Will Ben pull out all stops and inflate the hell out of the US to stave off liquidity and monetize every security out there? Will he fail and the ensuing derivative and debt crunch result in massive deflation? Please give your opinions as well as analysis.
John Makin, an economist at American Enterprise Institute, thinks the choice will be "to monetize or nationalize" -- that is, to inflate the economy or take over the banking system. Neither choice sounds too appetizing. http://www.kiplinger.com/columns/picks/archive/2008/pick0314.htm
- The first process is clearly already underway. And boy do they want inflation, Badly! But it won't matter how much printing goes on...no lenders/no borrowers...and, in fact⦠- The second process is also already underway. Just not in US dollar terms. Global deflation set in with the deployment of the TAF: Since the day of the fed's first TAF auction (12/17/07), every major equity, currency, commodity, and bond market in the world is deflating in price per unit gold, silver, and platinum, excepting only wheat and corn. Yes, even the markets that appear to be flying: soybeans, crude, t-bills, palladium, euro, yen, and francâ¦all solidly down in gold terms. At the same time, credit is simply going to sleep. Only, the melting dollar and the rising fear of systemic financial shock (which is the real driver for the move in gold) are combining to create an illusion of inflation... If the type of fear here spreads elsewhere, the dollar will be at a definitive crossroads. Not sure how that will turn out, but if history is any indication, we may start to see more traditional deflation set in via a rush into dollars, particularly if spreads in the eurozone start to widen and euro begins to crack apart. <a href="http://tinypic.com" target="_blank"><img src="http://i28.tinypic.com/o7senm.jpg" border="0" alt="Image and video hosting by TinyPic"></a>
Why would the euro crack anymore than the dollar to cause people to flood back? Also, oil is in for a correction once recession slams at the latest, won't that "deflate" the dollar as well? Isn't gold skyrocketing not due to inflation but due to fear/speculation? In which case using gold to denominate the value of commodities doesn't work since its all speculative.
Simple: The Euro is a centrally managed currency encompassing a variety of economic systems that are still not operating within as they are operating among. For example, Italy is operating with market-driven interest rates that imply a huge spread off eurozone-wide rates, which are essentially German-driven rates, so the management of the Euro may force Italy to begin to rely on the lira if markets move toward greater stress. Spain is in a similar situation. By watching the difference between Eurozone interest rates and the rates driving local economies, you can see the degree to which the Euro is stable. Those spreads are beginning to widen. It is also a problem for weak economies, like Spain and Italy, to be based on an externally strong currency. They may opt away from it as conditions deteriorate economically. The price of oil is unlikely to impact the value of the dollar very much under any conditions. The recession slam will have effects on markets. Crude. The dollar. Everything. But the dollar's value will be a function of the degree to which other large currency systems are also being 'slammed', and whether or not banking systems remain coordinated and liquid. As I said: "rising fear of systemic financial shock (which is the real driver for the move in gold)". But that simply means, people have more faith in gold as a currency...not a commodity. In other words, it is an allocation strategy to prepare for a 'worst-case-scenario' unraveling. And that only makes sense as a strategy if people think that gold will retain its value and transactability better than other vehicles. So, my position is that gold is not skyrocketing. Rather, it is actually more accurate to say that gold is retaining its value, while fractional reserve currencies are eroding. Hence, the real value of oil is revealed only when stripped of the effects of eroding currency stability and valuation.