Bitcoin Forum

Its very troubling to me to read many of the posts and irc discussions calling for doomsday economic collapse, often based on confused understandings of terms and economic frameworks.  I'd like to open up this thread as an opportunity to increase economic knowledge and hopefully identify ways to use that knowledge to better each person's economic position.

Please post your questions (or perhaps a doomsday scenario).  Then we can all work together to better understand the issues and concerns.

As a business major, I'm very interested in understanding the opinions of those outside academia.  I don't believe that academics has all the answers, but it does have sound models which identify how to use one's predictions to better one's financial position.

Since economics has quite a few differing opinions, each school of thought should present a viewpoint.  Then the reader can make their own decision avoiding arguments over the merits of each school of economics.

Economics has been called the dismal science for good reasons.  Are there any specific 'doomsday' posts that you are referring to here. of just the general bearish attitudes of the membership?

I'm a praxeologist in general, so I'm squarely in the Austrian Economic Theory camp.

I don't believe I have the understanding necessary to communicate others concerns.  I think one common theme that is discussion worthy:

  The current economic bailout will require hyper-inflation in the future.

Hyper-inflation does happen sometimes. What causes it?

An irresponsible central bank.

I think that scenario is unlikely for dollars, because the Federal Reserve central bankers already have a lot of dollar-denominated wealth, so have a strong incentive to avoid hyperinflation.

Compare that to the Zimbabwe central banker, who is basically under the thumb of a dictator who most likely holds his wealth in foreign currencies.  Their incentive is to squeeze as much wealth out of the economy before it collapses and they're deposed in the next coup.

Hyper-inflation is the final stage of a nation-state in decline.  It is usually regarded as a monetary event, but that part is only the 'seen' effects of the end-stage.  There is always a series of contributing events that vary somewhat, but always include certain common elements.

1) Oppressive levels of public debt, usually of a nature that the majority of common subjects don't agree that they are personally responsible for paying.  In the past, this has often been generational, as it is arguablely for modern states today.  The public will, eventually, begin to reject the idea of paying those debts; and the beginning of that is the intentional act of tax avoidance for it's own sake.(search agorism, 'Alongside Night')  Such a thing has been widespread in Greece & Spain for a generation, but may become a problem for the US much quicker for other socio-economic reasons.

2) A gradual, general loss of trust in the legitimacy of authority.  Wikileaks pretty much sums up this process in the modern world.  Americans pretty much expect to see political corruption in other countries, but when the revelation hits the mainstream that the US is not particularly special in this regard; things could start happening quickly.

3) A sudden public crisis.  This is the trigger event.  Could be economic, political or natural (think Katrina); but it has to be a 'black swan' event that the vast majority of the public never expects until it is too late to avoid it.

At this point, there must be some kind of political event, mostly as an emergency response to the crisis event, that is widely regarded as a "do something even if it's wrong" response that is actually wrong.  The powers that be then collectively decide that the thing is unsalvagable, and then order the presses in full gear for one last hurrah.  There is always a public excuse that has nothing at all to do with the private motivation, but that part doesn't really matter except for the history books.

Let hope it doesn't end in a genocidal event.

Did the Zim banker(s) print ZimBucks to buy real assets and move them out of the country?

I think it has more to do with obligations. If you can get away with simply meeting nominal obligations it might be okay, but if people will 'insist' that you give them roughly the amount of stuff the nominal promises implied or if the obligations were indexed to inflation in some way,it could get out of control.

Not necessarely hyper-inflation, but stagflation is granted. I have been betting in stagflation since the beginning of the crisis.

Which leads to another question. Redengin what will the kyenesian academia do when stagflation happens again and its too obvious to blame it on the oil producers again?

Lets make this a separate topic thread:

     What can be done about stagflation?

But for now, I'm more interested in why you believe increased inflation (as a component of stagflation) is inevitable.

The increase in money supply?

The odds are not good for avoiding that.

Than I guess it is one of the goal of the bitcoion community. Avoid economic collapse and pull back the economy from the brink of collapse.

The bankers are usually under someone else's thumbs.  The head of the central bank in Zimbabwe was beholden to that economicly illiterate dictator that is still in charge.  In that case, the trigger event was, itself, political.  The government was in the process of seizing agricultural land from wealthy white landowners, but many of those same white landowners were the economic powers-that-be, and viewed a continuing nation-state as futile.  So those that could leave with what they had, did so; leading to capital flight and a self-fufilling prophesy.  As land was seized and the wealthy fled, that land was less productive under new ownership, so more land was seized and the less wealthy fled, and so on, until Zimbabwe was no longer a net exporter of food.

This lead to the food crisis, which lead to a political choice by the dictator to run the presses to print money to buy foreign foodstuffs.  But the cause of the food crisis was never resolved, so the printing continued.

That would be an interesting movie. "The Planter Rebellion"

Stop inflation so prices stop rising? You speak of stagflation like if its something that comes out of the blue, and not something that happened because of a set of policies.

Its not "what can be done about stagflation". It is "what should the government stop doing to stop stagflation". But the high inflation that comes with stagflation devaluates government and financial institutions debt, so the government has all interest in letting stagflation run for a while.


I have had this discussion a lot of times and its getting kind of boring right now, but lets give it another shot.

Basically the Fed has pumped a lot of money into the financial system. This money has not been released into the market yet and it sits as excess reserves. Also, the Federal Reserve has bought government debt, which is one of the main reason the deflationary correction did not happen, therefore turning the crisis into a long depression. The Fed bought specially long term debt, to keep the yield curve in check, which is funny because the Fed spent years saying that it only influences the short term yields.

The reason that prices will start rising because of all this inflation is because the Fed has no chance to remove all that liquidity. If you want to discuss why we would have to analyze the Federal Reserve balance sheet, which I have no problem doing. But it should be noted that when Bernanke started all this mesures he said that he would have no problem removing this liquidity, but now he started using the money he gets from the MBS he bought into buying more government debt. He has no intention of removing the liquidty, but even if he wanted to, he has no chance.

The question is not why will inflation happen. The question is how can anyone be so blind as to not see big inflation is coming, and its going to push prices up a lot.

PS: English is not my mother language, and speaking technically is hard for me, so excuse any incorrection.

There is both understanding and error in your statements.  Deflation is here and now, and has been happening for at least a year.  What the Fed does has little bearing on that now, and arguablely never could have.

http://www.nfib.com/Portals/0/PDF/sbet/sbet201009.pdf

Check out the first and second charts on page 10.  Your thinking of total base currency, basicly M2, as your judge of whether there should be inflation or not.  However, the majority of transfers in the US isn't currency, but credit.  So a better measure of future inflation is the trend in M3 (M2 + credit), which has been in freefall for two years or more, the massive currency creation by the Fed notwithstanding.  Our near term outlook is all deflation, all the time, for as far into the future as I am willing to guess.

Note that I did not say that deflation did not happen. I said that the Fed aborted the "deflationary correction".

About what you are saying, there has been monetary deflation for sure, specially in the longer term debt (M3) towards cash or shorter term debt (M2). But if the Fed had not monetized government debt (pushing new money directly into the market) it would had been far more intense.

As for prices, consumer goods prices, the CPI which is usually what is referred as "prices" when talking in macroeconomics, have not gone down. If you look at shadowstats statistics is even worse, and they have been increasing around 5%. Sure, homes have gone down, stocks have gone down, etc... but the articles that people buy everyday, like food, have not gone down, and have keep going up, slower than usually, but still up.

I have checked the statistics in page 10 of that report, and yes its a big decline, but it seems to include all goods and only small business. Its interesting data, but it does not represent the whole thing.

And I am not denying there are deflationary presures. I believe the deflationary correction is going to start showing again (its already showing) until the Fed starts printing again on what its being called Quantitive Easing 2. Then prices will start rising again and heavily. Note that I am saying that prices will rise, not that the economy will recover, therefore stagflation.

People always complain about CPI's measures.  I think its important to understand what it does and does not include, but not very helpful to worry about if its value is a full picture.  Certainly the price of oil is having a dramatic effect on consumer goods and its hard to know if this will become a permanent increase in cost.

I've not heard that the Fed plans to induce the Treasury to print any more money for QE2.  There is certainly worry that the government's debt load is coming unbalanced and that may provoke some politicians to take drastic action and demand printing.  I still trust that having come this far, the Fed will persevere and maintain order.

Mmmmm, are you a CNBC comentator?  ;D  ;)

Can you be a bit more specific on the exact options and actions that the Fed could take to remove the money that sits as excess reserves in the banks? Also, do you believe that the treasury will be able to finance itself without the support from the Fed?

Btw, let me remind you again that Bernanke when starting QE1 said that it would remove the liquidity. Less than a month ago announced that it would use the money its getting from the maturing MBS into buying more treasuries, and has been doing so. So basically he is not removing the money.

Also, in the Jackson Hole meeting, Bernanke basically assured that QE2 will be a reality, or at least that is what everybody understood.

And s an Austrian, I reject the very concept that central planners have any such abilities.  The deflation is the correction.


Sure, it would have been more intense, but it would likely already be over.  Which is worse; 18 months of an unabated natural correction, with high unemployment, bank failures and forclosures; or the same exact end results over 10 years?

I'd rather take rip off the band-aid fast.


So markets vary, and different industries correct in different ways on different timelines.  That does not alter the overall results.


Neither does the CPI, or even GPD for that matter.  Human minds require looking a small slices of representative data at a time, which is why we depend upon statistics to begin with.


That may yet be, but it still looks like this is running more like 1932 than 1978 to me.

The thing is that the central planners use violence therefore they dont operate under the same market rules the rest of us do. Specifically, the central bank manages the monopoly on money imposed by the government using force. The Fed is not omnipotent, but it does have a very strong influence, greater than anything else probably.


I completely agree.


Yes, but it seems very clear to me that the new money injected by the Fed is not going to go to blow another bubble in the typical way, but rather concentrate in the most needed products: food, commodities, energy, etc... So its my opinion that the bubbled industries (mainly housing) is going to keep going down in price for a while, but the basic stuff like food or energy is going to go ballistic. The UK government is studying what would happen if the price of oil goes ballistic like it happen in the 70's:http://www.telegraph.co.uk/news/newstopics/politics/liberaldemocrats/8016774/Liberal-Democrat-Conference-Oil-price-could-double-in-return-to-1970s-style-shocks.html

Keep in mind that I am saying that prices will go up, but the economy will not recover. Unemployment will be still high.


We will have to wait and see.

I think there is still a chance, albeit getting smaller as time goes on, that the Fed will be able to sell treasuries to mop up the excess reserves.  It does appear that the banks still have quite a way to go with the new worries about credit unions.  Until confidence returns, the liquidity is necessary to keep the economy moving.  As certainty in the US's economic future returns, US investment should increase, and allow the Fed to act in kind to remove the excess reserves.

the fed will never be able to get out if this.

we will first see massive deflation and depression, much worse than in the 1920's

Sound like a prediction that can be set to the test.  ;) All it need is the date of happening and specific level of unemployment rates, amongst other things.

A reminder that I should continue and make progress everyday.

exactly! i will be one of the first with this prediction.

1) timing of stock market low
2) DJI in nominal points at the low
3) unemployment rate in June 2016

This is risky, but I'm willing to give #1 a shot, the other two are beyond unpredictable.


I say the stock market low for this cycle will either be in October 2010, or the low for October will be within 5% of the cycle low whenever that occurs. 

Considering the recent rally, this may seem absurd, but hear me out.

The second October following a new presidency is traditionally the market low month, as politics always affects the market, the 'honeymoon' period is over, and tensions are highest leading into the mid-term elections.  After the election, the near term future tends to look more clear regardless of the outcome, and uncertainty is always bad for stocks.  Add that to the overall state of the market, and if next month isn't the worst, it'll still be bad for those currently still in the market. 

Of course, it could also be a 'fire sale' for those who got out years ago and have the capital to jump back in.

I predict Obama wont run for president again and Hillary Clinton will take over. :D

Thats one scary woman.....

1) 2015 ~ 2016
2) < 3,000
3) > 20%

That's not as far-fetched as it seems.  It wouldn't be the first time that the incumbent president was defeated in his party's primary.

It won't happen that way, because if #3 happens, there will be a revolution.  The Hamptons will burn and there won't be a Dow Jones Index to report.

Who is John Galt?

That and Obama's wife doesnt like being first lady -he might not even get to the primaries  :D

You definitively either work at CNBC or watch too much CNBC.


Treasuries are only selling now because the Fed is buying some (POMO) and people are frontrunning the Federal Reserve who has guaranteed another big intervention in the future. But this is a short time trade, very profitable but short term. Once the Fed has done its second big intervention the game is over. If the Fed does not support the Treasury then the interests that it will have to pay for the debt will be mean default for the government. In this scenario do you really think the Fed will stop buying treasuries, and even start selling them? And even if it did so, how much is the Fed going to get from a junk government bond?


What good does JPM, GS or CityGroup do to the economy? They are horrible capital allocators as proven by the crisis. You dont want to get this economy artificially alive. You want the bad companies to go under, so new and efficient ones can prosper. You have to think that the USA was living a bubbled economy not a sustainable one. Returning to a bubbled economy is not the objective.

By saving the banks and trying to save all the zombie companies (f.e.: GM) the government has turned what could have been a one-two year recession into a long depression.

I agree with this. All the GDP forecasts are going down. The USA will show a weak GDP. Ireland just announced a -1.2% GDP. All european advanced indicators are showing a decline. This is actually good for the economy because it means that the inefficient industry from the bubble is disappearing, but in the short run its going to hurt. The stock market is disconnected from reality because of all the liquidity, but its not going to get away from this. Then at some point Bernanke will appear with QE2 and more monetization and then stagflation will start.