Posted by Michael A. Kamperman on October 28, 2009
Next week the Federal Open Market Committee will meet to determine whether to or not to change their near zero interest rate policy and whether or not to signal an exit strategy from quantitative easing to those concerned about runaway inflation and the fall of the dollar. Absolutely without a doubt the Fed needs to ignore the voices calling for a clear exit strategy and needs to up their program of quantitative easing to purchase more U.S. Treasury bonds. The real economy remains in terrible shape and deflation is gaining traction in the U.S. and global economy. Without a boost from the first time home buyers tax credit new home sales started falling again in September, because there was no longer enough time to complete a new home and close by the November 30 deadline. Consumer confidence numbers are falling hard again, which will further dampen consumer spending. This is also a clear signal the job market has a giant need not apply sign attached to it. The Fed cannot meet its mandate of full employment without being much more aggressive by printing more money.
Following World War I the Weimar Republic of Germany faced numerous challenges. They were saddled with crippling debts known as war reparations and they were facing inflation rates running as high as 60%, because wealthy Germans sought to move cash to hard assets and foreign assets as quickly as possible. It was into a high inflationary environment with full employment that the Weimar Republic chose to indiscriminately print money. Additionally, the rest of the world did not share Germany’s problems and currency traders were able to punish the Mark on global currency markets. We are in a deflationary environment and we have high rates of unemployment. And, outside of China the rest of the world does share our debt-induced deflationary depression. Germany experienced hyper-inflation because they chose to print money at the worst possible time. We have the ideal circumstances to print money in the U.S. In fact, if we don’t print a lot more money the economy is going to slide a lot lower. There is simply no other way to service all of the global debt. Whereas Germany threw gasoline on an inflationary fire, outside of a few speculative commodities we are desperate to spark inflation in the real economy. There is a time and a place for everything and now is the time to print.
The Fed needs to print enough money that policy makers in Washington will be relieved about worries over the national debt and the federal budget deficit. By taking near term debt worries off the table the Fed can clear the decks for Washington to come forward with a desperately needed massive job focused stimulus bill. There is no longer any reason to quibble about whether the last stimulus bill was adequate to restore economic growth. It is time for President Obama to admit the economy is in worse shape than his economic teams worst case projections. Unless the deficit and defense of the prior stimulus bill comes off the table we will not see a serious jobs bill emerge from Congress. It is up to the Fed to signal all is not well with the economy and to start aggressively buying U.S. Treasury bonds.
Posted by Michael A. Kamperman on October 14, 2009
It may happen as soon as tomorrow. The core rate for CPI includes everything except for volatile food and energy prices. Over the last 12 months the overall CPI rate has declined by 1.5%, primarily due to a pullback in food and energy prices. But for the most part the Core CPI rate has risen slightly month after month despite rampant deflation. Over the last year the CPI has calculated that rents and owner’ equivalent rents (the economist’s substitute for home prices) have risen by an annualized rate of 1.8%. It is mindboggling that the federal government’s statisticians have been using the cost of renting shelter as a substitute for actually buying a house. Everyone knows home prices have dropped dramatically during the last 2 years. The reason the Core CPI rate is about to turn negative is rents are now rapidly falling throughout the U.S. Rent and owner’ equivalent rent combined account for 30% of the overall CPI calculation. Importantly, they account for 40% of the Core CPI calculation. Most economists and investors pay much closer attention to the core rate than to the overall rate due to the volatility of food and energy prices. This summer apartment vacancies reached 7.8%. Landlords are forced to lower prices to attract tenants. Once the Core CPI rate turns negative it will confirm the U.S. is in a deflationary spiral brought on by the credit crisis.
The CPI rate is built into many contracts and negotiations in the U.S. Most employers’ base raises for employees on a cost of living adjustment, plus potentially something extra for merit. With the Core CPI rate trending negative the only raises given to U.S. workers will be for merit. Stagnant and potentially falling wages in the U.S. will only lead to lower prices as consumers and businesses are strapped with excessive debts. They need the forces of inflation to raise their incomes and the prices of their assets to service their debts. This year people on Social Security did not receive their usual annual cost of living raise. Less income will lead to lower top line revenues for businesses. This will mean cost cutting will be the only way maintain or grow profits. In the U.S. cost cutting for businesses is code for more layoffs. Getting out of this deflationary spiral will be very difficult because of the way incomes in the U.S. are tied to the CPI rate.
The Fed is currently pushing on a string and has been unable to get the Zombie banks to increase lending. The only way to fight deflationary expectations is for the Federal Reserve to print a lot more money. Yet some members of the Fed would like to exit their quantitative easing program believing the economy is recovering and inflation is around the corner. These attitudes should change once the Core CPI rate confirms deflation. The good news is the release of minutes from the Federal Reserve’s last meeting showed that some members of the Fed are still open to upping the quantitative easing program.
Posted by Michael A. Kamperman on October 9, 2009
Some Governors at the Fed have recently been speaking out about the need for a rapid exit strategy from the Fed’s accommodative policies. They must think a speculative pop in the markets is equivalent to price stability and economic stability, which are the two things the Fed is charted by Congress to focus on. Is the home listed from a realtor down the street from you in a bidding war? Is your friend from college who has been unemployed for a while inundated with job offers? The American people are suffering. They are unemployed and they cannot sell their home because their mortgage is underwater. The objective of the hawkish Fed governors speaking about the need to have a rapid exit plan is not intended to push for interest rates to be raised in the near term. The comments are intended to push for an end to quantitative easing and the other policies the Fed has put in place to provide extra support to the economy. To date the Fed has done too little, not too much. Consumer credit fell another $12 billion in August despite getting a big boost from auto loans because of the cash for clunkers program. The banks are continuing to tighten credit standards. Auto sales fell back to extremely depressed levels in September as soon as the clunker program ended. Home prices will begin falling again now that the first time home buyers tax credit is no longer driving home sales. How could anyone at the Fed be worried about exit strategies when the real U-6 unemployment rate is 17%.
The hawkish Fed governors are simply too concerned about inflation returning. They see the dollar falling and gold reaching new highs and they assume the markets are signaling significant inflation is just around the corner. Not a chance. Real wages in the last unemployment report rose by only a penny over the preceding month. Hours worked fell to 33.0. Every industry has significant amounts of idle capacity. Inflation comes from too many dollars chasing too few goods. Since over half of the country has a subprime credit score, access to cash to purchase goods is restricted. Since industrial capacity is still way below 80%, there is no shortage of goods in any sector of the economy. Until these dynamics change there is no reason to fear inflation. It doesn’t matter how high gold gets, because the fundamentals of the economy will not support inflation.
What the hawkish Fed Governors should be panicked about is deflation. The fundamentals of the economy point to deflation. In the Great Depression deflation ended in 1933 after FDR declared a bank holiday and created FDIC, which ended the bank runs and brought money out from under the mattresses and back into the banks. He also ended the physical exchange of paper dollars for gold. He ordered the conversion of gold money for $20.67 per ounce in U.S. paper dollars. Then, in January of 1934 FDR devalued the dollar by 40% by raising the gold per ounce conversion rate to $35. We have no such tricks up our sleeve today to end deflation. What we do have to end deflation is quantitative easing. The Fed Governors need to be talking about why they need to print more money rather than how quickly they are prepared to withdraw support for the economy.
Posted by Michael A. Kamperman on October 4, 2009
Vice President Joe Biden has been the Whitehouse’s point man on implementing and defending the failed stimulus bill. After Friday’s unemployment report he bailed on being the sacrificial lamb for the President’s political and economic advisers. He said “We don’t think that ‘less bad’ is good. ‘Less bad’ is not our measure of success. One job lost is one job too many, and it’s still too much pain. That is not what the American people were promised.” How could he possibly defend the stimulus bill or the other economic programs as working in light of Friday’s unemployment report? It was so bad the government itself lost 53,000 jobs. There were 15,000 teachers who were not returned to the classroom. The stimulus bill is not only failing to create jobs, it now not even saving the jobs of state and local government employees, or even teachers. Financial support for state and local governments and for schools was a key component of the stimulus bill. But stimulus support from the federal government is simply insufficient to make up for the lost tax revenues the states are experiencing. State governments are being forced to either raise taxes or cut spending. In many cases they are doing both. This is precisely the wrong response to dealing with a severe economic contraction in the private economy. Total tax revenues from all sources fell by double digits in 39 out of 50 states in the second quarter of 2009 compared to the second quarter of 2008. The economic contraction is so severe that sales tax revenues in all of the states fell by 9%. There is no better measure of consumer spending than sales tax revenues.
The cause of continuing job losses is not the stimulus plan. There is no doubt things would be even worse if nothing were done. But we need Washington to succeed in solving problems and not just say at least we tried. The real reason we are still hemorrhaging jobs is the stress test of the banks. Treasury Secretary Timothy Geithner supported Wizard of Oz style smoke and mirrors over the politically painful steps of fixing the broken credit markets. He should have created a “bad bank” to absorb the toxic assets, he didn’t. He doesn’t even want to encourage the FDIC to borrow money directly from the Treasury now that it is obvious it is broke, even though the FDIC has a $500 billion unsecured line of credit already set up with the Treasury. Remember, the stress test’s worse case assumption was that unemployment would not rise above an average of 8.9% in 2009. If not for removing 1.5 million people from the labor force the unemployment report would have already reached 11%. The banks cannot side step the fact that the real unemployment rate is much higher than the stated unemployment rate. People without jobs cannot pay their debts no matter how the statisticians in Washington categorize them. The losses at the banks will be much higher than the worst case scenario modeled by the Treasury. Therefore, they do not have enough capital and that is the reason they are not lending. Zombie banks do not lend.
The creative destructionist on the Fed and the liquidationists in the Obama Whitehouse are reaping what they have sown. The Whitehouse and the Fed have been talking tough on the need to reign in the deficit. The Fed has been talking tough about rapidly withdrawing monetary support to prevent the return of inflation. The Fed is concerned about the appearance of their independence. What the Fed should be concerned with is they are talking about withdrawing monetary support when they should be talking about adding it. They will add it. The Fed will back pedal and up its quantitative easing program. This reminds me a lot of August of 2007 when the Fed met in the first week of August and refused to lower interest rates. Less than three weeks later they started cutting rates drastically in an emergency session. The unemployment report and the state sales tax reports are better indicators of future Fed policy than tough talk. The Whitehouse has no political option but to back pedal come forward with a real job creation plan. Even the New York Times has turned against the President and his economic policies. Here is what the Times said in its editorial this morning “If successful, ambitious goals like health care reform and energy legislation may generate jobs, but officials have not persuasively linked them to job growth. Congress and the administration also have not done enough to directly create jobs. That could be done with more stimulus to spur job creation, or a large federal jobs program, or tax credits for hiring, or all three. Or surprise us. Just don’t pretend that the deteriorating jobs picture will self-correct, or act as if it is tolerable.” Ouch! The talking heads on the Fed and in the Whitehouse look like economic fools. At least Joe Biden is done with being made to look like one.
Posted by Michael A. Kamperman on September 24, 2009
Last week President Obama sent China a stern message on fair trade when he slapped a 35% tariff on low end tire imports from China. China is basically expanding industrial capacity far beyond their own internal demand and is looking to dump excess supply onto the U.S. and other markets. In the last two years China’s share of the U.S. tire market has risen from 4% to 16%. China retaliated with a couple of trade restrictions against the U.S. But nothing is set to rattle world markets and global trade more than Britain’s attempt to grow exports ala China by driving down the value of the pound against other currencies. The Bank of England’s Head Governor Mervyn King told a regional newspaper a lower currency was desired by the British government to grow their share of the export market. The corollary of course is that a weak currency encourages local production and discourages expensive imports. The Obama administration also believes a strategy of growing exports and shrinking the U.S. trade gap is the right strategy to restore the economic health of America. Basically, Britain and the U.S. want their economies to look more like China’s. Correspondingly, this beggar they neighbor strategy is dependent upon the large net export nations in Asia such as China and Japan, plus Germany, to change their economic models and begin to produce less and import more. Fat chance! While this may look good in some wonkish white paper it is not going to happen in the real world. The export driven nations have taken a huge hit to their economies and global trade has dropped more in the last year than at any time since the early 1930’s. It is politically unrealistic to expect them to ask their citizens to endure higher rates of unemployment so that America and Britain can experience lower levels of unemployment. The imbalances in the global economy brought about by excessive debt levels are continuing to unravel. The Great Unraveling is as inevitable now as it was in the 1930’s. The leaders in the 1930’s weren’t dumb, they were desperate.
One of the widely blamed causes of America’s deep suffering during the Great Depression was the Smoot-Hawley Act which raised tariffs on thousands of imports sparking a global trade war. Back then the U.S. was a creditor nation with a positive trade gap. Today we are a debtor nation with the world’s largest trade deficits. A trade war will hurt us less and hurt China, Japan, and Germany more. While our risks from a trade war are not as great as they were in the 1930’s, that doesn’t mean we won’t feel some real pain and should avoid one at all costs.
President Obama is looking to re-orient the U.S. economy to borrow less, save more, and spend less. He wants us to become a creditor nation again and lead the world in exports. He only wants responsible people to have access to credit. He wants to see the federal budget deficits reduced. He wants to drive down the costs of healthcare in the U.S. and bring them in line with the per capita costs experienced by other industrialized nations. While these virtuous ideals sound good, in reality they are the opposite of what is needed to get the country out of our debt induced deflationary depression. We need to look to solve our own problems and not expect the rest of the world to solve them for us. With the whole world in a depression it is not possible for the world’s largest economy to export its way to prosperity. We need to re-kindle internal consumer demand. We need massive quantitative easing from the Fed. Unfortunately, the Fed is bowing to the pressures from the inflation hawks and has failed to increase its program of quantitative easing. The Fed will up this program in time. It is just a question of how much more pain the Whitehouse and the Fed are willing for us to take before they act. My guess is we will not see a concerted effort from Washington to provide further assistance to the economy until unemployment reaches 11% in a few months. Hopefully by then it will not be too late to head off at the pass a new depression worse than The Great Depression.
Posted by Michael A. Kamperman on September 22, 2009
I’m not holding my breath. The Fed seems more concerned about pundits and speculators hyping potential hyper-inflation than about poor working stiffs in America with no job. But at this meeting the Fed needs to take a stand and up its program of quantitative easing rather than signal a plan to unwind it. At the last meeting the Fed extended the deadline to complete its purchases of $300 billion in Treasury bonds from the end of September to the end of October to soften the impact when it withdraws support for the Treasury market. Many expect the Fed will similarly extend the purchase of federally guaranteed mortgage-backed securities into next year to taper out of that program. For the Fed to withdraw support for the markets it needs to affirmatively answer two key questions; is the real economy experiencing a sustainable recovery and is there sufficient capital from other sources to replace the extra cash the Fed has been pumping into the market? The answer is a clear no to the question of whether the economy is experiencing a sustainable recovery. The answer is probably no to the question of whether or not alternative capital resources are available to replace the Fed’s printed cash.
Over the weekend Edmunds reported that September auto sales are running at an annual rate of 8.8 million units, the lowest annual sales rate of the year. This is the worst year for per capita auto sales in the post World War II era, and this month is looking to be the worst month during the worst year for auto sales. That is not a sign of an economic recovery, it is a sign the economy is starting to resume its slide. And it is real time data. I look for a slide in homes sales to follow the slide in auto sales as soon as the first time home buyers tax credit expires on November 30.
The more interesting question is does the cash exist outside of the Fed to support the needs of the mortgage markets and the bond markets? While we won’t know for sure until the Fed pulls its support, it certainly doesn’t look like the funds exist. The FHA has reported its reserves are close to falling below the regulatory minimum. Rather than asking Congress for more money the FHA has decided to tighten its lending standards. That won’t be very supportive for lower priced home sales. Additionally, the NYT reported a shocking story that the FDIC was considering borrowing money from the banks it regulates because it is running out of reserves. The FDIC has a line of credit from the Treasury but is apparently reluctant to tap it. The Whitehouse wants to save any additional deficit spending for healthcare reform. It is afraid that the votes in Congress won’t materialize to spend more money if the Congress believes the economy needs a lot more deficit spending. At the same time there is going to be a push at the G-20 meeting to raise the capital reserve requirements on banks to reduce their overall risk. On the surface this seems like good policy. But in a debt-induced deflationary depression the last thing governments should be doing is adopting policies that will further shrink the money supply by further deleveraging the banks. This policy will only exacerbate the powerful deflationary forces already unleashed in the economy. The only way out of a deflationary depression is to spend one’s way out. Yet people cannot spend money they don’t have and investors cannot purchase mortgage-backed securities with cash they don’t have. The ball is in the Fed’s court and I am concerned they are about to fumble it.
Posted by Michael A. Kamperman on August 13, 2009
Don’t ask me because I don’t know the answer. For many years now the U.S. consumer has been the source of final demand and has driven the global economy forward. Because of the collapse of available consumer credit, the U.S. consumer has reigned in their spending as evidenced by today’s disappointing retail sales report. Why some were surprised that rising unemployment and restricted access to credit led to lower retail sales is the real mystery. They explain the aberration in their mind away by guessing that since 200,000 people purchased a clunker in the last week of July that caused 300,000,000 people to close their wallets for the whole month. Who are these people that get passed off to us as experts? Today it was also reported that the Euro-zone economy contracted less than expected and that France and Germany actually had a small amount of positive economic growth in the second quarter. But this growth came from the calculations of modern alchemists known as economists. Because imports dropped faster than exports fell in both countries, the alchemists claim they are now growing. Countries with declining imports are buying less from others because they have weak economies. In no way are they positioned to drive global growth going forward. Many will claim China is prepared to drive global growth forward. China’s has a production oriented economy that is dependent on selling goods to the West. The West is buying less and less. China calculates its economic growth based on production and not based on final demand. So if China builds something nobody wants and sticks it in a warehouse they claim positive growth. If China has such a strong economy why are their imports falling too?
My concerted opinion remains that the key to restoring global economic growth relies heavily on reviving the spendthrift U.S. consumer. With excess debt levels and deflation prevalent in the U.S. and the rest of the world, the only way to restore the U.S. consumer is for the Fed to pursue a much more aggressive policy of quantitative easing. A step they failed to take at yesterday’s meeting. According to the economic data the U.S. economy was still declining in July. The predictions that the recession has ended by some alchemists and the consensus of the alchemists that the U.S. will see positive economic growth in the second half of 2009 looks to be in jeopardy right now. The problem is these alchemists continue to talk about how long past post World War II recessions lasted and base their forecasts on the false assumption that we remain in the inflationary growth economy that defined the first 62 years of the post-war period. Those days ended in August of 2007 and we have returned to a debt-induced deflationary depression.
Fortunately, the Fed with at least three blind mice as voting members did not signal an end to further shots of quantitative easing despite wide spread media reports to the contrary. What the timid Fed did was they punted the ball to the next meeting to make a final decision. Hopefully they can open their eyes and see the economic truth between now and then.
Posted by Michael A. Kamperman on August 11, 2009
The Federal Reserve has a dual mandate; economic growth and price stability. There can be little question that the economy would benefit if the Federal Reserve increased its program of quantitative easing (printing money) at tomorrow’s meeting. But what the markets and the media are missing is that the Federal Reserve needs to print more money to maintain price stability. Price stability requires limiting the amount of inflation or deflation that impacts the purchasing power of a dollar for a domestic U.S. consumer. This should not be confused with whether the value of the dollar is rising or falling versus other currencies like the euro, the pound, or the yen. Printing money to maintain price stability will seem counter-intuitive to most observers of the markets and the economy. The knee-jerk response is usually that if the Fed prints more money we will eventually have hyper-inflation. The Federal Reserve needs to ignore the voices of ignorance at tomorrow’s meeting and follow the lead of the Bank of England and print more money, and lots of it. The reason is the U.S. economy is experiencing levels of deflation that are approaching the levels of deflation last seen in the early 1930’s during the Great Depression. Most people have missed this fact due to the use of owners’ equivalent rent in the CPI index, which dramatically understates the decline in home prices in the U.S.
The official CPI numbers state that prices fell 1.4% in the last 12 months in the U.S. The CPI currently uses owners’ equivalent rent to calculate the price of home ownership. Owner’s equivalent rent accounts for over 23% of the CPI Index. In the last 12 months this calculation has risen 1.9% and has contributed a positive .4% to annual CPI. Say WHAT? That’s right; the official CPI statistics calculate that it is more expensive to purchase a home today than it was 12 months ago in the U.S. An alternative measure of home prices is the Case/Shiller index. This index has fallen over 17% in the last 12 months and much more accurately captures the trend of the costs of purchasing a home for a U.S. consumer. If the CPI used changes in home prices in the CPI index rather than owners’ equivalent rents, then the positive .4% housing contributed to CPI in the last 12 months would actually have been a negative detraction of approximately 3.9%. This means the real rate of deflation in the U.S. over the last 12 months is 5.7%, not 1.4%. If our CPI were reported as minus 5.7% over the last 12 months, then Washington would be much more concerned about deflation.
From 1929 to 1933 the U.S. economy experienced mid single digit deflation for 4 years in a row. But the official CPI Index in the 1930’s used home prices to calculate the cost of purchasing a home for a consumer, not owner’s equivalent rent. The federal government changed the calculation for the cost of homeownership in the CPI Index in January of 1983. We will find out tomorrow if the Fed understands that deflation over the last 12 months is tracking the levels of deflation of the Great Depression. If they get it they will surprise the markets and increase the level of their quantitative easing program. If they don’t get it, then they will stand pat. The Obama Administration has already checked out on further assistance to the economy in the near term. Mr. Bernanke is our last and best hope to battle the economic crisis. My objective in detailing this is not to be value added by helping people understand and interpret the statistics they are looking at. My objective is to give all Americans a wake-up call and say we are facing a New Great Depression and we need to insist Washington takes action.
Posted by Michael A. Kamperman on July 27, 2009
An analysis by the Wall Street Journal showed that the total loan portfolios of the nation’s 15 largest banks shrank by an aggregate of 2.8% in the second quarter. Most of the lending that did occur in the quarter went to mortgage refinancing and credit renewals for existing business customers. Less than half of the loans that were made represented new commitments by the banks representing new transactions for the economy. The banks claim that demand remains weak from potential borrowers, and potential borrowers claim the banks have overly restrictive lending standards. The truth is both viewpoints are true. Many of the highest quality borrowers are looking to contract, not expand. Meanwhile, the banks have significantly raised the bar on what it takes to qualify for a new loan, whether it is a consumer loan or a business loan. According to the WSJ, loan portfolios at the nation’s 15 largest banks have decline by 10% from year ago levels after acquisitions are netted out. The fact that lending is still contracting at the same pace as it did in the last couple of quarters means there is a real possibility the economy contracted at a similar pace as well. Economists are looking for a much more benign contraction in U.S. second quarter GDP. I would not be surprised if the number is much worse than expected, just like it was in Britain.
Fed Chairman Ben Bernanke, in a much hyped Town Hall style meeting to be broadcast this week on the PBS News Hour program, claimed that back in 1929 and 1930 the world was experiencing a normal recession. Then, major Central Europe lenders (Austrian Creditanstalt) faltered and further panic set in causing the Great Depression. His thesis is that since the large “banks” have been rescued the crisis has been averted. But we have no way of knowing if the rumors of trouble with certain banks indeed kicked off the Great Depression. It could be that the event was just the next inevitable phase of the crisis and the back then hoped for “green shoots” of 1931 vanished. We have built up significant hope in 2009 that the worst is behind us and blue skies are just around the corner. However, the shrinking credit extended by our largest banks is painting a very different story.
What I think Chairman Bernanke is missing is the world of lending has changed since 1931. Back then most of the credit extended in the economy came from commercial banks. If the commercial banks were lost the economy would be lost with them. However, in the 2000’s the vast majority of lending has come from the shadow banking system fueled by the asset-backed securities market. This market is dead and as CIT can attest the shadow banking model is broken. Yet our largest banks have not only failed to pick up the slack, they too are shrinking the credit they extend to the economy. Perhaps the real cause of the Great Depression was the inevitable “Great Un-Ravel” (yes I just coined that term) that was destined to occur one way or another as a global economy with too much debt ran into contracting economies and deflation. Just like early 1931, we have a global economy with massive imbalances that are still unraveling. We just don’t know what will be the next shoe to drop.
Posted by Michael A. Kamperman on July 24, 2009
For those thinking that the U.S. can ride the coat-tails of the global economy to recovery, think again. GDP in the U.K. fell by a worse than expected .8% in the second quarter. This dismal performance included the benefits of stimulus spending, .5% central bank interest rates, bank rescues, and quantitative easing. In Spain, unemployment for the second quarter reached 17.9%. Many Spanish construction workers are on a temporary status and are thus easier to lay-off than other workers in other parts of Europe. Admittedly, those championing growth prospects in the rest of the world often refer to the emerging economic BRIC countries, especially China. Well, in the first half of this year consumer price inflation fell 1.1% from the previous year. This in spite of significant stimulus spending on public projects by the Chinese government and the government and the government’s insistence that state own banks ramp up lending. The state owned banks supposedly doubled the lending rate from the year before. While these actions created a second quarter growth rate in China of 7.9%, it is strange that China is experiencing deflation. The rampant growth rates in China over the last several years have been accompanied by high single digit rates of inflation. In fact, inflation had been a key concern for the Chinese government up until now. To me, Chinese deflation is signaling a weakening Chinese consumer and a weakening Chinese private sector economy.
The Obama economic dream team needs to figure out how to generate internal demand, rather than chase after some pipe-dream of export led growth. And the Federal Reserve needs to up its program of quantitative easing and print more money before deflationary forces take hold in the global psyche. Once the desire to save replaces the desire to spend it could take a generation or two to reverse the psychic fabric of society. The economic paradox we face is that while spending too much got us into our economic mess, it only by spending even more that we can get out of it. Otherwise, the debts that are weighing down the economy will become even more difficult to deal with as global GDP shrinks and deflation decreases the value of assets and earnings.
