dw57

Deflation: The 800-Lb. Gorilla in the Room

so what tools does the FED and treasury have other than interest rates (which so far have been a non-factor) and spending money to fight deflation? once it starts, there is nothing else they can do is there?


On Jan 06 02:49 PM BS Detector wrote:

> "As a percentage of GDP, federal debt is roughly at the depths reached
> in the 1980s..."
>
> No. It's much worse than that.
>
> Refer to Economic Report of the President table B-79. As a percentage
> of GDP, the national debt has increased from it's post WWII low of
> 32.6% 1981 to 50% in 1987 to 60% in 1991 to about 68% today (higher
> really, based on a shrunken economy).
>
> "Summing up, deflation first, followed by inflation. Details on timing
> to be determined. Next question."
>
> Don't think so. The Fed and treasury have made it clear that deflation
> will be prevented by any means necessary. Significant inflation
> is likely, but not certain. Here's an example of why.
>
> The Fed is actively buying Treasuries and now agency securities,
> and has indicated a willingness to buy other types of debt, paying
> for them in new dollars. This should be inflationary, but in today's
> environment, it's counter-disinflationar... (same thing, just with
> a different starting point). This is just what the doctor ordered.
> In the future, as the economy comes back to life and private money
> creation returns, the excess Fed-created money that's buying debt
> should contribute to too-fast growth in the money supply -- unless
> the Fed exchanges the debt for money and takes that money out of
> circulation.
>
> Here's where the fun part starts. If the Fed has to sell securities
> to pull cash out of circulation, there will be more debt on the market,
> yields will tend to rise as buyers have more options, and interest
> rates would rise, which would slow the economy, reducing inflation.
> But the problem then is that we might not be able to grow the economy
> very quickly without inflation becoming a problem.
>
> There's a good answer, however. Suppose we gaze into a magic ball
> and find that the economy will stop contracting in 12 months and
> will really pick up speed in 24. The Fed could concentrate its debt
> purchases on those bonds that mature in 12-36 months. As long as
> the yield curve remains intact, interest rates across the board fall
> in response to the additional buying. And as the economy begins
> to grow, the Fed is repaid for the debt it has bought, and removes
> that money from circulation.
>
> A mechanism for money supply contraction is in place to counteract
> the private money supply growth that will occur as the economy recovers.
> And there is no negative impact on interest rates that would come
> from the Fed selling debt as the economy recovers.
>
> The Fed is essentially borrowing future money supply growth - which
> is desperately needed now - and then repaying it as the economy recovers.
> Short term impact on inflation? Positive. Long term impact on inflation?
> Zero. The trick comes in getting the timing right.
>
> Don't expect miracles along these lines. But at the same time, don't
> expect disaster. These people are not morons.