The late Hyman Minsky was one economist who studied how debt overload leads to economic catastrophe, and offered a view that tied it to business cycles. The term "Minsky moment" refers to the tipping point in an economy, where its debt load becomes more than its cash flow can bear. We passed that some time ago, thanks to a sustained set of inflationary policies that begat 2 major bubbles (dot-com, housing/mortgage), and are about to lead to a 3rd (government debt, with accompanying hyper-stagflation).
It was interesting to hear Nassim "Black Swan" Taleb make the point on CNBC the other day that the key problem facing the USA is "de-leveraging," reducing debt. Have a look at the CNBC video - he even has an interesting suggestion for doing this.
Note that "debt" includes more than public debt. Private debt has also been running up at ruinous rates, for a long time. Morgan Housel, in "Why It Could Take Years to Recover," looks at the numbers. Household Debt to Disposable income averages were about 63.5% in 1974. The much-heralded recent jump in savings rates has pushed that figure from about 133% in Q1 2008, to about 128% in Q1 2009. To put that into better perspective:
" [worthwhile table with figures, etc.] The personal savings rate has shot up from slightly negative in 2005 to about 4% today.
But even a 4% savings rate equates to just $476 billion per year - a fraction of what we need to get household debt down to safer levels. If we took every penny we're saving today and put it toward paying off [household] debt, it would take more than six years to get household debt back to 100% of disposable income - about where it was in 2001."
And of course, there's no way every penny saved will go to reducing debt. Allowing negative compounding to continue.
"Why It Could Take Years to Recover" is a worthwhile article, just for its service of helping us contemplate the scale of the core problem. One we didn't get into overnight.
Unfortunately even current savings rates, welcome as they are, are a recipe for a very long period of pain. Until and unless this is fixed, no real increase in consumer demand is sustainable, and any "confidence measures" are more like "confidence games." Vid. the phenomenon of the Great Depression's 7 (!) "suckers' rallies".
Some of the core problem will be "solved" by pure defaulting, of course. Another Housel article, "Dangerously Delaying the Inevitable," offers Office of Thrift Supervision and the Comptroller of the Currency figures that say over 60% of mortgages adjusted with the help of the government's $75 billion assistance plan end up in default a year later. You can ignore the speculation as to why (look instead to this data set from the WSJ). Just note the figures.
Which tell us the mortgage crisis still has a few economic shocks left in it. Especially as unemployment continues to rise. Credit card debt is likely to be the next domino.
What's left, and there will be an awful lot of it, still has to be addressed.
Worse, as government debt increases, and money is printed at incredible rates (M3, the real US money supply, has more than doubled since Obama took office), it gets much harder to save. Taxes go up, and so do prices. Recognition of this risk is beginning to dawn on people. But recognition aloe is not enough.
The "good" news is that inflation eats away at the value of all US dollar denominated debt. That brings the totals down much faster than saving, and represents a simple transfer of wealth from previous lenders to previous borrowers. Naturally, this will give inflation important political constituencies who will support it and shill for it. Starting with the most highly leveraged individuals and companies. Who have, by definition, been the least responsible. As inflation picks up speed, it can even serve as an incentive for some to take on more debt.
What will that cost you? More than you think.
Inflation eats away at the real exchange value of nearly every single thing you own. It also leads to higher prices of tangible assets, which tend to maintain their real value and so go up in dollar value. Things like oil, for instance. Which then factors into the prices you pay for gasoline and food.
You won't see that rise in phony government statistics, by the way - neither gasoline nor food are counted as part of "core inflation," even on an annual basis. That minimizes the numbers the electorate hears, and also minimizes added payments on government programs that automatically adjust for inflation. It's a win-win for the federales. Though it does make it hard for people to understand why they feel like they're falling behind, despite rosy overall figures.
As the amounts of government debt and inflation rise together, which they are set to do, premiums also rise on government debt, since they must pay people more to make them buy an asset that's seen as riskier and riskier. Certainly, the massive amounts being issued are already beginning to give the market pause, and we're seeing the beginning of rising rates (even more true in California than nationally). At a federal level, that eventually ends up driving interest rates more generally, unless the government chooses courses of action that would likely lead to full hyper-inflation. The consequence is that any payments you have to make make get much, much higher, unless you're already locked into fixed, long-term arrangements.
Depending on how the government fiddles with notional weightings, that impact may or may not find its way into 'official' inflation statistics, either.
In real life, the net effects translate into the evaporation of big chunks of your life savings, while simultaneously making it much, much more difficult to save going forward. Result: a lower current standard of living, and a much lower future standard of living.
"When Money Dies" described extreme examples of these interlinked phenomena in 1920s Europe. Where, as one observer described it, "The conflicting objectives of avoiding unemployment and avoiding insolvency ceased at last to conflict when Germany had both...." But just 5 years of 10% inflation would effectively remove 38% of your dollar-denominated saved wealth. I watched my grandmother live through something like that. Many of you are about to see it happen to your parents. Or yourselves.
This may help you understand the recent media features that are beginning to discuss "the end of retirement." You'll see more of them.
Meanwhile, every sign and decision I see re: government action is set to either increase inflationary pressures, or strangle economic output. Or both (cap and trade).
We have not avoided the Great Depression 2.0. Near as I can tell, the icebergs are still on the horizon. And we're steering straight for them.
I share your pessimism, and I do have substantial dollar savings that inflation will eat away. I'm trying to figure out how to protect them. The awful thing about inflation is that it isn't stable, even buying a note that pays high interest isn't safe, inflation may outrun it. Hmm... maybe I should become a debtor?
The link above re: growing awareness has some suggestions. Offhand, I see 4 broad strategies:
The foreign currencies strategy is a bit of a puzzler. Canada's dollar is tied to the USA's due to the volume of trade, though it has better fiscal management and a similar base of commodities divided among 10% of the USA's population. Australia has similar characteristics, but is more of an Asia play. Europe shares many of the USA's fiscal weaknesses and indebtedness, but the Euro could still benefit as the US dollar sees its global reserve currency status whittled down. China's currency is manipulated up the yin-yang, I don't want to go there. Figuring out which currencies to pick and in what weighting is not proving to be easy.
There's no obvious successor to the dollar as the global reserve currency, even as its value slides. Instead, the likely pattern is bilaterals or limited multilateral deals like the one among China, India, Russia and Brazil to trade in their own currencies amongst each other.
China is clearly going for that, and it will spread. And note how they've been using some of their dollars to buy up and stockpile commodities lately. It all adds up to a big "no confidence" vote in the US dollar, though they aren't about to say so publicly very often because of what that would do to the value of their massive dollar holdings. But watch what they do - they're definitely edging away.
The currency analysts I'm listening to are looking at "commodity country" currencies like Canada, Australia, NZ, Norway. Some are also looking at Brazil, though that has longer-term risks beyond Lula. Hong Kong's dollar is one option, though the China ties concern., Singapore is a watered down play with less risk overhang, but coud be affected by choking trade. Japan is iffy for a bunch of reasons. South Korea has significant challenges ahead - but has better odds of recovering than the USA does. Still researching...
Inflation in the price of necessities is a real danger but I'm not sure how the increase in money supply will be inflationary.
My understanding is that domestic prices have been flat or declining in real terms for several decades, tracking a decline in real incomes as a result of stagnant or falling real wages. The deflationary pressures responsible for these trends are not abating. In the current recession, an effectively zero interest rate has failed to restart the credit markets. I would think the danger now is a liquidity trap, not (excess) inflation.
I certainly have worries about what will happen if the stimulus fails to restart broader economic activity. Inflation is likely to come from the demand for energy as recovery begins abroad. I don't think any major currency or economy will be immune to the effects.
The fallacy is looking for signs of inflation today- we are in a deflationary period at the moment. That won't last.
All you have to do is look at the US government's liabilities (social sec, medicare, medicaid, our current budgets, and whatever new madness they tack on this year) and realize it will be financially impossible to meet those obligations without massive borrowing. As more and more of the budget goes to paying interest on the debt, you get in the famous revolving credit crisis many of us know from credit cards- you are borrowing to pay the interest on what you've borrowed. The only politically possible way to sustain our obligations will be to print money, which at some point must trigger inflation.
Its not about today, its about doing things today that will guarantee it in ten years, maybe less.
I don't think deflationary forces can be offset by inflationary ones unless you see budget deficits at least an order of magnitude larger than today. A government able to spend on that scale would almost certainly be able to raise taxes as an alternative.
"An order of magnitude larger"... you mean a deficit of $14-18 trillion per year, equal to the size of the American national DEBT? Nothing short of that would create inflation?
Dude, this is the part where I ask you what color the sun is on your planet...
"I don't think deflationary forces can be offset by inflationary ones unless you see budget deficits at least an order of magnitude larger than today."
It's highly unlikely, probably impossible, that we will remain in a deflationary period for the next decade. If we do, we'll be in huge trouble because our economy will be in free-fall.
My point is that deflation is temporary, but entitlements are forever. We are righting checks today that may guarantee inflation tomorrow.
"Dude, this is the part where I ask you what color the sun is on your planet..."
My concern is that we may be in a liquidity trap. I hope I am wrong about that and I would be delighted if someone would argue that I am. But deficit spending can have very different effects depending on the condition of the underlying economy. In this economy, I honestly can't see catastrophic inflation without much higher levels of deficit spending.
"It's highly unlikely, probably impossible, that we will remain in a deflationary period for the next decade. If we do, we'll be in huge trouble because our economy will be in free-fall."
We're in a slow-motion free-fall already. We're in wage competition with the rest of the world and jobs have left the country. We will recover from the present recession but it may be another relatively jobless recovery. Underemployment has been growing.
I think we could do a better job of buffering these shocks and in the next few years a lot will depend on whether new public spending is mostly for productive purposes. But I don't think inflation can sustain itself if real incomes continue to fall and the alternative to deficit spending is to raise taxes.
Joe, about TIPS: they track the entire CPI-U, which includes food and energy. "Core" inflation is a term usually applied to the metric which the Fed likes to track - the core PCE deflator, which does not include food and energy.
So TIPS may in fact perform adequately in a "commodity inflation / debt deflation" scenario - if the gummint doesn't alter the deal (any) further... and if the debt monitization spiral can be avoided... Unlike regular bonds (which can be monetized as fast as the servers will run), TIPS are effectively denominated partially in "foreign currency" - imported commodities - and face a real risk of default if the sh*t absolutely hits the fan.
About commodities: there are some serious issues with oil and gas ETFs - the amount flowing into these markets are swamping the liquidity in the futures market. This is very likely the cause of the contango in the futures market, and it means that you lose money on every roll in a flat spot market. Returns from commodities have three components: the appreciation of the commodities (which is what everyone thinks of exclusively), the interest on the collateral (you need collateral to buy futures), and the roll yield (the market is usually in backwardation, not contango). It's these last two sources which provide much of the return, historically.
Folks reading this who do not know what I'm talking about: you should study up (not years, just an afternoon or two) on the futures market before you invest in ETFs. Do NOT treat them like a black box. (Yes I know this from bitter experience).
TIPS may be used as collateral for commodity futures - PIMCO has a fund which does just that. (No position, but thinking about it).
David Billington: I agree, money supply doesn't magically create inflation - you need a mechanism. OK, here's one:
The moment the bond market understands that future deficits have no hope of being paid for out of revenue, but must be monetized - that is the "Minsky moment" when the bond market realizes the Treasury Bond market is a Ponzi scheme - and yields will go through the roof. The dollar will sell off, and raw imports will extortionately expensive. Goods will either be more expensive or not sold - too expensive to make. Finished imports will be expensive and domestic substitutes will thereby gain pricing power.
Even a ten percent chance of all this coming to pass is knicker-soilage event, or should be.
David, that's a clearer explanation. Thank you. Not sure I agree with it entirely... vid. What's next: Inflation or deflation? on MSN money.
I do agree that some of the things you're looking at are real, however... the "service economy" has some inherent problems at its core. As the easy money/debt solution hits its limits, they are likely to become clearer. (That will be a different problem).
As a bookend for investors to think about, here's an interesting growth/pessimism essay... Why hope (or fear) is a bad bet now. Unfortunately, it yanks us back to the common denominator of bad fed data, and does not offer god news re: savings rates.
lewy,
Thanks for all of that. I'm personally edged away from oil/gas ETFs, but for a different reason. Long term for those commodities may be good, but now does not seem like the time to buy. Waiting for a "post disappointment" opportunity.
Meanwhile the information you provided is very worthwhile - and the advice re: studying first is spot-on.
Lewy's on top of the mechanism, and think about it, that has to be the case! Otherwise, as a number of wits noted during the first stimulus debate, we should be borrowing 100 times more money than we have. The argument that Krugman and this administration are making is ludicrous- it can't be possible to print an arbitrary amount of money and not trigger inflation, whether or not we are in a deflationary cycle. This isn't (instantly) a question of dollars chasing goods, its a question of the value of the dollar and interest rates. If the market becomes toilet paper on the international market, what's going to happen to the aisles at Walmart? What's going to happy to the price of gasoline?
Krugman and the liberal intelligentsia live in a strange world where the middle class is still in 1976, mainly because they focus only on real wages and health care costs. But the truth is we are a country seeped in cheap consumer goods that make our lives much better (cell phones, dvds, i-pods, gps). The proverbial rug may well be the death of cheap imports the protectionists have been decrying for decades. Then we'll see if you can make a t-shirt in this country you can sell for under 20 bucks (you can't).
What Lewy describes is an exchange rate adjustment. The overall impact of that would depend on whether an inflationary effect on prices in the United States is permanent, as it would be for example if we cannot substitute domestic energy for imported energy. But import substitution in the energy sector should be possible if we are willing to pay a medium-term environmental cost for the kinds of energy that could be brought to market quickly (natural gas, coal, nuclear).
The benefit of import substitution to our energy security, and the comcomitant retention of savings, would be a huge net gain for us. We exported about a trillion dollars to oil-exporting countries in 2008 and those dollars would stay at home. A lower dollar would also bring gains in the competitiveness of U.S. exports. The price of domestically produced manufactured goods would go up if U.S. costs remain higher than those of low-wage countries abroad. But textiles will continue to be imported from countries that use the dollar as their currency (or have low exchange rates to keep their own exports competitive).
The real questions are (1) whether China will allow its currency to rise against the dollar and (2) whether oil exporters will denominate the price of oil in a basket of currencies instead of in dollars. But an exchange-rate adjustment that causes a fall in the dollar, if it really occurs, should lead to a temporary spike in U.S. domestic prices followed by gains to the domestic economy and gains to U.S. exports that go a long way toward restoring the solvency of the private economy on which our public solvency ultimately depends.
You are going to quit on the Green energy bubble?
Oh come on! Photovolatic panels are piling up in Europe awaiting for the savior from the other side of the pond.
David the problem with your scenario is timescale.
An energy and commodity shock from dollar devaluation would be a substantial drag on the economy - a tax, if you will - immediate and consequential.
The economy would sink much faster than any domestic substitution could be effected.
Such a decline would not only further widen the output gap, but would actually destroy output capacity - there are fears this could happen in Europe, and it could happen here too.
Energy substitution would require time and capital - both of which would be lacking in a dollar decline prompted by a Treasury market crash.
Once we got to "the other side" - if ever we did - we'd arrive with an economy which was permanently damaged.
In the meantime, energy, food, capital equipment, etc, would inflate in dollar terms.
One aspect would be deflationary - wages. Unemployment would surpass Depression levels.
I don't think it is really possible to predict the political consequences of all this - I have a hard time seeing much good come of it.
The best hope is of a gradual slide in the dollar, and not a "Minsky moment" Treasury bond market crash.
"But an exchange-rate adjustment that causes a fall in the dollar, if it really occurs, should lead to a temporary spike in U.S. domestic prices followed by gains to the domestic economy and gains to U.S. exports that go a long way toward restoring the solvency of the private economy on which our public solvency ultimately depends."
The problem is we are ill equipped to ramp up our production in any kind of short timeframe, and a lot of that is institutional red tape that would take a huge amount of government overhaul to eliminate. Speaking of textiles, do you have any idea the last time someone opened a dye-house in this country? Much of our industry is in the same boat that the nuclear industry is- living on grandfathered time because it is nearly impossible to build anything in a nation of lawsuits and environmental impact statements.
Now in theory a few waves of the pen could solve that (perhaps, it wouldn't end the lawsuits)- but even in a crisis the Democrats could well dig in their heels at the behest of the greens. After all, all of this to the left isn't a bug- its a feature intended to slow or reverse consumption. Look at the cap and trade bill, it is designed to raise prices and force conservation.
I think we may be so strangled by our current culture of non-industry it would take at least a decade to really even begin to go back to a manufacturing based economy, and thats before the products hit the shelves. What happens in the interim?
Lewy and Mark - If the shock is massive and sudden, it could have the consequences you underline, and I also agree that we need to be more alert to the danger than we are right now. But if we really did have to substitute for imports overnight, we would be in a wartime situation. I am fairly sure there would be public support to mobilize the economy, expand domestic energy, and ration.
Energy substitution would take years, not months, but not decades. On a wartime footing, in five years I think we could substitute for the half of our energy that we import right now. We would realize immediate savings from the oil we do not import and much of those savings could go to energy independence.
I don't see how the economy would emerge permanently damaged: what factors of production would be permanently worse and why? As alternative or green technologies become available in the decades that follow, we could substitute them for the older ones we had to expand in response to the crisis.
I do agree that the trends of the last three decades will be very difficult to reverse under current conditions. However, if there is a massive and sudden shock, I think the frame of reference for everything would change accordingly.
"But if we really did have to substitute for imports overnight, we would be in a wartime situation. "
Not necessarily- and there is precedence. Smoot-Hawley launched a trade war that cut imports by 2/3rds in a couple of years and plunged the world into a much deeper depression. It took an actual World War a decade later for the US to get on that war footing and recover.
Cap and trade in its present form looks awfully familiar.
Mark - A tariff war is completely different in that it destroys exports as well as imports. A fall in the dollar exchange rate that makes imports more expensive will make exports more competitive.
But to your larger point, you are quite right that countries don't normally mobilize for war unless they are actually at war, and it is very possible that America could languish for a decade as it did in the 1930s if there isn't a wartime sense of urgency. However, the United States did not in the early 1930s face a sudden loss of imports that were absolutely vital to its survival, as oil is to us right now. I think a wartime sense of urgency would exist if we suffered such a loss.
In the case of a sudden and drastic devaluation of the dollar, I doubt "war footing" would be the political modality. It would feel more like defeat - i.e. not a rallying to strike back against an enemy, but an internally directed populist rage and a search for scapegoats - not Pearl Harbor '41, but Weimar Republic '23...
...but even if cooler heads prevail, the economic damage caused by sudden commodities and import inflation would likely be permanent: I cited an EU report above which details the causes of permanent damage due to a financial crisis: download the PDF and go to page 34, and read a few pages. (NAIRU = Non-Accelerating Inflation Rate of Unemployment, TFP = Total Factor Production).
Further: I don't see how we'd "save" on our total oil bill: demand would have to be destroyed by more than the price increase. In other words, if the price doubles, demand destruction would have to be in excess of 50% for us to "save money". This might happen around $400 a barrel or so - but by that time our total outlay would be exorbitant. Oil would still be needed for fertilizer, plastics, critical infrastructure, etc.
Of course, we could collapse within our own petroleum footprint - the declining production of US territory - if we nationalized oil production, and prohibited its export. This would probably happen. This is a long, long way down.
In the meantime, given a collapse in the Treasury market, if we well and truly needed something from the world, we'd be forced to sell tangibles - land, mineral rights, and the future earnings streams of our corporations - to keep going.
From what I can see there is no quantity of domestically available BTUs sufficiently fungible in a timescale short enough to recover from sudden shock. Whatever the denomination of monetary units, the subsequent catastrophic loss of living standard would feel like precipitous inflation for the vast majority of Americans.
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There is a strain of thought out there (Paul Krugman, I'm looking at you) that dollars may be borrowed from the world without limit and without consequence.
If and when the possibility of currency or debt collapse is conceded, debate often shifts to the perspective of seeing this as a feature, not a bug.
This is no feature. This would be a disaster that would permanently cripple the US. (Of course, for some people, that's the feature.)
If you want to know what this looks like, consider Argentina.
The only way to avoid this disaster is to stop borrowing before the bond market becomes convinced that monetization of the national debt is arithmetically or politically inevitable.
The "Misky moment" is the Schwarzchild radius of the US economy...
"A fall in the dollar exchange rate that makes imports more expensive will make exports more competitive."
And what would we be exporting? Particularly considering the collapse of the worlds other markets would be inevitable, and considering the reprisal tariffs certain to be in place against what we do have to offer, I doubt exports will rise to the level to nearly offset the collapse of our consumer markets. What is Walmart going to sell to China, at any price?
As to the war footing argument, I think in absence of someone to shoot at it is fatally flawed. In a real war you are taking millions of the population, putting them in uniform, and have them consume vast amounts of ordinance and supplies. How many M1A1 rounds can we stockpile? It comes to the point where the government might as well hire people to dig holes and fill them in, it amounts to the same thing. This is little different than Keynesian stimulus which is not what you want in a period of hyperinflation.
Lewy - Just looked at the pages you reference. If I understand the argument correctly, the permanent effects assume labor market rigidities that don't exist in the United States. But even with these assumed, the conclusion for the Euro area on page 36 (below) is:
"We have argued that, although the adjustment phase could be protracted, the most likely scenario for the euro area is for a return of potential growth to its pre-crisis long-term trend."
There is a warning on page 37 (below):
"In a number of euro-area Member States, the recession of the 1990s was followed by enduring deceleration in potential due to weaker TFP growth. The long-lasting deceleration of potential in conditions which were arguably less dramatic than those prevailing now suggests that the downside risks on long-term prospects for TFP growth are substantial. Such risks should not be played down and curtailing them appears to be an essential policy challenge at the current juncture."
I agree with the above warning if this is your point. For commodities and import inflation to cause a permanent (as distinct from a protracted) decline, though, the American economy would have to be static, such that a permanent change in input costs leads to a permanent change in outputs. In any one decade there could indeed be a long stagnation but permanent implies decades and historically we don't see modern market economies stagnant for that long.
However, you do raise another more immediate point, namely the political damage that could result from a collapse. Although I think our democratic values are more deeply held than in interwar Europe, a sudden economic collapse could radicalize a large part of the electorate if elites in both parties prove unable to manage the situation.
Regarding the oil bill, sorry for some imprecision. By "save" I meant that the money we export for oil would be retained at home by shifting to domestic energy, not that the unit cost of energy to Americans would go down. The benefit would be the retention of net earnings at home for reinvestment at home.
The way to avoid disaster is not necessarily to stop borrowing; it is to make sure that any new borrowing is for productive purposes. That is where my concerns are greatest.
Mark - Walmart doesn't sell in China; it buys from China. But Boeing sells there and could take market share from Airbus if the dollar goes down in relation to the euro. The question is whether other countries that have trade surpluses with us as a result of exports are going to allow their currencies to revalue against the dollar, or at least allow their currencies to revalue suddenly.
When I used the term "war footing", I meant a mobilization of national resources on the scale of World War II, not to go to war, but to achieve a finite set of geological and industrial engineering goals related to energy independence. Sorry if that wasn't clear.
I agree on the uselessness of make-work employment. Any new spending must achieve real tangible gains to the productive economy or it will only worsen the situation.
David, the EU report includes several effects of financial crisis which can permanently damage long term growth potential: e.g., the increased risk aversion of capital, and the skills obsolesces of workers.
Fear and forgetfulness are aspects of the human condition, not just the European condition.
The optimistic caveat on page 36 applies to the current crisis - not a hypothetical dollar shock.
But we could spend all day talking about whether stunted growth would persist for a decade or three: you say:
In any one decade there could indeed be a long stagnation but permanent implies decades and historically we don't see modern market economies stagnant for that long.
I don't see how a decade squares with your original claim that an input price "spike" would be temporary, unless you torture your words to get them to say what you want them to.
And I don't see how war footing, massive state control, and a decade of stagnation leads inexorably to better growth and happier economic times.
I do agree that energy substitution is a battle to be fought with a ferociousness appropriate to war. And I do agree that balance has to be restored to the world economy. And I also agree that our future prosperity depends crucially on these issues.
But I maintain that the likelyhood of a good outcome is path dependent - it matters how we get there - and that not all economic destruction is cleansing, and not all financial conflagrations are cleansing. There are falls from which we may not rise robustly, or ever.
And I also maintain - to return, again, to the subject of the original post - that there are disasters for which the only sane prevention is to stop borrowing - and the virtue and merit of the activity such borrowing would finance are absolutely irrelevant.
When you can no longer pay interest on your debt out of cash flow, you need to stop borrowing. Full stop. There is no "happy ending" to the precipitous devaluation that Ponzi-regime borrowing would cause.
Lewy -
"David, the EU report includes several effects of financial crisis which can permanently damage long term growth potential: e.g., the increased risk aversion of capital, and the skills obsolesces of workers."
I guess I am unsure what you mean by long-term. Historically, risk aversion and obsolescence of skills do not last forever. I agree that these things could throttle economic growth or trap the economy in a depressed state for a decade or so if government cannot respond effectively to mitigate the situation. That was my concern earlier about a liquidity trap.
"I don't see how a decade squares with your original claim that an input price "spike" would be temporary, unless you torture your words to get them to say what you want them to."
Let me try to restate my argument. An exchange rate adjustment, if it occurs, would produce an initial dislocation to the American economy. The nature and length of the dislocation would depend on what caused it and on whether and how effectively the federal government is able to respond.
I argued, for the hypothetical situation in which oil became too expensive to import, that the federal government would undertake a World War II-style mobilization to shift domestic consumption of energy to domestic sources over a five-year period. This would be an engineering program to achieve an engineering outcome, not an open-ended experiment in Keynesian manipulation of the macro-economy. If the federal government does nothing, then it would be up to market forces to find a new equilibrium. This could take a decade to achieve.
"But I maintain that the likelyhood of a good outcome is path dependent - it matters how we get there - and that not all economic destruction is cleansing, and not all financial conflagrations are cleansing. There are falls from which we may not rise robustly, or ever."
For the economy not to recover ever, there would have to be an end to engineering innovation. I don't think a set of conjunctural circumstances today could bring two hundred years of engineering innovation to a permanent halt.
"When you can no longer pay interest on your debt out of cash flow, you need to stop borrowing. Full stop. There is no "happy ending" to the precipitous devaluation that Ponzi-regime borrowing would cause."
I agree if you refer to borrowing that finances consumption and overbuilding rather than productive investment. The problem we have right now is that we have borrowed to consume and overbuild, and that kind of borrowing cannot continue.
Money metals like gold and silver are traditional hedges. Buying the actual metals is a pure hedge play, and not the same kind of investment as a stock. There are various ways to do it, and there are also instruments like SPDR GLD out there.
Gold can be, and has been, seized before. Foreign holdings can easily be seized too, just set the tax rate for them to 100%, and since the US can tax its citizens wherever in the world they are.
Any holdouts who refuse to disgorge their foreign holdings can be imprisoned under color of contempt of court until they comply voluntarily.
My point is that deflation is temporary, but entitlements are forever. We are righting checks today that may guarantee inflation tomorrow.
That is easy to get around. Simply deny all entitlements to members of non-protected classes.