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Strategies & Market Trends : Heinz Blasnik- Views You Can Use -- Ignore unavailable to you. Want to Upgrade?

To: Perspective who wrote (1421)	5/16/2003 2:21:36 PM
From: Agamemnon	Respond to of 4905

<How does the Fed get out of this box?> Nobody here can answer that!<G> because the argument is they can't. I was thinking if we increased immigration by the millions again & used some kind of subtle job & goods support protectionism then demand could push production again.

To: Perspective who wrote (1421)	5/18/2003 10:41:00 AM
From: UnBelievable	Read Replies (2) \| Respond to of 4905

The Fed Can Avoid Deflation But Not Recession The Fed seems to be on an intense disinformation campaign to confuse people about deflation and recession. In an economy with a fiat money supply and a government that is allowed to operate with a deficit, such as that in the US, the idea that deflation is an unavoidable possibility is ridiculous. This is easily understood by looking at an extreme example. Suppose that the Federal Income tax is eliminated. The Federal government continues its current level of spending by financing its activity with debt. This would result in significantly more dollars chasing the same goods and services and would drive prices up. What cannot be changed is the contraction in the economy that is going to occur while we work through the malinvestment and debt that developed over the last decade. Clearly all taxes will not be eliminated but just as clearly the ability to prevent deflation (in a monetary sense) exists. As a consequence the dollar will continue its fall. Interest rates will rise as the significant amount of debt that is going to be incurred to finance the government comes to market. Any attempt to suppress long-term interest rates in such an environment will be both folly and futile. A higher interest rate within an economy with price inflation can in fact result in a lower real interest rate. Representations that increased government spending will help the recovery are similarly ridiculous but such spending will increase. BTW - where does the Fed get the dollars that are required to purchase long bonds thereby keeping the price up and the effective yield below free market levels - particularly at a time in which they are going to have to be selling a huge amount of debt to finance the deficit? The only method by which they could control long term interest rates would essentially be by having Congress fix those rates by law. The stupidity of that seems even greater than that which is found in the Fed and Congress. That being said.... The Fed can and will trade a deflationary recession for an inflationary one (stagflation) as the lesser of two evils. The long bond is next years dot bomb.