The Feds Are Trying to Avoid Deflation

As predicted in this space, the November payrolls were down a lot more than expected. Economists thought there would be 350,000 layoffs. Instead, the actual number was 200,000 more.

But U.S. investors shrugged off the employment news. The rally continued…it has gone on for a month. The Dow rose again yesterday; this time it was up 298 points to 8,934. If the rally retraces 50% of the losses, it will make it all the way to 11,000. So, this trend probably has a way to go.

Oil rose too – back up to $43. And gold shot up $17 to $769.

Commodities, stocks, precious metals – almost everything was up yesterday.

One important exception: Treasury bonds. The yield on ten-year T-notes rose to 2.76%…leading Bloomberg to report:

“Treasuries fall as US to sell more securities than expected.”

Watch those Treasury yields. Along with the dollar, they are going to tell the tale of the NEXT big bubble – the LAST big bubble of the whole Bubble Epoque – a bubble in public debt.

All over the world, the feds are desperately trying to inflate their currencies. People want money. People need money. And they need to spend money.

From the United States this morning comes news that a record one in ten homeowners is either in arrears on his mortgage or already in foreclosure. And everyday brings more dudes without paychecks. With no savings…and no jobs…people are squeezed hard. They can’t spend; they can’t even keep up with their mortgage payments.

So, the simpleton feds are giving people more cash and credit.

As everyone knows, what got them in trouble in the boom years was spending and borrowing. So what do the Feds do? They borrow and spend more! Altogether, they’re putting up more than $10 trillion to try to reflate the world economy.

Where do they get that kind of money? First, they borrow it. Then, they print it. So far, borrowing has been easy. Because, while asset prices are falling, investors lend to government in order to protect their money. And with consumers not spending, prices fall – so there is no consumer price inflation to worry about.

In fact, food and energy – key components of consumer prices, though not of the core CPI – are actually falling. And when prices fall, consumers have an incentive NOT to spend, because they will be able to get what they want at lower prices in the future. That’s when a recession gets to be serious; it’s what happened in Japan. And there’s not much the feds can do about it, because they can’t push their lending rates below zero. So, the feds are sweating deflation – not inflation. They want to avoid it in the worst possible way.

What’s the worst possible way to avoid deflation? Print money. ‘Governments can always avoid deflation,’ says Ben Bernanke – but only if they’re reckless enough to risk runaway inflation. ‘And you can really make a mess of things,’ Gideon Gono might add, if he had any idea of what he was doing to Zimbabwe.

And it can happen suddenly. There are huge piles of cash – in T-bills, in money-market funds, in foreign central vaults waiting out the crisis. At present, the owners of this cash are more worried about deflation than inflation. But at some point – maybe in 2009…probably in 2010 – that will change. Borrowing and lending money will prove ineffective. Real inflation – otherwise known as the kind of money that comes from trees – will be the only option left. Eventually, the feds will get the hang of it…inflation will soar…investors will dump dollars and T-bonds…and the last bubble, in government debt, will blow up.

*** “The great inflation continues,” says Strategic Short Report’s Dan Amoss.

“By inflation, I’m not referring to rising prices. I mean the creation of new fiat money and government credit amid this environment of fear and money hoarding. Lately, banks have hoarded excess reserves at the Fed, so this new money and credit is a long way from influencing consumer prices. But this condition is not likely to last much longer, and may be a function of banks wanting to report the cleanest possible balance sheets at year-end.”

“The latest inflation initiative was leaked earlier this week from the Treasury Dept. Treasury clearly wants lower mortgage rates and will work in concert with the Fed to force them lower. It has not been officially announced, but sources hint that Treasury might use Fannie and Freddie to bring down 30-year fixed mortgage rates to the 4.5% range.

“Many commentators note that government-imposed price floors for mortgage securities are no way to solve a problem rooted in a debt bubble. I agree, but I expect it to happen anyway, with the consequence of extreme dollar debasement.

“So despite their current lack of popularity, I expect inflation hedges, including gold and oil, to rebound strongly in the coming months.”

*** Our world tour continues. We’ve left the smells of Mumbai – spice, sweat and smoke – for the clean comforts of Melbourne, Australia.

But everywhere we go, there we are. We carry our doom and gloom with us, along with our toothbrush.

“Australia is no different,” says a colleague. “People lent money too freely and spent it too readily. House prices soared. Debt went a little crazy. But Australia is more like South Africa than like India. It’s a resource economy…so we went bust later…when the commodity bubble blew up. And when we went bust, we went bust hard. These commodity producers are down even more than the NASDAQ or the Dow. And now unemployment is rising. It was as high as 15% in the early ’90s, the last time there was a slump in Oz.”

But don’t worry, dear reader. The feds “Down Under” are taking action. They’ve promised to send out a check – to qualifying parents – for $1,000 per child. Senior citizens will get $1,400.

Why the giveaways? Don’t be so thick, dear reader; it’s the worldwide financial crisis. The feds can get away with anything.

Sending out checks is a simple way of “reliquifying” the economy. Especially if you send the checks to poor people. They spend the money.

“TVs and hookers,” says Dan Denning. “They’re both bound to go up…”

Sending money to people probably works better than bailing out Wall Street. If what you’re trying to do is to encourage people to spend, the best thing to do is to put as much money in as many hands as possible. If the government wanted, it could send everyone a $10,000 check…or even a $100,000 check. Of course, the bigger the check, the more obvious the scam.

Nobody bothers to think about it – especially not in a crisis – but if they spared a minute to reflect on it, they would notice that it is nothing more than fraud and grand larceny. In order to put money in some people’s hands, they have to take it out of other people’s pockets. Or, just print it up. Either way, resources are stolen and redistributed. The rightful owners of the money get less of what they wanted. The beneficiaries – whether they are Wall Street’s insiders…or single mothers in the Outback – get more.

*** Sign of the times: a headline on the web this morning: “How to look gorgeous – on the cheap!”

Until tomorrow,

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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2 Comments on "The Feds Are Trying to Avoid Deflation"

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Federal Reserve Chairman Ben Bernanke and his colleagues are clearly more concerned with the risk of a deflationary spiral than with inflation right now. But deflation can be scary. Buyers assume everything will be cheaper in the future, so they wait for bargains. If no one is buying, factories curb production. Workers lose their jobs and shops close.


“But deflation can be scary. Buyers assume everything will be cheaper in the future, so they wait for bargains.”

Hmm… that would explain why no-one ever buys a new mobile phone or computer, right?

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