Friday, June 26, 2009

Can the Fed Pull Liquidity?

Just a quick note.

I will be putting something up around possible hyperinflation this weekend. I will be quick today because I have a few thirsty friends that are dying to catch the end of happy hour.

Itulip posted a great piece today around Argentina's hyperinflation.:

Does the economy have the ability to withstand a pulling of liquidity by the Fed after viewing this chart?:

My Take:

I am not sure they can afford too. Itulip makes some great points here. Volker had the opportunity to raise rates(pull liquidity) because he had the luxury of rising employment which allowed him more flexibility to inflict pain and crush inflation by raising the lending rates into the teens.

Our Fed is in a much different predicament. We need to ask ourselves: With soaring unemployment, does the Fed have the ability to inflict pain and market discipline at a time when unemployment is soaring to levels not seen since the 1930's?

When you pull liquidity you do a lot of damage to the economy because borrowing becomes much more expensive. The USA dipped into a deep early '80's recession after Volker pulled liquidity.

I am starting to question how we can ever do it today as we sit in a depression with soaring unemployment. We do not have the ability to take much more pain without imploding the economy.

As a result, you need to wonder if the alternative is to keep pumping the system with dollars which then creates a perfect backdrop for crushing inflation and potential hyperinflation!

More on this tomorrow.

Pretty boring day in the markets today. Must of been the Michael Jackson saga.

I mean come on folks, lets get our priorities in order! The death of the "king of pop" is much more important than the potential destruction of the US economy!

Don't even get me started.

Until tomorrow!


Anonymous said...

"As a result, you need to wonder if the alternative is to keep pumping the system with dollars which then creates a perfect backdrop for crushing inflation and potential hyperinflation!"

Thats my husband's fear and one of the reasons we are going to buy a house sooner rather than later. Could we lose 10-15% more? Sure. But with 5% mortgage interest, and the potential to avoid crushing rent increases in another few years, theres alot of upside to buying now.

Jeff said...


Tough call.

If you live in a bubble area I might wait a tad longer. Housing is still dropping and way too expensive i these areas.

If you are in an area where prices never really exploded its not a bad bet.

Until the shadow housing inventory hits the market its hard to really believe in any of the pricing stabilization we are seeing in certian areas like Cali and Nevada.

Rents won't increase if people aren't working and can't afford them.

Its a very hard problem to get your hands around. I deflation for a short period follwed by inflation as the currency potentially falls apart.

Good luck with whatever you decide.

Anonymous said...

Jeff, have you seen this? Uncle Ben said auditing the Fed would destroy the economy.

Jeff said...


Thanks for sharing. Missed that that one.


Not surprised by his answer. The Fed is like the Wizard of Oz. Once you get behind the curtian he gets they get exposed for what they are: THIEVES.

I hope that Ron Paul gets this passed. Its time for this sham toexposed for what it is: A FRAUD at the expense of the taxpayer.

snood said...

I don't think the Fed has the gumption to raise interest rates to tame the coming inflationary tsunami.

High inflation and high unemployment here we come!

John Maynes said...

There would be much higher unemployment with higher rates. Make your pick! Hihger unemployment or higher inflation. US is a cornered rat. They will put the gun to the head on the rest of the world to make them buy useless treasuries.

Jeff said...

Snood, John


There is no easy answer for the Fed.

In fact, there is no answer for the Fed. Pick your poison: Economic collapse or hyperinflation.

There is no other option.

CT-Hilltopper said...

From what I've read here, I think we have another six months, at best:

"So how will we know when the end is near? When Helicopter Ben comes under attack for being too tight with the printing press, the end is near. When helicopter drops are not enough to satisfy the beast, the end is near. When the US borrows more in one week than it did in an entire year seven years prior, the end is near. When scorched earth self-preservation tactics, in-your-face theft of public funds, and outright corruption is done in broad daylight without fear of reprisal, the end is near. This is what to watch for."

This was posted at todays automatoc earth, the post you have to look for is "the triumvirate of wealth".

Right now we pretty much have Goldman doing anything in the market that they want. Nobody says a goddamn thing, except the bloggers, and nobody gives a good goddamn what the bloggers have to say. The press is in it hand over fist. A LOT of people wont believe that news is legitimate unless they hear it from the "big three", and that's what is going to mess up a lot of people in the end.

I've been reading a LOT about the first Great Depression, and during that one the press was being paid off by the banksters of that time. Do you really think that they aren't being paid off now?

Power corrupts, and absolute power corrupts absolutely. These huge banks have learned NOTHING from the collapse of Bear Stearns , Lehman, Wachovia, etc. The only thing that is going to bring them down is when they finally ruin themselves, and when they ruin themselves, they ruin us all.

jeff said...


Very well said. Couldn't agree more.

This whole thing is unravelling at a frightening pace. No one will give a crap until the stock market reflects it.

There is no doubt it will when the ROW pulls the plug and stops buying our debt.

I don't think we get to the end of the year without this whole thing imploding.

Anonymous said...

Ed Ericson here, from City Paper: Still a tough call, Jeff. Granted: the dollar is funny money. That's been true, though, since at least 1972. What the fed & co have been doing for the past year or so is replacing the leverage that engendered the bubble. All that "fake" fake money that was created by hedge funds and credit default swaps and derivatives of derivatives and funds of funds--all that disappeared (or was put in jeopardy, at least), when Bear sank. So the fed pumps in piles of "real" fake money to make up for the money that went to "money heaven."

Think of this as a fix for the inner wheel of the transmission--the pinion gear that turns the bigger, outer ring that ends up moving society forward.

OK, so, given that ALL the dollars are actually just air and promises, the next requirement (for the plan to work) was for all of us--that is, all the non masters of the universe--to just accept the deal and move along. That's what is called "confidence." When that started to slip, then there were these new problems--problems created by normal people behaving abnormally (or "abnormally," at least, according to their recent behavior).

That consumption is the outer ring, the big gear as described above. So the Obama "stimulus" is designed to get that wheel turning again, in hopes that it will mesh with the smaller inner gear.

Here's the problem, though: for 30 years, all the best mechanics have been working on this transmission--the money conveyer that multiplies the dollars in the economy. The engine, meanwhile, has gotten no attention (and, indeed, has at times been cannibalized for parts to "improve" the transmission). The engine can be thought of as industrial capacity--making actual stuff.

This is the big difference between the economy now and the economy of the Great Depression. In the '20s and '30s the "transmission" was small and simple (2 gears; could get stuck in reverse), while the engine was big and powerful. The GD was a transmission failure, and so policy makers have been rebuilding and tinkering with the transmission since, to the neglect of the engine.

So with the engine neglected, getting smaller, losing power while the smartest guys keep making a bigger and better transmission (more gears, electronic controls) to transfer that dwindling economic power into forward motion, we've reached a tipping point.

The main problem is that our finest economic mechanics have been at it so long, they've confused the transmission they're working on for an engine. They no longer seem to know--or care--what an actual engine is or does.

Given this, inflation or deflation isn't really the choice--we've seen them both at once before, and we are about to get a bigger dose, I think.