To: pogohere who wrote (15817 ) 11/2/2008 10:45:01 PM From: pogohere Respond to Velocity slows precipitously:banks refused to lend to each other, let alone to their customers. The financial crisis has fed back onto the real economy via a collapse in equity markets and attendant, massive wealth losses that have frozen credit to, and spending by, households and firms. Policymakers have responded with massive injections of liquidity into the banking system followed by some injections of capital into the banks by national treasuries. The banks have reluctantly begun to lend modest amounts to each other but so far have shown no sign of any willingness to lend to others and, therefore, continue to fail as financial intermediaries. The damage already inflicted on global balance sheets and the real economy is substantial.as households restrain consumption to pay interest on large stocks of debt that were accumulated during the bubble. Deleveraging by banks for the same reason has severely restricted the supply of credit to all but those who do not need it--that is, those who have not used it during the credit-driven boom. Trying to reverse the slow down in velocity: ]having the Fed print money and directly inject the funds into the economy by purchasing long-term government bonds used in turn to finance programs of government spending and capital injections into the banking system. The Fed has not yet reached that stage, but it is approaching it rapidly.The sudden unavailability of credit has caused consumption to drop sharply, falling probably at a 3 percent annual rate in the third quarter, and will possibly lead to a steeper drop in the fourth quarter. As prices fall, the attractiveness of holding cash rises. As people attempt to enhance their holdings of cash by further reducing their spending, prices fall further, and the demand for cash rises more. Deflation intensifies. Such a deflationary death spiral must be avoided at all costs. Simultaneously, the demand for money, in the forms of currency and (insured) bank deposits, is surging. Excess demand for money results in selling of commodities and risky financial assets along with elevated saving flows--all of which are deflationary. accompanied by direct purchases of long-term government bonds, mortgage-backed bonds, and equities. Printing money to directly support asset prices contained Japan's deflation and eventually reversed it by 2003. Today, a rapid onset of severe, incipient global deflation requires that the major central banks undertake an aggressive program of direct asset purchases to break the accelerating adverse feedback loop before further wealth destruction and more intense economic contraction usher in a global depression as devastating as the one that occurred in the 1930s.[emphasis added ]aei.org uk.youtube.com
