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Wednesday, July 21, 2010

Legislated Deflation - Government is the Ultimate Crowd

By Bill Fox, Senior Bonds Analyst
Thu, 10 Jun 2010 13:15:00 ET

"Government is the ultimate crowd; every decision being made by committee. It is always acting on the last trend, the one that is already over. (For example, the Federal government passed securities laws to prevent the 1929-1932 1934.)"
-- The Elliott Wave Financial Forecast, July 2007.

Politicians worldwide have historically proven themselves poor architects of fiscal policy. The Glass-Steagall Act of 1932 was a reaction to the persistent deflation following the stock market crash of 1929. The soon-followed Banking Act of 1933 was a reaction to the U.S. banking system collapse.

Sixty-six years later, the Banking Act was repealed -- in reaction to an expanding economy and financial engineered products that promised to lower systemic risks. We all know how that worked out.

Now we are promised a new set of financial reforms that will control systemic risks once and for all. Somehow, I believe that history will prove this legislation has missed the mark, as well.

U.S. banks have decided that hoarding cash is a better bet than loaning money; excess reserves at the Federal Reserve remain stubbornly high. The Fed has kept interest rate near zero, but we do not suffer from "a liquidity flood" or inflation; on the contrary, deflation is a concern. Now Europe's banks are hoarding cash, too: The European Central Bank reports that its overnight deposits are surging well above the historical average.

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1 comment:

  1. Again deflation is not the thing to worry about its inflation that should be the real concern.



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