Wizard of Oz Economics Runs Into Reality

This is an Econ 301 post, a bit more complicated than typical posts. But this post from Nic Lenoir of ICAP and published at Zerohedge is worthwhile for those inclined to deal with data and charts. It lays out the Fed’s options, neither of which is good. If we had followed proper economic theory, we could not be in this predicament. Nor does proper economic theory suggest two options that are diametrically opposite of each other. Does that not make the layman suspicious that we are dealing with snake-peddling shamans? We are fast approaching the point where the Wizard of Oz has no curtain to hide behind and is found to be naked. If our economic condition were not so tragic for so many, coming acts would be hilarious. Despite the pain, it will be hard not to be emotional. The unsuspecting will experience anger; the others laughter.

Here is an excerpt from the piece:

That leaves only two choices for governments: let the debt cycle take its course. Bankruptcies will rise further, real estate will devalue another 30%, equities will lose 65%, and we will start with a clean sheet. That will wipe out the baby-boomers who are the main asset holders. Note by the way that the correlation between the number of 45/55 year-olds in our society and equities is historically positive. The other solution is to print as much as needed to prevent that from happening. It will be very difficult because leverage will only find people with sound balance sheets who will pour the resources into assets, driving asset inflation at the expense of sound economic recovery. Also despite what politicians may think asset inflation is a lot worse for the lower and middle class than is the debt cycle, or maybe they are just cynical. In the end, there is little chance that governments will be able to coordinate their actions like they did last fall, because fear then was a lot greater than now, when consequences of today’s actions can in fact be more dramatic than they were then… In the end I think we will experience cycles of injection and draining of liquidity trying to dance between the two evils.

Related posts:

1. “New” Economics is “Bad” Economics
2. Earthquakes, Economics and Friedman
3. Keynesian Economics
4. Econ 201 – Clunker Economics
5. David Malpass: Economics Yes; Politics No