The Proposed Iranian Oil Bourse

[jimrockford]

Here is some more, excerpted by the very fine PBS website associated with its series "Commanding Heights: the Battle for the World Economy", at http://www.pbs.org/wgbh/commandingheights/shared/minitext/ess_germanhyperinflation.html, from the best-selling author and money-manager George J.W. Goodman, a.k.a. "Adam Smith", on Weimar Germany's hyperinflation:

The German Hyperinflation, 1923

Excerpt from Paper Money by "Adam Smith," (George J.W. Goodman), pp. 57-62.

In the mid-1960s, money manager George J.W. Goodman began to write a series of irreverent and witty columns for New York magazine under the borrowed name of capitalism's founding theorist, Adam Smith. As "Adam Smith," Goodman went on to write several bestsellers about economics, the stock market, and global capitalism, among them The Money Game, Supermoney, and Paper Money, from which this account of the Weimar Republic's disastrous hyperinflation is excerpted.






Essay




Before World War I Germany was a prosperous country, with a gold-backed currency, expanding industry, and world leadership in optics, chemicals, and machinery. The German Mark, the British shilling, the French franc, and the Italian lira all had about equal value, and all were exchanged four or five to the dollar. That was in 1914. In 1923, at the most fevered moment of the German hyperinflation, the exchange rate between the dollar and the Mark was one trillion Marks to one dollar, and a wheelbarrow full of money would not even buy a newspaper. Most Germans were taken by surprise by the financial tornado.

"My father was a lawyer," says Walter Levy, an internationally known German-born oil consultant in New York, "and he had taken out an insurance policy in 1903, and every month he had made the payments faithfully. It was a 20-year policy, and when it came due, he cashed it in and bought a single loaf of bread." The Berlin publisher Leopold Ullstein wrote that an American visitor tipped their cook one dollar. The family convened, and it was decided that a trust fund should be set up in a Berlin bank with the cook as beneficiary, the bank to administer and invest the dollar.

In retrospect, you can trace the steps to hyperinflation, but some of the reasons remain cloudy. Germany abandoned the gold backing of its currency in 1914. The war was expected to be short, so it was financed by government borrowing, not by savings and taxation. In Germany prices doubled between 1914 and 1919.

After four disastrous years Germany had lost the war. Under the Treaty of Versailles it was forced to make a reparations payment in gold-backed Marks, and it was due to lose part of the production of the Ruhr and of the province of Upper Silesia. The Weimar Republic was politically fragile.

But the bourgeois habits were very strong. Ordinary citizens worked at their jobs, sent their children to school and worried about their grades, maneuvered for promotions and rejoiced when they got them, and generally expected things to get better. But the prices that had doubled from 1914 to 1919 doubled again during just five months in 1922. Milk went from 7 Marks per liter to 16; beer from 5.6 to 18. There were complaints about the high cost of living. Professors and civil servants complained of getting squeezed. Factory workers pressed for wage increases. An underground economy developed, aided by a desire to beat the tax collector.

On June 24, 1922, right-wing fanatics assassinated Walter Rathenau, the moderate, able foreign minister. Rathenau was a charismatic figure, and the idea that a popular, wealthy, and glamorous government minister could be shot in a law-abiding society shattered the faith of the Germans, who wanted to believe that things were going to be all right. Rathenau's state funeral was a national trauma. The nervous citizens of the Ruhr were already getting their money out of the currency and into real goods -- diamonds, works of art, safe real estate. Now ordinary Germans began to get out of Marks and into real goods.

Pianos, wrote the British historian Adam Fergusson, were bought even by unmusical families. Sellers held back because the Mark was worth less every day. As prices went up, the amounts of currency demanded were greater, and the German Central Bank responded to the demands. Yet the ruling authorities did not see anything wrong. A leading financial newspaper said that the amounts of money in circulation were not excessively high. Dr. Rudolf Havenstein, the president of the Reichsbank (equivalent to the Federal Reserve) told an economics professor that he needed a new suit but wasn't going to buy one until prices came down.

Why did the German government not act to halt the inflation? It was a shaky, fragile government, especially after the assassination. The vengeful French sent their army into the Ruhr to enforce their demands for reparations, and the Germans were powerless to resist. More than inflation, the Germans feared unemployment. In 1919 Communists had tried to take over, and severe unemployment might give the Communists another chance. The great German industrial combines -- Krupp, Thyssen, Farben, Stinnes -- condoned the inflation and survived it well. A cheaper Mark, they reasoned, would make German goods cheap and easy to export, and they needed the export earnings to buy raw materials abroad. Inflation kept everyone working.

 

[jimrockford]

Goodman excerpt on Weimar hyperinflation, cont'd:

So the printing presses ran, and once they began to run, they were hard to stop. The price increases began to be dizzying. Menus in cafes could not be revised quickly enough. A student at Freiburg University ordered a cup of coffee at a cafe. The price on the menu was 5,000 Marks. He had two cups. When the bill came, it was for 14,000 Marks. "If you want to save money," he was told, "and you want two cups of coffee, you should order them both at the same time."

The presses of the Reichsbank could not keep up though they ran through the night. Individual cities and states began to issue their own money. Dr. Havenstein, the president of the Reichsbank, did not get his new suit. A factory worker described payday, which was every day at 11:00 a.m.: "At 11:00 in the morning a siren sounded, and everybody gathered in the factory forecourt, where a five-ton lorry was drawn up loaded brimful with paper money. The chief cashier and his assistants climbed up on top. They read out names and just threw out bundles of notes. As soon as you had caught one you made a dash for the nearest shop and bought just anything that was going." Teachers, paid at 10:00 a.m., brought their money to the playground, where relatives took the bundles and hurried off with them. Banks closed at 11:00 a.m.; the harried clerks went on strike.

The flight from currency that had begun with the buying of diamonds, gold, country houses, and antiques now extended to minor and almost useless items -- bric-a-brac, soap, hairpins. The law-abiding country crumbled into petty thievery. Copper pipes and brass armatures weren't safe. Gasoline was siphoned from cars. People bought things they didn't need and used them to barter -- a pair of shoes for a shirt, some crockery for coffee. Berlin had a "witches' Sabbath" atmosphere. Prostitutes of both sexes roamed the streets. Cocaine was the fashionable drug. In the cabarets the newly rich and their foreign friends could dance and spend money. Other reports noted that not all the young people had a bad time. Their parents had taught them to work and save, and that was clearly wrong, so they could spend money, enjoy themselves, and flout the old.

The publisher Leopold Ullstein wrote: "People just didn't understand what was happening. All the economic theory they had been taught didn't provide for the phenomenon. There was a feeling of utter dependence on anonymous powers -- almost as a primitive people believed in magic -- that somebody must be in the know, and that this small group of 'somebodies' must be a conspiracy."

When the 1,000-billion Mark note came out, few bothered to collect the change when they spent it. By November 1923, with one dollar equal to one trillion Marks, the breakdown was complete. The currency had lost meaning.

What happened immediately afterward is as fascinating as the Great Inflation itself. The tornado of the Mark inflation was succeeded by the "miracle of the Rentenmark." A new president took over the Reichsbank, Horace Greeley Hjalmar Schacht, who came by his first two names because of his father's admiration for an editor of the New York Tribune. The Rentenmark was not Schacht's idea, but he executed it, and as the Reichsbank president, he got the credit for it. For decades afterward he was able to maintain a reputation for financial wizardry. He became the architect of the financial prosperity brought by the Nazi party.

Obviously, though the currency was worthless, Germany was still a rich country -- with mines, farms, factories, forests. The backing for the Rentenmark was mortgages on the land and bonds on the factories, but that backing was a fiction; the factories and land couldn't be turned into cash or used abroad. Nine zeros were struck from the currency; that is, one Rentenmark was equal to one billion old Marks. The Germans wanted desperately to believe in the Rentenmark, and so they did. "I remember," said one Frau Barten of East Prussia, "the feeling of having just one Rentenmark to spend. I bought a small tin bread bin. Just to buy something that had a price tag for one Mark was so exciting."

All money is a matter of belief. Credit derives from Latin, credere, "to believe." Belief was there, the factories functioned, the farmers delivered their produce. The Central Bank kept the belief alive when it would not let even the government borrow further.

But although the country functioned again, the savings were never restored, nor were the values of hard work and decency that had accompanied the savings. There was a different temper in the country, a temper that Hitler would later exploit with diabolical talent. Thomas Mann wrote: "The market woman who without batting an eyelash demanded 100 million for an egg lost the capacity for surprise. And nothing that has happened since has been insane or cruel enough to surprise her."

With the currency went many of the lifetime plans of average citizens. It was the custom for the bride to bring some money to a marriage; many marriages were called off. Widows dependent on insurance found themselves destitute. People who had worked a lifetime found that their pensions would not buy one cup of coffee.

Pearl Buck, the American writer who became famous for her novels of China, was in Germany in 1923. She wrote later: "The cities were still there, the houses not yet bombed and in ruins, but the victims were millions of people. They had lost their fortunes, their savings; they were dazed and inflation-shocked and did not understand how it had happened to them and who the foe was who had defeated them. Yet they had lost their self-assurance, their feeling that they themselves could be the masters of their own lives if only they worked hard enough; and lost, too, were the old values of morals, of ethics, of decency."

The fledgling Nazi party, whose attempted coup had failed in 1923, won 32 seats legally in the next election. The right-wing Nationalist party won 106 seats, having promised 100 percent compensation to the victims of inflation and vengeance on the conspirators who had brought it.

Copyright © 1981 by George J. W. Goodman. All rights reserved.

 

[traderdragon]

This article doesnt even require a counter argument, since its not even an argument at all. Nothing more than assertion after assertion after assertion with nothing to back it up. A poorly written opinion piece, with the same old USA Oil conspiracies dragging the US the through the mud as usual. Its old. Really old.

 

[Term]

Jim, I appreciate your ability not to send insults back in the way of 2cents.

The model for immaturity on this board is that when someone has no rational counterarguement they result to childish name calling when it would be better not to respond at all. I just recommend you put 2cents on your ignore list. It's obvious that he has nothing of value to add here.

I've been keeping up with this thread since the first time it was posted and I do appreciate most responses here. I've only taken a basic college course on game theory but I am familiar with it all.

This was posted on another thread in ET:
http://www.prudentbear.com/internationalperspective.asp

Correct me if I'm wrong but the USD will eventually have to go through a period of higherinflation or deflation to unwind the debt? I imagine the chances of staying stagnant and paying off the debt is slim?

That said, I think the most beneficial discussion that can come to this thread is to talk about how we as individuals can do our best to protect ourselves in either case.

My general thoughts (which may be incorrect) are that with hyperinflation since the currency becomes worthless so fast it would be best to already be prepared - especially with warning signs already on the horizon - by diversification. I would think that owning a house, owning commodities and owning a basket of currencies would be the way to go (how this is divided up I do not know). If the warning signs become very apparent through this actual oil bourse or through Russia's coming online and being successful, I assume it would be best to move most currently earned money into commodities and other hard assets because who knows what the basket of currencies will be worth if global finacial collapse does take place.

On the other hand with depreciation, we would see interest rates skyrocket (although they didn't in Japan?), and obviously the best play would be to go to all cash as much as possible and lock in those rates.

If we do go into hyperinflation I assume we'll see the greatest bull run in history with commodities being the most volatile (like they just were recently).

On a side note, I do too hate the policians who just spend spend spend and seeing as how debt as a % of GDP is a relatively new thing (so I'm told), I do not feel very confident in the integrity of our politicians that they will do anything about it. I would love to see a fiscally conservative person run for office. They would get my full support.

Thoughts? I'm not a stupendious intellect nor a economist so these are just off the collar thoughts.


....
Here's a quote from that url I linked:

The United States needs to draw in more than $3 billion every working day just to break even from external deficits, and prevent the US dollar from falling further and keep interest rates from rising too far. The US current account deficit is the broadest measure of trade, including financial transfers along with goods and services, and widened $136.9 billion from 2004 to $804.9 billion in 2005, representing 6.5% of US gross domestic product, up from 5.7% in 2004.

However, Treasury data showed that central banks only bought a net $1.6 billion of US stocks and bonds in March, the lowest since they were $14.4 billion net sellers in March of 2005. Japan, the largest foreign holder of US government debt, sold a net $18.2 billion in Treasuries in February, but still holds a total of $640.1 billion. China bought a net $1.6 billion in US debt in March and holds $321.4 billion. Middle East oil kingdoms recycled $16.8 billion petro-dollars through British banks, and UK holdings rose in March by $16.8 billion and total $251 billion.

Nowadays, the US dollar is heavily dependent upon its role as the world's reserve currency, used for transactions in internationally traded commodities such as copper, crude oil, and gold. Therefore, foreign central banks must stockpile US dollars, which account for more than two thirds of all central bank reserves worldwide. This special reserve status means that the US dollar is always in demand, whatever the underlying strength of the US economy, or the level of US interest rates.

But the US dollar¡¦s counter trend rally from January 2005 to March 2006, that rode on the back of 16 quarter-point rate hikes by the Federal Reserve, started to unravel in April, following news that Sweden's Riksbank Sweden has cut its US dollar holdings, from 37% to 20%, with the Euro's share rising to 50 per cent. Kuwait, Qatar and United Arab Emirates also said they were buying Euros. Central banks in China and Japan hold less than 2% of their combined $1.75 trillion of foreign currency reserves in gold, and instead, hold depreciating US bonds.

But it was Russian finance minister Alexei Kudrin, who on April 21st, dropped the biggest bombshell on the US$ at the annual meetings of the World Bank and International Monetary Fund, by openly questioning the dollar's pre-eminence as the world's absolute reserve currency. The Russian central bank raised the Euro's weight in the currency basket against which it targets the ruble, by 5% to 35% on August 1st, 2005, reducing the dollar's share to 65% from 70 percent.

¡§The US dollar¡¦s recent volatility and the US trade deficit cause significant changes in the international situation and that is why we do not understand the US dollar at the moment as the universal or absolute reserve currency. The international community can hardly be satisfied with this instability. Whether it is the US dollar exchange rate or the US trade balance, it definitely causes concerns with regard to the dollar¡¦s status as a reserve currency,¡¨ Kudrin declared.

The EU-25 is dependent on Russia for 25% of its gas and 25% of its oil imports and sales of raw materials to the EU providing most of Russia's foreign currency and over 40% of the revenue for the Russian federal budget. It might only be a matter of time, before Moscow asks for Euros instead of US dollars for Urals oil. Iran¡¦s hardliner Mahmoud Ahmadinejad said on May 5th, that the Islamic republic still plans to open an Oil Bourse on the island of Kish within two months, and his close ally Hugo Chavez of Venezuela is also threatening a switch to Euros for oil transactions.

If Russia, Iran, and Venezuela decide to switch to Euros for future oil transactions, it could force the Federal Reserve to hike the fed funds rate to much higher levels to defend the US dollar in the foreign exchange markets. That in turn, could crush the US housing sector and rattle the S&P 500 stock index. Such a conspiracy theory is a dollar bear¡¦s dream, but could happen if the US crosses the red line of using military force to shut down the Ayatollah¡¦s nuclear weapons program.

In retrospect, the seeds of the latest US dollar crisis were also planted by Federal Reserve chief Ben Bernanke on March 21st, when he signaled that the Fed could live with a weaker dollar to help correct the US current account deficit.

"Although US trade deficits cannot continue to widen forever, these deficits need not engender a precipitous decline in the dollar, nor should such a decline, were it to occur, necessarily disrupt financial markets, production or employment,¡¨ Bernanke said in a letter to Rep. Brad Sherman, a California Democrat. However, two months later, the US dollar came under heavy speculative attack, sparking fears of higher inflation, and triggering a 4.5% panic ridden shakeout in the S&P 500.

 

[2cents]

another pathetic attempt jimmy... as i said

Quote from 2cents:

jimmy, you are just digging a bigger hole for yourself, and impressive amounts of smokey blather just won't do... you are the one who linked public debt / gdp ratio to hyperinflation, weimar had nothing to do with that...
... you haven't even begun to address any of my objections... but thats how it is with intellectual frauds, loads of posturing, no substance... not really a surprise

just by having 2 words on the same page doesn't establish a causal link, neither weak nor strong, not even a correlation... as you aptly note:

Quote from jimrockford:

one from an authoritative source, the Encyclopaedia Brittanica, at http://www.britannica.com/eb/article-58204:

--------------------------------------------------------------------------------
Although the inflation was rooted in the huge debt that Germany had amassed in financing its war effort, the hyperinflation of 1923 was triggered by the French-Belgian military occupation in January 1923 of the German industrial district in the Ruhr valley. The occupation occurred in retaliation for Germany's having fallen behind in its reparation payments and was intended to force German industry to provide compensation for the French and Belgian losses. Rather than accede quietly to the humiliation of occupation, the German government urged workers and employers to close down the factories. Idle workers were paid during the following months with a currency inflating so rapidly that printers gave up trying to print numbers on bills. By mid-1923 the German mark was losing value by the minute: a loaf of bread that cost 20,000 marks in the morning would cost 5,000,000 marks by nightfall; restaurant prices went up while customers were eating; and workers were paid twice a day. When economic collapse finally came on November 15, it took 4.2 trillion German marks to buy a single American dollar.
--------------------------------------------------------------------------------

the public debt / gdp ratio itself was not exactly on peoples minds nor the cause of the hyperinflation (by the way, when activity goes down to 0, do you know what becomes of the ratio?) not even a catalyst for that matter... just because a quantity is observable (to the extent that it was / was being) doesn't by virtue of that simple fact make it any of the above (cause, catalyst...)... and no quantity of talk will change that...

now as i said earlier in jest

Quote from 2cents:

yeah well if the jimrockfords of this world start printing their own currencies you BET there is gonna be some hyperinflation, man... whether they are publicly indebted or not, for that matter... and i am not even talking about their debt / output ratio... output, they have a lot of, useless for the most part, but A LOT...

except that wasn't in jest...

but let's not forget - how could we? - how absolutely desperate you are to establish any possible inch of relevance of the weimar situation to discuss today's alleged hyperinflationary risks that YOU'd linked to public debt/ gdp ratio (after so many pages of looking ridiculous you have sheepishly and grudgingly retracted that you meant to say that: "we have seen the beginnings of hyperinflation" however that still seems to be your main thrust...), which again i contend is a sad joke... without still providing any substantiated refutation to the cases of contemporary France, Germany, other European countries, Japan etc... http://www.elitetrader.com/vb/showthread.php?s=&threadid=62735&perpage=6&pagenumber=9

whats coming next, you want to go back to bernanke's helicopters perhaps? i'll send you back to pages 5 and 6...

anyway i don't mean to convince Rael nor the Raelians... how devious you are in your attempts to simply save face at any cost is pretty obvious all along these pages... any further INEPT attempts at bringing up weimar hyperinflation as a valid point of comparison will be similarly knocked down... you guys have your fun... not to worry, i am certainly having mine

 

[jimrockford]

Quote from 2cents:

another pathetic attempt jimmy... as i saidjust by having 2 words on the same page doesn't establish a causal link, neither weak nor strong, not even a correlation... as you aptly note:the public debt / gdp ratio itself was not exactly on peoples minds nor the cause of the hyperinflation (by the way, when activity goes down to 0, do you know what becomes of the ratio?) not even a catalyst for that matter... just because a quantity is observable (to the extent that it was / was being) doesn't by virtue of that simple fact make it any of the above (cause, catalyst...)... and no quantity of talk will change that...

now as i said earlier in jestexcept that wasn't in jest...

but let's not forget - how could we? - how absolutely desperate you are to establish any possible inch of relevance of the weimar situation to discuss today's alleged hyperinflationary risks that YOU'd linked to public debt/ gdp ratio (after so many pages of looking ridiculous you have sheepishly and grudgingly retracted that you meant to say that: "we have seen the beginnings of hyperinflation" however that still seems to be your main thrust...), which again i contend is a sad joke... without still providing any substantiated refutation to the cases of contemporary France, Germany, other European countries, Japan etc... http://www.elitetrader.com/vb/showthread.php?s=&threadid=62735&perpage=6&pagenumber=9

whats coming next, you want to go back to bernanke's helicopters perhaps? i'll send you back to pages 5 and 6...

anyway i don't mean to convince Rael nor the Raelians... how devious you are in your attempts to simply save face at any cost is pretty obvious all along these pages... any further INEPT attempts at bringing up weimar hyperinflation as a valid point of comparison will be similarly knocked down... you guys have your fun... not to worry, i am certainly having mine

Weimar Germany's excessive public debt, 1/3 of which were war reparations imposed by the Treaty of Versailles, caused Weimar to default on its debt. This default, in turn, provoked the Franco-Belgian invasion of the Ruhr for purposes of collecting the debt by force. The debt and the invasion, in turn, created the financial pressure which caused the Weimar government to inflate its currency, resulting in hyperinflationary destruction of the currency. The public debt was excessive, in that Germany lacked the productive capacity (GDP) to service the debt. The ratio of debt to gdb was too high. These events trace the causation from the excessive public debt to the hyperinflation. This fact is widely accepted by economists and historians, as one of the very most important facts of 20th century financial history. This fact is apparent, to any reasonable person, from the Britannica material I posted, and also, in much greater detail, from the other material I posted. I posted a BBC expert's answer, to a British schoolchild, for example, stating:

The two main causes of the hyperinflationary crisis in Weimar Germany in 1923 were the economic effects of the terms of the Treaty of Versailles on a war-ravaged economy and the Franco-Belgian invasion of the Ruhr to enforce the terms.

2cents, unfortunately, has posted that Weimar's hyperinflation had nothing to do with Weimar's public debt. This is because 2cents is unwilling to admit error or ignorance. He chooses, instead, to continue his barrage of childish insults and accusations against me. I suspect he is jealous of me.

2cents claimed that I retracted a statement. No, I did not retract anything, I merely regretted an ambiguous choice of words employed in making my statement. I stand by that prior statement of mine, that 2cents is using circular logic. 2cents posted, in this thread, an argument that since we have not yet seen the beginnings of dollar hyperinflation, we will never see it in the future. This is a silly circular argument. I wish I had used a more clear choice of words in expressing my crticism, but I retracted nothing. 2cents wants to create the appearance of a retraction, because he is not really interested in hyperinflation. He is only interested in misusing the forum as a way to proclaim his superiority to others, and the inferiority of those who challenge his claims.

It is very easy for people to misunderstand each other, when they use terms refering to increased inflation, on the one hand, and the beginnings of hyperinflation, on the other hand. The phrase, "beginnings of hyperinflation", can be defined in many different ways, including as any increase in inflation. The question as to whether or not we have seen "the beginnings of hyperinflation" depends on exactly what technicalities of definition one chooses in using those words. A resulting answer could go either way. 2cents is misusing the ambiguity to play word games, distracting us from serious and worthwhile discussion of the real topic at hand.

My previous postings, in this thread, already did refute the 2cents arguments concerning "cases of contemporary France, Germany, other European countries, Japan etc...". 2cents incorrectly claims I did not. This has been a pattern with him. No matter how many times I repeat something, he will continue to accuse me of never having addressed it, or he will act as though I never said and that I instead said something different. If anybody else, other than 2cents requests, THEN I will repeat my refutation; but I won't repeat myself yet again just for the sake of responding to 2cents and his childish bleating and name-calling.

We should keep in mind that Weimar Germany's war reparations debt was required to be paid in either gold-backed currency or in commodities. Weimar did not have the option of inflating its currency, so as to reduce the real value of its war reparations debt. Weimar could inflate only for purposes of spending elsewhere, and thereby relieving other financial pressures caused by the unrelievable financial pressure of the reparations debt.

The current U.S. public debt, in some ways, provides additional types of pressure to inflate the currency, because the debt itself is denominated and payable in U.S. dollars. This means that by printing more dollars, the U.S. can actually directly reduce and inflate away part of the real value of its public debt, an option which was NOT available to Weimar in regard to its reparations debt. Weimar shared, with the U.S., only the opportunity to use inflation only to ease other areas of financial pressures.

One of the main advantages the U.S. has, over Weimar, is that the size of its public debt is far more manageable than that of Weimar; but this situation deteriorates every day, because every day, the size of the U.S. public debt, as a percentage of gdp, grows aggressively and uncontrollably larger, with no end in sight. One wonders whether our own debt-addicted politicians will, in the war against inflation, ultimately prove to be greater enemies of the American people than were Weimar's enemies to Weimar.

I wish I could have responded more quickly and fully to the more constructive inquiries posted by Term, so it is unfortunate that I must first instead defend myself against the type of unfair attack continually pursued by 2cents.

I think 2cents is neither willing, nor able, to contribute to this discussion, nor to participate without extremely disruptive off-topic insults and false accusations, and that he should cease and desist so that others can continue the discussion without interference. I suggest that others who wish to participate in this discussion should discourage 2cents from continuing to interfere with the thread.

 

[jimrockford]

Quote from Term:

Jim, I appreciate your ability not to send insults back in the way of 2cents.

The model for immaturity on this board is that when someone has no rational counterarguement they result to childish name calling when it would be better not to respond at all. I just recommend you put 2cents on your ignore list. It's obvious that he has nothing of value to add here.

I've been keeping up with this thread since the first time it was posted and I do appreciate most responses here. I've only taken a basic college course on game theory but I am familiar with it all.

This was posted on another thread in ET:
http://www.prudentbear.com/internationalperspective.asp

Correct me if I'm wrong but the USD will eventually have to go through a period of higherinflation or deflation to unwind the debt? I imagine the chances of staying stagnant and paying off the debt is slim?

That said, I think the most beneficial discussion that can come to this thread is to talk about how we as individuals can do our best to protect ourselves in either case.

My general thoughts (which may be incorrect) are that with hyperinflation since the currency becomes worthless so fast it would be best to already be prepared - especially with warning signs already on the horizon - by diversification. I would think that owning a house, owning commodities and owning a basket of currencies would be the way to go (how this is divided up I do not know). If the warning signs become very apparent through this actual oil bourse or through Russia's coming online and being successful, I assume it would be best to move most currently earned money into commodities and other hard assets because who knows what the basket of currencies will be worth if global finacial collapse does take place.

On the other hand with depreciation, we would see interest rates skyrocket (although they didn't in Japan?), and obviously the best play would be to go to all cash as much as possible and lock in those rates.

If we do go into hyperinflation I assume we'll see the greatest bull run in history with commodities being the most volatile (like they just were recently).

On a side note, I do too hate the policians who just spend spend spend and seeing as how debt as a % of GDP is a relatively new thing (so I'm told), I do not feel very confident in the integrity of our politicians that they will do anything about it. I would love to see a fiscally conservative person run for office. They would get my full support.

Thoughts? I'm not a stupendious intellect nor a economist so these are just off the collar thoughts.

Thank you very much for expressing your recognition of what I have tried to so hard to prove, that the attacks on me, by 2cents, are incorrect.

Don't feel that you need to apologize for not being a stupendous intellect. Nobody else in this discussion is a stupendous intellect either. It is obvious that you don't feel 100% comfortable participating, because the disruptive and disrespectful behaviour by 2cents has intimidated you. Don't let him discourage your full participation.

I think you are in error to suggest that any period of deflation would help the U.S. to unwind its debt. U.S. public debt is denominated in dollars, not gold, not euros, not yen, etc., so that any deflation would increase the dollar's value, by definition; and this would increase the real value of the debt. So deflation would, in this way, certainly make the real size of the debt problem bigger.

Another problematic result of deflation would be that deflation almost always tends to cause shrinking of the economy, and to prevent economic growth. Why spend or invest now, when you can wait until later, when prices have fallen? Why borrow to finance consumption or investment, if we will need to pay back the loan in dollars that will be worth more than when we first borrowed them? So deflation would tend to reduce gdp. The gdp is a way to measure an economy's capacity to generate regular income so as to serve as a tax base from which the government can make payments of interest and principal, as required by the terms of its debts. The smaller gdp gets, in relation to the size of the public debt, the harder it will be for the government to raise the taxes needed to service that debt. So this is a second way that deflation would make the public debt problem worse.

A third way that deflation would make the debt problem worse is that deflation would force the government to increase its borrowing. The economic decline, associated with deflation, would increase various government obligations, like unemployment insurance benefits and pension guarantee benefits. Deflationary economic decline would also pressure the government to increase its borrowing and spending, because this is a standard policy choice used by governments to stimulate a declining economy to reverse its decline and to resume economic growth. Prudent government borrows and spends in recessions, and then mops up the resulting debt mess by paying debts when the economy is growing; but the U.S. Government, in Bush's America, always borrows more and more and more, no matter what is happening.

It is also not clear that your suggestion of higher inflation would be helpful to solving the public debt problem. It might help, by reducing the real value of the debt, and by helping to increase the size of the gdp used as the base of wealth from which to service or to repay the debt. But it might also have the opposite effect.

Higher inflation sometimes interferes with economic growth or causes economic decline, thereby making a public debt problem worse, because the gdp, and therefore the taxes collectible for purposes of servicing the public debt, will be smaller compared to the debt.

Inflation also tends to increase interest rates, not just to compensate for inflation, but also by additional amounts, to compensate for the increased risk of less predictable inflation rates, which risk tends to increase whenever the inflation rate itself increases. Such interest rate increases raise the cost, to the government, of making interest payments on its debt. This can force an over-indebted government to go even more deeply into debt, just to be able to pay the higher interest rates. This process can get so out of control, that it causes the total public debt to grow exponentially, until there is no hope of anything other than bankruptcy of the government, possibly including hyperinflation, and especially including hyperinflation if the government controls the presses which print the currency in which its own debts are denominated.

Another danger of increased inflation is that it could cause foreign central banks and other foreigners, and perhaps even American citizens and companies, to sell dollars and to keep their wealth in other foreign currencies and in gold, and to avoid investing in U.S. bonds, stocks, real estate, etc., and to avoid holding savings in the U.S. This process could then lead to a self-reinforcing, vicious circle of greater and greater inflation, or even a dollar panic and hyperinflation. This process could also severely reduce the economy's gdp, so that the public debt would need to be serviced on the basis of an even smaller productive capacity upon which to do so. This would increase the ratio of public debt to gdp, thereby worsening one of our best ways of measuring the size of the problem.

I will try to find time to respond to some of your other concerns tomorrow. If you could persuade 2cents to stop interfering with this thread, it would free up most of the limited time I can afford to spend on this thread, and thereby let me be more helpful.

 

[2cents]

Quote from Term:

This was posted on another thread in ET:
http://www.prudentbear.com/internationalperspective.asp

Correct me if I'm wrong but the USD will eventually have to go through a period of higherinflation or deflation to unwind the debt? I imagine the chances of staying stagnant and paying off the debt is slim?

That said, I think the most beneficial discussion that can come to this thread is to talk about how we as individuals can do our best to protect ourselves in either case.

My general thoughts (which may be incorrect) are that with hyperinflation since the currency becomes worthless so fast it would be best to already be prepared - especially with warning signs already on the horizon - by diversification. I would think that owning a house, owning commodities and owning a basket of currencies would be the way to go (how this is divided up I do not know). If the warning signs become very apparent through this actual oil bourse or through Russia's coming online and being successful, I assume it would be best to move most currently earned money into commodities and other hard assets because who knows what the basket of currencies will be worth if global finacial collapse does take place.

On the other hand with depreciation, we would see interest rates skyrocket (although they didn't in Japan?), and obviously the best play would be to go to all cash as much as possible and lock in those rates.

If we do go into hyperinflation I assume we'll see the greatest bull run in history with commodities being the most volatile (like they just were recently).

On a side note, I do too hate the policians who just spend spend spend and seeing as how debt as a % of GDP is a relatively new thing (so I'm told), I do not feel very confident in the integrity of our politicians that they will do anything about it. I would love to see a fiscally conservative person run for office. They would get my full support.

yeah i remember seeing this link too... why didn't you post the link to the ET thread mewonders???

good common sense overall... except for this:
. "- especially with warning signs already on the horizon -" which i say is cheap (i.e. unsubstantiated by any serious research) talk... and honestly i mean no offense to you at all...
. and particularly this: "seeing as how debt as a % of GDP is a relatively new thing (so I'm told)"... don't believe everything you're told...

think about it, those refutations i have posted are no insults, otherwise jimmy would just ignore them, those are facts - check my posts & data if you don't want to spend the time researching by yourself -, facts that he has a problem with... because he can't accept he could be wrong... would rather twist the facts, rewrite his own words etc so that things end up conforming to his OPINIONS...

i've also offered some contributions, notably but not only:http://www.elitetrader.com/vb/showthread.php?s=&postid=1119486#post1119486 fwiw... thoughts?

 

[2cents]

Quote from jimrockford:

My previous postings, in this thread, already did refute the 2cents arguments concerning "cases of contemporary France, Germany, other European countries, Japan etc...". 2cents incorrectly claims I did not. This has been a pattern with him.

well simply because you have NOT jimmy, not even begun, and any reader can check that for him/herself... at this point you are still the same old INTELLECTUAL FRAUD that i have exposed pages before...

keep going with your vehemential denegations, your fabrications of claims etc... i am not expecting you to accept being called a FRAUD, but hey, you're not really helping your case here

 

[2cents]

Quote from jimrockford:

I think you are in error to suggest that any period of deflation would help the U.S. to unwind its debt. U.S. public debt is denominated in dollars, not gold, not euros, not yen, etc., so that any deflation would increase the dollar's value, by definition; and this would increase the real value of the debt. So deflation would, in this way, certainly make the real size of the debt problem bigger.

Another problematic result of deflation would be that deflation almost always tends to cause shrinking of the economy, and to prevent economic growth. Why spend or invest now, when you can wait until later, when prices have fallen? Why borrow to finance consumption or investment, if we will need to pay back the loan in dollars that will be worth more than when we first borrowed them? So deflation would tend to reduce gdp. The gdp is a way to measure an economy's capacity to generate regular income so as to serve as a tax base from which the government can make payments of interest and principal, as required by the terms of its debts. The smaller gdp gets, in relation to the size of the public debt, the harder it will be for the government to raise the taxes needed to service that debt. So this is a second way that deflation would make the public debt problem worse.

A third way that deflation would make the debt problem worse is that deflation would force the government to increase its borrowing. The economic decline, associated with deflation, would increase various government obligations, like unemployment insurance benefits and pension guarantee benefits. Deflationary economic decline would also pressure the government to increase its borrowing and spending, because this is a standard policy choice used by governments to stimulate a declining economy to reverse its decline and to resume economic growth. Prudent government borrows and spends in recessions, and then mops up the resulting debt mess by paying debts when the economy is growing; but the U.S. Government, in Bush's America, always borrows more and more and more, no matter what is happening.

It is also not clear that your suggestion of higher inflation would be helpful to solving the public debt problem. It might help, by reducing the real value of the debt, and by helping to increase the size of the gdp used as the base of wealth from which to service or to repay the debt. But it might also have the opposite effect.

Higher inflation sometimes interferes with economic growth or causes economic decline, thereby making a public debt problem worse, because the gdp, and therefore the taxes collectible for purposes of servicing the public debt, will be smaller compared to the debt.

Inflation also tends to increase interest rates, not just to compensate for inflation, but also by additional amounts, to compensate for the increased risk of less predictable inflation rates, which risk tends to increase whenever the inflation rate itself increases. Such interest rate increases raise the cost, to the government, of making interest payments on its debt. This can force an over-indebted government to go even more deeply into debt, just to be able to pay the higher interest rates. This process can get so out of control, that it causes the total public debt to grow exponentially, until there is no hope of anything other than bankruptcy of the government, possibly including hyperinflation, and especially including hyperinflation if the government controls the presses which print the currency in which its own debts are denominated.

Another danger of increased inflation is that it could cause foreign central banks and other foreigners, and perhaps even American citizens and companies, to sell dollars and to keep their wealth in other foreign currencies and in gold, and to avoid investing in U.S. bonds, stocks, real estate, etc., and to avoid holding savings in the U.S. This process could then lead to a self-reinforcing, vicious circle of greater and greater inflation, or even a dollar panic and hyperinflation. This process could also severely reduce the economy's gdp, so that the public debt would need to be serviced on the basis of an even smaller productive capacity upon which to do so. This would increase the ratio of public debt to gdp, thereby worsening one of our best ways of measuring the size of the problem.

the ultimate darwin award material... say no more