Since the Fed response to the crisis basically mirrored Japan's response to their own crisis, is the U.S. doomed to two decades of economic stagnation? Gary Shilling lays out a compelling case for what appears to be unavoidable deflation on the horizon. He says the Fed has already fired every arrow in its quiver, and he goes so far as to suggest we might see 30-year zero-coupon Treasury bonds appreciate 30% from here.
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There are some very valid points there. I think there will be some SMALL deflation. I wrote this in another post:
"There is a pattern in history that is: small inflation(during good times), then deflation(when the recession hits), massive inflation(when the FED prints 24/7 to get out of the recession)
Ever heard of 'fractional banking'? It expands the money supply. With the huge housing market the money supply was greatly increased. When the housing collapsed and home equity were destroyed, it actually shrank the money supply. Now we have a time of deflation like circumstances and the FED is giving away money.
It follows the same process: small inflation, deflation, massive inflation.
At least that's what I think."
Your scenario is a very typical path of what a less-developed country can usually be trapped into; and it can also provide a great example of how a lax monetary policy can eventually lead to a dismal outcome. But, you should bear in mind that those countries usually don’t have the supply-side capacity to match the rising demand after domestic currency debasement. It is under in this circumstance where you will see hyperinflation. But, the US is definitely not in the same case.
"What's the maturity on stocks?" "Oh, same" (as 30-yr treasuries)
It's fractional reserve banking.
Can you say 2.5% on a 30 year govie??
The term structure of Japan is terrible. Their 30-year benchmark yield is half of the US right now; and of course their money market rates are hovering around near zero. I hope we don’t fall into that situation. But again, if the government and Fed cannot figure out any measures to pick up the aggregate demand then I guess we can say that we are not far from that.
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