Inflation Isn't Inevitable (Debt to GDP)

[D-Mack]

Inflation Isn't Inevitable

Jeremy J. Siegel, Contributing Editor,
Kiplinger.com
Wednesday, March 11, 2009; 12:00 AM

...


Warning signals. Although deflation is in the headlines today, the Fed has to be alert to inflationary pressures in the future. The value of the dollar, the price of gold and, most important, commodity prices have historically been early signals of inflationary pressures. Commodity prices -- particularly oil prices -- are depressed now due to the worldwide recession. But traders expect the price of oil to top $60 a barrel by the end of 2010. So once confidence returns, the Fed must act to withdraw excess liquidity and raise interest rates.

Those large projected federal deficits are manageable for now. As the economy recovers, they should be reduced by increasing tax revenues and the winding down of support programs, such as unemployment insurance. The federal government's debt-to-GDP ratio is now about 70%, not much different than the postÐWorld War II average.

Japan offers a good example of how much debt a developed country can handle without succumbing to inflation. Over the past ten years, Japan has doubled its debt-to-GDP ratio, to 180%, more than twice the average of other developed countries. Nevertheless, by reining in its money supply, Japan has not only avoided inflation but has actually experienced deflation. And the Japanese yen has been the world's strongest currency over the past decade.

....

What are the numbers for debt to GDP in the US for private and government debt ?


It looks like Credit Suisse thinks it's all right

http://www.businessinsider.com/2009/...nd-meaningless

http://www.businessinsider.com/yes-w...in-debt-2009-2

[Wild Style]

Re: Inflation Isn't Inevitable (Debt to GDP)

In Japan and Post WWII America were the overwhelming majority of citizens have a incredible debt to income ratio? Where personal incomes declining for the previous two decades or so. Did either of them have little to no meaningful productive capacity? I have not look into either so I am not saying this is the case but I am wondering if all things are indeed equal.

[ASH]

Re: Inflation Isn't Inevitable (Debt to GDP)

Japan offers a good example of how much debt a developed country can handle without succumbing to inflation. Over the past ten years, Japan has doubled its debt-to-GDP ratio, to 180%, more than twice the average of other developed countries. Nevertheless, by reining in its money supply, Japan has not only avoided inflation but has actually experienced deflation. And the Japanese yen has been the world's strongest currency over the past decade.

Lets see how Japan's currency does if they run a current account deficit for a few years. For that matter, the article makes no mention of the difference between creditors and debtors. All in all, the article doesn't reassure me, because it seems a fairly superficial analysis of Japan's circumstances.

[FRED]

Re: Inflation Isn't Inevitable (Debt to GDP)

Inflation Isn't Inevitable

Jeremy J. Siegel, Contributing Editor,
Kiplinger.com
Wednesday, March 11, 2009; 12:00 AM

...


Warning signals. Although deflation is in the headlines today, the Fed has to be alert to inflationary pressures in the future. The value of the dollar, the price of gold and, most important, commodity prices have historically been early signals of inflationary pressures. Commodity prices -- particularly oil prices -- are depressed now due to the worldwide recession. But traders expect the price of oil to top $60 a barrel by the end of 2010. So once confidence returns, the Fed must act to withdraw excess liquidity and raise interest rates.

Those large projected federal deficits are manageable for now. As the economy recovers, they should be reduced by increasing tax revenues and the winding down of support programs, such as unemployment insurance. The federal government's debt-to-GDP ratio is now about 70%, not much different than the postÐWorld War II average.

Japan offers a good example of how much debt a developed country can handle without succumbing to inflation. Over the past ten years, Japan has doubled its debt-to-GDP ratio, to 180%, more than twice the average of other developed countries. Nevertheless, by reining in its money supply, Japan has not only avoided inflation but has actually experienced deflation. And the Japanese yen has been the world's strongest currency over the past decade.

....

What are the numbers for debt to GDP in the US for private and government debt ?


It looks like Credit Suisse thinks it's all right

http://www.businessinsider.com/2009/...nd-meaningless

http://www.businessinsider.com/yes-w...in-debt-2009-2

Siegel is missing the point. It's not the public debt to GDP ratio that matters it is the combination of net external debt position, level of dependence on capital inflows to finance that debt, and rate of increase of fiscal outlays relative to both receipts and GDP. They are all headed in the wrong direction. If interest rates were to increase dramatically, we'd be in serious trouble.

[gwynedd1]

Re: Inflation Isn't Inevitable (Debt to GDP)

Public debt like Japan's means nothing in a context like that. Is it better to have individual paying interest on bank debt or to pass around public debt? One is an interest bearing money supply while the other is a central bank created money supply. The reason why the debt to GDP ratio is so high is because Japanese are not being suckered to go into debt.

[bart]

Re: Inflation Isn't Inevitable (Debt to GDP)

One measure of external debt:

[c1ue]

Re: Inflation Isn't Inevitable (Debt to GDP)

Is iTulip still giving out Flying Monkeys of the FIRE economy awards? Maybe we need a monthly ceremony.

After all, Ben Stooge shouldn't be allowed to win every year.

[occdude]

Re: Inflation Isn't Inevitable (Debt to GDP)

Inflation is always inevitable, equal to the amount of money creation taken up by the government.

The government is just getting warmed up, there is so much deflationary pressure downward at the moment that the government, true to its inefficient nature, can't keep up with it. Deflation is currently market driven whereas inflation is the governments reaction to it. If people expect debt to GDP to remain static as this deflationary period evolves they aren't in tune with government omnipotent psychosis syndrome.

Once inflation is let out of the bottle, you have to almost stick a stake in its heart and twist it to get it stop because it re-shapes an economy down to the foundation which is where you have to go to back again to kill it.


After the deflationary period where all the means of production are scaled back, the relatively late introduction of stimulus kicks in like a mule unto an environment that has fewer goods. Everyone knows what happens then.

So while I give deflationist a wide berth now because they've been on target, but this aint gonna last. All that money, sitting in treasuries is like having gun cocked at your head and the slightest permutation will send the herd scurrying. Gold will be the last bubble to pop when the gig is finally up.