06/29/10 Baltimore, Maryland – From within the Fed in the days that the policy of quantitative easing became official, Philadelphia Federal Reserve Bank President Charles Plosser alerted us that “(recent economic statistics) prompted some commentators to suggest that the United States is facing a threat of sustained deflation, as we did in the Great Depression or as Japan faced for a decade.
“I do not believe this is a serious threat… (but) the Fed must credibly commit to preventing sustained deflation from becoming widely anticipated, just as it must prevent sustained inflation from becoming widely anticipated.”
All this is well and good. But between the lines one gets the feeling that Plosser and much of the Fed want to be inflation hawks and are maybe a little bit irritated that they have to stop and do something so radical as print money just like in the olden days of the Continental Congress, the French National Assembly, or the Weimar Reichsbank, as if the current circumstance had nothing to do with their having presided over a doubling of the broad money supply from $7 trillion to $14 trillion in the eight years ending in 2008.
Up until now Fed governors felt very effective, having seen strong income and employment growth, yet inflation was subdued. In the eight years through 2008, the CPI-U increased at an annual rate of just 2.9 percent, well below the 4.6 percent average of 1971-2007 or the 3.3 percent felt from 1913 to 2007.
But so much focus on the targeting of inflation has permitted robust credit expansion to stowaway on the economic ship, lifting total commercial bank credit ($10 trillion) to 77 percent of GDP from 45 percent of GDP in 2000, and seeing debt in aggregate rise to 360 percent of GDP, twice the level touched in 1929.
Regards,
Bill Baker,
for The Daily Reckoning
[Editor's note: This passage is reprinted from William W. Baker's book, Endless Money: The Moral Hazards of Socialism, with the permission of John Wiley & Sons, Inc (©2010). You can get your own copy of his book here.]
Bill Baker
Bill Baker is author of Endless Money: The Moral Hazards of Socialism and founder of the Conservative Economist web site. He developed the firms GARP Research & Securities Co. and Gaineswood Investment Management. Before this he was at Reich & Tang, Oppenheimer Funds, and Van Kampen American Capital. An Oppenheimer fund he managed was awarded a Morningstar five-star rating. Baker received his MBA from Dartmouth College and his bachelor in economics from the University of Pennsylvania. He is vice president and a trustee of Baltimore's Harbour League.
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If the printer were to slow down now.
1. Unemployment shoot up vertically.
2. Debt ridden economy will not find the
money to service interest, let alone
getting cash flow to reduce the
principal sum. Insolvency is the
outcome.
3. Immediately under austerity drive.
4. Whole world will go into deep deep
recession.
5. When things get worse, folks end up in
the street chanting their favourite
melody.
6. World trade slashed by 80%???
6. Finally, governments toppled, Karls
on the rise again.
Is it worthwhile to slow down the printer?
Can we find an ultimate solution from here?
Yes, unemployment WILL shoot up vertically, but it has to happen. We can’t keep bailing out GM and others. Those employees must find a job in a more productive endevour. Otherwise, the country is just mis-allocating resources and going further into debt.
The debt has gotten too big to service. Debt must go away by bankruptcy so that the assets behind that debt can be purchased by more productive sectors of the economy — at usually pennies on the dollar.
There is no easy way out of the mess our governnment leaders and the FED have created, but the debt is the problem. The recession (more likely — the depression)is the cure.
Adding more debt to solve the problem of too much debt is insane, and cannot work.
Too keep printing money only results in a collapse of the whole system at some point in the future. THEN you would see REAL pain.
The solution is to SAVE money, cut government spending drastically, and put the savings into producing things. That is what creates wealth. Printing money only makes us all poorer.
The corrupt fiat money system must be replace with honest money — silver/gold.
So here is the question that must be asked to find the ultimate solution: How do we get back to honest money and get rid of the FED?
I would say either way has its merit points. Absolutely, without doubt, either direction will not be an easy way out, none of them goes without generating severe pain.
Actions and response are already a deeply rooted culture. You can’t change a culture, way of life overnight. It takes a gargantuan engineering feat to bring about a complete facelift to the human race.
Then, sacrifice will be tabled. Would it be fair to all quarters. Would someone be termed as victim or scapegoat. Let’s not just go ahead without realising something is on top.
Solving problem from the source, from the root is the ultimate solution.