David Gallaher: "I'd like opinions on the future of inflation in US dollars".'You won't see inflation (as its measured through the Consumer Price Index) since wage levels are low (because of global wage disparity causing jobs offshoring) and low interest rates. Interest rates are not just to generate new credit/loans, its to keep asset prices high. High asset prices mean less spending on non-assets, more saving, so avoids current account issues. That's why they subsidize interest rates. The question is what can undermine asset prices which they can't control? Bird flu? The government doesn't care where the money goes, as long as it keeps asset prices high. So it's invested in derivatives. For financial institutions this is appealing for a number of reasons:
1. They expand earnings
2. They can defer taxation by not selling, but simply opening a contrary position.
Credit keeps growing as long as asset prices are stable and that means low interest rates.
So what would end this state of affairs?
Well, there are a number of potential sources for a financial collapse:
1. Evaporation of wage disparity - When third-world labour is fully absorbed this will result in a rebalancing of labour costs. It will make sense to work. This could however be expected to result in more workers in the West, with the discretion not to work, deciding to re-enter the workforce. Of course people don't at the high-end work just for the money, but they tend to at the 'low end', and it can be construed as partially resulting in the casualisation of labour, as well as the employer's desire to avoid 'added costs' of medical care, super contributions.
2. Serious collapse of confidence. Hard to think of what might cause this other than a run on the banks and a bird flu. If people stopped spending for a sustained period, this would cause a loss of jobs. Personally, I don't see this because of inability to undermine confidence, and the inability for a viral outbreak to get far. i.e. Its too easy for people to hoard food and stay at home. It would have to be a 'well engineered' pathogen with a long latency in the human body. i.e. Like AIDs but airborne.
3. Computer hacking of banks. Might some foreign government or anarchist undermine the Western banking system by plundering them through the international banking system. Hard to believe. Crisis of confidence? Govts would probably just guarantee the paper, which is of course backed by tangible assets, which greatly outweigh the 'paper'.
4. Rise in interest rates. You might wonder whether there might be some reason for interest rates to rise. It would be hard to believe that the banks don't know what the governments are doing; indeed I'd expect that the govt would have orchestrated its current policy with the banks. Basically, governments are favouring the banks with current policy because its injected funding into banks, who have used that funding for portfolio investment rather than home loans. Why? Because interest outlook can only deteriorate, because lack of confidence means jobs at risk. Institutional financing made more sense because derivatives gives investors long & short exposure to the market. Those positions get unwound when interest rates rise. There is however a 'systematic risk' caused by this since institutions pay tax on profits. In a trending market, they are destined to 'sell' losing positions to cover profits.
It is mooted that Chinese, Arab withdrawal of financing would be a possible cause for a collapse. I don't see that because China and Arabs have a vested interest in persisting with such support. Might they invest in their own countries? Yes, but that is the next phase, pursued by Japan to the extent that Japan's depopulation makes investing locally possible or plausible. The same issue for China. It cannot just spend money on infrastructure if there are insufficient Chinese people able to afford those expenditures. That just creates an expensive maintenance burden on the govt. Instead they have financed US government debt. Wise move? You could consider it a diversification strategy.
5. Financial failure is considered to be a reason for higher interest rates. I would doubt that unless precipitated by 'systematic tax' issue because these instruments are destined to 'balance risks', so it will take a systematic risk to undermine them. This government imposition is not something they can avoid; particularly as these large institutions can't so readily expand interest deductions to offset tax.
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