Tuesday, May 11, 2010

There's Enough "Money" But Not Enough "Wealth"

The European bailout. TARP. GM. Fannie May. The list goes on and on. The basic premise in all these deals is that something was "too important" to the economic system and had to be bailed out by the government or the central bank.

In all these cases the bottom line was the money was simply created for the bailout. Poof. There was nothing behind these dollars or Euros being created. The U.S. government simply borrowed more, the Fed simply printed more.

So while all this created money did save these various institutions, the question is if there is enough wealth in the world to eventually pay off all these debts. There isn't. The world is not going to "grow" or "tax" or "save" its way out of this problem. And like Greece, countries and states will keep on borrowing and spending beyond their means since they know they will be bailed out in the end.

There is a fixed (but slowly growing) amount of "wealth" in this world that is being represented by a rapidly growing amount of "money". The denominator is growing much more rapidly than the numerator, so this means the value of "money" is simply getting smaller and smaller and smaller.

Inflation is already locked in. Are you smart enough to see it?


Sensei Mitch said...

I've been saying the same thing for years.

It seems this new trend simply supports my theory that we are living in "The Age of Incompetence"... Though as time passes I think I should revise that to "The Age of Incompetence, Ignorance, and Complacence", IIC for short.

Interestingly this trend started around 1998 or '98 with IIC represents in Roman Numerals...so it is a good fit all around! :-)

Apex said...

The way you state that inflation is already locked in is an interesting way to view it. Basically the excessive debt makes a demand on the existing wealth which by its very nature makes the monetary representation of wealth inherently worth less.

Looking at it from the other side the question is when the rubber will actually meet the road? Technically we should already be experiencing inflation but we don't as we continue to kick the can down the road. But when the demands of this debt begin to overwhelm the budget it seems to me the easiest way to deal with it is for the govt and the fed to allow inflation to start to run. Inflation running at 10% would cut the debt into a quarter of its current size in only 14 years. It's pretty easy to see how letting inflation run is an easy choice. The question is once you let it run can you keep it from running away.

Director Mitch said...

Apex, good input. We are kicking the can down the road as the deficits get larger and larger, the demands of the government growing exponentially (the deficit today does not include Soc Sec and Medicaire commitments, and don't get me going on Obamacare).

Personally I think they should allow inflation to start now and let it grow slowly since if they wait and wait it just collapses at once when everything hits the breaking point.

You can argue that the stock market run-up is where a lot of that inflation is being soaked up today, plus look at oil, gold and other commodities and you can see it alredy happening.

Apex said...

I agree with you about letting inflation start now. The fed should probably start to target something more like 5-6% instead of 2-4%. It will be really brutal for those on fixed income but keeping it at bay and letting the pressue build is truly passing the problem to the next generation. We created this mess and we should start paying for it now through moderate inflation.