The Parallax Brief

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Unrepentant Subjectivity on Economics, Politics, Defence, Foreign Policy, and Russia

The Fed’s Ten Trillion Dollar Problem

If anyone should have been prepared for the credit crunch it was Federal Reserve chairman Ben Bernanke (pictured right). Much of his academic reputation, which is immense, was built upon his work on the causes of depressions and, specifically, the Great Depression.

Although central bankers and economists assumed that advances in economic understanding — a significant portion of which came from Bernanke — had made depressions avoidable, Japan’s oft-discussed lost decade of deflation raised some uncomfortable questions.

Here was a nation not unlike the US and large Western European countries, with a powerful industrial base, sophisticated financial sector, and a modern, mature economy, which became mired in monetary quicksand, unable to exfiltrate itself from economic stagnation, despite following the playbook economists throught could avoid just such scenarios. Why?
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World Economy at One Minute to Midnight

Over the last week, portents of doom have enveloped the Parallax Brief. Increasingly, a Great Depression of the Twenty Tens looks to be the fate of the world. Lest we forget, the economic turmoil between 1914 and 1945 led to political upheaval almost unimaginable now, and unleashed the horrors of total war on the developed world.

Why do I feel so pessimistic?

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Dr Ros Altmann is an Idiot and is Dangerous

One aspect of this terrible crisis that has consistently astonished me is how many so-called economists and financial experts can be so very wrong about even the simplest disciplines within their supposed field of expertise.

Quite apart from the terminally orthodox men of the ECB, who seem intent to fiddle while Rome burns, a gaggle of galloping morons with letters after their names have been remunerated by a variety of newspapers to peddle some of the most egregious bullshit I’ve ever read.

This would be irritating in milder climes, but in the current hellhole of an economy it becomes outright dangerous.

One such ‘economist’ and ‘financial advisor’ is Dr Ros Altmann. Upon the news that the Bank of England had reduced rates to 1%, Dr Ros penned an article offering ‘Five reasons why a rate cut is wrong’. There is nothing in monetary policy theory to suggest that easing rates is the wrong thing to do. NOTHING. In fact, most serious experts suggest that the Bank of England is dragging its feet and should have been at zero long ago.

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Crisis Expained: MV=PQ

One of the best ways to understand why fiscal stimulus is of paramount importance if we are to avoid a Great Depression of the Twenty-Tens is that monetary policy has simply run out of room. Interest rates cannot drop below zero, and since the Fed and most major central banks are at, or will soon be at, zero, we need something more if we’re to arrest the decline toward economic oblivion.

A brilliant multi-media presentation from the Guardian (London) provides a hint as to why zero rates are proving ineffective, and ironically, just as the teachings of John Maynard Keynes are reentering the lexicon of politics after a 30 year hiatus, it is an equation beloved of Milton Freidman which provides the key insight.

Click here for the kind layman’s monetary explanation of the crisis I find useful, and why MV=PQ highlights the need for government fiscal intervention.

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