Pull Out The Pin, The Bubble’s About To Pop

Last modified on July 14th, 2010

Despite having a relatively positive outlook about the economy previously, the Fed today just downgraded all its forecasts and even mentioned the taboo “D” word, deflation.

I thought it would be fun to post a few of the more educated comments from CNN here.

Keynesian versus Austrian economic theory. Keynes 0, Austrians 1. Now pull up a lawn chair, pop a cold one, and kick back to the soothing hissing sound of every asset class deflating… ~ Jim Koutras

I got my beer chilling in the fridge.

You do realize that the only reason we’re in this mess is because the Fed flooded the economy with ever cheaper cash that encouraged mal investment? Why put money in a safe savings account @ .75% when you can make 20% plus in a mortgage backed security? It’s the keynesian way, keep the bubbble inflated until its bursts and then inflate another ~ Dave Fini

Match point.

I am nearly 70 years old and I have never known a person or a business who have spent themselves out of debt. Why do our democrat politicians think the federal government can do it? ~ Keith Long

Old people 1, Democrat Politicians 0.

The Fed is actually doing a good job managing a terrible situtation. It is faced with two bad choices: inflation (by expansionary policy) or deflation (likely would occur by doing nothing at this point). Inflation is bad but disinflation (leading to deflation) would be far worse for both our citizens and our government. Think about what happens with deflation – asset values fall relative to secured debt. This leads to a shift in wealth to lenders (i.e. banks and other countries). With inflation (which occurs when the Fed prints $), the dollar value of assets rises, current debts become less burdensome and easier to pay off (for both our citizens and our government). ~ Anonymous Facebook User

She’s actually kind of right, but only because the US has floated its entire economy and asset structure on an ocean of debt. Many people think the only way out for the US is to default on all its debt obligations and start over. Unless its economy grows and a massive pace, it simply doesn’t have the steam to ever repay its debt obligations, especially if you factor in medicare and all the other debts that the US doesn’t even keep on its books. Obviously defaulted forces hardship onto all the countries that lent the US money or bought its debt. But it’s not much different than when the US closed the gold window in 1971.

I’m just worried that Bush’s policies may have crippled our economy to the point that a long-term recession is inevitable, despite the best bailout efforts. ~Chris Vaccaro

It really seems inevitable at this point to me.

The FED? What a joke. The Federal Reserve Bank is not even a part of the Federal Government. They control monetary policy and have been a dismal failure since inception. Bottom line-The USA is BANKRUPT, and most Americans are sleeping through it. ~ Frank Michael

It’s true, the Fed is a private entity. Also true the US is in trouble.

5 responses to “Pull Out The Pin, The Bubble’s About To Pop”

  1. Alex Curylo says:

    “and even mentioned the taboo “D” word, deflation.”

    Hmmmm. Moderately high unemployment, anemic growth, continued flirtation with deflation; so the first five years after the big U.S. property deflation began are going to play out pretty much the same as the five years after the big Japan property deflation began, they’re saying.

    Gee, wasn’t there somebody around here saying that they figured Japan’s history was the best guide to our future? Think there was, yes, yes I do.

  2. Hesty says:

    Obviously the solution to too much debt is… wait for it… more debt. There is no way for inflation to kick in for US. Employment down, productivity up means people aren’t getting higher wages. Banks sitting on piles of cash and not lending. House prices are dropping hence no equity withdrawal (house ATM).

  3. The one challenge I see from most commentary is that it takes the US economy and places it into a bubble.

    Yes the US has an absurd amount of debt, but so do many other countries.

    No doubt Social Security payments are going to skyrocket as their population ages, but the demographics in most other developed nations are similar.

    If other countries pull out of US dollars, where else can they park their money? If we experience global deflation, there will be no safe haven.

    In summary, all ships rise and fall with the tide. In studying the central banking system in the early 1900’s, I’ve learned that quite often the right decisions can lead to unintended consequences. Subsequently, all of the seemingly wrong decisions can lead to success (as with France in the 1930’s).

    The US will likely remain the global superpower, albeit a changed country as far as the lifestyle of it’s citizens are concerned.

    In the end, the county with the most military might makes the rules, not the one with the most gold.

  4. Alex Curylo says:

    And while we’re on the topic of prescient forecasts, you may recall my saying the goldbugs were deluded because government will take whatever they’ve got?

    “… The responsibility for issuing forms kicks in at $600 for coins or bullion – not a very high level and one that has already started sounding alarm bells. It doesn’t matter in what form payment is made, whether cash, check, credit card, or Yap stone money, the $600 threshold applies…”


    I particularly like the way they label this “an unintended consequence”.


  5. kid says:

    US money supply increased by 1,000% last year under a policy of “quantitative easing” (instead of printing money, they supply credit electronically, and provide liquidity swaps (“swap lines”) to foreign central banks etc.) and there is still a shortage of supply of US dollars. It has always been assumed that the US could inflate its way out of any ultimate crisis but I wonder just how much money they would have to print in order to get there, if 1,000% yr-over-yr doesn’t even register on the speedometer…

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