While Greenspan did not coin the term, he gave the definition of the term new meaning, to wit:

"a riddle whose answer is or involves a pun"

Jesse Livermore

Dear sir: US debt held by foriegners is 3 to 4 $trillion. US Debt owed to Government trusts by the Treasury is 6 to 7 $Trillion. Does this mean we owe it to ourselves, or does it mean we "Trusted" the government and they mis-appropriated the money?

Pepe,

An excellent piece. It amazed me back in 08 (such a long time ago), when Uncle Ben would not admit to Ron Paul, that he was deflating the currency to prop up asset prices.
So why should the same crew admit to deflation when in their speeches they all but swear it will never appear on their watch.
The D word is such a dirty word, that it is possible any new crew will also avoid mentioning it to avoid the possibility of angst or panic.

Now go wash your mouth out with soap.

But Debt and Deficits "don't matter", and are not dirty words. They are words to be embraced and cherished.

Rocky 3 aired in Germany tonight. Rocky faced off against Clubber Lang, played by Mr. T.

And gold breaks critical support while it is airing. Simply unbelievable. ;-)

You answered Jesse's concerns very well.Thank you minyan,JT

Pepe,

Excellent piece and you have reassured me. I am a nervous holder of intermediate and long-term Treasuries. When Barron's ran their cover story on the Treasury bubble it almost scared me out of them. Now the Barron's Roundtable folks also seem to be pro-inflation and anti-Treasuries. You have made a reasonable case, based on Japan, that we may face enduring deflation.
Thank you!

Debt destruction and deflation will take at least two years to find some bottom and may stay there through a five year period. Short to mid term Treasuries appear reasonbale as do interim investment grade corporate debt and similar muni's. Given the various opinions regarding long term T's, I am staying away. Everyone is talking up stocks again as earnings season will drive the S&P down to 600 ($50 per share at 12). Caveat emptor.

Population trends say we will not have a robust recovery and we will be Japan like for a decade or so.

Consider: The working age population increased about 60% from 1980 to 2000, from 2000 to 2020 the increase will be about 12%. So where will demand come from? From 1990 to 2000 the change was +18%, from 2000 to 2010, 12% and from 2010 to 2020 1% !!

If we accept Dents theory that the markets are driven by people in their late 40's (peak earnings and peak savings) we have:
1980 to 2000 +148%, 2000 to 2020 +8%. For 1990 to 2000 we had +58%, 2000 to 2010 +19%, 2010 to 2020 -10%

I think Japans stagnant population explains their problem, and it will explain ours too.

Only one way out and that is exports. If Japan can't do it how can we? Exports will require a very large devaluation of the $. If the fed pumps enough money and the new administration and congress can start a wage price spiral that might happen. Increased unionization and large cost increases due to carbon controls might do just that, more likely that would just kill domestic demand more.

<b>Chairman Ben S. Bernanke, Quantitative Easing Can't Work.</b>

In a Liquidity Trap although Saving (S) is abnormally high investment (I) is next to 0.

Hence, the Keynesian paradigm I = S is not verified.

The purpose of Quantitative Easing being to lower the yield on long-term savings and increase liquidity <i><b>it doesn't create $1 of investment.</b></i>

In a Liquidity Trap the last thing the Market needs is liquidity. This is why, Mr Chairman, we call it a Liquidity Trap,

Force-feeding the Market won't achieve anything useful.

If short-term risk free interest rates are at 0.00% doesn't that mean that credit is worthless?

Quantitative Easing does diminish the yield on long-term US Treasury debt but lowers marginally, if at all, the asked yield on long-term savings.

Those purchases maintain the demand for long-term asset in an unstable equilibrium.

When this disequilibrium resolves the Market turns chaotic.

This and other issues are explored in my tract:


<b>A Specific Application of Employment, Interest and Money
Plea for a New World Economic Order</b>


Abstract:

<i>This tract makes a critical analysis of credit based, free market economy, Capitalism, and proves that its dysfunctions are the result of the existence of credit.

It shows that income / wealth disparity, cause and consequence of credit and of the level of long-term interest-rates, is the first order hidden variable, possibly the only one, of economic development.

It solves most of the puzzles of macro economy: among which Unemployment, Business Cycles, Under Development, Trade Deficits, International Division of Labour, Stagflation, Greenspan Conundrum, Deflation and Keynes' Liquidity Trap...

It shows that no fiscal or monetary policy, including the barbaric Quantitative Easing will get us out of depression.</i>

<b>A Credit Free, Free Market Economy will correct all of those dysfunctions.</b>


The other option would be to wait till, on the long run, most of our productive assets get physically destroyed either by war or by rust.
It will be either awfully deadly or dramatically long.

<b>In This Age of Turbulence People Want an Exit Strategy Out of Credit,<br>
An Adventure in a New World Economic Order.

We Need, Hence, Abolish Interest Bearing Credit and Cancel All Interest Bearing Debt.</b>


âś” <a href="http://edsk.org/"><b>Exit Strategy Out of Credit</b></a>
http://edsk.org

âś” <b><a href="http://edsk.org/interest.html">A Specific Application of Employment, Interest and Money
[Intended for my Fellows Economists].</a></b>
http://edsk.org/interest.html


Press release of my open letter to Chairman Ben S. Bernanke:

<i><b>Chairman Ben S. Bernanke, Quantitative Easing Can't Work!</a></b></i>
http://www.prlog.org/10165667.html


Yours Sincerely,

Shalom P. Hamou AKA 'MC Shalom'
Chief Economist - Master Conductor
<a href="http://edsk.org/">1776 - <i>Annuit CÅ“ptis.</i></a>

<b>Ben S. Bernanke Exposed</b>

<b>This is quit embarrassing, the Japanese must be laughing when they recall the lecture from Professor Bernanke:</b>


Ben S. Bernanke:

<i>"The debate about the ultimate causes of the prolonged Japanese slump has been heated. There are questions, for example, about whether the Japanese economic model, constrained as it is by the inherent conservatism of a society that places so much value on consensus, is well-equipped to deal with the increasing pace of technological, social, and economic change we see in the world today.

The problems of the Japanese banking system, for example, can be interpreted as arising in part from the collision of a traditional, relationship-based financial system with the forces of globalization, deregulation, and technological innovation (Hoshi and Kashyap, forthcoming). Indeed, it seems fairly safe to say that, in the long run, Japan's economic success will depend largely on whether the country can achieve a structural transformation that increases its economic flexibility and openness to change, without sacrificing its traditional strengths.

In the short-to-medium run, however, macroeconomic policy has played, and will continue to play, a major role in Japan's macroeconomic (mis) fortunes. My focus in this essay will be on monetary policy in particular. Although it is not essential to the arguments I want to make—-which concern what monetary policy should do now, not what it has done in the past—-I tend to agree with the conventional wisdom that attributes much of Japan's current dilemma to exceptionally poor monetary policy-making over the past fifteen years (see Bernanke and Gertler, 1999, for a formal econometric analysis).

Among the more important monetary-policy mistakes were 1) the failure to tighten policy during 1987-89, despite evidence of growing inflationary pressures, a failure that contributed to the development of the “bubble economy”; 2) the apparent attempt to “prick” the stock market bubble in 1989-91, which helped to induce an asset-price crash; and 3) the failure to ease adequately during the 1991-94 period, as asset prices, the banking system, and the economy declined precipitously

Bernanke and Gertler (1999) argue that if the Japanese monetary policy after 1985 had focused on stabilizing aggregate demand and inflation, rather than being distracted by the exchange rate or asset prices, the results would have been much better. Bank of Japan officials would not necessarily deny that monetary policy has some culpability for the current situation. But they would also argue that now, at least, the Bank of Japan is doing all it can to promote economic recovery.

For example, in his vigorous defense of current Bank of Japan (BOJ) policies, Okina (1999, p. 1) applauds the “BOJ's historically unprecedented accommodative monetary policy”. He refers, of course, to the fact that the BOJ has for some time now pursued a policy of setting the call rate, its instrument rate, virtually at zero, its practical floor. Having pushed monetary ease to 2 Posen (1998) discusses the somewhat spotty record of Japanese fiscal policy; see especially his Chapter 2.its seeming limit, what more could the BOJ do? Isn't Japan stuck in what Keynes called a “liquidity trap”?

I will argue here that, to the contrary, there is much that the Bank of Japan, in cooperation with other government agencies, could do to help promote economic recovery in Japan. Most of my arguments will not be new to the policy board and staff of the BOJ, which of course has discussed these questions extensively. However,<b> their responses, when not confused or inconsistent, have generally relied on various technical or legal objections—- objections which, I will argue, could be overcome if the will to do so existed.</b>

My objective here is not to score academic debating points. Rather it is to try in a straightforward way to make the case that, far from being powerless, the Bank of Japan could achieve a great deal if it were willing to abandon its excessive caution and its defensive response to criticism."</i>

Prof. Benjamin Shalom Bernanke
<b>Japanese Monetary Policy: A Case of Self-Induced Paralysis?</b>
For presentation at the ASSA meetings, Boston MA, January 9, 2000.


So Mister Chairman Ben S. Bernanke is not fit to deal with the present situation he does not even readily understand.
Moreover, he advocates illegality.
There is no pilot in this plane! We are going to crash!


If short-term risk free interest rates are at 0.00% doesn't that mean that credit is worthless?

<b>A Credit Free, Free Market Economy will correct all of those dysfunctions.</b>

The alternative would be to wait till, on the long run, most of our productive assets get physically destroyed either by war or by rust.
It will be either awfully deadly or dramatically long.


<b>In This Age of Turbulence People Want an Exit Strategy Out of Credit,<br>
An Adventure in a New World Economic Order.</b>


<b>We Need Hence Abolish Interest Bearing Credit and Cancel All Interest Bearing Debt.</b>

âś” <a href="http://edsk.org/"><b>Shalom Exit Strategy Out of Credit</b></a>
http://edsk.org/

âś” <b><a href="http://esdk.org/interest.html">A Specific Application of Employment, Interest and Money
[Intended to my Fellows Economists].</a></b>
http://esdk.org/interest.html


Press release of my open letter to Chairman Ben S. Bernanke:

<b><i>>Chairman Ben S. Bernanke, Quantitative Easing Can't Work!</b></i>
http://www.prlog.org/10165667.html


Yours Sincerely,

Shalom P. Hamou AKA 'MC Shalom'
Chief Economist - Master Conductor
<a href="http://esdk.org/">1776 - <i>Annuit CÅ“ptis.</i></a>

I like the idea of looking at population trends as a part of the big picture. It's like looking at the "nutrition" an economy gets and seeing if we can make some predictions based on that.

It's part of the reason I'm buying the long term deflation argument. Apparently, there was also a working age population "bust" around the Great Depression as well, so there is some historical correlation for the idea.

I wish I could find more on the topic that didn't involve Dent and/or "get your guns and head for the hills" type prophecies. Dent has a very population good analysis, I think. But in the book I read, he goes on to tell us all how wonderful Boomers are and how the Wal-Marts of the world disappear as we all roll in luxury goods. It didn't do much for his credibility. :(

I'm getting early signs people are waking. The Federal system says in effect, don't change the economy, simply change the measure. This is cause and effect in reverse. Grab a gun and head for the hills. I don't think so. Grab a gun and head for a rally to throw out the government.

I know he's old but NOT that old! The word has been around for centuries, so, Greenspan is a come lately in adding it to his vocabulary in 2005.

Dent's first book "Our Power to Predict" explains his ideas, all the other books are simply his way of trying to capitalize on an apparently correct theory and make a living.

The basic premise is that the economy and stock prices are driven mainly by people in the prime of earnings, savings and consumption, those in their late 40's (the age has been increasing and probably is centered around 50-55).

The other driver is technology that increases efficiency, like steam power, electric power, railroads, computers, internet.

Both outlooks are not good.

"population "bust" around the Great Depression " yes and there was a baby bust in the 30s too that helps explain the 70's.

I don't think the idea is new at all, the observation that population increases lead to boom times probably has been known for ages, and population busts lead to bad times, think black plague.

Some one, (I forget who) once said that demographics is destiny, and is the only sure thing you can know about the future.

Of course. I meant Greenspan coined the usage of it to describe unusually low Treasury yields. I'm well aware he didn't invent the word.

It amazes me that more attention isn't paid to this issue.

As you state, there is empirical evidence to support arguments that uneven population growth can have dramatic economic consequences.

Also, I recall books and magazines of the 60s and 70s discussing the possible effects of the baby boom bubble on future generations.

Why was it news to report this demographic bomb 30 years ago but now that the bomb is actually beginning to explode no one in the mainstream media is willing to discuss the consequences of 70+ million people as they retire, downsize, experience declining health and ultimately die?

Did the Japanese "lost decade" begin with a significant monetary stimulus COMBINED with a significant fiscal stimulus? Or was it just the monetary forces that failed to work because the velocity of money was not accelerated by fiscal stimulus?

Today, we hear the BOJ has reduced rates.....AND announced fiscal action.

Any students of history in Minyanville know if the "lost decade" included BOTH sides of stimulus?

Thanks guys.

As always, Kevin, I admire your analysis and factual support and admire your courage. I respectfully raise the following questions and comments regarding inflation:
1)    Japan's deflation may have been a political choice, and not an inevitable result. Japanese citizens consumed little and saved a lot. These savings accounts were often kept at the Post Office and garnered very low interest. Many US economists suggested that Japan should have encouraged mild inflation as a way to drive savings out of low interest rate accounts and encourage more consumption. However, destroying the value of the savings of so many Japanese citizens was not a politically popular idea. Further, I suspect, although I don't know for sure, that those savings were probably used by local Japanese governments on infrastructure projects, and that the national government did not want to lose favor with important local politicians and their friends.
2)    Many believe that World War II saved us from the Great Depression. Personally, I believe that the US victory merely allowed the US to roll-over the unfinished debt destruction process all the way to the present, with massive additions of new debt. In any event, WWII also brought inflation. A sustained effort at government spending at that level would probably do the same again.
3)    A central tool relied on by the US government during the Great Depression was deficit spending on public works. The red-hot economic idea of the time was that of Keynes (also famous for refusing to run in the London 10K marathon during the August heat, claiming that, “in the long run, we are all dead”). The US did not as far as I know “print money” to encourage consumer spending. Since the Fed., Treasury and Congress are all prepared to “do something”, anything, it seems unlikely that they would leave this arrow in their quiver. Instead, rather than sit and wait while deflation takes hold, they are more likely to try to hand out money to people to get them consuming.
4)    I acknowledge one important, and perhaps unique, theme of your writings—that lenders don't want to lend and borrowers don't want to borrow. If this remains true, then no amount of money given to banks or to consumers will restart one of the major activities of the US in the last 10 years—borrowing money and buying things. But if it is only half true—that borrowers still want to borrow, but lenders don't want to lend—then we may see the US government become the new lender to consumers, through guarantees, etc. I suspect that this will be one of the Fed's major areas of focus during the next year. (By the way, I find it Constitutionally suspect that a branch of the Executive (assuming the Fed is part of the Executive Branch of Government) can do things that would appear to have been reserved for Congress.)

Thank you. Bill

The Paradox of Thrift and the impact (and amount) of fiscal stimulus on aggregate demand may hold the "KEY" to the conundrum.

I suspect few consumers know the difference between real and nominal interest rates during times of deflation. Of course, the BIG money does...hence T rates. Fear can drive down the velocity of money.

On the other hand, ALL of us understand if our money, saved or not, is losing purchasing power during times of inflation. Check the velocity of money in Zimbabwe.


How long will it take for a shift in thought to occur? About the same amount of time it took oil to go from $147 to $38?

non-interest bearing debt or credit? sounds like islamic law! and they found ways around that too....

--

whether you are right or wrong, i don't think it matters.

should <> must <> is -- not an equation!

--

hey for x-mas i became a billionaire! i received a half-billion dollar note (zimbabwe) and that with chump change rounds up to one billion!

yeeehaaaa!

food is stable/up however.

my new years resolution is to quit eating however...

wachovia seems to want me to borrow...

and discover just increased my credit line (dammit!) i hate that actually as it drives DOWN my credit score.

i don't see the 0% letters anymore.... they seem to be consolidating around 7-10%.

--

chase is the ONE lender that CUT my lending lines, by about half, but i wasn't using them anyway.

and capital one has threatened to close my account with them.... but i've not used it ever -- in over 5 years. probably should be closed by this time.

--

i DO have debt mind you (unfortunately!) so its not like they CAN'T make interest money off of me.

just that SOME indeed ARE lending!

Ron,
"All" we need to do is vote ALL the bums out.