@Denis:
As for the cash bubble, every bubble/mania has its day. And then it is over — abruptly. The recent move down in Treasuries is looking much like the move in oil and commodities, something that started off for all the right reasons but then was pushed to extremes by a tidal wave of money. I fear this will end very badly.

Why is everyone piling into Treasuries when the yield is already at record lows while some stocks are trading at 2 times earnings. It doesn’t make a lot of sense.

As for Gold, it won’t go up until it is clear deflation is not a risk. Gold seems like a good play. I would say, it is a good hedge, but we still have to worry about deflation — asset and consumer price.

The other way to look at it is that we’re in the cash bubble, and in particular a dollar bubble. Gold is actually up or flat against Australian Dollar, Euro or Pound. So maybe you’re right, and the prudent thing is to abandon the dollar bubble while it’s hot and jump to gold now. Decisions…

@hbl, thanks for the chart, it’s very valuable. I am struggling to interpret it now.
One could say that banks are hoarding money out of fear of bad economy.
Or one could say that the accounting is forged and what is deemed as “excess” reserve is actually not at all excessive – banks know they hold a lot of worthless paper (e.g. Opt ARMs, credit cards, commercial real estate etc) and they stock up in advance.

I agree we need action not just throwing up of hands. Part of my tangent was just recognizing that action really is about reducing bad outcomes and that there are no good outcomes. I think we agree on this.

As for excess reserves, isn’t it one of the charts kept up to date at the St Louis Fed?
http://research.stlouisfed.org/fred2/series/EXCRESNS?cid=123

In the UK, some pundits have told the government to credibly threaten to fully nationalise the large banks which refuse to lend. This is testament to how dire the situation is.

When I get some good charts on excess reserves I will post. If aanyone has the chart already, please share the link.

I had said all along that inflation was not the real threat. Yes, it had to be dealt with, but the real threat was asset price deflation leading to depression. The Fed waited too long to deal with this situation and we are now facing deflation. But, I still ask: could any amount of reflation do the trick when you have suffered a debt bubble of such proportions?

As to the differences between the U.S. and Japan, you are right on the money: on the whole they make the situation in America look more dire than in Japan. You should note too that prior sources of funding i.e. China and the Middle East are both dealing with their own economic problems (property bubbles deflating, oil prices decreasing, industrial output collapsing). This does not bode well for the U.S. But, we should not expect policy-makers to throw up their hands and let the worst take effect. This leads to anarchy and chaos. We should continue to press for action: stimulus spent on investment in infrastructure (health, education, roads, energy) and continued monetary support. All of this should be done with a bit more transparency, however. The Treasury has been chastised by the GAO for lack of transparency and the Fed has been sued by Bloomberg for the same.

But then of course I might spend money quicker on some of the things I was going to buy anyway, so it will help somewhat.

By the way, any idea on how to make sure I do not miss QE when it happens? I don’t need perfect timing, just the ballpark. The best I came up with so far is TED spread – if it falls back to 1% we can assume that banks think the worst is behind. Well, I’m a noob, too, so help is appreicated.

One could argue that to some degree your “if” condition happened between summer 2007 and summer 2008, minus the explicit central bank promise of quantitative easing — i.e., most knew that Bernanke had expressed confidence in being able to beat any deflationary threat, and hence most feared inflation (remember all the talk of stagflation), hence the blowoff peak of the commodity bubble (since many sought refuge in hard assets rather than simply spending all their savings). Without labor being able to participate via wage inflation (due to globalization, excess supply, concentration of wealth, etc) this inflationary burst was unsustainable and destined to be overpowered by debt deflation. So perhaps perfectly executed aggressive fiscal stimulus and tax policy changes could have steered us to prolonged inflation rather than deflation, but not monetary policy alone.

IMO you are correct that few will lend and few will borrow when debts are already unsustainable high, and hence there is little hope of growth via new debt. And since many loans were essentially ponzi schemes (relying on continually appreciating asset prices in order to have any hope of repayment, a la Hyman Minsky’s theories), the whole debt pyramid is inherently unstable. And recent asset price growth that has outpaced underlying productivity and demographic growth is simply illusionary (resulting from fractional reserve broad money supply expansion). As it becomes clear this wealth is gone (no policy can bring it back quickly, after adjusting for inflation) the negative wealth effect seems likely to be an unavoidable drag on spending.

For the US, a fall in GDP (inflation adjusted of course) appears inevitable no matter how perfect the policy response. Despite dramatic asset price declines, Japan’s GDP has kept growing due to its aggregate savings buffer. With a negative US savings rate, assuming ponzi leverage can grow no further (possibly debatable?), the US has to increase savings, which will be a negative drag on GDP. Roubini estimates this GDP loss at potentially 10% if we return to traditional savings rates.

There is a human tendency to assume our leaders are in control far more than they really are in this type of scenario, IMO. It seems quite reasonable to me that Japan really did manage one of the less bad possible outcomes, even if might not have been the absolute least bad outcome possible.