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So it's pretty obvious at this point that there's almost certainly going to be a recession starting later this year; even the major papers are talking about it, and they don't notice until that cat is entirely out of the bag and it's really too late to do anything about it. The Fed is, as I've mentioned before, in a bad position; tighten to try to keep inflation under something distantly like control but get a recession, or loosen to try to keep the credit-driven economy continue to bubble a little more and risk losing inflation. Bernake and company have decided to try to split the hair and I think have failed to raise rates enough to control inflation but not kept them low enough for economic growth, but this monster is going to come down one of these days and it's probably better sooner than later. But to a very real degree, particularly at the highest levels, what they're doing doesn't really matter as much as it used to; I'll try to explain why in a moment.
One thing you don't have to worry about - at least, not too much - is the BP shutdown in Alaska. It's 2.5% of total US consumption, which is a lot, but outside Cascadia you aren't going to see a lot of pain from that alone. With the recession coming up in the next couple of quarters, demand isn't going to grow as strongly in the US next year anyway, so the shutdown-driven slump in production growth will hopefully be nicely offset by economic demand drawdown. (I do make an assumption here: that the oft-discussed "decoupling" of the world economy from reliance on the US economy for its health takes place, but only partially. Unlike the contrarians, I do not discount decoupling entirely - but I don't think it will be as simple a break as do the optimists.)
On the other hand, consider the effect of slower production growth over the last couple of years on prices, then extrapolate to production drops circa 2010 or whenever it finally does happen. That'll keep you up at night. By the way, don't forget to register and vote for I-937 this fall, and get involved with attempts to make local versions happen - but I digress.
The upcoming recession, even assuming no further major oil disruptions, could be pretty bad; for those of us in Cascadia who suffered through the tech depression - most of the country got to skip out of that one, having only a limited recession to live with - it probably won't be any worse than the last one, but the rest of the country will get to feel our pain. You aren't going to like it. However, you've got a small assortment of months left, so save up your money - as much as you can, anyway. The American savings rate continues to be well below zero, which, simply put, can't go on much longer - the housing "wealth effect" is drying up and American consumers are in unbelievable amounts of debt against income, and, in an economy largely driven by discretionary spending, that's really, really bad - particularly going into a downturn.
Of course, what some people have really been waiting for is the inflation shock that is presumed will come the next fall of the dollar, the fall that stubbornly just keeps not coming, as China, India, Japan, and an assortment of other countries continue to be willing to float our national trade and budget deficits. (The latter, by the way, is much worse than the official number - $700B if you include medicare and social security receipts, even higher if you don't, as you're not supposed to.) There are various reasons the dollar hasn't fallen further than it has over the last couple of years; some have been discussed extensively - momentum, safety-blanket psychology, the semi-de-facto oil standard kept in place by dollar-denominated transactions. And most of those have some weight. But a big one, honestly - and the usual retort handed to anyone saying that we can't keep up these insanity-driven spending practices without crushing the dollar - has been the lack of an apparent successor currency. Nobody expects the Euro to be it; the Yen is too limited; the Chinese economy isn't at all ready. There's no one else ready to take the throne.
But I think people have it wrong. I would assert that politics - the policies of central banks - do not lead economics, but follow them, and are, in fact, a lagging indicator, not a leading one. I would assert that the reason we don't have a successor currency to the dollar is because there isn't going to be one, because there doesn't need to be one anymore. As Bretton Woods II - the informal currency-control system made up by an assortment of important central banks, mostly dedicated to keeping the dollar strong and currency exchange values relatively stable - breaks apart, the countries most able to be flexible in their reserve situations have been moving to baskets of currencies - some dollars, still, but also some pounds, some yen, some yuan, a lot of euros, and so on. This is no longer difficult; currency exchange is a matter of a few dozen keystrokes instead of hauling great stacks of paper - or, previously, gold - around, and information about currency conditions flows much more freely than at any time in the past. Note that Bretton Woods II itself - thinking about it for even half a minute - is an example of the same process of formal singular structure leading to informal multiple structures.
In other words, history rhymes, and wherever you go, there you are. Where we're going is where we already are, cobbling together a set of basket systems, without a single dominant currency. As soon as the currency traders finish realising this - probably about the time everyone is pretty well situated with well-diversified basket reserves - someone will probably notice that the dollar has already been dethroned, and the last leg will be kicked out from whatever props will still be holding it up.
All this touches upon why gold is not the future. A lot of gold standard enthusiasts - "gold bugs," to use the common and somewhat-derogatory nickname for them - assume that we'll end up back on a gold standard after a significant deflationary period. I don't think this is true, and explaining why leads to an assortment of questions about the historical role of gold as having inherent value.
I assert that the traditional role of gold stemmed from its value as an information unit. As soon as you start to have trade, you're going to start to want to have a way of moving wealth around without hauling huge loads of beans, wheat, wood, peat, or whatever around physically with you. You need tokens, which become money. But you need something stable (so it doesn't go away), something rare (so that nobody can just make lots more of it), something not particularly bulky (for ease of transport), and most importantly of all, something easy to identify as valid in an environment where communication is no faster than transport. Any intrinsic uses of the token is utterly irrelevant - in fact, you'd want something not hugely useful in common life, so it doesn't get manufactured away.
Gold and silver fit the bill nicely; they're easy to identify, thanks to their physical and chemical properties; they're stable - gold doesn't even tarnish, thanks to the tightness of its monatomic lattice structure; they're reasonably rare; they're too soft to make effective weaponry; they can be stamped for association to an institution, to propagate word of that institution's wealth - for advertising, or for quality assurance, or plain old glory if you will. That their intrinsic non-ornamental uses were actually rather few, at the time, didn't matter; inherent useful value is a negative property in this circumstance. Fundamentally, they were just as much a fiat currency as the paper dollar would be later.
Continuing down the chain, note how once communication became easier, cheaper, and independent of transport, the gold standard fell apart. This didn't happen immediately; it took some time for the inertia of ideas to be overcome and the old system to die. I suggest this is not coincidence, and that the new, easier, more convenient system replaced the old, and that we won't be reverting to that old system of a gold standard until and unless previous constraints on information reappear, something I sincerely hope does not happen. A similar delay of realisiation - a similar inertia of assumption - currently supports the dollar right now.
A few years ago, I read a book by Martin van Creveld called The Rise and Decline of the State. (Note that it's not the Rise and Fall. That's important.) I recommend it, despite a disappointing final chapter. His thesis is that state unity of power is on the decline, and will continue to decline as second-tier power groups become more powerful, but will not vanish. I, in turn, have argued previously that many forms of power have become increasingly dispersed - and in particular that the amount of power, particularly destructive power, available to the smaller group and to individuals is scoping up beyond the capability of states - or anyone, really - to control. For example, the entire smallpox argument going around about five years ago - whether to destroy the last samples known to be held by government agencies - was utterly pointless. The virus had already been sequenced; the sequence had been published. The data was available. In a small number of years, the ability to rebuild the virus from scratch will be in graduate-level labs in the West, and in Japan, and China. The efforts of the states to destroy this will become irrelevant, the feat impossible, the acts without effect. Relatively few people argue with this - certainly not anyone who knows anything about biology and related technologies.
It's been clear for some time that the same sorts of power-shifts have been happening with military forces. "Fourth generation warfare" is simply what you call it when individuals can carry around tankbusting grenade launchers, and a lot of them are around. It's the kind of war you get when the offensive power available to large numbers of free-roaming individuals reaches a certain level. With money, power is in the form of information - and, fundamentally, always has been. And as communication improves - making transactions easier - and information availability improves - arguably the same thing - the same penumbra of available power descends from governments to larger organisations to smaller organisations - and perhaps eventually even to individuals, who knows? In this environment, just as armies and central governments still matter but matter less, central banks still matter but matter less; superpowers (economic and otherwise) matter, but less... and single-reserve currency plans stop making any sense at all. Central banks will still be around; some of them will still matter; some currencies will be quite a bit more equal than others. But there will be more than one.
So if you're betting against inflation on the idea that the dollar is the indispensable medium, that there must be one (but can be only one), you might want to reconsider your position. The world is already changed; it just hasn't noticed yet.
One thing you don't have to worry about - at least, not too much - is the BP shutdown in Alaska. It's 2.5% of total US consumption, which is a lot, but outside Cascadia you aren't going to see a lot of pain from that alone. With the recession coming up in the next couple of quarters, demand isn't going to grow as strongly in the US next year anyway, so the shutdown-driven slump in production growth will hopefully be nicely offset by economic demand drawdown. (I do make an assumption here: that the oft-discussed "decoupling" of the world economy from reliance on the US economy for its health takes place, but only partially. Unlike the contrarians, I do not discount decoupling entirely - but I don't think it will be as simple a break as do the optimists.)
On the other hand, consider the effect of slower production growth over the last couple of years on prices, then extrapolate to production drops circa 2010 or whenever it finally does happen. That'll keep you up at night. By the way, don't forget to register and vote for I-937 this fall, and get involved with attempts to make local versions happen - but I digress.
The upcoming recession, even assuming no further major oil disruptions, could be pretty bad; for those of us in Cascadia who suffered through the tech depression - most of the country got to skip out of that one, having only a limited recession to live with - it probably won't be any worse than the last one, but the rest of the country will get to feel our pain. You aren't going to like it. However, you've got a small assortment of months left, so save up your money - as much as you can, anyway. The American savings rate continues to be well below zero, which, simply put, can't go on much longer - the housing "wealth effect" is drying up and American consumers are in unbelievable amounts of debt against income, and, in an economy largely driven by discretionary spending, that's really, really bad - particularly going into a downturn.
Of course, what some people have really been waiting for is the inflation shock that is presumed will come the next fall of the dollar, the fall that stubbornly just keeps not coming, as China, India, Japan, and an assortment of other countries continue to be willing to float our national trade and budget deficits. (The latter, by the way, is much worse than the official number - $700B if you include medicare and social security receipts, even higher if you don't, as you're not supposed to.) There are various reasons the dollar hasn't fallen further than it has over the last couple of years; some have been discussed extensively - momentum, safety-blanket psychology, the semi-de-facto oil standard kept in place by dollar-denominated transactions. And most of those have some weight. But a big one, honestly - and the usual retort handed to anyone saying that we can't keep up these insanity-driven spending practices without crushing the dollar - has been the lack of an apparent successor currency. Nobody expects the Euro to be it; the Yen is too limited; the Chinese economy isn't at all ready. There's no one else ready to take the throne.
But I think people have it wrong. I would assert that politics - the policies of central banks - do not lead economics, but follow them, and are, in fact, a lagging indicator, not a leading one. I would assert that the reason we don't have a successor currency to the dollar is because there isn't going to be one, because there doesn't need to be one anymore. As Bretton Woods II - the informal currency-control system made up by an assortment of important central banks, mostly dedicated to keeping the dollar strong and currency exchange values relatively stable - breaks apart, the countries most able to be flexible in their reserve situations have been moving to baskets of currencies - some dollars, still, but also some pounds, some yen, some yuan, a lot of euros, and so on. This is no longer difficult; currency exchange is a matter of a few dozen keystrokes instead of hauling great stacks of paper - or, previously, gold - around, and information about currency conditions flows much more freely than at any time in the past. Note that Bretton Woods II itself - thinking about it for even half a minute - is an example of the same process of formal singular structure leading to informal multiple structures.
In other words, history rhymes, and wherever you go, there you are. Where we're going is where we already are, cobbling together a set of basket systems, without a single dominant currency. As soon as the currency traders finish realising this - probably about the time everyone is pretty well situated with well-diversified basket reserves - someone will probably notice that the dollar has already been dethroned, and the last leg will be kicked out from whatever props will still be holding it up.
All this touches upon why gold is not the future. A lot of gold standard enthusiasts - "gold bugs," to use the common and somewhat-derogatory nickname for them - assume that we'll end up back on a gold standard after a significant deflationary period. I don't think this is true, and explaining why leads to an assortment of questions about the historical role of gold as having inherent value.
I assert that the traditional role of gold stemmed from its value as an information unit. As soon as you start to have trade, you're going to start to want to have a way of moving wealth around without hauling huge loads of beans, wheat, wood, peat, or whatever around physically with you. You need tokens, which become money. But you need something stable (so it doesn't go away), something rare (so that nobody can just make lots more of it), something not particularly bulky (for ease of transport), and most importantly of all, something easy to identify as valid in an environment where communication is no faster than transport. Any intrinsic uses of the token is utterly irrelevant - in fact, you'd want something not hugely useful in common life, so it doesn't get manufactured away.
Gold and silver fit the bill nicely; they're easy to identify, thanks to their physical and chemical properties; they're stable - gold doesn't even tarnish, thanks to the tightness of its monatomic lattice structure; they're reasonably rare; they're too soft to make effective weaponry; they can be stamped for association to an institution, to propagate word of that institution's wealth - for advertising, or for quality assurance, or plain old glory if you will. That their intrinsic non-ornamental uses were actually rather few, at the time, didn't matter; inherent useful value is a negative property in this circumstance. Fundamentally, they were just as much a fiat currency as the paper dollar would be later.
Continuing down the chain, note how once communication became easier, cheaper, and independent of transport, the gold standard fell apart. This didn't happen immediately; it took some time for the inertia of ideas to be overcome and the old system to die. I suggest this is not coincidence, and that the new, easier, more convenient system replaced the old, and that we won't be reverting to that old system of a gold standard until and unless previous constraints on information reappear, something I sincerely hope does not happen. A similar delay of realisiation - a similar inertia of assumption - currently supports the dollar right now.
A few years ago, I read a book by Martin van Creveld called The Rise and Decline of the State. (Note that it's not the Rise and Fall. That's important.) I recommend it, despite a disappointing final chapter. His thesis is that state unity of power is on the decline, and will continue to decline as second-tier power groups become more powerful, but will not vanish. I, in turn, have argued previously that many forms of power have become increasingly dispersed - and in particular that the amount of power, particularly destructive power, available to the smaller group and to individuals is scoping up beyond the capability of states - or anyone, really - to control. For example, the entire smallpox argument going around about five years ago - whether to destroy the last samples known to be held by government agencies - was utterly pointless. The virus had already been sequenced; the sequence had been published. The data was available. In a small number of years, the ability to rebuild the virus from scratch will be in graduate-level labs in the West, and in Japan, and China. The efforts of the states to destroy this will become irrelevant, the feat impossible, the acts without effect. Relatively few people argue with this - certainly not anyone who knows anything about biology and related technologies.
It's been clear for some time that the same sorts of power-shifts have been happening with military forces. "Fourth generation warfare" is simply what you call it when individuals can carry around tankbusting grenade launchers, and a lot of them are around. It's the kind of war you get when the offensive power available to large numbers of free-roaming individuals reaches a certain level. With money, power is in the form of information - and, fundamentally, always has been. And as communication improves - making transactions easier - and information availability improves - arguably the same thing - the same penumbra of available power descends from governments to larger organisations to smaller organisations - and perhaps eventually even to individuals, who knows? In this environment, just as armies and central governments still matter but matter less, central banks still matter but matter less; superpowers (economic and otherwise) matter, but less... and single-reserve currency plans stop making any sense at all. Central banks will still be around; some of them will still matter; some currencies will be quite a bit more equal than others. But there will be more than one.
So if you're betting against inflation on the idea that the dollar is the indispensable medium, that there must be one (but can be only one), you might want to reconsider your position. The world is already changed; it just hasn't noticed yet.
