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Why "stimulus" means inflation

Sandhusker

Well-known member
First of all, a message to Obamazombies; This is waaaay over your heads. Stick with your fluff postings.

Why 'Stimulus' Will Mean Inflation

In a global downturn the Fed will have to print money to meet our obligations.

By GEORGE MELLOAN
As Congress blithely ushers its trillion dollar "stimulus" package toward law and the U.S. Treasury prepares to begin writing checks on this vast new appropriation, it might be wise to ask a simple question: Who's going to finance it?

That might seem like a no-brainer, which perhaps explains why no one has bothered to ask. Treasury securities are selling at high prices and finding buyers even though yields are low, hovering below 3% for 10-year notes. Congress is able to assure itself that it will finance the stimulus with cheap credit. But how long will credit be cheap? Will it still be when the Treasury is scrounging around in the international credit markets six months or a year from now? That seems highly unlikely.

Let's have a look at the credit market. Treasurys have been strong because the stock market collapse and the mortgage-backed securities fiasco sent the whole world running for safety. The best looking port in the storm, as usual, was U.S. Treasury paper. That is what gave the dollar and Treasury securities the lift they now enjoy.

But that surge was a one-time event and doesn't necessarily mean that a big new batch of Treasury securities will find an equally strong market. Most likely it won't as the global economy spirals downward.

For one thing, a very important cycle has been interrupted by the crash. For years, the U.S. has run large trade deficits with China and Japan and those two countries have invested their surpluses mostly in U.S. Treasury securities. Their holdings are enormous: As of Nov. 30 last year, China held $682 billion in Treasurys, a sharp rise from $459 billion a year earlier. Japan had reduced its holdings, to $577 billion from $590 billion a year earlier, but remains a huge creditor. The two account for almost 65% of total Treasury securities held by foreign owners, 19% of the total U.S. national debt, and over 30% of Treasurys held by the public.

In the lush years of the U.S. credit boom, it was rationalized that this circular arrangement was good for all concerned. Exports fueled China's rapid economic growth and created jobs for its huge work force, American workers could raise their living standards by buying cheap Chinese goods. China's dollar surplus gave the U.S. Treasury a captive pool of investment to finance congressional deficits. It was argued, persuasively, that China and Japan had no choice but to buy U.S. bonds if they wanted to keep their exports to the U.S. flowing. They also would hurt their own interests if they tried to unload Treasurys because that would send the value of their remaining holdings down.

But what if they stopped buying bonds not out of choice but because they were out of money? The virtuous circle so much praised would be broken. Something like that seems to be happening now. As the recession deepens, U.S. consumers are spending less, even on cheap Chinese goods and certainly on Japanese cars and electronic products. Japan, already a smaller market for U.S. debt last November, is now suffering what some have described as "free fall" in industrial production. Its two champions, Toyota and Sony, are faltering badly. China's growth also is slowing, and it is plagued by rising unemployment.

American officials seem not to have noticed this abrupt and dangerous change in global patterns of trade and finance. The new Treasury secretary, Timothy Geithner, at his Senate confirmation hearing harped on that old Treasury mantra about China "manipulating" its currency to gain trade advantage. Vice President Joe Biden followed up with a further lecture to the Chinese but said the U.S. will not move "unilaterally" to keep out Chinese exports. One would hope not "unilaterally" or any other way if the U.S. hopes to keep flogging its Treasurys to the Chinese.

The Congressional Budget Office is predicting the federal deficit will reach $1.2 trillion this fiscal year. That's more than double the $455 billion deficit posted for fiscal 2008, and some private estimates put the likely outcome even higher. That will drive up interest costs in the federal budget even if Treasury yields stay low. But if a drop in world market demand for Treasurys sends borrowing costs upward, there could be a ballooning of the interest cost line in the budget that will worsen an already frightening outlook. Credit for the rest of the economy will become more dear as well, worsening the recession. Treasury's Wednesday announcement that it will sell a record $67 billion in notes and bonds next week and $493 billion in this quarter weakened Treasury prices, revealing market sensitivity to heavy financing.

So what is the outlook? The stimulus package is rolling through Congress like an express train packed with goodies, so an enormous deficit seems to be a given. Entitlements will go up instead of being brought under better control, auguring big future deficits. Where will the Treasury find all those trillions in a depressed world economy?

There is only one answer. The Obama administration and Congress will call on Ben Bernanke at the Fed to demand that he create more dollars -- lots and lots of them. The Fed already is talking of buying longer-term Treasurys to support the market, so it will be more of the same -- much more.

And what will be the result? Well, the product of this sort of thing is called inflation. The Fed's outpouring of dollar liquidity after the September crash replaced the liquidity lost by the financial sector and has so far caused no significant uptick in consumer prices. But the worry lies in what will happen next.

Even when the economy and the securities markets are sluggish, the Fed's financing of big federal deficits can be inflationary. We learned that in the late 1970s, when the Fed's deficit financing sent the CPI up to an annual rate of almost 15%. That confounded the Keynesian theorists who believed then, as now, that federal spending "stimulus" would restore economic health.

Inflation is the product of the demand for money as well as of the supply. And if the Fed finances federal deficits in a moribund economy, it can create more money than the economy can use. The result is "stagflation," a term coined to describe the 1970s experience. As the global economy slows and Congress relies more on the Fed to finance a huge deficit, there is a very real danger of a return of stagflation. I wonder why no one in Congress or the Obama administration has thought of that as a potential consequence of their stimulus package.
 

don

Well-known member
well sandhusker you're a little behind the times. that's been a concern of some people for about a year now. this was all foreseen by some economists and market analysts a while back. that's why the stimulus effort is futile. the developed economies are out of bullets because their growth has all been financed by debt and now the printing presses will start up, devalue the american dollar and it's going to get mighty ugly. gerald celente, peter schiff, robert prechter, to name a few have all seen this coming for quite a while. this depression will bring on a permanent weakening of the western economies relative to bric (and probably more).
 

Sandhusker

Well-known member
don said:
well sandhusker you're a little behind the times. that's been a concern of some people for about a year now. this was all foreseen by some economists and market analysts a while back. that's why the stimulus effort is futile. the developed economies are out of bullets because their growth has all been financed by debt and now the printing presses will start up, devalue the american dollar and it's going to get mighty ugly. gerald celente, peter schiff, robert prechter, to name a few have all seen this coming for quite a while. this depression will bring on a permanent weakening of the western economies relative to bric (and probably more).

I don't agree with you that I'm behind the times, but I agree with you on the rest of your post. This spending bill is irresponsible, short-sighted, and could very well cause a global depression.

Change we can all believe in.... :mad:
 

don

Well-known member
i don't think it matters which party or which person is presedent now. they could not be seen to be doing nothing so there would be a stimulus package of one sort or another proposed and then it would be prostituted through congress. nobody, democrat or republican, could sit by while this unfolds even if it's bigger than any one country can control. the other thing is it's fine to just yell tax cuts for stimulus but bush already did that and increased expenditures beyond any extra revenues with his stupid, illegitimate war. the tax cut shot has been fired in the wrong direction and the magazine is empty.
 

Sandhusker

Well-known member
Tax cuts work - just about anything works, if the government cuts their own spending. That was Bush's problem, he didn't mind the checkbook. If we cut taxes without raising spending, we'll get out of the hole.
 

don

Well-known member
nope, you already went over the tipping point. it's beyond control; we're all just going to have to ride this one out.
 

Steve

Well-known member
don said:
nope, you already went over the tipping point. it's beyond control; we're all just going to have to ride this one out.


most of the business insecurity concernig taxes is "what will happen?"

how do you as a business plan for higher taxes in comparison to stable or lower taxes?

even a small rise in taxes now would help if it was backed by a commitment to not fiddle with the taxes for an extended period.

With all the "tax the rich" Rhetoric that Obama used on the campaign trail, few small business are willing to take risks with capital only to have it taxed away from them..

So Obama needs to send a clear signal as to what the liberals want.. so the businesses can plan how to invest thier capital.. and not pay any more of his excessive taxes..
 

aplusmnt

Well-known member
Sandhusker said:
Tax cuts work - just about anything works, if the government cuts their own spending. That was Bush's problem, he didn't mind the checkbook. If we cut taxes without raising spending, we'll get out of the hole.

I agree, four things need to be done and this would be a short lived recession. Cut capital gains tax, Cut government spending, drop the lowest two tax brackets by 5%.

They do those four things and the economy would be booming more than ever by the end of the year.

Thing is it is the lower tax brackets that get the break primarily, thought the democrats want to help the poor!

People would start getting bigger checks in two weeks from the day it is signed, what more would stimulate the economy so fast as doing this?

Problem is Politicians want to spend our money how they chose, they want the condoms and the water parks they not want us to chose how to spend the money.

And the thing is with lowering the bottom two brackets by 5% is that the stimulus will be evenly distrubuted amongst the entire country, not just who gets the pork!

There is always a simple solution but politicians will never take it! They have political debts to pay!
 

Tex

Well-known member
We are at risk of deflation because the velocity of money has decreased. We can afford to put more dollars in the market (which is done by buying tbills) to combat this decrease in velocity. If the velocity (the turnover of money in an economy) picks up, we need to pull back dollars buy selling tbills on the market.

The biggest problem is that interest rates will go up and we will start realizing all the borrowing we have done in the past and have to start paying for it in higher interest rates.

Structurally we have real problems in the economy in that wages have been depressed by imports and by illegal means of competing (where companies with market power have stolen the supplier's part of the economy and passed it to consumers to win in the competition game), and poor trade policies that allowed China to manipulate their currency until biz went over seas to produce goods for our market.

I was amazed to see this Sunday that one of the excuses for govt. spending was the fact that if we gave the money to the regular guy, they would spend it on goods that probably come from China and that would benefit Chin a, not the U.S. economy so spending by the govt. on infrastructure here was better.

What a bunch of crock!!! We will not solve our economic problems by continually stealing that part of the economy from suppliers and giving it to consumers. We eventually ship all our wealth from suppliers over seas when China is able to have low, low communist wages and capture all of that part of the economy because they don't have a floating currency.

We will have a lot to go through and a lot of pain in the U.S. because of the past actions that have been piling up. There is really no way around it. Politicians usually get away with this past mismanagement because they have managed to allow these things like trade deficits and the such to happen and the real price and consequences for them are not having to be paid as they occur. The big bubble they have created is starting to burst.
 
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