Chilling Repetition of History

Here is some of our guesses:

We guess Ben Bernanke is probably seeing with apprehension that what happened to Japan (deflation) is probably going to happen to the US as well. Therefore, he’ll probably try to preempt deflation as much as possible by ‘printing’ money. Whether he succeed or not, the outcome will the monster of price inflation and debasement of currency.

As we said before in A painful cleansing or pain avoidance at all cost?,

Economists from the Austrian School of economic thought will recommend a painful cleansing of the economy through a recession. Through the liquidation of mal-investments during the bust, it will set the scene for a sounder and more sustainable economic growth in the long run.

But will the Fed follow the Austrian recommendation?

We believe it is highly unlikely. Even if Ben Bernanke is an Austrian economist, political pressure alone will do the job of forcing him to act otherwise. This is the Achilles’ heel of democracy. The mob will scream at the Fed to bail them out by ‘printing’ money (i.e. pump liquidity into the economy in the form of cutting interest rates). Should the Fed refuse to comply, we can imagine the mob storming the Federal Reserve to demand the head of Ben Bernanke. Therefore, the Fed will have no choice but to acquiesce to the desire of the mob, whose aim is to avoid immediate pain as much as possible.

We can expect to see more bailouts, cutting of interest rates (’printing’ of money), etc.

I’m still unconvinced one can print their way out of a deflationary environment. Whatever happened to uniquely tailored solutions? It seems like they pretend a giant lever is the only solution, and how far, when, and why you pull it determines everything. Whatever happened to a long term solution involving fixing the underlying issues?

I’m still unconvinced one can print their way out of a deflationary environment.

That’s right- there’s no way they can print their way out of trouble. But Ben Bernanke is going to try anyway. And the result will be eventual debasement of currency to zero (assuming they’ll try to fight deflation till the very end).

Whatever happened to uniquely tailored solutions?

Well, there’s too many of them for tailored solution. So, the only way out is to use blunt instruments.

Whatever happened to a long term solution involving fixing the underlying issues?

Unfortunately, this is the Archille’s Heels of democracy. The mob will rule and the politicians will give them whatever they want.

The long term solution is to let the economy go through a very serious and painful recession (i.e. perhaps even a depression).

If you haven’t seen this already, take a look:

http://pineapplewatch.com/2007/10/27/the-sub-prime-crisis-explained-in-simple-terms/

Very funny. But the last comment of the movie held too much truth; governments can be held by the balls thanks to pension funds. Average Joe may not understand the markets, but keep his pension fund solvent, he won’t much care what you do. Lose the pension fund, and there will be no forgiveness, even if the solution made logical sense.