No inflation means no recovery: "What we need is a healthy dose of inflation."

[Better Believe It]

No inflation means no recovery
By Anthony Mirhaydari
MSN Money
September 8, 2010

Over the past three years, central bankers have flooded the U.S. financial system with money. Interest rates are at historical lows. But the economic recovery has stalled anyway. Unemployment remains troublingly high. Home prices and stocks are still down a third from their pre-recession peaks. The traditional approaches to stimulating the economy -- ultralow interest rates and government spending -- just aren't working.

What we need is a healthy dose of inflation.

Because inflation and interest rates are so low right now, strange things are happening:

Companies are hoarding cash instead of putting it to work, because, with capital so cheap, even the tiny return from saving it is a boon.

Investors are tucking money into safe, low-return investments instead of feeding growth by buying company stocks.

Consumers are saving instead of spending despite low interest rates, partly because prices may fall lower.

Banks, scared to lend, are piling up excess reserves that are earning virtually nothing.

An increase in prices would force changes in these behaviors.

Instead of using cheap financing to invest and hire workers or even raise dividends or repurchase shares, corporations are hoarding cash. The ratio of liquid assets to total assets has jumped from 2.9% in 1980 to nearly 7%, a level not seen since 1960. As a result, the manufacturing capacity of the country is beginning to rust away as managers forgo even basic maintenance expenditures to stash money in the bank, a subject explored at length in a recent column.

The banks aren't doing much either. Although we've seen some positive signs, with lending standards finally beginning to ease, there are now fewer loans outstanding than there were in September 2008. Instead of extending credit to businesses and consumers, the financial sector is dumping its cash into U.S. Treasurys and parking money in the Federal Reserve's vaults. The latter strategy earns a paltry 0.25%, yet the amount of money sitting idle at the Fed has jumped from just $810 million in the months before the recession to more than $1 trillion now.

Read the full article at:

http://articles.moneycentral.msn.com/Investing/Extra/mirhaydari-no-inflation-means-no-recovery.aspx

[Warpy]

1. It's not going to happen without massive government intervention

meaning high taxes at the top and high employment at the bottom.

Inflation was seen as a bad thing mostly by retirees on fixed pension income. It slaughtered them, and before social security increases became tied to the CPI, they really were reduced to eating pet food to survive, especially during the hyperinflation of the 1970s. Inflation was actually good for everybody else, any debt shrinking as the value of the dollar shrank and banks happily lending because they knew inflation in wages would keep the money rolling in.

Unfortunately, until we get those infrastructure jobs at the bottom paid for by high taxes on the top, there will be little inflationary pressure beyond that from offshore. Everything done domestically will be in a deflationary cycle, the worst of all worlds, with assets deflating while the foreign goods we now depend on continuing to inflate in price.

I see no way out of this mess while Congress remains full of such timid and partisan fools.

[Better Believe It]

2. But we need a "lean government".

[Warpy]

3. That's what the ultra rich want

Ask the people of New Orleans how well it works for the rest of us.

[pansypoo53219]

4. should never have given the TAR to paulson.

but this is just saying more that greenspan SUUUUUUUUUUUUUUUCKED. hell yeah he fucked up the economy. yes. the interest rate should be higher. it didn't reward savers at all. and now that people WANT to save, it makes it harder. it's class warfare you can't see.