believe it won't be able to do its job.<BR/><BR/>What's lost on them is that if the FDIC can't do its job, THEY WON'T BE ABLE TO GET THEIR MONEY BACK FROM THE TREASURY, EITHER. And the only way that statement can't be true is if the government intentionally withholds funds from the FDIC. Do you really think that's likely?<BR/><BR/>I don't.kcbhttp://community.marketwatch.com/kcbnoreply@blogger.comtag:blogger.com,1999:blog-8305505968390768234.post-61218955872504581162009-03-27T17:38:00.000-04:002009-03-27T17:38:00.000-04:00kcb, what does T bill yields tell ya?kcb, what does T bill yields tell ya?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8305505968390768234.post-13348584899140422009-03-27T13:55:00.000-04:002009-03-27T13:55:00.000-04:00"My point was, simply, that during the Great Depre..."My point was, simply, that during the Great Depression, one of the primary deflationary mechanisms was the run on the banks, and this is much less likely to occur now than it was then.<BR/><BR/>Yes, you are right that the printed money just sloshes from bank to bank. <BR/><BR/>As far as bank runs, I think they are much more likely today and we are seeing that now. <BR/><BR/>The difference between now and then is people like me transferring account balances into the US Treasury from home, crushing T bill yields.fdralloveragainhttps://www.blogger.com/profile/03488923148019117760noreply@blogger.comtag:blogger.com,1999:blog-8305505968390768234.post-26015093235370383632009-03-27T13:40:00.000-04:002009-03-27T13:40:00.000-04:00FDR wrote: "That is a part of it. The primary meth...FDR wrote: "That is a part of it. The primary method of currency creation is (more like, was) commercial banks printing up to 40:1 above actual reserves so they can collect interest on principal they do not have."<BR/><BR/>Well, actually, what I mentioned was all of it, but deposits and cash usually come from loans issued by banks (money loaned to someone usually winds up in someone else's bank account as a deposit), so what I mentioned doesn't contradict what you're talking about in the least.<BR/><BR/>My point was, simply, that during the Great Depression, one of the primary deflationary mechanisms was the run on the banks, and this is much less likely to occur now than it was then.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8305505968390768234.post-25201027749905142652009-03-27T11:25:00.000-04:002009-03-27T11:25:00.000-04:00"The amount of money in circulation, which is the ..."The amount of money in circulation, which is the total amount of deposits plus any cash people are holding"<BR/><BR/>That is a part of it. The primary method of currency creation is (more like, was) commercial banks printing up to 40:1 above actual reserves so they can collect interest on principal they do not have.<BR/><BR/>It is true that these banks don't own the principal they create (print), since printing cash (counterfeiting) and sticking it in your own pocket remains, for the time being, illegal.<BR/><BR/>But the principal they loan (launder) still enters the currency base as spendable cash. And with legal 40:1 leverage, who needs to pocket phony principal?<BR/><BR/>In other words, if I can print and lend (counterfeit and launder) 20x reserves at 5% interest, I have doubled my money no matter how you parse the words.fdralloveragainhttps://www.blogger.com/profile/03488923148019117760noreply@blogger.comtag:blogger.com,1999:blog-8305505968390768234.post-50044071715141287622009-03-27T09:22:00.000-04:002009-03-27T09:22:00.000-04:00I understand that kcb, (given I alerted many in MW...I understand that kcb, (given I alerted many in MW to the fact that fractional reserve banking was an issue). What I've had difficulty in understanding is whether the government stimulus will lead the system to implode. There are many factors to consider here - endless debt and endless losses, whether the model can sustain 'perpetual growth' (unlikely since consumer demand globally is pretty tapped out), the dollar as reserve currency, economic alliances and political aims.... Hence, isn't the outcome more predictable when we know the strength of our foreign relations?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8305505968390768234.post-8897119389146924732009-03-27T07:50:00.000-04:002009-03-27T07:50:00.000-04:00Great post hun...Inflation is the way by which cen...Great post hun...<BR/><BR/>Inflation is the way by which central bankers pay virtually nothing for our time and labor.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8305505968390768234.post-86006355527699168052009-03-27T07:19:00.000-04:002009-03-27T07:19:00.000-04:00Oh, dear. Where to begin...First, remember that c...Oh, dear. Where to begin...<BR/><BR/>First, remember that currency has no value except as a medium of exchange. Exchange of what? Wealth? No. Labor.<BR/><BR/>If you take any financial transaction and trace it back through all the other financial transactions involved, you'll find it ends with someone being paid for their time. This is true of every good, service, or raw material.<BR/><BR/>The service is obvious on its face: you're paying for the person's time. Obviously you're also paying for some of his equipment, overhead, etc.<BR/><BR/>What of a piece of equipment? For that, you're paying for the raw materials, the labor required to manufacture the parts, assemble it, test it, market it, and sell it. And, of course, some of what you're paying for is the equipment necessary to manufacture it, etc. Apply this recursively to the equipment.<BR/><BR/>What of raw materials? For that, you're paying for the labor to extract the raw materials and to convert them to a usable form. And, of course, for the equipment used (to which you apply the previous comment).<BR/><BR/>When all is said and done, all you're really paying for is someone's time.<BR/><BR/><BR/>Why is that important? Because it is highly relevant to the discussion of currency and the currency supply. The price someone is willing to pay for something is ultimately measured by that person not in the currency price of that something, it's measured in the AMOUNT OF TIME IT TOOK TO EARN THE MONEY TO PAY FOR IT. Someone who makes $1 million a year has a very different view of the cost of food than does someone who makes $1 thousand a year. To the latter person, the cost of food is very high. Not because it costs any more in dollar terms, but because it costs so much more in terms of how much work he has to do to earn the necessary money.<BR/><BR/>When the currency supply increases uniformly, as it tends to do (more or less) in a typical fractional reserve induced inflationary environment, everyone has more money available later than they had before. The price of everything readjusts upwards to compensate. Has the actual *value* gone up? No. The amount of labor required to buy things hasn't changed in the least, nor has the amount of labor required to produce it. Increase the currency supply and everyone gets slightly "richer" (in terms of currency), and goods and services appear "cheaper", so the price goes up, either due to increased demand or due to the knowledge that the market will bear the increase. The price trend is thus upwards, and it tends track the inflation rate.<BR/><BR/>The same is true of currency deflation, provided it happens relatively uniformly -- prices drop because if they didn't, everyone would have to work more to buy the same things, and that reduces demand. The prices drop to accommodate the lower demand, and the end result is that the prices again track inflation -- which is now negative.<BR/><BR/><BR/>The kind of deflation FDR talks about in the message above this one is not currency deflation. It's price deflation as a result of changes in supply and demand. That kind of deflation tends to be relatively tightly constrained. As long as the currency supply remains constant, a drop in prices results in greater demand, which stabilizes the prices.<BR/><BR/>The huge deflation that occurred during the Great Depression was currency deflation. It occurred because there was a big run on the banks. The amount of money in circulation, which is the total amount of deposits plus any cash people are holding, decreased towards the amount of cash in the wild as banks went under and took the bulk of the deposits with them (because in a fractional reserve system, most deposits are not backed by cash or anything else -- they are money from loans, remember?). As FDR has, I believe, pointed out elsewhere, dollars became very valuable during that time.<BR/><BR/>That's not the situation today. If a run on the banks occurs, banks which are the targets of these runs will fail and be taken over by the FDIC. While the FDIC is ostensibly funded by insurance payments by the banks, under such a situation it *will* have access to cash directly from the treasury if necessary. And in that case, the only thing that would allow the FDIC to fail would be the Fed failing to buy enough treasuries. And when the Fed buys treasuries, guess what it's doing? You got it: it's loaning the government money, fractional reserve style. But the Fed doesn't have to adhere to fractional reserve rules -- it can print as much money as it wants. So while currency deflation in the style of the Great Depression can't be ruled out entirely, it's *much* less likely than it was during the Great Depression. Inflation is much, much more likely.<BR/><BR/><BR/>FDR talks about net worth. I don't quite understand why. Net worth is generally *meaningless*. It is the sum of the price someone could get at the time for everything they own. That means that in the general case, most of what comprises someone's net worth is *illiquid*. It's either difficult, time consuming, or inconvenient to sell, or it is something the person in question has no desire to sell because it has some kind of non-monetary value (a home is such a thing). The only thing a person's net worth is generally useful for is as something to borrow against.<BR/><BR/>So if everyone's net worth is dropping as a result of a decrease in price of the most expensive item most people have, their home, it is *not* massively deflationary in the way the Great Depression was. It's deflationary, yes, but only because it serves to reduce the demand for goods and services. The amount of money in circulation does *not* decrease as a result of this, and as a result the amount of deflation that will happen is almost certainly much more limited than what we've experienced in previous deflationary cycles.<BR/><BR/>There is a difference between "deflationary" and "less inflationary". A drop in the net worth of individuals reduces inflation, because it leaves them less to borrow against, and the end result is that money cannot be loaned as quickly. It may cause some temporary deflation as prices adjust downwards somewhat due to the anticipation of smaller amounts of borrowing (and thus less spending), but that will last only as far as the primary assets fall in value.<BR/><BR/>How much will they fall in value? In this case, enough to cause the prices to be considered affordable again. Remember, the real estate price hike was a *bubble*. The prices went out of control, well beyond the range of reasonable affordability. They must revert to the mean, and are doing so now. They will drop below the mean for a bit (most reversions to the mean result in this), and then come back up again. But they will stabilize, and they'll stabilize at roughly the same value levels as they had historically been: between 2 and 3 times the median household income (which is under downwards pressure, but not at the same rate as real estate, so the two curves will converge). When that happens, fractional reserve institutions will become willing to lend against real estate again, and the economy will stop freefalling.<BR/><BR/>However, that's not the only deflationary pressure. There's another one that's at least as important, and may be enough to get us deflation on a scale rivaling that of the Great Depression.<BR/><BR/>And that is: the U.S. has been in a trade deficit for at least the last 30 years. A trade deficit means you consume more than you produce. A trade surplus means the opposite. In the case of the U.S., we've been consuming more than we've been producing. That's an unsustainable condition.<BR/><BR/>There are two ways we can do that: by spending our savings, or by borrowing from outside sources (and not from within as we had been). We've already done the former, and we've been doing the latter for the last 10 years. The sale of various financial instruments is what has financed the past 10 years, and that is now at an end.<BR/><BR/>So we cannot borrow any more, and we don't have any savings left to spend. There's nowhere left to go but towards being a producer nation. At the very least, we must begin producing for ourselves, because we haven't the means left to continue operating under a trade deficit.<BR/><BR/>For us to become a producer nation, we must produce goods and services at prices competitive with the rest of the world. Right now we can't do that because the price of living in the U.S. is far too high. It has to drop. That will happen as a result of massive unemployment and the resulting competition for jobs. People will become poorer. Their standard of living will drop. And when the standard of living drops, so does the price. Eventually it may drop enough that labor here in the U.S. will start to be price competitive with the rest of the world.<BR/><BR/>I hate to see what that will look like, but I see no other possible outcome, aside from the U.S. economy becoming essentially a closed economy not due to protectionist measures, but because it may be the only way for people in the U.S. to be producers and consumers in equal measure.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8305505968390768234.post-65029884109355660792009-03-27T03:58:00.000-04:002009-03-27T03:58:00.000-04:00I want to add to the above: I understand devaluing...I want to add to the above: I understand devaluing the currency by printing will cause inflation, but isn't the broader picture deflation because the losses are so gargantuan?Anonymousnoreply@blogger.com