正文
1. The current deflation is caused by de-leveraging. Banks, businesses and consumers all try to conserve cash, reduce debt. This will continue for some time.
However, the No. 1 task for the new US government is to reverse this and inflate another bubble. If they fail, the economy will fall into a self propagating deflationary trap and may not recover for 15~20 years! Only inflation can save the US banking system and US housing market!
The O8M government just pushed a 0.82 trillion dollar stimulus package, in addition to the 0.7 trillion TARP which is almost used up now. I think very likely this 0.82 trillion stimulus will not work either. The government will soon(later this year or 2010) start to lobby for a 1 trillion plus super stimulus package.
Who's going to pay for all this? Who's going to pay for the social security deficit for the baby boomers?
The Japanese certainly can't. They are in recession too and their government has one of the largest debt to GDP ratio in the world. Our Chinese government probably will only increase US Tbill holding a little(We will not sell off US Tbill in any significant way unless we go to war with US. I'll explain this in a separate post). The European countries are trying to find money for their own stimulus package.
Well, if there's no external buyers, guess who's going to buy all the Tbills? he he. The only big buyer left is the FEDs. They print money and buy all these T-bills.
The result, a huge excess of money supply that goes into the system. This will cause a war between deflationary pressure and inflationary pressure. There's only one possibly winner--> Inflation!
Since the 80s, the FED has been using the weapon called "throwing money at the problem". They have succeeded a few times, up till now. If you keep throwing money at the problem, sooner or later, the money you threw becomes your new problem. But the FED don't have to worry about it now. Their primary task now is to reverse deflation and they are doing everything they can to just achieve that. It's a very delicate balance however. It looks very likely they will over do it. Let's wait and see.
However, the No. 1 task for the new US government is to reverse this and inflate another bubble. If they fail, the economy will fall into a self propagating deflationary trap and may not recover for 15~20 years! Only inflation can save the US banking system and US housing market!
The O8M government just pushed a 0.82 trillion dollar stimulus package, in addition to the 0.7 trillion TARP which is almost used up now. I think very likely this 0.82 trillion stimulus will not work either. The government will soon(later this year or 2010) start to lobby for a 1 trillion plus super stimulus package.
Who's going to pay for all this? Who's going to pay for the social security deficit for the baby boomers?
The Japanese certainly can't. They are in recession too and their government has one of the largest debt to GDP ratio in the world. Our Chinese government probably will only increase US Tbill holding a little(We will not sell off US Tbill in any significant way unless we go to war with US. I'll explain this in a separate post). The European countries are trying to find money for their own stimulus package.
Well, if there's no external buyers, guess who's going to buy all the Tbills? he he. The only big buyer left is the FEDs. They print money and buy all these T-bills.
The result, a huge excess of money supply that goes into the system. This will cause a war between deflationary pressure and inflationary pressure. There's only one possibly winner--> Inflation!
Since the 80s, the FED has been using the weapon called "throwing money at the problem". They have succeeded a few times, up till now. If you keep throwing money at the problem, sooner or later, the money you threw becomes your new problem. But the FED don't have to worry about it now. Their primary task now is to reverse deflation and they are doing everything they can to just achieve that. It's a very delicate balance however. It looks very likely they will over do it. Let's wait and see.
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