Don't go wobbly on us now, Ben Bernanke

Discussion in 'Wall St. News' started by Debaser82, Mar 1, 2010.

  1. Barack Obama's home state of Illinois is near the point of fiscal disintegration. "The state is in utter crisis," said Representative Suzie Bassi. "We are next to bankruptcy. We have a $13bn hole in a $28bn budget."

    The state has been paying bills with unfunded vouchers since October. A fifth of buses have stopped. Libraries, owed $400m (£263m), are closing one day a week. Schools are owed $725m. Unable to pay teachers, they are preparing mass lay-offs. "It's a catastrophe", said the Schools Superintedent.

    In Alexander County, the sheriff's patrol cars have been repossessed; three-quarters of his officers are laid off; the local prison has refused to take county inmates until debts are paid.

    Florida, Arizona, Michigan, New Jersey, Pennsylvania and New York are all facing crises. California has cut teachers salaries by 5pc, and imposed a 5pc levy on pension fees.

    The Economic Policy Institute says states face a shortfall of $156bn in fiscal 2010. Most are banned by law from running deficits, so they must retrench. Washington has provided $68bn in federal aid, but that depletes the Obama stimulus package.

    This is not to pick on America. Belt-tightening is the oppressive fact of 2010-2012 for half the world. Hungary, Ukraine, the Baltics and the Balkans are already under the knife. Latvia's economy may contract by 30pc from peak to trough as it carries out an "internal devaluation", ie wage cuts, to hold its euro peg.

    The eurozone's fiscal squeeze is well advanced in Ireland. Brussels has told Greece to cut by 10pc of GDP in three years, Spain by 8pc, Portugal by 6pc. Britain must slash soon, or face a gilts strike.

    The Bank for International Settlements says Britain needs a primary surplus of 5.8pc of GDP for a decade to stabilise debt at pre-crisis levels, given the ageing crunch as well. The figure is 6.4pc for Japan, 4.3pc for the US and France. It warns of "unstable dynamics", posh talk for a debt spiral. "Action is needed now."

    Indeed, though cutting too fast would tip the West back into slump and kill tax revenues, solving nothing – a risk that austerity priests rarely acknowledge. Pacing is everything.

    Mervyn King, the Bank of England's Governor, seems strangely alone in facing the implications of this for central banks, and in seeing the absurdity of a recovery strategy where everybody tightens at once and surplus states keep on dumping excess capacity abroad. "I was struck by the mood at the G7, where several of the major economies around the world said quite openly that they were relying on external demand growth to generate growth. That can't be true of everybody," he said.

    The West risks a slow grind into debt-deflation unless central banks offset fiscal tightening with monetary stimulus – QE, of course – to keep demand alive. Yet the Fed and the European Central Bank are letting credit contract.

    Bank loans in the US have fallen at a 14pc rate this year, caused in part by Basel III rules pushing banks to raise capital ratios.

    The M3 money supply has fallen at a 5.6pc rate since September. The Fed's Monetary Multiplier dropped to an all-time low of 0.809 last week.

    The contraction of eurozone bank credit to firms accelerated to 2.7pc in January, while M3 fell by a further €55bn. Japan's GDP deflator has dropped to a record low of -3pc.

    These are epic warning signals, with echoes of 1931. Yet the Fed has just raised the Discount Rate. It is winding up liquidity operations, and preparing to reverse QE, even though the housing market has tipped over again. New home sales fell 11pc in January to 309,000 units, the lowest since data began, and 24pc of mortgages are in negative equity.

    Fed chairman Ben Bernanke told us in his 2002 speech "Deflation: Making Sure It Doesn't Happen Here" that: 1) Japan's slide into deflation was "entirely unexpected", and that it would be "imprudent" to rule out such a risk in America; 2) "Sustained deflation can be highly destructive to a modern economy and should be strongly resisted"; 3) that a "determined government" has the means to stop deflation, if necessary by use of the "printing press".

    Yet here we are, facing exactly that risk, unless you think one good quarter of inventory rebuilding has conjured away our debt bubble. The one-off inflation blip caused by a doubling of oil prices is already fading, revealing once again the deeper forces of deflation. Core prices fell 0.1pc in January. They plummet from here.

    So why has Bernanke broken ranks with King and begun to flirt with disaster by tightening too soon? Has he lost control to regional hawks, as in mid-2008? Have critics in Congress and the media got to him? Has China vetoed QE, fearing a stealth default on Treasury debt?

    Don't go wobbly on us now, Ben. If the governments of America, Europe, and Japan are to retrench – as they must – their central banks must stay super-loose to cushion the blow. Otherwise we will all sink into deflationary quicksand.
  2. i demand Ben send a 1 million dollar cheque to every household in America. That will solve the problem.

    edit: Gays only get 250k because....they are gay.
  3. Deflation is painted as the worst possible villain, when in fact the worst is INFLATION. The effects of deflation are very bad for POLITICIANS at election time, so is to be avoided at ALL COSTS*!

    *ULTIMATE FINANCIAL DESTRUCTION OF THE USA IS NOT TOO BIG A PRICE TO PAY... just don't make it difficult for politicos in the next election.

    BTW... Prechter is of the belief that we will have a big deflation regardless.... nothing BS Bernanke nor anyone else can do about it.
  4. I dont think there has ever been a greater collection of retards running the world.
  5. Mnphats


    Thanks for the laugh, wasn't quite ready for that edit. :D
  6. I don't think you have a firm grasp of economics. Deflation would bankrupt the USA given it's level of debt. Inflation will allow the USA to to be able to pay back debt. Read past history of highly indebted sovereigns and how they inflated away the debt.

    A bankrupt USA is much worse for Americans than erosion of your retirement savings.
  7. Has Ambrose Evans-Pritchard lost his marbles?

    In regards to Quantitative Easing, how many times do we have to prove it does not solve a thing? Hasn't Japan proven that for two decades? What does Japan have to show for it?

    The answers to those questions should be obvious but obviously they are not. Proof is in the title to Prichard's post "Don't go wobbly on us now, Ben Bernanke".

    QE Is Useless

    There is already over $1 trillion in "excess reserves" sitting around that theory (wrong theory) suggests banks could lend.

    Pray tell what difference would it make to bank lending if excess reserves was 3 times that or even 10 times that?

    Quantitative Easing (QE) is useless. All it does is complicate exit strategies down the road.

    The problem is debt. Illinois is swamped in it. So is California, New Jersey, New York, and for that matter nearly every state in the union. Consumers are swamped in debt as well. Businesses have no reason to borrow.

    What states need to do is live within their means. To do so requires lower union wages and benefits, and the end of defined benefit pension plans for public workers. There simply is no other way. Consumers are too tapped out to support tax hikes for union parasites. More federal stimulus will result higher debt levels and more bridges to nowhere.

    On the QE side of things, Bernanke can make any amount of money he wants available for lending and it will not do a thing. Banks are too capital impaired to lend, and credit worthy consumers and businesses do not want to borrow.

    I have talked about this on many occasions, most notably in Fictional Reserve Lending And The Myth Of Excess Reserves, something that monetarists believing in QE ought to read.

    Fiscal Insanity Virus Strikes Again

    Ambrose Evans Pritchard, Paul Krugman, Joseph Stiglitz and scores of other economists all think it is possible to spend one's way to prosperity. Simple logic would suggest the idea is nonsense. Moreover, in practice it has failed every time.

    Greenspan tried stimulating the economy by holding interest rate low, and all he accomplished was creation of the biggest global housing bubble and debt bubble on record.

    Japan is proof as well. Japan tried both Quantitative Easing (a Monetarist policy), and Fiscal Stimulus (a Keynesian policy).

    Both failed (which is what one should expect following a collapsed debt bubble) and all Japan has to show for it is debt to the tune of 200% of GDP, with an aging population now needing to live off savings. Sadly those savings were squandered building bridges to nowhere. Yet, there is no end in sight to Japanese deflation.

    I do not know why economists believe in fairy tale economics and free lunches when the average 6th grader would know better. The only theory I can come up with to explain this phenomenon is a renewed outbreak of the Fiscal Insanity Virus rapidly spreading the globe.

    Ambrose Evans-Pritchard is no doubt, infected.
  8. No, only inflation GREATER than the previous inflation will allow us to pay back our debts. Any idea how much inflation we would need exactly to begin to approach that?

    And in the process how many individuals would be completely bankrupted by a system that is hell bent on its ZIRP (essentially slowly but surely bankrupting many many people) while in the process igniting an inflationary depression?

    Either scenario bankrupts many many people. Certainly, some corporations are well positioned to prosper, yet I don't see how municipalities make it thru either scenario to be perfectly honest.
  9. Inflation is not terrible in moderation. If it gets out of hand, obviously, it becomes a major problem. But all else being equal, deflation must be avoided at all costs, especially for the USA. There can be no other way. If the country was a creditor, that would be a different story. But it's a gigantic debtor.

    The USA will have a hard time paying back their debts if inflation was @ 0%. Could you imagine the hardships for the American people if the Fed didn't ease and the inflation rate plummeted to
    -5% or worse? Either default or raise taxes to heights the USA has never seen before. And then proceed to give all of that directly to China & Japan.

    At least with inflation, the USA has a fighting chance.
  10. From what I have seen thus far, there is quite a bit of inflation in the system regardless of what we've heard thus far. I know that it becomes a political game to define inflation. For instance, when asset prices such as homes tripled in 5-6 years, that was seen as a positive, while for thus who did not own a home, it was very real inflation. It's sort of a double standard how a bureaucrat decides what's inflation and what isn't.

    Currently, what I'm seeing are alot of cash strapped local governments are raising property taxes, raising fees, raising all sorts of miscellaneous taxes, while simultaneously cutting services, hours, bus routes, libraries, etc, etc...

    Nonetheless, they are still hopelessly insolvent and tax revenues (they've just released a number of both local and national figures) are in fact down in many instances on a YOY basis. So we are getting the inflation part of the equation on your average Joe while he is busy earning 0% on his money and probably not seen his portfolio grow (if he even has one) over the last decade. Beneath the surface, this inflation is going strong, I just don't believe it's the type that will lead to wage inflation, so it's the "wrong" inflation for us to grow our way out of this mess.

    Just my take.
    #10     Mar 2, 2010