March 11, 2013 at 11:33 pm #7096
In the current Zombie economy it is hard to spot what is going on as regards inflationary and deflationary influences. So here is an attempt to ‘join the dots’ of the current deflationary influences here in the UK.
History never repeats but rhymes. The 1970-s saw an oil induced economic crisis that saw massive inflation coupled with economic stagnation which gave rise the phrase ‘stagflation’. However things are vary different now, partly because of being on the other side of the 1970s peak in per-capita oil availability as well as the global oil production plateau but also due to the systemic changes in the economy such as the decline in manufacturing and the growth of the financial services ‘industry’. Also during the 1970s, there were large wage increases to go along with the large price increases due to the then large union movement in western economies. This all changed in the 1980s with the rise of the neo-liberal agenda which was anit-union in the extreme and preached de-rgulation and free market laissez faire, which surfed on the back of the last great oil and gas discoveries of the North Sea and Alaska. Things are different now…
For a start, wages are struggling even to keep pace with the current relatively low levels of price rises, tough current energy costs are going through the roof due in part to the depletion of easy and cheap reserves:
UK North Sea depletion.
Falling wages are having an impact on the standard of living; UK wages have fallen 3.2% while Germany’s have risen by 2.4%. over the last couple of years. This lack of real cash in terms of wages to spent in the economy is a big deflationary pressure, without it consumers cannot consume. On the plus side, as the UK manufactures so little it reduces imports which might help the balance of payments if the pound wasn’t devaluing.
Work meaningful or otherwise:
Overall a substantial majority of the 105,000 were likely to be subsisting on unemployment benefits – given that several DWP schemes are entirely unpaid – and only a minority of people on the work programme would have been in paid work placements.
The Office for National Statistics (ONS) estimate that private sector employment figures have been inflated by around 196,000 jobs as a result, and guess what? If you redistribute those jobs to the public sector, his claim is no longer true.
The increase in private sector jobs between the second quarters of 2010 and 2012 was 1.07 million according to the latest figures from the ONS, but this falls to 874,000 when the educational bodies are moved back to the public sector.
Also due to the withdrawal of social security benefits more people than ever are chasing fewer jobs, despite claims of a million new jobs ceated with no corresponding increase in GDP; and downwards pressure on wages, the figures just don’t add up. Coupled with further stealth withdrawals of benefits with such things as capping the total amount payable to a family and the “bedroom tax” and there is a very significant withdrawal of money directly from the population, and from those at the bottom end of the scale who are most likely to spend that money direct into the economy. There has also been a large increase in those in work applying for help such as housing benefits due to large increases in rent.
While the neo-liberal race to the bottom logically demands falling wages, the upshot is that no one can afford to buy anything:
… neoclassical economics can be summed up, as Galbraith one remarked, in the twin propositions that the poor don’t work hard enough because they’re paid too much, and the rich don’t work hard enough because they’re not paid enough (Galbraith)…
If society desires a higher level of employment and output, then the only way to get it is to reduce the real wage (and the logical limit of this argument is that output will reach its maximum when the real wage equals zero).
(Keen, 2011, “Economics Unmasked”, p.121.
Even if wages were to go to zero, exports would not necessarily increase as for one who would you export to? As most of the material for any (non-existent) manufacturing process would have to be imported with a devaluing currency and increasing transport cost. With a further decline in home consumers, you would face the same dilemma as China whose own internal market is spluttering. People tend to forget that China’s growth was gained on the back of debt ridden western consumerism, something that is fast becoming history.
Further other government spending cuts have been reassessed by the IMF to produce a bigger “multiplier effect”, going from 0.5 to 1.5 times. Thus instead of a reduction in government spending of £1million having and actual effect of £500,000 it is now calculated as having an effect of £1.5million.
George Osborne’s austerity is costing UK an extra £76bn, says IMF
George Osborne’s drastic deficit-cutting programme will have sucked £76bn more out of the economy than he expected by 2015, according to estimates from the International Monetary Fund of the price of austerity.
This is now thought to have impacted much greater on GDP:
Ronald Janssen at the Social Europe Journal:
Blame it on the Multiplier
In this simulation, a country with a 120% of GDP debt ratio reacts to a negative shock to its economy by going for a fiscal squeeze of 5% of GDP over one and half years, and with the entire consolidation being based on public spending cuts. The result is that debt continues to explode. The reason for this has to do with the ‘denominator’ effect. Even if the annual deficit (which is part of the nominator) is being reduced, this consolidation policy triggers a prolonged recession depressing nominal GDP (which is in the denominator), thereby pushing the debt to GDP ratio up, not down! After four years, the debt to GDP ratio is still 14% of GDP higher compared to another scenario in which the consolidation is done in a gradual way and equally based on expenditure cuts and tax hikes.
So by cutting government spending they may have cancelled out any effect that quantitative easing might have had on the real economy, bit like sitting on an economic whoopee cushion. However, these reductions in benefits are a classic sign of contraction as discussed on the TAE and in Joseph Tainter’s “Collapse of Complex Societies”.
Affordability is another key factor. As Keen and others have shown (as he points out in his book “Debunking Economics”), the neo-classical economics model of demand and supply breaks down to be replaced by one of affordability. Along with availability this is what really drives prices. Coupled with local currency devaluation in a global market and local prices can for a while go through the roof. This has the effect of siphoning money out of the system as more of what money there is in the system has to go to pay for the same stuff. While currency devaluation may work for a resource rich country, it will not work for one that has to impost those resources in the first place:
Parliament Briefing:After spending most of the previous 25 years as a net exporter of energy the UK became a net importer in 2004. The gap between imports and exports has increased since 2004 and this looks set to continue to increase in the future. This, alongside higher fuel prices and increased concern over the security of energy supply has increased the attention on energy imports and exports.
Also prices will eventually start to come down as affordability falls through the floor crashing demand. As the local economy tanks, even cash rich outsider investors who have kept local process high buy pouring in external investment will take fright and pull out. This is exactly what has happened post de-industrialisation in the north, where a distinct north/south divide exists. The benefit cuts are also more likely to affect the north due in part to the higher unemployment levels.
Despite quantitative easing the money made available to the banks is being used to bolster their reserves and not fed into the greater economy, where it would only inflate the debt bubble further anyway. This has led to some historical announcements:
Bank of England mulls negative interest rates
Paul Tucker, deputy governor for financial stability, raised the possibility in front of MPs after saying the Bank could be doing more to help the economy, including measures to boost lending to small businesses.
Negative interest rates would mean high street lenders paying the central bank to place their money with it. The move would be intended to encourage more lending to businesses and households. But it could also lead to a reduction in the interest paid on individual savers’ accounts held with high street banks.
Also at the other end of the scale, new regulations regarding the so called pay day loans could restrict these ‘Vinny the Knee Capper’ style loans, no bad thing as their equivalent APR’s can be as high as 2,670% and ‘Vinny’ ensures that the debtor remains in debt, but while its another constraint on credit, the cash saved on extortionate interest payments might balance things out.
Stella Creasy from the Guardian, Wednesday 6 March 2013 19.00 GMT
The case for capping payday loan rates is overwhelming
The Office of Fair Trading has now confirmed what many of us feared. Legal loansharking is out of control in Britain. The myth there are simply a few rogue firms has been blown apart by their description of “widespread irresponsible” behaviour. The OFT’s devastating analysis reveals just how they benefit from getting people into debt, with 50% of profits being generated by consumers rolling over loans and racking up costs month on month. Crucially, the OFT outlines problems not simply to do with compliance with existing regulation. They are so fed up with the conduct of these companies they have announced their intention to refer the lot to the Competition Commission.
For any other government this would be a wake-up call that urgent reform of this market is needed. Nearly 5 million people are borrowing in this way and the cost of living crisis in Britain is going to get worse, not better, in the months ahead. Yet despite these practices they continue to resist capping what these companies charge.
The case for capping is overwhelming – countries with these measures have lower levels of illegal lending as well as lower levels of personal debt. Yet the government listens only to the industry that claims caps could stop them lending – just as turkeys claim Christmas is a bad idea. This stance now makes Britain one of the few places in the world where consumers can be charged extortionate rates of interest without any form of redress.
In a nation where wages are stagnating and prices are rising, many will find themselves with too much month at the end of their money. To restrict their access to credit would cause more financial distress. Yet, to only offer this toxic form of expensive credit is hardly better. Regulating costs, requiring all lenders to do proper credit checks and changing the way in which continuous payment authorities work would help reduce the pressures these loans are creating for millions of families.
Some commentators have drawn parallels with the Japanese situation of the last twenty years, in which growth has been sluggish and investment low as both companies and individuals have hoarded cash, and where the government has been the consumer of last resort. However these commentaries have been blaming the lack of ‘structural reform’ and not the deflationary forces of a deflating stock and property bubble from way back in the late 1980s (a reminder of the hangover period of excessive bubbles), though deflation is mentioned, that and the fact that the crisis in Japan has led to a generation of more conservative investment thinking. Also Japan still has an active manufacturing base while the UK’s has been vastly reduced, leaving it in 9th place globally below France, and just above India. Japan is third.
When it comes to political will, the UK is leagues ahead of Japan. But elsewhere, the parallels are eerie.
For many who follow the Japanese economy, another disaster is building. “The deficit and debt,” Kohei Otuska, a politician with the Democratic Party of Japan, says. “It’s something like an earthquake. It may come tomorrow or in 10 years, but it is coming.”
Japan’s economic problems are well-rehearsed. The world’s third largest economy has national debt of 236pc of GDP, and a budget deficit of 10pc. The UK, by comparison, is a bastion of fiscal rectitude, with national debt of 88pc and an 8pc budget deficit, using International Monetary Fund numbers.
If that was not unsustainable enough, Japan’s ageing population is piling even more pressure on the public finances.
A decade ago, social security expenditure was 12pc of GDP, it’s now 24pc. In the same time, tax receipts have dwindled from 30pc to 28pc as the workforce has shrunk.
The system is crying out for reform, but there is political stasis. The two main parties have agreed to balance the primary budget no earlier than 2020, having struck a cross-party deal to raise VAT from 5pc to 10pc by 2015.
It is not enough. The IMF says VAT needs to rise to 15pc and welfare reform, of pensions and medical care, is long overdue.
Both nations suffered a financial crisis that, as economists put it, left them with zombie households (UK) or zombie companies (Japan), and zombie banks.
Policy has also trodden a similar path. Rates have been cut to near zero, central banks have printed money and tried “credit easing”, governments have looked to infrastructure to cure slow growth, and there has been a rapid rise in the non-regular workforce – in the UK, part-timers and the self-employed. The young have been disenfranchised.
The UK may have recapitalised the banks faster and started printing money earlier, but policy action has been largely the same. The big difference so far, has been deflation.
At the same time, deflation has made it desperately difficult for companies to manage their costs.
The response has been dramatic. Japan, which was one of the last torch-bearers for jobs-for-life, now has the largest proportion of “non-regular” contract workers – with little employment rights and reduced career prospects – in the industrialised world, Shiseido director Carsten Fischer says.
UK economy slides towards Japanese-style funk
Another set of subdued GDP figures has begged an old question: is Britain turning into Japan? The difference between the two economies is in many respects still so great as to make the question seem almost laughable.
…There is no surer way of ending up in the Japanese trap than by further piling on public debt, and thereby permanently crowding out private sector activity. It is in any case wrong to think that deficit reduction is the cause of the present hiatus in the economic recovery. In fact, government spending continued to contribute positively to growth in the first quarter.
Deficit reduction is merely a way of insuring the UK against the massive economic dislocation which would be caused by a sovereign debt crisis. Lower medium-term growth is part of the price that has to be paid for putting the economy back on a less risky footing.
Far from condemning the economy to a Japanese-style funk, where private sector activity is done lasting damage, sticking to Plan A offers part of the solution. Nobody could think it acceptable for the state to continue providing nearly a half of all economic activity.
Yet to ensure the private sector picks up the baton and runs with it requires a much bolder approach to supply-side reform than the somewhat underwhelming set of measures we have seen to date.
Japan’s failure to tackle structural reform is one of the main reasons for its continued state of economic paralysis. Britain doesn’t have to become Japan, but it will require political nerve to avoid it.
Not deflation of a massive bubble then…
In the UK people are realising that saving is again an option (if they have any money to begin with) such as trying to save for that enormous deposit for a (currently) overpriced house, and starting to hold onto money as a cushion against hard times as the welfare state disappears, this is further going to stall the money flows in the economy.
Global deflationary trends aside, the UK is experiencing many deflationary forces, and this is before major debt defaults through rising interest/unserviceability of debt kick in.
The disappearance of credit seen so far could portend the return to the days of only the privileged having access to credit, something already discussed at TAE. Also cutting taxes and cutting benefits is a deflationary policy by default, as the first takes money out of the real economy and puts it into the hands of people who more often that not will squirrel it away in some investment fund or offshore account, and the latter deprives people who would otherwise spend the money directly into the economy on essentials. But then cutting the government deficit is also paramount. It’s an impossible situation, enough to drive a headless chicken mad. Still at least there is growth in one area, food banks are thriving.
Food banks are thriving, much to the government’s embarrassment
Volunteers rallying to distribute food aid to those who can no longer afford to put a meal on the table isn’t the big society David Cameron planned.
Alms for the poor…
Ultimately all the pointers are telling us we’re already in a deflationary environment.
Sid.April 14, 2013 at 6:51 pm #7403
Oh I see, they’ve renamed it:
Inflation in Greece was negative last month for the first time in 45 years. That is because prices are being pushed down by the country’s deep recession. Consumer prices fell by 0.2 percent from March last year. Greece is in its sixth year of recession, hit by austerity policies imposed under a bailout from the European Union and International Monetary Fund which is keeping it from going bankrupt. The government is forecasting the economy will contract by 4.5 percent this year. Data on Tuesday also showed industrial output fell 3.9 percent year-on-year in February after dropping 4.2 percent in the previous month, underscoring the grim state of the Greek economy.
“Negative Inflation” 😆 Anything but ‘deflation’ eh?
Sid.April 24, 2013 at 5:31 pm #7475
The Government’s raft of controversial welfare reforms will take almost £19 billion a year out of the UK economy and hit northern England hardest, researchers say.
Residents in the Lancashire resort town of Blackpool will lose out more than anywhere else in Britain when changes to the benefits system kick in, academics at Sheffield Hallam University said.
Former industrial areas including Middlesbrough, Liverpool and Glasgow will also be disproportionately affected. However, wealthier areas, predominantly in the South, such as Cambridge, Surrey and the Cotswolds, will see the smallest financial losses.
Researchers assessed the financial impact of changes made by the Conservative-led coalition to housing benefit – including the so-called bedroom tax on public housing tenants who have unused rooms – disability living allowance, child benefit, tax credits, council tax benefit and several other hand-outs.
Professor Steve Fothergill, from Sheffield Hallam’s Centre for Regional Economic and Social Research, led the study, which was based on a range of official statistics. He said: “A key effect of the welfare reforms will be to widen the gaps in prosperity between the best and worst local economies across Britain. Our figures also show the coalition Government is presiding over national welfare reforms that will impact principally on individuals and communities outside its own political heartlands.”
Generally, the more deprived the local authority, the greater the financial impact, Prof Fothergill found. He said the three regions of northern England – the North West, North East and Yorkshire and Humberside – can expect to lose a total of £5.2 billion a year in benefit income. Much of the south and east of England outside London escapes comparatively lightly.
Researchers calculated the average amount that every working-age adult stands to lose in each region of Britain per year. This average figure allowed them to gauge how much each area would be affected.
Working-age residents in Blackpool will lose an average of £910 each through welfare cuts. Westminster, with its high cost of living, will be the hardest hit London borough. Residents will be £810 out of pocket on average.
However, the Department for Work and Pensions said the reforms will benefit the vast majority of working households. A Government spokesman said: “Around nine out of ten working households will be better off by on average almost £300 a year as a result of changes to the tax and welfare system this month. Raising the personal allowance to £10,000 we will have lifted 2.7m people out of income tax since 2010.
“Our welfare reforms, including reassessing people on incapacity benefit, will help people back into work – which will benefit the economy more than simply abandoning them to claim benefits year after year. These changes are essential to keep the benefits bill sustainable, so that we can continue to support people when they need it most across the UK.”
If that’s not deflationary then I don’t know what is. It will be interesting to see how those de-industrialised economies in the north of the UK cope as those benefits acted as a government subsidy to keep the local economies running. These cuts coupled with the abolition of other local industry subsidies such as Yorkshire Forward mean there could be some interesting times ahead up north. The north/south divide could end up as a full blown two-tier economy, a micro version of the EU with parts ot the UK like Greece and Cyprus and others like Germany. Three guesses as to which parts…
Sid.May 2, 2013 at 8:02 pm #7507
What’s this, a case of Dutch [strike]Elm[/strike] Debt disease? :ohmy: :
Debt-crippled Holland falls victim to EMU blunders as property slump deepens
The eurozone’s slow suffocation is going Dutch. Each extra month of slump caused by Europe’s negligent authorities is pushing Holland closer to a debt-deflation trap.
The coalition of Mark Rutte has belatedly woken up to the danger. Last month it retreated from pro-cyclical tightening, delaying €4.3bn in budget austerity. By then Mr Rutte’s totemic worship of EU deficit targets had invited the ridicule of the official Bureau for Economic Policy Analysis (CPB), which said Dutch leaders did not seem to understand how private credit busts interact with fiscal cuts to create havoc.
“The Dutch government’s inability to acknowledge the damage done by austerity despite mounting evidence is a case of ‘cognitive dissonance’,” it told the Financial Times.
Yet this is not at root a case of botched fiscal policy. It is a case of misaligned monetary policy. The Netherlands offers a salutary lesson of what can happen to a rich sophisticated economy caught in a post-bubble crunch once it has lost control of its currency, central bank and monetary levers. This would have happened to Britain without the Bank of England, and the US without the Fed.
The Dutch crisis has crept up quietly, though hedge funds have been nibbling for months. Most people lump the Netherlands together with Germany, Finland and Austria, the hardline AAA fist-thumpers who dictate terms to others.
Unemployment was very low until the dam broke. It is now soaring as fast as in Cyprus. The rate has doubled over the past two years, jumping from 7.7pc to 8.1pc in the single month of March. The economy has been in recession since early 2011.
As in Britain – or Japan when it buckled in 1990 – there is a long-term housing shortage. Rabobank says the overhang of unsold homes is 228,000. That is bad but not disastrous. The crisis stems from rampant credit, not rampant building.
Instead, the ECB has engineered a Japan-style liquidity trap. Broad M3 money growth has slowed to 2.6pc. It contracted in March. Core inflation has fallen to a record low of 0.4pc, once austerity taxes are stripped out. This is one shock away from debt-deflation.
While they use it as an excuse to denounce federalisation (ironic they do not mention US states going bankrupt!), they at least mention the words ‘debt-deflation’. Not surprising given the debt level and private consumption figures:
Now, which web site has been banging on about this for years already… :whistle:
Sid.May 2, 2013 at 8:21 pm #7508
Actually it seems that Ambrose has a crush on the ‘d’ word, has he been reading TAE?:
Eurozone risks Japan-style trap as deflation grinds closer
The eurozone is one shock away from a Japan-style deflation crisis after a key measure of prices fell to the lowest since the launch of the single currency.
The region’s core inflation rate – which strips out food and energy – fell to 1pc in March. This is far below expectations and leaves monetary union with a diminishing safety buffer.
“The eurozone is tracking the experience in Japan in mid-1990s. there is a very high risk of a slide into deflation,” said Lars Christensen, a monetary theorist at Danske Bank.
While eurozone core inflation was slightly lower in the aftermath of the Lehman crisis, the current figure is distorted by the one-off effects of VAT increases and levies linked to austerity. Adjusting for these taxes, the rate is now running at 0.4pc.
“The European Central Bank [ECB] should be concerned. If there is another severe shock, the eurozone faces a much bigger risk of falling into a deflationary trap,” said Julian Callow, global strategist at Barclays. “The danger is when deflation combines with high debt and deleveraging and becomes toxic. That raises the risk of a debt-deflation spiral. There are already signs of this in southern Europe.”
Mr Callow said nominal GDP – tracked by monetarists as the key indicator in sovereign debt crises – fell 1.8pc in Spain and 1.2pc in Italy last year. This means that the debt burden is rising fast on a contracting base.
David Owen, from Jefferies Fixed Income, said the mix of falling inflation and an ageing population risks pulling the eurozone into a “liquidity trap” where the self-correcting mechanisms of the economy break down. “This looks strikingly similar to Japan 15 or so years ago,” he said.
Mr Owen said the ECB cannot just “sit back and do nothing this week” at its meeting on Thursday, and may ultimately have to launch full-blown quantitative easing.
Most analysts expect the ECB to cut rates a quarter point to 0.5pc but there is broad consent that this will do little to alleviate the credit crunch for smaller firms in Spain, Italy and Portugal, where borrowing costs are two to three times higher than costs for North European rivals.
Data from the ECB show that the eurozone’s “broad” M3 money supply contracted in March, while private loans fell by 0.8pc. “The growth of money over the last three months has been very weak. The imbalance within EMU between Germany and the rest is intensifying,” said Tim Congdon from International Monetary Research.
Hell they even mention such scary monsters as “liquidity trap”s: “This means that the debt burden is rising fast on a contracting base.” Wow, who’da thought it… :dry:
Sid.May 19, 2013 at 4:31 pm #7582
To my previous comment on the absence of the use of the word ‘deflation’, we now have “disinflation”:
From Zero Hedge:
Submitted by Lance Roberts of Street Talk Live,
There have been quite a few bold predictions, since the beginning of the year, that the dollar was set to soar and that the great “bond bull market” was dead. The primary thesis behind these views was that the economy was set to strengthen and inflation would begin to seep its way back into the system. Furthermore, the “Great Rotation” of bonds into stocks, on the back of said economic strength, would push interest rates substantially higher.
While I have no doubt that at some point down the road that inflation will become an issue, interest rates will rise and the dollar will strengthen – it just won’t be anytime soon. A wave of “disinflation” is currently engulfing the globe as the Eurozone economy slips back into recession, China is slowing down and the U.S. is grinding into much slower rates of growth. Even Japan, despite their best efforts through a massive QE program, cannot seem to break the back of the deflationary pressures on their economy. This is a problem that has yet to be recognized by the financial markets.
The recent inflation reports (both the Producer and Consumer Price Indexes) show deflationary forces at work. Wages continue to wane, economic production is stalling and price pressures are falling. More importantly, there are downward pressures on the most economically sensitive commodities such as oil, copper and lumber all indicating weaker levels of economic output. The battle against deflationary economic pressures has been what the Federal Reserve has been forced to fight since the financial crisis. The problem has been that, much like “Humpty-Dumpty”, the broken financial transmission system, as represented by the velocity of money, can’t be put back together again…
The weak level of economic growth, global deflationary pressures, demographic trends and excess indebtedness which derails productive investment are keeping inflationary pressures suppressed.
(bold in orig)
…The same goes with the U.S. dollar. With Japan engaged, on a relative basis, in a Quantitative Easing program twice as large as the U.S. on an economy just one-third the size, the suppression of the Yen has boosted the Dollar higher in recent months. However, the deflationary pressures globally are likely to create a feedback loop on Japan’s effort to create inflation leading to a economic decoupling that creates a potential disaster in Japan. This is the bet that Kyle Bass has made and anticipates happening in the next 24 months…
The real concern for investors, and individuals, is the actual economy. We are likely experiencing more than just a “soft patch” currently despite the mainstream analysts rhetoric to the contrary. There is clearly something amiss within the economic landscape and the recent decline in rates, the dollar and inflation are telling us that.
“There is clearly something amiss within the economic landscape and the recent decline in rates, the dollar and inflation are telling us that.” Erm I wonder what that could be? Nothing to do with a humungus debt bubble and the peaking of energy supplies obviously. Maybe it’s just the ‘New Normal’. :unsure:
Sid.May 22, 2013 at 7:02 pm #7603
Maybe the Real Reason for QE: they’re scared of turning Japanese… in terms of a deflationary liquidity trap (so no its not a bailout):
Bill Dudley speech:
Lessons at the Zero Bound: The Japanese and U.S. Experience
Remarks at the Japan Society, New York City
“…Fifth, at the zero lower bound, risk management becomes extremely important. In particular, because the costs of getting stuck in a liquidity trap with chronic deflation are high, a central bank should put substantial weight on avoiding this outcome.
…With deflation intensifying, the Bank of Japan embarked on a quantitative easing (QE) program in 2001 designed to increase the size of the monetary base. The Bank of Japan engaged in purchases of JGBs that were large in scale, but confined to short-dated maturities. This reflected a view that such purchases primarily acted through the liabilities side of the central bank’s balance sheet—pushing up the amount of reserves in the banking system. Because the growth of the monetary base was deemed the goal of policy, it was logical to purchase short-dated assets, which could be allowed to run off once a sustainable recovery was in place.
…More than a decade after Japan’s bubble burst, the U.S. housing bubble burst. This exposed extensive vulnerabilities in our financial system and triggered a global financial crisis.6 Unlike Japan, we had the advantage of being able to learn from another nation’s recent experience. We applied what we understood to be the lessons from Japan, though with hindsight, perhaps not in every respect as completely as we could have.
In particular, Japan’s experience reinforced the lessons of the Great Depression here in the U.S. and made us sensitive to the disinflationary force of an asset price bust and financial crisis. We recognized that we had to be very aggressive to prevent deflation and deflation expectations from becoming well entrenched.”
(bold in excerpt added)
Way to go, don’t end up like Japan by doing exactly what Japan did. :huh:
The problem they have of course is that there is not going to be a sustainable recovery, as they are sitting on a foam of bursting bubbles and blowing bigger ones all the time just to fall behind at a slower rate (– IMHO they are no longer doing the ‘Red Queen’ stunt of running to stand still, they are instead just sinking into the foam.) They say you can’t fight the FED, well the FED is about to find out it can’t fight the laws of thermodynamics (energy) and the ‘law’ of diminishing returns (environment), or continue to inflate the biggest debt bubble ever (economy)… 🙁
Heads up to TAE for telling it how it now is way back when.
Sid.May 25, 2013 at 5:58 pm #7616
Whip-flation anyone? It looks like the ‘deflation’ might be rapid and brutal followed by a sudden inflation as governments panic and do all sorts of silly things causing people to suffer the equivalent of “financial” whiplash:
Submitted by Tyler Durden on 05/23/2013 22:33 -0400
From: Submitted by Michael Snyder of The Economic Collapse blog,
“The next major financial panic will cause a substantial deflationary wave first, and after that we will see unprecedented inflation as the central bankers and our politicians respond to the financial crisis. This will happen so quickly that many will get “financial whiplash” as they try to figure out what to do with their money. We are moving toward a time of extreme financial instability, and different strategies will be called for at different times.
…Right now, we are living in the greatest debt bubble in the history of the world. When a debt bubble bursts, fear and panic typically cause the flow of money and the flow of credit to really tighten up. We saw that happen at the beginning of the Great Depression of the 1930s, we saw that happen back in 2008, and we will see it happen again. Deleveraging is deflationary by nature, and it can cause economic activity to grind to a standstill very rapidly.
During the next major wave of the economic collapse, there will be times when it will seem like hardly anyone has any money. The “easy credit” of the past will be long gone, and large numbers of individuals and small businesses will find it very difficult to get loans.
When the debt bubble bursts, cash will be king – at least for a short period of time. Those that do not have any savings at all will really be hurting.
And some of the financial elite seem to be positioning themselves for what is coming. For example, even though he has been making public statements about how great stocks are right now, the truth is that Warren Buffett is currently sitting on $49 billion in cash. That is the most that he has ever had sitting in cash.
Does he know something?
Of course there will be a tremendous amount of pressure on the U.S. government and the Federal Reserve to do something once a financial crash happens. The response by the federal government and the Federal Reserve will likely be extremely inflationary as they try to resuscitate the system. It will probably be far more dramatic than anything we have seen so far.
So cash will not be king for long. In fact, eventually cash will be trash. The actions of the U.S. government and the Federal Reserve in response to the coming financial crisis will greatly upset much of the rest of the world and cause the death of the U.S. dollar.”
That is of course assuming that anything resembling politicians and central bankers actually survives the ‘crash’. Here is how a previous ‘problem’ was resolved… and we all know how well that went. :dry:
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