China Overwhelmed by Cash

China May Be Overwhelmed by Cash, World Bank Says (Update2)

If that happened, the central bank wouldn't be able to sell enough bills to soak up excess cash, increasing the risk of asset bubbles and accelerating inflation, he said.

The world needs a giant cash sponge apparently. The dotcom bubble worked until it popped. The global housing bubble worked until it popped. The China stock bubble worked until it popped.

I refer you to a chart showing why a giant cash sponge is truly needed.

Money, Money, Money

Here's my first solution. A paper towel bubble would seem the perfect excess cash sponge in this environment. All that money could be used to buy and hoard paper towels. People would feel more upbeat as they saw the value of their paper towel holdings increase. Unfortunately, unlike the other bubbles it would affect the CPI. It is therefore not a preferred bubble in the minds of central bankers. What if we excluded paper towels from the CPI though when talking of the economy? We could speak of the CPI ex-food, ex-energy, and ex-paper towels. That way people could hoard as many paper towels as they liked without anyone caring. I know what you are thinking. Mark, you'll make out like a bandit since you have already hoarded paper towels and the price would skyrocket. You've got me there. Shame on me. I therefore withdraw this solution as being too self-serving.

Although Greenspan has stated that it is impossible to see a bubble, I'm confident he would have noticed a paper towel bubble just the same. He no doubt would have responded somewhat appropriately in the face of much higher paper towel prices (especially if most prices like canned goods rose similarly). I also suspect Bernanke could spot a paper towel bubble, but am somewhat less confident since he's so scared of deflation. I'm hoarding anyway though. Go figure.

This brings me to my second solution and it would seemingly play on Bernanke's strengths. A serious deflation scare could see people bury dollars in their backyards. That would be the very best giant cash sponge money could (not) buy, at least temporarily. It would put a short-term end to all bubbles. Perhaps Bernanke just needs to write another deflation speech, only this time without the helicopter references. He could also imply the impending deflationary crash is a permanent fixture of our overleveraged society, thereby trapping said dollars in backyards for all eternity. This solution could clearly work if we were willing to endure the pain that such a speech would bring.

Solving "dangerous and intractable" economic problems involving "huge imbalances and risks" is not my forte it seems. Sorry about that. Maybe I'll just stick to heckling those who think they have viable solutions.

February 16, 2005
Former Fed chief warns that nation is facing 'huge imbalances and risks'

"Altogether, the circumstances seem as dangerous and intractable as I can remember," Volcker said during a keynote address at the second annual summit of the Stanford Institute for Economic Policy Research. "But no one is willing to understand [this] and do anything about it."

Greenspan sees turbulence, inflation, and possibly even stagflation coming too. What is it you former Fed Chairmen see behind closed doors to make you so paranoid? Is it a coincidence that Volcker gave his speech at the peak of the housing bubble? Is it a coincidence that Greenspan published his "Age of Turbulence" book within a month or two of the credit crisis unfolding?