My hesitation with Japan being the perfect analogy is 1) we aren’t as old as Japan 2) our culture is far more acceptable of risk and second tries. But I agree the lesson is as you state: govt cannot overcome the psychology of millions.

Regarding your experience with the 62-65 y.o. demographic and their down-side risk aversion, over at Calculated Risk, this weekend there was a post about one of the investors in the Bear-Stearns MBS hedge funds (they had been opened to investors with $250k to invest, down from their original $1M). He thought 15-18 months of steady 1% gains were a sign of low-risk. Obviously down-side volatility was his overriding concern.

Yeah, I know COLA’s are supposed to offset inflation, but what if they don’t? What can one do?

One demographic force that does suggest that increased risk aversion is possible/likely is the titanic sized bulge of baby boomers fast approaching what they believe is a God given right to retirement age at 62-65. Most are not prepared financially and those who have some assets are likely to get VERY risk averse at the first signs fo strain. Anecdotally, much of my client base is comprised of this demo and they have extremely low tolerance for downside volatility. Now that most boomer’s largest asset is deflating, I doubt that the impulse to take risk will return quickly.

I am not predicting hyperinflation – just pointing out what the likely market realities would be if/when the government tries to respond to the inevitable credit contraction.

To add to your comment about just offering credit is not enough if no one wants it, that was also the case in the Great Depression. I’ve seen money growth charts for the years leading up to, during, and after the Depression. They are amazing. I also remember seeing a show on the History channel on coin mints in which they made a passing mention about the amount of coins that were stock-piled during the Depression because no banks could use them.

I think when 50% of the population has just lost 80% of their wealth, no one has any stomach for risk. They are disgusted by the whole thought of it. Just putting food on the table is all they are concerned with.

I also think that is why Depressions are so scarey to central banks. They essentially have lost control. Making credit available when no one wants it is useless. In today’s global world it just creates a carry trade to goose other economies (Japan). Dropping currency from helicopters when no one wants to invest won’t grow the economy either. It just creates hyper-inflation.

But before you go betting on carry-trades or hyper-inflation in the US, I think you have to consider a certain cultural component. Is the populace of the US capable of being either risk-disgusted or asset-satiated? I don’t know. We’ve been skimming the most motivated-to-get-ahead individuals in the world for some 100 years. IMO, that has to matter for something.

Best.

I happen to think that the Fed will do what it has to to keep deflation at bay and, per Bennie’s famous 2002 speech, that they have the tools to do so. They can always monetize… credit can contract, but once printed, money sticks around.

Anyway, I am also baffled by how ill-understood inflation seems to be, and I am on the same page as you. (As is Jim Grant, just to circle back to my first comment).

Fiat currency inevitably leads to excess credit creation. As long as people are desiring ever-more amounts of credit, this is inflationary. However, the obsession of US economists to label “inflation” soley as “consumer inflation” is very dangerous. Credit can be created and demanded, but the government cannot control where it is “spent”. Rapid credit creation can contribute to asset bubbles – also a symptom of inflation. Whether it is consumer prices or asset prices, they are simply the symptom of inflation, which at its root is a the combination of demand for credit with excessive credit creation.

The last 5 years have been fascinating because it is quite clear that the central banks have largely lost control of inflation. Credit has been created at an explosive rate via non-regulated financial entities and off balance sheet operations. Derivatives have been a primary mechanism. The recent rumblings in the credit markets suggest that demand and non-gov’t creation may have reached a tipping point. Credit is now being taken away and destroyed. Left to itself this is the inevitable result of massive credit inflation. The Fed and congress may try to stop a deflationary credit contraction, but unless they can re-ignite the collective desire by people and institutions to demand more credit, just offering it and making it easy to obtain is not enough (see Japan). Either a deflationary credit crunch will develop with assets being liquidated or the gov’t gets too aggressive with trying to “encourage” credit demand and the dollar drops – which is hyperinflationary.

The timing of all this is uncertain for sure, but no nation in the history of the world has successfully navigated out from under such a massive credit inflation. Talking about ridiculous academic notions of “core inflation” or incredibly tortured price indexes is just aiding and abetting the movement towards these outcomes. All of this in my opinion of course!

I suspect that the “maybe he’s seeing the light” comment was intended to imply… “but probably not.”

thanks!
Achal