Why Obama's economic program will collapse

[Atash Hagmahani]

http://www.safehaven.com/article-11914.htm

The think-tanks are fixated on zero-interest-rate thresholds and "deflation". What will happen is that we will get inflation, but no real job creation. The jobs created will be for special groups of people who "qualify" for them. In other words, many of us will lose jobs due to capital depletion of the REAL economy, while government "gatekeepers" decide who gets the boondoggle jobs.

The situation will drain the REAL economy of capital. We will all be poorer.

[The Future]

it is a good thing plants have not been miseducated abotu inflation

[Mike]

Atash's link,
http://www.safehaven.com/article-11914.htm
was really interesting.  It referenced Japan's WW I boom and busts of 1920 and 1927.  Then contrasted them with the US' Austrian solution to America's 1920-21 bust.

....
The author, Gerard Jackson, states,
.The so-called boom-bust cycle is said to be the reason why the US economy is sliding into recession. Now there is no such cycle. What we do have are central banks that think that by manipulating interest rates and the money supply (no matter how they define it) they can stabilise the economy.
...

I fear Jackson has slipped into a misplaced belief in the Efficient Market Hypothesis (EMH), that the market pricing of labor, resources, finished goods,& etc. is perfect and perfectly balanced.  Wrong!  The rule is that everything is mis-priced and in a market economy is moving as quickly as possible to capture ever diminishing profit margins. 

Yes, there is a Capitalist Credit Cycle.  It is the result of mass-misconception.  Nothing can be done about it.  People, by nature, have misconceptions and ask wrong prices and pay too much..  Jackson is right in that Central Banks compound the mis-pricing with their actions.  Central Banks can not calculate or spot mis-pricing.  It is best if they acknowledge their uselessness and leave pricing to the emergent order of markets.
*************

http://www.nakedcapitalism.com/2008/12/martin-wolf-says-big-stimulus-programs.html
Mr. NakedCapitalism (Yves Smith) quotes Tom Ferguson.  Ferguson maintains that Keynes would have believed that it is China that needs to apply stimulus, not the US.  His idea is that in 1929 the US was sucking the world's currency (gold) to such a degree that world trade suffered. 

Translated to today, Ferguson argues that it is China that is sucking the world's currency (paper dollars) to such a degree that world trade is suffering.  And the solution is for China to liquify, not the US.

Comment: 
There is some truth in Ferguson's thesis.   The problem in his assumptions is that a central bank (China's) is capable of manipulating liquidity  better than a market economy can allocate money and resources.  A neo-Keynesian understanding is no better than any other Keynesian understanding.

Our task is to allow for, and profit from the market's response to Central Bank's mis-allocations of money labor and resources.

[The Future]

One author's work I was reading noticed after a lot of reflection the inherent contradiction of the 'free' market from basic capitalist principles.  In simple terms, supply and demand dictate economic activity, profits draw in more sellers and thus profts are driven down (in theory to zero). In essence the market is self governing.  Yet, there is a well known mechanism by which a 'hidden hand' manipulates a "free" market: interest rates (and other fiscal and monetary policies).  By raising or lower rates, a free market can be convinced to change its activity level....so thus it is not free.

[Mike]

I agree.  But I'm not sure how much control the FED has over interest rates.  Tim Woods maintains that the FED doesn't set the rates, but follows them.  I believe it is the 3 year Treasury that Tim says they follow.... and have been faithfully doing so since, something like, the forties. 

Has the market been successfully guess the FEDs rate moves? since the forties??  Or does the FED follow?

[Atash Hagmahani]

But I'm not sure how much control the FED has over interest rates.

More than you think, since roughly the early 1990s. However, in order to accomplish that, they had to make some one-time-only sacrifices, such as our manufacturing base and our jobs. At some point, their continued efforts to keep short-term rates low, will result in high inflation.

Also, they only have total control over rates at the short end. At the long end, they can muck with their own rates for government debt by secretly buying it up, which simply results in inflation, and increasing spreads between gov't debt and private.

[Mike]

At the long end, they can muck with their own rates for government debt by secretly buying it up, which simply results in inflation, and increasing spreads between gov't debt and private.

So 'Flight to safety' means the government is secretly buying its own debt?

[Atash Hagmahani]

Mike, yes, they have to create that illusion. I think, too, that this also sets the deflationuts like Bob Prechter going. Have you seen any gold for $20? I'm still waiting.

Doesn't George Soros'es concept of "Reflexivity" mean that "manipulation works"? It turns into a self-fulfilling prophesy. But it also changes the equation, and then a new problem breaks out.

So instead of going into the deflationary spiral that we're supposed to be trying to avoid, we go down the worst case of stagflation in history.

[Atash Hagmahani]

Speaking of deflationuts, I see Mish is at it again:

http://globaleconomicanalysis.blogspot.com/2008/12/prepare-for-depression-level.html

The problem is a fallacy called "broad equivalence". If unemployment rates soar, that's the same thing as "deflation". Another broad equivalence that we see a lot of is "inflation is the opposite of deflation" or "inflation cures deflation". That this bailout thing is all good

However, I will post a link on its own thread anyway, to remind folks about unemployment.