Here’s something I have not gotten a straight answer on anywhere as I have been following the current financial crisis and resulting economic slowdown. Dad and Dave, I think you are two of the three people that read this blog, so if you have any thoughts on this, feel free to put them in the comments.
The government has been printing money like crazy, with billions to a trillion or so created to give out to banks, etc. Historically, when a nation prints up a ton of money, this leads to wild inflation, but the real activity in the economy points to deflation.
This makes sense, since credit is being destroyed, offsetting the increased money that has been added to the economy by the Fed. Once all this credit mess is sorted out, however, and banks start opening up the lending spigot, are we gonna get a big dose of inflation, due to the fact that there is a larger base money supply?
When the usual money multiplier kicks in again, and the money the fed puts out there is multiplied by the “magic” of fractional reserve banking, are we gonna have a ton more money in the economy than we did before?
I think there is at least one or two things I am missing here.
Tags: Economy
Credit isn’t being destroyed, debt is being destroyed through the magic of deleveraging.
Actually, credit is being destroyed as well, but that’s not the same thing as the reduction in the money supply occurring as debt is destroyed. I do not believe there is a relevant measure or index for what is happening right now, which is why the Fed is mystified that the M1 is having no effect on the economy.
What people don’t get is what we could call the “banality of evil.” Hitler, the middle class burgher with a chip on his shoulder. Osama bin Laden, the same, laughing and smoking around the typical middle class dinner table. How utterly mundane.
This relates to the current situation: our financial “Masters of the Universe” aren’t really all that smart, and they aren’t all that wise. They think they are, and want us to think they are, but the results of their actions demonstrates otherwise. Some very foolish people got their hands on the reins of power, and now the world is going to pay.
What is happening right now is not what happened in ’29-32. Only the symptom of the credit bubble is the same. The underlying economy is different. Bernanke’s folly is applying his academic theory of the Great Depression to the current situation. He would likely be better served using the 1873 depression as a model, or perhaps (*shudder*) the 1720 South Seas debacle. It took England decades to recover from that one, and they weren’t in the natural resource bind that we’re in today.
But they are Keynesians one and all. Print money, kick the can down the road, get voted in for that next term.
So, yeah, once the debt is finally cleared, watch interest rates get into the double digit range again, as the Fed attempts to cool off the coming inflation. No way of knowing when it will get here. An indicator is gold price, but I don’t know if it’s leading or trailing. Gold of course being absolutely “worthless” except that they aren’t giving any of it away. My bet is another round of debt clearance as the last of the hedge funds give it up, more banks go under. My buy order is in for $750… fundamentals point to gold ~650… so if it starts to zoom up now, the feds program is working.