The hottest topic on financial news networks these days is the question “To which brand of economic collapse do you subscribe?” This is where academic economists and market pundits come on TV to point to similarities to the United States’ current environment to that of various other economic horror stories through-out history. And while this type of radical apocalyptic story-telling can make great television, it does not jive with a logical reality.
I will not waste the time of my tiny but “ultra-cool” readership by going into a diatribe about academics vs. markets, or try to give a history lesson. I do want to try and ease any fear invoked by these sensationalists on TV by saying DONT PANIC, because we are not headed for either deflationary Lost Decade status of zero growth and sky rocketing debt loads, nor are we heading for days where a loaf of bread will cost $3.2 Billion.
Starting in 1989 Japans rapid growth of the previous 20 years ground to a halt. Interest rates were dropped to zero, banks were nationalized, the stock market over the next ten years fell 82%. So what caused Japan to fall into this trap? Their growth was fueled by debt and when that growth ran out, the engine stalled. Once the economic fire goes out, its very hard to start up again. Without prospects for future growth, citizens hide cash in their mattresses knowing that everyday they wait to buy, they can buy more. At that point it becomes a self-fulfilling prophecy.
First of all the coup-de-grace that no one talks about is that Japan has zero population growth and with that an aging population that is getting less productive as time goes on. The US however is still making babies and babies cost a lot of money! This in turn creates a natural source for economic activity. More people equals more demand for food, energy, diapers, and hand sanitizer, and thus more people put to work to serve that demand.
Also, while we do have high levels of debt in the US, we still have room to raise it higher. In other words the treasury still has some dry tinder to throw in the furnace in order to stoke a self-sustaining blaze that will get the economic engine turning. The other problem comes when too much dry powder is thrown in and the blaze becomes uncontrollable. This brings us to the next doomsday scenario….
POST WWI GERMANY:
At the height of the crisis in 1923 the price of a kilo of butter at the general store rose over the course of a few months from $26,000 Marks to $6,000,000,000,000 Marks!! Yeah that’s trillion. That is more than all the German Marks that were in circulation just ten years prior!
Now believe me, I can understand the arguments that this country could experience higher inflation down the road. But to suggest we could see anything similar to the images of people taking wheel barrows of money through the streets to buy eggs is non-sense. The people who own the 1-800-buygoldnow companies may promote this kind of scenario but even on a more muted basis, hyper-inflation of that kind is not on this country’s horizon.
There are two quick reasons why we will not experience hyper-inflation. First, the dollar is still considered the reserve currency of the world. This means that there is an international demand to hold dollars. Inflation is described as too many dollars chasing too few goods, but when you have people chasing those dollars then the risk that there are too many out there is significantly lowered. Second, the biggest component of inflation is wage growth. With unemployment at 9.5%, there are over 8 million jobs that need to be created before we have to worry about labor demand rising meaningfully.
In conclusion lets consider a quote from uber-philosopher Bertrand Russell:
“The whole problem with the world is that fools and fanatics are so certain of themselves, while wiser people are so full of doubt” The next time you see a table pounding, doom-sayer on television, my advice is to be skeptical.