The Great Divergence

[Jester]

Due to the counteracting inflation caused by the Fed, peoples wages and income are not being reduced. AND, the prices of goods and services are not falling (at least in aggregate).

Either prices of goods and services are falling, or they aren't. Understanding the point that there are different commodities behaving in different ways, you still have to pick one story and stick to it.

The bailout is not painless, the stimulus is not painless, quantitative easing is not painless. They are only less painful than the alternatives. Nothing comes without a price.

Were it not for Bernancke's hyper-activity in preventing a deflationary spiral, we'd be smack in the 2nd Great Depression. However, I'm not sure if we can coast out of it merely due to his interventions. I still feel there will be a price to pay eventually for the Fed's recent actions in massively devaluing the US dollar. It may be that China takes over as the worlds most important economy, and reigning military super power.

Correct me if I'm wrong here, but you believe the Yuan is being kept undervalued by China, no? If that is the case, how would a revaluation that promotes US exports help China become powerful? It would make them richer in terms of US products, but then, that's what everyone (except consumers) wants - more US exports to China, and fewer imports. And since they're already holding a hojilion US dollars, anything that makes those less valuable makes them poorer, not richer.

Militarily, we still live in nuclear stalemate. No matter how wealthy China becomes, they cannot escape that fundamental position. Even conventionally, the US still spends nearly seven times what China does on its armed forces. I don't see their relative military positions swapping anytime soon.

My bet would be on a high rate of inflation that higher interest rates cannot cure. Couple that with how near the world is in hitting the peak oil ceiling, which suddenly will drive up the cost of energy (needed for all economic activity). Then, there are the secondary unintended effects we saw in 2007, when oil hit ceiling: higher gasoline pushed people to use more ethanol, which caused more grain to be used for fuel, which drove up the price of food worldwide.

Noted. We shall see.

-Jester