The Fed’s last round of inflationary interest rate cuts (2001-2004) funneled newly created money into the economy that took almost five years for the boom to top out. Once the Fed’s current rate cuts are ended and the Treasury’s current velocity of debt raising is brought to a halt, how long until we see the current “boom” they are attempting to generate, collapse? More importantly, do we even see another boom arise, or simply see stagflation manifested in rising prices and a still retracting economy?
My opinion is that many treasuries markets will collapse first, paving the way for massive amounts of created cash sitting in the central banks to be pulled out, beginning the general rise in prices. Since economies haven’t had the time to heal themselves by exposing and ridding themselves of much of the previous malinvestments still lying in wait, I don’t see a serious boom taking place. Stagflation (hopefully not hyperinflation) soon becomes evident and the currency fountains are turned off.
With what velocity does anyone seeing this (or any other scenario) take place? When will the guild finally be stripped from the lily?
I disagree. I am more and more convinced that the US will experience a big (Hopefully not gigantic) dose of the Japan effect. That is a long no-growth to slow-growth period where businesses are unable or unwilling to make large investments despite the ease of getting credit. In other words, people are not saving enough to replace the destroyed capital stock at the same time government is unwilling to liquidate insolvent businesses to release their capital stock.
My opinion is that the bailouts will not only continue but they will expand as these zombie banks and businesses require more and more resources to maintain their painful existence. The only way to do this is for the government to steal money for these entities through inflation. As the value of the currency falls, foreigners are less willing to invest in businesses inside the US as well. The government will not be able to stop printing enough money required to keep their spending habits going and support these zombie businesses. Individuals will attempt to save but will still fall behind the relentless inflation.
I hate to say it, but it is how I see it. Keynes will eventually destroy society. It is quite sad, I am not only a witness but a cog stuck in this giant machine grinding ever slower but never to the halt.
I could see your scenario happening if the monetary base wasn’t being expanded at such an exponential rate. That’s what scares me the most. I just can’t see people willing to accept such low returns from US treasuries while prices and costs start climbing higher. When people pull out of treasuries, all that cash will hit the market on top of the new money that has already made it out, after which the Fed will only have the power to print even more money to depress interest rates.
The pulling out of treasuries is not the problem itself. It’s more or less irrelevant. When you sell the bond, you get money from someone else, he gets the bond (but has less cash in his account). Money in circulation stays the same.
Only if bonds are bought with newly printed money, monetary aggregate will rise. The pulling out of treasuries would be just a symptom of inflationary expectations (it’s bad to be caught with fixed income asset during inflation).
The best fun begins when real interest rates hit very low or negative numbers. Cash is deprecating asset then, hard stuff is appreciating asset. People get frenzy trying to get rid of the cash. But you cannot get rid of the cash on average. When you buy something, seller gets the cash.
That’s just the thing, the bonds are being bought with money printed during the last boom. Most of the treasuries being purchased are short term. When you have a combination of the money used by the government (from the sale of treasuries) on all the pork projects taking place with all the possible money that will have to be printed in order to repay the principle amount of all these short term bonds that could be pulle out in the near future, you have a recipe for massive inflation. If the government is going to spend like they promise, there won’t be anything left to repay the huge liabilties being taken on; the treasuries market could run dry of new investors and the printing presses will run overtime.