Emergent disorder: four pieces of really bad news

by Russ Roberts on January 29, 2009

in Financial Markets, Politics

Buy American! Waste resources! Save some jobs while destroying others and in the process make us poorer!

Slaughter Pigs Destroy Cars to Help the Car Industry! Waste resources! Save some jobs while destroying others and in the process make us poorer! (scroll down to Cash for Clunkers. HT: Greg Bain)

You deserve a do-over today.

And another.

Any one of these would be a bad sign. All four in the same day? As each legislator and Congressional committee and the Fed and the President try to help improve the economy (or bail out a favored constituency) the stress on the whole system grows. Every once in a while I think we can come out of this mess. On a day like today, I start to think we're going to have a profound economic collapse.

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{ 49 comments }

eric mcfadden January 29, 2009 at 6:34 pm

The American military requires that all uniforms are made totally in America. An amendment on the stimulus bill expands that to airport and other uniformed government employees. This is just a small step down the path of protectionism but it still annoys me. Your average low ranking soldier is not really the guy you want to take advantage of with "screw china" tarrifs. Small slice of the picture, but hey, it's my world

T L Holaday January 29, 2009 at 6:58 pm

Did Hayek write anything about bankruptcy?

Is there any economic reason for treating debt secured by residential real estate differently than debt secured by other assets?

Bankruptcy judges can write down principle under Chapter 11. Do you think that is bad law?

Lee Kelly January 29, 2009 at 7:02 pm

In the 1930s it was bad, but now there is no gold standard to impose monetary discipline.

T L Holaday January 29, 2009 at 7:09 pm

Surely it is obvious that a law exempting one kind of loan (e.g. residential mortgage) from principle-reduction in bankruptcy proceedings while exposing all other kinds of loan to the risk of principle-reduction is simply another form of government-enforced guarantee. Surely it is better from a market perspective that there be no bias favoring investment in Donald Trump's home mortgage over investment in Donald Trump's casinos.

So why are the last two not good signs?

Lee Kelly January 29, 2009 at 7:13 pm

The looter class in Washington is trying to re-inflate the bubble.

What happens when the Federal Reserve pumps the banks full of phony credit, and Congress begins destroying goods to push up prices?

But hey, World War II got the U.S. out of the Great Depression, right? If using resources to destroy goods in other countries stimulates the economy, then surely it does here too.

Lee Kelly January 29, 2009 at 7:13 pm

The looter class in Washington is trying to re-inflate the bubble.

What happens when the Federal Reserve pumps the banks full of phony credit, and Congress begins destroying goods to push up prices?

But hey, World War II got the U.S. out of the Great Depression, right? If using resources to destroy goods in other countries stimulates the economy, then surely it does here too.

Morgan January 29, 2009 at 7:25 pm

It's genius. We'll require everyone to buy a new, energy efficient car and a new house, and require the banks to make the loans that allow them to do it. If servicing the loans pushes you into bankruptcy we'll simply forgive the principal on the loans!

So everyone will rush out to buy a new home (housing problem solved) and a new AMERICAN car (auto industry problem solved), made entirely of AMERICAN components and AMERICAN raw materials (steel industry problem solved).

We smash their old (foreign, in many cases) cars to get steel (HA HA foreign devils, we got your steel!) right here in AMERICA, which we'll recycle into bridges and other infrastructure.

The steel from the old bridges and stuff then gets recycled and turned into the new AMERICAN cars!

At the end of this very busy time we'll all have new houses, new cars, and new infrastructure to drive on and deliver sewage from our new homes to the most high-tech waste treatment plants ever made. Everything will be energy efficient, and shiny and new, and we'll all wonder why we didn't do it sooner. And then we'll realize we should just do it again.

Adam January 29, 2009 at 7:37 pm

** News Flash **

Government begins hiring hoodlums to break butcher's windows nationwide. Economic activity expected to triple within weeks.

Ironman January 29, 2009 at 7:50 pm

Russ concluded:

"On a day like today, I start to think we're going to have a profound economic collapse."

At least you can be reassured that it didn't happen by accident. Is there anything that central planners can't do?

Willabus January 29, 2009 at 8:03 pm

TL Holaday:

I'm not sure if Hayek wrote anything specific about bankruptcy but I am pretty sure that he would say that treating certain types of bankruptcy differently is against the Rule of Law and therefore the law is invalid and has no place in a truly free society.

All forms of tax breaks (credits and deductions) are incompatible with the Rule of Law and should be eliminated because they give preference to one type of behavior over the other.

See The Constitution of Liberty.

SteveO January 29, 2009 at 8:52 pm

As much as I hate to say it, it's time for Atlas to Shrug.

Bill Gates, Steve Jobs, Sergei, Immelt, all these guys just need to say "F- it, I'm done" liquidate their assets and hang out on the beach.

As bad as things would get, I still know I'd be at the top of the hiring pool for whatever third-world/medieval age job market emerges.

I guess sometimes people need a spoonful of tar to remember how good everything else tastes.

pinus January 29, 2009 at 9:06 pm

"Because [the cash for clunkers car program] holds appeal for both environmentalists and the auto industry, the cash-for-clunkers idea seems to be generating the most discussion."

I always thought the largest environmental damage caused by a car is done by its actual production…

Jason O January 29, 2009 at 9:21 pm

My last comment was the same as this but on a post by Don Bourdeaux: the American public behaves like Alzheimer's patients in a whore house, doesn't ever remember being screwed and pissed about having to pay for it. Although, I may have to amend it this time because I no longer think the American public realizes we all will pay for this behavior. They just keep taking Viagra and forgetting about the bill.

scott CLark January 29, 2009 at 10:29 pm

you forgot to mention that the senate passed the SHICP expansion and the gov't will now pay for kids health care for families making 3x the poverty mark or $66,000 a year. Families earning up to $88,000 in income will qualify in NY and NJ. Its the creeping expansion of government coverage that will end in nationalized healthcare. Very emergent.

scott CLark January 29, 2009 at 10:48 pm

oh yeah, and Pres BO signed the lily whatever fair pay act which makes it more expensive to hire women. So there's that, too

Jeremy P January 30, 2009 at 12:09 am

Lets give China all of our cars if they promise not to flood our markets with their cheap steal. We've got those Chinese suckers right where we want them.

Jacob Oost January 30, 2009 at 1:18 am

"I was watching, I saw the whole thing. First it started to fall over, then it fell over."

ker-BOOM!

So far retail ain't collapsing. I can still go to Wal-Mart and get a gallon of milk for $2.50. Now, when I have to sneak into my neighbors yard and night with a bucket, and get my own milk from her bony cow, then fight rape gangs on my way back to the shack I live in, THEN I'll start to think the entire economy has collapsed.

I think it's easier for sectors of the economy to collapse (and for the effects of that collapse to be felt throughout the economy for a time) but the entire economy won't collapse without some universal fundamental–like law enforcement or money–kicking the bucket.

And it seems to me that this talk of inflation is overblown. Looking at the data, it does not seem like the money supply is drastically out-growing the economy. Am I wrong?

Gil January 30, 2009 at 2:24 am

". . . then fight rape gangs on my way back to the shack I live in, THEN I'll start to think the entire economy has collapsed." – J Oost.

Well I would said something along like ". . . when you down&out people in long lines waiting outside a soup kitchen". But I guess that'd work too.

mark January 30, 2009 at 3:15 am

"buy american" has meant the following on some govt. funded projects:

1) buy a length of conduit from china
2) by a coupler from an American factory.
3) connect the coupler to the conduit at the facility of a third party american manufacturer, which in turns calls the coupler connected to the conduit one item – an assembly.
4) sell the assembly to the govt funded project. despite the fact that most of the materials (the 20 ft length of conduit) was made in china, the fact that much of the labor to attach the coupler to the conduit took place in an american factory makes it an american product.

Jacob Oost January 30, 2009 at 4:18 am

And "buy local" in state government parlance often means "buy stuff made by prisoners." :-)

Methinks January 30, 2009 at 8:46 am

On a day like today, I start to think we're going to have a profound economic collapse.

Russ,

You're truly an optimist if it took you this long to feel this way. Everyone I know has begun to make some preparations for a full blown collapse – people who would have laughed at such a thought a year ago. Some are concentrating on moving assets abroad and some are concentrating on stockpiling metals (taking delivery of the physical commodity). We seem to be heading down the road to Banana Republic. I'm hoping for a change of directions, but I can't see that happening right now.

JP January 30, 2009 at 8:46 am

“I predict future happiness for Americans, if they can prevent the government from wasting the labors of the people under the pretense of taking care of them.” ~Thomas Jefferson

Gamut January 30, 2009 at 9:06 am

I just read the most heartwarming post about our dear old premier of Ontario. He was previously famous for galavanting around Europe trying to bribe one of their automakers to build plants here to "protect our auto workers". This post starts off with his suggestion that we should not be thrilled about the stimulus (yes, we just got our own version of yours), he says that "perhaps government is actually putting the brakes on the economy". So I thought, "WOW! He's turned over a new leaf!". And then the clarification:

Apparently, all of these infrastructure projects that need to be executed toute suite will also have to undergo long and wasteful environmental impact studies. This is troubling to our dear premier as, you see, the government may be acting as a check on it's own spending, putting a "brake on the economy". !!!

Suddenly they realise the problem this poses to getting anything actually done. Have no fear, they are working hard to remove these requirements for public works projects. Apparently protecting the environment is a key priority, except, of course, when handouts are on the line.

I'm sure your EPA is not as easily influenced; or is it?

dave smith January 30, 2009 at 9:13 am

Washington and Lee University should be ashamed.

dave smith January 30, 2009 at 9:17 am

What we should do is what I suggest to my principles of macro students:

Have people launch their shoping carts across parking lots towards parked cars

Never clean up after yourself at McDonalds…in fact throw food around

Litter

There is a whole list of simple stuff everyone could do to make work for people and stimulate the economy. And most of the stuff like the three above wouldn't even cost Congress a cent. They just are not thinking hard enough.

muirgeo January 30, 2009 at 9:36 am

On a day like today, I start to think we're going to have a profound economic collapse.

Russ,

You're truly an optimist if it took you this long to feel this way.

Posted by: Methinks

What a bunch of malarky. Both you two are on record on this blog as little as a year ago denying any problems with the economy while others (economist) for several years earlier were claiming we were running another depression style economy. Now that the collapse has occurred and Barack has been president for a week the situation is dire. Sure it is dire but it is not dire based on anything Obama has done to date. And it is quite possible YOUR solution to do nothing would be the one to run us into a profound depression. The credibility of the positions you hold is strained but I'm sure you've already got free-market explanations for how the Dow doubles and full employment returns under and "in spite of" two Obama terms.

Per Kurowski January 30, 2009 at 9:38 am

They gave subprime Joe a 300.000 dollar mortgage at 11 percent for 30 years and then, with the help of credit rating agencies, they restructured the mortgage to “merit” an investment rate of only six percent and sold it to Fred the investor for 510.000 dollar. They pocketed a tidy profit of 210.000 dollar.

Now we have subprime Joe, with a real liability of a mortgage of 300.000 dollar guaranteed with a house that might o might not be worth it, and Fred, with a 510.000 dollar investment in the willingness of Joe to service his original mortgage at 11 percent for 30 year.

To give Joe now the benefit of the rate of 6%, which he supposedly merited, does not seem outlandish. That way Fred might perhaps be able to save 300.000 dollar of his investment… and then try to collect his 210.000 dollar loss from "they" and the credit-rater.

Per Kurowski January 30, 2009 at 9:43 am

We should all sit down in a circle and scratch each other’s back, at an extraordinarily high hourly salary

Martin Brock January 30, 2009 at 9:59 am

Everyone I know has begun to make some preparations for a full blown collapse – people who would have laughed at such a thought a year ago.

Collapse to what? I don't foresee any "collapse", but a stagflation seems in the cards, because we aren't facing the fact that we've already promised too much entitlement to consume to too many people, and the Social Security programs are only the tip of an iceberg.

Mortgage backed securities were the same sort of promise. Buyers of these bonds (including many pension funds and insurance companies selling annuities) hoped that buyers of costlier (or simply pricier) homes would deliver more entitlement to consume to the bondholders. As it turned out, the home buyers couldn't deliver, because the costlier homes didn't really add commensurate value to their labor.

We could expect more productivity today if we had raised more children in smaller homes and labored to integrate this labor into our modern, productive economy, but it's too late for that now. Nine men can produce a new home in a year, but nine women can't produce a child in one month, and raising a child to a productive state in the modern world still requires a couple of decades.

Some are concentrating on moving assets abroad …

The fundamental problem is demographic, and the situation abroad typically is worse. The most productive labor forces are peaking or beginning to shrink. China is no exception. India could be. Other nations with growing labor forces and potentially growing productivity, like Pakistan, face serious developmental impediments, but I suppose at least some of these nations will develop.

Regardless, world population seems likely to peak around mid-century. Population aging precedes this peak and then follows it for some time. As a population ages, its labor force shrinks. This shrinkage occurs because fewer younger workers enter the labor force as more older workers leave it.

If older workers leave with more productivity than young workers bring, while the size of the labor force peaks, output falls. Much of the real means of this productivity, the human capital, exists in human heads, and moving it from one head to another is even costlier than moving gold from one hole to another.

… and some are concentrating on stockpiling metals (taking delivery of the physical commodity).

Right. Everyone you know is either moving assets abroad or stockpiling metals, i.e. they're exchanging entitlement to consume denominated in dollars for entitlement to consume denominated in other currencies or they're using bits of their dollar denominated entitlement to direct people to dig metal out of one hole and bury it in another.

Apparently, no one you know is producing more of the goods for which they expect to exchange their titular "assets" or their buried metal.

muirgeo January 30, 2009 at 10:05 am

"Every once in a while I think we can come out of this mess."

How? Where do you see investment dollars going to spur a recovery? What sector? Who are investors going to sell to when no one has any money? … When there is NO demand?

Are not productivity numbers still looking good? How could that be except if we have too much investment being chased by too few dollars.

muirgeo January 30, 2009 at 10:13 am

"Buy American! Waste resources! Save some jobs while destroying others and in the process make us poorer!"

Where is the evidence for this claim? We passed NAFTA, GATT and all other sorts of free trade policies 15 years ago to allow the American worker to compete against the indigent and to allow American Capitalist to move capital over borders and where has it gotten us? We ARE poorer since not richer… well except for the top 01% of earners?

Methinks January 30, 2009 at 10:16 am

Both you two are on record on this blog as little as a year ago denying any problems with the economy

Hardly surprising that a moron with zero reading comprehension skills would think that.

Martin Brock January 30, 2009 at 10:18 am

They gave subprime Joe a 300.000 dollar mortgage at 11 percent for 30 years and then, with the help of credit rating agencies, they restructured the mortgage to “merit” an investment rate of only six percent and sold it to Fred the investor for 510.000 dollar. They pocketed a tidy profit of 210.000 dollar.

They bought a bond from Joe for $300,000 (rising from a yield of 4% to 9% over a few years). Joe used the $300,000 to buy a house, and Joe also paid them a commission to buy the bond from him and resell it to someone else.

They also bought a default swap from Bear Stearns. Their commission possibly paid for this swap. They combined the bond with the swap and sold the combination, promising a 5% yield at "low risk", to Fred for $300,000. They retained entitlement to the remaining 4% of the 9% yield.

Or maybe they kept the commission, and Bear Stearns bought entitlement to the 4% for the price of the swap. Something like that.

indiana jim January 30, 2009 at 10:19 am

muirgeo wrote: "Sure it is dire but it is not dire based on anything Obama has done to date."

It appears that you do not recall who has been in control of the Congress for the past 2 years; and in case you have forgotten, the Big Zero was part of than majority. Furthermore, if he had been more persuasive we would have eschewed the "surge" in Iraq that has since proven itself.

Rhett January 30, 2009 at 10:22 am

I love this part from the 'Buy American' piece:

'It's not protectionism, Dorgan said. Citing the massive U.S. trade deficit, he added, "and it's pretty hard for anyone to look at our trade situation and suggest that we are being unfair."'

Hey Dorgan, I just saw on the news last night that George W. Bush did that whole "France did it to us, so let's do it back to them" tarrif thing with cheese and almost all European chocolate. When are you policians going to realize that two wrongs do not make a right? Imposing tarrifs, no matter whether they are retaliatory or preemptive, only limits the choices of consumers. Sure, tarrifs on imported steel might help out 25,000 workers that are unemployed in the steel industry, but that is at the expense of 150 million taxpayers and 200 million consumers. I'm sure everyone will be thrilled to pay an additional $4,000 for that new American car despite having already lent GM the money to keep operating and building it in the first place. I think that even Krugman would oppose this!

Methinks January 30, 2009 at 10:39 am

Collapse to what?

Martin,

In short: A currency crisis. We're printing money at an astonishing rate. Government spending could well crowd out private investment, reducing production. As you persistently remind us, government borrows against the future production of taxpayers. If the growth of the deficit outstrips the growth of production, we will be in trouble. All it takes to set of a currency crisis is one of America's creditors deciding that the risk of lending to America has grown to the point that it needs to even slightly reduce its exposure to U.S. Treasuries (nothing so overt as requiring a higher interest rate is required) and for that to be perceived as a bad sign by other creditors. That's when the stampede will begin out of Treasuries (and the dollar), as each creditor fights to not be the last out the door. The dollar will collapse and inflation will skyrocket. We have no way of predicting when such an event will occur. All we can know is that if the deficit persistently grows faster than production and wealth destroying entities are subsidized at the expense of wealth creating enterprise, the probability of such an event rises.

In such a crisis, there are two ways to repay creditors: print more money or confiscate private wealth. I agree with Arnold Kling that the government will choose the latter option as the former will be politically unpopular. Printing money will exacerbate inflation – a tax on everyone. "Asking" people to hand over their accumulated wealth as we are "all in this together" and the "rich" must "do their fair share" will be very politically popular. The easiest target will be 401K's. Argentina already confiscated its version of private retirement savings and Nancy Pelosi has been eying American 401K's lately.

I don't know if this is what Russ had in mind, but this is what I have in mind.

Fritz January 30, 2009 at 11:03 am

I am living the surreal experience of listening to the audio version of Atlas Shrugged (I'm halfway through) and reading the news every day. In both the fiction and non-fiction worlds, I'm so curious to find out what's going to happen next. I don't want to start a big Ayn Rand debate here; I just wanted to point out how eerie it is. 'Who is John Galt?' indeed.

MWG January 30, 2009 at 11:25 am

"We ARE poorer since not richer…" (refering to the 90s and NAFTA)

Posted by Muir

Questions: You're poorer than you were in the early 90s?

I'm certainly better off than I was then. My parents are better off than they were then. My siblings are better off than they were then. 99% of my friends are better off than they were then… In fact, I'm gonna be honest. I don't know anyone who isn't better of today than they were then. Oh, and believe me, we're not part of the top 01%.

Also, GATT wasn't passed in the 90s. The WTO sort of replaced it. You sometimes remind of the boss from the show "The Office". It seems that sometimes you'll start a sentence without having any idea what you're gonna say.

Sam Grove January 30, 2009 at 1:04 pm

George has a Keynesian perspective on economics.

He expects to score points on Cafe Hayek by quoting Keynes.

Randy January 30, 2009 at 1:15 pm

Fritz,

Just reread the book a couple of months ago. Eerie, isn't it.

MnM January 30, 2009 at 1:34 pm

Muirgeo, you're entitled to your own opinion but not your own facts.

Per capita personal income 1990 (in 2007 dollars): $30,534.02

Per capita personal income 2007 (also in 2007 dollars): $38,564.00

Kevin January 30, 2009 at 1:50 pm

Randy, I wouldn't say "Eerie." To me, this behavior is so obvious and makes so much sense that the only real curiosity is how many folks actually think it advances the state of human affairs. Humans do not have a heritage of peace, liberty, rule of law, or any of the things folks seem to fear losing. Quite the opposite, in many ways. Why should this generation be any exception to this? Because the last few were, for some?

Not saying we won't continue to be an exception – just pointing out that this isn't even close to the first time events have paralleled AS.

Lee Kelly January 30, 2009 at 2:00 pm

Methinks,

The Fed might just buy up all U.S. Treasuries with money fresh off the printing press.

Looking at the U.S. Government's expanding debt (including all obligations like social security and medicare), it seems fanciful to think that politicians will ever pay it off (especially considering their record so far). It is already some ridiculously high multiple of GDP.

The Federal Reserve will buy and hold this debt, but it will never be repaid. It will be debt in name only, and debasement of the currency to everyone else. At what point will it become more valuable to melt coins and use the metal than to hold them currency?

Methinks January 30, 2009 at 2:32 pm

Lee,

This is precisely the reason some people are hoarding gold and silver. I think that the Fed will only be able to do what you suggest in the absence of an accute desire by U.S. creditors to withdraw credit. I expect that a slow debasement of currency and a steadily rising inflation rate is easier to manage than a fast one. However, I suspect the Fed hasn't quite enough control over the change in the rate of inflation to be able to achieve this orderly buy-up of Treasuries. What creditor which has already determined that the U.S. is a poor risk will be willing to take on more risk by extending its time horizon to allow the U.S. to slowly print more money to buy back its debt? Of course, if the rest of the world continues to be in an even worse economic position than the U.S., a currency crisis may never occur at all.

Oil Shock January 30, 2009 at 4:23 pm

I found this great comment on the blog of your fellow travelers at austrianeconomists.typepad.com

Here is a snippet about the "hands-off" hoover.

But as President, Hoover would be able enact the policies for the Great Depression that he dreamt up for the 1921 depression. Chapters 7-12 of Murray Rothbard’s “America’s Great Depression” detail his numerous interventions to keep nominal (and thus, real) wages high during a sharp deflation as well as prices in general for crops and other products. And the bite of government steadily increased during his term, as reflected on page 347 of the book:

1929 – 14.3% of gross private product, 15.7% of net private product
1930 – 16.4% of gross private product, 18.2% of net private product
1931 – 21.5% of gross private product, 24.3% of net private product
1932 – 24.8% of gross private product, 28.9% of net private product

To read the whole thing, click the link above.

Martin Brock January 30, 2009 at 4:24 pm

Of course, if the rest of the world continues to be in an even worse economic position than the U.S., a currency crisis may never occur at all.

Bingo. I don't expect the dollar to play its preeminent reserve currency role forever, but I'm less concerned about an outright dollar collapse and hyperinflation than about stagflation as title holders try to exercise all of their entitlement to consume over the next couple of decades. European nations face even greater challenges in this regard than the U.S.

The value of empire is vastly overrated, so the U.S. could be very malinvested at this point, and we may sink deeper into "debt" for this reason in the near term, but I don't take these debts very seriously, because we'll repudiate them through inflation if nothing else. Sorry China. You fucked up. You trusted us. Same news to Saudi Arabia and the rest of you. Go ahead and dump you Treasury paper. Who cares?

They sure aren't dumping it now.

The debt isn't the problem as much as the malinvestment. Many of us are trained to produce stuff that we don't really consume and that our international trading partners don't want to consume either, stuff like boots and bullets. Many other resources are organized for this useless production too. Many more of us are simply entitled to consume, and if these entitlements include inflation adjustments, reorganizing the title holders productively is more difficult, because we can't inflate the entitlement away, unfortunately.

On the upside, the U.S. is still one of the most enviable combinations of natural resources, infrastructure and human resources on Earth. Sure, we've organized ourselves to produce a lot of imperial intimidation and dubious promissory notes in the last few decades, but we can stop doing that and revert to more productive lives. We certainly have the means.

Kevin January 30, 2009 at 4:29 pm

if the rest of the world continues to be in an even worse economic position than the U.S., a currency crisis may never occur at all.

No kidding. That's the other side of the whole argument. Most other countries/markets opt for social stability at the expense of never working out their problems. When the weaknesses are revealed, they're devastating and induce a mass capital flight to wherever the problems are either the smallest or in the process of real resolution. This is IMO the reason why the dollar has been so strong in spite of everything.

A good argument can be made that this process will continue and even accelerate as this recession moves forward. That is tremendously dollar bullish and bad news for US hoarders of metal. And speaking of air drops, the precious metals are already priced too rich for a lot of their industrial uses and even jewelry, so where's the bid when/if people find out the dollar is the reserve everyone wants?

You're wise to qualify your post.

vidyohs January 30, 2009 at 6:14 pm

I guess I am in the top 1% of income earners because my income has been going up and still continues to do so. Sssssss so good.

But, as such, I am contemplating going into cat breeding in a big way, so I think I will just buy muirduck and put him to work making sure my kitties stay healthy.

Of course I will pay him well, as well as I can in this terrible economy….and in accordance with the dictates of King Obama.

Muirduck, your worries are over, I am going to employ you in a field for which you are vastly unqualified..kitty health care.

Methinks January 30, 2009 at 8:10 pm

A good argument can be made that this process will continue and even accelerate as this recession moves forward.

I agree with you, Kevin. I also agree that the dollar has been strong because the U.S. is in a relatively better position than other countries. For now. But even without that last sentence in my post, I only said the probability of a currency crisis sometime in the future has increased. Some people have begun to calculate that the probability has risen enough to make it worth the time and energy to devise an exit strategy – just in case.

so where's the bid when/if people find out the dollar is the reserve everyone wants?

The bid is lower. These people are long dollars. The metals are a hedge. If they're losing on their metal hedge, it's likely because they're winning on their long dollar position (likely, but not certainly as the two aren't perfectly inversely correlated).

Although I agree with you about the behaviour of foreign countries, I think it's possible that they may decide not to opt for social stability this time. For example, As the rest of the world panicked and stupidly banned short selling, China introduced short selling for the first time its stock market. I don't mean to rely on a single policy to make the case that China will continue to liberalize as the global recession rolls on, but I think that's it's a mistake to assume that it won't. I think Europe will probably always turn back to more socialism, to its detriment. But, Asia may behave differently in the future. I guess we'll have to wait and see. It's also possible that the U.S. will turn back from the socialist path it's on in time. However, Obama seems determined to expand massively on Bush's socialist foundations, reducing that probability daily.

Let's just say that I make no concrete predictions but I get less optimistic about America's future every day. It gives me no pleasure to say that and less pleasure to think it.

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