Gladwell's tipping point

Ambrose Evans-Pritchard collects some more timely quotes and adds one truly scary metaphor in an attempt to give proper context to all the actions taken by central banks around the world over the last few weeks, notably the Federal Reserve.

You pretty much know where things are probably headed just from having a quick look at the title - Federal Reserve is damned either way as it battles debt and deflation - but there's a surprising amount of nuance involved too, beginning with the scary metaphor.

"Such a disaster is somewhat like the capsizing of a ship which, under ordinary conditions is always near stable equilibrium but which, after being tipped beyond a certain angle, has no longer this tendency to return to equilibrium, but a tendency to depart further from it," he said.

Today we call this "Gladwell's tipping point". Once it goes, you can't get back up. This is why the Federal Reserve has resorted to emergency measures that seem mad at first sight.

Ruh-roh.

Hopefully, we're not yet past the point where "it goes".

The subject then turns to the reason for the tipping - debt deflation.

Brian Reading from Lombard Street Research has revived this neglected thesis and come up with some disturbing figures. US household debt is now $13.9 trillion, down just 1pc from its peak last year. Meanwhile household wealth has fallen 14pc as property crashes, a loss of $6.67 trillion. The debt-to-wealth ratio is rocketing.

Clearly the US is already in the grip of debt-deflation. "The obvious conclusion is that the Fed should print money to purchase private sector assets so as to drive up their price," he said.

Fed chief Ben Bernanke does not need prompting. He made his name as a Princeton professor studying the "credit channel" causes of depressions. Now fate has put him in charge of the channel.

That much should be obvious by now, the real question becomes whether it will work.

Ambrose notes that Ben Bernanke is "deliberately stoking inflation", but clearly, a better characterization at the moment would be the breaking of ever larger smelling salts under the nose of a prostrate fighter who, so far, has failed to stir.

The final notable quote pertains to what might happen when consciousness returns and all the liberally applied money, credit, government guarantees, low interest rates, and asset purchases gain traction sometime next year causing the "Treasury bubble" to burst.

"The bond markets could go into free fall," said Marc Ostwald from Monument Securities.

"The Fed went into this all guns blazing just as the Neo-cons went into Iraq thinking it was a great idea to get rid of Saddam, without planning an exit strategy. As soon as we get the first uptick in inflation, the markets are going to turn and say this is what we feared would happen all along. Then what?" he said.

Exit strategy?

Time and again, economists have cautioned that you can't worry about water damage when you're trying to put out a once-in-century fire.

Besides, in-flation is a lot easier to tame than de-flation.

Or, so they say.