Monday, October 1, 2012

Stephen Roach on the US economy and the Fed

Stephen Roach is a sharp critic of the manner in which the US govt. is building up debt, and the US Fed printing cheap money:
His piece speaks for itself, so I don't know why I am putting extracts down on my site! Except that I have to say I agree, and would like to have it at hand whenever I need it again
"The convoluted logic behind this strategy is quite disturbing – not only for the US, but also for the global economy. There is nothing cyclical about the lasting aftershocks of a balance-sheet recession that have now been evident for nearly five years. Indeed, balance-sheet repair has barely begun for US households. The personal-saving rate stood at just 3.7% in August 2012 – up from the 1.5% low of 2005, but half the 7.5% average recorded in the last three decades of the twentieth century.
CommentsMoreover, the debt overhang remains massive. The overall level of household indebtedness stood at 113% of disposable personal income in mid-2012 – down 21 percentage points from its pre-crisis peak of 134% in 2007, but still well above the 1970-1999 norm of around 75%. In other words, Americans have much farther to go on the road to balance-sheet repair – which hardly suggests a temporary, or cyclical, shortfall in consumer demand."
In other words, the deleveraging by households is about 1/3rd of the way done, whereas this has resulted in govt debt shooting up to nearly 3 times GDP. Cheers! Wonderful for the dollar - once the world is done dealing with the Euro, and ends up with at least one new currency - the drachma or the D Mark. perhaps many more, as the Euro project is fried. Zen ze dollar will be fried, too.

And, just in case anyone believes that the current debt scenario was forced by the Recession, here is a note from Peter Singer, writing for Brookings:
"What makes the problem worse is the poor track record that both parties have at shrinking this debt. Over the last 50 years, the US has only run a budget surplus five total years."

And, on the connection between debt and inequality, here's what Keynes wrote,
"“By a continuing process of inflation, Governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some."

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