Tuesday, November 9, 2010

Which Deadly Cycle is the FED Trying For?

The FED is planning to print a ton of money in its QE2. Perhaps we should name it the Andrea Doria. We show two options above which can be effected. The first we discussed several time already. It assumes that China and others will no longer be so generous so we just print money and have banks buy Treasuries. But what of inflation here? Probably low since the Government is spending what s printed and as we know from Romer and her ilk the Government multiple is probably negative, a joke but close. Thus we fear little from this one.

However the Keynesians in us seem to like the second. We show that in some detail below:

This shows how inflation might occur. It however assumes a great deal. First that banks will lend. Not quite likely in the current regulatory tightening as well as the demand for cash by the Government. It assumes companies will expand. Based upon what one might ask? There is so much slack in the economy that there would be little demand. The old aggregate demand stuff just seems to not work here. Finally, if indeed all this does happen, then and apparently only then do we see 20% inflation.

The question truly is, what does the FED really intend and what is their vision. In a strange way our economy is in the hands of these folks, the current administration can just foul things up, not fix it. Oh, yes, also in China's hands as well.