Chairman Ben Bernanke has some radical ideas about pumping money into the economy to keep prices up. This is no way to kick an economy when it's down.
The Bank of Japan sent pulses racing recently by announcing that it was going to hold an unscheduled meeting to discuss monetary policy -- the net result of which (surprise, surprise) was a decision to spend about $115 billion in the form of quantitative easing.
What are the real risks of deflation?
Japan's economic malaise is, and ought to be, a reminder of what the consequences of financial bubbles can look like.
As we pursed our twin bubbles here in the United States, in tech and real estate, I was always amazed that so few people seemed to understand that in the aftermath of a bubble that creates a disaster, it's not bad decision making after the fact that creates the disaster. It's the bubble, and the misallocation of capital while it is building, that creates the disaster. (More in a second about misallocation, Dubai-style.)
That is not to say that decisions made in the aftermath can't make things worse. They can. Perversely, nearly all decisions wind up making matters worse, as governments are loath to let negative events run their course.Not all the selling was 'made in Dubai' When I first saw the news of Dubai's debt crisis, I wasn't sure exactly what to make of it, but the 4% swoon in world equity markets seemed a bit much to me.
My oft-cited friend the "Lord of the Dark Matter" offered his view, and it's one that I share:
"In terms of scale, the problems of Dubai will potentially be not much larger than a big municipal bankruptcy in the United States, for example, and currently (at maximum) represent roughly 10% of the overall write-downs thus far from the global financial crisis. However, this does not diminish the fact that an important part of the Gulf would appear to have a substantial dollar-cash-flow problem."
From what I've been able to discern, Dubai has been an overbuilt, debt-driven accident waiting to happen for some time now, and I suspect that in the coming months we'll see more dead and/or wounded financial bodies popping up in various facets of businesses with a connection to the United Arab Emirates. More from MSN MoneyHow much longer can gold rise?The dollar's down decadeArrogant Fed hasn't learned a thingFarewell to Wall Street's decade of hubrisIndia's big vote for a gold rallyDubai also demonstrates the fact that financial entities continue to be black holes. Since we still know little about them -- i.e., what exactly they own and how what they do own is valued -- folks can easily become fearful about what might lie beneath the surface.
It doesn't take much to conjure up the ghosts of late 2008, when the full measure of all those toxic assets surfaced. From an investment standpoint, buying financial stocks should make you ask yourself the question posed by Clint Eastwood's Dirty Harry: "'Do I feel lucky?' Well, do ya, punk?" 'Bernanke at his word' So read the headline of a recent article by Jim Grant, in which he reprised a speech that Ben Bernanke gave in Japan on May 31, 2003, as a Federal Reserve governor, three years before becoming Fed chairman. (You can find the article here; subscription required.) The topic that day: deflation.
Posing his own question and answer, Grant writes: "And what was deflation? Falling prices, pure and simple. Bernanke did not bother to distinguish between prices that fall on account of a banking or credit crisis vs. those that fall on account of advances in productive technology or improvements in economic organization. It was all the same to him -- and all bad."
Video: Japan's fight against deflation
As Grant notes, the speech Bernanke gave on that particular day in Tokyo was more radical than his musings had been in the U.S., at that time or since. In Grant's words: "It isn't enough, after prices have begun to fall, to stop the decline, the chairman said. Rather, a central bank should push prices up to where they would have been if they had never weakened in the first place."
Reread that. It is rather shocking.What Japan heard from our whirlybird In Bernanke's words: "One might argue that the legal objective of price stability should require not only a commitment to stabilize prices in the future but also a policy of actively reflating the economy, in order to restore the price level that prevailed prior to the prolonged period of deflation." (The emphasis is mine.)
It's absolutely mind-boggling that this is in Bernanke's DNA. Not only are all falling prices to be prevented, but prices must be driven back up to where they used to be.
To quote Bernanke further: "Because deflation implies falling prices while the target price level rises, the failure to end deflation in a given year has the effect of increasing what I have called the price-level gap. The price-level gap is the difference between the actual price level and the price level that would have obtained if deflation had been avoided and the price stability objective achieved in the first place."
This is the core of Bernanke's heart and mind, and anyone who thinks that this Fed is going to lift a finger to fight inflation anytime -- before the unemployment level has dropped precipitously or the economy is nearly broken -- is sadly mistaken. (For more on the effects of this and how to protect yourself, read "The case for inflation -- and gold.")
What are the real risks of deflation?
As Grant says, "'Helicopter' is who he is." He's referring to the nickname Bernanke's critics have given him because of his propensity to fire up the printing presses and airdrop money into problems.
I might tweak that slightly and say: Helicopter's the name, gold's the game. HousekeepingOver Thanksgiving weekend I was interviewed by the "Mad Hedge Fund Trader," John Thomas, on Hedge Fund Radio. You can listen to the wide-ranging discussion by clicking here.
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The term "keynesians" are descriptive of Mr. Ben. In Michigan we have underway a precipitous fall of values in real estate. A real estate "deflationary situation". The State government is in total anguish over the huge plunge in general state revenues. The State now needs double digit increases in values of real estate to help replenish the coffers. On a national level, think about it. To try to reflate the economy with stimulus is folly policy, one that will fail. It may seem to work initially but it will fail and the second fall will be fatal. God help our nation. The entrenched economic doom will consume our democracy. We have in power those who will also take advantage of the situation and create a new more sinister replacement for democracy. From a conservative viewpoint, "you can't spend your way out of debt" the end consequences are more painful than you can imagine.
As with comsense and many others, I saw this months ago. I agree this is a very dangerous situation and not just economically. Americans are, generally, ignorant of the true situation and are easily led by radical agendas of one kind or another. With this in mind, I find myself considering what I say and where I say it, just in case as they say. I never, never thought I would find myself thinking that way in America. I, also, find many who simply don't want to think or talk about it at all.
One thing the situation has helped me understand is Nazi Germany and how things played out there. I was never able to understand the passivity or the cruelties of the German people until I witness it here. Reality can be very difficult to cope with but may the gods help those who don't face it.
I agree with Mr. Fleckenstein ... BERNAKE WILL NEVER RAISE RATES !!!!! Why? Because if he did, Uncle Sam would default on debt ... but unlike Japan, the U.S. can't keep short term rates at 0% without inducing HYPERINFLATION. Why? Oil is priced in dollars .... not in Yen. The **** "pissed" on their own currency to keep their export economy to the United States afloat. A kid in Japan couldn't buy a Microchip 8 bit processor for $2 even if he wanted to ... because Hitachi wasn't going to allow that **** kid to buy any American products for less than what he could from a Japanese company. The United States wants to believe it is "technology superior" to other nations. Nothing could be further from the truth. Every tech product made in America can be made cheaper in Taiwan, Korea, and Thailand ... and not only that ... tech products are cheaper to DESIGN in those countries. The only export advantage America has is timber, coal, corn, and soybeans ... because the U.S. is not as "crowded" as Asia. Like Jim Rogers said, "when the inflation comes, if you are not a farmer or own a coal mine you're going to be a nobody in America."
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