Prop, Drop, and Roll

Well I see a face coming through the haze
I remember him from those crazy days
--The Who

Another missive by Mr P that should be marked 'read multiple times.' Reflecting on another pass thru it this morning, I'm struck by a few thoughts.

One is how closely the United States is tracking a textbook central planning model. The extent of our goverment's involvement in markets is truly breathtaking. Is it any wonder we're seeing 'tea parties' and other form of citizen pushback against government intervention. It's hard for me to see how this pushback from liberty-loving individuals does not continue to escalate.

Another is the extent to which the current pause in economic decline is purely a construct of government efforts to prop things up. Among other things, the government is keeping insolvent institutions from failing, buying mortgages, monetizing debt, buying old cars, extending unemployment coverage, buying in interest rate spreads, and backstopping the entire banking system. Pundits who create analogs with previous periods just don't understand (or care about) how truly novel this situation has become.

It will be interesting to see whether Mr P's thesis, that US government officials may cut stimulus to appease Chinese creditors, comes to fruition. Given the magnitude of the intervention, and its influence on keeping the system from crashing (not to mention this administration's core ideology), it's hard for me to see this set of bureaucrats easing off the gas--even with a brick wall right in front of them.

Finally, I think Mr P is spot on the inflation/deflation debate. In the long run, I think 'big inflation' is inevitable as bureaucrats desperately attempt to print our way out of the abyss. But the printing press requires credit creation, and credit creation requires appetite for risk. I doubt that higher collective risk appetites are in the cards for quite a while. Given the hundreds of trillions in credit and related derivatives, it is more likely that debt will continue to be destroyed in the near term. This deflationary contraction only ends at lower prices (probably much lower) that prompts folks to take more risk again.

Near term deflation; long term big inflation. That's the most likely scenario in my mind's eye.

Risk indeed seems very high, Mr P.