Guest Post: Janet Yellen Channels Ronald Reagan

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Served by Jesse of Le Café Américain

“You know, Paul, Reagan proved deficits don’t matter.” Dick Cheney to Paul O’Neill

The mainstream media is reporting that Fed governor Janet Yellen, a noted dove on inflation as Fed governors go, just told a gathering of bankers in Idaho that “deficits do not cause inflation” and summarily dismissed any concerns in that regard.

So, consulting the source material which is included just below, I am struggling to understand what she is saying, and to believe that she said it with a straight face, and was not just jawboning.

What Janet Yellen seems to be saying is:

First, that deficits do not matter unless they are ‘structural’ and not temporary. It does not matter how much, for example, we give to the banks. When the crisis is over, the deficits will remain, but will not grow larger, and will be offset by higher taxes, that will come from the improved economy.

Secondly, that developing countries have independent central banks that know how to and are willing to fight inflation, as opposed to the central banks of undeveloped countries where the government impedes their ability to fight inflation and to monetize the debt.

Thirdly, monetary inflation only occurs where excess demand for goods and services is generated. Until that point, unless there is this demand, increased money supply does not generate inflation. We might call this the reverse Laffer, in that it is a Demand side view of inflation that tends to discount the supply side completely.

One would not think that the US had recently seen the collapse of an enormous housing bubble, following the collapse of a large but less enormous stock bubble. Janet brushes this off faster than a stock strategist on CNBC.

Although she received her Ph.D. from Yale in 1971, she surely must have subsequently studied the stagflation of the 1970’s in the US, where demand remained relatively stable, but a supply shock on the oil side, together with the egregious monetary policy of a pliable Fed that had been accommodating Richard Nixon, finally triggered a rather nasty stagflation that the hairy-knuckled resolve of tall Paul Volcker was finally able to overcome.

Janet Yellen is greatly mistaken, but almost emblematic of the thinking in some circles that can see only the demand side of the equation, which is most common in a layperson relating to their common domestic experience. What is frightening in a way is that she is not some blogger out on the net, or a talking head for the extended infomercial that is financial reporting in the US, but is a Fed governor.

And she is no outlier. Her thinking underpins the basis for Bernanke’s strategy of packing the banks with liquidity, monetizing their assets, but maintaining control of that added liquidity by having the ability to attract bank reserves into the Fed where they can be managed through the ability to pay interest on those reserves.

Can the Sorcerer’s apprentices keep a steady hand on this latest monster from their laboratory? Every time they try this, something unexpected happen, and we go to the brink, to be rescued by another patch, another new experiment, designed to save us from the last one gone wrong.

Her arrogance toward ‘developing countries’ is absolutely appalling, and sure to come back to haunt her at some later date. If one looks at the performance of the dollar and its long term purchasing power under the Fed, it appears that Janet is a proud member of the subjective idealist school of behavioural economics. What we do not admit to be real cannot exist, and will not hurt us.

So, we can inflate our way to prosperity, provided that we control the perception of the results of our actions. Jigger the CPI so its no longer valid, suppress long term interest rates by buying the curve selectively and suppressing gold (See Gibson’s Paradox by Larry Summers), and coerce the world’s central banks through various means to support our monetary inflation step for step. After all, everything is relative. Until it is not.

OMG. Our entire financial system is based on the sufferance and good will of potential adversaries to do what is in our best interests because the fragility of our currency frightens them. And well they might be fearful, when they read this from Ms. Yellen, and see how many true believers in the omnipotence of the Fed take it seriously.

Large deficits don’t cause inflation: Fed’s Yellen
By Greg Robb
Jul 28, 2009, 1:06 p.m. EST

(MarketWatch – Washington) — Concern that the massive federal budget deficit will cause inflation is misplaced, said Janet Yellen, the president of the San Francisco Federal Reserve on Tuesday. Deficits don’t cause inflation, she said. Instead, the worry is that they might cause interest rates to rise. “Right now, private investment spending is extremely weak, so financing for the large federal deficits is readily available. But once private spending recovers, the competition for funds between the government and private sectors could drive interest rates up,” Yellen said in a speech to bankers in Idaho.

Jesse here. The relevant quote from Janet Yellen’s speech to the bankers in Idaho is excerpted below from the San Francisco Fed’s website.

Let me now address another issue that is garnering attention—inflation. This is a subject rife with contradiction. Almost without exception, my business contacts report downward pressure on wages and prices. At the same time, they tell me they worry that the United States is on the threshold of serious inflation. They see large federal budget deficits today and more looming on the horizon. They also note that the Fed has pumped up bank reserves and expanded its balance sheet to fund its financial support programs. They worry that this may amount to financing deficits with money creation. Surely, they say, these things will eventually have to lead to higher inflation.

I’ll begin with budget deficits. The gap in the federal budget for the current and the next fiscal years are projected to exceed $1 trillion, far larger than anything we’ve ever seen before. But a large part of these current deficits are temporary. A portion stems from the impact of the weak economy on the budget. In a recession, tax collections fall and spending on programs such as unemployment insurance rise automatically. A significant portion is due to the fiscal stimulus that has been put in place over the next few years to address the recession. Antirecessionary fiscal policy, in my view, is entirely appropriate. Since that stimulus is temporary by design, the resulting deficits will shrink as the stimulus phases out. But federal deficits will not disappear completely even when the economy has recovered and the stimulus program has phased out. On the contrary, these ongoing or “structural” deficits are anticipated to stretch indefinitely into the future and to escalate over time in a manner that ultimately is not sustainable. The long-term projected structural budget deficit mainly reflects the impact of an aging population and rapidly rising health-care costs on spending for federal entitlement programs, particularly Medicare and Medicaid.

Economists have known, worried, and warned the public about the damaging consequences of escalating long-term budget deficits in the United States for decades. It’s high time for our country to tackle the problem head-on. But the main concern with these deficits relates to productivity and living standards, and not high inflation. Large budget deficits do not cause high inflation automatically. In fact, since World War II, large deficits have been associated with high inflation only in developing countries. That’s because developing countries often have central banks that are under the sway of the government, which sometimes induces them to print money to finance government spending. The connection isn’t found in countries such as ours with advanced financial systems and independent central banks. Remember that, in the 1980s, the United States ran large deficits just as inflation was coming down. And Japan has had huge deficits through much of the past two decades, yet its problem is persistent deflation—precisely the opposite of inflation. The United States and most other industrialized countries have central banks with long traditions of independence and deep-seated support for keeping politics out of monetary policy. In those countries, the monetary authorities generally have stuck to their inflation objectives, even when governments ran large budget deficits.

In advanced countries, the problem isn’t that large deficits cause inflation. Rather it’s that they raise long-term interest rates, thereby crowding out private investment, which holds back advances in productivity and living standards. Right now, private investment spending is extremely weak, so financing for the large federal deficits is readily available. But once private spending recovers, the competition for funds between the government and private sectors could drive interest rates up. A decline in productivity growth is a serious problem—one we should strive to avoid—but it is not the same as inflation.

So what about the Fed’s unprecedented balance sheet expansion? Our strong steps to avert financial and economic meltdown have caused our assets to more than double, from under $900 billion at the start of the recession to over $2 trillion now. This expansion is largely financed by increases in excess reserves that banks deposit with us.

Now we come to the crux of the issue: Will this expansion of credit and bank reserves create high inflation? My answer is no. And the reason again is because of current economic conditions. Monetary policy fosters inflation when it loosens the stance of policy enough to create excess demand for goods and services. Right now, we have exactly the opposite—an excess supply of goods and services. We need more demand—not less—to offset slack in labor and product markets. We have seen a noticeable slowdown in wage growth and reports of wage cuts have become increasingly prevalent. Businesses are cutting prices to boost sales. As a result, core inflation—a measure that excludes volatile food and energy prices—has drifted below 2 percent, a level that I and most of my colleagues consider consistent with price stability. With unemployment already substantial and likely to rise further, and industrial capacity utilization at record low levels, downward pressure on wages and prices isn’t likely to go away soon. I expect core inflation to remain below 2 percent for several more years.

Of course, the economy will eventually recover and we will need to withdraw monetary accommodation. If we were to fail to do so, we would indeed have higher inflation. The Fed is keenly aware of this. We have the tools to tighten policy when the time is right and we have the will to use them. First, many of our emergency programs are already tapering off as market conditions improve. Second, many of the assets that we have accumulated during the crisis—such as Treasury and mortgage-backed agency securities—have ready markets and can be easily sold. Finally, the Fed can push up the federal funds rate and tighten policy by raising the rate of interest paid to banks on the reserves they deposit with us—authority granted by Congress last year. An increase in the interest rate on reserves will induce banks to lend money to us rather than to other banks, thereby pushing up rates in the interbank market and, by extension, other interest rates throughout the economy. This is an important tool because, even if the economy rebounds nicely, the credit crunch might not be fully behind us and some financial markets might still need Fed support. This tool will enable us to tighten credit conditions even if we maintain a large balance sheet for a time. The experience of central banks in Europe, Japan, and Canada suggests that this approach can be effective.

Full Text of Janet Yellen’s Speech to the Idaho Bankers here.

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  1. Ina Pickle

    Inflation may have to do with supply and demand, but hyperinflation is purely a creature of monetary policy. Print too much money and you destroy the value of it. We're working on getting there VERY fast.

    Where are the sensible people?

  2. But What do I Know?

    "Second, many of the assets that we have accumulated during the crisis—such as Treasury and mortgage-backed agency securities—have ready markets and can be easily sold."

    Sold to whom? Doesn't the Fed realize they are the Last Buyer–the bagholder? As soon as they appear to be ready to sell, their prices will drop and rates will shoot skyward (just as rates dropped after it became obvious they announced they would buy–and have done nothing but go up ever since they started.) The fabled liquidity of the Treasury market will not withstand a sale in size by the Federal Reserve at these prices! Ditto but even more emphatically for the MBS.

    The Fed doesn't realize (or want to admit) that there is no going back. As for having the "will to use [tightening policies]" I seriously doubt it. Everyone admires Volcker, McChesney, and Eckles, but no one wants to be them.

  3. Jesse

    I am now convinced she and many of her staffers believe this latest twist on their engineering of the economy.

    And when this one hits the wall, well, we'll just try something else.

  4. Anonymous

    I have been saying this for years. Janet Yellen is THE DOVISH central bank outside of Zimbabwe. You want to turn US into Zimbabwe, make her the central bank chair. Not only has she not learnt from the bubbles that she helped cause, she is still advocating silly policies.

  5. Scott

    "We need more demand—not less—to offset slack in labor and product markets."

    US consumers with overwhelming debts can't be a source for additional demand. Yellen has no answer as to the source of additional demand; assumes that it will magically appear.

  6. Richard

    You guys need to read up on Minsky. You sound like the crew back in 1931 arguing what a disaster it would be for the United States to go off the Gold Standard. Well, Hoover kept us on the Gold Standard, but I think you could say that what ensued was the worst man ade disaster outside of war as deflationary cycle spun down, the economy and banks cratered, and the United States approached a revolutionary situation with 25% unemployment and its then substantial farm population bankruptcy. I agree the CPI is flawed, but now it is flawed in failing to reveal the current deflation. All those reserves are simply, and only partially, off-setting the 20 trillion dollars of wealth contraction that has taken place since 2007. Wages and incomes, as well as asset prices, continue to fall. Demand, after the cliff dive is flat or continuing a slide path down when dealing with discretionary expenses. Except for health care, where the players still have pricing power, contraction and deflation is the order of the day.

  7. redst8r

    Ms. Yellen postulates that the Fed will fulfill its monetary policy responsibilities and control inflation. She ignores the congressional mandate for the Fed to provide BOTH monetary stability AND full employment. Never mind that these are intrinsically divergent goals. My fear is that the Fed will talk a good game on monetary stability but is actually focusing on using monetary policy to provide full employment so as to keep Congress at bay.

    And why do these central bankers stipulate that 2% inflation is a stable monetary policy? The dollar losing 50% of its value every 25 years is only stability if marked on a curve like they must have done at Yale.

  8. Richard

    Read Mish Shedlock guys. He is a member of your Hayekian/Libertarian faith. Treasuries, deflation adjusted, may be returning 9%, the most since the Continental Congress. Treasuries preserve wealth (especially TIPS), a priceless commodity right now.

    Yellen points out in her speech the same issues that Roubini has pointed out, that with the consumer still retrenching and trying to save and deleverage at the same time, and with Foreigners still locked into a model where the U.S. is everyone's export market, the engines for growth are mostly bounces off the floor, which means that there is serious risk of second, if shallower, dip next year. Which means more contraction of demand for goods, and more increase in the demand for dollars for the purpose of having capital and reserves for loan losses and to deleverage debt.

    Further, I don't blame the Federal reserve for the decline of the dollar, which after 15 years of running constant current account deficits growing to 6% of GDP in 2006, is as certain as the Sun rising in the East. It was our entire financial elite and business elite who constructed an economic model where production and employment would be outsourced to low income countries with goods and services imported back in for sale in the United States. For individual companies I guess it made great sense. But when they all do it the trade deficit becomes chronic and eventually unsustainable while the mass middle class market simply disappears as their jobs disappear.

  9. SplendidMarbles

    The deficits we are creating now will not be unwound with ease, instead, they will grow because they are structural. We are spending an ever-growing share of the federal budget on interest payments, and entitlement costs are set to go through the roof. In addition, the financial system's woes are not being resolved and the Fed's balance sheet will therefore stay bloated. This is inflationary because, as noted in the first piece, the supply of money is growing at unsustainable levels. We are headed for a prolonged and nasty bout of stagflation.

  10. Johan

    "Janet is a proud member of the subjective idealist school of behavioural economics. What we do not admit to be real cannot exist, and will not hurt us."


  11. Anonymous

    There are no wage pressures. Without which there is no inflation – there can't be too much money chasing too few goods without wage increases or job increases. We have neither.

  12. Edwardo

    Marvelous piece, Jessie.

    The deflation/inflation debate misses the picture, and references to Minsky aren't terribly helpful. The fact is that all across the spectrum there are massive crosscurrents of both deflation and inflation classically defined. The economic picture is distorted in ways that Minsky, as insightful as he was, would have found novel.

    Jessie and the boys don't need to read Minsky, Richard, but you might benefit from reading closely Von Mises. We are going to get hyper-inflation here in the U.S., and it's coming much sooner than some might imagine. Why? Something as elemental as a lack of confidence is all that's required, and ultimately the lack of it will manifest to a critical degree in our bond market.

    This will precipitate the need to, no ifs ands or buts, monetize like we've never monetized before. The Consumer confidence #s mean more than any other single statistic and they flat out stunk. We are on the road to serfdom and a currency devaluation is in the offing.

    Bank on it! No pun intended

  13. joebhed

    With all due respect I feel that neither Yves nor Janet are saying anything at all about the real problems of the economy, the financial system, and most especially, the money system.

    First, Yves focuses on Ms. Yellin's comment on the inflationary aspects of the deficits.
    I see no connection whatsoever between this deficit spending and my own definition of inflation, which is an over-supply of money chasing too few goods and services, the opposite of what we have now.
    That's why it's so easy for the Yellin-Bernanke team to claim to be managing our finances.
    Deficits only really relate to fiscal policies.

    Ms. Yellin eventually moves on to the real culprit relating to the potential for inflation, the creation of Trillions in new money(debts) to support the ability of the financial giants to make their debt-service payments. It's nothing more or less than that.
    But she glosses it over with the claim that she can reverse the near-Trillion in excess reserves, and the several Trillions in new loans/guarantees by raising interest rates, which is a total fool's errand.
    The only reason the economy is not in free-fall is because Benny let all that new money out at less-than-zero real interest rates.
    So, the talk about controlling inflation by raising interest rates must be challenged, not about its effects on inflation, but its effects on the real economy.
    ALL of the stimulus and expansionary efforts will be bygone, and for naught, making things worse.
    We will be back to square one.
    There will be no jobs.
    There will be inadequate capital
    to make the debt-service payments on BOTH the old gross toxic exotica, but also on the newfangled stuff spilling out of Benny's toolbox.
    Does anyone understand the money system?
    It is the money system that is insolvent.
    As Einstein said, we cannot fix this crap with more of the same of what broke it.
    A new money system.
    Think about THAT.

  14. Doc Merlin

    Is there such thing as a government bubble that can then burst? I mean beyond things like higher-ed which is a bubble thats already bursting.

  15. skippy

    The human bubble (aided by technology) seems to have reached another limit. Can the powers that be increase its elasticity one more time, probably, but for how long and what will happen when it does contract (equal and opposite reaction). Can they control the stored energy sufficiently enough from creating a singularity where it's gravity precludes any escape. I fear not, as they invested in life long beliefs to climb the ladder of success in their respective houses of thought, prisoners of their own minds, geographically and ideologically.

    The vast majority of the human population is woefully ignorant to the very mechanisms by which the world conducts its daily business, whilst they either attempt to survive or chase the dream of the good life. Nothing more than Cannon Fodder for those of the Grand Design, fodder that have no say in the reality they live out.

    For those of us that toy with it's nuts and bolts we can only applaud or boo to the actors and their ability's upon the stage. Critics whom, to the masses regularly ignore in their blind faith, need to hope for continuation of imprinted reality's.

    I humbly summit, that as long as humanity's number one rule by which it judges its expansionist activity's ie: "Viability" the economic sort, we will all suffer. To judge our deeds and actions on the economic viability model (an incredibly narrow view point in such an reactive environment, [our world]) will only hasten our demise. The laws of the Universe are pushing back on us, but we continue to invent means by which we can usurp their function ie: mono-theocracy the belief that we come first in all matters regardless of future out comes for all living things as our creator empowered us, in-order to defeat the evil in his universal poker match, barf. Technology that assist in creation of new technology exponentially which then is set lose upon this world and whose effects are judged by economic viability in the short term only Q/Q Y/Y.

    Were on the cusp of a possible age of great discovery, but all our efforts are to reestablish a consumerist/credit bubble to which no one has an end game save a bigger one, barf.

    Skippy…untill someone bulldogs the herd and points out that the castle/temple of their worship (idealogical, political or other wise) is really an abattoir/slaughterhouse to the prospective generations of diverse life upon this little world, we will feel the pain, watch the life of this world extinguish, less really is more.

    ps verification is EMYSATIN rofl!

  16. Hugh

    My impression of Yellen is that she is a very conventional economic thinker faced with an unconventional situation. She views it the only way she can, in conventional terms, and the result is a dreadful mishmash of ideas. Looking at her whole speech, she thinks the economy is poised to resume growing, but almost all of her indicators remain strongly negative. So you might wonder where this recovery is going to come from. Yellen says rather vaguely that it will come from the business cycle. Good luck with that. If people are afraid of losing their jobs and are trying to stabilize their finances and manage their debt, they are likely going to delay as long as possible many of the purchases that Yellen thinks will turn the economy around.

    As for inflation, the subject of this post, she is so focused on it not being a problem that she virtually ignores that the reason for this, deflation, is even more of a concern than inflation would be.

    She blows off homeowners almost entirely and doesn't address any of the other fundamental and unresolved problems our financial system and economy confront. She never mentions once all the crap that is still on bank books. Apparently the Fed as systemic risk regulator and the new consumer agency will address all problems going forward. I doubt if anyone here believes that. She never does say how an institution like the Fed which missed an $8 trillion housing bubble and everything that led up to the meltdown and its aftermath is likely to catch what he never caught before.

    She does mention CRE but just says that banks should have been warned by a 2006 advisory and should not have gotten in so deep. I mean could anything be more useless? Well yes, because Yellen says the Giethner's stillborn projects the PPIP and TALF will be able to bail commercial real estate out. I'm dying to see how that is going to work out. And then she finishes by suggesting that banks could always run some stress tests, because as we all know stress tests are good for, well I'm not sure what they are good for, but perhaps it will serve as a distraction as banks continue to go kerblooey.

    Yellen has no answers, but if you have a problem, she has a program she can refer you too. It is all rather like someone drowning in a lake. Yellen stands on the shore. The drowning person yells to be thrown a line or a life preserver. Yellen refers them to park rules on swimming. The person yells again. Yellen reassures them saying that if the person has trouble swimming the local Y offers swimming classes. And to show that she really does understand she promises to push to have the area posted as a no-swim zone. Having fulfilled her duty, she then wanders off.

  17. Greg Hall

    Deficits don't cause inflation. Printing too much money does.;-)

    Just like, "Guns don't kill…people do."

  18. Doc Holiday

    Bloody great post dude and what I find most interesting is that Yellen and Pelosi look and act like twins, although I'm not sure what that means (right now).

    Back on track >>>

    Re: we can inflate our way to prosperity, provided that we control the perception of the results of our actions.

    Yes, yes, yes, that was great, because, obviously this old bag, along with all the other stuffed scumbags that float about as Fed members are either highly un-informed, retarded or part of some nepotism conspiracy fantasy — nonetheless, after all the name calling, it is women and Fed members like her that did a heck of a job during The Bush reign of terror. Essentially all these same people that helped bring about systemic economic chaos, are the same bags that have the same jobs today — and the only thing that changed was the loss of a few Trillion bucks ….

    FD: The author has once again decided to post this and not edit the contents or delete stupid shit or mistakes and after all, we really dont have time for this blogging anymore, now do we?

  19. Hugh

    The point about a liquidity trap is that it makes liquidity illiquid. So vast sums of money are out there but as long as they aren't doing anything they will neither cause inflation nor mop up all the excess supply in the economy.

    Now some of this money is leaking out and some firms like Goldman are using it to re-engage in speculation in commodities and stocks. Some of it was used to finance mergers and acquisitions principally in BigPharma and, of course, in the banking industry itself. Where it is not going is into the real economy where it could reduce the supply overhang and only after that spark inflation. Now this is unlikely to occur because banks need this money to offset all the crap that is on their books (or that they have temporarily transferred to the Fed) and that all the cooking of them has not removed.

    What we have is a Catch-22 or maybe it's a Mexican standoff. At some point, this money has to go back to the Fed, FDIC, and Treasury but if it does, we are back to where we were with insolvent banks. So the money has to stay with the banks, but at the same time it can't stay with them forever.

    It is a stupid, futile strategy but Geithner and Summers are hoping that if they can keep this all in suspension long enough then the banks will find other avenues, i.e. speculation and soaking the public to restore their balance sheets to some kind of something that could be mistaken for solvency if no one is looking too closely. As this is going on, the Fed et al can gradually feed the crap they have taken on to their balance sheets back to the banks in exchange for the money the banks got from it. As I said, this won't work. The banks are way too insolvent, and the economy is far too sick to be leeched off of like this. As a result, the next year is going to be very interesting in a Chinese curse sort of way.

  20. Jesse

    When it comes to inflation and its causes remember the three L's:

    Lags, Lags, Lags.

    In fact that might be a good thing to remember about a variety of economic cause and effect.

  21. Anonymous

    Did I miss something?

    This banking system is based on inflation, putting it in reverse arrives at the brick wall faster than the course it's on now…..a brick wall.

    There is no escaping as the mathematical consequences (debt) play out into a reset.

  22. LeeAnne

    '"You know, Paul, Reagan proved deficits don't matter." Dick Cheney to Paul O'Neill'

    That remark says it all: no moral compass + no common sense + political talent = pure evil.

  23. Greg

    I dont think she's as wrong as some suggest here. I think she, like all the monetary gurus right now, has a misguided idea about capitalizing the consumers,the demand side, via the banks.

    It seems stupid to me that if you want consumers to have more money to demand more things to reinflate your economy, dont try to get it to them via a third party mediator (a bank), just pay them more.

    Increasing wages will reverse this cycle.

  24. Brick

    There were one of two good points about wages but like others I would take issue with some points. Firstly that treasury assets have ready markets seems like wishful thinking. Concern with deficits relating to productivity and living standards is right but she does not join the dots up to think about the implications for tax receipts. Stating that Japan has had huge deficits misses the point that the US deficits relative to the size of the market are on a different scale.
    I also think she has her head in the clouds over treasury debt and compound interest that will be applied. Tax receipts will not grow quickly enough to service the interest let alone the debt without raising taxes. Essentially she is saying anything outside of the US is unimportant, the price demand relationship cannot have elasticity, the dollar will always be strong, the FED does not need to worry about Treasury actions and there will be no political backlash from raising taxes.

  25. Jesse

    I am slightly astounded at how many miss the points of the essay presented.

    We tried reinflation without reform after the tech bubble collapse, which itself was a response to a prior crisis.

    What was produced was the housing bubble, and a much worse credit crisis.

    And so now we go back to the well again, sloughing off past results as if they had not occurred, masking the sterility of the plan with misgiven statistics, shibboleth quotes, and theoretical rubbish.

    What do they say about a people who keep doing the same thing, expecting a different and better outcome each time?

    Janet's point people is that now they have the tools to prevent another bubble, and know more.

    Good luck on try number three (or four or five). Back to the brink.

  26. Siggy

    Jesse & Yves,

    Delightful post and the comments are very instructive. It is my view that Madam Yellin is incompetent! Most of the comments are dither! My view is that deficits require borrowing. The ability to carry debt requires the ability to repay it. A country that borrows more than it can repay will be forced to default! Now what percentage of debt can be supported by GDP? Also, is the quantity supply of money/credit large enough to accomodate the amount we want to buy?

    In my view deflation may not be such a bad idea and consequence. At present we are a nation of some 300 plus million. If we lost 100 million, we might be better able to manage our entitlement programs, or would the remaining 200 million all be on the dole? Increasingly I am of the view that defaltion and faster that it occurs is the better mid and long term choice. What we are doing now merely delays what must ultimately be done. And what must be done is to liquidate all of the debt that was issued to parties who could not perform! Keeping subprime borrowers in contracts that they cannot satisfy is stupid beyong my comprehension. Take the loan and cut the face amount to 80% of the current market value, the borrower can't meet that fixed rate payment, evict them and sell the home. As to CDS, what are the specific terms of the contract. If its a pure cash settlement that can't be met, void the contract and beef oup the law schools.

    Enough rant, we are becoming a banana republic withou bananas!

  27. Anonymous

    Great post and commentary by Jesse.

    The Fed has become a highly politicized entity ever since Greenspan. They are firmly in a policy stance of debt-based serial bubble blowing at least since LTCM. Every time Wall Street speculation caused the big financial institutions losses the Fed has blown a new asset bubble. Each bubble has become larger than the previous one and the only thing growing rapidly is total debt. During the last bubble cycle debt grew 5 times faster than GDP. Today total debt/GDP is 375% and growing.

    Each time the Fed blew a bubble they came up with economic mumbo-jumbo like savings glut and now output gap to justify their actions. But the reality is that their actions exclusively benefit the "too big to fail" Wall Street banks and penalize middle class taxpayers.

    Instead of going around in circles with all the "mathematically structured" economic dogmas – why is there no debate on simple fundamental questions – a) should we have a sound currency? b) what are the pros & cons of currency debasement?

    To all the science-based economists I have a simple question. Can you point me to prior instances in history where there has been a deflating economy along with currency debasement? What were the outcomes?


  28. Alfred

    The question is not will we get either inflation or deflation, but rather will the Fed be in a position to prevent whatever it is we have to cope with. If its going to be ugly one way or the other will the Fed be able to lean against it? Their actions clearly have not been effective on credit markets and the economy. I don't see anything on the horizon that changes that. The best they can shoot for is a sluggish economy with high unemployment for quite some time. Something elected officials sure won't like. It is only under this scenario that Yellen's echoing of Reagan makes sense. After the deflation scare has past the most likely outcome of all this is a repeat of the seventies with high inflation and low growth and numerous recessions along the way.

  29. moslof

    One percent of professional investors ( think the risk of deflation is high!
    Just think how wrong their current stance is as we are in the beginning of the worst credit deflation collapse ever. Once gold collapses and the dollar goes to the moon then they will finally go to all cash when the time is just right to buy gold.
    Then the search for the guilty will begin.

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