The Great Depression Online

Great Depression Online Archive Issue:

An Impressive Dilemma

Great Depression Online
Long Beach, CA
January 04, 2008

Inside This Issue You Will Discover…

*** When Too Much Is Not Enough
*** Pushing On A String
*** When Too Much Is Too Much
*** And More

“There was only one catch and that was Catch-22, that specified that a concern for one's own safety in the face of dangers that were real and immediate was the process of a rational mind.  Orr was crazy and could be grounded.  All he had to do was ask; and as soon as he did, he would no longer be crazy and would have to fly more missions.” – Joseph Heller, Catch-22

When Too Much Is Not Enough

“Twenty billion dollars here, $20bn there, and a lush half-trillion from the European Central Bank at give-away rates for Christmas.  Buckets of liquidity are being splashed over the North Atlantic banking system, so far with meagre or fleeting effects.”

We came across the December 29, 2007 Telegraph article “Crisis may make 1929 look a 'walk in the park'” with keen interest.

We weren’t disappointed.  For the article offered insights into the ongoing banking system breakdown.  It seems the central bankers of the U.S., U.K., and EU are, like a deer between the headlights, caught between the opposing and destructive forces of inflation and deflation.


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The story continues…

“‘Liquidity doesn't do anything in this situation," says Anna Schwartz, the doyenne of US monetarism and life-time student (with Milton Friedman) of the Great Depression.

“‘It cannot deal with the underlying fear that lots of firms are going bankrupt.’”

And herein lies the deflation part of the central banker’s impressive dilemma.  That is, they are pushing on a string.     

Pushing On A String

Central bankers can make more money available in the financial system, but they can't force lenders to lend it out – or borrowers to borrow it.  Economists refer to this problem as “pushing on a string.”  You can push and push on one end of the string, but the other end doesn’t move.

Japan’s experience during the 1990’s gives evidence to this consequence…or lack of consequence depending on your perspective.

“In theory, Japan had ample ammo to fight a bust.  Interest rates were 6 per cent in February 1990…  In the end, rates fell to zero.  Still it was not enough.

“The risk is a Japanese denouement across the Anglo-Saxon world and half Europe.”

But that is only one part of the central banker’s impressive dilemma…

“They are caught between the Scylla of the debt crunch and the Charybdis of inflation.  It is not yet certain which is the more powerful force.”

Yes, let’s not forget about the inflation part of the central banker’s impressive dilemma.

When Too Much Is Too Much

The November 2007 CPI was reported at 4.3 percent.  Food, gas, utilities, medical insurance, dinner and a movie – you name it, it all costs more.

And when central bankers create money out of thin air the apparent result is that prices go up.  In reality, the value of the dollar, or what ever currency is being inflated, goes down.

Thus, in their efforts to prop up asset prices to sustain the banking system, central bankers could further stimulate consumer price inflation.  

Or, in the grand comedy and tragedy of it all, they could do both.  And in our opinion, they will.  Asset prices, including housing, stocks, and bonds, will lose value, as consumer prices, including goods and services, go up. 

Compounding matters, this could happen as the cold winds of recession blow across the land.  Add rising unemployment and bankruptcy to the equation and you have a formula for financial disaster.

That’s enough grim thoughts for one day.  If you can think of a consolation, let us know at


M.N. Gordon
Great Depression Online

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