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FMX | Connect – www.fmxconnect.com - (Reported 6/25/2010)

 

 

 

 

 

 

 

 

 

 

Albert Edwards had some choice words on US fiscal policy In this week’s Global Strategy Weekly from Societe Generale:

“The clowns pulling the levers of fiscal and monetary policy will take us back into recession. But this time outright deflation beckons and we will all be turning Japanese. Yet the fiscal hawks are right to say that the fiscal situation is unsustainable. Our view is that governments are indeed insolvent. But the doves are also right that current tightening will take us back into recession and drive the deficits even higher. There is no ‘good’ way to end this. Ultimately central banks will be forced to print and print for fear of the alternative. And maybe 20%+ inflation will indeed prove to be the ‘best’ (or least bad) way out of this mess.”

Moving on:

“Our view that this economic and market recovery will collapse like a pack of cards as soon as the steroid-like stimulus is reduced is gaining ground. Most forward-looking leading indicators now signal some sort of second-half slowdown. The only area of debate now seems to be in its magnitude. By the end of this year, I believe we will be back in recession.

At the same time, although our deflationary arguments are gaining some traction in the bond market, investors have yet to fully acknowledge we are now walking on the deflationary quicksand that will inevitably suck us towards total fiscal and financial ruin - you ain’t seen nothing yet. With core inflation rates now sub-1% in the eurozone and the US, we are only one recession away from Japanese-style deflation. Recent fiscal tightening will hasten the speed of our descent into this quagmire. The market reaction to the acknowledgement of that fact is likely to be unprecedented in its savagery. The response to the coming deflationary maelstrom will be additional money printing that will make the recent QE seem insignificant. The super-inflationary end result will become obvious to all.

Data from the recent Federal Reserve Flow of Funds report give us an update on the progress of the economy-wide de-leveraging in the US (see chart below). These trends are crucial to understanding the deflationary forces that are overwhelming current attempts by impotent policymakers to pull our economies free from the already enveloping quicksand.”

 

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