Friday, July 12, 2013

You can keep stealing from the bank as long as the bank doesn't notice.

You are the bank in this scenario

Last night I was talking to Mr S. about the Fed. I'm more freaked about the economy than ever which I will talk about at the end of this post. I was telling Mr S. that I thought it was interesting that Bernanke thinks what he is doing is totally cool man. The problem is "the perception" about what he is doing. I told Mr S. that I notice Krugman does this too. Essentially saying you can print all the money you want, but you just need to change peoples "perceptions" about the result.

This is where Mr S. says to me - well, yeah. Keynesian economics is based on tricking people. You print money in the hopes that it will trick people into thinking things are better than they are because more money is floating around the economy. But if you keep doing that people start to figure out it's a false signal for the economy and they still won't spend money. My add is this creates a liquidity trap which I talked about in May.

Which is also probably why each round of QE has a shorter and shorter lifespan.

Long time readers may note that I have been calling for deflation since April. I was very alone in that camp. As the months have gone on, more and more people seem to believe we are in a deflationary spiral as well. Including the Fed who gave this quote. "Fed's Bullard says "nervous" about persistently low inflation". If this is the Fed's belief, then quite obviously they are going to keep printing money until they don't believe that anymore. Only this time people are freaked out about the bond market who the Fed needs to keep interest rates low. Which means in all probability the Fed will have to print even more manufacture low interest rates.. Some economist are insisting that tapering is still going to happen. OK? I think those people are fools. The reason I believe this is because all I have to do is watch Japan. They are the model for what is possible apparently. They devalued their money by half, and they are still getting paltry inflation. Apprently governments can print all the money it wants, but if people just hoard that money - it doesn't matter.

Additionally, if it's true that China is going to print a huge miss on GDP next week - we are truly screwed. It's rumored that China accounted for 40-45% of broad money growth. There isn't another country on the face of the planet that can make up for that short fall.

So we either go into a deep recession, or the Fed prints more until morale improves. Which only makes more of the same.

No comments:

Post a Comment