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Wednesday, August 11, 2010

Deflationary depression - depressionary deflation

NY Times reporting the Federal Reserve is gloomy:

The Fed’s new stance marked the completion of a turnabout from a few months ago, when officials were discussing when and how to eventually raise interest rates and gradually shrink the $2.3 trillion balance sheet the Fed amassed through its response to the 2008 financial crisis.

In buying new Treasury securities to the tune of about $10 billion a month — a small fraction of the roughly $700 billion in Treasury debt sitting on the Fed’s balance sheet — the Fed will not let the balance sheet shrink for the time being.

The NY Fed signalling the recessionary freeze will continue. Ultra-low interest rates, huge government debt, deflationary spiral - sounds like Japan.

The credit melt-down caused a recession. Then there was a brief recovery - a spike back into the black - as the government spending peaked and the emergency stimulus measures flowed through the economies of the world and now there comes a long plateau of relative inactivity as everything is spent. The overall cycle will be similar to the Great Depression - even if the free trade policies hold up against domestic discontent.

If 2008 was the 1929 event then 2010 is 1931. We have better trade relations, physical infrastructure and welfare systems to cope, but the stagnation pattern is the same. Now that businesses are starting to see the bottom of the governments' coffers - and with growth potential limited/dependent on opaque markets like China - no wonder there is a palpable loss of confidence in investment and hiring. And as if planning for a decade-long depression isn't itself a depressing vibe in the boardroom the 1930s parallel would indicate we need a global war about 2018 to finally rescue the economy.

Anyone in Auckland since 2008 will have noticed that all the empty commercial and industrial property that became vacant as a consequence of the credit tightening has not been occupied at all for the last two years, or in the case of retail shops some have only been open briefly and then closed up. Things look depressing. There isn't enough wage pressure to affect inflation much at this point - yet the NZ Treasury is predicting a surge when the GST gets put up in October, meaning the average punter will pay for the price rises by making do with less (because they can't borrow). The GST rise is for the wrong reason (tax cuts for the wealthy) and at the wrong time (it will further dampen economic activity by reducing sales). Looks very bleak.

It wasn't until 1935 that NZ elected a Labour government - the voters gave the Tories a chance to tackle the depression - which would make the 2011 election the 1932 election.

UPDATE | 5:30PM: And like the 1930's the government is going to try to mop up a lot of unemployment via a public works programme. The Finance Minister this morning spellingpricing it out for the vested interests:The question is: how much of this Crown borrowing will end up being stimulus profiteering - cream to the especially selected corporations in these PPPs? - and how much will actually be paid out to how many employees?



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