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Friday, July 30, 2010




Stratfor issues new security alert

Links of the week:

Stratfor issues new security alert: Escalating Violence From the Animal Liberation Front


PIMCO: Privates Eye

FT: Sow the seeds of long-term growth (by Jeffrey Sachs)

PIMCO's Bill Gross says that old fashioned Keynesian stimulus programs are bound to produce dwindling results as they are running into "the headwinds of a structural demographic downwave". The demographic winter steadily worsening across the developed world is eroding the consumer base. This basically piles over another trend recently debated by the Economist's panel of big firms and banks oversaving and hoarding cash.

In the US the fed has been on a money printing spree since the beginning of the crisis. Yet, this failed to produce any surge in inflation with persistent worries about a possible deflationary spiral and the whole thing increasingly looking like Japan's lost decades.
If the Bank of Japan says, “We're going to go for an inflation target,” then something has changed dramatically, because everybody knows that the Bank of Japan has no tools to achieve an inflation target with the monetary multiplier zero negative.

. . .

We actually tried all of this back in 2001 to 2006, right? And we increased to 30 trillion yen the reserves—that's 6 times the legal reserve requirement. So that means the money supply should have increased by 500 percent and we should have had a 500 percent inflation rate. And absolutely none of that happened.

And we see the same thing in the UK today, the same thing in the US today, a massive increase in liquidity which [Bank of England Governor] Mervyn King once said, “We’re not like the Japanese. We’ll do it quickly and in massive amounts and we’re going to get the money supply going.” But he's not saying that anymore. He's realized that it doesn't work.

Source: Who Controls Bank of Japan?
If Gross is right, then pumping consumers with cash is not going to do the trick just as QE has failed to do so through banks and companies. Instead, Gross argues, governments should move in and do the spending and investment by themselves. Here he calls on Sachs among others (You can google for Sachs article by cope pasting the title into Google if you don't have FT subscription. FT is open for searches from Google), who suggests an alternative to the current fiscal stimulus in the form of a long term investment recovery plan driven by the government's spending. Regardless of what one may think about the whole approach, it's obvious that these days even Keynesians have to consider the implications of a rapid descent into sub replacement fertility now spreading from the rich world into developing nations.

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