Laffer: Get Ready for Inflation and Higher Interest Rates

[achilles28]

Quote from makloda:

What if nobody wants these loans (like in Japan post 1990)? The banks could offer new loans all they want, should the private sector wake up from a 30 year debt-fueled spending spree with little appetite for further debt then Laffer's argument quickly collapses like the house of cards it is IMO.

The ground is set for a secular shift in household savings and less consumption. Combine this with low global capacity utilization, higher unemployment and even higher taxes (= less disposable income) and you have a cocktail that is (if it indeed unfolds) dis-inflationary, not the opposite.

Thats brass tax. Good post.

It all comes down to banks willingness to lend and the private sectors willingness to borrow.

The doubling of the monetary base is an ominous warning, that in normal times, would have signaled certain inflation.

The crux - most money is created through loans, which must be granted by solvent banks, to solvent customers.

By that measure, we're 1/3rd of the way there.

Then consider the market. Gold at 950$, Oil at 65$, commodities resurging, bonds dumping, dollar dumping and markets up....

 

[ByLoSellHi]

Quote from Random.Capital:

I still believe the best path forward is to have a controlled default on sovereign debt. It is inevitable that it will happen some day - better it happen now when the US is still the dominant economic actor and can dictate a more favorable "response".

Of course, this is predicated on rationalizing gov't expenditures and fixing the fundamentally broken trade policies of the past 30 years. Otherwise it'll all be for naught.

Yes, I know none of this will actually happen.

I'm glad you thought as much to bring up trade policies, and their role in the situation we find ourselves in.

It seems to be the White Elephant in the room that no one wants to talk about anymore, despite possibly being one of the most fundamental issues of our time.

Maybe the dogma about 'free trade' being good is so strong that we no longer seek to challenge that assertion, despite my contention that there is NO free trade, given that every country in the world is massively subsidizing just about every domestic industry in one form or another.

 

[Cutten]

Quote from PragmaticIdeals:



Basically, we are looking at 1 of 2 outcomes:

1) LONG TERM: Banks keep lending at low rates, consumers keep borrowing. Inflation escalates out of control. Interest rates are FORCED to spike. Borrowers massively default, credit default swaps collapse, banking sector fails.

2) SHORT TERM: Either rates spike early (in anticipation of scenario 1) or banks/consumers realize what's going to unfold and cease lending/borrowing practices prematurely. Deflation, job losses, equity declines ensue. Unemployment climbs enormously.

So you are saying either we get high inflation or deflation? That's a bit like saying either we are going to have a recovery or the recession is going to get worse, or that the stock market will either go up or down.

 

[Scataphagos]

Quote from ByLoSellHi:

".. Maybe the dogma about 'free trade' being good is so strong that we no longer seek to challenge that assertion

America's heydays were when there was NOT free trade. We had a relatively "closed" economic system.

Things were made and consumed HERE... gave rise to union wages as there was virtually no viable competition. Now with "free trade", many things boil down to the low-cost producer or provider.... and virtually NONE of that is in the US.

 

[Random.Capital]

Quote from ByLoSellHi:

...despite my contention that there is NO free trade, ...

I agree with your contention.

Further, it is my contention that there can never be free trade without freedom of labor movement. Having borders open to flow of capital but closed to flow of labor is not capitalism, it's feudalism.

Once it's put in that context, it turns out that there are extremely few actual believers in free trade in the US.

 

[Cutten]

Quote from ByLoSellHi:

Laffer's a pretty sharp guy

http://www.youtube.com/watch?v=g-x9hgx3tTY

Check out the high stakes he plays for - a whole penny!

But apparently a penny is too much for him to pay:

http://www.youtube.com/watch?v=9BND3F1KfZ0&feature=related

From "the economy has never been in better shape" to "The End of Prosperity" and welshing on a 1 penny bet within 18 months.

 

[makloda]

From Gluskin Sheff/Rosenberg, regarding the "breathing room" of the US to increase taxes in order to service future debt, putting intermediate-term US sovereign default risk into perspective (the sectors loaded with debt and facing borderline bankruptcy are private households, banks and corporations, not so much the US government in particular -- contrary to popular belief. Uncle Sam can simply hike taxes. What will private households do? Ask for higher wages like in the 70s? ):

Not only that, but the taxing capacity in the United States is much larger – government revenues
absorb 42% of national income in the U.K. versus 33% in the U.S.A. Those
comparable figures are 43% in Germany, 46% in Italy, and 49% in France. In
Canada, it is 40%.

 

[ByLoSellHi]

Quote from Cutten:

http://www.youtube.com/watch?v=g-x9hgx3tTY

Check out the high stakes he plays for - a whole penny!

But apparently a penny is too much for him to pay:

http://www.youtube.com/watch?v=9BND3F1KfZ0&feature=related

From "the economy has never been in better shape" to "The End of Prosperity" and welshing on a 1 penny bet within 18 months.

Wow. I wasn't aware of that whopper of a flip-flop.

Maybe I'm holding him to too high a standard by expressing dismay, as even the best economists can get it wrong, but that is an extreme range in a short period of time for someone who is accepted as and deemed credible.

 

[Cesko]

I think we are all forgetting the market's ability to adapt to government intervention.

And should adapt much faster than in the past thanks to more efficient flow of information (hopefully).

 

[PragmaticIdeals]

Quote from Cutten:

So you are saying either we get high inflation or deflation? That's a bit like saying either we are going to have a recovery or the recession is going to get worse, or that the stock market will either go up or down.

I can't predict human behavioural responses to stimuli, but I can offer hypotheses on what may occur given a set of potential responses.