The Real Danger Of The Fed's Easy Monetary Is Not The Risk Of Hyperinflation

TBI ^ | 2-21-2013 | Comstock Partners

[blam]

The Real Danger Of The Fed's Easy Monetary Is Not The Risk Of Hyperinflation

Comstock Partners
February 21, 2013, 2:56 PM

The Fed's current attempt to control long term rates, "QE to infinity", is based on the hope that by providing cheap money, banking and financial firms will lend and thereby stimulate the economy. This would be a sound plan if the problem with the US economy was a shortage of credit. With corporations holding back cash and depending on productivity gains to drive earnings, the typical recovery scenario where the private sector borrows money for investment and drives job growth and ultimately demand, is not materializing.

Demonstrably cheap money is not the answer. The real constraint on the economy is two pronged: 1. expectations of low growth keep corporations from investing funds and instead they hold large sums of cash on their balance sheets and 2. continued high unemployment and a continued deleveraging of household debt keeps consumers from spending. We have discussed this before and used the term to describe it as a "liquidity trap." Despite the evidence that QE is not working as planned (employment and GDP remain lackluster) the Fed continues on this course as QE has become the proverbial financial crack pipe that allows the asset markets to continue higher and higher.

Surely inflating housing, stock and bond prices by governmental money printing is a good thing, right? Ask Alan Greenspan how well the Fed's last foray into propping up asset prices worked out for them. Every time the government decides to manipulate markets, there are many very unpleasant unintended consequences. Under Greenspan artificially low rates were used to expand the housing market and allow businesses and consumers to get cheap money to leverage up their balance sheets. As we know, it ended badly.

(snip)

[chrisser]

The real constraint on the economy is two pronged: 1. expectations of low growth keep corporations from investing funds and instead they hold large sums of cash on their balance sheets and 2. continued high unemployment and a continued deleveraging of household debt keeps consumers from spending

Has nothing to do with the spectre of uncertain, ambiguous and potentially devestating regulation just over the horizon...

[BfloGuy]

continued high unemployment and a continued deleveraging of household debt keeps consumers from spending

Consumers aren't spending because so many of us aren't working, for Pete's sake. The problem of the economy is a lack of investment caused by Obama's healthcare plan and his incessant threats of higher taxes. Period. Stop there.

People have to produce [i.e., work] before they can consume. Now, increasingly, in the U.S., you can consume without working, but someone, somewhere still has to go to work in your place.

Even the all-powerful Obama can't change that law of nature.

[blam]

My son has been working for 12 years as a physicist for a large defense contractor in Southern California.
His department was hit thursday (last week) with lay-offs. He survived but the survivors were placed on a four day work week.

He will be spending less on everything.

[BfloGuy]

He will be spending less on everything.

Yep. Production creates demand. Washington [Democrats and Republicans alike] claim it's the other way around.

They are wrong. There can be no demand without production. Attempts to goose the economy by encouraging consumption are and always have been failures.

Now, you won't like this part. Defense spending is government spending and all government spending [even on projects we approve of such as defense] is a drain on the private economy.

Defense spending is necessary, but it does not create economic growth. It reduces it.