PIM of SPAIN | October 24, 2009 at 07:31 amby
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At present, technically, the world is in a depression and not in a recession, otherwise the economy would have been revived as a result of the enormous amount of money that have flooded the market with bailouts and stimuli undertaken by the fed. Depressions take longer to sort out and are also far more treacherous. Because there are always temporarily periods when the economy seems to going "back to normal," only to return downwards in the spiral at the time investors turn optimistic.
When the crisis became apparent, enough practical proof was visible, even for politicians to recognize it, those who didn't see it coming in the first place tried to tell people how the future would pan out. Mr. Bernanke told that if he didn't do something, "we may not have an economy left on Monday." Vice President Joe Biden told us “that if the rescue package didn't go through, unemployment would soar to 9.6%...”
So, what if they had done nothing? No bailouts. No stimulus. No monetary policy. No fiscal policy. What might have happened? As usual, history is ready with the answers, if only people would care to listen. Anyhow the world at present is in a deflationary mode, which makes it useful to understand what this means.
First, there is rising unemployment. There has never been a sustained inflationary period without wage inflation. At present wages are basically flat and falling. With 9.8% unemployment, 7% underemployed (temporary), and another 3-4% off the radar screen - the ones discouraged and stopped looking for a job. In this situation there is no wage inflation, neither in the foreseeable future. A few years ago, less than 1 in 16 were unemployed or underemployed, at present 1 in 5.
The economist Keynes said that you should stimulate the economy in recessions in order to bring back consumer spending. That has not happened so far and is not going to happen this time either, because this crisis doesn’t show any sign of a recovery. As is reported: "Where are we going to get business-investment spending when banks aren't lending and capacity utilization is at an all-time low?" The Keynesians will say, "The government has to step up and jump-start consumption!" Which in reality means more debt.
Secondly, deflation in fact is massive wealth destruction. Two bear markets and a housing market collapse have put the consumer on the ropes. And the next bear market will bring them flat on the floor.
Reduced borrowing and lending signals the third cause of deflation, since consumers are paying down debt and banks are reducing their lending, which are necessary in a credit crisis-caused recession. Bank lending shows no sign off rebounding either. Banks are buying US government debt to shore up their balance sheets. Lending to small business, the real engine of job creation, is consequently decreasing each month.
Fourth, there is decreased demand for everything due to increased savings. The savings rate eventually will go beyond the 9% level where it was 20 years ago. The psyche and habits of consumers have been permanently changed.
Fifth as a result the industry has a 30 – 40% reduced capacity utilization, in such an environment businesses don’t have any pricing power. In fact nowadays it is a buyers market, where consumers dictate the price level.
And last but not least sixth there is a massive deleveraging of about $2 trillion in bank losses, and a very weak housing market that slows the velocity of money – the speed money changes hands. Prices are a function of the amount of money times the velocity of money.
Consequently if the velocity of money is slowing, the amount of money will increase beyond control that will alter the economic direction into the opposite called inflation, and at the end is causing hyperinflation due to the fact that too much money has been brought into circulation and cannot taken out in time.
Meanwhile the Fed still is on its track of creating inflation. As in some circles is suggested, “Instead of monetizing US government debt or printing money to fight deflation, they could buy mortgage or credit card or other forms of private debt, which have the convenience of being self-liquidating.”
The bottom line: “The Fed will do what it takes to keep us from deflation. They will deal with the problems of the ensuing inflation.” Though far more worrisome is the prospect of increasingly more trillion-dollar deficits.
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Omaha, Nebraska, United States
Omaha, Nebraska, United States
Susan Marie KovalinskyThese members have powered this story: