Joined: Aug 03, 2006 Posts: 4302 Location: Graceland
Posted: Tue Mar 18, 2008 7:29 pm Post subject: In Case of Emergency, Break Glass
When economic problems seem to be brewing, the government and central bank have several tools that can be deployed on an "in case of emergency, break glass" basis.
Here is a short list of U.S. options, along with the status of the glass:
1. Cut taxes. Glass broken in 2001 and taxes have been cut to the point that further cuts are probably not possible.
2. Gimicky tax moves. Glass broken in 2008 in the form of "tax rebates." No one thinks it will do much good, but it's worth a try.
3. Run up government debt. Glass broken in 2001 and been used regularly ever since.
4. Cut interest rates. Glass broken in 2007 and 2008. Benefits of this action are unclear.
5. Create big government spending programs to stimulate economy. Glass broken in 2001 with Department of Homeland Security and Medicare Part D in 2003. Benefit may have been to delay economic calamity.
6. Go to war. Glass broken in 2001 in Afghanistan and 2003 in Iraq. Benefit may have been to delay economic calamity. Ability to break glass again may be restricted by availability of military bandwidth and money to fund it.
7. Have central bank create liquidity without regard to inflationary effect on currency. Glass broken in 2007 and 2008 in the form of injections of liquidity into market.
8. Have government step in to prevent failure of financial institutions. Glass broken in 2008 with Bear Stearns bailout.
9. Convince oil producers to flood market with oil to provide economic stimulus and jump start economy. Glass is unbreakable because no producer has spare capacity, though the government likely continues banging on glass.
10. Manipulate economic figures to disguise extent of economic trouble. Glass broken in 2006 with Fed's decision to discontinue reporting of M3. Glass broken continuously by excluding energy and food from CPI.
11. Adopt trade policies aimed at creating trade surplus to create real wealth within borders to ease other economic pressures. More unbreakable glass here. Current economy is not configured to achieve this outcome.
12. Identify an enemy that the country can unite in fighting and for which the society will be willing to undergo hardship. Glass broken in 2001 in identification of Islamic extremists as ideological enemy, rather than political/military enemy.
13. Creation of "Black Swan" event for the purpose of uniting country and stimulating additional economic activity. Glass MAY have been broken in 9/11 attack. Glass MAY be broken with some type of Iran event before the end of 2008.
14. Institute price controls. Glass threatened with breakage in the form of serious discussions of freezing mortgage rates in 2007 and 2008. This action doesn't work, so breaking glass is purely symbolic.
15. Confiscate hard assets such as gold to prevent hoarding and further devaluation of currency. Glass not broken. This action doesn't work, so breaking glass would be purely symbolic.
16. Rely on private citizens to take on extra debt to finance living expenses through hard times. Glass broken in the early to mid-2000s in the form of consumer debt and home equity loans used to finance consumption. No lines of credit remaining except retirement plan balances.
17. Rely on a "leading industry" to "power" us out. Leading industry of this generation is internet, computers and mobile phones. All are reaching saturation point, after which ability to "power" economy through hard times is severely restricted.
18. As a last resort measure, start to spend through various asset "reserves" earmarked to fund future liabilities. Glass broken many years ago by spending surplus of Social Security tax receipts to fund current consumption.
19. Severely devalue currency to cheapen otherwise insurmountable debt. Glass broken with current monetary policy. Problem with breaking this pane of glass is it may exacerbate other problems in a manner that will outweigh the benefit from the devaluation in the first place.
***
Is there any more glass to break? I just don't know how much more the government and the Fed can do at this point. If there is no more glass to break, I don't know what will prevent a cascading failure of confidence in the currency and most paper assets.
If I left something out or mis-characterized some of the glass breaking, feel free to offer a different view.
I didn't mean to put together a doomer jubilee, even though that is sort of what it looks like. _________________
Joined: Aug 26, 2005 Posts: 428 Location: Windy City No Longer
Posted: Tue Mar 18, 2008 9:02 pm Post subject: Re: In Case of Emergency, Break Glass
The only other one I can think of is to "Pull a Volcker", which despite sounding like a euphemism economists use in the shower, would actually mean that the Fed Chairman hiked interest rates high enough to halt inflation in its tracks, restore confidence in the dollar as the world's reserve currency and grow hair on the chest of sissy boy bankers and traders who think 7% interest rates are the end of the world.
Of course, in today's over leveraged debt happy world, such a shock treatment would probably kill the patient. _________________ TANSTAAFL
Joined: Aug 03, 2006 Posts: 4302 Location: Graceland
Posted: Tue Mar 18, 2008 9:12 pm Post subject: Re: In Case of Emergency, Break Glass
benzoil wrote:
The only other one I can think of is to "Pull a Volcker", which despite sounding like a euphemism economists use in the shower, would actually mean that the Fed Chairman hiked interest rates high enough to halt inflation in its tracks, restore confidence in the dollar as the world's reserve currency and grow hair on the chest of sissy boy bankers and traders who think 7% interest rates are the end of the world.
Of course, in today's over leveraged debt happy world, such a shock treatment would probably kill the patient.
I think we can safely say that it WOULD kill the patient. No doubt in my mind about that one.
You may have heard stories about how much Volcker was hated in the early 1980s. Car dealers mailing him keys to cars that they couldn't sell because interest rates were too high. Home builders sending him keys to houses they couldn't sell for similar reasons.
Society today is always on the verge of an emotional breakdown as it is. If you put reality-based interest rates in front of them they would probably faint, then Congress would demand a new Fed chairman because high interest rates were so painful.
I read Alan Greenspan's book and he approved of Volcker's approach, though it was very unpopular. I got the sense that Greenspan wouldn't have had the guts to do that, so he was a little in awe of Volcker's courage. _________________
Posted: Tue Mar 18, 2008 9:36 pm Post subject: Re: In Case of Emergency, Break Glass
Cutting interest rates is a fatal mistake. There is currently a rather unusual feedback loop of the dropping dollar precipitating economic weakness which "requires" lower interest rates which in turn drive down the dollar. Under normal economic conditions, a weaker dollar would be a boon for the US export industry. But such an industry appears to be nearly absent. America's biggest export is its dollar and its devaluation is dropping demand for this export. This is what you get with a service-finance economy. There is no product, just the need for lots of confidence.
Joined: Aug 03, 2006 Posts: 4302 Location: Graceland
Posted: Tue Mar 18, 2008 10:57 pm Post subject: Re: In Case of Emergency, Break Glass
dissident wrote:
Cutting interest rates is a fatal mistake. There is currently a rather unusual feedback loop of the dropping dollar precipitating economic weakness which "requires" lower interest rates which in turn drive down the dollar.
Yes, it is a bad idea. I wonder why the Fed has done it twice in the past two days, and why the market seems so HAPPY about it.
Gold was down today. Wow. I understand why, but it's still insane. But it will be up up up up up up as long as the Fed is engaged in this stupid feedback loop. _________________
Posted: Tue Mar 18, 2008 11:06 pm Post subject: Re: In Case of Emergency, Break Glass
BigTex wrote:
dissident wrote:
Cutting interest rates is a fatal mistake. There is currently a rather unusual feedback loop of the dropping dollar precipitating economic weakness which "requires" lower interest rates which in turn drive down the dollar.
Yes, it is a bad idea. I wonder why the Fed has done it twice in the past two days, and why the market seems to HAPPY about it.
Gold was down today. Wow. I understand why, but it's still insane. But it will be up up up up up up as long as the Fed is engaged in this stupid feedback loop.
These stupid feedback loops seem to occur with disturbing frequency in policy making. For example:
* Traffic congestion is becoming a big problem, so lets build another road/highway or add more lanes to existing ones- thereby encouraging people to buy and use cars all the more and create more traffic congestion.
* There's an oil shock, so lets go look for even more oil to get our fix thus setting ourselves up for an even bigger shock when the next oil shortage inevitably comes along
*The dollar is falling and causing economic weakness so lets cut interest rates to stimulate the economy-and cause the dollar to fall even further
Why don't TPTB try to think outside the box? Are they insane or just stupid? Or have they dug themselves so deep into a hole they can't get out, so they keep doing the only thing they know how to do and dig themselves even deeper?
Last edited by Precipice on Wed Mar 19, 2008 12:36 am; edited 1 time in total
Joined: Mar 12, 2007 Posts: 1004 Location: As close as I can get to the beginning of the pipe.
Posted: Wed Mar 19, 2008 1:21 am Post subject: Re: In Case of Emergency, Break Glass
There's an insane level of denial going on right now. And stupidity. This is just too funny not to share. Tex, love the new avatar. LOVE it. Keep that one awhile.
" Markets these days seem like the proverbial little kid, lying in bed in the dark, absolutely certain there is something under the bed, but not wanting to appear too chicken. Even though his mom has assured him there isn’t anything to worry about, he lies there with the covers pulled up to his chin, waiting to hear that dreaded “bump” in the night.
Friday, we heard a bump. Not only that, but we could swear a big, hairy claw reached out with no warning, grabbed a major U.S. investment bank, and in the blink of an eye, dragged it under our mattress. Kind of begs the question: WHAT is really out there?
That’s the problem, and it has been since last summer. We don’t know how bad bank credit really is. This week, Bear Stearns, the first bank to announce a major sub-prime hit to two of its hedge funds last year, became the first U.S. investment bank to go belly-up (though the big-wigs aren’t calling it that). The Fed acted quickly to stave off what could have become a major global financial crisis. But how many others might there be?
That is rhetorical, of course. You get the Moose’s drift if you’ve ever sat in a horror movie asking yourself, “Why in heaven’s name is that idiot teen-jock going into a totally dark house when we can all hear his semi-slutty girlfriend screaming in the basement?”
The Moose is perfectly happy being chicken. Witness our position in gold for the last four months. It doesn’t change this week. We still have the covers pulled up to our chin.
So how bad is it? Well, the Fed offered to pump $200 billion into the markets this week, prompting the largest one-day stock rally in five years. It was short-lived, however (one session). Stocks did a U-ie after that and ended the week flat to lower.
Gotta think if 200 billion dollars in temptation sparks zero greed, the fear must be palpable. And if the Fed believes that at least 200 billion is needed (they offered more, days before another rate cut -- and 200B is one fourth of their total capital), then maybe fear is justified. It’s like your mom telling you there’s nothing under the bed, but tucking you in with a rocket-propelled grenade launcher… “Just in case, sweetie”.
Love your pancakes, Ma, but we need to discuss the threat assessment skills."
_________________ "When fascism comes to America it will be wrapped in a flag and carrying a cross." --Sinclair Lewis
Posted: Wed Mar 19, 2008 3:11 am Post subject: Re: In Case of Emergency, Break Glass
Perhaps it is not how many options policy makers have to pull out in the case of an emergency, but an entitlement society that expects to be rescued every time from the consequences of their own mistakes?
The speeding car has burst into flames, it has broken through the guard rail and is plummeting down a steep cliff, and the driver has suddenly realized that McGiver is not there to save his butt. It is too late to worry about getting them brakes checked or just to slowdown! ; - ) _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Posted: Wed Mar 19, 2008 3:50 am Post subject: Re: In Case of Emergency, Break Glass
MrBill wrote:
Perhaps it is not how many options policy makers have to pull out in the case of an emergency, but an entitlement society that expects to be rescued every time from the consequences of their own mistakes?
The speeding car has burst into flames, it has broken through the guard rail and is plummeting down a steep cliff, and the driver has suddenly realized that McGiver is not there to save his butt. It is too late to worry about getting them brakes checked or just to slowdown! ; - )
Just when I was starting to feel better because no one had to be rescued on Tuesday... _________________ "Mit der Dummheit kaempfen Goetter selbst vergebens" -Friedrich von Schiller
Joined: Aug 03, 2006 Posts: 4302 Location: Graceland
Posted: Wed Mar 19, 2008 8:28 am Post subject: Re: In Case of Emergency, Break Glass
MrBill wrote:
Perhaps it is not how many options policy makers have to pull out in the case of an emergency, but an entitlement society that expects to be rescued every time from the consequences of their own mistakes?
The speeding car has burst into flames, it has broken through the guard rail and is plummeting down a steep cliff, and the driver has suddenly realized that McGiver is not there to save his butt. It is too late to worry about getting them brakes checked or just to slowdown! ; - )
Note, MrBill, that an entitlement society sets the stage for a MUCH LARGER CRASH when all of the rescue levers have been pulled and you are still heading straight for the brick wall.
It probably would have been better to let a really ugly recession unfold in the 2001-2003 timeframe (and skip the Iraq war), and then have gotten back to reality. We would be in SO much better shape today.
Posted: Wed Mar 19, 2008 9:17 am Post subject: Re: In Case of Emergency, Break Glass
That's an old trading adage. "Your best loss is your first loss." _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Posted: Wed Mar 19, 2008 10:20 am Post subject: Re: In Case of Emergency, Break Glass
Attempts to carry out economic reforms from the monetary side can never amount to anything but an artificial stimulation of economic activity by an expansion of the circulation, and this, as must constantly be emphasized, must necessarily lead to crisis and depression. Recurring economic crises are nothing but the consequence of attempts, despite all the teachings of experience and all the warnings of the economists, to stimulate economic activity by means of additional credit.
LUDWIG VON MISES
PREFACE TO THE ENGLISH EDITION
The Theory of Money and Credit
June 1934
Posted: Wed Mar 19, 2008 11:22 am Post subject: Re: In Case of Emergency, Break Glass
"
Why don't TPTB try to think outside the box? Are they insane or just stupid? Or have they dug themselves so deep into a hole they can't get out, so they keep doing the only thing they know how to do and dig themselves even deeper?"
as terry pratchett would say " why try thinking outside of the box when theres no evidence of thinking inside the box"
possible mis-qouted
look interest rate increases hurt - amerika can't take pain anymore!
P.
"In the Grim darkness of the future there is only - fed rate cuts"
Posted: Wed Mar 19, 2008 11:57 am Post subject: Re: In Case of Emergency, Break Glass
peasea wrote:
"
Why don't TPTB try to think outside the box? Are they insane or just stupid? Or have they dug themselves so deep into a hole they can't get out, so they keep doing the only thing they know how to do and dig themselves even deeper?"
as terry pratchett would say " why try thinking outside of the box when theres no evidence of thinking inside the box"
I think there is a bug involved called "social status". I suspect that it's THE major factor guiding people's behavior. If you just have social status, most other things take care of themselves. Since social status is mainly built on illusions, it can easily be lost, and there is a nasty tendency to lose 90%-100% of it once you start to lose a little bit of it.
Most people who control important aspects of the current system are literally scared to death by the thought of losing social status, and they try to avoid changes at any cost. Most of them are not very intelligent - shrewd and smart, but not intelligent - and they have been good at one thing only: To climb the ladder. We can never expect them to think "outside the box", because they are simply not people who do such things.
The only way forward I can see is to just let the thing crash, and then look for what's coming up instead. My humble guess is that people will ask for many more political solutions, and the "free marketists" will be about as popular in ten years as th memory of Yeltsin is in Russia today.
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