Welcome to the board fang. What level of inflation are we talking about? Post WWI Germany (an extreme, obviously) or something more reasonable? What will be the real world impact from an employment and quality of life standpoint, in your opinion, since you seem to have some knowledge in the area?
Charon
Thanks for the welcome....
Honestly, I have no idea. That's the $10 question.
I have read a great deal from some really smart folks who believe the Fed will not be able to prevent a Deflationary Depression and we are going to see asset values crash. This argument is supported by what is happening now in real estate. Folks who think this is the direction thing will go believe the Fed will either not be capable of channeling enough created money to consumers to drive inflation or that consumers will refuse to spend even if they do benefit from fundings. Mike Shedlock feels this is the direction things will go.
http://globaleconomicanalysis.blogspot.com/Then again, lots of folks think as I tend too that the Fed will end up doing anything and everything to flush the system with cash as required until it DOES drive spending. This is what Bernanke has indicated..... before he became Fed Chairman. Bernanke is a top expert on the Great Depression and has written a good bit about it and his critique of actions taken then do clearly indicate that he believes monetary policy driven inflation would have made the entire event much less severe.
When I look at the bigger picture I see the events and issues that are playing out currently as truly the tip of the iceberg. Strip away all the political rhetoric and blame games and what your left with is the reality that all of these problems boil down to housing prices having gotten totally out of control. Home prices soared to levels that were simply unaffordable. Period. These absurdly inflated home prices drove absurd levels of debt. Levels of debt that simply were impossible to pay back.
How much debt? Between 2004 and 2007, the time frame when the overwhelming majority of the mortgage loans in default were closed, the mortgage markets funded around $8.5 Trillion in total mortgages. About 50% of those were subprime or Alt-A or non-traditional conforming loan programs. In other words the kind of loan programs that drove this mess. This means about $4.25 Trillion in "questionable" loans were done. About 10% of these have experienced delinquencies and around 6% or so are in default. So all we are experiencing is the result of perhaps $255 billion in mortgage loans going to foreclosure. So why does that lead to the need for over $1 Trillion to bailout and another $ Trillion in Fed funds to prop up the system? LEVERAGE..... the banks too the hard asset (the mortgage and the house behind it) and they leveraged it and sold derivatives and CDO's and packaged it all up into complicated pools of mortgage loans that nobody was really sure what was in there but the ratings agencies called it AAA....
The end result is that we are facing a possible systemic collapse.
Here is what really worries me: IF we are facing problems of this scope as the result of debt defaults on less than $1 Trillion in actual bad loans..... what happens when the US Federal Govt. cannot fund its over $58 Trillion in currently unfunded liabilities?
It is clear that these obligations cannot be funded. At least not in todays dollars. But they can be funded in printed dollars.
So I feel that just as the Fed has so far responded to this crisis they will respond to the far greater crisis that is looming relative to entitlement funding shortfalls. They will expand the balance sheet, create money and purchase Treasury bonds thus providing the Govt. with new funds.
This will yield inflation. How much and how fast? There is no way to know. How quickly will a specific crisis explode? How willing will the rest of the world be to buy up US debt even though it is obvious that the US is incapable of redeeming the paper? How long will world oil markets continue to base their trade on a currency that is clearly being devalued by its backer?
I do not think things will deteriorate as quickly as they did in the Weimar Republic. In that case, once the monetary supply inflation began the inflation rate immediately exploded. They went from inflation running 10% to over 10,000% in something like 8 months. I do not see that happening. I think it is more likely that things will expand from current levels to something like 25% over a period of several very painful years and then it will rapidly crash to something approaching 3 figures before we get intervention and the deployment of a new currency system.
But thats just my guess....
Fang
