Posted on 08/16/2010 10:19:35 AM PDT by jackmercer
We are again looking at the same abyss we faced in the Fall of 2008.
(Excerpt) Read more at finance.yahoo.com ...
The feebleness of ridiculous government ‘stimulus’ programs is now apparent. All they did was buy some time. Sooner or later they will have to pay the Piper. Socialism never works.
There may be some deflation as the economy grings to a halt. But that will be quickly followed by runaway inflation as the printing presses bellow smoke.
Maybe there is something to that voo-doo we were talking about yesterday!
We are at the zero lower bound. Inflation isn’t going anywhere with that kind of suppresive monetary leverage....not for a long while. We would need at least 4% inflation for 3 years to get back on track as deflation or even low inflation that outstrips pay raises makes debts heavier to carry and thus suck the economy even more dry. In a liquidity trap the Fed can buy up all the treasuries it wants and all the bonds it wants (i.e. printing money) but inflation isn’t going anywhere...the banks are sitting on the money or buying up treasuries.
I wonder what Milton Friedman would recommend. Bernanke is one of his disciples, so he’s probably following his teachings.
I believe the thing that’s spooking a lot of companies from hiring (especially small businesses) is the total uncertainty and instability as to what the rules of the games are in terms of taxes, regulations, mandates and the general anti free-market sentiments that pervades today’s politics. This is something that’s outside the fed’s control - it’s the political system.
If the republicans were to gain control of both houses and show some strong leadership in reversing this, we could pull out of this “malaise” fairly quickly.
The Chinese aren't so much, anymore. They're net selling, and looking to Japan and Europe for bonds.
I think you are right that uncertainty is the driving factor here. The banks, investors and most importantly, consumers, are sitting on their dollars. With consumer savings now above 6% and with another point or two will be at savings rates of the 50s and 60s, there’s no place to put investment dollars. Since 70% of our economy is domestic consumer spending, that is a big deal.
This translates into a demand problem. The supply is ample as the Fed has dumped trillions into bank reserves and buying up bonds. The factories and manufacturing capacity is there but just sitting idle. Under normal circumstances, we should have inflation through the roof. But being monetarily at the zero bound, that’s not going to happen anytime soon. It’s a liquidity trap.
So the supply side is ready to go, there’s plenty in dollars and manufacturing capacity to kick start things. The problem I think, and yes I know this sounds Keynesian, is demand. No one is buying. So long as no one is buying the surplus goods inventories, housing, exports, etc, manufacturing will be idle and banks have no place to put money other than treasuries. And this is global, not just us.
Lastly, unless the republicans gain veto proof majorities in the House and Senate, the fall elections aren’t going to solve the economic problems. With the veto pen, they will be able to get at most, half measures. Depends on whether Obama will be stubborn or more flexible like Clinton was after 94, economically speaking. I think we will be in this uncertainty until 2012, assuming big congressional wins AND the White House in 2012.
Back in June China reversed direction, their holdings increased 2.6%. They are buying again.
If they stop financing our debt, we stop buying their goods and then they are in a sociopolitical mess.
All this talk of deflation is a red herring, meant to distract us from the danger of more and more money printing.
It’s not “uncertainty.”
It’s debt.
Debt is deflationary. Japan has showed us that fact every year since 1989.
Debt is also addictive. The addicts swear that it will do what it can’t: cause inflation. Addicts lie.
Governments must deleverage away from debt to break the deflationary death sprial...and *THAT* would mean harsh short-term pain before the Recovery began.
I think Friedman would recommend igniting artificial inflation. He has written extensively about getting the funds rate to zero, bailing out banks, and pumping lots into the economy with non-traditional monetary methods like buying up mortgages and other assets to clear balance sheets.
Friedman’s famous “helicopter drop” of dollars via tax cuts and asset purchases which Bernanke later quoted and got the nickname Helicopter Ben from his 2002 paper that quoted Friedman on how to combat deflation.
Bernanke is kind of doing that now when he announced last week that he would let proceeds from the mortgage bond purchases “ride”. But this is half asses IMO and he needs to do more.
They both knew that with the funds rate at zero, any reasonably large amount of liquidity injection would not trigger an inflation crises. They most fear Deflation.
Once we are in deflation, we are screwed since the majority of the US carries debt in mortgages, autos, personal loans, student loans, credit cards, etc. Deflation will make these debts a hell of a lot more expensive to service. When we are barely able to service our debts, we have almost no disposable income to put into the economy through goods and service purchases and unemployment and deflation continue in a downward spiral.
Those without any debts? Well they just need to park in bonds and they will be on easy street.
“THERE WILL BE NO DOUBLE DIP….. (It Will Be A Lot Worse)”
With respect to the poster of the article, I think the author of the article is seriously misguided. The issue isn’t the fiat status of our currency, it is the fact that the banks, investors and consumers are just sitting on it and not investing since there is nothing to invest IN. In addition, with the funds at 0% for all practical purposes, this “printed money” can be recalled instantly with rate hikes if inflation toys with 4%. We are at 0%, the only place to go is UP.
Explain to me the mechanism on how debt is deflationary. I am genuinely curious since I have always read the opposite where deficit spending was inflationary. In this country in 1945 our Debt was 120% of GDP, worse than our current 60 - 70% of GDP and we had inflation that peaked at 14% (avg) by 1947 and took a few more years to come back down to normal.
Japan issued tons of debt but if you look at their banking sector from their lost decade to present, they pretty much sat on that debt. There was no place for it to go. You can’t say they had deflation (mostly low inflation), high debt, therefore debt causes deflation. You have to explain how they are connected, if at all.
I do agree however that we are doing exactly what the Japenese did and will probably have a lost decade just like them. Their policies both monetary and fiscal were half assed and they just sat around hoping for the best. The uncertainty created by their indecisiveness may have triggered deflation but as far as deficit spending causing it, I’d have to hear a specific mechanism and an historical corollary to the sentiment before I understand it.
I don’t think it’s a liquidity trap - there’s plenty of money sloshing around. Banks have tons of money and they’re probably parking it in treasuries. That’s why interest on treasuries is so low.
I believe it’s more a credit crunch. You constantly hear of small businesses complaining about not being able to get a loan. And I have personal experience as to how difficult it is for a real estate investor to get a loan. And yet you see ads from banks offering loans at the lowest interest rates in history.
So how does one explain this seeming contradiction? My theory is that the reasons more loans aren’t being made is because the qualifications for a loan have become much more stringent (probably what they should have been all along) - taking millions of people and thousands of business out of the game.
It’s going to take a while for the economy to adjust to these new “settings” and find its new “equilibrium”.
I don’t know how much of this new “qualification requirements” are dictated by the fed and how many are the banks themselves. Maybe that is one area where the fed could to do some “easing” while still being mindful of not going back to the bad old days of giving a loan if you fogged a mirror.
Red herring? No. Deflation is worse than inflation.
“Once we are in deflation, we are screwed since the majority of the US carries debt in mortgages, autos, personal loans, student loans, credit cards, etc. Deflation will make these debts a hell of a lot more expensive to service. When we are barely able to service our debts, we have almost no disposable income to put into the economy through goods and service purchases and unemployment and deflation continue in a downward spiral.”
I agree. In fact I think about my own personal situation and cringe at the thought of deflation. My income would sink and my debt load and payments would not. Why? Because even though most of the loans I have are variable, which means they should be adjusting to the index, and thus falling, they won’t because they have a floor below which they are not allowed to fall.
Deflation could be made much more palatable if the fed were to pass some rule that would disallow that “floor” and let the interest rates on loans adjust to the prevailing rates, including negative rates.
This of course would not sit well with the creditors. But in a way I think they would be short sighted because they may end up losing everything as well if they insist on maintaining the floor. Even with falling rates they would still be making the same margin over the index.
Seems like a way to disarm the specter of deflation.
Ironically, financial experts from almost every point along the Economic Theory spectrum have been screaming at Americans to save money and not spend so much (I keep 6 months' gross income in a CD that has no early liquidation penalty -- it don't make much but a little is better than a poke in the eye with a sharp stick).
But clearly, this is not what they had in mind...
I have been overpaying (almost double) my mortgage for years and will pay it off in about a year (total about 9 years). I have never liked the uncertainty of the economic times and the damnfools we allow to occupy Congress. The only way to control your destiny is to have no debt.
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