(") "I would say there's still a significant risk, maybe one chance in three, that there will be a double dip, real GDP falling, before we're in the clear," said Feldstein, member of the committee at the National Bureau of Economic Research that dates the beginning and end of recessions. (")
"We see a weak economy," Feldstein said. "We see a fragile economy that is growing at a slower pace."
(") The 1.6 percent growth rate is still "very weak" and another slump would signal that the nation remains mired in a recession, Feldstein, 70, said in a separate interview with Bloomberg Television from Jackson Hole, Wyoming, where the Federal Reserve is holding its annual symposium.
"If the economy turns down again, we would still be in recession, but that remains to be seen," said the New York-born economist, who twice served as president of the NBER from 1977 to 1982 and from 1984 to 2008.
(")Feldstein's remarks contrast with those of Federal Reserve Chairman Ben S. Bernanke, who told conference attendees that "the preconditions for a pickup in growth in 2011 appear to remain in place." (")
The Fantasy of Hyperinflation:
This is the
propaganda of the Ron Paul's followers. It is
true that in a normal economic environment, and following the
monetarist theory, an increase of trillion of dollars of liquidities
would translate in a vast increase of money supply which would trickle
in a vast increase of demand hence inflation. But we are not in a
normal environment are we? If we were we wouldn't use non conventional
monetary tools would we? We know that what Bernanke is asking from
Santa Klaus is 2% inflation rate he would even settle for 0%. Worrying
for the rate of inflation is like worrying if you will spend wisely
your lottery money as you go buy your ticket. Worrying about a very low
probability event.
It is true
that if the economy returns to normal it will be
necessary to take out those enormous amount of Liquidity but there is
no theoretical problems in doing that so we don't have to worry about
inflation.
I am proposing here a non competitive agreement to Doctor Ron Paul: I agree to never try to cure a patient if he agrees to never deal with monetary policy. This way we will save the life of both patients and the economy. That would be in itself quite an achievement.
For the Future we Have Then Two Types of Possible Scenari:
The strongest business will take over the smallest businesses or their market share and we will have an increasingly high concentration of capital. It will be the death of the small enterprise. But that is the best scenario.
The second is that the economic activity of the strongest businesses won't be enough to replace the economic activity of the small enterprise (my working hypothesis) and that more and more businesses will not be able to get funded because their marginal return on investments will go down and their default risk premium will go up. That disruption of capital markets can be brutal.
Even with sound credit-risk management, a sudden widening of credit spreads could result in unanticipated losses to investors in some of the newer, more complex structured credit products, and those investors could include some leveraged hedge funds. Risk management involves judgment as well as science, and the science is based on the past behavior of markets, which is not an infallible guide to the future.
In anyway without a prior increase of demand it is difficult for us to imagine that the increase of investment will be sufficient to trigger a magical recovery. The answer could be that the Fed would buy corporate debts, then we can ask ourselves what is the limit? The Fed could end up owning all the debt of every corporation in the USA. PIMCO has already suggested that the mortgage market should be nationalized! That would mean that the credit market would be nationalized or at least its risk, which would mean that it is the Fed that would decide which corporation deserves to get credit and will live and which one does not and will die (Lehman Brothers vs Citi Group).
How Long Can Doctor Bernanke Run the Show?
The Limits of Doctor Bernanke; I have since 1994 predicted the inevitable collapse of the capital market what I have not predicted was the size, the brutality and injustice of the non conventional measures of Doctor Bernanke.
In fact we are already as most of market participants have noticed in a new phase of non conventional monetary policy: not only does the Fed buy long dated Treasuries it buys also all sort of different investment vehicles:
The Deflation Bias and Committing to Being Irresponsible by Gauti B. Eggertsson of the Federal reserve Bank of New York:
Abstract: I model deflation, at zero nominal interest rate, in a microfounded general equilibrium model. I show that one can analyze deflation as a credibility problem if three conditions are satisfied. First: The government's only policy instrument is increasing the money supply by open market operations in short-term bonds. Second: The economy is subject to large negative demand shocks. Third: The government cannot commit to future policy. I call the credibility problem that arises under these conditions the deflation bias. I propose several policies to solve it. They all involve printing money or issuing nominal debt. In addition they require cutting taxes, buying real assets such as stocks, or purchasing foreign exchange. The government "credibly commits to being irresponsible" by pursuing these policies. It commits to higher money supply in the future so that the private sector expects inflation instead of deflation. This is optimal since it curbs deflation and increases output by lowering the real rate of return.
What it means is that the Fed is slowly, secretly and unobserved buying all the investments vehicles in the US economy that is, if I am right, called in other countries rampant socialism. It means that it is the Fed that will ultimately bear the investment risk and hence decide what business will deserve to live and receive credit and which will deserve to die and will not receive credit. Marx and Lenin didn't do anything more and nothing less. The only notable exception is that it is the owners of the Corporations that will ultimately receive the dividends while the Fed will bear both the systematic and specific risk! The privatization of the profit and the socialization of the risk!
Of course that nationalization of the capital market is not the intention of Doctor Bernanke he is optimist and believes he will, once the illness is cured, unload his balance sheet. But how much of his $2 trillion balance sheet has he unloaded since he started his Quantitative Easing adventure: Zilch!. What is the size of his off balance sheet obligations: the amount of loans he has already explicitly guaranteed? The definition of insanity is doing the same thingover and over again and expecting different results. An optimist is a misinformed pessimist.
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