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Well, hopefully US institutions will be able to prevent mismanagement at the level of Venezuela or Zimbabwe. But imagine the following scenario: 1. Some left-

Well, hopefully US institutions will be able to prevent mismanagement at the level of Venezuela or Zimbabwe. But imagine the following scenario: 1. Some left- or right- wing populist (worse than Trump) is president, and is backed by congress. 2. A 1929 size crack hits the market. 3. The deficit is increased to 2B/y, following the doctrines of most populists due to stimulus policies combined with reduced tax incomes. 4. The market for US treasuries collapse, making them almost unsellable. 5. Fed buys all treasuries, both the ones needed to cover the deficit and to roll over existing debt as well as rotten private sector debt. 6. Inflation follows the money supply increase, and then some. 7. Massive strikes/protests hit the country as purchasing power for imported goods and goods created from imported materials. (Think French yellow shirts x3) 8. The government caves in, and increases wages by decree to match the inflation. (Repeat steps 5-8 ad infinitum) What would the inflation be after 5-10 years of such policies? Probably less than 1000%, but quite possibly more than 20%

pjc50 8y ago
4 is a really big stretch - what's safer to put cash in? 5 essentially already happened with QE 7 Americans don't really do this on any scale And finally.... 20% inflation is hardly a nightmare. The US hit 14% in '79. The only thing that can take it back there is an external oil shock.
- trashtester 8y ago
  4 : Confidence in a currency lasts until it is gone. After it is gone, so is the feeling of safety. When the feeling is gone, the strength of the currency can only be defended by tight fiscal policies. Edit: Just to clarify. Other currencies exist, some may be seen as safer than dollars if a populist government is wrecking the economy there. Also, there is always stocks, real estate, precious metals and possibly crypto. 5 : Yes. So next time the expectation will be that it is ok to do this. Which it is, until the time that confidence is lost. 7 : Watching from the outside, America seems to be radicalizing, as is the rest of the West. New generations no longer seem to understand the risks of fascism or socialism. And finally, I agree, 20% is not necessarily a nightmare. But keep in mind that the US had general growth exceeding the inflation in 79. UK, for instance, had stagflation, which is quite a bit more demanding. In order to reign in the inflation, fiscal tightening is a necessity, or the inflation may become permanent.
- dragonwriter 8y ago
  > 20% inflation is hardly a nightmare. The US hit 14% in '79. Er, ’79 was widely regarded as a nightmare, and inflation was a huge part of the reason. ’79 was the center of the “night” implicitly referenced by Reagan's “Morning in America” reelection image that contrasted the time after his election to the time immediately preceding. > The only thing that can take it back there is an external oil shock. An economic shock, but no reason it would have to be an external oil shock (in fact, the US is more resistant to that particular kind of shock than it was in the 70s.)
dragonwriter 8y ago
> What would the inflation be after 5-10 years of such policies? 5-10 years of a combination of #1 would have results that would make inflation the least of most people's concerns. (Also, somewhat implausible; even Trump has had problems with a same party Congress while he had it.) > The deficit is increased to 2B/y, following the doctrines of most populists due to stimulus policies combined with reduced tax incomes. The budget deficit for FY 2018 was $779B, or over $2B/day. It can't “increase to $2B/year”, that would be a ~99.75% reduction, not an increase. > 5. Fed buys all treasuries, both the ones needed to cover the deficit and to roll over existing debt as well as rotten private sector debt. So, populists supporting the radically insane President have taken over the Fed (enough to direct the FOMC consistently, even though that body consists of a mix of the Board of Governors—wih staggered 14-year terms) and a rotating subset of the Reserve Bank Presidents (who are elected by each Reserve Bank’s directors, who largely come from the banking industry?) as well as Congress? This scenario is increasingly implausible. > 8. The government caves in, and increases wages by decree to match the inflation. What now? It can increase minimum wages by legislation, sure, but if it does so to match runaway price inflation not driven by output gains, it just kills employment, which breaks the cycle because no one is going to demand wage increases when they don't have a job. It can directly employ people at whatever wages it chooses, of course, or try to force employers to retain employees while paying higher wages, but those each have their own plausibility problems. > (Repeat steps 5-8 ad infinitum) Yeah, that's not going to happen as infinitum. If you get through 8 once (which you won't), government collapse and/or civil war are imminent.
- trashtester 8y ago
  > The budget deficit for FY 2018 was $779B, or over $2B/day. It can't “increase to $2B/year”, that would be a ~99.75% reduction, not an increase. Thanks for pointing this out. It should be 2T of course, in US units. > So, populists supporting the radically insane President have taken over the Fed (enough to direct the FOMC consistently, even though that body consists of a mix of the Board of Governors—wih staggered 14-year terms) and a rotating subset of the Reserve Bank Presidents (who are elected by each Reserve Bank’s directors, who largely come from the banking industry?) as well as Congress? > This scenario is increasingly implausible. QE was used after 2008, and there is a perception that this is not a problem. Hopefully you are right, and the Fed would be able to resist demands to continue QE into hyperinflation. > What now? It can increase minimum wages by legislation, sure, but if it does so to match runaway price inflation not driven by output gains, it just kills employment, which breaks the cycle because no one is going to demand wage increases when they don't have a job. You are right, it does kill employment. Still, it was just done (to some extent) in France (technically not due to inflation, but due to increased costs of living). > It can directly employ people at whatever wages it chooses, of course, or try to force employers to retain employees while paying higher wages, but those each have their own plausibility problems. Populist governments all over the world have been using both approaches for a long time. Anyway, the above is a perfect storm scenario. It is not happening tomorrow, but requires 3 trends to continue, probably for 10 years or so: A: A continued move towards more populist leaders in both parties. B: A continuously increasing pubic deficit C: A major worldwide economic crisis as a trigger. Edit: C is not a trend, only a trigger. And even then, responsible institutions may be able to step in and limit the impact to a 1929-like event. But if not, the US may head down the same path as Argentina or Brasil.

pjc50 8y ago

4 is a really big stretch - what's safer to put cash in? 5 essentially already happened with QE 7 Americans don't really do this on any scale And finally.... 20% inflation is hardly a nightmare. The US hit 14% in '79. The only thing that can take it back there is an external oil shock.

trashtester 8y ago
4 : Confidence in a currency lasts until it is gone. After it is gone, so is the feeling of safety. When the feeling is gone, the strength of the currency can only be defended by tight fiscal policies. Edit: Just to clarify. Other currencies exist, some may be seen as safer than dollars if a populist government is wrecking the economy there. Also, there is always stocks, real estate, precious metals and possibly crypto. 5 : Yes. So next time the expectation will be that it is ok to do this. Which it is, until the time that confidence is lost. 7 : Watching from the outside, America seems to be radicalizing, as is the rest of the West. New generations no longer seem to understand the risks of fascism or socialism. And finally, I agree, 20% is not necessarily a nightmare. But keep in mind that the US had general growth exceeding the inflation in 79. UK, for instance, had stagflation, which is quite a bit more demanding. In order to reign in the inflation, fiscal tightening is a necessity, or the inflation may become permanent.
dragonwriter 8y ago
> 20% inflation is hardly a nightmare. The US hit 14% in '79. Er, ’79 was widely regarded as a nightmare, and inflation was a huge part of the reason. ’79 was the center of the “night” implicitly referenced by Reagan's “Morning in America” reelection image that contrasted the time after his election to the time immediately preceding. > The only thing that can take it back there is an external oil shock. An economic shock, but no reason it would have to be an external oil shock (in fact, the US is more resistant to that particular kind of shock than it was in the 70s.)

dragonwriter 8y ago

> What would the inflation be after 5-10 years of such policies? 5-10 years of a combination of #1 would have results that would make inflation the least of most people's concerns. (Also, somewhat implausible; even Trump has had problems with a same party Congress while he had it.) > The deficit is increased to 2B/y, following the doctrines of most populists due to stimulus policies combined with reduced tax incomes. The budget deficit for FY 2018 was $779B, or over $2B/day. It can't “increase to $2B/year”, that would be a ~99.75% reduction, not an increase. > 5. Fed buys all treasuries, both the ones needed to cover the deficit and to roll over existing debt as well as rotten private sector debt. So, populists supporting the radically insane President have taken over the Fed (enough to direct the FOMC consistently, even though that body consists of a mix of the Board of Governors—wih staggered 14-year terms) and a rotating subset of the Reserve Bank Presidents (who are elected by each Reserve Bank’s directors, who largely come from the banking industry?) as well as Congress? This scenario is increasingly implausible. > 8. The government caves in, and increases wages by decree to match the inflation. What now? It can increase minimum wages by legislation, sure, but if it does so to match runaway price inflation not driven by output gains, it just kills employment, which breaks the cycle because no one is going to demand wage increases when they don't have a job. It can directly employ people at whatever wages it chooses, of course, or try to force employers to retain employees while paying higher wages, but those each have their own plausibility problems. > (Repeat steps 5-8 ad infinitum) Yeah, that's not going to happen as infinitum. If you get through 8 once (which you won't), government collapse and/or civil war are imminent.

trashtester 8y ago
> The budget deficit for FY 2018 was $779B, or over $2B/day. It can't “increase to $2B/year”, that would be a ~99.75% reduction, not an increase. Thanks for pointing this out. It should be 2T of course, in US units. > So, populists supporting the radically insane President have taken over the Fed (enough to direct the FOMC consistently, even though that body consists of a mix of the Board of Governors—wih staggered 14-year terms) and a rotating subset of the Reserve Bank Presidents (who are elected by each Reserve Bank’s directors, who largely come from the banking industry?) as well as Congress? > This scenario is increasingly implausible. QE was used after 2008, and there is a perception that this is not a problem. Hopefully you are right, and the Fed would be able to resist demands to continue QE into hyperinflation. > What now? It can increase minimum wages by legislation, sure, but if it does so to match runaway price inflation not driven by output gains, it just kills employment, which breaks the cycle because no one is going to demand wage increases when they don't have a job. You are right, it does kill employment. Still, it was just done (to some extent) in France (technically not due to inflation, but due to increased costs of living). > It can directly employ people at whatever wages it chooses, of course, or try to force employers to retain employees while paying higher wages, but those each have their own plausibility problems. Populist governments all over the world have been using both approaches for a long time. Anyway, the above is a perfect storm scenario. It is not happening tomorrow, but requires 3 trends to continue, probably for 10 years or so: A: A continued move towards more populist leaders in both parties. B: A continuously increasing pubic deficit C: A major worldwide economic crisis as a trigger. Edit: C is not a trend, only a trigger. And even then, responsible institutions may be able to step in and limit the impact to a 1929-like event. But if not, the US may head down the same path as Argentina or Brasil.