WHY A RECOVERY WOULD ACTUALLY BE WORSE.....
April 13, 2009
– Comments (2)
I agree that everyone would be happy and cheerful thinking we've printed our way back to the artifical economy we are used to. Here is my reasoning:
1) In order to get back to the bubble economy we all love when its booming and grow to hate during the bust, blaming the free market and capitalism, the consumer needs to spends (obviously). But all this would lead to even larger missallocations of capital. This artificial low rate for loanable funds would be invested in higher order goods (tech spending, innovative alternative energy spending, the next ipod etc). But artificially low rates distort those borrows in terms of where they allocate capital. Additionally people would go back to using innordinate amounts of consumer credit (credit cards) and there would likely be a craze to buy real estate again. The average joe is thinking "we may never see these prices again" and they may be true at least in nominal terms. So why would this be worse?? As you all know federal reserve has been increasing the money supply at an exponential rate since last october, not to mention all the money pumped into the system since the bursting of the tech bubble. So there are two scenarios possible (even the fed said they will need to contract the money supply eventually, though i doubt they will).
: The fed does a 180 in terms of manipulating the money supply. They go back to the volcker style era, letting the prime rate float. Rates reached 20% back in the 70's and given our situation rates would probably be much much higher. This would not only send the economy into a deep recession again, but all those who borrowed and spent when the prime rate was 0%, are very likely to default on loans and credit, while those who invested what they borrowed will have invested to deep in the capital structure or in the best case scenario have already reached final output, but the tendency for consumers would be to save and only spend on basic goods, thus. In other words, the major banks would be even worse shape than their currenct condition. Then we would start over and repeat the same monetary and fiscal policy in the currenct crisis. The next time around would involve increasing the money supply again, then the cycle would start over. This is exactly was happened with the asignot in pre-revolutionary france. Think of it as taking heroin, you need a bigger and bigger dose to feel the same effect (though i don't do it, i assume thats how it works).
we continue down the current path, but maybe the fed will eventually realize the consequences of their actions, or the chinese, japanese and all other creditors want to redeem their debt. This would most defintely cause the fed to stop running the printing press 24/7.
WE NEED TO STOP PRINTING MONEY BECAUSE IT IS DESTORYING EVERYONES REAL WEALTH, WE NEED TO SAVE NOT SPEND OUT WAY OUT OF A RECESSION, ETC
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