Americans must prepare themselves for a massive collapse in the dollar as investors around the world dump their US assets, a former Bank of England policymaker has warned.
..."The past eight years of imperial overstretch, hubris and domestic and international abuse of power on the part of the Bush administration has left the US materially weakened financially, economically, politically and morally," he said. "Even the most hard-nosed, Guantanamo Bay-indifferent potential foreign investor in the US must recognise that its financial system has collapsed."
He said investors would, rightly, suspect that the US would have to generate major inflation to whittle away its debt and this dollar collapse means that the US has less leeway for major spending plans than politicians realise."
..."Schwartz warns against facile comparisons between today's world and the Gold Standard era. "This is nothing like the Depression. I don't really believe the economy as a whole is going to fall apart. Northern Rock has been the only episode of a bank failure so far," she says.
Over 4,000 US banks - a fifth - collapsed in the 1930s. There was no deposit insurance. Real economic output fell by a third, prices by a quarter, and unemployment reached a third. Real income fell by 11 per cent, 9 per cent, 18 per cent, and 3 per cent in the years to 1933.
According to Schwartz the original sin of the Bernanke-Greenspan Fed was to hold rates at 1 per cent from 2003 to June 2004, long after the dotcom bubble was over. "It is clear that monetary policy was too accommodative. Rates of 1 per cent were bound to encourage all kinds of risky behaviour," says Schwartz.
She is scornful of Greenspan's campaign to clear his name by blaming the bubble on an Asian saving glut, which purportedly created stimulus beyond the control of the Fed by driving down global bond rates. "This attempt to exculpate himself is not convincing. The Fed failed to confront something that was evident. It can't be blamed on global events," she says.
That mistake is behind us now. The lesson of the 1930s is that swift action is needed once the credit system starts to implode: when banks hoard money, refusing to pass on funds. The Fed must tear up the rule-book. Yet it has been hesitant for three months, relying on lubricants - not shock therapy.
"Liquidity doesn't do anything in this situation. It cannot deal with the underlying fear that lots of firms are going bankrupt," she says. Her view is fast spreading. Goldman Sachs issued a full-recession alert on Wednesday, predicting rates of 2.5 per cent by the third quarter. "Ben Bernanke should be making stronger statements and then backing them up with decisive easing," says Jan Hatzius, the bank's US economist.
Bernanke did indeed switch tack on Thursday. "We stand ready to take substantive additional action as needed," he says, warning of a "fragile situation". It follows a surge in December unemployment from 4.7 per cent to 5 per cent, the sharpest spike in a quarter century. Inflation fears are subsiding fast.
Bernanke insists that the Fed has leant the lesson from the catastrophic errors of the 1930s. At the late Milton Friedman's 90th birthday party, he apologised for the sins of his institutional forefathers. "Yes, we did it, we're very sorry, we won't do it again."
..."In recent speeches the Governor, Mervyn King, and the Deputy Governor, Charles Bean, have warned that – unless banks lend more to the private sector – the economy will not recover in 2009.
This credit-determines-spending doctrine is false and dangerous. The correct answer is for the government to replace the private sector in the credit process, and so to create new deposits by itself borrowing from the banks and increasing the quantity of money. Since the government has the power of taxation, its own credit-worthiness is not in doubt and it can borrow almost without limit from the banks.
In the first instance the proceeds of the banks' loans to the government would be credited to the government's deposit. But civil servants can then write cheques to the government's suppliers and add to the quantity of money. These suppliers may include some financially hard-pressed small companies, giving them immediate help. But the favourable effects of extra money should soon spread widely. Payments between different companies and individuals are on such a scale that all cash-strained companies ought to find it easier to improve their financial position.
We are of course opposed to an excessive rate of monetary growth, because that causes inflation, and favour sound public finances over the medium term. But large-scale government borrowing from the banks in early 2009 – of between, say, £50bn and £100bn – would be simple to organize given the enormous budget deficit now being incurred. That would quickly boost the quantity of money, easing the financial squeeze on British companies, and helping them to maintain jobs and investment."
Simple Logic vs. Paradox of Thrift
Simple logic would dictate that excessive spending and loose lending standards caused this crash so excessive spending and loose lending standards cannot possibly cure it. Indeed it is axiomatic that the problem cannot be the solution. The concept is so simple that Keynesian demagogues cannot see it.
Is there a Keynesian on the planet who can think more than one second ahead?
Paulson and the Keynesian fools want banks to lend. For what? What is it we need more of? Houses? Condos? Pizza Huts? Home Depots? Lowes? Nail salons? Strip Malls? Walmarts? And if by some miracle banks did lend that money and new stores were built, who is there to buy? What would happen then? Is the amount of money that can be thrown at problem unlimited? What about the problems that will create? Can problems be postponed forever? Is there a Keynesian on the planet who can think more than one second ahead?
Something For Nothing vs. Paradox of DeleveragingAttempts to prop up the stock market, housing prices, and to stimulate lending, etc., are all doomed to fail.
The simple truth is that Keynesian economic theory is based on the same failed something for nothing theory of perpetual motion. Attempts to get something for nothing are a complete waste of both time and resources and thus can only make matters worse.
Let's look at this still another way. In Austrian economics terms, saving is what is left over (not consumed) from production.
Keynesian theory suggests you can have something today and tomorrow which is of course as preposterous as having your cake and eating it too. In simple terms one cannot consume what one does not produce, at least not forever.
Spending now will only borrow from future production. The United States has been doing that for decades and all we have to show for it is an exodus of manufacturing jobs from the United States to China, and a housing bubble of epic proportion.
There is no paradox. The United States has borrowed itself into oblivion. Consumers have finally seen the light and are attempting to save in spite of horrible economic policy encouraging them to do otherwise."
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.comdeadpetey : y'all should read the lot dudes...
vince : whahoppen? musky?
musky : paintbrush got shottin a head...
opkin : is he gon be OK?
spidah : shure...lucky dude...no vital organs...in he head man...
and this from the market ticker...
Break the momentum of the recession?
Mr. Obama, with all due respect, would you please stop lying?
See, I know full well that you're not one of the 99% of America that is too stupid (or simply uneducated) to understand exponents. And I certainly hope Michelle isn't, seeing as she has an advanced degree.
See, government caused this mess. That's right. It enabled people like Madoff, it conspired with the lenders, including Fannie and Freddie (the revolving door in DC with those two was not only incestuous it was outrageous and feckless besides) to pump asset values in a puerile attempt to prevent the recession in 2000 from working off credit excess and then to put a nice cherry on top of it government put in American's heads that they should just "go out and shop" after a terrorist attack - whether we had any money or not.
As a consequence what was a fairly serious recession that had to be suffered in 2000 was "kicked down the road" and due to the power of exponents has now turned into something far worse.
The "far worse" isn't an accident, it isn't a coincidence, and it isn't a part of the "natural business cycle." It was caused by the direct actions of government, including yours as a Senator.
I expected more from you, even though knowing you're a politician, my expectations were somewhat tempered. After all, we know that politicians are the easiest to read in terms of honesty any time their lips are moving: they're lying...."
