Best Case / Worst Case
Someone please tell me how I am wrong:
1. Best Case Scenario From Government Intervention: It works. The trillions in bailouts and fiscal stimulus revitalizes the economy in a big way. Asset prices recover, jobs return, economic activity picks up and the huge increase in the monetary base works its way through the system. Tax revenue increases, deflation abates and inflation returns in a big way. As fear abates, investors move out of the "safe haven" of treasuries, and bond prices decline. Interest rates rise and with the increase in money supply and economic activity, inflation is off to the races.
2. Worse Case Scenario From Government Intervention: It fails. The trillions in bailouts and fiscal stimulus are insufficient to counteract asset deflation. Asset prices continue to drop. Job losses mount, economic activity continues to decline, and the big increase in the monetary base fails to work its way through the system. Tax revenue continues to decline, budget deficits mount, and the US government finds itself deeper and deeper in hoc. Foreigners find themselves poorer and poorer and less able to purchase our bonds and finance our debt. This leads to debt monetization and a downward spiral in the desireability of government debt. Bond prices collapse, the dollar collapses, printing becomes the only option, and hyperinflation is off to the races.
Someone please tell me how I am wrong:
I’d be happy to.
Nah, I’m just kidding. But here’s my take on what you wrote.
It seems like the first scenario you describe is the return of the status quo and the resumption of the growth model, which I believe is unlikely, but the chain of events you describe that would embody that return I think are correct in terms of economic theory and past economic activity. Certainly a ‘Bama Bounce in the markets during late January and February could be the catalyst for this. As our economic system is essentially a faith-based one, I can see this triggering all the right psychological prompts to carry out the rest of your list: assets recover, jobs return, increased liquidity and things start flowing again, etc. Presumably, with things chugging ahead full-steam again – people actually working a lot and maybe even making more money than before – the surge in inflation would be counterbalanced or at least somewhat counterbalanced. And though I said I think this is unlikely, I could envision it occurring in the short-term, say starting in the spring but only lasting several months or so only to return to where we are at the present and ultimately scenario two.
Your second scenario seems more likely, though maybe not down to the last detail. I wonder if we could just have a prolonged deflationary depression where hyperinflation does not rear its terrifying head and our economic landscape is purged of the chafe – as painful as this will most assuredly be for many. At some point we’d hopefully be able to soberly re-evaluate our position and plot at least a sketchy path forward.
Regarding hyperinflation, it seems that many are now opining the idea of hyperinflation not really being able to set in so to speak because once it arrived it would more or less take everything with it. So not that it won’t or can’t occur but that it would destroy the whole financial and social landscape within weeks so it would never be a long-term situation we would find ourselves in. More like an explosion where we’re left to deal with only its aftermath. I mean, I really can’t see price increases of say two, five, or ten-fold being sustainable for any chunk of time before there being serious social upheaval. Most Americans, I don’t know, let’s say 80% wouldn’t have the financial ability to hold out more than a few weeks if everything (or only a third of it) suddenly quadrupled in price in a matter of a few weeks, right? And as far as the theoretical idea that wages would also increase to mirror the increase in goods, I just don’t buy that – especially considering our point of origin for that hyperinflationary leap: significant unemployment, companies pinching every penny they can, widespread trepidation about the future. Wages have not kept up with even regular ole’ inflation even during the boom times when there was enough love to go around. So I guess I basically see hyperinflation as the end of our entire system. Though not the end of it all in some doomsday way.
I think the only area where you may be "wrong" is that you didn’t explicitly talk about energy. I think any kind of return to growth would immediately be halted by the oil situation. It seems like there’s a pretty strong correlation between GDP and barrels of oil pumped per year.
Right, I’m not trying to suggest which is more likely . . . . "recovery" or "failure" of government stimulus. It just seems like a plausible argument can be made for high inflation coming on the heels of either.
Scenario 1 or 2 show Government intervention doesn’t work either way. Best overall case Scenario 3, without government intervention, we deflate wages and prices and go through the bankrupties and defaults and start the healing process. Don’t Scenario 1 or 2 just prolong this eventual outcome anyway?
I think it is a pipe dream to think there will not be continuing and escalating government intervention in all things financial.