Inflation is wrecking economic recovery
Prices are rising, and consumers are losing their spending power. Are the Fed's inflationary policies backfiring?
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The percentage of forced sales rose to nearly half of all sales in early 2009, at the height of the credit crisis, but fell to around 30 percent as the economy began to improve and banks imposed moratoriums on foreclosures. Now it is on the rise again, producing new pressures on prices and increased competition for home builders still trying to sell homes built in more optimistic times.Skip to next paragraph
Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning (dailyreckoning.com).
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And now, as predicted, the feds’ policies are making things worse.
Mr. Market went into correction mode almost exactly four years ago. After years of letting himself go, he had to work out some issues…get clean…get straightened out.
The feds couldn’t leave well enough alone. They fought this correction with everything they had.
Mr. Market wanted deflation – to get rid of 50 years’ worth of debt build-up.
The feds wanted inflation – to boost the economy…and, not coincidentally, reduce the real value of the debt in the system.
Mr. Market took down asset values…reduced prices…bankrupted businesses…and forced households to cut back.
The feds pumped more cash and credit into the system – trying desperately to tempt the economy back to its bubble ways.
So far, neither Mr. Market nor the feds are getting all they want. But they’re both getting something…
Generally, the private sector is de-leveraging…but in an odd, uncertain, hesitating kind of way. A report in yesterday’s Financial Times tells us that the “rich” are cutting back their credit card debt. But the “poor” are actually increasing theirs.
Subprime borrowers have reduced their debts too – mostly by defaults, foreclosures and write-offs. They probably have been unable to pay down debt, for an obvious reason – they don’t have any money.
We saw a report that all of the increase in consumer debt could be traced to the government’s student loan program. The FT article made no mention of it. But it would be just like those wily feds – sneaking bottles of Jim Beam into the rehab center!
Prime borrowers, on the other hand, learned a lesson in the sharp crisis of ’07-’09. They’re still de-leveraging and drying out, no matter how much gin the feds put in the punch.
De-leveraging has put the real economy in a funk. Households struggle to make ends meet.
But the feds’ easy money – zero interest rates, $1.8 trillion in deficit spending, QE1 & 2 – is boosting up prices of speculative assets and global auction-priced goods. They’re having the first effect Mr. Bernanke wanted.
It’s that secondary effect that must be causing some worry at the Fed. Instead of giving households a helping hand, lifting them up out of the icy water…inflation is forcing them under water!
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