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Policy Options Dwindle As Economic Fears Grow

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http://www.nytimes.com/2010/08/29/weekinreview/29goodman.html?_r=1&hp

THE American economy is once again tilting toward danger. Despite an aggressive regimen of treatments from the conventional to the exotic — more than $800 billion in federal spending, and trillions of dollars worth of credit from the Federal Reserve — fears of a second recession are growing, along with worries that the country may face several more years of lean prospects.

On Friday, Ben Bernanke, chairman of the Fed, speaking in the measured tones of a man whose word choices can cause billions of dollars to move, acknowledged that the economy was weaker than hoped, while promising to consider new policies to invigorate it, should conditions worsen.

Yet even as vital signs weaken — plunging home sales, a bleak job market and, on Friday, confirmation that the quarterly rate of economic growth had slowed, to 1.6 percent — a sense has taken hold that government policy makers cannot deliver meaningful intervention. That is because nearly any proposed curative could risk adding to the national debt — a political nonstarter. The situation has left American fortunes pinned to an uncertain remedy: hoping that things somehow get better.

It increasingly seems as if the policy makers attending like physicians to the American economy are peering into their medical kits and coming up empty, their arsenal of pharmaceuticals largely exhausted and the few that remain deemed too experimental or laden with risky side effects. The patient — who started in critical care — was showing signs of improvement in the convalescent ward earlier this year, but has since deteriorated. The doctors cannot agree on a diagnosis, let alone administer an antidote with confidence.

This is where the Great Recession has taken the world’s largest economy, to a Great Ambiguity over what lies ahead, and what can be done now. Economists debate the benefits of previous policy prescriptions, but in the political realm a rare consensus has emerged: The future is now so colored in red ink that running up the debt seems politically risky in the months before the Congressional elections, even in the name of creating jobs and generating economic growth. The result is that Democrats and Republicans have foresworn virtually any course that involves spending serious money.

The growing impression of a weakening economy combined with a dearth of policy options has reinvigorated concerns that the United States risks sinking into the sort of economic stagnation that captured Japan during its so-called Lost Decade in the 1990s. Then, as now, trouble began when a speculative real estate frenzy ended, leaving banks awash in debts they preferred not to recognize and hoping that bad loans would turn good (or at least be forgotten). The crisis was deepened by indecisive policy, as the ruling party fruitlessly explored ways around a painful reckoning — boosting exports, tinkering with accounting standards.

“There are many ways in which you can see us almost surely being in a Japan-style malaise,” said the Nobel-laureate economist Joseph Stiglitz, who has accused the Obama administration of underestimating the dangers weighing on the economy. “It’s just really hard to see what will bring us out.”

Japan’s years of pain were made worse by deflation — falling prices — an affliction that assailed the United States during the Great Depression and may be gathering force again. While falling prices can be good news for people in need of cars, housing and other wares, a sustained, broad drop discourages businesses from investing and hiring. Less work and lower wages translates into less spending power, which reinforces a predilection against hiring and investing — a downward spiral.

Deflation is both symptom and cause of an economy whose basic functioning has stalled. It reflects too many goods and services in the marketplace with not enough people able to buy them.

For more than a decade, the global economy was fueled by monumental spending power underwritten by a pair of investment booms in America — the Internet explosion in the 1990s, then the exuberance over real estate. As housing prices soared, homeowners borrowed against rising values, distributing their dollars to furniture dealers in suburban malls, and furniture factories in coastal China.

But the collapse of American housing prices severed that artery of finance. Homeowners could not borrow, and they cut spending, shrinking sales for businesses and prompting layoffs.

Early this year, some economists declared that the cycle was finally righting itself. Businesses were restocking inventories, yielding modest job growth in factories. Hopes flowered that these new wages would be spent in ways that led to the hiring of more workers — a virtuous cycle.

Another 2 pages at the link.

The problems remain because the debt remains, this was never tackled. There is no pain free exit we have been living in one huge debt fuelled boom that has been at artificial levels for too long. Demand levels have been an illusion and the contraction cannot be avoided.

Japan has never bottomed because it didn't tackle its debt problems.

We haven't tackled ours, there is no pain free option either the money is paid back and we have reduced demand for products and services / reduced standards of living or we default and have a reduced standard of living for a time. There is no pain free option.

Luckily we have a global leadership that are attempting to find a pain free option, so far they have given free money to the bankers, whether this proves to be a pain free option we will await and see. For the bankers its so far been pain free, for the taxpayer it has not.

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But the hopes failed to account for how extensively spending power had dropped in the American economy, and how uneasy people were made by every snippet of data showing that houses were not selling, employers were not hiring, and stock prices were foundering.

Now, a new cause for concern is growing: the flat trajectory of prices, which might metastasize into a full-blown case of deflation.

The primary way to attack deflation is to inject credit into the economy, giving reluctant consumers the wherewithal to spend. The chief deflation fighter is the Federal Reserve, which traditionally adjusts a benchmark overnight rate for banks that influences rates on car loans, mortgages and other forms of credit. The Fed pulled this lever long ago, and has kept its target rate near zero since late 2008.

The Fed has also been more creative. During the worst of the financial crisis, the Fed relieved American banks of troubled investments, many linked to mortgages, to give the banks room to make new loans.

This engendered the sort of debate likely to fill doctoral dissertations for generations. Most economists praise the Fed for confronting the possibility of another depression. But the Fed added to the nation’s debts, provoking talk that it was testing global faith in the dollar.

A bit from page 2.

I love the way deflation is a great evil that must be avoided at all costs.

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Just like Japan.. America isn't willing to print, borrow and spend on the level it takes to get out.

And it also isn't willing to allow the unwind that many here want to see - and I agree having a massive unwind which wiped most people out would also work and the economy would start rolling after it was over. But politiclaly that seems even less likely than spending more.

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  • 246 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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