Sunday, July 18, 2010

Deflating Bubbles

In America the word deflation has a similar ring to it as socialism or universal healthcare. In other words, we have to avoid it at all costs. Deflation would stunt growth which we have to pursue. But isn't growth often just another term for a bubble? Are we never satisfied with what we have?

Anyone who has experienced out of control hyperinflation would welcome deflation over it without a second thought. As a little boy I was collecting stamps and was amazed by old German ones which had a value expressed in milliards. Americans are in love with large numbers and base their unit system on thousands after a million, in contrast to European million millions. We lack a milliard (109) and call it a billion. Their billion equals an American trillion (1012). Confusing but perhaps this makes us feel richer. Runaway inflation at its extreme is scary as money loses its value faster than new bills can be printed. Prices go up daily: a simple bus fare in the afternoon may be higher than it was in the morning. People start using a barter system instead of a monetary one, or if the latter is a must, it will be done in another currency, such as the U.S. dollar. Above is a picture of a German woman using totally depreciated paper notes for cooking in 1923: it gave more heat than using the same money to buy any kind of fuel. The worst hyperinflation took place in post-war Hungary where prices tripled every day. In 1946 a bank note of 100 million billion pengő was issued and a couple months later a new currency was issued. One new forint equaled four hundred (our) octillion, or 4x1029 old pengő. For those who are not comfortable with exponents, the enormously large number looks like this:

I came back from Argentina in early 1980s as a millionaire many times over. I bought Marjorie a beautiful pair of amethyst earrings but had to pay for those in U.S. dollars. Much of Latin America suffered from hyperinflation and the governments had to print ever increasing quantities of paper bills to pay for their financial obligations. Israel had its share of similar woes and lately Zimbabwe had 98% inflation per day. With Communism's collapse the ruble suffered the same fate. In 1992 alone the inflation rate was 2,520%. Russians resorted to the old barter system. A plumber would come to fix your leaking faucet and in return you gave him a piece of paper promising five music lessons. He would use it to get groceries and the merchant would pass it on. One day a mother would show up at your door with her child and the promissory note which might have changed hands fifty or more times, and five piano lessons would be given.

For investors who like to gamble, rampant inflation is an opportunity, even if a risky one. But deflation puts an end to speculation. People want to hold onto their money, either in cash or in a bank even if it doesn't earn interest. Japan has lived with deflation since 1990s and people are not exactly suffering. Our country went through deflation during the Great Depression and we might be in a similar situation presently. Economists like to talk about deflationary spiral, yet there is no actual proof that it can happen. The stock market and speculative gambling would suffer, but people would still invest in something they see as worthy. Fewer mansions would be built but who really needs them? Taking a deep breath for a few years would do us no harm. Salaries for professions that are overpaid would correct themselves, others would go up. The former includes spectacle sports and all forms of entertainment. Let musicians, dancers and actors earn what audiences are willing to pay: forget a parasitic lifestyle. A doctor can heal people for a lot less, just as those working for Doctors without Borders do. Do away with malpractice lawsuits but publish the names of bad doctors instead. Train more primary care givers; we already have far too many specialists. Increase the number of nurse practitioners and midwives who in many cases do a better job than a doctor and for a lot less. Make teaching regain the respect it deserves, but throw out union contracts that make it next to impossible to fire bad instructors. Let Americans learn how to manufacture goods again, instead of depending on Chinese imports. Let working hard become again a virtue and base an income on that, not on crooked betting.

Growth has its limits. A pyramid scheme soon collapses as it is impossible to sustain. Bernie Madoff's Ponzi scheme lasted as long as it did because investors believed in the phony statements that made them seem rich on paper. A country's economy automatically grows if its population does. Yes, we can find capable leaders for a company or a bank for a lot less than their present CEOs demand. The head of Wal-Mart makes more in an hour what the workers earn in a year. Perhaps my value system seems strange but to me that is crazy. It is also nuts that an orchestra's conductor, titled "music director", would earn as much as 25 musicians and he does only a fraction of the yearly work. Yet many would argue that said musicians are already grossly overpaid. Is it not possible to find a stage hand for Carnegie Hall for less than the $500,000 or close to it five of them make? The purpose of labor unions was to guarantee people a living wage, not to rip off the system.

Even in physiology a growth cannot continue forever. In a malignant case it will kill the patient, and itself, unless a surgical or other medical intervention will result in a remission. In a few cases a gigantic non-malignant tumor can grow to an enormous size. In 1991 a multicystic mass of an ovary weighing 303 lbs (about 138 kg) was successfully removed. Needless to say, without the operation the woman's life span would have been shortened quite a bit. We don't know if our present economic tumor is a killer but it is clear that surgery will be needed.

Time for a witch's brew: bubble, bubble, toil and trouble…