Slow Motion Depression Continues

Optimists expect mild inflation in a decent recovery. Pessimists fear the feds may have waited too long; they think they see higher rates of inflation coming. Here on the back page we see no recovery…nor any inflation. At least, not yet. Instead, we are blind. We see nothing. As for what is coming…a slow motion depression wouldn’t surprise us. Neither would the collapse of the public debt market. Words: 594

In further edited excerpts from the original article* Bill Bonner (www.dailyreckoning.com) goes on to say:

There is always a wide gap between the Fed’s reach into the economy and their grasp of what they are really doing. When the Fed increased reserves in the banking system, the idea was simple enough. More reserves would allow the banks to lend more. In turn, more credit would allow consumers to spend more. Ergo, the recession would soon be over.

The more reserves the Fed pumped into the banking system, however, the more reserves the bankers didn’t lend out. In 24 months, excess reserves (beyond what was needed for loans) expanded 500 times from the level they had been for the previous 30 years.

If the banks chose to lend these reserves they could multiply them into another $10 trillion to add to the money supply. Instead, lending to households and business is in a steep decline. Nothing like it has happened since WWII. Total credit outstanding is falling too. The banks are barely even lending to the US government from which they got the money in the first place. Why?

The “Unintended Consequences” of Quantitative Easing
Bankers competed for yield with the deepest pockets in the monetary universe – the central bank itself. When the Feds bought Treasury bills they drove yields down to such skimpy levels that the incentive for risky private loans was nearly lost all together. Better to leave the money on deposit at the Fed.

No Loans, No Multiplier. No Multiplier, No Recovery.
Instead, the Feds take a dollar’s worth of supposedly “idle” resources out of the private economy (actually, savings that people hoped to spend or invest later); squander it on bribes, bailouts or boondoggles; and get 90 cents worth of ‘recovery.’ Then, when a real recovery doesn’t come, they spend two dollars.

Where this will end up? With the multiplier out of action, consumer price inflation – and a recovery – seem far away and the Feds are helpless. What? What about more government spending or dropping hundred-dollar bills from airplanes? But those tools have self-mutilating effects too. They jeopardize governments’ access to deficit financing.

Inflation and Rising Interest Rates are Coming
Sooner or later, lenders will worry about inflation and the risk of default. They’ll demand higher interest rates. Treasury bond yields will rise, in real terms, even in a deflationary world. These higher rates affect public finances like a cold draft on a pneumonia patient. As governments pay more to borrow, their condition deteriorates. The odds of default increase.

The slow motion depression continues, if we are lucky…and nothing goes wrong.

*http://www.dailyreckoning.com.au/mild-inflation-in-decent-recovery/2009/12/07/

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
- Buy the book below from Amazon. It’s pertinent to this article and inexpensive too.

Related Posts:

• Environment is Inflationary, NOT Deflationary – Here’s Why
• “Financial Repression” May Soon Become Our Worst Nightmare! Here’s Why
• Stock Market is Due for a 15-20% Correction – Here’s Why
• Here’s the Definitive Article on Why Gold is Going Even Higher
• A Return to the Gold Standard Has Major Shortcomings

Short URL: http://www.munknee.com/?p=2606