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Sreeni
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In information technology industry >15 years. After the dot com bust, stopped investing, and again started in investing since 2007.
  • Fed's Printing Press , Great Recession and Inflation. 0 comments
    Apr 24, 2009 2:35 PM | about stocks: TWM, SDS

    During the past couple of months each of top guys in Gov announced $1T programs to get the economy out of the Great Recession. If we look back to the past, every time US is met with a recession one or the other foreign countries played a major role in containing the inflation. Since the 1970's and 1980's Japan took our paper money gave the cars and electronics. Since the 1980's and 1990's middle east took our paper money and gave the cheap oil. Since 1990's and 2000' China gave pretty much many things cheaply and took the paper money, India gave computer services, Korea and Taiwan gave the electronics etc, and Mexico gave the cheap labor. Like wise many foreign countries gave lots of goods and services, this can be watched as reflected in the trade gap. It is going to be interesting to watch this time which country is ready to take our paper money and continue giving the goods and services. Where and when does this imbalance end, with trillions of hole in the Social Security payments there seems no end in sight to the money printing. So the question is what happens when it reaches a point where the holders of our paper want some thing tangible like gold, land and not our currency ? (If we ever reach that point I assume our currency will not have any power).

    To me it seems that the options are

    1. Tax the tax payer to death, (any amount of cuts in Govt spending can't fill the massive hole)
    2. Sell parts of the country
    3. Another break through innovation. In fact these innovations made US rich in the first place(like Telephone, TV, Air Plane, Computer   and Internet, etc)
    4. Go to war with the country that does not bend to our terms

    In my opinion option 1 , 2 and 3 are less likely.

    Inflation

    The only thing that is saving our country in this rough economy looks like is our currency, no matter how much we print it, there still seems to be demand. On the flip side, the inflation might be muted, as much of the printed money goes to the rich guys and still the poor remains poor. If that is the case the printed money takes long time to reach the masses to ignite the inflation, but where did the printed money go ? and what are the effects of it ? In fact it will appear as in one form or other on the wall street, it the excess liquidity from Y2K recession that fueled the massive rally from 2003-2008 that lead to the Great Recession of today, so we can expect another Great Recession II in a couple of years from now. In the mean time people can take advantage of the wobbly wall street if they have a strong stomach, by trading TWM, SDS and the like.

    Why we have to print

    Even though our country is Rich, why do we have to print currency to solve the problems ? It is a combination of fiscal irresponsibility and strong currency. It is evident that even after all these problems US $ is the strongest guy in town, and for policy makers it is the easiest and shortest path to solve the problems in the near term, if there are any side effects he does not have to worry about it as the guy who is going to take the office after him will have to deal with it, this way the fiscal responsibility is getting postponed into the future indefinitely. As the developing nations are developing, the developed nations are sliding to undeveloped ?

    Great Depression Vs Great Recession
    Many economists and pundits tell stories about why 1929-1932 recession became a Great Depression, and what are the conditions or gov policy actions that are responsible for the Great Depression. But I see some things little differently, since 1932 we did not have had a recession of that magnitude, the recent one is the closet one. So it has been close to 80 years, since we had a recession of the magnitude of Depression, So I guess it is their austerity we reaped the benefits of, who knows. So with the current policy response can any body guarantee at least 40 years free of recessions whose severity is close the current recession, in other words can we have 40 years before another recession of this magnitude hits us ? It is always dead easy to look back and see the mistakes made e.g. it is easy to look at the chart of an index like DOW 30 or S&P 500 and tell how to make the maximum profit (buy low and sell high ). But the hardest thing is how to solve the current problems or when to buy stocks, in other words the current policy actions are merely do the best and hope for the best and make history for the future generations to learn, that's all, there is no guarantee that will work, it may work or it might not. Even if we do the exact same policy actions that we did back during the Great Depression, I think Great Depression is NOT guaranteed, there will be a good chance. The main problem with economics is that there is very limited measure of success or failure for an action. In science you can do an experiment in a lab and once the formula is tested well in a contained environment then the success can be replicated by applying it to the masses. In other words, eg, to find a better pain medicine you spend a lot of time in the lab coming up with the formula and let it go through clinical trials etc and once successful that will be applied to the masses, barring few side effects, that medicine will work no matter what, it works now, it works after 100 years, it works in US, it works in UK etc. But the same can not be said with economics. In economics the most notable one is tinkering with the Fed Funds rate. If we are in recession reduce the lending rate, if economy is over heating increase the lending rate.



    Disclosure: Trading(in and out) TWM, SDS since couple of months.

    Stocks: TWM, SDS
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