Monday, December 7, 2009
The latest lunacy out of the Institute for International Economics notes that the dollar can and should go to negative territory courtesy of another roughly $6 trillion in Quantitative Easing. Enter Joseph Gagnon, who is obviously daring to boldly go where the Fed Chairman can only dream of going, and is set on ruining whatever is left of America’s (and the world’s) middle class.
- The Federal Reserve should purchase an additional $2 trillion of longer-term debt securities, with an average maturity of around 7 years.
- The European Central Bank should lower its main refinancing rate to 50 basis points, continue to extend unlimited 12-month credit to the banking system at this rate, and purchase €1 trillion of longer-term debt securities.
- The Bank of Japan should state more clearly its intention to return inflation to at least 1 percent over the next two years, purchase an additional ¥100 trillion of longer-term debt securities with an average maturity of around 7 years, and commit to a further ¥100 trillion in such purchases in 2011 if core inflation over the next 12 months remains negative.
- The Bank of England should purchase an additional £200 billion of longerterm sterling bonds or an equivalent amount of longer-term foreign-currency bonds with the interest and principal hedged using currency swaps.
And just in case those still capable of rational thought feel like dryheaving upon reading more than one or two sentences of this pamphlet, Gagnon attempts to preempt the anger and loathing of all those who know full well that this action would merely create the most insane bubble in the history of the world. In order to do so, Gagnon cites none other than Iceland bankruptcy specialist extraordinaire, and the man who knows all about blowing not only bubbles but smoke up the collective rectum of Fed sycophants, Fred Mishkin:
(ARTICLE CONTINUES BELOW)
Concern about asset price bubbles in the main developed economies is not warranted in the near term. As Mishkin (2009) reminds us, the harm caused by bursting bubbles arises almost entirely from excessive leverage used to finance asset purchases. At present, leverage is falling as banks continue to tighten credit standards and terms. Should unsafe lending practices return, financial supervisors need to aggressively shut them down. (Posen (2009) discusses systematic policies to counter lending booms and busts.) Equity prices have risen, but from excessively low levels, and price?earnings ratios remain within historical ranges. It is important to recognize that current and expected future low interest rates are a fundamental element of asset valuation that supports high asset prices. A bubble occurs only when asset prices significantly exceed their fundamental value. In the emerging markets, there is also little evidence of asset price bubbles[...]
Let us take a quick look at the claims citation-worthy Mishkin made on Iceland shortly before the country went bankrupt:
- Fiscal imbalances are not a problem in Iceland: quite the opposite, with Iceland having an excellent fiscal position with low government net debt (less that 10% of GDP) and a fully funded pension system (with assets amounting to more than 120% of GDP).
- Monetary policy has also been successful in keeping inflation low and near the inflation target, particularly when housing prices are excluded from the inflation measure, as is the case in the United States and the eurozone.
- Research on multiple equilibria suggests that self-fulfilling prophecies are unlikely to occur when fundamentals are strong, as they are in Iceland.
- The analysis in our study suggests that although Iceland’s economy does have some imbalances that will eventually be reversed, financial fragility is currently not a problem, and the likelihood of a financial meltdown is low.
- Iceland is an advanced country with high-quality institutions. GDP per capita (adjusted for PPP) ranks fifth highest in the world; longevity is the highest for females and second highest for males; unemployment is almost non-existent and way below the natural rate; net government debt is almost nil, labor force participation among older workers the highest in the world, and of women the highest in the OECD (almost 80%, compared with 56% on average in the OECD).
- Noteworthy among Iceland’s country rankings for quality of institutions is that Iceland ranks fifth in economic freedom, firs in terms of the lowest corruption, seventh in terms of competitiveness, first in the percentage of population connected to the Internet (ADSL or ISDN), and the first in terms of
freedom of the press, compared with number 113 for Turkey and 59 for Thailand [and 666th for America].
- These rankings are of course sometimes arbitrary, but they clearly illustrate that Iceland is a well run, advanced Nordic country that has little in common with emerging market countries, a fact important to recognize when we start discussing financial stability in the next section.
Can someone please stop feeding booze to these animals? In the words of Raoul Duke, it truly won’t be long before they tear us to shreds if something doesn’t snap.
After reading the report here please crumple up and dispose of properly in your nearest bathroom.
This article was posted: Monday, December 7, 2009 at 11:13 am
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