As best I can tell the derivatives game has failed and the teams have no option but to post the results on their balance sheets and plead for Fed aid. Whilst the game was off- balance sheet it was a game of numbers only but now it is a game of money which I gather is being madly printed as we speak. Eventually all the bad paper will be cleansed by more and more printed money and the cycle will move on. My question is "what are the long term ramifications" of all this new money
Actually, money is not flowing through the system like the good ol' days. Banks are reluctant to create it at this point. I haven't checked lately, but from what I've read money supply is slowing a little because of it. That is not the case with other countries however...
The Fed should cut to Zero and we'll become the new carry trade. Pump up the TAF auction to $1 trillion and banks will have no choice but to lend to anyone at any rate.
Deflation is the effect. The money being pumped in does not make up for the credit defaults. You can't look at only one side of the equation. You need to understand the amount pumped...not just look at the verb.
Fed just pumped money into system using Open Mkt Ops which is a little more reliable: http://biz.yahoo.com/ap/080916/fed_credit_crisis.html Link says there's been an overnight spike in lending rate which will slow inter-institution lending...
Now we are getting to the bit that I find confusing. 3 posts back Rickb says deflation is the outcome, while the last post by gnome says inflation will be the result. Are they both correct and we have stagflation. If so what is the cure for this.
the economy has fundamental flaws which can not be fixed short term consumer part of economy must be significantly low, finance service economy must shrink, manufacturing must come back do not forget wars that drain resources and bail out psychology will not let this economy to survive actually I don't see how we can avoid long term depression
Many parts to an answer, however... 1. Declining housing prices are deflationary... so are paying off debt "in kind" (as opposed to printing money and paying back with inflated and devalued currency). 2. A slowing economy and outsourcing middle class jobs are deflationary. But the Gummint and Fed's answer to EVERYTHING is "print money and throw it at the problem"... that's inflationary. Many at this time are thinking the US is going to experience deflation. Many others think inflation will prevail. We've had stagflation for years already, though the Talking Heads won't admit it. We may also get the worst of all possibilities... declining housing prices, loss of well paying jobs and stagnant wages... but rising prices for food, energy, services, etc.... Oh wait, maybe we already have that.
That's the current situation and has been this year for years. The country is being turned into Brazil/Mexico, a nation in poverty & turmoil with a small middle class and small group of rich. The rich have to live in gated communities and are targets for kidnappers & robbers. The middle class will be only slightly above the poor, able to afford basic needs but that's about it.