Arch, your sensible approach is to view the questions on the basis of what we know (as opposed to what we fear, and assuming that what we fear is what we know).
Your post elicits other aspects of the matter:
[1] It's all relative. There are no absolutes.
[2] There's a world of players out there, some big and important like China, others less so. One could apply game theory to how each player will choose to act, but there are so many dependent or contingent variables that the number of outcomes would be unmanageable.
In parallel to game theory, economics provides different models for expected behaviors, but these also cannot provide useful predictability.
We can expect national players to act in their own self-interest, but the question each is asking of itself is: "What action best serves my interests? Yes, there is uncertainty and risk... but does that mean we shouldn't buy American assets? If we don't buy, are we increasing systemic risk?"
We already know that everybody has understood the danger of a USD run. Call it the "economic balance of terror" or whatever; everybody loses. As you correctly note, however, buying has moved from long-term to short-term, and that's clear recognition of risk. On balance it's a neutral move: not destructive, more like short-term supportive.
In the greater scheme, other countries are carefully moving away from reliance on USD as global reserve currency. The move is definite, but it'll take time, and require judicious action.
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Meanwhile in the US, the savings rate has gone from near-zero to +5% in less than a year, and still rising. Even with monetary stimulus, credit has shrunk dramatically. The interest rate environment is uncertain. Both leading and lagging indicators show contraction continues globally and domestically. Prices continue to decline, and there's so much unemployment that near-term wage pressures are negligible.
Banks still wrestle with enormous losses, and will for years to come. They've been recapitalized courtesy of the taxpayer, but that money isn't reaching consumers. Even if it did, they'd save it, or use it to pay down debt: consumer spending has fallen off a cliff.
Trillions have been lost: in housing, and in markets.
"Beige Book
Federal Reserve officials, in their Beige Book business survey released on June 10, said price pressures were contained.
“With few exceptions, Districts reported that prices at all stages of production were generally flat or falling,” the Fed said in the survey. “The notable exception to the downward pressure on prices was the widely-reported increase in oil prices.” "
bloomberg.com
One telltale sign: US corporate insiders are selling at unprecedented rates.
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In this environment, it hardly makes sense to worry about inflation. What about the future?
No question, significant debt has been added to a decades-old long-term tally. A crash has been averted, but at the cost of more debt; not only in the US, but globally. True, different countries have different debt manageability.
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Posters here are arguing unconstrained flow of money into a revitalized economy. Is that the truth? No, it's not. Economists universally recognize the risk of inflation, but also recognize that it's a mitigated risk. It's more correct to note US Fed comments: when inflation begins to appear, liquidity will be withdrawn from the economy.
Critics say the Fed can't do it. I'm not saying it can; I don't know, and perhaps nobody does. But here's the thing: Bernanke has taken the most aggressive monetary action the world has ever seen. It's unprecedented. If he acts with equal aggression on inflation, we can't rule out the possibility that he might be successful, or partially successful.
It's OK for posters to say "He can't do it! and "The Fed will fail; it always has!" but that's a fear, not a fact. They don't know: they don't know how aggressive the Fed will be, and they never imagined it would be as aggressive as it has.
Is default possible? Yes. Is it 100% certain? No.
This crisis is unique. It's like '29, and it's not. In many ways, it's different than anything we've ever seen before.
Whole nations have been thrown into near-chaos and unprecedented economic intervention. Geopolitics is changing as we watch. Economists and experts are divided and confused.
This is no time for cookie-cutter explanations of cause and effect. The truth is, nobody knows. Yes, excessive debt is bad - but only if the creditor calls "Time! and only if debt can't be paid off in a few decades or more. So far, nobody has called time, and maybe no one will.
Meanwhile global economic actors move like porcupines making love... very, very carefully -g-
Jim |
