i’ve heard deflation denounced several times today on tv or the radio and yet, it seems appropriate given all the other circumstances, that prices should go down. am i missing something?

great.. now add an asset spike or shock of some type now and shrub/Paulson/Bernanke will have given us Weimar Germany. Beautiful.

The TARP recipients have already shown that lending is not their priority, but hoarding–in preparation for acquisition–is. Is TARP a total clusterF?

Deflation is really bad, because no one wants to spend. Economies in deflation have a very very bad time.

So, expect the Fed to spend a LOT of money and get very little in return until someone uses some of the money to buy a clue.

Clues for the clueless! Get cher clues for the clueless right here!

Nationalizing the banks could make sense not that anyone is willing to do this.
This time can we call the depression something other than a “great” depression?

the problem is also that this cuts both ways. If we’re now dependent on removing neartime monetary policy lever flexiblity (by reducing the cost of capital to effectively zero) while at the same time printing oddles of money, your ability to cope with suddent shocks to the economy becomes virtually ‘nil. You’re basically one terror attack away from stagflation or something even scarrier, and the Fed would have effectively neutralized its own ability to respond.

roubini’s latest: Has global stag-deflation arrived?

and update: Afternoon Update following the FOMC Statement:

The Fed decision to cut the target for the Fed Funds rate to a 0% to 0.25% range is just underwriting what was already obvious and happening in reality: while the target Fed Funds was – until yesterday – still1% in the last few weeks – following the massive increase in liquidity by the Fed – the actual Fed Funds was already trading at a level literally close to 0%. So today the Fed formalized what was already happening for weeks now, i.e. that the Fed Funds rate was already zero and that the Fed had already moved to quantitative and qualitative easing in the form of massive increase in the monetary base and aggressive use of monetary policy – via a range of new facilities and tools – to reduce short term and long term market rates that are stubbornly high in a sign that the credit crunch is severe and worsening. I predicted early in 2008 that the Fed Funds rate “would be closer to 0% than to 1%” in the midst of a severe recession. Now 12 months into this severe recession (that officially started in December 2007) – a recession that will last at least another 12 months (if not more) – the Fed Funds rate is already down to 0% (the beginning of the zero-interest-rate-policy or ZIRP for the US) and the Fed has moved into uncharted unorthodox monetary policy as a severe stag-deflation is taking place. And as predicted in this forum over a month ago the Fed is now committed to keep the Fed Funds rate close to zero for a long time and even considering purchasing long-term Treasuries as a way to push lower long term government bond yields that are already falling sharply.

Yes.

We already had stagflation. Hyperinflation from overshoot would be my fear.

I guess I need to call some of my shots.

via CR: bernanke explains quantitative easing. (cartoon)

yep! Like I said, Weimar Wheelbarrow time! Deflation continues, currency gets devalued, people panic by fleeing back into real goods.. Fed has ZERO maneauvering space left (with zero interest rates and mad money printing) and wham.. we’re screwed.

How would that affect home prices in this market???

hahahahaha

please see the last two words in my response to #13 :)

Prices for everything would go up, but you wouldn’t be able to buy squat with all your money.

I don’t actually /think/ we’ll get hyperinflation. But while I don’t think it’s probable, it’s certainly very possible.

Liquidity trap. Bernanke is an even bigger goof than Paulson because he is spending way more money and getting nothing for it.

bernhard argues (and quotes naked capitalism among others) that big stimulus comes with it’s own risks due, i think primarily, to global production/consumption imbalances:

The big U.S. stimulus package risks to crash the dollar. That may help to reignite local production, but will make the accumulated debt burden harder to carry as lenders will demand sharply higher interests.

Would someone please ask the Decider when his tax cuts for himself, his family, and his cronies are supposed to start working? I mean working for the rest of us.

I think the risk is a deflation situation, in a scenario where the Fed has no room left to move, followed by a confidence-sapping shock of time type (say a terror attack or something of the like). Then we’d be in deep deep deep doodoo.

Deflationary expectations have set in, and folks figure that a dollar a year from now will be worth more than dollar now, so even borrowing at zero or .5% doesn’t seem like that good a deal.

Huh? Why not borrow now at zero percent and spend it later, when prices are down and the interest rate might be back up?

Just another reason to nationalize the banks.

Why not borrow now at zero percent and spend it later, when prices are down and the interest rate might be back up?

where do you keep it until later? the mattress?

i don’t understand… would you walk me through it?

Huh? Why not borrow now at zero percent and spend it later, when prices are down and the interest rate might be back up?

Who’s going to lend to whom? And while the wait is going on the country is down the toilet and in the sewer lines.

to illustrate how this would work (in Ian’s improbable but not impossible scenario.. growing less improbable with every Paulson/Bernanke/shrub pronouncement).

Germany was experiencing a deflationary collpase and credit crisis in 1920, with multiple bank failures and so forth. Firms had their credit lines cut, which meant supply chain collapse and massive layoffs. Sound familiar? The Weimar government started to print money at an incredible rate in a desperate bid to re-inflate the rapidly deflating economy. Meanwhile, the interaction of foreign and domestic developments caused the Deutschemark to increase in value versus Germany’s trading partners, causing the prices of imports to fall (and thus the trade deficit to expand quickly… leading to massive new foreign debt). To service that debt, the central bank printed monmey even more quickly. Eventually, thinks came to a head, consumers lost confidence in the currency and the full effects of the rapid monetary policy expansion (without accompanying growth) began to take the form of hyperinflation. Really, really, really bad hyperinflation.

brad sester: This is what a crisis looks like in the balance of payments data

At least a crisis marked by a run out of risky US assets and into safe US assets. Right now Agency bonds — think Freddie and Fannie — are considered risky assets while Treasuries are not.

A run out of all US assets and the dollar would look very different.

The October TIC data tells a striking story — one marked by a massive surge in demand by both private and official investors for “safe” assets. Foreign investors bought $182 billion of Treasuries — including $147.4 billion of short-term Treasury bills. There is no real mystery why bill yields dropped so low even as the supply of bills surged. And foreigners added $207 billion to dollar bank accounts.

Sum that up and it works out to close to $400 billion in demand for safe dollar denominated assets. If that kind of monthly inflow is annualized it is a shockingly large number.

It isn’t hard to figure out why the dollar rallied.

$400 billion in a month is far more than the US needs to cover its trade deficit. It allowed foreigners to reduce their holdings of Agencies by close to $75 billion (including a $25 billion fall in short-term Agencies), their holdings of long-term corporate bonds by $13 billion and their holdings of US equities by $6 billion without causing any strain on the dollar.

It is. They are just asking for it. Begging.

And the market jumps near 5% today on the news. iow, the market is stumbling drooling stupid.

You could control the conditions of the lending. As is, what we are seeing are a bunch of partial solutions that may address a single issue while worsening problems somewhere else in the system. We already see this with the auto bailout. We need to keep these jobs to keep from tilting into depression but people will only start buying autos again if there is credit there to finance them (and if they believe there is a real plan to get the economy moving).

I remember as a kid you could get German notes from the Weimar period. I thought I was rich with a fist full of DM 2M notes. During the Weimar period it took a wheelbarrow load of those notes to buy a loaf of bread.

It’s pretty short term money.

Exactly, that’s why I keep calling for taking over banks that aren’t lending.

The FED lends, gives (do we know?) $2,000,000,000,000 to undisclosed companies, lowers the effective rate to

would nationalizing the banks protect against a dollar crash (if bernhard is right and i wasn’t completely confused by his post)?

And the market jumps near 5% today on the news. iow, the market is stumbling drooling stupid.

Good description. Remember how the Giethner nomination was supposed to have fixed up the market? The fact remains that none of the fundamental problems underlying the current meltdown have been addressed, not one.

This recent bounce looks like a dead cat.

the market is stumbling drooling stupid.

re djia. reminds me a bit of oil prices this spring/early summer – in that i don’t see any connection between price and fundamentals.

others here know more than me about oil, but to me that was all falling dollar and funds flooding into the oil market–because the equities mkt. wasn’t making sufficient money for them.

Remember how the Giethner nomination was supposed to have fixed up the market?

and the tarp before that.

re oil – speculation and bubble psychology (ie not supply/demand fundamentals). don’t have the foggiest about djia, although after friday’s non crash i suspect gov manipulation.

would nationalizing the banks protect against a dollar crash (if bernhard is right and i wasn’t completely confused by his post)?

To be honest I don’t fully understand his point. Is it a dollar crash or an economic crash? If it is a dollar crash, why would a trillion dollar program crash it where the $3 trillion or more that Bernanke has pumped into the system would not? I wish he had amplified on his point. Currently money is flowing into the dollar because it is a safe haven. If that should change maybe bernhard would have more of a point.

i *think* it’s a dollar crash. w/o agreeing or disagreeing w bernhard (i don’t understand well enough to judge) – i’m pretty sure he thinks that there needs to be a big decline in the dollar (to rebalance global production/consumption) and that a big stimulus by the usa would be an attempt to avoid that outcome… an attempt that would fail and then lead to a dollar crash instead of a controlled decline.

I don’t think that is how the world economy works. If we stop consuming, it is not just us but the Chinese who will crash. And there isn’t just one kind of stimulus. It really depends on how it is spent and on what. The main danger I see is in the financing aspects. It increases debt but short term there really is no other choice.

thanks. i have to think more about this.

Repudiating the national debt

Should the opportunity arise, the Republicans will use repudiation of foreign-held US debt to regain power. It’s what demagogues in Banana Republics do to gain power in times of economic crisis, and they’ve already succeeded in making us a Banana Republic and creating an economic crisis.

Repudiating foreign-held debt would bring together in one knot all of the separate strands of their demagoguery.

The know-nothing, xenophobe appeal is obvious.

The neocon angle would come in as their justification for what could otherwise be viewed as theft. Our fiscal and economic difficulties will be blamed on the role we have taken on of protecting the world from global terror, whatever the price tag that the US taxpayer has so selflessly, hitherto, taken on himself to confer this benefit on an ungrateful world. We wouldn’t present it as repudiating foreign-held debt, it would be presented as collecting delinquent money that foreign countries owe us for protecting them from the terrorists. This would also get around the difficulty that simply repudiating debt because we can’t afford repayment would create — that this would immediately stop all future loans to us. The assessments for protection against the terrorists would continue indefinitely into the future. Countries that refused to pay would find out that how much they really need protection from the US.

But this would work well also for the drown-the-government-in-a-bathtub crowd. Foreigners would start paying our entire Defense bill. The lure of essentially ending the income tax would be used to get the electorate to go along with privatizing the entitlement programs.

You’ld think that maybe the one Republican interest group that would hold out against this would be big business. But would they really be able to resist the lure of no tax burden, combined with a continued government expenditure gravy train that they would be allowed to feed at, because money would still be coming in from foreign sources? What’s going to hold them back — business ethics? Not so much…

This arrangement would work best of all for the Unitary Executive believers. The last bastion of Congressional power has been the power of the purse. Give the president control of this new revenue stream of protection money from our tributary states, and even that last barrier to unchallenged presidential supremacy is gone.

People,

The Weimar comparison is very weak. Germany’s debts were in another currency. No matter how much Weimar printed, it couldn’t print the currency that it had to use to pay its debts. In comparison, the US owns the WORLD’s reserve currency printing press.

And the world WANTS us to print. In fact, the whole world is printing in UNISON. They’re doing this to fight deflationary psychology. During deflation, everyone puts off purchasing everything. Investors put off investing. Many companies — even food companies with significant debt but that didn’t ”lever up” — will find themselves unable to repay their debts, because those debts are increasing in real terms.

So, will we replay the late 1970’s? IF WE ARE LUCKY. If we are lucky — if the Fed’s continued efforts and Obama’s fiscal stimuli are enough to restore inflationary expectations — then we might be lucky enough to replay the 1970’s. If we are not lucky, then we will relive the 1930’s. Not 1930’s Germany. 1930’s America.

You do not want that.

Nor does the rest of the world. China does NOT want millions unemployed. India does not want millions unemployed.

You’re going to have a tough time hearing opinions that support what I just said. Why? Because the blogosphere and the business media is full of right-wing economists. USUALLY, these are the same people who’ve been against progressive taxation, against government regulation, etc., etc. In some, er, many cases, I either AGREE with them (e.g., get government out of the housing market) or I’m sympathetic (e.g., eliminate fractional reserve banking and probably the Fed — the US government should issue currency directly free-and-clear of an opposing debt obligation). (I also favor bailing out workers and creating new banks but not bailing out failed businesses and banks. (Unfortunately, these ships have sailed.) But, anyway, a problem here is: you will run into many very, very smart people who have a particular mental framework that leads them to condemn Bernanke (and, next, Obama).

You’re going to have a tough time hearing contrary opinions. ”Good luck.”

We already had stagflation. Hyperinflation from overshoot would be my fear.

I’ve already warned about that. The incentive to push money into the economy to keep it going can be overdone and in this situation where banks aren’t lending at all we’re getting the worst of both worlds — too much cash, but a slowing economy.

Thing is, Bush could probably kick ass and fix this, but he won’t.

So, we wait ’til our saviOr takes office and hope we can fix some mortgages and kick some ass and start things going again. It’s not like there isn’t a lot of work that needs to be done in the economy. It’s like the infrastructure jobs which are, as they say, shovel-ready.

Exactly, that’s why I keep calling for taking over banks that aren’t lending.

Maybe this is the Paulites dream, to have a solid reason to break up the Fed and have the Treasury loan to other (or all) banks and take away the power of the huge banks to kill credit and the economy with it.

It would be strange for them to get something they want with as little power as they have. But, if the Rich guys force this kind of thing on us, then what are we to do. It’s another case of monopoly/trust powers needing competition.

More Free (but regulated) Market Competition!

The fact remains that none of the fundamental problems underlying the current meltdown have been addressed, not one.

Blame it on Bush. Congress has tried and the administration has simply refused to do anything.