Mish & Tooearly.
Tooearly:
we still need to figure out two things:
1) exactly how much power do they really have?
2) Who stands to benefit the most in various scenarios?
I'm interested in knowing "how much power does the Fed really have", but also, what are the power blocks that have the most to lose/gain from inflation/deflation, and how much power do "they" really have? After all, the Fed is a hired gun. A very powerful hired gun, perhaps the most powerful of all, but a hired gun nonetheless. And the concensus of the elites who interests it represents are fluid and can change suddenly with little forwarning. IMO.
Mish:
The Fed has the power and means to prevent a deflationary collapse ... "only by sacrificing banks, bond-holders, credit card companies, all creditors (the wealthy). Thus I do not believe they will do it."
I tend to agree in principle. But when the boat capsizes, like the Titanic, not everyone can be saved. I think it is very possible that banks, credit card companies, and other financial intermediaries could wind up as "shells", discarded after the big money private wealth behind the scenes turns liquid and (significantly) shelters their wealth from the bust. The most dramatic losers won't be the super-rich in the event of a banking failure, rather, it will be the lower echelons of the rich, the upper middle class, the middle class, and the lower classes. It is historically almost always so - unless their is a complete social revolution, like the Russian Revolution, which I think is pretty unlikely - and then the "collateral damage" tends to be even worse!
So to my mind, it's not really about whether the Fed will sacrifice financial institutions and wealthy creditors. I believe the interests the Fed represents would be willing to do that in a heartbeat. Rather, its the consequences of doing so, and the overall threat to American industry and capital (and to a lesser extent, the vengence the middle class in particular would inflict on said interests in the event that their entire savings were wiped out).
However, I don't believe the U.S. is in a position to have its creditworthiness destroyed. The impact on U.S. industry and government would be horrific. In the end, the US$ will have to be debased, don't think there's much doubt about that. But a hyperinflationary scenario would have horrific reprecussions for U.S. industry and commerce.
Thus, I lean towards a normalization of interest rates, brought about through some manner of deflation. At some point in this process, you must inevitably have significant policy reversal. Followed by a long-trend decline in the US$.
Them's my 2 cents worth. Thoughts?
Glenn |
