The Oil Drum | DrumBeat: September 13, 2008

175 comments on DrumBeat: September 13, 2008

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GreenMan on September 13, 2008 - 4:22pm

The general objection to that point is that while the Fed can make credit available, it cannot force people to borrow. Individuals and businesses need to be willing and able to take on and service additional debt, and they (we) are pretty much tapped out. The metaphor is "pushing on a string".

My counter to that is that there is a "borrower of last resort" : the US government. They can borrow and simply send checks to everyone. Only one loan needs to be written to get a vast amount of additional credit/money into circulation. A tax cut has a similar effect, but distributes the largess differently. Of course, it doesn't need to be the Fed writing the loan, it can be selling regular bonds, but the point is that the US Government can act as a borrower of last resort while the Fed acts as a lender of last resort. One weekend in a smoke-filled room.

Can we really doubt that when faced with significant deflation that this option will not be exercised?

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css1971 on September 13, 2008 - 4:38pm

Really? 1% base rate? 0% base rate? Happened in Japan.

The people want it, the banks want it, the government want it and it's the natural end point of fractional reserve banking. The whole population indebted to the banks to the maximum possible level. Exponential functions, there's always a limit.

I think there's a whole lot of consumption left in the USA yet.

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Stoneleigh on September 14, 2008 - 10:00am

Even 0% is not low enough, as Japan discovered. The nominal rate is not important - it is the real rate that matters. Under deflationary conditions, when the loss of credit reduced the effective money supply, the real rate is the nominal rate minus negative inflation. Real rates can be high even at very low nominal rates.

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JWhitland on September 13, 2008 - 8:25pm

The simplest way to increase available money would be to reduce taxes to zero/low and at least partially monetize the debt (pay it off in paper). The currency would quickly re-inflate, as it became worth much less. This would have nasty effects on people who value money (ie, retirees, pensioners etc), but would probably be a good thing for those of us who are still young, and might want to live in a house some day.

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JWhitland on September 14, 2008 - 9:20am

Hmm, my comment is at -1. Well, it is a bit of a troll. Society as a whole needs to decide how to allocate resources; if they all go to the old, there's less for the young. If it all goes to the young, there's less for the old. Deflation is really bad for poor / young people -- its usually linked to recession, and there's no incentive to put capital to work. Inflation is really bad for the old -- they can't increase income easily, because all they have is money, not good jobs.

Mike Shedlock [sp?] thinks that deflation is inevitable; that you can't force people to borrow. But you don't need to force people to borrow--all you need to do is ensure that they have more money, and decreases in taxes can also have that effect. No "pushing on a string" here. I think "helicopter ben" is right so far as inflation is concerned. He's just not trying hard enough.

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notintodenial on September 13, 2008 - 9:13pm

GreenMan,

This article explains why there are unpleasant consequences to using the Treasury as the lender of last resort (expanding the federal deficit):

http://www.financialsense.com/Market/pretti/2008/0912.html

Goldman Saks (the most connected of the 'shadow banks') estimates the federal deficit to go from $160 billion in FY 2007 to $565 billion (!) in FY 2009. This will not be without consequence.

Errol in Miami

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BrianT on September 13, 2008 - 9:14pm

Bill Gross (PIMCO) is calling for 1 trillion in 2009 so IMO 565 is light.

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joe costello on September 13, 2008 - 10:12pm

It looks increasingly likely deflation is the growing problem. There's massive deleveraging of the financial system, meltdown in home prices, equities down, wages stagnant, and the global economy is slowing, resulting in dropping commodity and oil prices.

If you want a nice bit of history take a look at this:

Marriner Eccles

Eccles was a Mormon, Republican, businessman, who basically laid out the foundation of the New Deal before the Senate, two months before Roosevelt came in. Roosevelt then made him head of the Fed. What's interesting is how standard this all seems, but it was quite innovative thinking at the time.

There's a lot of problems with these solutions today including: 1)The US is 10 trillion in debt, and relying on China, Russia, and Gulf states to lend us money. 2)Any resulting new boom, will quickly be slowed by rising oil prices.

We need a new Eccles or two.

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TrueKaiser on September 14, 2008 - 2:49am

the big problem today is with the bailout of fannie mae and fredie mac, our debts have exceed our value. though the economists when asked will spew double speak about this. they will claim that the gdp for the united states does not equal it's value, while in the next sentence point out the opposite but for a different country.
Though by doing this they have turned a very likely possibility of a complete collapse of the united states economy into a certainty.

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DaveMart on September 14, 2008 - 4:46am

I would agree with your basic point, but it should be noted that as one of the Pitt's noted there is an awful lot of ruin in a country.

Japan, for instance, has a national debt of 188% of GDP, against around 60% for the US, not including the F & F fiasco.
They also have a population which is rapidly ageing and will soon be in decline. However, they are net savers.

Internal debt via too generous mandated spending can also always be halted or repudiated, it is the external debt which is trickier.

So you are correct, but there may be some time to go before the pigeons flap their way to roost.

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175 comments on DrumBeat: September 13, 2008

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