The Fed will never allow deflation, but they there is a risk of price declines due to deleveraging as the "green-shoots" wither in the face of the next wave of adjustable rate mortgage defaults.
Friday, June 26, 2009
There is no exit strategy
Voltron says: There is a lot of talk about how the Fed is going to soak up all of the money it's injected into the system before it causes massive inflation: the so-called "exit strategy". My take is there is no "exit strategy" The Fed and Treasury Dept need inflation to erase the massive household and federal debt. Whether or not that is the official plan is irrelevant because the fact is it's inevitable. Do you really think the US will *ever* repay the national debt otherwise? Do you think house prices will *ever* rise back to their highs otherwise? We're certainly not going to do it the old fashioned way - by earning our way out. We can't. We've exported all of our factories. Seventy percent of our gross domestic product is consumption. What the heck does that even mean? It doesn't even make sense! How is consumption suddenly production? The rest of GDP is mostly services. We can't refinance the household debt because the houses are "upside down". We won't be able to continue to refinance the national debt because the Chinese are already reducing their treasury holdings. Not just reducing the amount they are buying, they are actually reducing the net amount (by letting more debt mature than they buy, in effect demanding payment). So you can ignore all of this nonsense about "exit strategy".