by Jerome a Paris
Tue Oct 30th, 2007 at 10:33:58 AM EST
History’s warning about the price of money
As one of the great monetary economists of the last century, Jacques Rueff, pointed out in the late 1960s, people react to the “growing insolvency” of a reserve currency, such as the dollar, by acquiring “gold, land, houses, corporate shares, paintings and other works of art having an intrinsic value because of their scarcity”. Sounds familiar? Indeed, this is the story of our present decade, one in which alternatives to the dollar as a store of value have soared even while the CPI has remained subdued.
This phenomenon is well-known in developing countries, where asset booms combined with low CPI inflation have preceded monetary and financial crises.
Perhaps the biggest structural problem of the UK is an over-reliance on personal debt and a built-in tendency towards speculative housing bubbles. Britain has owed much of its 15-year spell of good economic growth to an unprecedented credit and housing binge that has lasted abnormally long.
(...) housing cycles are very long – long enough even for rational people to form irrational expectations. The boom was driven by cheap money and abundant credit and it was sustained by an irrational belief that prices would rise for ever in real terms. The downturn is driven by the same process in reverse: expensive money, a credit squeeze and an equally irrational belief about how far prices can drop.
In both countries, asset price inflation reflect a debasement of currency by increasing financial speculation while the underlying economy stagnates. The boom will be followed by a bust, in the form of inflation, followed and or repressed by significantly higher interest rates but these two articles suggest that the two countries may take different paths to get there: a currency crash in one case, as foreign investors move out of the dollar, triggering higher interest rates (and a recession) even before inflation is visible in the CPI numbers; and a housing market crash in the other, as market psychology changes bring out more stringent lending standards, and speculative buying collapses.
Abusing the benefts of a reserve currency only works so long as such abuses remain tolerable internally (government incompetence) and externally (warmongering) and there is no alternative; relying on importing foreign billionaires and on parasiting the real economy of the rest of the continent can only take place once. All of this is coming to an end now.
[editor's note, by Migeru]
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