Re: US Using Inflation To Reduce Its Debt.

On Jun 8, 6:32 pm, PaPaPeng <PaPaP...@xxxxxxxxx> wrote:
Read the original ECONOMIST article if it interests you.  It didn't
add anything that I didn't already know.  It is always the Reader's
Letters that interest me.  You should read this one closely, the
second last letter.  Simon has put his thumb exactly on the problem.
His other point is that the world shouldn;t complain too much. The US
was the engine that pulled the world out of its economic slump after
WWII - is also true.  What to do?  Not much.  Just don't put your own
money into USD.[simon says wrote:

For 300 millions of Americans, where else could we put our money in
but USD?


June 06, 2008 09:28
The US is in the process of doing what every government does when it
can't repay it's debt - it lets inflation take care of it. Don't be
fooled by the Fed's professed aversion to inflation. LIke fire, you
don't want to see it get out of control, but it can have its uses if
properly handled.  ...more]

----------------------------

Currencies
Dollar dilemmas
Jun 5th 2008  http://www.economist.com/finance/displaystory.cfm?story_id=11506822
WASHINGTON, DC
From The Economist print edition
Does the new dollar policy make sense?

AP Speak loudly but carry a small stick
FOR several years two rules have governed America's dollar policy. The
first was that only the treasury secretary talked at length about the
greenback. The second was that he repeated a vacuous mantra about a
strong dollar being in America's interests, even as everyone knew
policymakers quietly welcomed its slide.
(.....more)

simonisp wrote:

June 08, 2008 16:35
To all Fiscal Deficit Fear Hawks:
It is easy, but wrong, to cite the US governments debt as evidencce of
impending doom. Although the debt is higher than ever in abosolute
dollars, the correct measure of a countries debt is the amount of debt
as a percentage of the GDP. Of course the debt is bigger in absolute
dollars because of inflation, but when the real yardstick (debt as a
percentage of GDP) we see that the debt is getting slightly smaller
and not nearly at apocalyptic levels.
An important part missed in the article is the falling dollar is the
global economy readjusting to the US's period of trade deficits. By
making imports expensive and exports cheaper, the dollar depreciation
is reallinging the the world economy closer to a long term equilibrim
where the US trade deficit is more sustainable.
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dwstager wrote:

June 07, 2008 11:12
I think the decline in the dollar is not so much a result of the
Federal Reserve's monetary policy, but is rather a result to
administrations pro-debt fiscal policy. The federal government's debt
equates to over $30k per person. (Seehttp://www.brillig.com/debt_clock/) This burden is draining the US
economy and brings into question the United State's ability to be the
fiscally conservative leaders of the world economy.
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Victor L wrote:

June 07, 2008 00:19
I wonder if the Gulf states that adopts the Dollar peg will suffer in
the end as they will end up importing inflation from the U.S. as the
Fed injects more liquidity into the system, and as inflation rises.

Being the world's biggest debtor nation, having a weak currency will
correct the current/capital account imbalances although at a cost to
the domestic and world economy. The flexibility of adjustment to
changes in the economy quickly will be a key factor to avoid a prolong
recession in my opinion.

Monetary and fiscal policy is certainly going to be very challenging
for the U.S.
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rakeshkapoor...@xxxxxxxxxxx wrote:

June 06, 2008 16:52
Superb article as it shows the dilemmas we face in the international
arena expaining something to somone and also contrary to others and to
finish this we need productivity and jobs for the masses to sustain
modern production capacities
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PanamanianS wrote:

June 06, 2008 14:33
I can't believe I'm reading such gullible reasoning as appears in the
first two paragraphs of this article.
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Fenland wrote:

June 06, 2008 13:27
Economist tells us: the Dollar's depreciation can expand the goods and
service export, yet it has also immediately driven upward the CPI and
inflation today. Therefore, we should increase the bank rate to resist
the increasing CPI and inflation. Yet the danger of falling into
economic depression requires the government to reduce it, or keep it
at a low level at present; meanwhile if increase the bank rate, the
Dollar will appreciate and restrain the export, so increase the total
unemployment number, further accelerate the economic depression, etc.
It is another question about chicken and egg in this field. If there
is an answer for this conundrum, it is must be the economist's
preference for the chicken or the egg.
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R Hiesey wrote:

June 06, 2008 13:13
In your article, you say:
"At the same time, Fed looseness has caused headaches for countries,
such as many Gulf states, that peg their currencies to the dollar.
These countries ought to allow their currencies to rise."

They have. It's called "oil".
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simon says wrote:

June 06, 2008 12:22
Fivealive asks "Doesn't this seem like the fed constantly reacting to
problems that it created?"

Yes it does. There is something referred to in aviation as PIO - Pilot
Induced Oscillation. An example occurs during landing if a pilot lets
the plane get too slow. The natural reaction of the plane is to nose
down to pick up speed. Once a little speed is gained, the plane will
then pitch back to a sustainable attitude - assuming the pilot stays
out of picture other than putting in a minor correction to address the
original low speed problem. But some pilots see the ground rushing up
and react by pulling stick back to raise the nose. Invariably, they
react at just about the time that the plane was ready to correct
itself. The result is that rather than coming back to a sustainable
attitude, the plane pitches up too much, climbs, and .... loses speed
which was what started the problem in the first place. Now, about the
time the plane is ready to pitch down all by itself due to the new low
speed situation, the pilot realizes the speed is low and pushes the
stick forward to dive which adds to the natural tendency of the plane
to correct itself. So instead of a gentle pitch down, the plane ends
up diving toward the ground worse than before. The pilot panics and
now pulls back again and ... well you get the picture. This
oscillation, which the pilot creates, will go on until one of two
things occur. Ideally, the pilot should put the stick into the proper
position to establish a sustainable flight attitude and keep it there.
The plane will run though a fw of oscillations, each less severe than
the previous and then settle down. The other way to end it is for the
pilot to keep trying to fix his last mistake resulting in oscillations
getting larger until the plane crashes.

So, what does this have to do with the price of eggs (or oil)? As
noted, the Fed stood by inactive through most of the housing boom
which was a clear sypmtom of excessive liquidity because the economy
though growing, was not as strong as they'd like. But finally they
start raising rates when, in fact, the situation was on the verge of
correcting itself. Then when the pitch down comes harder than they
thought, they loosen the purse strings just as inflation is heading
up. So they end up increasing liquidity, which was the problem that
started the whole cycle in the first place.

It's right about now that, if this were one of those old movie
serials, we'd see the plane just about to hit the ground, the screen
would go black and a booming voice would come on: "What will pilot Ben
do? Can he save the good ship US Economy? Will he finally set course
and hold it? Or will he keep trying to fix his last mistake, always
reacting too late and in the wrong direction? Come back next quarter
folks for another exciting chapter the continuing story of 'The
Oscillations of Pilot Ben'!"
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simon says wrote:

June 06, 2008 09:28
The US is in the process of doing what every government does when it
can't repay it's debt - it lets inflation take care of it. Don't be
fooled by the Fed's professed aversion to inflation. LIke fire, you
don't want to see it get out of control, but it can have its uses if
properly handled.

Just because these guys aren't talking about the fact that there is no
way for the US to cover its ever growing obligations doesn't mean they
aren't aware of them and planning. But the only viable plan is to pay
off the debts with devalued $. There are two things they must avoid
though - a complete rout on the $ and a rapid economy crippling
devaluation. So, they can't just come out and state that they have
shifted to a weak $ policy. It was clear they had, but saying it would
have resulted in panic selling of the kind that would have severe
economic consequences. Also, the longer they wait to take action, the
more severe the action and consequences would be. Allowing an extra 1
to 1.5% inflation now may avoid much higher inflation in 5 to 10
years.

So, for all those countries kind enough to have taken $ in payment and
to hold US Treasury Securities, all we can say is thanks for floating
us all these years and sorry but we won't be paying you back in full.

Perhaps you can consider it a fair trade for the trillions the US has
spent since 1945 to keep the world relatively safe. I know a lot of
you will consider the US the great agressor since WWII, but the fact
is while there have been lots of little wars, the big powers haven't
gone head to head in a long time. In fact, it is the longest period in
over 2000 years that the major powers have not gone to war against
each other. And the US has not taken territory as a result of any
fight its been in since WWII.

So how has US spending benefitted the world since WWII. Western Europe
was not overun by the Soviets thanks to US troops and was able to
rapidly rebuild thanks to the Marshall plan. Japan was rebuilt and
reformed into a strong democracy. The Soviets were contained until
they collapsed. And Eastern Europe was given its shot at liberty. Pax
Americana may not be perfect, but it ain't been too bad either. And it
hasn't been free. Those countries who have benefited may have avoided
most of the blood cost, but the world is about to find out that one
way or another, they are going to pay a share of the $ cost.
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DougNHI wrote:

June 06, 2008 09:04
Bernanke expects people to believe he cares about the dollar after
presiding over its trashing? The man is a joke, and NOBODY is fooled
by his jawboning. His actions have almost singlehandedly caused this
commodities bubble (we'll give Greenspan credit for creating the
mortgage mess). Inflation isn't just an expectation, it's FOR REAL.
Buy stuff and ask for a raise, because for all Helicopter Ben's talk,
his actions are yelling moral hazard and inflation at the market! His
legacy will be as bad or worse than Alan's, and history will judge him
very poorly. The so-called expert on depression is recreating exactly
the moral hazard conditions necessary to visit this all over. We could
have had a recession, but now we're staring at a meltdown. Thanks Ben!
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