European banking crisis causing a constitutional crisis of the European Central Bank; Germany; the myth of Social Security in the US.; bank balance sheet crisis; food, fuel and climate crisis; the super congress; debt deflation; FHA lawsuit against the banks; criminalization the financial sector; Modern Monetary Theory; the coming lost decade; debt cancellation.
Renegade Economist » Renegade Economist Talkshow – 2nd October (no longer available)
The Talkshow is back and we kick off the season answering your questions with our guests Dominic Frisby and Michael Hudson. The team discusses gold, Zimbabwe hyper-inflation v 70’s inflation, deflation and the Japanese lost decade. Keep your questions coming in at email@example.com
One of the most peculiar aspects of the economic crisis is also one of the least remarked upon. Never in recent memory have so many economic experts warned of the prospect of inflation while an equally large group warned of impending deflation. In all but the most unusual cases, inflation and deflation are mutually exclusive. Either one or the other might be a threat, but not both at the same time. The current bizarre situation is as if a group of doctors examined a patient and half of the doctors warned that the patient was freezing to death while the other half diagnosed the patient with heat stroke.
Inflation is the phenomenon of too much money chasing too few goods, thereby causing rising prices, whereas deflation is the opposite – i.e. a glut of goods and services with not enough demand, thereby causing prices to fall. So, how is it possible that both could threaten us simultaneously?
There should be a modest uptick in GDP in either in the 4th quarter 2009 or the 1st quarter 2010. This will mark the end of the current 20 month-long recession, but not the end of the crisis. The blip in growth doesn’t mean that the troubles are over or that the economy is on the way to recovery. It simply means that Obama’s $787 billion fiscal stimulus is beginning to kick in, giving a boost to consumer spending and generating short-term economic activity. Regrettably, when the stimulus runs out, the economy will slide back into negative territory. That’s because the US consumer has crossed an important threshold and no longer has the ability to drive the economy through debt-fueled consumption. The data indicates a critical change in consumer behavior which portends a shift away from the current model for economic growth. It’s a whole new ballgame.
From the mid-1980s to 2007, the ratio of debt-to-GDP rocketed from 165% to to over 350%; more than doubling in that same period. The build-up of personal debt follows the exact same trend-line as the aggregate profits of the financial sector; they’re opposite sides of the same coin. Financial institutions increase profitability by expanding credit and inflating asset bubbles, not by allocating capital to productive enterprises. Their business model is inherently flawed. Speculative bubblemaking is Wall Street’s method of shifting wealth from workers to the investor class. It never fails. It’s the reason why 42 states are now facing budget shortfalls, unemployment has risen to 9.5 percent, and $45 trillion has vanished from global equity markets. Financialization has created a global crisis, crushed consumer demand, increased systemic instability, and put the economy into a nosedive.
Collapsing home prices and credit markets continue to put downward pressure on consumer spending, forcing the Federal Reserve to take even more radical action to revive the economy. Last week, Fed chief Ben Bernanke raised the prospect of further monetizing the debt by purchasing more than the $1.75 trillion of Treasuries and mortgage-backed securities (MBS) already committed. The announcement sent shock-waves through the currency markets where skittish traders have joined doomsayers in predicting tough times ahead for the dollar. Foreign central banks have been gobbling up US debt at an impressive pace, adding another $60 billion in the last three weeks alone. That’s more than enough to cover the current account deficit and put the greenback on solid ground for the time-being. But with fiscal deficits ballooning to $3 trillion in the next year alone, dwindling foreign investment won’t be enough to keep the dollar afloat. Bernanke will be forced to either raise interest rates or let the dollar fall hard.