Thursday, March 19, 2009

The Big Fight Against Deflation


Sometimes you have to look beyond the obvious. It should be clear that the state of angst over the potential for deflation to bring down the financial system is enormous. The Federal Reserve announcement that they will be buying Treasuries, mortgage backed securities, and agency securities is clearly aimed at bringing liquidity back into the market. If 30 year mortgages were to fall to 4.5 percent, and if all homeownwers were able to refinance, it would create about $200 billion in cash flow savings to the consumer.

However, there are still many question that need to be answered. Will all consumers be able to refinance? What will consumers do with these cash flow savings? Will consumers spend or save? Will lower mortgage interest rates bring the supply and demand of houses into balance, or will the market continue to suffer from over supply?

The big questions is--what will be the longer term effects of the monetization of debt by the Federal Reserve? Short term this policy should bring an end to the deflations psychology. This is needed. It will bring liquidity into all debt markets; but, at what price? The monetization of debt right now looks like the necessary strategy in the short term. I agree. But, I have severe reservations about the long term.

The goal right now is to get us out of recession.

Is this new strategy a panacea or is it a Pandora's box? We will be looking at this over the weekend.
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Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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