Market crash: are we there yet ?

[wind_magic]

Originally Posted by sailhog

Get out of the jam by smoking crack cocaine. That's what I'm doing. BAck on the pipe. That's right. BAck on the pipe. Uh-huh! That's right! BAck on the pipe! Struttin' round the house like a rooooooooster! Back on the pipe! Back on the pipe! BACK ON THE PIPE!

Here are some comments made by Treasury Secretary Ben S. Bernanke before the National Economists Club on 21 Nov 2002, before we started having all of these troubles with defaults, etc. You don't have to read between the lines on this one, he says exactly what his plan is should deflation take hold. He's going to print money. And that's exactly what he's been doing.

What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior). Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. Alternatively, the Fed could find other ways of injecting money into the system--for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities. Each method of adding money to the economy has advantages and drawbacks, both technical and economic. One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies. Thus, as I have stressed already, prevention of deflation remains preferable to having to cure it. If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.

What would Bernanke do if faced with a severe deflation ? I mean the man tells you exactly what he'd do, we don't have to guess. What would happen to gold as a result ? Well he tells us that too.

Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934.17 The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt's devaluation.

What about printing money and just stuffing it into people's pockets at the expense of savers, effectively devaluing the currency and spurring on growth by encouraging inflation of prices ? What about letting people experience a little pain to spur production and actually pay off debts ? No, Bernanke weighs in on that one too ... apparently paying off debts is for sissies when you can just give them money and pay their debts for them.

Each of the policy options I have discussed so far involves the Fed's acting on its own. In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money.

His conclusion is obvious enough ...

Conclusion: Sustained deflation can be highly destructive to a modern economy and should be strongly resisted. Fortunately, for the foreseeable future, the chances of a serious deflation in the United States appear remote indeed, in large part because of our economy's underlying strengths but also because of the determination of the Federal Reserve and other U.S. policymakers to act preemptively against deflationary pressures. Moreover, as I have discussed today, a variety of policy responses are available should deflation appear to be taking hold. Because some of these alternative policy tools are relatively less familiar, they may raise practical problems of implementation and of calibration of their likely economic effects. For this reason, as I have emphasized, prevention of deflation is preferable to cure. Nevertheless, I hope to have persuaded you that the Federal Reserve and other economic policymakers would be far from helpless in the face of deflation, even should the federal funds rate hit its zero bound.

I think the people who are buying precious metals are just listening to what Bernanke said and taking him at his word. The man said exactly what he'd do if the U.S. is faced with deflation, he's going to devalue the currency, he's going to print money, and he's going to give it to whomever he thinks will spend it and/or loan it, and he's going to keep doing that until he gets the overall effect he is after which is price inflation. Wouldn't it be nice is all leaders were so clear about their intentions.

Source: Deflation: Making Sure 'It' Doesn't Happen Here
Remarks by Governor Ben S. Bernanke
Before the National Economists Club, Washington, D.C.
November 21, 2002

[wardp]

The problem with printing money is that we can't print it fast enough. Most of the money actually printed only covers what is destroyed during circulation.

The money injected comes from banks lending. You deposit $100. 7% is kept the rest is loaned out. With the bailout the banks don't have to maintain the liquidity needed for outstanding loans. Therefore hopefully will lend more money.

Yes what is needed and will be used is FDR's playbook. Just hope they don't wait too long.

The siren song of less "Big guvermint" and "no taxes" has led to this mess. Now is the time to step up to the plate and save your country and life as you know it.

Also, we has better be concerned about America's debt holders (ie. China) if they start selling the dollar will crash and no one will buy anymore US debt. Then we will see how bad is bad.

[chucklesR]

Think outside the box Ward.

They printed 700 billion shiny new 1 dollar bills with just 449 or so pages of law.

They can print a trillion bucks in a microsecond. I carry 3-5 bucks in my pocket on average - and four pieces of plastic I can buy a house with.

[wardp]

Think outside the box

That plastic is not printed money, it is manufactured money. Visa does not have the 50 bucks that pays the gas station operator where you just filled your tank. The operator does not pay the wholesaler with cash for the gas you just got. They give the visa receipt to the wholesaler who gives it to the supplier who gives it to the refiner who sends it overseas to the Saudi who owns the oil and he puts it in his account. There is no printed money.

That is why it is so important for the banks to start manufacturing money with credit lines, loans, etc.

[PBzeer]

The dirty little secret with credit is, that sooner or later, somebody has to fork over some dough.

[wind_magic]

Originally Posted by wardp

That plastic is not printed money, it is manufactured money. Visa does not have the 50 bucks that pays the gas station operator where you just filled your tank. The operator does not pay the wholesaler with cash for the gas you just got. They give the visa receipt to the wholesaler who gives it to the supplier who gives it to the refiner who sends it overseas to the Saudi who owns the oil and he puts it in his account. There is no printed money

Wardp, the use of words like "green ink", "printing press", and "printing money" doesn't mean that any of us actually intends to convey the idea that the government is physically printing more cash. It's obviously a metaphor.

[wardp]

Yes that is so true.

How does it feel to be the number one investor on the street my fellow taxpayers. I think C-span might be a watched channel this next year.

[TropicCat]

Originally Posted by chucklesR

That was of course THE point.

What? That the Dems were onboard for the slimmed down 1st version of the bill, Republicans refused? Or, that all those earmarks had to be added so republicans would vote for it?

[TropicCat]

Originally Posted by PBzeer

The dirty little secret with credit is, that sooner or later, somebody has to fork over some dough.

True. When housing prices were increasing 20% a year, homes made great ATM machines and debt was refinanced into mortgages. All this did was mask the fact that the economy was in trouble, middle class was shriinking and jobs disappearing. I've said this here 20 times.

Some here have said that this bubble created a class of people who lived beyond their means. Well, look at consumer spending, home and auto sales today. They're down significantly. If people are just being conservative and holding back on purchases until the economy gets better, which is understandable, we would all be reading about the sudden spike in American savings accounts. We aren't reading about this, because it isn't happening. So if people aren't spending, where is all this money from our real economy? It can't just disappear, so where did it go. People aren't stuffing their mattresses, are they?

No, the truth is that there is no money. This should be obvious to everyone now. As it turns out, people were using those ATM machine refinances on their homes to actually make ends meet. The economy was in trouble from the beginning of the Bush administration, and it was handled by Greenspan putting the petal to the metal which created the bubble we are watching burst right now.

The lack of good paying jobs is the problem. It's the only problem. You can't buy a car or a house making minimum wages. Fix this and the economy takes care of itself.

[PBzeer]

People have been living on credit for a lot longer than Bush has been President.

As long as there are more disincentives than incentives for creating "good jobs", don't hold your breath waiting for them. Labor costs are the most easily controlled part of overhead, as well as being an area of high supply. Some companies put a limit on the number of employees, or how many hours they work, simply to avoid having Federal mandates kick in.

Also, the middle class isn't shrinking from going downward, but from going upward. As the table I previously have posted shows, all income classes below $75k are shrinking, while those above are growing.

While consumerism is a driver of the economy, when it's coupled with unending revolving credit, then it's ultimately false. In an era of instant gratification and gimme mentality though, it is the norm. Where the parents of the Boomers worked and saved towards their major purchases, we now see people "wanting it all", right from the git-go.