There Will Be Bubbles

My rant on Gonzalo Lira's hyperinflation prediction has prompted me to make a clearer prediction for the future. I think that the Lira's of the world will speculate into commodities, driving prices up. Producers will be squeezed, their production costs will rise, but no one will buy their products if they raise prices. They won't hire, certainly won't be giving any raises, probably even let some more people go. As unemployment stays flat or even rises, stockpiles of commodities will accumulate until prices fall again back to normal levels. This scenario will play out several times over the next few years. The only very dangerous bubbles are debt fueled. We are already over-indebted, and this debt has to work its way out before a new debt fueled bubble can occur.

Hyperinflation

I read this and am impressed with the logical progression. I haven't really seen it laid out and with the difference between hyperinflation and inflation it seems really convincing. There is a big problem though - where does the money come from? The fed printed it, you say? Well, no, they didn't actually print it. They made it available for banks to lend out. Tried getting a loan lately?

People are tapped out, who has the money to go speculating into hard commodities? If no one has any money to buy these commodities, how high can they get? Going to get a bank loan for some silver? Good luck. Think about it, everyone is already just scraping by as it is. Are they suddenly going to go rush out and stock up on gasoline? Or are they going to stop driving as much en masse and buy up Priuses - like oh that last time oil shot up to 150 for no reason.

Here's what I think is going to happen instead. Worried inflationistas will continue to hedge into commodities, predicting Lira's scenario. The prices may very well rise, even balloon for a while until, well until the next report comes out that sees stockpiles have risen because no one in the end market is buying it. Because they can't. There's no extra money in the economy, no one will suddenly get a raise to go get their hands on pork bellies. The money on the Fed's balance sheet will stay right where it is because no bank is going to lend anyone money to speculate in commodities. Then they will come crashing down again and everyone will go back to treasuries and we may have another bad quarter or so with more deflation worries until QE3. This scenario will happen several times over the next 1 to 3 years until the economy recovers on it's own.

Update
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Another point that Lira's argument hinges on is that government can do nothing right. I'm not one that believes government is perfect, far from it, but I don't believe anything is. Every system has problems - including unfettered free markets. Government has been growing the entire time America went from being an "also-ran" to the dominant economic force in the world. When you let blind ideology guide your decision making you will make mistakes. Lira DEPENDS on the Fed making mistakes - not seeing inflation and fueling it by printing dolalrs. He then fails to deliver on "printing dollars". There is a complicated mechanism to "printing dollars", but he assumes you think they've already been printed - they haven't. The Fed can simply make those dollars not available to loan, and it's unlikely the banks will loan it anyway.

All Kinds of Stuff Wrong With This

Paul Krugman attacks the deficit commission co-chair report here. He neglects a lot of detail when he claims it's a huge transfer from the middle class to the wealthy because of lower rates. It looks to me like everyone's taxes will be going up, especially the super-rich.

1. It keeps PPACA medicare rate increase on the rich in place
2. It taxes dividends and interest as income - this is where the REALLY rich derive most of their income today.
3. As the report states, the middle class don't benefit nearly as much from the mortgage interest deduction as the rich do since the amount of this is only the delta it gives one over the standard deduction.
4. The rate for the middle class is also reduced in a trade-off for the increased tax on medical benefits - and this is a terribly distorting tax expenditure that is partly to blame for the high cost of health care.
5. Estate tax seems to revert to 2001 levels.
6. Expands payroll taxes to incomes beyond 105k.

As a middle-classer, it looks to me like I'd pay more in gas taxes - but Saudi Arabia will too and that's good (producers tend to share the cost of a retail tax with a consumer because the producer will lower their prices to reduce the dead weight loss). The loss of my current deductions would be a wash because a significant portion of my income would change from being taxed at 25% to 15% - my average tax rate last year was right around 15% after all the dust settled. Once I have paid off enough of my mortgage to where itemizing no longer makes sense I'd likely be ahead AND I'd save about 4 hours of time inputting stuff into turbo tax.

Bad Stuff That's Actually Good Stuff

Posts like this are amusing to me. It boils down to "If the Fed succeeds in righting the economy and creating inflation, we could have inflation!" (my paraphrase). The Fed would not be doing it's job properly if we did not expect inflation when the current predicament is disinflation. In other words, one of his "risks" is actually that the policy will work.

The concerns about borrowing dollars to buy hotter currencies are worries that ignore balancing effects. Stronger Brazilian currency for instance could be offset by more Brazilians buying American vacation property and USD denominated assets and goods.