ECB Is Martian, Fed Venusian, Says Deutsche Bank: Chart of Day
By Mark Gilbert
July 1 (Bloomberg) -- The European Central Bank and the Federal Reserve are reacting differently to the threat of faster inflation, with policy makers in Europe likely to backtrack after raising interest rates, according to Deutsche Bank AG economists.
By Mark Gilbert
July 1 (Bloomberg) -- The European Central Bank and the Federal Reserve are reacting differently to the threat of faster inflation, with policy makers in Europe likely to backtrack after raising interest rates, according to Deutsche Bank AG economists.
``Recent and prospective differences between the Fed and the ECB in the conduct of monetary policy have been striking,'' the analysts, led by chief U.S. economist Peter Hooper, wrote in a report published yesterday. ``The ECB has launched a Martian frontal assault on inflation while the Fed has opted for a more cautious and patient Venusian approach.''
The chart of the day shows the recent jump in expectations for how much inflation will accelerate and how high interest rates will rise. The top chart shows breakeven rates in the U.S. and Italy, measuring the yield gap between ordinary government debt and inflation-protected securities. The bottom chart shows the three-month futures contracts for December settlement.
``The historical experience of deflation and depression in the U.S., and of German hyperinflation and currency reform in Europe, plays a key role in shaping different responses,'' the economists wrote. ``We expect the present trans-Atlantic monetary policy divergence to diminish when weaker economic growth eventually reduces inflation fears at the ECB. The ECB will lower rates in the course of 2009, while the Fed will probably keep rates on hold.''
The ECB will raise its key rate by a quarter-point to 4.25 percent when it meets this week, according to 57 of 58 economists surveyed by Bloomberg News. There's a 75 percent chance that the Fed will keep its benchmark rate at 2 percent when it next sets policy on Aug. 5, according to prices in the futures market.
Here is an insight of the 1929 Great Depression:
The Great Depression was a dramatic, worldwide economic downturn beginning in some countries as early as 1928.The beginning of the Great Depression in the United States is associated with the stock market crash on October 29, 1929, known as Black Tuesday and the end is associated with the onset of the war economy of World War II, beginning around 1939. The depression had devastating effects in both the industrialized countries and those which exported raw materials. International trade declined sharply, as did personal incomes, tax revenues, prices, and profits. Cities all around the world were hit hard, especially those dependent on heavy industry. Construction was virtually halted in many countries. Farming and rural areas suffered as crop prices fell by 40 to 60 percent. Facing plummeting demand with few alternate sources of jobs, areas dependent on primary sector industries such as farming, mining and logging suffered the most. At the time, Herbert Hoover was President of the United States.Even shortly after the Wall Street Crash of 1929, optimism persisted. John D. Rockefeller said that "These are days when many are discouraged. In the 93 years of my life, depressions have come and gone. Prosperity has always returned and will again. The Great Depression ended at different times in different countries; for subsequent history see Home front during World War II. The majority of countries set up relief programs, and most underwent some sort of political upheaval, pushing them to the left or right. In some states, the desperate citizens turned toward nationalist demagogues - the most infamous being Adolf Hitler - setting the stage for World War II in 1939.
Causes
Recession cycles are thought to be a normal part of living in a world of inexact balances between supply and demand. What turns a usually mild and short recession or "ordinary" business cycle into a great depression is a subject of debate and concern. Scholars have not agreed on the exact causes and their relative importance. The search for causes is closely connected to the question of how to avoid a future depression, and so the political and policy viewpoints of scholars are mixed into the analysis of historic events eight decades ago. The even larger question is whether it was largely a failure on the part of free markets or largely a failure on the part of governments to not exacerbate widespread bank failures and the resulting panics and reduction in the money supply. Those who believe in a large role for governments in the economy believe it was mostly a failure of the free markets and those who believe in free markets believe it was mostly a failure of government that expounded the problem. Current theories may be broadly classified into three main points of view. First, there is orthodox classical economics: monetarist, Austrian Economics and neoclassical economic theory, all which focus on the macroeconomic effects of money supply and the supply of gold which backed many currencies before the Great Depression, including production and consumption.
Second, there are structural theories, most importantly Keynesian, but also including those of institutional economics, that point to underconsumption and overinvestment (economic bubble), malfeasance by bankers and industrialists or incompetence by government officials. Another theory revolves around the surplus of products and the fact that many Americans were not purchasing but saving. The only consensus viewpoint is that there was a large scale lack of confidence. Unfortunately, once panic and deflation set in, many people believed they could make more money by keeping clear of the markets as prices got lower and lower and a given amount of money bought ever more goods. Third, there is the Marxist critique of political economy. This emphasizes contradictions within capital itself (which is viewed as a social relation involving the appropriation of surplus value) as giving rise to an inherently unbalanced dynamic of accumulation resulting in an over accumulation of capital, culminating in periodic crises of devaluation of capital. The origin of crisis is thus located firmly in the sphere of production, though economic crisis can be aggravated by problems of disproportionality between spheres of production and the under consumption of the masses. There were multiple causes for the first downturn in 1929, including the structural weaknesses and specific events that turned it into a major depression and the way in which the downturn spread from country to country. In terms of the 1929 small downturn, historians emphasize structural factors like massive bank failures and the stock market crash, while economists point to Britain's decision to return to the Gold Standard at pre-World War I parities.
Second, there are structural theories, most importantly Keynesian, but also including those of institutional economics, that point to underconsumption and overinvestment (economic bubble), malfeasance by bankers and industrialists or incompetence by government officials. Another theory revolves around the surplus of products and the fact that many Americans were not purchasing but saving. The only consensus viewpoint is that there was a large scale lack of confidence. Unfortunately, once panic and deflation set in, many people believed they could make more money by keeping clear of the markets as prices got lower and lower and a given amount of money bought ever more goods. Third, there is the Marxist critique of political economy. This emphasizes contradictions within capital itself (which is viewed as a social relation involving the appropriation of surplus value) as giving rise to an inherently unbalanced dynamic of accumulation resulting in an over accumulation of capital, culminating in periodic crises of devaluation of capital. The origin of crisis is thus located firmly in the sphere of production, though economic crisis can be aggravated by problems of disproportionality between spheres of production and the under consumption of the masses. There were multiple causes for the first downturn in 1929, including the structural weaknesses and specific events that turned it into a major depression and the way in which the downturn spread from country to country. In terms of the 1929 small downturn, historians emphasize structural factors like massive bank failures and the stock market crash, while economists point to Britain's decision to return to the Gold Standard at pre-World War I parities.
Debt and Effects
Debt is seen as one of the causes of the Great Depression. Macroeconomists including Ben Bernanke, the current chairman of the U.S. Federal Reserve Bank, have revived the debt-deflation view of the Great Depression originated by Arthur Cecil Pigou and Irving Fisher: in the 1920s, American consumers and businesses relied on cheap credit, the former to purchase consumer goods such as automobiles and furniture and the latter for capital investment to increase production. This fueled strong short-term growth but created consumer and commercial debt. People and businesses who were deeply in debt when price deflation occurred or demand for their product decreased often risked default. Many drastically cut current spending to keep up time payments, thus lowering demand for new products. Businesses began to fail as construction work and factory orders plunged.
Massive layoffs occurred, resulting in unemployment rates of over 25%. (US) Banks which had financed this debt began to fail as debtors defaulted on debt and depositors became worried about their deposits and began massive withdrawals. Government guarantees and Federal Reserve banking regulations to prevent these types of panics were ineffective or not used. Bank failures led to the loss of billions of dollars in assets. The debt became heavier, because prices and incomes fell 20–50% but the debts remained at the same dollar amount. After the panic of 1929, and during the first 10 months of 1930, 744 US banks failed. (In all, 9,000 banks failed during the 1930s). By 1933, depositors had lost $140 billion in deposits. Bank failures snowballed as desperate bankers called in loans which the borrowers did not have time or money to repay. With future profits looking poor, capital investment and construction slowed or completely ceased. In the face of bad loans and worsening future prospects, the surviving banks became even more conservative in their lending. Banks built up their capital reserves and made fewer loans, which intensified deflationary pressures.
A vicious cycle developed and the downward spiral accelerated. This kind of self-aggravating process may have turned a 1930 recession into a 1933 great depression.
Comparing to the present day situation
All the available signs basically tells us that our world economic situation is heading towards the Mother of All Depression. Only this time around, it is cause by the collapse in sub-prime mortgages loan. When sub-prime collapsed, there was this big shift of funds that poured into commodities market where record prices continue to be set beyond the fundamental of the demand and supply theory, more devastatingly so, when the world economic climate had begin to slowdown drastically over the past 6 months.
Unlike 1929, where Asia was spared from the devastating effect of The Great Depression, this Mother of Depression is going hit every living soul in this planet like several nuclear bombs being set off at different part of the world at the same time.
The impact on countries may varies depending on the prudence of each country's leadership in handling this coming crisis in terms of their foresightedness and their know-hows on the world economy. From where i stand, our country is doom for sure with this bunch of corrupted idiots for leadership. And they are still barking over their loss of absolute power and busy trying to hold on to power by denial and fabricating lies and more lies. My advice is for us to adjust ourselves fast and brace ourselves for this coming devastating Mother of All Depression. Stick to basics and get rid of all excesses. Good luck and God bless us all..
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