[quote=UCGal][quote=Allan from Fallbrook]
Your argument also avoids answering the focal question that Domo has also evaded up to this point: WHAT ABOUT THE ASSETS? If you were to take the balance sheet of the ECB and correctly value the assets, the ECB becomes effectively insolvent (I’m sure the Fed is in a similar predicament).
[/quote]
Forgetting the politics and back to the topic of inflation (or lack thereof)…
I read something a few weeks ago that made sense to me. With the fed doing the massive QE – which in theory should have an inflationary effect, why haven’t we seen massive inflation. The explanation I read was that the fed wasn’t *adding* to the currency, it was replacing the currency represented by the collapsed assets.
We know that banks have to have treasuries or other “dollar equivalents” at some percentage to meet capitalization requirements.
A lot of these dollar equivalents (or close to dollar equivalents) turned out to be toxic derivatives. (mortgage backed securities, bonds issued by AAA rated Lehman for example). So when the value of these assets collapsed, the banks sold them to the fed, and recapitalized. All that re infusion was not adding money to the system, is was restoring (and not 100% restoring) some of the money that was in the system before the financial collapse.
We still have a problem with the assets being worth crap… but it’s not in the private sector as much.[/quote]
UCGal: Agreed. I think we (the US) are in a better position than Europe, and that is one of the reasons. However, we have only partially cleaned up the mess. There are still huge amounts of toxic assets out there and they continue to plague the balance sheets of the big players in the banking world, hence no real lending. The banks in question are well aware of the risk they’re carrying and they are doing everything humanly possible to shore up their position. Again, no real lending.
As far as inflation goes: Don’t believe what the gubment tells you is the “real” core inflation rate. This is similar to the gubment’s assertion of the “real” unemployment rate. Between the gubment and the Fed, they are pedaling as fast as they can, in the (potentially forlorn) hope of outrunning another crash. This is why the Eurozone and Chinese situations are so worrisome: TONS of toxic assets, bad loans and helpless political leadership make for a fatal combination.
