El-Erian: If You Doubt The Danger Of Deflation Get On A Plane And Go To Japan

El-Erian: If You Doubt The Danger Of Deflation Get On A Plane And Go To Japan

Mohamed El-Erian of Pimco spoke to CNBC this morning ahead of the Fed's announcement on how it intends to deal with the current economic situation.

* 0:40 The Fed will revise its language, point to disinflation, and further explain that there is an uncertain outlook.
* 1:00 It is unknown whether the Fed will push for more risk taking in the market.
* 1:30 The country is facing structural problems, and the Fed can't solve them.
* 2:15 The Treasury is not likely to step up to solve the problem.
* 2:50 Anyone who doubts how dangerous deflation is should get on a plane and go to Japan.
* 3:35 The government has to sell a long term vision on how to increase employment and provide structural solutions.
* 4:05 We have to be honest about national and global realignments.

As the US dollar “deflates”

http://www.bloomberg.com/apps/quote?ticker=DXY:IND

prices for everything will RISE leading the Fed to think inflation is coming.

So the Fed is stuck.

If they do nothing the dollar could drop to 70 or less on the index and collapse.If they raise rates to defend the dollar those rates will collapse the phony recovery, crash what`s left of the housing market and bankrupt the bailed out banking firms.

Basically, the USA is f***ed.

From another article by CNBC dated 14 Jul, 2010:

Fed Forecast: Like a Long, Bumpy Train Ride

To understand the way the Federal Reserve views the economic recovery, think about a long, bumpy train ride.

The train is moving toward its destination—but it could well be “five to six years,” as the Fed put it in the minutes released Wednesday of its June meeting—before it moves as fast as it can.

. . .

In normal times, you would expect the Fed to either be hitting its targets for inflation, growth and unemployment now, or to do so within a three-year window.

The Fed drives the train. So if it’s not where it wants it to be, it can speed up or slow as needed. If a majority of Fed officials, for example, don’t believe that the unemployment rate will be in the 5 percent range by 2012, the Fed should lower rates.

. . .

So not only the Fed has been unable to get the train up to speed, it’s been acknowledging it wouldn’t get there.

Federal Reserve policymakers statement

Here is the policy statement issued Tuesday from the Federal Open Market Committee:

Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Bank lending has continued to contract. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated.

Measures of underlying inflation have trended lower in recent quarters and, with substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The Committee will continue to roll over the Federal Reserve's holdings of Treasury securities as they mature.

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh.

Voting against the policy was Thomas M. Hoenig, who judges that the economy is recovering modestly, as projected. Accordingly, he believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted and limits the Committee's ability to adjust policy when needed. In addition, given economic and financial conditions, Mr. Hoenig did not believe that keeping constant the size of the Federal Reserve's holdings of longer-term securities at their current level was required to support a return to the Committee's policy objectives.

Looks like the train is going to be late at its destination.

America is a “Mickey Mouse economy” that is technically bankrupt, according to Jochen Wermuth, the Chief Investment Officer (CIO) and managing partner at Wermuth Asset Management.

“The big evil for the IMF in Russia in 1998 was the prospect of the central bank funding government debt. The Fed is now even buying mortgage-backed securities,” he noted.

“Even before the (Troubled Asset Relief Program) and the expansion of the Fed’s balance sheet, total US public and private debt as a percentage of GDP in the US stood at 290 percent, that figure is now far higher,” Wermuth added.

“US credit risk is huge and America has two options, either default or let the currency depreciate substantially against currencies such as the yuan and the rouble,” he explained.

“Last night’s news from the Fed simply creates the right conditions for dollar weakness and a reduction in US liabilities to foreign investors and governments,” Wermuth said.

http://www.cnbc.com/id/38654017

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