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Blood Transfusions Can Get Messy

Posted by Larry Doyle on April 30, 2009 3:00 PM |

Friends of mine have asked me to explain some of the dynamics involved in the government rescuing of our banking system, equity markets, and economy as a whole. Allow me to share with you the following analogy I gave them.

A patient in distress enters surgery and badly needs a blood transfusion. The blood in our economy is transferred via massive increases in deficit spending funded from borrowing in the government bond market. The same sort of operations are occurring in every major country and region literally around the world. The overall blood donor supply is not limitless. In withdrawing the blood from the government bond market, other patients (consumers, corporations) have found blood to be in very short supply and they have suffered as a result. 

We all know that blood can regenerate. Are the “green shoots” in our economy a result of “blood doping,” in which the patient regenerates his own blood even in the midst of the transfusion? Blood doping is a very dangerous procedure. When should the patient become a blood donor rather than a blood recipient?

Are our surgeons talented enough to know when and how to precisely withdraw the blood? Does the patient run the risk of another much more serious condition from excessive blood flow? No doubt.

Who on our staff is practiced in the art of withdrawing blood?  Paul Volcker was chair of the Fed in the early 1980s when inflation ran rampant. He increased the heart rate monitor known as the Fed Funds rate to near 20% in order to choke off the inflation monster. 

Without referencing a specific target Fed Funds rate, Volcker remarked yesterday that an overheated patient this go round may also require similar treatment.

LD

  • Marcus Welby, MD

    LD, The thing to remember about “green shoots” is that they grow from the bottom up. Let’s hope that Washington can take a lesson from Main Street in this regard and learn to live on a pay as you go basis. Otherwise Dr. Obama and the rest of the hematologists in DC will come to realize that all bleeding stops…eventually. Marcus

    • Dr. Hugo Hackenbush

      Dr. Welby, First of all don’t get technical with me about “green shoots” and hematology. I wrote the book when I took four years at Sweetbriar. Nevermind that it’s a girls’ college! I only found that out the third year. Why, I’d have been there yet, but I went out for the swim team. Say what you want about increased fiscal responsibility by the American consumer. According to my diagnosis, either he’s dead or my watch has stopped. Stick to the swine flu and leave the veterinary work to the professionals. Respectfully, Dr. Hugo Z. Hackenbush

      • Quincy, MD

        Dr. Hackenbush, Dead? I know a little something about dead, my friend. What do you think this entire Federal stimulus plan is all about? It’s gonna take a little more than smelling salts. Quincy, MD

  • I agree Larry that the Fed very well may have to raise interest rates to stifle inflation. The problem though is that the Fed has caused an extreme addiction in our economy to low interest rates. Our economy is as addicted to low interest rates as a heroin addict is to heroin. If they raise interest rates, that will stifle any economic recovery, because it will hurt the housing market and mortgage market, make borrowing more difficult at all levels, and likely hurt the stock market. That’s the problem when you have an economy based on borrowing and debt, and the Fed has been like a heroin dealer feeding the economy with lower and lower interest rates and more and more debt. So do they allow mass inflation by keeping rates low or do they stop inflation while simultaneously stopping the economic recovery? That’s the choice they will be faced with in my humble opinion.

  • Matt,

    The market will likely force their hand. In fact I think it has already started to do exactly that. Treasury rates would not be this low if not for the Fed’s purchases. My sense is that the market will force the Fed to continue to defend the market.

    As the Fed does that and continues to grow its balance sheet in the process, the dollar may very well give ground and other inflationary signals will increase.

    Remember, one of the greatest factors involved in inflation is the mere “expectation” of inflation. The Treasury and Fed stop gap measures come at a price. That price is inflation and potentially hyperinflation.

    These surgeons ultimately may have to perform a radical maneuver. This process is very high risk.






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