Can someone help me out here?

[Beet]

It will only work if our foreign creditors continue to hold dollar assets despite those assets depreciating due to our printing. There are a couple reasons why some of the larger foreign entities (e.g., govt. and quasigovt. entities) might do this. First of all, if they have a stake in preventing a dollar crisis and the consequences that entails that is greater than the capital loss they would take by pulling out; for example, in my estimation, the Chinese dependency on holding down their currency has marginally more to do with the domestic employment situation than the nominal yuan value of its dollar holdings, and similar for the rest of Asia. Right now all the main actors of the world have a stake in the current system not unravelling. Secondly, (and this applies to more than the govt. and quasigovt. entities) if the world is filled with risks and the dollar, despite being depreciated, is still safer than anything else. We saw something of that last year. Thirdly, I have argued that if you're holding a lot of dollars and really want to extract value from them rather than just have them looking nice and pretty on a balance sheet, depreciation of the dollar isn't an unmitigated bad because it makes US assets and goods cheaper to acquire; as long as there is not domestic inflation in the US, you're not necessarily worse off from a buyer's perspective. Keep in mind that printing causes some domestic inflation in the US due to rising import prices, even if it doesn't create an overall increase in CPI.

Still, the Fed clearly doesn't want to (1) test whether these reasons will hold up, because if you're wrong, you just potentially blew up the world [although I suspect that's a remote scenario], and (2) it's basically immoral, because you're defaulting in a sense obligations to others, and others clearly won't like it and may not stand for it. Again, you don't want to test that.

Printing money I think won't necessarily result in a collapse but it's also not cost free. Probably what is going to happen is a continuation of debt liquidation and also the Fed has already done some monetization, but together these two things still don't add up to a solution. You may see a reflation of the debt circle in the short or medium term and some real crisis about 5-30 years down the road.

By the way, I'd be curious to see how jmfcst thinks the debt crisis will be resolved, and what Sam Spade thinks would have happened if we had just let everything fail.

[Beet]

In order to have high inflation you need to have a wage- price cycle. Labor has to have some bargaining power politically to say "Raise my pay to meet standard of living adjustments!"

Absent this, you have inflation in imported goods, but not wage inflation and not necessarily asset inflation, which means prices go higher up to a point, but no vicious cycle as we've seen in Latin America where there were much more populist governments in power that made sure wages rose.

As for people working more and consuming less-- we want people to work more. Not enough people are working right now, which is part of the problem. And people will have to consume less, to build up their savings and start paying down debt. That is already happening and is not necessarily a bad thing in the long run.

[Beet]

As for people working more and consuming less-- we want people to work more. Not enough people are working right now, which is part of the problem. And people will have to consume less, to build up their savings and start paying down debt. That is already happening and is not necessarily a bad thing in the long run.

Sure. Work more (forever), consume less (forever) - if that makes you happy (in the long run), I am happy for you. But, overall, your country (and, given its role in the world - the entire world) will be a poorer and more miserable place. If you like that, I am not the one to judge your preferences. It is not my definition of a good thing, though.

Working more is bad? So you want the unemployment rate to stay at 9.5% and the broader measures of unemployment to stay at 16%, and the average workweek to stay at 33 hours or less? I think we must be talking about different things. America would not be a poorer and more miserable place if Americans worked more than they are today. We were working more a year ago and we were a happier place.

On the consumption side, I am not calling for reduced consumption, but I do not see how Americans can consume more in the short to medium term than it has been in recent years. If you have a plan for how this could be accomplished, I'd love to hear it.

[Beet]

In order to have high inflation you need one and only one thing: print more money.

We mostly agree, but not entirely. I see a difference between different kinds of inflation. Some kinds, are asset driven. Some are commodity driven. Some last for a period of time, and can be high in that period of time (e.g., Indonesia 1998) but quickly go away. Others last for years and gradually accelerate. Yet others only reverse deflations, as you hinted. What distinguishes different kinds of inflations has to do with the conditions surrounding those inflations. I am saying not all inflations lead to a cycle of higher prices, causing demands for higher wages, which lead to higher prices, forcing the government to print more and more and more to keep up-- hyper-inflations. That is the kind that will really screw you-- other kinds have winners and losers, and are generally things to avoid as well, but they have to be compared to the alternatives.

[Beet]

As for people working more and consuming less-- we want people to work more. Not enough people are working right now, which is part of the problem. And people will have to consume less, to build up their savings and start paying down debt. That is already happening and is not necessarily a bad thing in the long run.

Sure. Work more (forever), consume less (forever) - if that makes you happy (in the long run), I am happy for you. But, overall, your country (and, given its role in the world - the entire world) will be a poorer and more miserable place. If you like that, I am not the one to judge your preferences. It is not my definition of a good thing, though.

Working more is bad? So you want the unemployment rate to stay at 9.5% and the broader measures of unemployment to stay at 16%, and the average workweek to stay at 33 hours or less? I think we must be talking about different things. America would not be a poorer and more miserable place if Americans worked more than they are today. We were working more a year ago and we were a happier place.

On the consumption side, I am not calling for reduced consumption, but I do not see how Americans can consume more in the short to medium term than it has been in recent years. If you have a plan for how this could be accomplished, I'd love to hear it.

No, that's not the "working more" I have in mind. What will happen is that you'd be working longer ours in crappier jobs for a lower (real)wage to make ends meet: you'd need to work longer ours to buy necessities. Leisure would become too expensive.

A lot of people are already doing this, and more of them will as the economy continues to lose jobs, and I don't see any inflation.

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Not in itself, but if the exchange rate is more competitive, the benefits to employment will exceed the costs of higher imports.

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I'd take a 1982 style recession any day to what we saw during the Great Depression-- which incidentally was cured through inflation.

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You're assuming a currency crisis of some sort-- that is not inevitable.

[Beet]

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My worry is that every time one of these large 'interconnected' banks fails, it drives a ton of other financial institutions not only illiquid, but insolvent, for two reasons. First, they're holding as assets a ton of paper from said failed bank. Second, the damage to the real economy caused by one of these guys going down deteriorates the value of the assets of all financial institutions, no matter how well run.

It's like a stack of dominoes. Bank A is insolvent and goes down. This accrues enough loss to Bank B to render it insolvent. This causes Bank C to be insolvent. Bank C could have survived the loss of just Bank A, or just Bank B, but not both A and B. And so on.

Wouldn't this stack of dominoes just have kept going on until eventually the entire financial system- the banks, the hedge funds, the "vehicles", and everything else delevered to death? Even if you wanted to backstop a bank that was just having a liquidity problem, investors would still dump everything on the government if they felt that a bank's liquidity problem might soon turn into a solvency problem, or if they simply weren't sure. The whole thing ($52 trillion) would have quickly unraveled, and if the taxpayer didn't end up with the whole tab, interest rates would go sky high as all kinds of assets were dumped.

Using government money to create banks might work, but keep in mind that the government does not have the manpower or expertise to create these huge banks. And the bank would be operating in an impossible environment. No one would be wanting to take out loans for legitimate purposes such as investment.

Basically, you get a deep, deep depression. The government would end up running trillion dollar deficits anyway, as tax revenues collapsed. International capital flows would dry up, and so would international trade, and you would have an instant 1930s. You go from 1929 to 1933 not in 3 1/2 years, but more like 6 months. Living standards would fall 20, 30, 40 percent, especially in economies heavily dependent on trade.

And you think this would not have had a gargantuan human and political toll? That recovery from such a catastrophe would be easy? It could easily take decades. So when you say that the bailouts make it "far worse", it's really scary. Allowing a systemic crisis in the private sector-- these big banks to go bankrupt-- and trying to avoid a taxpayer loss- would have caused something as bad as the Great Depression, and at a far quicker pace. And it would have failed to prevent taxpayer loss. Taxpayers would be taking it up the ass, not only from the government, but from their own employers, as they lost jobs in mass numbers.

If there's even a small chance of escaping this, wouldn't it be worth it to try? Wouldn't it be far better to spread out the loss over a long period of time, and try to re-adjust the economy towards where it needs to go slowly, over many years, as Japan did? Japan is in crap shape, but it never had 25% unemployment or a 30% drop in output. Its society remained stable. They slowly worked off their bad loans over time.

[Beet]

It is easy to print money, it's not that easy to expand the money supply. Expanding the money supply and printing money are not the same thing. When a bank expands the money supply, it is not printing money-- it is creating an interest bearing instrument. In the United States, only the reserve bank has been granted a monopoly right on the issuance of legal tender. Other banks can expand the money supply-- and it's hard for policymakers to coax them to expand it at any given pace, true, but that is not "printing money." The Fed can, and does, print money at will, quite easily.

What you're assuming is that there is some "point" where the money supply will start stretching again like a rubber band and if the Fed contracts the monetary base at that time, then it's not really printing money to pay off debts. Very well. I think the Fed has very similar thinking. The problem is, without defaulting on the debts somehow, either through monetization or outright default, these debts will continue to act as a drag on the economy forever, potentially sinking the country into a prolonged debt-deflation. Therefore, I predict the Fed will be very cautious in reversing its extraordinary moves and may not do so for a long, long time. And even when it does, the problem will not be solved because the debts will still be there in another form.

Only by fixing the exchange rate-- and allowing the US to work off its debts by production and saving over a long period of time-- in other words allowing the demand of the world economy to come from somewhere else for once, can the US pay off its debts humanely.