Here in the Philippines where I live, we are just coming out of the rainy season but today it is persisting down with rain. But it's not so bad, at least the rain is warm and the air is so much cooler. Makes a nice change from all that hot sun and humidity. I've been pondering on the financial crisis, wondering which way it's going to go -- will it be deflation, where GDP and growth are concurrently and neatly garroted and the whole economy remains neutered for years (because the velocity of money or spending is negligible) or hyperinflation which, driven completely by market and human behaviour, is where the population -- en masse -- suddenly decides in a panic to give up on their currency and effectively rush into hard assets such as commodities or other more stable currencies (where the velocity of money rapidly rises out of control)? Put simply -- deflation utterly kills and stagnates or reverses the economy, whereas hyperinflation slays and decimates the national monetary base. So, both deflation or hyperinflation can easily train-wreck any economy. This is the choice. Both Europe and the US are still currently in deflation, with the Fed trying to desperately turn this disinflation spiral -- through its inflationary QE policies -- back into a mild, steady inflation of about 6%. A helluva balancing act that is rarely successful.
"Obama would regulate bubbles," quotes Politico in one of its more memorable articles.
Really? I guess Obama must be God then. Nobody -- but no government body -- has ever been able to regulate or spot any of the bubbles that have so suddenly and viciously erupted throughout the economic history of the US (...and anyone who does spot and warn of impending bubbles is either ignored or ridiculed). And the fact that Obama -- who really knows absolutely nothing about economics -- and who boldly spouts this trash with his rapidly tarnishing silver tongue, is surely testament to his complete lack of respect and disdain for his own beloved citizens. That statement by Obama is almost as dumb as him saying that Americans can save by spending more. Who's he trying to kid? From the Daily Reckoning:
"Oh, the sheer absurdity of it all! We have a government that doesn't even seem to know where bubbles come from. They don't know how they work. They don't know why they keep inflating. They don't understand why you can't deflate them slowly. In short, an administration with a rudimentary understanding of economics is confident it can regulate the next bubble - whatever it might be."
While shaman Ben Bernanke recently decreed that the US economy will start to recover by the end of 2009 -- which hat did he pull that one out of? Reasons? (none given, Ben has spoken) -- and all this from a man whose Fed monetary policies and gross financial manipulations regularly and so consistently cause these bubbles in the first place without fail. So much for for the myth of free, honest markets.
Much has been said within the US media concerning the necessity of China continuing their steady purchasing of US Treasuries. But it's all OK apparently, China is still purchasing our debt -- so there's no need to worry folks. Ah, but what the US media completely omitted to tell you is the fact that the Chinese are now purchasing short-term US Treasuries and have given up completely on the long-term 10, 20 and 30 year T-Bills. This is very bad news for the US. This new switch to short-term US Treasuries by China greatly hinders the US Government's capability of simply "inflating away" their debt to China over 20-30 years(China now only holds these Treasuries for only 2 or 3 years -- which is not enough time to dissolve the US debt by inflation). Other creditor countries are also doing this now and this is what is causing long-term US Treasury yields to move upwards so dangerously. Even if there is a mild recovery in the US stock market -- within the next 18 months, when the Chinese see further evidence that both The Administration and the Fed have been lying and are continuing to inflate(devalue) the dollar (and perhaps, by then, they will have also lost their AAA rating) -- thus eroding the value of even short-term US Treasuries, the Chinese are likely to abandon even these grossly manipulated and corrupted investment vehicles altogether in order to preserve their own surplus savings. The Chinese have already been buying up all the commodities and raw resources they can, both to protect their savings and to prepare their exit from this financial mess. And who can blame them?
Meanwhile, US GDP now stands vertically at -6%, real unemployment is already at 21% and CPI inflation is still heading South towards negative (all figures from Shadowstats.com). Bear in mind that hyperinflation generally leads to a fast economic death(think Weimar Republic(1923) or Zimbabwe), whereas deflation always seems to lead to a slower, lingering and more painful death(think Great Depression or Japan). The outcome -- deflation or inflation -- will depend on the existing and continuing Keynesian policy mistakes which are currently being achieved so effortlessly by the Obama Administration. Pure and simple. Take your pick.