How will the Fed get off its Tiger?

By J Saft
December 19, 2008

James Saft Great Debate – James Saft is a Reuters columnist. The opinions expressed are his own –

The Federal Reserve and U.S. economy have two considerable risks now that quantitative easing is at hand: keeping the dollar from a disorderly decline and figuring out how to dismount from the tiger.

The Fed has cut interest rates to a range of zero to 0.25 percent and said it would use “all available tools” to get the economy growing again, including buying mortgage debt as well as exploring direct purchases of Treasuries.

While the central bank was at pains to distance its policy from Japan’s during its extended downturn, there can be no doubt that the dollar printing presses are and have been running and will pump out as much currency as is needed to avoid deflation and make credit available at a stimulative rate.

There is no question of the Fed not being able to re-ignite inflation in the U.S. economy; if they print money fast enough, prices will go up. The issue is more about the collateral damage possible when a major debtor nation takes these steps, even if it is doing it for all the right reasons in support of the best possible cause.

In the short term the risk is that foreign holders of the dollar and Treasuries are spooked by the whirring of the presses, and, reasoning that the Fed cannot fail in its quest to re-ignite inflation, decide to hold something less, well, risky.

Now of course in the current circumstances there may, for better or worse, not be that much of a dollar alternative for global reserve managers and investors and, seeing as how a rapid unwind in the dollar would hurt creditors, they may stick it out.

But the risk is higher now than last week, and much higher than earlier this year.

The value of a dollar against a trade-weighted basket of currencies fell sharply after the Fed’s announcement and is down about 10 percent in the past month.

Two factors that had been supporting the dollar through the recent months of the crisis, a tendency by U.S. investors to repatriate dollars during periods of stress and the need to purchase dollars as part of the process of unwinding leveraged financial trades, will not continue forever.

“The risks for the dollar are pretty clear,” said Michael Hart, a foreign exchange strategist at Citigroup in London. “It is going one way and the only question is how uni-directional it is going to be and how many starts and stops we are going to see.”

IT’S DIFFERENT THIS TIME

U.S. policy appears to be aimed at helping to recapitalize the banks and cutting the cost of finance to consumers by buying up assets and is distinct from that of the Bank of Japan, which increased bank reserves.

There are some key differences between the U.S. and Japan, which didn’t have the same need to attract external finance, and for that matter between the U.S. now and the U.S. during the Great Depression. When the Depression struck, the U.S. was the world’s biggest creditor, rather than its principle debtor.

The U.S. economy is both distended and hollowed out; it needs to redirect itself more toward savings and producing goods and services that can be sold overseas. The problem is that doing that quickly will be both very painful and produce a lot of collateral damage. Fed policy can only succeed if it softens the very terrible impact of that reallocation but does not prevent it.

But what happens if, or rather once, the Fed and the U.S. government’s combined stimulus succeeds? How exactly do you unwind a program of Treasury and mortgage asset purchases and near zero rates without bringing on too much inflation, perhaps much too much?

If foreign holders of the dollar stick with it during the next crucial months, there is little to prevent them from bailing out later, if they judge the Fed to have kicked the ball too far down field. There is no way of knowing how this can be undone or what to expect.

There is also another set of actors who can cause problems; foreign central banks and their government bosses. If the dollar weakens much during a time of global recession many will have a hard time resisting the urge to devalue their own currencies in order to capture a bigger share of what little demand remains.

The plan to buy assets to cut the knot of finance is sound but begs the question of how and when the banking system will be brought back to life. I’m not sure that buying time and hoping it can outlive its debts will work.

The new administration needs to, quickly, enunciate a clear and comprehensive policy on how recapitalizations will work, so that private capital and taxpayers can know where they stand.

– At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. –

45 comments

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I knew back when the interest rate was lowered to 1% that they could not raise it quickly. But they did and that’s what caused the mortgage/financial meltdown. Brilliant going guys! The only way to raise rates back up is to do so extremely slowly. I would say about 1/4 point a year. This way those with ARMs of 3/5/7 year terms will still be able to get loans even 5 years out. If you don’t do it this way then it will just cause another mess once the current ARMs come up years from now.

Posted by Hal | Report as abusive

“If the dollar weakens much during a time of global recession many will have a hard time resisting the urge to devalue their own currencies…”
This is precisely what will happen. A race to the bottom that will destroy the savings of billions. What better tactic for a nation of spendthrift non-savers to employ? Of course, getting savers to lend to the US afterwards may be a little problematical.
Devaluing the USD, either directly or by benign neglect, is an historically tried and true method by the US to avoid its financial liabilities; ask any Asian, and, thus surely we have reached, even passed, the point where a better world reserve currency system is an absolute imperative.

Posted by dhome | Report as abusive

This isn’t that hard to figure out. The more dollars you print the less each one of those dollars is worth. The less they are worth the more of them you have to surrender to buy real goods. No way we avoid substancial inflation. The real question is what does the average Joe with a small nest egg of say $30,000 buy right now so his $30,000 isn’t worth $15,000 in a few years?

Posted by Bill | Report as abusive

what to buy as a hedge against inflation? answer=gold

Posted by william johnson | Report as abusive

“… world’s biggest creditor, rather than its principle debtor.”
Principle?

Posted by Lyle | Report as abusive

I agree with many others that we are, of course, looking at substantial if not horrific inflation down the road. It’s the simplest way to devalue the existing debt burden which, one way or another, will inevitably occur. Gold or other commodities, other things of tangible value, perhaps real estate (though not yet, of course) would seem the way to go.
Of course, there’s that nettlesome little detail of timing . . .
It might behoove the powers that presume to be to prepare contingencies for a re-valued currency, probably pegged to gold, if the inflation-to-come proves too destabilizing. That way the existing debts would be devalued by rampant inflation while it would be possible to transition to a more stable path forward.
Is this cruel and unfair? Well, yes, and also duh. Welcome to a small planet sometimes referred to as ‘terra’.

Posted by arctenebrous | Report as abusive

wake america! the country is broke, we dont have any money.goverment owes billions already,and somebody tell me. how those billions of bailouts are going to be paid.
they are telling us to spend, but to save is the way. do not be deceived again, save,save!

Posted by saul | Report as abusive

First of all, the question which must first be answered is this:

Do we want to FIX the current system, which is prone to abject failure as a direct result of it’s growth, OR devise a new system of bettering the quality of life for not only Americans, but for the rest of the world as well?

1. Gold Standard:

Not enough gold in the world to satisfy Free-Market Capitalism, which demands exponential growth. That was a factor in abandoning the gold standard to begin with. That is unless the price of a troy ounce of gold is arbitrarily lifted to a minimum of $5,000/oz. Even then, where is all the gold? I know that in my country, Canada, during the 1980′s our national reserves were sold off from a total of 88 million ounces to roughly 80,000 ounces while gold was at low prices. Who can say for sure how much US gold is in Fort Knox (which stands as collateral against the USG National debt).

The IMF has 3,217 tonnes of gold held by the International Monetary Fund. It is currently priced at $42 a troy ounce ($1,370/kg) for accounting purposes, a price that was fixed in 1971 just before the Nixon administration officially delinked the U.S. dollar from gold. Should a new global currency be introduced to save the 1st world (whose rioting citizens just might demand just to stop the carnage…and we all have that nagging inclination that very scenario is not at all unlikely), then perhaps that reserve could be used to backstop any new currency.

2. Creating a secondary national currency to compliment the USD. I am no economist, so I will not even attempt to formulate how such a scheme would work.

Either way, the USA needs to re-read “that god-damned piece of paper” called your constitution, especially the part about the valuation and issuance of national currency – which your forefathers warned you about explicably from falling into private (foreign) hands.

Thomas Jefferson I believe said it best:

“I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”

Thomas Jefferson, Letter to the Secretary of the Treasury Albert Gallatin (1802), 3rd president of US (1743 – 1826)

Posted by Baron von Lufthoven | Report as abusive

A good thoughtful article as usual.The point is that no one knows what is going to happen with these economic policies. The only thing I believe is that there is a race to the bottom for currencies and then we will have high inflation. I cannot see how the Dollar can survive this amount of financial pumping. I think that the Bond market will be broken and that commodities are the place to invest. Savers will decimated.

Could it be that in the process of trying to save the global economy the Fed and its counterparts in other countries have inadvertantly exposed the two biggest ponzi schemes of all times. I am talking about the global Currency Markets and the global Equity Markets.

Both these ponzi schemes have become first and foremost the playground of unprincipled hedge funds, day traders, speculators, derivative traders, short sellers, etc.

Madoff has graphically shown us what happens when ponzi schemes collapse. Unless there is a rapid return of confidence in GLOBAL currency and equity markets these could be the next to collapse completely. Just think of what would happen if investors started unwinding their US Dollar investments

Posted by anton kleinschmidt | Report as abusive

The system is made up of smoke and mirrors. Gold is about the only option I can see. And at that, in your hand! or it might get confiscated. Paper money might just turn out to be, well, paper!
There is serious trouble on the way, and few will survive with their savings intact.

Posted by G. Kaiser | Report as abusive

US Fed must realise it cannot create something out of nothing.America is the biggest Debtor and much poorer countries are the Lenders.This Debt is never going to be paid so the strategy is to make the Dollar worthless and in the process pauperise the holders of Dollar.That the US Fed is clueless and bankrupt of all ideas is reflected in the zero US Fed Fund rate.
The World will not watch helplessly.They will also start printing Currency to maintain a level playing field.Call it competitive Economics of destruction.The kind of Inflation we will see sooner than later will kill us.Forget Cash and stocks,load up on HARD ASSETS.

Posted by F.Daruwala | Report as abusive

Perhaps it is only a manner of speech – but “printing dollars” doesn’t really explain what goes on with the growth of the money. I can say with certainty that most of the “money” I spend is only recorded in the form of credit card receipts. Even when my income was in better shape than it is today, most of the money I made was never in the form of currency.

The bulk of mortgage payments, and all other consumer loans and even those 700 notorious billions (or 5 to 7 trillion depending on the economist you listen to) will never be seen in the form of currency. Forex traders do not buy “baskets of currency” like they were stamps.

I’m almost certain the electric bills for the treasury printing presses aren’t any higher now than they usually are – other than due to the fluctuations in the cost of the electric power itself.

All of the threat of inflation is a phenomenon that appears mostly on accounting ledgers. That’s where the growth of the money supply is really occurring and that is where it will be rectified if we get that far.

It’s odd that so many of the comments above seem to believe that the notes we use are the “money”. When it comes down to it – money in all its aspects – from the penny in ones pocket to the trillions that flow through the budget process of Congress – are pure abstractions. Any form of metal currency (and gold is not legal currency in this country – no landlord can insist that they receive the rent in gold or silver – thank god or the US government) is a matter of cultural of expectations that are based on a very primitive understanding of what money is.

When it comes down to it – what is the inherent value of anything? All value is relative to all other value and is prone to gross distortion. And it doesn’t really matter who tries to determine the values of “things”. Whether it is Congress or Federal banks or private banks, they all play a guessing game – perpetually.

One sure way to soak up excess money supply without inflation is for everyone to individually and collectively become more productive. (If you view credit as a tool for moving money through time, then this is also the most natural response to a credit crunch: “You’ve had the meal, now wash the dishies.”)

Sadly, because of the very nature of the current difficulties, it’s hard to imagine the population of any first-world country knuckling down and doing that!

Posted by Ian Kemmish | Report as abusive

Someone asked what a small investor with $30,000 or so of investment money can buy to survive through the Great Hyperinflation. The answer is a few silver bullion futures contracts delivered.

Open a commodities futures account with a futures dealer which is experienced at delivery. PFGBest, RJFutures, and a few others come to mind. Avoid ThinkorSwim, Interactive Brokers, and OptionsXpress, and the like, who claim to be “futures brokers” but refuse to deliver.

Buy NYSE-Liffe mini-silver contracts for a 1,000 ounce bar of silver each, at the nearest maturity date, and take delivery as soon as the contract matures. Don’t buy COMEX miNY silver, as it is cash settled, not subject to a delivery demand. Deposit all the money needed to buy the futures contract at the price you paid, and after you obtain your bars, bury them somewhere.

Silver and gold are both heavily manipulated by JP Morgan, Goldman Sachs, HSBC and others, who conspire with the government to hold down prices, as well as create the volatility that allows them to profit. But, they are incapable of creating silver out of the air, which is why the price has gone up so much in the last 8 years. They basically make their money off the volatility, by chasing out highly leveraged long players on a periodic basis, and closing their short contracts at a profit.

If you take delivery, and hold for the long term, you will beat them, because the short term volatility will not affect you. As the hyperinflation takes effect, there will be a huge jump in demand for all goods, including the electronic goods that need silver so badly, and have caused the market to be in perpetual shortage for 8 years. That will be combined with crazed investors who, unlike you, were not lucky enough to read my comment in time to buy silver and/or gold (if you have the money for the latter) in time to get a cheap price!

Posted by John | Report as abusive

Paul, I am sure that most people have a good understanding of what money is. Be it in the form of a computer entry or a stack of notes or coins. Fact is that there is now more getting created, and that is to make up for the fantastic “profits”, silly salaries, bonuses and simple fraud and theft. The pie is only this big at any given moment, and slicing it in more pieces (creating more money without extra production) will make you poorer. You were lucky to match inflation after taxes before, you can be sure you won’t in the forseeable future.
Gold, on the other hand, is an almost finite resource. It cannot easily be manipulated and certainly not created out of thin air so dicing it in thinner slices is impossible if you have it in your hand! That is the difference.
Trusting your government by sitting on cash is foolish. Trusting the stockmarket by sitting in equities is not clever either, and anyone expecting a reverse into the bull market that we have seen for many years is going to be disappointed, since it was fuelled by “cheap” money. Sitting on gold is not guaranteed to save your sorry behind, but I would rather trust gold than either of the other.

Posted by G. Kaiser | Report as abusive

I have been thinking about this alot lately; what to purchase to preserve my savings in the face of the coming devaluation. The only thing I can figure is debt. By taking on as much debt as possible (by purchasing solid fixed assets, ie. property) with today’s dollars and repaying it with the future value of these dollars, ie. devalued dollars, we should be able to maintain our savings, or at least have something to show for it in the future.

I do not think gold or other commodities are a stable store of value, as even their prices have been non-responsive with the announcement of the latest fed actions.

The biggest problem with this theory, however, is that we do run the risk of being wrong. We are assuming (those of us who follow this prescription) that we know more than those who are in charge. This may or may not be true. We may simply be focussed on two different perogatives; the fed’s battle w/ depression and our battle with wealth preservation.

If the fed has accepted the cost of economic revitalization as a currency devaluation, which it seems they have, we must position ourselves on the defensive.

My personal course of action, with say a $30,000 savings is to buy a property. Do solid research and find a property whose owner simply can’t hold onto it anymore. Even if the aggregate price level, ie. inflation rate, stays stable over the next several years we will have lost little–as we did buy the property at a 25% discount to the aggregate housing peak, and with solid research, it is easy to find prices depressed to 50% of the ag. peak level.

To me, this is the most stable course of action. I do not see why dollar would stay stable with the activities of the fed; it should devalue. By borrowing money and paying it back with inflated dollars, like the US government is attempting, we should preserve our savings.

Posted by John | Report as abusive

If inflation is highly likely, what are the alternative for the average investor? Some automatically say “gold”.

But what about U.S. inflation-linked bonds, such as TIPS or I-Bonds. Those bonds are keyed to one of the consumer price indexes. (FYI, Inflation is probably higher than the official CPI as calculated by the federal government). However, are inflation-linked bonds a meaningful alternative to gold?

Posted by L. Taylor | Report as abusive

After reading some of the newer comments regarding protecting saving s with land acquisitions, something occurred to me.

Yes, land is at depreciated prices right now (in comparison with its previous bubble status) and it would definitely appear to be an opportune time to invest in land prima facie. Even in my jurisdiction (BC, Canada where our provincial Premier has frozen property assetments at 2007 levels to guarantee that the government won’t experience the decline in property tax revenue) there are for sale signs everywhere. There have been for almost two years…but noone is buying.

Now let us ask, “what type of land will be most beneficial to acquire?”

Will it be a condo suite (or complex) 30 stories in the air with no soil to rub between your fingers? What about commercial property? Will urban property altogether be not worth the trouble (think security)?

Now I know that not everyone has access to the same kinds of property, but what I personally had in mind was something a little more remote, with a natural watersource (which can be converted to basic hydro-electric power), trees, wildlife (game) and arable soil.

True, I may be going a bit too far, but after researching what happened in Argentina in 2000-2005 after their currency crisis, and whats happening all over the world (think Greece for example – a week of rioting over a 15 year old? Me thinks there is more to it all than just that), I do not want to be in any major urban centre when the fit hits the shan.

Food supplies will take only days to disappear from shelves (do you have an adequate supply already, or not?), and then the ‘fun’ will start.

I’ve been to NYC, LA, Chicago…and those are the LAST places I’d want to be when the bad news hits.

Unless you’re one of the people out there who still thinks there are some great deals on the stock markets in which to park your savings, or are depending on your respective governments to save your currencies from looking like Zimbabwean ones, I suggest you think about the following:

1. Food and water supply
2. Petrol supply
3. Security (guns & ammo?)
4. Starting up a support network of those you TRUST
5. HAM radio with NOAA capabilities
6. A remote marshalling area for families and support network to report to before executing Plan B
7. Having a Plan B

Hope for the best, but prepare for your families.

Regards,

Your Northern neighbour

Posted by Baron von Lufthoven | Report as abusive

A great article, and I wonder why such so few when the mess is so obvious.

I do not know whether to buy gold or other hard assets like land, but I do believe that we have to begin to create disciplined communities to withstand the chaos of the collapse of mega-polis, which I believe is already this side of the horizon. Which is probably why so few articles as this one.

Posted by Eso | Report as abusive

It is deeply distrubing to myself how many individuals realize that our government is further destablizing our financial system, yet he fed and treasury continue to do so at a huge cost to the common man. Our government appears determined to bail out wall street at any cost and bankrupt the country in the process. I think it reflects the access money has in our government, because there can be no other reason for such clearly disturbing actions. Contrary to what the government would have you believe, deflation makes wages go further, allows you to spend that extra money increasing overall properity, and encourages saving which is woefully limited in our society. Increasing the money supply encourages the excessive risk taking that got us into this mess. In addition low cost funding promotes the use of leverage causing the boom bust cycle to begin again prevents true price discovery, bails out debtors (banks), and ensures those who have worked and saved are runined. How can someone who has studied economics so extensively be so clueless to what our economy really needs.

Well, when I meant property, I simply meant something tangible, not necessarily a lot to put up condos (I doubt that market will be coming back any time soon). On another note, I do live on a farm, so the access to property to grow and hunt food would also be a plus in the scenario alluded to above.

But I doubt the world is falling in around us. I’m not necessarily an alarmist, but I am alarmed at the potential financial ramifications of the fed’s most recent activities.

When I reccomended the purchase of property I am simply stating that the purchase of something with a high level of intrinsic value may be desirable. Not something like a stock or other business. Property has always been desired, as has gold, silver, and other commodities. However, gold, and commodities in general, seem to be as over valued as most other things this decade (and fairly unwieldy to handle).

To me, property just seems more tangible and a better investment as you can take out a loan to pay for it. If we get moderate inflation, the present value of that property, paid in future dollars, is drastically reduced. If we get a full scale armageddon scenario, which seems to be mentioned above, most likely the banks that we need to repay will be out of business, and the thought of wealth preservation will most likely be pretty low on our priority list.

My main intention is recieving a tangible asset that I can finance over time. The world is not falling apart, things are no more screwed up than they have always been. We all just seem to be paying much more attention to things than we used to (myself included).

The current recession and financial turmoil is simply that. It doesn’t signify impending doom or anything out of the ordinary. It may be more severe than usual, but so was the up-swing. This current situation is a necessary correction.

Our government’s hadling of it, for the Americans, may be the appropriate response to stave off a future Great Depression. I know that I would rather have a job paying me in devalued dollars than no job at all.

That said, however, I am going to prepare myself to attempt to capitalize on what looks most likely to happen. Which gets back to the initial idea of financing something solid and tangible; my suggestion – property.

Again though, I am not a specialist, just an outside viewer who will undoubtedly continue to be affected by the actions of those in Washington.

Posted by John L | Report as abusive

Instead of relying on the bank willingness to start crediting the economy and instead of bringing down to almost zero the bank’s refinancing rates Fed could create a couple of new state controlled banks with less capital that is needed now to save the Wallstreet.

This will allow crediting the economy right now and do not wait till banks sort out all their problems and will allow keeping the interest rates at the sane level.

Sounds like socialism, but why not if it works? If the state is controlling the prices of food by active participation and intrusion in the food market why not in the banking?

For sure this approach will bring down many banks but depositors would be protected in any case to a limited amount by deposit insurance (state giveaways anyway).

This will save the system from the unnecessary inflation and will get rid of insolvent banks instead of saving them.

Posted by jamap | Report as abusive

Mr. Saft, thanks for pointing out our debtor status, versus creditor status entering the depression of the 30′s. I believe this, plus the unprecedented leverage, that truly does mean it’s different this time and goes some of the distance to explain why phase one TARP and TARF failed to accomplish any stimulation. It concerns me greatly that the Fed will not disclose any detail about the assets that are on it’s balance sheet because I doubt that their definition of a “haircut” would stand up to public scrutiny, and that the public has an even greater future liability to deal with than we realize.
I fail to see how quantitative measures will be different, and the upcoming fiscal stimulus will just add risk to the world financial system. The odds of stimulus spending creating productivity and improving the US’s ability to compete in the world seem remote, but at least those measures will get the money out of the banking system and in hands where it will move and contribute to short term velocity.
I am wondering how many failed programs and how many years it is going to take for our government to realize that they are experimenting and that we will not return to a borrow and spend mentality, if for no other reason than we in the real world can openly see the folly.

Posted by Gary Leeper | Report as abusive

Get rid of so-called “shadow banking”, and bring the CDS market et omnis under a transparent global regulator with teeth. Otherwise, the governments are outmatched by heartless, ruthless, and anti-patriotic leveraged capital pools that exceed governments’ resources.

Posted by uhohjongo | Report as abusive

Huge potential for higher taxes and insurance on real estate.

Posted by kelly p | Report as abusive

Lets see if I understand our Congress, We the taxpayers
present and future generations have spent over a “Trillion Dollars” Bailing out people who didn’t do
their job. Wall street should crumble under it’s own
neglect.

Posted by Clyde Preston | Report as abusive

The U.S. Federal Reserve has absolutey no credibility when it comes to (1) the notion that excess liquididity will be mopped up when (2) the economy improves. If massive dollar devaluation is not accomplished in the open FX market then unilateral massive devaluation will most certainly be resorted to in January 2009 before the new administration takes office so that resulting anger and blame cannot be directed at the Obama team. Massive devaluation will be massive theft of those finacially responsible in order to recapitalize those who are teetering on default as Mr. Bernancke acts out his academic thesis with the determination have the Fed do “whatever it takes”. Interest rates will will go to sub zero; very soon to minus 2%, as Bernacnke and Paulson take the Dollar into uncharted dark territory. A 40% devaluation from current levels is imminent.

Posted by Ex-Apostle of the $USD | Report as abusive

I think it is preposterous that people keep thinking that ‘WE the people’ are going to have to handle this debt. We don’t make anything any more and a good number of us don’t have jobs. Exactly how are WE going to pay off this massive debt that the government is proposing WE tackle and claim as our own in order to bail out BANKS and BLOATED BUSINESS’?

You cant expect people to pay for debt with what they don’t have money to pay it…as more and more people loose their job, the pressure to pay these massive debts will bankrupt the very people who are still working and capable of paying them…it is a crazy snowball effect…

If there is someone that is not thinking things through, it is our government…they must be SO out of touch with what is happening to ordinary people that they cant get any real perspective on what they are actually proposing WE take on through this massive debt scenario.

I am not working right now, but I already have MASSIVE crazy debt that I got myself into…how exactly am I supposed to take on the current debt load of another $500,000 per household that our bailout package is going to strap on our backs…

Even if I was working I could, in no uncertain terms, afford another $500,000 dollar loan added to the insane amount of debt that I already have.

Posted by Kiki | Report as abusive

Deadly accurate Mr Saft. You state: “the US economy needs to redirect itself more toward savings and producing goods and services that can be sold overseas”.

The chances of this must be near zero. As you say, the Fed has to dismount the tiger – and the size of the tiger is shown by Fed figures on M1. which after nearly 100 years of a steady track has suddenly launched into outer space.

But that’s not all. The situation was produced by:
• consumer borrowing to fund consumption and consequent national borrowing to buy imports
• politicians relentlessly pushing cheap funding for housing; e.g through Fannie Mae and Freddie Mac and refusing to tackle the cause of earlier symptoms
• the finance sector obliging all with hucksterish practices and infantile analysis of risk
• a Fed chair and supervisory bodies exercising minimal supervision and focussing on a narrowly defined measure of inflation – not to mention non GAAP figures for national debt et al.

Can one imagine U.S. consumers, politicians, financiers, regulators, and central bankers all working together to navigate what you call “the very terrible impact of reallocation”? Is there any appetite to tackle the issues? Well, just look at most of the comments on your column.

As U.S. debts mount, weak economic performance makes servicing them increasingly difficult and foreigners get more nervous about the US $, very rapid depreciation of the dollar and hyperinflation is much more likely.

Posted by NZ economist | Report as abusive

An ounce of sweat is worth an ocean of tears.

Posted by kelly p | Report as abusive

Europe and Japan had to rebuild themselves out of the remaining rubble left from World War II. As a result these nations developed a public mindset of personal thrift, sacrifice and forward looking attitude all to better prepare for the future. We must also let go of the past and build a new future. The difference is we have a choice while Japan and Europe did not.

Building a green energy infrastructure goes without saying. However, regarding all those outsourced manufacturing jobs, we must find a way to reinvent those industries and rebuild them inside the U.S. and keep them here. We have seen the disaster that globalization has wreaked upon the world. History is replete with the collapse of empires and thriving societies that were too dependent on the flow food, clothing, labor and raw materials of industry from other nations.

The cry is loud and clear from the celebrated and the common man, “We don’t make anything in this country anymore”. As long as the printing press is cranking out dollars, why not spend a little to build some state of the art clothing, shoe, appliance, auto and tool manufacturing facilities. We have millions of unemployed so let’s build and retrain immediately. We must then protect the industries we rebuild from the regional and political interests that have divided this country for over three decades. I think the functional word here is self reliance.

As the world could not depend on the U.S. to keep buying there products, we cannot keep depending on the world to provide them for us. Fiat currencies are worthless, so while we devalue the dollar and make it more worthless, we should aqquire the capacity to at least get ourselves to work, feed, cloth and shelter our families before Chinese goods become to expensive too.

Posted by Anubis | Report as abusive

The US is no longer competative in the world. It’s high life style requires it to work for salaries that the world can no longer afford. How can any US company complete with a $1/per hour bid from China? Food & fuel will be the only investments , besides gold , that have any value for a good many years going forward. The world doesn’t need any new Tech or banks . It’s back to the basics. These are the jobs that the US outsourced to the lowest paid work forces in the world. Now they have to reinvent themselves.

L Taylor,

For the sake of argument, lets establish a scenario.

It’s September 2009 and the banking crisis has further decimated the banking system – and more importantly the public confidence in it. Add that to the near hyper-inflationary properties of the US dollar by that time as a result of over (so far to date) $8 trillion USD worth of monetized debt.

Now, lets say for example that my car was in disrepair and you were a mechanic. I have in each hand a medium of exchange for you to choose from for payment. One is a 1 troy oz bar of gold and 5 ozs of silver. In the other, I have some bonds – which have to be monetized into some form of currency in order for you to gain the benefit from them…gold you can turn over immediately again to anyone on the planet. A US bond however is not so palatable to everyone.

My bet is that I’d be driving away with that bond in the back seat, and you’d be nestling in your garage petting your ‘preciousssss’ bar of gold.

Hope that helps some.

Posted by Baron von Lufthoven | Report as abusive

Careful Baron. That dude behind you follows you home, puts a knife to your loved ones throat, and you’re lucky when it is over to have anything left.

Posted by kelly p | Report as abusive

kelly p,

Of course if you have any gold or silver, if you have any sense, you’ll also have guns & ammo.

Guns & Gold go together like Mac & Cheese

Happy Holidays

Posted by Baron von Lufthoven | Report as abusive

Granpappy said “like chitlin’s and collard greens”.
Merry Christmas.

Posted by kelly p | Report as abusive

Im facinated by the discussion linking violence with poverty. I grew up in India in the 70′s when the economy and currency management was an absolute mess. Poverty was extreme and yes people did keep gold and stockpile enough water and food to get through shortages during summer. However I walked in the poorest area’s and there was never an increased level of violence due to poverty. In fact most of the poor parts of Asia are the same today – pretty safe.

No matter how bad it gets – its not going to be as poor as India was then – probably more like what Japans going through now.

For all of these commenters – dont you think the US is civilized enough not to fall apart from a bit of financial chaos? Is it not as strong a society as India.

As a guest in the USA for many years – I think it is a a strong society and will not falter. My reccomendation is buy the gold – forget the guns. If you actually need guns then move somewhere safer in Asia rather than live in extreme violence – thats my plan B.

Posted by Raj | Report as abusive

The government is not out of touch. They are working together with the international bankers who own the federal reserve corporation. This is a cabal that intends to bring about another great depression so they can buy everything up at rockbottom prices and ultimately kill the dollar. They will make money on the way down then make even more on the way up. According to Franklin Roosevelt “the US government has been owned by a financial element in the large centers since the days of Andrew Jackson.” Look up the documentary called Zeitgeist:The Federal Reserve if you need more info on what the real problem is.

Posted by jay | Report as abusive

Actually if you pump money into companies to create products for non-existent markets, the end result is not inflationary. For instance if we paid auto makers $800 billion to upgrade machinery and restructure, the general idea is that the new products will be sold for less or at prices that are more competitive than in past years. When we pump money in banks, keeping competitors alive rather than letting them fail, we maintain a larger number of players going after the same market. That is actually deflationary. In effect we are financing slimmer profit margins. This means in the longrun the cost of repaying the stimulus will be much more painful than the stimulus itself. Times have changed. But we still keep harping on prehistoric concepts.

Posted by Don | Report as abusive

Raj writes:

“Im facinated by the discussion linking violence with poverty. I grew up in India in the 70’s when the economy and currency management was an absolute mess.”

My question is:

Is the particular region to refer accustomed to abject poverty?

Let me assure you that the majority of America is not.

You continue:

“If you actually need guns then move somewhere safer in Asia rather than live in extreme violence – thats my plan B.”

There are here in North America (I know it’s hard for foreigners to imagine) those who consider these lands to be theirs. They do not just up and go when the going gets tough. I always felt that focusing the base of a nation upon those who flee for comfort was a weak policy of statecraft but nonetheless Americans, historically are not prone to running away from their native soil when things go sideways.

While those ‘guests’ of the continent are more than free to seek refuge elsewhere, those who consider this their home will not.

Posted by Mr. North American | Report as abusive

It forever amazes me how economists are unaware of the political consequences of this or that policy. Do they really expect that government will actually confiscate gold? From burying it in a mason jar in the back-yard to a foreign bank vault! Let the hide-and-and-go seek games begin! From gold teeth crowns to Aunta Agatha’s wedding ring, from Krugerrands to American Gold Eagles (sold by the US Mint) the price per ounce would rise to thousands of dollars overnight. Meanwhile, the peasants will not crawl off in a corner and die quietly. That sound you hear outside the gates of Dr.Frankenstein’s castle is growing louder. The peasants are angry and are carrying torches and pitchforks! Plutocrats have nowhere to run, nowhere to hide. As of now the dolar blizzard is up to our knees. By next year it will be up to our necks. Lay in a supply of gold sovereigns,good cigars and fine whiskey. It is going to be a long, long winter.

Many good points made in the article and comments. Never dawned on me that in our brave new e-world there are many “virtual dollars” not accounted for in the M1! Would advise all that there are skills to be learned beyond the mentioned cigar smoking and whiskey drinking. Purchasing a rural property provides the opportunity to tend a veggie garden and can the output for winter, home grown grass fed beef is cheaper and better for you, too. Reduce, reuse and recycle makes economic and environmental sense. As agricultural and domestic skilled trades will be needed in tough times it will become more useful to be a “maker” than a “consumer”.

Posted by pumpkin | Report as abusive

Actually if you pump money into companies to create products for non-existent markets the end result is not inflationary? Obviously the writer must live in an alternate universe. When you pump money into factories producing things people don’t want – like electric cars it means that the factory is not producing the cars that people do want. Scarcity of the desired product combined with the debt incurred and a loss of capital investment in the goods and services people do want creates stagflation. The cost of goods and services skyrocket as money is flushed down a rat hole.

Posted by Peter Berg | Report as abusive

If your really that scared, go buy land(the only “real” asset), bring a sack lunch and wait for the end of the world.