Anyone willing to bet on a devaluation of the dollar when all the debt bubbles burst?

[Kinser79]

(05-28-2016, 08:05 AM)Mikebert Wrote:

Ragnarok Wrote:No!  Deflation is defined by the decrease in money + credit relative to the supply of goods + services.  Geeze, no wonder why the Fed is so messed up.

Just because you assert this does not make it so.

Mike, it isn't an assertion. It is a definition of what deflation is. It is like saying a tree is a plant that is relatively tall, and contains a main woody stem (trunk) with smaller woody stems (branches) attached to that main woody stem and leading eventually to photosynthetic organs (usually called leaves).

Quote:And you have a sufficient supply of dollars that you have no need to generate more?  In a deflationary world the prices of every are continuously falling.  Why buy today, when tomorrow it will be cheaper.  So unless you have enough dollars for the rest of your life right now, you are going to need to get more. How are you going to persuade others to part with theirs?

I would argue that there are two different types of demands. Demands that can wait, and demands that cannot wait. Providing others with goods and services for demands that cannot wait (food, water, haircuts) generally produces smaller marginal returns but repeat business.

For demands that can wait, by waiting the consumer can actually purchase more with the same amount of money or sometimes for even less.

Quote:People take on business business risk in order to earn a return on their capital.

In a deflationary economy where your cash grows in value around 1 or 2% just by hanging under one's matress it makes the accumulation of capital--particularly by those of fewer means--much easier. Often such people would go into providing goods and services that are of immediate fulfillment demands.

Quote:  The long term return on capital is about 5%.

That is a very large assumption you have there. Capital is destroyed all the time through investment, some investments have a larger long term return because they are incredibly risky, other investments have a smaller long term return by cause they are much less risky. I'm only going to agree to this assumption for the sake of argument here. Otherwise it is nothing more than an unsubstantiated assumption.

If we assume that the Fed is right and that 2% inflation is necessary to maintain economic growth (there is no evidence for this but lets for the sake of argument assume they are right), and that long term return on capital is 5% per year then each year the actual return on capital in real terms (purchasing power terms) is only 3%. But it gets worse as I'll show below.

Quote: The long term return on zero-risk securities has been about 1%. 

There is no such thing as a zero-risk security. All investments contain some element of risk. That being said, I'm going to assume you mean very low risk securities like governmental debt instruments (IE Bonds) if the return is 1% per year and inflation is 2% per year the return is -1%. In short people investing in such a manner are paying someone else to park their money in real terms.

While this may be acceptable when there is an obvious asset bubble that could pop at any second (like the Stock Market for example) it is totally unacceptable in otherwise normal business climates. As such the return on those low risk instruments has to produce in interest a return higher than the rate of inflation for people to even consider them--driving up interest rates in the case of bonds denominated in a currency.

Quote: I simply cannot see nuclear-armed developing nations like China or Russia willing to stay in such a straight jacket.

I'm sure that no one saw the USSR collapsing under its own weight. I'm also certain you didn't predict the Berlin Wall falling on 9 November 1989 either. But I digress.

Then explain why both are buying gold as fast as they can. It is my assumption that since no other currencies are backed with gold that both are seeing a need that their currencies might aught to be as a hedge against dollar collapse. Furthermore, with more and more dollars being produced and so few goods to buy with those dollars (the US' main exports are wheat, corn, soybeans and timber--in that order no less) and the potential to purchase oil in currencies other than dollars (as with Iran [gold, RMB, INR] and Russia [RUR, and USD--which Russia is converting to physical gold as fast as they get their hands on those USD]) I would say the end of the USD as a reserve currency is no more than 20 years away, and probably within a decade from today.

As such all those dollars are going to have to be repatriated all at once to the US and with so few goods to buy in dollars we'll be seeing bread sell for 1000 bucks a loaf.

 

Quote: They would have an overwhelming incentive to set up their own trading bloc anchored around one of their own fiat currencies (probably the yuan) and enjoy faster growth, allowing them to more rapidly surpass the Western countries.

They have every incentive to do that whether the US uses specie as currency or a fiat currency. Russia in particular does not gain anything from US hegemony, and US hegemony is constraining China and India. Neither are going to slow their development because Americans want them to nor should they.

Quote:  We went through this before in the 18th century.  Britain embraced their own fiat currency, while France, because of the unpleasantness in 1720, continued to hug gold.  France was eclipsed by Britain.  Although only a fourth the size, Britain was able to outspend France in the Napoleonic wars.  France eventually threw in the towel and got on board about a century after Great Britain did.

Your history is bad and you should feel bad for using it. The GBP was throughout the 18th and 19th centuries backed by gold. France's currency was gold or backed by gold most of the same time. France did, during the revolutionary period introduce a fiat currency which wrecked the economy and was undone by Nepoleon.

The differences between France and Britain during this time frame were cultural rather than monetary. As for how the British were able to outspend the French during the Nepoleonic Wars was due primarily to their use of fractional reserve banking which the French rejected. However at no time until WW1 did the British or French Empires abandon the gold standard for their currencies because no foreigner would accept anything but specie for their purchases.