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“Overleveraged Society”

Of course I don’t want to make too much out of one data point but it’s interesting that the day after my hyperinflation post the dow is down____ gold is down 2.5% and silver is down 9.5%, oil is down 6.4%.  Not exactly inflation expectations running away with themselves.  And I heard a reporter on the news say (paraphrasing) “Everything is down.  The only thing that is up–this might surprise you–is the U.S. dollar.” People just don’t get inflation/deflation…..

Well some people do.  Here is what  Bob Worthington, president of Hatteras Funds, had to say in a WSJ article today (emphasis added).

The problems that exist here in the U.S. and Europe, in terms of an
overleveraged society, have not been resolved in the past two to three years.
Credit bubbles, when they burst, take a long time, for any economy to really fix
those problems,

Maybe Wall Street is finally reading my blog.

This move by the Fed is actually an interesting test of my theory.  Supposedly (there is some doubt about whether it will really go down like this) they will keep the size of their portfolio the same but change the structure of it to lower longer-term rates.  If my theory is correct and it is really about the quantity of money, this should have a limited effect.  If it is really about interest rates then this will help.  It’s worth mentioning beforehand that there may be some effect on velocity (or to look at it another way an increase in higher order measures of the money supply with no change in base money) brought about by increased borrowing due to this change in term structure.  In this case it could have some effect even when my theory is right.  I’m guessing this is more or less what the Feds have in mind–to get the money out of the bank vaults so to speak.  However, I will go on record as saying I don’t expect a significant positive effect.  Of course, I wish I had made this prediction yesterday….

  1. steve618
    September 22, 2011 at 9:05 pm

    Couldn’t the Fed move to exchange short term debt for longer term debt possibly be viewed another way? Perhaps it’s just the cynic in me, but isn’t the main purpose of the Fed to make money for its shareholders? (Forget about stable prices and employment, etc…). By purchasing large quantities of Mortgage Backed Securities and Collateralized Debt Obligations, aren’t they positioning themselves to become owners of a large part of America’s “hard” assets in the event of debtors defaulting? What a wondeful way to turn the American population into a modern serf class. (Just a thought from the wicked part of my brain).

  2. Free Radical
    September 22, 2011 at 10:15 pm

    Yeah well that’s pretty much what I’m saying that they are doing no matter what they buy so yes. Is it even more so with long-term than short-term securities? Perhaps, I hadn’t thought of it that way but I wouldn’t dispute it.

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