Home » Money » It Works Out – Because of the Bad Stuff

It Works Out – Because of the Bad Stuff

Over the past year, we’ve been discussing how the current depression might end.  Two distinct scenarios have emerged as the likely candidates – a slow return to work for everyone as small companies complete a transition to a new economy and a collapse of the world’s economic system.  Which will it be?

There is plenty of evidence for both.  The decline in people of working age in the developed world (and soon the developing!) points to more opportunity and higher wages once everything evens out – something like a golden age.  But the recent World Economic Forum and ongoing trauma in Europe highlight the obvious weakness at the top, starting with leadership.

The best answer for crystal ball readers is an obvious one – both might happen simultaneously.  That’s not a punt, it’s a statement of deep belief that, in the long run, the Free Market is probably going to work.

creditunionThe good news is apparent all around us, even if it seems a bit thin.  Job growth has been continuous even as inflation stays at a reasonable 2%. It appears to be fueled by small banks making small loans and managing risk the old fashioned way – up close and personal.  Things haven’t exactly turned around, but the worst is behind us.  The US is importing far less oil than before and is consuming less just getting around.  Corporate profits are up, and housing prices appear to be picking up off the bottom.

It all seems to be running in time to turn a corner about 2017, about what we would expect by looking at business cycles.  Each phase of the cycle lasts about as long as the previous, and given that the boom that started about 1983 ended in 2000 the down-cycle should also last 17 years.

But huge risks remain in the global economy, as highlighted at the recent Davos Conference.  It’s even worse than they let on, too.  Japan seems unafraid of accelerating a currency war which they hope will lead to more exports by reducing the price of Japanese goods.  It’s clearly about to be met by South Korea, as expected, based on these remarks by their Finance Minister Kim Choong-Soo:

“We live in a global economy, so you yourself cannot do something alone,” Kim said. “You have to cooperate with your partners.”…

Asked whether South Korea would be forced to respond to the Bank of Japan by managing the won in a more meaningful way for the country’s manufacturers, Kim said: “… our central bank will do whatever it’s supposed to do to protect the high volatilities in the financial sector.”

So what happens when every currency in the world devalues at the same time?  The answer is a kind of inflation.  Right now, every developed nation has a negative real interest rate – a rate lower than inflation.  Those with a lot of money have it “parked” in the Federal Reserve, European Central Bank, and so on are losing value constantly for the privilege of keeping it parked.  The best way to see the devaluation of all currencies is by comparing them to gold – shown here in the price per troy ounce versus the US Dollar since 1968:
Note how it spiked up to around $400 during the last downturn, roughly 1965-1983, stabilized or even fell during good times, and then took off when this depression hit in 2000.  It’s about $1600 today, but stabilizing again.  The price of gold clearly shows us the business cycles – as statements of faith in currencies that capricious governments can print.  Right now, all of them are net losers even before Japan gets going.

What does that mean in the long run?  While we’ve never gotten together a “Jubilee”, or global forgiveness of debt, the global rise in debt will probably be solved by inflating our way out of it – more or less paying it off with worthless paper.  That tremendous concentration of wealth that has created growing inequality?  Those with money are seeing it vaporize every day.

And yet, despite what we can see happening, things are coming together for those who do not have trillions of bucks to spend.  It’s all roughly evening out, all around the world, as those with too much money to know what to do with it lose it slowly.

How will this all turn out?  Barring hyperinflation that destroys everything, most of the terrible economic problems that plague us – debt, unequal wealth distribution, and disparity between developed and developing nations – will probably dissolve gradually over the next 20 years.

The Free Market really does work – in the long run.  Of course, in the long run we’re all dead.

9 thoughts on “It Works Out – Because of the Bad Stuff

  1. In other words the excesses will simply fade away by attempting to preserve themselves. Nice, if it happens. I can see it.

    • Yes, not with a bang but a whimper. I do believe that collateral damage if major investment banks fail would be minimal, as they are not tied to the underlying economy. It seems more likely that inflation will continue to eat away at their share until they clearly don’t matter anymore.

  2. Your being all crazy hopeful again. I agree that big investment banks can go away & we won’t miss them but hyperinflation is real and damaging. If it comes to that and I think it will there will be no way to buy anything and the whole system collapses.

    • Maybe. I do wonder about “fiat currencies” and what might possibly come to replace what we know now. Global hyperinflation would be an amazing phenom, and the way things are tied together it’s hard to see how that would be avoided if, say, the US started that way. So as long as everything moves together – how can it really get moving?
      I do see a more gradual erosion until actual growth sets in. And, of course, if the velocity of money comes back we will have more inflation.

  3. I have to reluctantly agree. You have said before & I agree that a return of corporate profits is key and we are seeing that as the Dow hits new highs. Investment banks are a big part of corporate profits but they have been underperforming so long that they are totally discounted. Its almost as if they don’t count anymore.
    A lot of inflation would be bad all around but there is no sign of that at all. If there is a budget deal in Washington I think we will be on the right track and it will work out smoothly even if there is a collapse of big banks.
    I think I am with you that they do more harm than good right now though.

    • It caught me by surprise, and I don’t like surprises like that. Hurricane Sandy was a huge deal, bigger than most people think, but that’s not enough to explain it. There was a downturn at the end of December, something I know from small biz work I do, which may have something to do with the fiscal cliff. But these seem like lame excuses.
      Can’t wait for the January job numbers – that will tell us if 4Q12 was a blip or something real.

  4. Pingback: Bear or Bull? | Barataria - The work of Erik Hare

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