Riggo-toni Posted February 19, 2011 Share Posted February 19, 2011 The Fed has been practicing "quantitative easing" - partly monetizing the debt (aka printing money) in part to prevent possible deflation in the wake of a housing collapse, and also in part to put pressure on China to stop undervaluing its currency. This is liable to cause a drop in the purchasing power of the dollar, which has always led eventually to a rise in oil prices (already likely to climb following turmoil in the Middle East), which could subsequently trigger inflationary pressures. What if the world loses some degree of confidence in the dollar (or China gets dollar fatigue) and demand for treasury bonds sags, forcing a hike in market rates. If interest rates rise a full percentage point, the cost of servicing the debt goes up about another $300 billion/yr, thus triggering a pernicious spiral of needing to borrow more, which could push interest rates up further, which then increases the deficit, and so on. The housing market, which is already in the toilet now, would further collapse with the rise in interest rates. Is it possible that those who are painted as extremists for wanting to slash the deficit asap might potentially benefit the economy if they got their way, whereas the conventional neo-Keynesian wisdom of spending is always healthy could lead to either a replay of the 70s stagflation or even something worse? I am NOT being an apologist for tea-partiers - though I'd support their proposed cuts it's still just a drop in the bucket and way too exclusively targeted at Democratic programs without scrapping wasteful GOP favorites like ethanol. I'd like an honest ECONOMICS discussion here rather than the usual partisan soundbite hackery. Link to comment Share on other sites More sharing options...
Fergasun Posted February 19, 2011 Share Posted February 19, 2011 Folks have been raising this concern since the Federal Reserve started "Quantitative Easing I". I've seen some chatter from the blogosphere that the inflationary pressures we are seeing might cause the Fed to stop QE2. Deflation is very bad for our situation since if the dollar rises in value it'll make it damn near impossible to pay back our debt. There's all sorts of policy implications in this discussion. It's the primary reason why we shouldn't have pushed our deficit (and national debt) to the level we are at now. We are somewhat stuck in a corner. Now all policy is basically geared toward ensuring we don't get deflationary pressures... it's kind've insane what has happened in the past 20 years... and without much public debate as well other than the "hey our children and grandchildren will have to pay!" Many of the people in power are now facing the fact that it is infact themselves who are going to "pay" in some way or another... Link to comment Share on other sites More sharing options...
mojobo Posted February 19, 2011 Share Posted February 19, 2011 You pretty much hit the nail on the head on whats going on. The Federal Reserve has to keep interest rates low by artificially expanding the credit supply or else the government really has no way of financing its debt. The fact that we are the worlds reserve currency is going to add to the inflationary pressures as many are going to release their holdings of our dollars since we are committing to devaluing it (no point in holding something where the value is guaranteed to diminish). China pegging its dollar to ours isn't really a problem, and in fact has alleviated some of the inflation we would have otherwise seen. I've thrown his name out there a few times recently but I would highly recommend reading Crash Proof by Peter Schiff where he predicted the economic meltdown we were facing and wrote about how people could protect themselves from the collapse (check out "peter schiff was right" on youtube to see how right he was back then). China is starting to take price control measures to fight its inflation, but once they start to cause shortages I don't think they will have much choice but to drop their dollar peg. France is calling for a new reserve currency which would also mean inflation as more dollars hit the market. To make matters worse an event like Katrina or a significant terrorist attack would likely lead to a huge dollar panic and would probably spark a huge sell off. Link to comment Share on other sites More sharing options...
Hubbs Posted February 19, 2011 Share Posted February 19, 2011 Folks have been raising this concern since the Federal Reserve started "Quantitative Easing I". I've seen some chatter from the blogosphere that the inflationary pressures we are seeing might cause the Fed to stop QE2. Deflation is very bad for our situation since if the dollar rises in value it'll make it damn near impossible to pay back our debt. There's all sorts of policy implications in this discussion. It's the primary reason why we shouldn't have pushed our deficit (and national debt) to the level we are at now. We are somewhat stuck in a corner. Now all policy is basically geared toward ensuring we don't get deflationary pressures... it's kind've insane what has happened in the past 20 years... and without much public debate as well other than the "hey our children and grandchildren will have to pay!" Many of the people in power are now facing the fact that it is infact themselves who are going to "pay" in some way or another... Where to start... Bernanke is committed to preventing CPI deflation, because CPI deflation could spark a spiral in which banks would be increasingly prompted to stop lending, which in turn prompts further contraction, which in turn prompts further reductions in lending, which in turn prompts oh no my head just exploded. (All of this happens because of a practice called fractional reserve lending, but that's another matter for another thread.) As for the past twenty years, it's actually the past thirty years, and it leads to posts like this.... You pretty much hit the nail on the head on whats going on. The Federal Reserve has to keep interest rates low by artificially expanding the credit supply or else the government really has no way of financing its debt. The fact that we are the worlds reserve currency is going to add to the inflationary pressures as many are going to release their holdings of our dollars since we are committing to devaluing it (no point in holding something where the value is guaranteed to diminish). China pegging its dollar to ours isn't really a problem, and in fact has alleviated some of the inflation we would have otherwise seen. I've thrown his name out there a few times recently but I would highly recommend reading Crash Proof by Peter Schiff where he predicted the economic meltdown we were facing and wrote about how people could protect themselves from the collapse (check out "peter schiff was right" on youtube to see how right he was back then). China is starting to take price control measures to fight its inflation, but once they start to cause shortages I don't think they will have much choice but to drop their dollar peg. France is calling for a new reserve currency which would also mean inflation as more dollars hit the market. To make matters worse an event like Katrina or a significant terrorist attack would likely lead to a huge dollar panic and would probably spark a huge sell off. Peter Schiff is damn near Miss Cleo, but let's back up to the problem of exporting inflation, that's the real boogeyman. If you have the pieces of paper that everyone else holds in reserve, you have a magic trick. Normal currency fluctuations don't matter. But when they undo themselves, they're likely to do it all at once. Last guy at the table gets the check. You hold dollars too long and... well, just how much do you want to be last person to sell Lehman? We print, they pay. Until they don't anymore. Hard to say when. Want to call the day it happens? Link to comment Share on other sites More sharing options...
DRSmith Posted February 19, 2011 Share Posted February 19, 2011 Of course if the same people who complain about the debt were balanced they would ask for the tax rates to be brought back to pre Bush levels I mean if you want the same economic situation and you are aksing for the spending to be the same then the tax rates should be restored Link to comment Share on other sites More sharing options...
TradeTheBeal! Posted February 20, 2011 Share Posted February 20, 2011 Tax the churches. Legalize Cannabis. Police the banks. Cut the military. Boom...Deficit roasted. Link to comment Share on other sites More sharing options...
Riggo-toni Posted February 20, 2011 Author Share Posted February 20, 2011 Not that I'm necessarily against those proposals, but the deficit will never get fixed without entitlement reform. Link to comment Share on other sites More sharing options...
twa Posted February 20, 2011 Share Posted February 20, 2011 Ya need to throw in taxing non-profits Link to comment Share on other sites More sharing options...
Stadium-Armory Posted February 20, 2011 Share Posted February 20, 2011 Link to comment Share on other sites More sharing options...
DRSmith Posted February 21, 2011 Share Posted February 21, 2011 Not that I'm necessarily against those proposals, but the deficit will never get fixed without entitlement reform. Well except when the baby boomers die off Link to comment Share on other sites More sharing options...
rdsknbill Posted February 21, 2011 Share Posted February 21, 2011 That first post gave me a headache. IT happens when reading enormous run-on sentences Link to comment Share on other sites More sharing options...
Kosher Ham Posted February 21, 2011 Share Posted February 21, 2011 Too much money wasted with no results. There is no reason at all this country should have a 10 year war. And that is just one example. Link to comment Share on other sites More sharing options...
Fergasun Posted February 21, 2011 Share Posted February 21, 2011 Taxing non-profits will increase tax revenue by a total of zero. By definition I' m pretty sure non-profits can't make any profits. Link to comment Share on other sites More sharing options...
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