The power of III

Summum ius summa iniuria--More law, less justice

06 April 2011

Two good posts on the economy from Gonzalo Lira

First, from Friday April 1st:

 The causes of the mess we're in
Right now, we’re in that weird in-between time of financial crises: The Global Financial Crisis of 2008 is behind us, while the next global crisis is not here yet—but it’s on its way.
“But I just wanted a pony!”
We can feel how it’s on its way. Most everyone plugged into the macro-economic zeitgeist can tell you that bad juju is most definitely in the post—just that nobody yet knows (or is sure) what shape the next crisis will take.

Lots of people have been pointing to the various signs of the coming crisis: A U.S. Federal government deficit that’s over 12% of GDP, to be repeated in fiscal years 2012, ’13, ’14 and possibly ’15, if not surpassed; abnormal rises in commodity prices; European disintegration; a Federal Reserve that is printing money like there’s no tomorrow; the largest bond fund in the world—PIMCO—exiting
Treasuries (that’s like Baskin & Robbins exiting chocolate); a complete inability of the political leadership class to do anything about the fiscal mess of the United States, at the Federal, State and local levels.
Continued here

and he debunks an argument against hyperinflation in this post, from April 5th:
In fact, the money [for hyperinflation] is coming right now from the Federal Reserve to the wider economy, by way of the Federal government’s spending.

As I have shown elsewhere—and this isn’t controversial or anything anyone seriously debates—the Fed is monetizing roughly 50% of the Federal government’s FY 2011 deficit by way of QE-lite and QE-2. That’s roughly $100 billion a month that the Fed provides, $75 billion of which it is printing out of thin air.

The Federal government needs this money printing—as I’ve said repeatedly, Washington is a junkie, and the Fed is its friendly neighborhood dealer. Washington can’t afford to go off the horse—the Federal government would go broke if it did. Broke as in bankrupt—broke as in full government shut-down. Broke as in no more money to pay for entitlements, the military, or regular government services.

Broke as in broke.

Think it through: If the Fed suddenly cut off it’s $100 billion monthly purchases of Treasuries, where would the Federal government get its funding? From China? They’re selling Treasuries and getting into commodities. From Japan? They’ve got Fukushima to deal with. From Europe? They’ve got Portugal on deck, Spain and Italy warming up.

Read the whole article here.

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