Wikinvest Wire

Trillion dollar deficits and zero interest rates

Monday, October 19, 2009

After shunning "alternative" financial market news for the better part of the last month while we were traveling around the country, listening to about an hour or so of Bloomberg Radio each day on XM Radio where straight news was delivered with commentary mostly provided by bullish money managers and no offsetting views from the talented corps of skeptical Bloomberg columnists, the adjustment back into a more "balanced" view of financial markets has been something of a violent transition, Doug Noland's latest commentary at Prudent Bear on a recent piece by Paul Krugman being this morning's jolting read.

Dr. Krugman, like so many economists of our time, is an inflationist. He, like so many before him, sees easy Credit and the government printing press as the solution to unemployment and other economic problems. And - in our age of electronic “money” and unbounded global finance - there are apparently no longer any bounds to U.S. fiscal and monetary stimulus.

Messrs. Greenspan and Bernanke are inflationists. The inflationists have been running the show since easy Credit was employed to juice the system after the 1987 stock market crash. The consequences of that bout of policy-induced excess led to a more potent inflationist policymaking elixir in the early-nineties to mop up the financial mess. Since then, ever more emboldened Credit inflation has been required to battle crisis after crisis after crisis. Easy money and Credit – the bane of Capitalism – were allowed to overwhelm the workings of the system. The point of Trillion dollar deficits and zero interest rates has been reached – with the undeterred inflationists now bent on this sorry state of affairs continuing indefinitely.
It is rather astonishing to see and hear with fresh eyes and ears that with some Wall Street firms reporting knock out earnings, the stock market rally looking like it will never end, and third quarter GDP set to be reported next week at an annual rate of 3.5 percent, that, absent the pesky weak job market, there is a growing consensus that the coast is clear.

A better example of this could not possibly be found than Fareed Zakaria waxing poetically about renewed prosperity in the world in the last item a short time ago.

Back to Mr. Noland for another dose of reality:
Inflationism doctrine is riddled with failings: Easy Credit distorts system pricing mechanisms; foments destabilizing speculation; spurs societal wealth transfer; distorts the underlying economic structure; fosters financial fragility; and debases the currency – to name just a few. History – including recent history – validates this analysis.

Yet there are two particular facets of today’s inflationism that make “Keynesian” policymaking extraordinarily dangerous. First, the global backdrop is one of unchecked Credit and the absence of any disciplining global monetary regime. Policy mistakes are free to run longer and with enormous global financial and economic consequences. Second, policymakers and pundits herald incredible post-Bubble policy responses, while failing to recognize that aggressive stimulus is, once again, fostering problematic Bubbles. For too long the inflationists have been negligent in their disregard for Bubble dynamics.
While confidence in the global reflationary backdrop may be rising, the dollar is in trouble. And many dollar apologists will claim the greenback has no immediate replacement and thus will retain its status as the world’s reserve currency. This line of reasoning misses the key point: the dollar reserve global monetary “regime” has broken down as a mechanism for supporting stable global Credit and economic performance. Unchecked global finance now rules, a consequence of the massive and ongoing devaluation of the world’s reserve currency.

Only the inflationists could argue the dollar’s current predicament is “good news.” I don’t see it. I don’t view a world economy rebalancing or becoming more stable. Instead, we’re witnessing the unleashing of another furious global boom and bust cycle. Crude oil traded above $78 this week as gold responded to the weak dollar by surging to an all-time record high. U.S. wealth is being shifted overseas, and Americans’ savings are being devalued. We are losing financial power by the day. Good news? More easy Credit to the rescue?
There is much more in this piece that is worth a look - it seems that talk of a "bubble in bubbles" and the bursting of the next ones being even worst than the last has intensified significantly in recent weeks, though it comes as news to me.

Now it's on to John Hussman's latest piece - something about the stock market being overvalued? I didn't hear too much about that over the last month either.

Bookmark and Share


NC Jim said...

I have been following Doug Noland for many years and I believe he has been much under appreciated. His "Credit Bubble Bulletin" was the first usage of the term I recall and he was the first I read to identify the crisis as a general credit problem as opposed to a subprime or generic mortgage problem. Although very early in his call for a credit crisis his analysis has been very prescient.

It is time Mr Noland receives the credit (no pun intended) he deserves for his early insight and analysis.


Tim said...

I couldn't agree with you more and I imagine it's killing him right now to see that we're in the process of just creating more and more bubbles.

  © Blogger template Newspaper by 2008

Back to TOP