PeakOil is You
Why exactly is growth necessary?
by JohnDenver » Thu 30 Jun 2005, 11:27:56
$this->bbcode_second_pass_quote('nero', 'I') agree that in a deflationary cycle there might be a massive exit to cash as peoples expectations for growth disappear. However there is a solution to that: the printing press. In an inflationary environment even if you have negative real interest rates for high credit rating debtors there will still be a market for the debt because as long as the nominal interest rate is positive the return is better than holding cash.
Isn't the real worry not the exit to cash, but to the underlying real commodities? If you've got negative real interest rates (say 1% nominal, 3% inflation), then, yes, a bond paying 1% is better than cash, but the bond is worse than buying into the underlying basket of goods which is inflating at 3%. Or worse yet, wouldn't this strategy lead to "banking" in the most rapidly inflating commodity (like oil). It seems to me that the printing press would exacerbate that problem, not help it.
$this->bbcode_second_pass_quote('', 'O')ne thing I'm curious about is how investors risk taking will change as the expectations for the economy change. Will they chase the real return by taking on riskier debt?
Mulling it over, positive real interest, per se, is not a problem at all in a negative GDP growth environment. The problem is any loophole which allows indefinite compounding of positive real interest in a risk-free fashion.
Any savings vehicle with 100% security of the principal (TIPS, T-bills, cash, savings accounts, CDs, loans, securitized loans), will be unable to offer a positive real return over the long run. A declining real GDP climate is one where no consistent risk-free real return is possible. Nevertheless, savers will try to compound by parking their money in higher risk investments (which do not guarantee the principal), most of which will not pan out. That's how problem 1) gets solved. You can try to compound your real assets, but bad fortune will foul you up, more often than not. Investments like TIPS, T-bills and savings accounts will turn out to either not offer a real return, or not be risk-free. You end up with a 100% casino economy, where interest and investing are still a dominant feature, but all saving involves risks, and defaults are frequent. Interest doesn't pose any more of a threat to the integrity of a non-growing financial system than payouts at a casino in that same system.
To address your question then, I think lots of people will pursue the higher return in the beginning, and lose their principal. This will turn off all but the hardiest speculators, and money will exit into real commodities and productive assets.
Maybe the financial system doesn't collapse due to some sudden internal contradiction, but rather people turn away from it because it's becoming increasingly surreal, risky and irrelevant.
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by nero » Thu 30 Jun 2005, 12:50:30
$this->bbcode_second_pass_quote('MonteQuest', 'A')nd to whom will you sell these dollar denominated assets? Or are you talking Weimar Germany 1923?
I'm not sure I understand your question. When the government or the Fed expands the money supply the federal government gets to spend the new dollars into the economy, just as is happening now.
I think people shouldn't equate inflation with hyperinflation. We have had many years of inflation (ever since 1973) without falling into hyperinflation. The options are not deflation or hyperinflation. A moderate amount of inflation can be maintained indefinitely. (that is current goal of the central bankers)
$this->bbcode_second_pass_quote('JohnDenver', 'I')sn't the real worry not the exit to cash, but to the underlying real commodities? If you've got negative real interest rates (say 1% nominal, 3% inflation), then, yes, a bond paying 1% is better than cash, but the bond is worse than buying into the underlying basket of goods which is inflating at 3%. Or worse yet, wouldn't this strategy lead to "banking" in the most rapidly inflating commodity (like oil). It seems to me that the printing press would exacerbate that problem, not help it.
Yes I suppose an exit to hard fixed assets is also a problem in a deflationary environment. People paying off their mortgages without taking on new debt is effectively exiting the market to hard fixed assets.
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