What To Do Now? or,
Zebediah's Choice (cont.)

.....Zebediah is in trouble. Not only did he pay a million bucks for ordinary sardines but he has opened the damn can and can't fool anyone else into paying more than a buck fifty for it. What now?

The US has pumped up asset prices through debt so much that diminishing returns have set in and a correction is imminent: you can't have return on assets at the lowest level ever and debt at the highest and still pretend there is no trouble. But what kind of trouble? Weimar Republic cash by the barrow-full trouble, or Great Depression trouble? Or, maybe, neither?

The debate rages between the usual "market participants" masked by polite, erudite and academic terminology, though the occasional "helicopter cash" comment escapes to underscore the true underlying fears. Naturally, comments are significantly less guarded in the blogosphere - to put it mildly. They range from extreme superinflationary gold-buggery and bi-metalism, to down and out survivalist wood stove comparisons and advice about stockpiling, ah, feminine hygiene products. Right. Moving along to (I hope) saner commentary...

Devoted "inflationists" claim that the US will have no choice but to devalue the dollar and inflate its way out of the onerous debt. In my opinion that is nearly impossible because of the following reasons:

1. The only kind of debt that can be "destroyed" this way is fixed-rate, long-term bonds or 30 year mortgages. There is much less of such debt now than, say, 1980 and what there is, is constantly securitized and swapped to and fro into short and variable through the enormous derivatives market.
2. Monetary inflation immediately results in very high interest rates, making debt payments extremely expensive and rendering debt roll-over almost impossible. Defaults would rise dramatically and a massive recession would ensue.
   
3. The only way to "inflate" in this fashion is by printing money, relegating the dollar to the same league as the Weimar Republic mark, the Argentinian peso of the 1980's, etc. It is ludicrous to imagine that any sane administration would choose to do that by choice and throw away the global reserve status of the US dollar.
4. American assets would become dirt cheap for foreigners with strong currencies who would proceed to strip the country bare - like wealthy Americans did to Europe after WW I.
5. How would the US economy function under such a scenario? By monetizing gold and silver? Keep in mind there is a finite amount of such metals in the world - that by itself creates ideal deflationary conditions. Barter? Please...

In the sardine story, the extreme inflation scenario is equivalent to Zebediah cutting off his fingers on the ragged, sharp edge of the can, proclaiming himself incapable of working to recoup the million bucks and asking for disability insurance, too. Fat chance.

The "Save and Re-Use Your Tampax" scenario is even more extreme because:

1. We are not going to run out of resources suddenly.
2. There is a lot of "fat" in the system - no one needs to have yet another WalMart open next door to the 21-screen magaplex. Do with less - yes, do without - no.

Again, this would be like Zebediah wolfing down the very last sardine and saving the can for future use as he heads to live in the woods - pup tent, firewood, Winchester rifle, wolves... heroic stuff. Slim chance.

If you are by now biting down your fingernails with anticipation and excitement (yeah, right!) to find out what will happen....

Stay tuned!