I agree. I was hoping to get some more commentary on this, but the impression that I'm getting is that the Fed has opened the door and nobody is walking through it. Take the case of corporate bonds: right now a lot of corporations are issuing bonds and no one will buy them. So they sweeten offer to the semi-ridiculous and still no one will come to the table. This is happening not just in corporate bonds but everywhere I believe and so, I think, that just because the Fed lays money on the table doesn't insure that anyone will pick it up. For example, who wants a low interest T bond based on dollars that may very well depreciate? One hedge fund manager is arguing that now is China's time to unpeg their currency from ours. His claim is that their economy will expand at a rate much greater than ours and put them easily into the #1 position if they will just unpeg themselves. I don't see that happening, but it is an interesting idea. And what I'm getting at: maybe Asia and the Middle East haven't been buying. I was hoping to get some commentary from someone who knows the gory details on stuff like this. Another example is a lot of the intrabank lending. The Fed steps in and changes the rate to boost lending but still no one does it cuzz the banks are still recovering. Some of them have just had tens of billions of dollars in write offs. They don't know who to trust or who is going to survive and who isn't. Some of them are able to just sit in a corner and lick their wounds. You also have problems on the CDO side: from what I have read you have insurers that really don't have the collateral to back up their insurance. So I am sure you have a lot of banks and lenders sitting on the sidelines waiting for this to resolve itself. The list just goes on and on. So I think it will take longer than three months before the confidence level of the institutions builds up and all the money that the Fed is putting out there will really make it into the system. Agree? Disagree?
Most of the marginal borrowers are blown out of the marketplace now. Rational consumer borrowers are not going to increase borrowing just for the Hell of it. When banks DO make loans, they will be expecting to be paid back this time, not "securitizing" and dumping the loans off on stupid investors...Borrowers will have to be well qualified and have collateral... therefore borrowing pace will slow significantly. The "trough" may be deeper and wider than anyone can imagine at this time...
One sign of this is that they have been growing M2 at a 9-12% annual increase per year since 97 at least. http://research.stlouisfed.org/fred2/data/M2SL.txt This year we already have 9 months of data and it's only up 4.6%! So, in spite of their best efforts, I would argue that they can't get anyone to bite...
The single biggest argument against price inflation is that it requires either strong increases in outstanding consumer debt (unlikely from current levels) or strong increases in personal income (hasn't been the case for three decades, what will change it now?). There is a third alternative rarely seen in market-based economies - so many buying choices disappear from the availability so the money is left chasing a much smaller selection of goods. This happened in the USSR, and would seem rather unlikely in G7 countries without a major collapse in international trade.
Disregarding the credit freeze and subprime problems we were on the very verge of going into recession anyhow, it was that point in the business cycle. That alone would have kept housing prices down for a couple of years if not more but now with all the bailouts, which likely serve only to increase the volatility of everything, well, no sense in predicting much of anything, just roll with the punches, try to be prepared for anything...
You are missing the big picture. A deep deflationary trend would be disastrous. Debt to GDP was around 15-20% I believe at the start of the depression, and we had no entitlements to dole out back then. We could actually *afford* a cleaning back then without destroying the currency, despite the painful event that it was. The same isn't true today. Deflation would be better if we weren't so steeped in debt and obligations. We have $2700B coming in every year and more than $3000B going out. If you had a deflationary trend like the great depression and tax revenues cut in half, how would you manage an already $10T-$11T ($6T-$7T) of debt on top of $1.5T+ of current medicare and social security obligations (which are merely recirculated back into the economy)? We can't afford deflation until we half the national debt, cut defense spending from $600-700B+/year to $100/year, and roll back social security and medicare benefits to more manageable levels (means based exclusion possibly?) The same destruction to GDP that happened in the great depression happening today would make a modern great depression all the worse, and result in a collapse of the currency and even worse chaos than trend inflation. It is clear the long term trend is inflation and supply rationing either way, due to weakened exchange rates (rather than solely aggregrate demand).
Great (more sophisticated) extension of these ideas: http://www.econbrowser.com/archives/2008/10/deflation_risk.html