Sunday, October 19, 2008


Judging by the latest article in the Financial Times, it seems as though our Fed still doesn't want to recognize deflation:

Some worry this could end in deflation. Senior Fed officials admit they cannot completely rule it out. However, Fed simulations with even severe recessions do not result in falling core prices, due to the high initial level of inflation, firm expectations and a weak relationship between unemployment and prices.

Standard models suggest that the US central bank should cut rates further from 1.5 per cent to 1 per cent and possibly lower, and do so quickly.

Policymakers will probably end up doing this. But senior Fed officials are unenthusiastic, worrying that further rate cuts will not have much impact and this could weaken confidence further.

At best, they now see rate cuts as a secondary issue, compared with bank recapitalisation, asset purchases, borrowing guarantees and Fed commercial paper purchases.

The Fed should get rid of their models, and take a look at real life. Russian and American billionaires are going bust in this deflationary environment, along with blue collar Joe and Mary Sixpack.

Even the Wall Street Journal finally recognizes deflation:

Policy makers navigating the U.S. through the global credit crisis may have a new concern on the horizon for 2009: deflation.

The risk of deflation -- generally falling prices across the economy, beyond volatile energy and food costs -- remains slim. But the financial shock and a faltering economy can set the stage for a deflationary environment.

Federal Reserve officials view broad-based deflation as unlikely but possible. Federal Reserve Bank of San Francisco President Janet Yellen said in a speech this week that the plunge in oil prices along with slackening demand for labor and goods should "push inflation down to, and possibly even below, rates that I consider consistent with price stability."

2009? It's already here, along with the recession. According to Ernst & Young, it will take until 2011 in the UK, until consumer spending turns positive. They deal in reality. The Item Club report, which also predicts another 500,000 people will lose their jobs, provides a clear illustration of how the turmoil in the financial sector has spread "like a pandemic" from the City to "every part" of the lives of ordinary families.

What makes our Fed, think our consumer is any different?

It's no wonder the Europeans and the US are clashing!

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