It is clear now that fiscal stimulus has not engendered a V-recovery and deflation is here in spades as money velocity and quantity plummet. Bankruptcies, defaults, and deleveraging are destroying money at an historic pace, perhaps as much as $12 trillion USD in the past 18 months, crashing prices for houses, oil, flat panel televisions, and falloff in purchases of labor, food, and clothing. Price cuts for non-commodities have been moderated as corporate managers cling to what little pricing power they have since they're unwilling to crash their wages. As our economy unwinds, we stare out the back window wondering what we can grow for food, and wonder what happened to Ben Bernanke's helicopter
When excess capacity is pandemic, and when half the planet is still living in near poverty- why isn't economy activity booming? Well, it was, but then the Fed increased interest rates 18 times. 18, stealing cash for debt service and profit coverage, like reducing the oxygen in a room full of students building a human pyramid- and when a couple of them faltered, the whole thing started coming down.
So what's the solution that will rebuild the pyramid - just tell them to get up? No. Prop a couple of them up? No. The answer should be obvious: more oxygen, in concentrated form, the sooner the better - and a promise not to cut it off again.
So, where's the money? Where's the quantitative easing? Not token hundreds of billions. Trillions. Dollars. Without sterilization. The kind of money that will create - no, force - inflation. Unfortunately, there are still too many inflation hawks and scarcity paradigm acolytes in the mix, the chicken littles of our day.
It is clear this generational crisis needs serious action. Not so much to preserve the supply and demand that are being destroyed- those can be rebuilt fairly quickly, if demand returns. Rather, the rules of capitalism- rewarding risk and competition with reward- have been broken, and if not fixed the confidence and desire to play the game will be greatly diminished. And given the massive increase in global living standards the past 30 years, this would be a bad thing for human progress.
So, print money. It's an economic tool actually bestowed by the Constitution to Congress (who's outsourced it to the Fed). Buy Treasuries and oil with newly minted dollars. Sure, the price of imported commodities will skyrocket. Exchange rates will shift (though many countries are in our same boat). Long term interest rates will increase. But aren't these all necessary? When an hour of labor in the US costs many times what it costs in the developing world, shouldn't there be a shift? And when we're drowning in debt, who needs more?
Hyperinflation, you say? The US is not Zimbabwe - we have way more productive capacity and supply potential. So oil goes back to $120 and gas $4/gallon - we can telecommute while we build out solar and the smart grid. Food climbs - the government can stop paying farmers to not grow crops. Travel to China- the Olympics were last year. Meanwhile, shifting exchange rates help exporters and employment grows. Real labor prices and home prices recover, toxic assets become less toxic, and consumers start buying again- reviving the tattered export economies of China and Japan to offset devaluation of their dollars - and they start to take advantage of the affordability of a vacation in the USA.
As prices and utilization rise, payback on investment in new capacity improves, and economies of scale, technological substitution, competition, and specialization mitigate price increases. And investors see that inflation will rob them of deals, and come off the sidelines to invest in productive ventures sooner rather than later.
And then, Congress must act to keep Fed fund rates low - for a long time. The next time GDP approaches 4%, tell anyone who uses the word "overheated" to take their Philips curve and go home and plant their garden. Encourage global development, alternative energy development, cyberspace development, to alleviate your commutes, our sickness, and our ignorance.
Once money and velocity recover, what will happen to stock prices? They'll go up, along with all other assets, in dollar terms. What will be the big winners? Probably oil, although alternative solutions will eventually force much of it to rot in the ground. Probably gold, although productive assets that once can have confidence in without an assay or forensic accountant should increase in value more. Probably copper, although aluminum wires and wireless could create a major shift in consumption. Emcore (EMKR) is positioned as the arms dealer in the solar wars, Boeing (BA) the arms dealer in the travel wars, and Microsoft (MSFT) the arms dealer in the cyberspace wars - and is there a more optimistic view of the future than clean energy powering both real and virtual exploration?
Without having to pick the winners, if the government (and European Central Banks in the same predicament) just fuels the economy with enough money, equilibrium can be reached by the market without massive government intervention, and further damage to the rules of the game. And once we recover, more and more people are poised to enter the game, which is good for everyone.
So, Mr. Bernanke, please take off, and drop the cash as you've promised. Trillions, sir, trillions.