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Fed won't be able to halt this downturn
Baltimore Sun ^ | 29 Nov 10 | Steven C. Isberg

Posted on 11/29/2010 7:59:41 AM PST by SkyPilot

Is the beast of deflation crouching outside our door? Could this be the real reason behind the Federal Reserve's recent injection of $600 billion into the economy?

Despite the logic of much of the criticism being aimed at the Fed, it may be doing what it has to do to keep the country from spiraling down into a deeper recession. In the midst of what amounts to a virtual economic war with some of our trading partners, it's important for us to understand exactly what is at risk and what the Fed is up to.

First, the risk: Deflation is a chain of events in which consumer spending declines, prices fall, and business activity contracts. When that cycle repeats, it gets worse every time. Goods are cheap, but you're too broke to afford them. Nobody wants what you have to sell, and soon you don't have a job.

(Excerpt) Read more at baltimoresun.com ...


TOPICS: Business/Economy; Culture/Society; Editorial; News/Current Events
KEYWORDS: bernanke; debt; deflation; economiccollapse; fed; inflation; thefed; theqe2
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First it was Greece. Now it is Ireland. Soon it will be Portugal and Spain.

With the collapse of the Irish economy, its people are going to be forced into what amounts to economic slavery. There is plenty of blame to go around in that nation - namely out of control spending, pensions, and banks that made loans to everyone and anyone regardless of the risks (sound familiar?)

The tide is rising around our ankles now, but we chose to look away, and pretend it is all a dream.

Many foolish Americans believe that our nation is somehow immune to the fiscal realities that have overtaken Europe. Because of Obama, our national debt stands at $13.8 trillion and is accelerating at warp speed.

Nothing can stop the coming global economic collapse now, (short of a miracle) and I don't see our nation's leaders on their knees praying.

We have become a nation of "takers." We aborted our future generations, and now ask who will pay for it all.


1 posted on 11/29/2010 7:59:44 AM PST by SkyPilot
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To: SkyPilot

Stopping deflation is easy...

...it’s stopping the hyperinflation that happens as a result of your efforts to stop deflation that is hard.


2 posted on 11/29/2010 8:07:18 AM PST by Yet_Again
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To: SkyPilot
I'm probably missing the "nuances", but I think this argument boils down to --

Deflation doesn't have to be the end of the world. A flexible economic system can make adjustments and deal with this.
Deflation is only a big problem if society has lots of government intrusion in the economy and if debt levels are very high.

Fortunately, we are pursuing a wise policy of more government intervention and multiple years of trillion dollar deficits.

Yeah, and when my house is on fire, I throw gasoline on it.

3 posted on 11/29/2010 8:10:44 AM PST by ClearCase_guy
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To: Yet_Again

Irish debt 50% of GDP
POrtugal 359% of GDP
US 94% Of GDP

And
Ireland is bankrupt


4 posted on 11/29/2010 8:14:20 AM PST by Flavius (A)
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To: ClearCase_guy
Yeah, and when my house is on fire, I throw gasoline on it

To any economic genius out there: Computer Hardware and Software have been deflating since the 1980's. Why is that different?

5 posted on 11/29/2010 8:16:25 AM PST by central_va (I won't be reconstructed, and I do not give a damn.)
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To: SkyPilot; ding_dong_daddy_from_dumas; stephenjohnbanker; DoughtyOne; dools0007world; Gilbo_3; ...
Interesting article. Almost no-one I know understands that it was the Federal Reserve’s actions contracting money supply, raising interest rates, that triggered the housing bubble burst; anymore do they know that low interest rates-easy money supply contributed to creating the housing bubble.

Second, I can see where deflation would be problem when wages and other costs are not allowed to deflate, it results in unemployment.

First, the risk: Deflation is a chain of events in which consumer spending declines, prices fall, and business activity contracts. When that cycle repeats, it gets worse every time. Goods are cheap, but you're too broke to afford them. Nobody wants what you have to sell, and soon you don't have a job.

Deflation is survivable when wages and prices are free to adjust — e.g., in the absence of minimum wage laws and mandatory health insurance. Even though they're working at lower wages, consumers are not much worse off because prices are lower. But deflation is dangerous when it occurs in a high-debt environment like the one we're living in now. With more income going to debt payments, there is less to spend on other things. This empowers a recession and creates even more deflation. Eventually, the economy collapses under the weight of its own debt.”

Quantitative easing,” the Fed's ongoing act of increasing the money supply, may be an attempt to avoid that scenario. But the Fed's seemingly rational response to consumer inflation may have unwittingly played a role in facilitating the financial and economic collapse of September 2008. “

Dial back to the middle of 2006, when the U.S. economy appeared to be running strong. That October, prices started to climb. Inflation peaked at 11.69 percent (annualized) by June 2008. The Fed, watching this month-by-month tip into unsustainable inflation, started to reduce its holdings of treasury securities beginning in October 2007. Less than a year later, its ownership of this government debt had fallen from $779 billion to a low of $478 billion. The reduction contributed to an increase in treasury yields beginning in May 2008. There is no other way to put it: This was quantitative tightening.”

But the strategy backfired. Economists peg the recession as starting in October 2007, just when the Fed began pulling back. Despite rising prices, the underlying economy was weak at the time: The real estate and mortgage markets were wobbly; the trade imbalance was climbing; interest rates were on the rise. Tightening the money supply was like lighting the fuse to the bomb that led to the collapse of September 2008. What followed was a period of significant deflation, with prices falling by nearly 20 percent (annualized) in the following month. Unemployment began its inevitable rise, soon hitting 10 percent. “

It would be misguided to blame the entire collapse on the Fed. This was a unique conflation of problems that had been building up in our financial/economic system for years”

6 posted on 11/29/2010 8:18:47 AM PST by sickoflibs ("It's not the taxes, the redistribution is the federal spending=tax delayed")
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To: sickoflibs

The Fed is the Problem:

Considering ALL MONEY IS LOANED INTO EXISTENCE with Interest, and all NEW MONEY introduced into society is also loaned into existence with interest, Where does the interest come from?? Can it ever really be payed off?? is it not destined for collapse mathematically?? Let’s say that the interest payed is the very sweat and blood of labor by that countries citizens, Isn’t that SLAVERY?? Maybe some of the pseudo science economists can explain it to me.

If All Public and Private Debts were paid off tomorrow, ALL OF THE COMBINED INTEREST WOULD STILL BE DUE, Remember ONLY THE PRINCIPLE IS CREATED BY THE FED. Not the INTEREST.


7 posted on 11/29/2010 8:28:06 AM PST by eyeamok
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To: Bullish; CJ Wolf; houeto; Quix; B4Ranch; Whenifhow; Silentgypsy; blam; FromLori; Lurker; ...
Got Silver? ping.

"Economic Holocaust" ping.

Moderate volume ping list watching the slow motion Economic Holocaust.

FReepmail me if you want on or off
The Comedian's "Economic Holocaust" ping list...


Frowning takes 68 muscles.
Smiling takes 6.
Pulling this trigger takes 2.
I'm lazy.

8 posted on 11/29/2010 8:43:43 AM PST by The Comedian (Government: Saving people from freedom since time immemorial.)
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To: SkyPilot

“Despite the logic of much of the criticism being aimed at the Fed, it may be doing what it has to do to keep the country from spiraling down into a deeper recession.”

This is funny in light of the fact that it is government actions that usually turn a mild recession into what we now call a depression (same thing happened in the Great Depression).


9 posted on 11/29/2010 8:55:51 AM PST by RWB Patriot ("My ability is a value that must be purchased and I don't recognize anyone's need as a claim on me.")
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To: SkyPilot
There is plenty of blame to go around in that nation - namely out of control spending, pensions, and banks that made loans to everyone and anyone regardless of the risks (sound familiar?)

The better answer would have been to let the banks collapse and then have the government provide a safety net until the banking system was restored. Socializing the risk of loss has led to the enslavement of the taxpaying serf class to protect the banks. People are going broke all over the world so that banks can survive. Isn't THAT special?

10 posted on 11/29/2010 9:08:05 AM PST by April Lexington (Study the Constitution so you know what they are taking away!)
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To: Flavius

With us it is only going to get worse. Our industrail base,read tax base, is decreasing while the debt is increasing.

It was ill before 2008,but,in 2008 the parasites killed the goose that laid the golden egg. Once dead, there is no coming back. The politicians will be able to stall it for awhile, but in the end the piper will be paid.


11 posted on 11/29/2010 9:09:24 AM PST by sport
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To: SkyPilot
Why do we not have a Federal statute that makes it a crime to run a bank into the ground? Seems cratering a bank is a systemic risk and those who impoverish billions of people should, at least, have their (&^*& whacked!
12 posted on 11/29/2010 9:09:38 AM PST by April Lexington (Study the Constitution so you know what they are taking away!)
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To: central_va

I kind of like deflation. hings get cheaper to buy and I have lots of rolls of nickels hidden away!


13 posted on 11/29/2010 9:10:46 AM PST by April Lexington (Study the Constitution so you know what they are taking away!)
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To: eyeamok; ding_dong_daddy_from_dumas; stephenjohnbanker; DoughtyOne
RE :”If All Public and Private Debts were paid off tomorrow, ALL OF THE COMBINED INTEREST WOULD STILL BE DUE, Remember ONLY THE PRINCIPLE IS CREATED BY THE FED. Not the INTEREST.

Don't the lending institutions create even more money with the fractional reserve system? They create new money with credit expansion and charge interest. This all seems to work well until the expanded money supply creates inflation, and the Fed triggers a contraction. There were also other changes to the laws that helped create the bubble, like eliminating down payment requirements.

I don't claim to be an expert BUT Bernake was clearly part of the problem but instead got credited for saving the economy after the crash, with re-appointment. To me that makes GWB and Obama as guilty as him. Bush got the blame first, now it has moved to Obama. These guys want credit for anything good, but others to get the blame for any negative results. (Liberals playing this game with Obama.)

14 posted on 11/29/2010 9:17:54 AM PST by sickoflibs ("It's not the taxes, the redistribution is the federal spending=tax delayed")
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To: The Comedian

Particularly since they don’t want to.


15 posted on 11/29/2010 9:19:12 AM PST by Quix (Times are a changin' INSURE you have believed in your heart & confessed Jesus as Lord Come NtheFlesh)
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To: ClearCase_guy

http://www.youtube.com/watch?v=2fq2ga4HkGY


16 posted on 11/29/2010 11:12:05 AM PST by RipSawyer (Clem Hussein Kadiddlehopper would be a vast improvement.)
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To: central_va
Moore's Law
17 posted on 11/29/2010 11:44:49 AM PST by blam
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To: The Comedian

And they will be coming for your pensions next!

Remember My Discussion on Pensions?

And how you were going to get screwed?

Continue http://market-ticker.org/akcs-www?post=173478


18 posted on 11/29/2010 1:29:53 PM PST by FromLori (FromLori)
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To: Flavius

They weren’t broke until they had to bail out the banks!

Ireland’s Fate Tied to Doomed Banks

snippet...

Up to €50 billion—nearly $50,000 for every household in the Emerald Isle.

Read it all to see the lies by the Banks and Politicians!

http://online.wsj.com/article/SB10001424052748704506404575592360334457040.html

Ireland is on the brink of insolvency too, which has helped drive down the S&P 500 stock index by nearly 4 percent over the last few days. But unlike Greece, Ireland is a relatively wealthy country, with per capita GDP of nearly $38,000. That’s 21 percent higher than per capita GDP in Greece, and in the top third for European countries. Low corporate tax rates and a skilled workforce have made Ireland a haven for some of the world’s biggest companies. And its public debt, about 65 percent of GDP, is far below Greece’s crushing load, which is 126 percent of GDP. Ireland’s debt levels are even lower than those in France, Germany and the United Kingdom.

But Ireland has one huge problem that may soon make it a supplicant to its European brethren: A failed banking sector that Ireland’s government can no longer rescue on its own. Ireland is in the midst of a real estate bust that could trump even the ruinous downturns that turned parts of southern California and Nevada into suburban ghost towns, with home-grown banks stoking it all. Now, those banks are trying to manage catastrophic losses. The Irish government has effectively nationalized the nation’s biggest banks by guaranteeing their debt, which would be akin to the U.S. government taking over Citigroup, Bank of America, J.P. Morgan Chase and Wells Fargo.

That means the Irish government is also on the hook for the losses those banks endure—which have risen far beyond initial estimates, and may have a lot farther to go. So far, the Irish government is obligated to cover losses amounting to 175 percent of Irish GDP, which is becoming an unsustainable burden. “If the Irish banks go down, the Irish government also goes down,” says economist Jacob Kirkegaard of the Peterson Institute for International Economics.

http://finance.yahoo.com/news/Why-the-Irish-Crisis-is-Going-usnews-4028366968.html?x=0

Ireland bailout: the Datablog guide to who will fund it, which countries are most exposed - and who will be next?
Ireland’s bailout negotiations for a bailout are under intense scrutiny. But where’s the money coming from - and which countries in the world have the most claims by foreign banks?

http://www.guardian.co.uk/business/datablog/2010/nov/22/ireland-bailout-bank-exposure

In the end here’s the really bad news it looks like the US is actually the one who will end up funding this for the Banks!

http://www.zerohedge.com/article/who-who-listing-countries-will-fund-imfs-bail-out-europe


19 posted on 11/29/2010 1:42:51 PM PST by FromLori (FromLori)
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To: FromLori
Right on.

Did you post that article as a thread anywhere yet? It's brilliant.


Frowning takes 68 muscles.
Smiling takes 6.
Pulling this trigger takes 2.
I'm lazy.

20 posted on 11/29/2010 2:15:26 PM PST by The Comedian (Government: Saving people from freedom since time immemorial.)
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