Orlandini talks about the "D" word....

Now here's a piece of what I call straightforward down-to-earth-one-plus-one-makes-two rational economic reasoning. It's from the latest Dow Theory Analysis by Enrico Orlandini:

".. I’ve talked a lot about deflation, so let me give you a simple explanation of how deflation works.

The Fed has been trying to grease the wheels of the economy with liquidity, or so it says, in an effort to get Americans back into stores and spending money. Yet every month 500,000 more Americans are unemployed. The current “official” rate is 9.5% and is projected to surpass 10% before the end of the year. The last thing you are going to do if you are afraid of losing your job is spend money on worthless crap, when you may need it to survive. You will service your debt for as long as you can, spend only on the basics, and save what you can. That’s why the savings rate has gone from 0% to 6% in less than a year. So you cut back on spending and that means store sell less. The store then cuts back on inventory and lays people off. The companies that produce goods for those stores cut back on production, buy less raw materials, lay people off, and in the end pay less taxes because profits fall. Everyone lays off employees and consumes less. This leads to even further cost cutting measures and that causes even bigger declines in consumption, and more jobs are lost and so on...

That’s a deflationary spiral, it takes on a life of its own, and that’s where we are now.

The Fed had one shot to stop deflation dead in its tracks, and failed miserably.

Now they will be forced to do one of two things: write off debt or print even larger amounts of money. Yesterday the administration sent off a trial balloon when Obama’s economic advisor, Laura Tyson, mentioned that we should consider a second stimulus plan. That in itself is misleading because we have already had three, maybe four, stimulus packages of one form or another.

It should be clear to a blind man by now that this is not the answer, but the administration persists, just as Bush and Paulson did. Again, I would love to know why.

The so called bail outs were never intended for the general public, so it should come as no surprise that they had little or no effect on the average consumer. Banks received the cash, but never wrote the bad debts off, so they really can’t loan. Aside from that, the banks never disclosed the amount of bad debt they really hold.

Current economic policy is more in the form of a hope and a prayer, and it’s been my experience that God does not answer that type of request."..

...and may I add, "Allelujah!!"