Well, FWers, just like everyone else, can take their pick between Paul
Krugman's Keynesian rescue scheme -- governments must print massive amounts
of new money (by buying existing bonds*) in order to stimulate consumer
spending, and others, like Pimco (article below), the world's largest bond
buyer (in essence a friend of governments) who say that further
money-printing will only bring forward the day of massive inflation (though
it doesn't dwell on the inevitable subsequent collapse).
(*Bonds are called assets. They are when we buy them [that is, new bonds]
as individuals because they give us an income. They are not when
governments buy already existing bonds with brand-new money. They are
liabilities because governments have to pay a dividend [sometimes to
themselves if they are government bonds]. So, when a government finally
pays off a bond -- if it ever does -- it will have paid twice. That is, the
taxpayer pays twice. Once a government passes a line [variable in different
countries but roughly at about 120% of GDP] where the dividends it has to
pay are beyond the electorate's ability to be taxed, the whole fandango is
actually unsustainable.)
Consumers are not buying goods as they used to for several reasons
(depending on their situation): 1. they haven't got sufficient income; 2.
they are saving hard because they're worried about the future; 3. . . .
It's the third one, which cannot say its name and which almost all
economists totally ignore -- whether of the Krugman or the Pimco school.
The plain fact is that there are no more iconic consumer products.
For 200 years (roughly 1780-1980) every single adult knew of some consumer
product that he couldn't afford but yearned for because the next higher
class was flaunting it. So, whatever his discretionary income, be it ever
so small (200 years ago), the next desirable product was identifiable and
was saved hard for. Those products of the first 100 years or so we would
now regard as trivial. Those of the last 100 years were not so trivial --
radio, telephone, car, fridge, central heating. All iconic products start
out by being very expensive. But, increasingly mass-produced, they work
their way down through successive classes. They motivate everyone to buy
something at some income level or other.
Where are the new iconic products? There aren't any. They petered out at
around 1980 and it was then that the financial sector then started throwing
credit at consumers to keep them buying new embellishments of old products,
not uniquely new ones. But now, since the credit-crunch, we are now into a
no-growth economy and it may be a very long time before a new situation
emerges.
Keith
Pimco likens US to 'Ponzi' scheme
US authorities are operating a "brazen" Ponzi scheme in government debt by
buying trillions of dollars of bonds to stimulate the economy, according to
Bill Gross, managing director of Pimco, the world's biggest bond house.
By Philip Aldrick, Economics Editor, Daily Telegraph
Published: 8:14PM BST 27 Oct 2010
Mr Gross said more QE is a huge gamble, but necessary because the US is "in
a 'liquidity trap'
In a bid to restart the stalling recovery, the US Federal Reserve is next
week expected to unveil a second round of quantitative easing (QE) of as
much as $500bn, on top of the $1.2 trillion already completed.
In typically robust comments, Mr Gross said the Fed had run out of other
options but warned that more QE would in the long-term mean "picking the
creditor's pocket via inflation and negative real interest rates".
"[Cheque] writing in the trillions is not a bondholder's friend; it is in
fact inflationary, and, if truth be told, somewhat of a Ponzi scheme," he
wrote on his investment outlook, arguing that creditors have always
expected to be paid out of future growth.
"Now, with growth in doubt, it seems the Fed has taken Ponzi one step
further," he said. "The Fed has joined the party itself. Has there ever
been a Ponzi scheme so brazen? There has not."
More QE is a huge gamble, he said, but necessary because the US is "in a
'liquidity trap', where interest rates or QE may not stimulate borrowing or
lending because consumer demand is just not there."
Mr Gross is best-known in the UK for saying gilts were "resting on a bed of
nitroglycerine" as a result of the nation's high debt levels. Pimco has
since reversed its position on the UK and advised clients to gamble on a
British recovery.
Keith Hudson, Saltford, England
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