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Re: RBS: Prepare for ‘Monster’ Money Printing

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  • Mon, Jun 28, 2010 - 10:51pm

    #14
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    Re: RBS: Prepare for ‘Monster’ Money Printing

[quote=ashvinp]

[quote=machinehead]

Ben Bernanke’s writings suggest that he will ‘throw the kitchen sink’ at any hint of deflationary recession. Whereas the conservative ECB, influenced by German cultural memories of hyperinflation, may engage in quantitative easing only with a time lag. This could produce an inversion of what happened in Depression I.

The UK depegged pound sterling from gold in 1931, side-stepping the worst of the Depression. But the US dollar wasn’t devalued against gold until 2-3 fateful years later, after a dire 20% further drop in the price level. Ben Bernanke won’t repeat this mistake, but conceivably the hard-headed ECB might.

Thus in this inverted analogue of 1931-1934, the U.S. sidesteps the worst of the ‘double-dip’ recession, while Europe slides into the dark night of deflationary collapse and default. Maybe this is what Michael Hudson is alluding to, but I wish he would focus more on macroeconomics and less on class war rhetoric.

[/quote]

The problem I see with this is the simple fact that this time it is different. Bernanke’s QE 2.0 (should he choose to do it, which seems very likely) won’t get the US economy much more than austerity will get for Europe IMO. As the entire global economy is saturated with debt, there really aren’t any marginal profits to be made off of loans or productive investments even when you’re getting free money from the Fed. The only thing banks can do with this liquidity is use it to gamble in a casino paper economy, and how long can that shell game last between 3 or 4 counterparties while entire countries are going broke? I really don’t see anyone “sidestepping” a depression this time around, regardless of the path they choose to get there. Both fiscal and monetary policy really become useless tools for “recovery” in a debt-based economy and a world with finite resources.

PS – I also really respect Michael Hudson and his intelligent economic views but I think he may be missing the scope of the global economy’s predicament this time around.

[/quote]

The global economy was a pretty dismal show for everyone during the 1930s, with depressed growth, trade, capital flows, immigration, etc. But one of the lasting themes of the 1930s which we still hear about today is ‘competitive devaluation.’ In a shrinking global pie, relative gains versus others can make a substantial difference in the perceived pain of deflation, unemployment, and depressed GDP.

For instance — by hanging on to the gold peg until 1933, after peers such as Britain had suspended gold convertibility in 1931, the US made its dollar the strongest currency on the planet from 1931-1934. The results: 10% annual deflation, 89% stock market decline, 25% unemployment. Other nations, taking a more devaluationist, inflationist approach (or protecting their banks from failure, as Canada did) did not suffer nearly as much. It was a no-growth decade, but not a deflationary catastrophe. Germans learned a different lesson in the 1920s — to fear hyperinflation, which the U.S. never experienced.

These cultural predispositions could lead to opposite results in a fresh global depression. Although the US dollar currently is enjoying ‘safe haven’ strength, Bernanke’s instinct will be to pre-emptively depreciate it to ward off deflation at all costs. Meanwhile, the ECB, viscerally loathing such a deliberate dilution of the euro’s value, may make the mistake of ‘holding the line’ even as the continent’s governments leap lemming-like off the cliff of fiscal austerity. 

The bizarre result is that the US [avoiding its worst fear of deflation] may set itself up for serious devaluation and inflation afterward, while Europe [avoiding Germany’s worst fear of hyperinflation] plunges into the icy waters of deflation. Both parties will be equally surprised and dismayed by the unintended consequences.