Agreed that government can buy stocks to keep them from falling, as HK did.

But the 1930s was a gold standard deflationary collapse.

The Fed was constrained from net buying anything due to the risk of losing gold reserves.

The risks are very different now with non-convertible currency/floating fx:

Depression risk might force U.S. to buy assets

by John Parry

“The Fed probably can’t fix it all on its own now,” Connolly said. “There is a chance the Fed gets forced into unconventional cooperation with government,” which could involve buying a range of assets to reflate their value.

Operationally this can be readily done. But what assets would the Fed want to reflate? Equities represent a return on investment, which is what it is. Yes, it might make sense to have a bid, like HK did, for ‘market-making stabilization’ purposes, but not to hold longer term, as that would be public ownership of the means of production, etc.

That would be reminiscent of some steps the U.S. government took in the 1930s when the economy was mired in deflation and high unemployment.

One turning point came when agricultural prices were restored to their pre-slump levels, Connolly said. Such measures were among the New Deal programs that President Franklin D. Roosevelt launched to bolster the economy.

Note that we don’t have a problem with low agricultural prices today!

Nor with low energy prices or plunging nominal wages.

Only housing prices have been falling due to excess inventory that I calculate will be cleared in a few months. The risk is that housing prices rise after that.

Either way, investors face bleak prospects now without some kind of further government intervention, he said.

Investors, yes. Consumers, not so bleak. Jobs and income are holding up, and most forecasts are only minor rises in unemployment. And with booming exports and the fiscal package in place, GDP has been revised up.

Those steps might offer clues to investors in stocks and commodities, which Connolly expects the government might be ultimately force to step in and buy to stabilize markets.

Yes, as above. Maybe some market stabilization in the financial sector. I don’t see anything in the real sector that needs more government buying right now. Seems CPI is high enough as is for more mainstream economists.

He expects that a depression may be averted, but only by the state and the Fed reinflating the price of such assets.

If we do get a recession, it will be due to falling demand from something like a tax hike to balance the budget.

Beleaguered housing, non-government fixed-income securities and even the now overvalued Treasury market have little hope of generating substantial returns for investors over the next few years, he said.

Earned income is sufficient to drive effective demand, even without investor income.

“If we don’t avoid depression, the only thing worth holding is cash,” he added.

As we watch it buy less and less CPI? Looks more like we are turning the currency into wallpaper, at least so far.

As long as resources producers spend their incomes on imports of real goods an services (and don’t ‘save’ it), world demand is likely to be sustained at whatever prices they wish to charge.

Twin themes seem to be continuing: weaker demand with higher prices. But no recession, yet.


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