Fed Big-Wig Echoes EconomyWatch: US / EU Falling Into Japan-Like Deflation / Lost Decades

30 July 2010. By David Caploe PhD, Chief Political Economist, EconomyWatch.com

Even before we came aboard EconomyWatch.com, we’ve argued that,

in their pathetic “responses” to the twin disasters of Black September 2008 and the ever-roiling Euro-zone crisis,

the political leadership of US and European Union have been following Japan down the path of deflation and Lost Decade/S –

30 July 2010. By David Caploe PhD, Chief Political Economist, EconomyWatch.com

Even before we came aboard EconomyWatch.com, we’ve argued that,

in their pathetic “responses” to the twin disasters of Black September 2008 and the ever-roiling Euro-zone crisis,

the political leadership of US and European Union have been following Japan down the path of deflation and Lost Decade/S –

basically by letting the Too Big To Fail Banks keep off their books their incredible losses from derivatives,

thus creating the same kind of zombie banks – effectively bankrupt, but still operating – that have bedeviled Japan

since ITS political leadership allowed their banks to do the exact same thing when the Tokyo real estate market collapsed in 1989.

And now James Bullard, president of the Federal Reserve Bank of St. Louis, has warned that

the Fed’s current policies were putting the American economy at risk of becoming

“enmeshed in a Japanese-style deflationary outcome within the next several years,” according to this story in the New York Times,

which also notes that Bullard is a voting member of the Fed committee that determines interest rates.

Just to confirm our consistent stance on these issues, go to the Economy Watch Search Site, and type in “Lost Decades”,

and you’ll get a whole series of links, which we’ll list below –

AFTER which, we’ll re-print the crucial New York Times article,for any of you who might miss it –

given that it appeared on the Times website at the close of business Thursday on the East Coast,

which is admittedly not as good as close of business on a Friday for burying disturbing news, but it’s close –

although it WILL be interesting to see how the markets react tomorrow / later today, starting here in Asia.

First, a quick scan of the links – then the Times piece, which you should not forget to read 😉 .

1. Table of Contents

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   Lehman & Repo 105 = Goldman & Greece: The Global Finance System …

   Welcome to the Lost Decades. Credit: DPStyles. 15 March 2010. By David Caploe PhD, Chief Political Economist, EconomyWatch.com. Even for freaks like us, … www.economywatch.com/…/lehman-repo-105-goldman-greece-global-financial-system-has-irreversibly-failed-15-03.html

2. Bank Bailouts No Bargain for US Taxpayer | Economy Watch

   21 Apr 2010 … As we’ve said so often, WELCOME TO THE LOST DECADES !!! Would you like to follow EconomyWatch.com’s unique take on the global political … www.economywatch.com/…/bank-bailouts-no-bargain-for-US-taxpayer-21-4.html

3. Is Europe Turning Japanese? Starting To Think So | Economy Watch

   12 May 2010 … it seems more than likely that Europe will be right behind both Japan and the US heading into Lost Decades for the foreseeable future – … www.economywatch.com/…/is-europe-turning-japanese-starting-to-think-so-12-05.html

4. China – Green Technology Leader: Has the Future Arrived? | Economy …

   27 Mar 2010… Japan’s Lost Decades since 1989 – has taken huge amounts of taxpayer money merely in an effort to avoid having to come to terms with the … www.economywatch.com/…/China-Green-Technology-Leader-Has-Future-Arrived-27-03.html

5. Germany Unlikely To “Spend” Europe Out of Recession | Economy Watch

   15 Jun 2010 … which has created TWO “Lost Decades” since their real estate market imploded in 1989. Would you like to follow EconomyWatch.com’s unique … www.economywatch.com/…/germany-unlikely-to-spend-europe-out-of-recession-15-06.html

6. China: Krugman, New York Times Editorial, Beltway Gang ALL Wrong …

   “Welcome to the Lost Decades,” which are, unfortunately, only just beginning. David Caploe PhD. Chief Political Economist. EconomyWatch.com … www.economywatch.com/…/China-Krugman-New-York-Times-Editorial-Beltway-Gang-ALL-Wrong-re-Currency-Values-18-03.html

7. Nightmare On Wall Street: A Shock But Not A Surprise | Economy Watch

   7 May 2010 … where we’ve now had two “Lost Decades” since the collapse of THEIR real estate market in 1989. To top it all off, I just heard Jim Rogers … www.economywatch.com/…/wall-street-free-fall-shocking-but-hardly-surprising-07-05.html

8. Featured Economic News and Analysis | Economy Watch

   Japan has had more than two “Lost Decades“, the US is following right along in its footsteps, and if Europe is now heeding America’s advice, it seems more … www.economywatch.com/economy-business-and-finance-news/

9. North Dakota: Lots of Jobs but Far Too Few Places to Live …

   30 Apr 2010 … where the domination of TBTF banks and insurance has – in true Japan Lost Decades style -. created a GENERAL situation of too many people … www.economywatch.com/…/north-dakota-lots-of-jobs-but-far-too-few-places-to-live-01-05.html

10. NYTimes’ Bob Herbert on Economic Catastrophe for Individual US …

    22 Mar 2010… having used it all to prop up the “zombie banks” that are the precursor to come of the US version of Japan’s “Lost Decades” — … www.economywatch.com/…/NYTimes-Bob-Herbert-Economic-Catastrophe-Individual-US-States-23-03.html

1. Goldman Fine – Thanks to You, SEC and President Obama …

   19 Jul 2010 … now up to TWO “lost decades”, in which the stock market needs of the financial sector. take capital / energy / talented people away from the … www.economywatch.com/…/goldman-fine-thanks-to-you-sec-and-president-obama-19-07.html

2. New Chinese Revolution: Worker Power Transforms World Economy …

   9 Jun 2010 … a disastrous move that has not only created TWO “Lost Decades” for the Japanese economy through the creation of so-called “zombie banks” … www.economywatch.com/…/new-chinese-revolution-worker-power-transforms-world-economy-09-06.html

And here are some of the more recent links re a search for “deflation”:

1. Deflation Becoming Serious Issue for Europe | Economy Watch

   14 Jun 2010 … Some economists say the European Central Bank’s “obsession” with inflation has blinded the bank to a potentially bigger threat: deflation. www.economywatch.com/…/deflation-becoming-serious-issue-for-europe-14.06.html

2. Deflation Fears Rise in US with Lowest Inflation Since 60s …

   20 May 2010 … Consumer prices fell in April for the first time since early last year, and inflation rose at its slowest rate since the 1960s. www.economywatch.com/…/deflation-fears-rise-in-US-with-lowest-inflation-since-60s-20-05.html

And now here’s the Times article in which a voting member of the Federal Reserve pretty much concurs with everything we’ve been saying for years:

A subtle but significant shift appears to be occurring within the Federal Reserve over the course of monetary policy amid increasing signs that the economic recovery is weakening.

On Thursday, James Bullard, the president of the Federal Reserve Bank of St. Louis,

warned that the Fed’s current policies were putting the American economy at risk of becoming

“enmeshed in a Japanese-style deflationary outcome within the next several years.”

The warning by Mr. Bullard, who is a voting member of the Fed committee that determines interest rates, comes days after Ben S. Bernanke, the Fed chairman,

said the central bank was prepared to do more to stimulate the economy if needed, though it had no immediate plans to do so.

Mr. Bullard had been associated with the camp that sees inflation, the Fed’s traditional enemy, as a greater threat than deflation.

But with inflation now very low, about half of the Fed’s unofficial target of 2 percent, and with the European debt crisis having roiled the markets,

even self-described inflation hawks like Mr. Bullard have gotten worried that growth has slowed so much that the economy is at risk of a dangerous cycle of falling prices and wages.

Among those seen as already sympathetic to the view that the damage from long-term unemployment and the threat of deflation are among the greatest challenges facing the economy,

are three other Fed bank presidents: Eric S. Rosengren of Boston, Janet L. Yellen of San Francisco and William C. Dudley of New York.

As the Fed’s board of governors shifts, the doves are getting more attention.

President Obama has nominated Ms. Yellen to be vice chairwoman of the Fed.

The Senate Banking Committee voted 17 to 6 on Wednesday to confirm her, though the top Republican on the panel, Senator Richard C. Shelby of Alabama, voted no, saying he believed Ms. Yellen had an “inflationary bias.”

EW: You can ALWAYS count on a Republican to say / do something incredibly stupid and self-defeating when it comes to almost anything, but especially economic policy

Mr. Bullard, in an conference call with reporters on Thursday, said he was not calling right away for the Fed to drop its position

that interest rates would remain exceptionally low for “an extended period,” or to resume buying long-term Treasury securities to stimulate the economy.

But both steps, he said, should be taken if any new “negative shocks” roil the economy.

“This is very significant,” Laurence H. Meyer, a former Fed governor, said of Mr. Bullard’s new position.

“He has been one of the most hawkish members, but he is now calling for the Fed to ease aggressively.

There seems to be no question he wants to do it sooner rather than later, and relatively forcefully.”

Until now, Mr. Rosengren of the Boston Fed had been perhaps the Fed official most outspoken on the prospect of the economy getting mired in a deflationary cycle.

“While I am not anticipating we will be in a deflationary period, it’s a risk that I do take seriously, and we should continue to monitor what’s happening with prices,”

Mr. Rosengren said in an interview last week. “A heightened risk of deflation is something that we should react to.” …

Starting in 2007, the Fed lowered the benchmark short-term interest rate all the way to zero – EW: just like Japan –

and pumped some $2 trillion into the economy with an array of emergency loans and purchases of government debts and mortgage bonds.

Those purchases were phased out in March, but there is now talk within the Fed of resuming them.

Doing so would further enlarge the central bank’s balance sheet, which has more than doubled, to $2.3 trillion.

To buy all those assets, the Fed essentially printed money — the $1 trillion in reserves.

If the reserves were withdrawn and lent out quickly, the supply of money in the economy could increase rapidly.

But right now there seems to be little threat of that happening.

Bank lending has continued to contract, as EW pointed out just a little while ago.

Big companies are in essence sitting on piles of cash,

while many small businesses complain that getting a bank loan has gotten much tougher …

In his article, Mr. Bullard warns: “Promising to remain at zero for a long time is a double-edged sword.”

Mr. Bullard said that inflation expectations had fallen from about 2 percent earlier this year to about 1.4 percent now, as judged by one measure, five-year Treasury inflation-protected securities.

The outcome could be an “unintended steady state” like Japan’s slow-growth economy.

“The U.S. is closer to a Japan-style outcome today than at any time in recent history,” he wrote.

While the rest of the article talks about various technical means the Fed could – or could not – use,

the key point is that – seemingly out of the blue – a voting member of the Federal Reserve has raised the very direct prospect of deflation and Japan-style Lost Decade/S for the US,

and, we would argue, insofar as the European Central Bank is making the exact same mistake of letting banks “hide” their disastrous losses, the European Union as well.

As we’ve said so many times, Welcome to the Lost Decades.

David Caploe PhD

Editor-in-Chief

EconomyWatch.com

President / acalaha.com