Till now, the USA Fed is still concentrating on a painless “cure” for its economy, thinking that it can spend its way out of troubles. This is more of trying to learn from the lessons of the Great Depression in that it was generally perceived that the credit crunch was the cause of the Great Depression. But the credit crunch was the result of the Great Depression and not the cause of the Great Depression.

Flooding the economy with trillions of dollars doesn’t help if the banks are risk adverse as what we are seeing. The banks have the money, but they aren’t lending out as in a usual economy. The “sudden” influx of bad news isn’t really sudden. It is just a matter of time when the stock markets are inline with the expectations of the economy. It is also a matter of time when the other major economies realize that they can no longer fuel the expansion of USA consumerism. The latest Fed response to the rapidly declining economy of USA is quite impotent. It is more symbolic rather than of any significant improvements to the economy. After trillions of dollars, pouring in billions of dollars will not make much of a difference.

We are hearing talks that another economic stimulus is needed. But that would mean a greater scale of the influx of liquidity into the markets. The end result will be a situation whereby a much more severe credit crunch is needed to curb the implosion of the USA economy. There is no such thing as a painless cure which the USA is still pursuing.

Is it too late to bite the bullet? If there is another “economic stimulus”, I guess by the time the Fed wants to get out of the mess, it will be impossible. A double dip is not impossible but is still a remote possibility. But we may be in for a long long time of stagflation which will not be much difference from a double dip. I personally prefer a double dip than prolonged agony. But the way it is heading, I guess a stock market crash will be a welcome news for the Fed to implement austerity measures rather than continue their expansionist monetary policies. All in all it has been a series of extreme value destruction and it will continue for the foreseeable future until a balance between production and consumption is achieved in the USA. Persuading the Chinese to start spending isn’t going to be helpful as it is not that the Chinese do not spend, it is because the Americans are consuming too much of their future money.