Wonder what Heinz would think?
Here's the question I asked him:
I'm wondering where he thinks things are going... deflation or inflation (next several years)...in US of course. Unemployment and all that would be a bonus!
Here's his response:
the answer is, it is hard to say. if it were up to the market, then we would get deflation, as private sector credit is contracting, which would normally serve to contract the money supply.
the other side of the coin is printer Bernanke and the deficit spenders in the administration. the question is really, how far are they prepared to go to avert the deflation.
in theory, the government can force inflation on the economy. the question is whether this will be seen as practical, and whether the markets will have time enough to stop these efforts in their tracks (similar to an hyperinflationary spiral that gets out of control, a deflationary spiral of accelerating defaults and debt repayments can acquire dynamics of its own and become very difficult to stop).
Bernanke is on record that he will take all steps nevcessary to avert a deflation (a deflation would shift economic power away from the status quo, the preservation of which is his job). However, he continues to run the Fed countercyclically, this is to say, he pulls back whenever markets recover. The Fed's decision to end QE (for now) must be seen in this context. This leaves the ultimate outcome still in doubt.
as to unemployment, given the massive amount of government intervention in the economy since the crisis, there is every reason to remain very pessimistic on the chances for a genuine economic recovery (i.e. one that is not just an inflationary mirage). in all likelihood unemployment will remain at a high level, although there could be some cyclical improvement from time to time based on the inventory cycle. it is important to realize that the downturn is not similar to other post war downturns. it is a genuine credit bubble collapse, the likes of which haven't been seen since the 1930's in the US. one could perhaps look at Japan for a contemporary comparison (although there are important differences as well, some good, some bad). the fact remains, the 'long run' has caught up with us, finally. all the structurally damaging interventions that have been used to avert economic corrections in the past are now coming home to roost. the downturn is of the secular variety, at least one degree of cycle trend in order of magnitude above the 'usual' post WW2 downturn. |
