Best of the Week
Most Popular
1. Dollargeddon - Gold Price to Soar Above $6,000 - P_Radomski_CFA
2.Is Gold Price On Verge Of A Bottom, See For Yourself - Chris_Vermeulen
3.Dow Stock Market Trend Forecast 2018 - Nadeem_Walayat
4.Gold Price to Plunge Below $1000 - Key Factors for Gold & Silver Investors - P_Radomski_CFA
5.Why The Uranium Price Must Go Up - Richard_Mills
6.Dow Stock Market Trend Forecast 2018 - Video - Nadeem_Walayat
7.Jim Rogers on Gold, Silver, Bitcoin and Blockchain’s “Spectacular Future” - GoldCore
8.More Signs That the Stock Market Will Rally Until 2019 - Troy_Bombardia
9.It's Time for A New Economic Strategy in Turkey - Steve_H_Hanke
10.Fiat Currency Inflation, And Collapse Insurance - Raymond_Matison
Last 7 days
Gold Price Seasonal Trend Analysis - Video - 20th Sep 18
The Stealth Reason Why the Stock Market Keeps On Rising - 20th Sep 18
Sheffield School Applications Crisis Eased by New Secondary Schools Places - 20th Sep 18
Precious Metals Sector: It’s 2013 All Over Again - 19th Sep 18
US Dollar Head & Shoulders Triggered. What's Next? - 19th Sep 18
Prepare for the Stock Market’s Volatility to Increase - 19th Sep 18
The Beginning of the End of the Dollar - 19th Sep 18
Land Rover Discovery Sport 'Approved Used' Bad Paint Job - Inchcape Chester - 19th Sep 18
Are Technology and FANG Stocks Bottoming? - 18th Sep 18
Predictive Trading Model Suggests Falling Stock Prices During US Elections - 18th Sep 18
Lehman Brothers Financial Collapse - Ten Years Later - 18th Sep 18
Financial Crisis Markets Reality Check Now in Progress - 18th Sep 18
Gold’s Ultimate Confirmation - 18th Sep 18
Omanization: a 20-year Process to Fight Volatile Oil Prices  - 18th Sep 18
Sheffield Best Secondary Schools Rankings and Trend Trajectory for Applications 2018 - 18th Sep 18
Gold / US Dollar Inverse Correlation - 17th Sep 18
The Apple Story - Trump Tariffs Penalize US Multinationals - 17th Sep 18
Wall Street Created Financial Crash Catastrophe Ten Years Later - 17th Sep 18
Trade Wars Are Going To Crash This Stock Market - 17th Sep 18
Why Is Apple Giving This Tiny Stock A $900 Million Opportunity? - 17th Sep 18
Financial Markets Macro/Micro View: Waves and Cycles - 17th Sep 18
Stock Market Bulls Prevail – for Now! - 17th Sep 18
GBPUSD Set to Explode Higher - 17th Sep 18
The China Threat - Global Crisis Hot Spots & Pressure Points - 17th Sep 18 - Jim_Willie_CB
Silver's Relationship with Gold Reaching Historical Extremes - 16th Sep 18
Emerging Markets to Follow and Those to Avoid - 16th Sep 18
Investing - Look at the Facts to Find the Truth - 16th Sep 18
Gold Stocks Forced Capitulation - 15th Sep 18
Hindenburg Omen & Consumer Confidence: More Signs of Stock Market Trouble in 2019 - 15th Sep 18
Trading The Global Future - Bad Consequences - 15th Sep 18
Central Banks Have Gone Rogue, Putting Us All at Risk - 15th Sep 18
Gold Price Seasonal Trend Analysis - 14th Sep 18
Growing Number of Small Businesses Opening – and Closing – In the UK - 14th Sep 18
Gold Price Trend Analysis - Video - 14th Sep 18
Esports Is Exploding—Here’s 3 Best Stocks to Profit From - 13th Sep 18
The Four Steel Men Behind Trump’s Trade War - 13th Sep 18
How Trump Tariffs Could Double America’s Trade Losses - 13th Sep 18
Next Financial Crisis Is Already Here! John Lewis 99% Profits CRASH - Retail Sector Collapse - 13th Sep 18
Trading Cryptocurrencies: To Win, You Must Know Where You're Wrong - 13th Sep 18
Gold, Silver, and USD Index - Three Important “Nothings” - 13th Sep 18
Precious Metals Sector On a Long-term SELL Signal - 13th Sep 18
Does Gambling Regulation Work - A Case Study - 13th Sep 18
The Ritual Burial of the US Constitution - 12th Sep 18
Stock Market Final Probe Higher ... Then the PANIC! - 12th Sep 18
Gold Nuggets And Silver Bullets - 12th Sep 18
Bitcoin Trading - SEC Strikes Again - 12th Sep 18

Market Oracle FREE Newsletter

Trading Any Market

The Fed is Steering U.S. Economy into Deflation 

Economics / Deflation Jul 15, 2010 - 04:47 AM GMT

By: Mike_Whitney

Economics

Best Financial Markets Analysis ArticleThe Fed is steering the economy into deflation. It's a political calculation that will keep unemployment high, increase excess capacity, and deepen the recession. C.P.I. continues to fall, bank lending is down 4 percent year-over-year, housing prices are slipping, business investment is off, and consumer credit continues to shrink.  On Wednesday, the Commerce Dept reported that retail sales fell 0.5 percent, more than analysts expected. This is the second drop in retail purchases in the last two months signaling weakness in consumer demand.


The slowdown hit nearly every sector including auto sales, furniture, computers, building materials, clothing and sporting goods. There was also bad news on housing on Wednesday. The Mortgage Brokers' Association reported that loans purchase applications fell to a 13-year low last week, and refinancing contracts continued to slide despite record-low mortgage rates. The housing depression is ongoing and is adding to deflationary pressures in the broader economy.

Federal Reserve chairman Ben Bernanke claims the recovery is still "on track", but more than 60% of last quarter's GDP can be attributed to fiscal stimulus and inventory adjustments. That means demand will drop as the stimulus runs out and restocking ends. Then the economy will have to stand on its own.  Expect negative growth by the forth quarter 2010 or first quarter 2011. 
 
There are things the Fed can do to fight deflation.  Bernanke can resume his bond purchasing program (quantitative easing), this time buying US Treasuries to increase inflation expectations and add to the money supply. Or the Fed can purchase corporate bonds to increase business investment and hiring. Even a bit of jawboning would help; like issuing a statement saying that the "extended period" for zero rates will last for at least two years or more. That will assure businesses that their long-term plans will not  disrupted by unforeseen rate hikes. Instead, the Fed chooses to do nothing. 

 Last week, Richmond Fed President Jeffrey Lacker summed up the Fed's position saying that any consideration of further monetary easing "is very far away....It would take a very substantial, unanticipated adverse shock" for the Fed to resume its QE program. This appears to be the prevailing view at the Fed; wait-and-see while the economy tanks and the GOP takes congress in a landslide in November. The Fed is essentially a political institution. 

 Here's a thought from economist Bradford DeLong who warned early-on that the Obama stimulus was too small to sustain a recovery and reverse the output gap and soaring unemployment:

  "The Federal Reserve has already increased the monetary base to a previously unimaginable extent and has doubled its balance sheet to $2 trillion. Even though there is good reason to think that further increases in the money stock alone will have little effect on the economy--that conventional monetary policy is tapped out--the Federal Reserve could always further increase its balance sheet to $3 trillion or $4 trillion. Such quantitative easing would be highly likely to eliminate fears of possible deflation or other lower tail risks and act as a powerful spur to investment. Such an enormous expansion of the balance sheet would produce a qualitative improvement in the assets held by the private sector, which would greatly reduce risk spreads and make funding available to American companies on much more attractive terms." ("A Keynesian voice crying in the wilderness", Bradford deLong, Grasping Reality with Both Hands)
 

Bernanke has more arrows in his quiver, but he chooses not to use them.

The stock market is sending mixed signals, but volatility on low volume tells us nothing about the state of the so-called "recovery". It's just noise.  Personal consumption expenditures (PCE) and housing typically lead the way out of recession, and both are still showing little sign of improvement. Housing is headed for a double dip while personal spending is down. Consumers face a long period of deleveraging and retrenchment ahead. Consumer demand will likely be weak for a decade or more without wage growth and a better jobs market, neither of which are forthcoming. 

This is from the IMF's "World Economic Outlook" report:

"Inflation pressures are expected to remain subdued in advanced economies. The still-low levels of capacity utilization and well anchored inflation expectations should contain inflation pressures in advanced economies, where headline inflation is expected to remain around 1¼–1½ percent in 2010 and 2011. In a number of advanced economies, the risks of deflation remain pertinent in light of the relatively weak outlook for growth and the persistence of considerable economic slack."

Inflation is not a problem. The economy is in a depression. The historic low yields on Treasuries indicate an appetite for high-quality liquid assets. The Fed should satisfy that need by issuing more debt, selling more Treasuries, increasing inflation expectations. That would increase spending and pull the economy out of the doldrums. Instead, Bernanke preaches austerity, because the real objective is political--dismantling Social Security and other popular programs. Bernanke (a Republican) has aligned himself with the GOP and Wall Street who seek to bury Obama in the midterms by trashing the economy, keeping unemployment high, and increasing the prospect of another vicious downturn.

Meanwhile, deflation looms larger by the day. Here's a clip from a recent article by John H. Makin in the Wall Street Journal:
 
  "U.S. year-over-year core inflation has dropped to 0.9 percent--its lowest level in forty-four years. The six-month annualized core consumer price index inflation level has dropped even closer to zero, at 0.4 percent. Europe's year-over-year core inflation rate has fallen to 0.8 percent--the lowest level ever reported in the series that began in 1991....As commodity prices slip, inflation will become deflation globally in short order....By later this year, persistent excess capacity will probably create actual deflation in the United States and Europe....

The G20's shift toward rapid, global fiscal consolidation--a halving of deficits by 2013--threatens a public sector, Keynesian "paradox of thrift" whereby because all governments are simultaneously tightening fiscal policy, growth is cut so much that revenues collapse and budget deficits actually rise. The underlying hope or expectation that easier money, a weaker currency, and higher exports can somehow compensate for the negative impact on growth from rapid, global fiscal consolidation cannot be realized everywhere at once. The combination of tighter fiscal policy, easy money, and a weaker currency, which can work for a small open economy, cannot work for the global economy." ("The Rising threat of deflation", John H. Makin, Wall Street Journal)

Obama intends to double exports within the next decade. Every other nation has the exact same plan. They'd rather weaken their own currencies and starve workers than raise salaries and fund government work programs. Class warfare takes precedent over productivity, a healthy economy or even national solvency. Contempt for workers is the religion of elites. 

  When wages increase, spending  increases, too. But wages cannot increase without investment, so investment is key to the process. The problem is that businesses are hoarding because consumers are deleveraging and repairing their balance sheets. So sales are off and consumption levels do not warrant further expansion, additional machinery, employees or products. The economy is in a holding-pattern. True, the markets have improved and stocks have bounced off the bottom. But the real economy has reached a high-water mark beyond which it cannot move without extra stimulus.

The deficit hawks, the Bluedogs, the inflationistas and the Fed have taken us to the brink. We now face a general decline in wages and prices and the real prospect of a downward spiral. Digging out will not be easy.

By Mike Whitney

Email: fergiewhitney@msn.com

Mike is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective.

© 2010 Copyright Mike Whitney - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Mike Whitney Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules