The fact that President Obama, who in his first two years spent like the drunken sailor who had woken up next to J.M. Keynes, now wants to mollify the Tea Party should tell us something: not only will markets resist inflation, but the voters will as well. Inflation transfers wealth from creditors to debtors. As the population of the industrial world ages there are more creditors than debtors, and they hold the balance of political power. That explains the success of the Tea Party, whose leadership was so scattered and amateurish as to make its influence seem freakish, but which nonetheless centers around a perfectly rational fear that governments will wipe out the value of pensions.The argument about old folks should work out in the end - been making it myself for years - but the Tea Party as a deflationist organization? Come on. These guys, or their allies, are on the record saying deficits don't matter. My assumption is that they just don't understand, or maybe care, that they'll be paid off in the end with higher taxes or inflation, and that inflation is a tax (I sometimes have trouble explaining the latter point even to otherwise intelligent people).
The best you can hope for with the Tea Party is that the educated leadership is manipulating the rest to cut taxes now, "starve the beast", and then raise taxes to pay off the debt after people have already gotten used to reduced public services. But I doubt it. I think they just want their tax cuts and Medicare too.
His next post redeems him a bit:
Gold is up, but everything else is down. Gold is NOT, NOT, NOT an inflation hedge: it is a hedge against the end of the dollar’s status as a reserve currency, a deep out-of-the-money put against the US currency. The marginal cost of production of gold at the world’s most expensive mine is well under $1,000, and the metal is trading at a 50% premium to marginal production cost. If the US emulates the UK’s drastic budget cuts of last year and tightens monetary policy even marginally (not an inconceivable outcome) gold should fall to $1,000 an ounce. As I’ve said before: gold and government debt both are bubbles and you don’t know which one will pop first. You need to own some of both, unless your crystal ball is in better working order than mine.
3 comments:
"As I’ve said before: gold and government debt both are bubbles and you don’t know which one will pop first. You need to own some of both, unless your crystal ball is in better working order than mine."
I'm a little confused...if both are bubbles, shouldn't the answer be stay away from both? Bubbles burst, and bad things happen to asset prices when they do. I'd think it would be better to be in assets that show less, or even better no, sign of bubbles.
Bryan's the finance expert in these parts, thoughtgolem, but my answer would be that there's still money to be made in a bubble. If you got out of the dot-com bubble at the right time, you made out like a bandit- same with real estate. So I think Bryan is saying, put some money in these bubbles, and when they start to pop, bail, and count your winnings.
There is money to be made in a bubble, it just feels like most of the easy money to be made in these trades has already been made. Gold and treasuries are so high because people have already moved to protect themselves from disaster. How much more expensive protection are people going to be willing to buy unless things really start to fall apart? If things do start to fall apart, i don't think faith in the US government will keep people buying enough treasuries to keep up with government borrowing. If things do fall apart, how much extra wealth will remain to buy $1500 or $2000 gold? It just feels more like a fear trade than a reality trade, and people have a bad habit of forgetting their fears in a hurry.
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