Global Race to Stop Deflation is A Losing Battle: Trade Wars & Protectionism Near

[ByLoSellHi]

With a rapid deterioration in financial markets in the developed world, and astounding drops in manufacturing output in both the developed and developing markets, it is a near certainty that some degree of protectionism and trade disputes, coupled with charges of currency manipulation (or maybe fueled primarily by such charges) loom near on the horizon.

Watch and see the utter failure of central banks to stem the deflationary forces seizing our global economies, no matter how hard they try, and watch as borrowers are crushed by the impossible task of attempting to repay massive debt caused by the incredible leverage allowed them in past years, as each dollar of debt that has to be repaid is worth some 30% to 70% more than those borrowed.

 

[libertad]

ByLoSellHi

With a rapid deterioration in financial markets in the developed world, and astounding drops in manufacturing output in both the developed and developing markets, it is a near certainty that some degree of protectionism and trade disputes, coupled with charges of currency manipulation (or maybe fueled primarily by such charges) loom near on the horizon.

Watch and see the utter failure of central banks to stem the deflationary forces seizing our global economies, no matter how hard they try, and watch as borrowers are crushed by the impossible task of attempting to repay massive debt caused by the incredible leverage allowed them in past years, as each dollar of debt that has to be repaid is worth some 30% to 70% more than those borrowed.
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Exactly....and what is interesting is that one still sees some companies that are hopeful ....future pricing to be in line with 2004/7 pricing.....which just cannot happen.....

The real question becomes what is price parity for existing going concerns versus 2004/7 prices....now that consumer credit has been largely banished....

Also the largest part of the US auto equation is consumer credit....not just trying to hold together manufacturing.....The manufacturing and credit have to go together.....The same holds true for most big ticket item manufacturers....

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The point being what would be a lower cost solution ?

Letting productivity form prices and jobs.....and the consumer not being taxed at all on their income....thus having the maximum to spend ? ie 10% consumption tax....

Or run a delcining earnings base through heavier taxation....and supporting losing firms ? After all running a $1 through government ends up being less than 50 cents toward the project....Running a $1 through a 10% consumption tax allows for 90 cents towards the project.....

It becomes quite clear that structural changes particularly regarding taxation are required in order to provide support for higher "real prices"......

 

[Paaah]

Central banks have failed to stop the deflation, and now there are fears of a liquidity trap situation, as Paul Krugman has recently suggested.

Indeed, with the Fed lowering its interest rates to 0.25% there is no longer opportunity to rev up the economy. There are risks that the US know the same situation that Japan in the 1990s.

The Eurozone has more opportunities and can avoid a severe recession. Trichet's policy of higher rates is more relevant than Bernanke's one.

 

[ByLoSellHi]

I'm in the quasi-Depression camp, firmly.

...less severe than the Great Depression, but far worse than any recession we've seen in 50+ years.

 

[Fractals 'R Us]

The cure is worse than the problem. Democrats have to protect their welfare voter sector and public sector employees so they will print all the money it takes, and that won't be the answer anyhow. After awhile inflation will be the real problem and there is no answer to that one either!! All the fixes are serving only to increase the volatility.

 

[Paaah]

Quote from Fractals 'R Us:

The cure is worse than the problem. Democrats have to protect their welfare voter sector and public sector employees so they will print all the money it takes, and that won't be the answer anyhow. After a while inflation will be the real problem and there is no answer to that one either!! All the fixes are serving only to increase the volatility.

Yes, but the US has always had a higher inflation rate than in Europe. The US has always chosen full employment while the EU has chosen a low inflation rate as its priority. Obama will continue this policy and revive the economy thanks to huge investments in green technologies.

This is why I don't think the Obama presidency will worsen the situation. On the other hand, the US is very likely to know another bubble and krack in the next years, because of the low-interest-rates-policy that encourages speculation.

 

[tradestrong]

Quote from Paaah:

Central banks have failed to stop the deflation, and now there are fears of a liquidity trap situation, as Paul Krugman has recently suggested.

Indeed, with the Fed lowering its interest rates to 0.25% there is no longer opportunity to rev up the economy. There are risks that the US know the same situation that Japan in the 1990s.

The Eurozone has more opportunities and can avoid a severe recession. Trichet's policy of higher rates is more relevant than Bernanke's one.

The Eurozone is in far more risk of a severe recession than the United States. Europe is heavily, heavily invested in emerging markets. Additionally, many European countries have more public debt than the United States. So how are these European countries going to support their massive social programs when in a financial crisis? Simple...by adding to their debt.

Contrary to what most may realize, when compared to most other countries of the world, the United States is probably the best prepared for dealing with a world global crisis and will probably withstand the storm with the least amount of damage as compared to the rest of the world.

Why do you think there has been a flight recently to buy American dollars? One of the reasons is the stability that many large funds around the world see in the US markets as compared to most other parts of the world. America is a huge importer. If we stop spending, that hurts the rest of the world astronomically higher than it hurts us.

 

[tradestrong]

Quote from Paaah:

Yes, but the US has always had a higher inflation rate than in Europe. The US has always chosen full employment while the EU has chosen a low inflation rate as its priority. Obama will continue this policy and revive the economy thanks to huge investments in green technologies.

This is why I don't think the Obama presidency will worsen the situation. On the other hand, the US is very likely to know another bubble and krack in the next years, because of the low-interest-rates-policy that encourages speculation.

I agree with you for the most part here.

 

[tradestrong]

Quote from ByLoSellHi:

I'm in the quasi-Depression camp, firmly.

...less severe than the Great Depression, but far worse than any recession we've seen in 50+ years.

I tend to agree with this thought. One thing that when compared to the great depression makes this one look far less severe is the difference in the number of bank failures as compared to the great depression. At this point during the great depression, there were well over 10,000 bank failures and already 2 runs on the banks. We've had like 30 failures so far. Without massive runs on the banks, I don't believe we'll see a contraction of the money supply quite like the great depression which should help to mediate the "severe" crisis.

If one good thing came from the new deal, it is definitely the FDIC insurance.