There are at least two certainties concerning addictions. One is that they can only be sustained by escalation. The other is that escalation is ultimately unsustainable.
As a nation we are beginning to find this out. Currently we have an addiction to cheap goods and even cheaper money. And it just so happens we can get both of these from the same place. That place is not called the great wallet of China, but it would be rather funny if it were, and not entirely inaccurate.
In some ways this addiction serves the same purpose as Rome’s great experiments with bread and circuses. But instead of having to conquer the world for plunder and tribute we can finance these things through borrowing. Or more specifically treasury bills sold to nations that can, after a point of maturation dependant upon the final face value of the note, redeem those bills for an amount ostensibly larger than the purchase price.
By these means our economy can be sped along, consumers buying cheap goods (made in China and sold at Wal-Mart) on credit with the balance of borrowed money remaining large enough for the politicians to fund all sorts or social manipulation and vote buying schemes. It is absolutely perfect . . . right until the moment when it all falls apart.
Of course, we are not alone in our addiction. China has a jones of their own. But instead of needing cheap goods and cheap money (although their currency is consistently kept undervalued so as to make trade more favorable to them) they need to maintain a fantastic level of consumption if their “miracle economy” is to be kept from collapsing in upon itself. This consumption is made possible by the tendencies of the American consumer. And those tendencies are in turn made possible by the ever-increasing supply of money guaranteed by a debt to China and lent at impossibly low rates from the Federal Reserve.
And therein lies the rub.
The consumption must continue. So must the borrowing and lending. But if the borrowing and lending continues and increases so does the money supply. If the money supply increases beyond what actual wealth is being created and accumulated then the value of the money decreases. If value decreases, prices increase. More money is needed. So more money is created. And the creation of more money contributes to the further deflation of the money and inflation of the cost of goods and services.
Meanwhile on the other side of the planet those lending the money are getting nervous. They bought up the treasury bills for a specific amount valued in dollars. Many of those dollars could now be paid back at a value significantly lower than the investment made. So they have a very peculiar and specific dilemma. Do they let their economy collapse under the stagnation that results from cutting off the cheap money? Or do they let their economy collapse under the weight of their US T-bill holding shedding value in the amounts of hundreds of billions at a time?
Who knows? But we are rapidly approaching a time in which we are going to find out.
- Written by Kip Hooker at TheVitaminPress.com
{ 3 comments… read them below or add one }
I don’t get what you’re saying about the creation of more money which leads to the deflation of money, it’s quite the other way around. Investment-wise China is the biggest friend of the USA, the situation would be hell if the Chinese government were to drop the dollar. Still there are internal disputes regarding dropping GDP stats and focusing on internal consumption. When China will let the Yuan appreciate, the whole world will thank them. The main cullprit for cheap dollars and mega supply of it is the Federal Reserve. Economists, think tanks and people in general should favor a two tier credit system, with a relative high interest for overnight credit and a special rate of credit with low fixed interest for agriculture, energy, infrastructure and industry.
It is quite simple really. Value is pinged to demand and scarcity. Increasing the number of dollars in existence decreases its scarcity. Without an equal uptick in demand for those dollars the excess is absorbed into the re indexed value of the goods and services that did not as well increase in the interim. The deflation of the dollar (and inflation in the cost of living) might be a mere annoyance were the newly created money evenly distributed. But it is not. It is divided up amongst the few. The remainder are left to exist in a world where their money has less value and they’ve no expectation to increase their income by a similar amount.
Central planning with favorable rates for some and punishing rates for others will not correct the system. The system is broken because of their meddling.
Not only excess monetary aggregates are the problem, but also excess fictitious financial aggregates correlated with a decreasing physical input/output of the world economy.