Jerry O’Driscoll’s discussion at yesterday’s Reno Hayek dinner on our future economic environment was excellent. The subject was designed to forecast deflationary or inflationary forces in place now that must of necessity influence financial management of our assets and liabilities. Jerry handled that expertly and at the same time previewed his Cato Institute podcast published today, November 18th.
With the blowup of the government-fostered real estate bubble we began a period of domestic deflation mainly in real estate but also in other products especially those not heavily dependent on foreign content. The extended resultant recession fostered business cost cutting, high unemployment, and consumer retrenchment and de-leveraging. As Mark Gongloff pointed out in yesterday’s WSJ the difference between the producer price index and the core consumer price index shows that the producers have borne the world inflationary brunt. But our current economic malaise is keeping domestic inflation in check.
So, in essence, we are experiencing deflation relative to the rest of the world! How can that be? Jerry’s simple answer is that we are exporting inflation. Our profligate fiscal and monetary policies are creating asset bubbles in other countries, particularly those with currencies linked to the US dollar. Investors borrow dollars at near-zero interest rates and invest in foreign assets paying higher returns. This is the “carry trade,” a near-perfect arbitrage. This is why Chinese financial authorities are screaming at Geithner and Obama to get America’s fiscal house in order.
Why then are we worried about inflation? We are living beyond our means now and Obama’s policies are bent on making it worse. The 2009 deficit will exceed 12% of our GDP and deficits for the next ten years are projected at 7% of GDP resulting in national debt approaching 100% of GDP.
When will this reverse? When will inflation raise its monstrous head? When China and the rest of the world will no longer buy the worthless debt America is selling at ridiculously low interest rates. Jerry “guesstimates” 2011 or 2012. So forecast high interest rates and high inflation in the intermediate term.
Participation of the attendees was fun and informative. Den Jilot told the upbeat saga of his recent IPO, proof that capitalism is still very much alive. He has business in over 100 countries and is keenly aware of favorable jurisdictions; he is comfortable with the Asian countries close to China.
We welcomed two new members Manny Martinez and George Caras. George in fact has just been to an offshore investment seminar where they discussed opportunities in Australia and New Zealand. I speak for the group in thanking Jerry O’Driscoll for a great discussion.
Tom Motherway