The Chairman of the Fed will testify today about all the troubles in the world. The head of the ECB is slowly coming to terms with the idiocy of his earlier flirtation with higher rates and hard currency. The Q2 infatuation with commodities as an asset class and inflationary fears have been abandoned for the bond market and debt depression stress. These latter developments put CB money printing back in play both here and abroad. Many define this as a liquidity trap.
We have opted for the Structural Trap condition. In a structural trap, liquidity floods are filtered into weak, outdated and politically connected industries. Autos got a free ride on the financial sector bail here in the US. Globally, "banks" create a unique industry hurdle to escaping a structural trap. This is the real lesson of the Japan experience. "Reform," the euphemistic buzzword for regulatory micro-management is the political cement that solidifies the trap. Put simply, as long as liquidity is created solely for the purpose of filling financial market holes, little positive economic consequence occurs.
The Chairman should address this stark situation openly to his Congressional overseers. Austerity in a structural trap is economic suicide. Fiscal initiatives that are not focused on the archaic and weak sectors can have a impact. The hostile political environment makes this delicate and difficult. Bernanke should be honest about policy tool's loss of efficacy while in the Congressional Dog House. As we have warned before, volatility and short horizon moves will remain with us as long as structural problems continue to be dealt with purely as liquidity issues.