I read Martin Weiss' 12-08-80 newsletter
and tried to crystalize out his line of reasoning leading up to his prediction of economic depression, which as he thinks cannot be averted by Federal Reserve's, congress' and Treasury's actions.
He predicts that the United States economy is headed for depression because of two coinciding trends last crossing in 1929, deflation and debt exhaustion, each of which in isolation would be managable, but together launch a spiral of
debt default-->bank insolvency--->credit crunch--->asset price deflation--->demand destruction--->business default--->job losses--->further debt default.
The reason why reflation attempts fail, regardless of quantity, to prevent demand destruction and unstoppable economic contraction is excessive debt preventing further indebtedness to fuel demand and economic recovery.
His prediction may have important consequences for gold bugs and critics, because if he is right, gold may spiral down with deflation of prices as the Dollar gains in purchase power. If he is wrong, and the Fed succeeds in reflating the economy by sufficiently capitalizing banks through monetizing failing bank loan assets while the Treasury succeeds in stimulating growth, the price of this rescue will be inflation and gold prices will rise as the Dollar falls. There is a historical precedence for rising gold during deflation, where its rising value as a last resort asset became more important than its falling value as a backing to a stronger Dollar.
Anna Schwartz' clarity and logic cuts through Federal Reserve Bull$it with the hardness of a Toledo Steel Claymore and the sharpness of a Samurai blade.
One of the best economists ever alive.
May God Bless her
Batsh, great article it is hard to believe a 92 year old lady can speak so clearly, intelligently, concisely, courageously and with wisdom. It is also shocking that she can "see" the problem with such clarity and was quick to assess the heart of the problem.
I am sure Bernanke read her words, it must of hurt.
One comment, in reading her words, she speaks of the banks as a local problem....a US centric problem. She may not realize the international implications and potential image lost to the country by foreigners. The US economic problem may of caused political image problems, i.e., a foreigner who invested in a US company security and US guarantee may of perceive the economic downfall as intentional by the US government. In other words the foreigner may not understand it was just a bad decision made by a bad US company. The US market is much more intertwined with the world market today than in her day. This is NOT to say that there wasn't an international crisis in her day, it is to say the World financial intertwined market has really only matured in the last 20 years.
I do agree with her assessment as to what the "REAL" problem is, she is right on. I am not sure of the wisdom of maybe for instance letting AIG fail given 50% of US bonds are purchased over seas and it would be difficult to explain to a typical foreign investor who lost money because of AIG bankruptcy that yes the US government could of bailed out AIG but chose not to based upon principle. To say the previous sentence to US investor would fly, to a typical foreign investor it probably would not fly, without serious repercussions.
Batsh, I thanked you in your other post for writing this exercise....I swallowed my pride and did the exercise and with time grew to appreciate the significance of the exercise, i.e., became a bit more part of me.
There IS a difference between intellectual discussion of swimming and actually swimming.
psa150vs6,sorry I over-looked your response....we're kickin' it on three tiers at once...it gets to be confusing, LOL
Yes, a bail-out for one month costs 4964.01, one year is just under $60,000 of a "reserve" injection. Not bad compared to a Mill notional congress scare.
You could also modify the loan to lower payments or extend the loan term.
Going through the numbers always helps, even if you qualitatively get it. I do this all the time to understand more deeply. In any case, it is obvious that the implications of insolvency an illiquidity are strikingly different....and banks, while balance sheet insolvent, do not have a liquidity problem, because they can flip illiquid assets at the Fed windows and liquid assets in the markets.
The Fed and Treasury, however, have acted as if this is a lquidity problem and continue to inject liquidity to squelsh a FEAR problem, which, as you so brilliantly pointed out needs clarity and transparency through GAO and audits, not money.
Anna Schwartz wrote a blistering critic of Paulson and Bernanke accusing them of not understanding this difference between illiquidity and insolvency among other things. You should read it, it's very enlightening. After all she and Milton Friedman wrote the book on depression.
Hi bat and everybody,
Not everybody agrees that FDR was a great man, or the savior of the United States during the 1930's and 1940's.
Amity Shlaes, the WSJ columnist and economist, wrote a bestselling novel, The Forgotten Man, in which she proposed that the Great Depression resulted from:
(1)Deflation and credit challenges at banks
(2)Loss of int'l trade
(3)Federal Government tried to balance budget during the deflation/depression
(4)Gold standard prevented reflation
(5)The deepest problem was government intervention:
(a)Smoot-Hawley tariff caused retaliation by foreign governments (b)Hoover raised taxes in 1932 (c)wage controls (d)Soviet model of central planning--"Brain Trust" of college professor advisors, many who had travelled to Russia (e)Roosevelt persecuted businessmen, including Treasury Sect'y Mellon and industrialist Sam Insull, and sought to blame them for the Depression--creating scapegoats (f)government businesses, such as the Tennessee Valley Authority, crowded out private business (electric utilities) (g)Wagner Act encouraged the formation of unions (h)price controls--keeping farm prices high by restricting acreage used for plantings, killing young piglets to keep pork prices high...
Why didn't Dr. Weiss mention any of these matters?
We are dealing with complexity NOT unpredictability. You are simplifying the human condition too much to the point that the your proposed model would be useless. Randomness is a very very very very simple model of complexity.