Wednesday, April 22, 2009

The deflation argument


The Washington Post says their may be pay limits on the TARP. Does anybody really want to take that bet?

So now there is nobody to buy toxic assets because of pay restrictions. Oh my! Prices will be going down!

Treasury Department lawyers have determined that firms participating in a $1 trillion program to relieve banks of toxic assets could be subject to limits on executive compensation, contradicting the Obama administration's previous public position, according to a report to be released today by a federal watchdog agency.
http://www.washingtonpost.com/wp-dyn/content/article/2009/04/20/AR2009042003294_pf.html

Monday, after the market rout by the deflationistas, Tuesday morning, the NY Times comes out with an article saying that deflation is conquering the world--first in Spain, and then the rest of the world, culminating in the US:

With the combination of rising unemployment and falling prices, economists fear Spain may be in the early grip of deflation, a hallmark of both the Great Depression and Japan’s lost decade of the 1990s, and a major concern since the financial crisis went global last year.

Luxembourg, Portugal and Ireland have reported price drops, too....

In Germany, wholesale prices dropped 8 percent in March from a year ago, the steepest fall since 1987. In Japan, wholesale prices fell 2.2 percent on an annual basis. In the United States, the Consumer Price Index fell 0.1 percent in March, year over year, the first decline of its kind since 1955, though prices rose 0.2 percent excluding food and energy.
http://www.nytimes.com/2009/04/21/business/global/21deflate.html?_r=1&scp=2&sq=deflation&st=Search

That was their Tuesday morning discount!
http://www.tuesdaymorning.com/indexCatalogOff.asp

The NY Times missed Britain, but the Telegraph covered them!

Deflation returned to Britain for the first time in nearly five decades last month as prices measured by the retail price index (RPI) were lower than the same time a year ago.
http://www.guardian.co.uk/business/2009/apr/21/deflation-returns-rpi-negative

The deflationistas scoreboard is below:

  • 1. Reduce nominal interest rate to zero. Check. That didn’t work...
  • 2. Increase the number of dollars in circulation, or credibly threaten to do so. Check. That didn’t work...
  • 3. Expand the scale of asset purchases or, possibly, expand the menu of assets it buys. Check & check. That didn’t work...
  • 4. Make low-interest-rate loans to banks. Check. That didn’t work...
  • 5. Cooperate with fiscal authorities to inject more money. Check. That didn’t work...
  • 6. Lower rates further out along the Treasury term structure. Check. That didn’t work...
  • 7. Commit to holding the overnight rate at zero for some specified period. Check. That didn’t work...
  • 8. Begin announcing explicit ceilings for yields on longer-maturity Treasury debt (bonds maturing within the next two years); enforce interest-rate ceilings by committing to make unlimited purchases of securities at prices consistent with the targeted yields. Check, and check. That didn’t work...
  • 9. If that proves insufficient, cap yields of Treasury securities at still longer maturities, say three to six years. Check (they’re buying out to 7 years right now.) That didn’t work...
  • 10. Use its existing authority to operate in the markets for agency debt. Check (in fact, they “own” the agency debt market!) That didn’t work...
  • 11. Influence yields on privately issued securities. (Note: the Fed used to be restricted in doing that, but not anymore.) Check. That didn’t work...
  • 12. Offer fixed-term loans to banks at low or zero interest, with a wide range of private assets deemed eligible as collateral (…Well, I’m still waiting for them to accept bellybutton lint & Beanie Babies, but I’m sure my patience will be rewarded. Besides their “mark-to-maturity” offers will be more than enticing!) Anyway… Check. That didn’t work...
  • 13. Buy foreign government debt (and although Ben didn’t specifically mention it, let’s not forget those dollar swaps with foreign nations.) Check. That didn’t work...
http://globaleconomicanalysis.blogspot.com/2009/04/bernankes-deflation-preventing.html

Well, did anyone think deflation wasn't a surprise? We've been in deflation. It just took forever for our Government officials to recognize it.

So how is it possible for inflation then to start?

How are our august officials going to recognize the kindlings of inflation, when they couldn't recognize the deflationary forest fire?

So their policy will foster it.

Except no-one recognizes seeds or shoots, just Redwoods and Douglas Firs!

And Redwood seeds are 6666 to the ounce.