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EJ
07-10-06, 02:27 PM
June 5, 2002. I'm in Seoul, South Korea. My business dinner is proceeding on schedule even though my host's country is about to get its first World Cup win in 47 years. On this warm evening the doors to our private dining room are open to a hallway that leads to the street. The roar of what must have been millions of Koreans screaming in unison in their apartments across the city poured through the streets and flooded in around us. Two years later in downtown Boston when the Red Sox beat the Yankees in 2004, a bigger deal than winning the Pennant, the public display was tepid compared to this communal outburst.

I was so sure there was a vast arena full of howling people somewhere below us, above us, or beside us that at one point I went outside to look for it. But the sound came from nowhere and everywhere. These were Koreans, a boisterous and communal group, being their boisterous and communal selves. My host said he didn't mind not watching the game, the business at hand was more important, but I knew he was lying. I asked our waiter to bring in a TV. On the flight to Japan the next day -- we did get a deal done -- the Koreans on the flight stopped me to ask, "Did you see the game?! Did you see that!"

So last night as I look at pictures of Italy, today's World Cup winner, and think of Korea. Reading about South Korea's nutty neighbor to the north, I'm also reminded that a mere four years before my visit, Korea stood on the brink of economic catastrophe and how they responded.

Here's an interview of Mary Jordan (http://www.pbs.org/newshour/bb/foreign_correspondence/july-dec98/jordan_9-8.html), Northeast Asia co-bureau chief for the Washington Post, by Phil Ponce of the Jim Lehrer Newhour, September 8, 1998:

PHIL PONCE: "You were here a year ago and you gave a picture of a very prosperous Korea, where people were buying things and were well dressed. What's Korea like now?"

MARY JORDAN: "Well, it's just been a stunning reversal of fortune for a country. This time last year it was still a powerhouse. You know, there was great pride in every American home. There was a Korean-made air conditioner or computer or some electronics goods. And this year so many people that were working in those factories are out of work that the city had almost no homeless people last year, but every city park now has become almost like a virtual tent city, with homeless people, families, people that were even owners of companies that are now sleeping under the stars, because they have lost everything, lost their jobs, lost all their savings."

Then, almost as quickly, Korea came roaring back. Michel Camdessus, Managing Director of the International Monetary Fund, speaking at the Conference on Economic Crisis and Restructuring (http://www.imf.org/external/np/speeches/1999/120299.htm), Seoul, Korea, December 2, 1999 put it this way:

"Two years ago, Korea stood on the brink of a potential disaster, a situation that came as a shock, as it became the latest, and perhaps the most unexpected, country to be caught-up in the tide of contagion that was sweeping through global financial markets and economies. One year later, the global economy, shaken by new crises in other corners of the world was in precarious condition."

"With each passing month, we see ever more encouraging indicators of the speed and vitality of Korea's recovery, clear evidence -- Mr. President -- that the policies you adopted in response to the crisis were the right ones and that they are working. Well over a year ago, once the currency had stabilized, short-term interest rates fell below pre-crisis levels and now long-term rates have also done so. At the same time, the country's usable reserves were already climbing to record levels, and exports had begun a strong rebound. During 1999, unemployment has fallen sharply, and recent statistics show that Korea is well on its way to realizing 9 percent growth this year."

"President Kim, I should like today to salute the government, the institutions, and the people of Korea for the remarkable courage and determination with which you met the crisis. For if this was a Korean crisis, you have met it with a Korean response, and now the rewards are Korea's to build upon for the future. Of course, the IMF stepped forward as soon as Korea requested help and we are gratified to see that the program that was initiated immediately, and which is now entering its third and final year, has contributed to such a quick and strong recovery in Korea, which couldn't be explained without the spirit of sacrifice, the sense of community and solidarity, the capacity for renewal which are distinctive values and quality of your people."

Back to the Mary Jordan interview for background on the foundations of that spirit of sacrifice:

PHIL PONCE: "How about middle class families, those families that still have, where somebody is still employed and still earning some income, how have their lives been changed?"

MARY JORDAN: "Well, there's 44 million people in South Korea, and most of them are middle class people. And that's been the strength of this country. And I guess I think it's fair to say that there's no life that hasn't really been changed there. There's - Korea is famous for being kind of an education powerhouse. They tend to staff the Harvard - Stanford in greater numbers than any other country in the world, and many of those Korean students have had to return home because when the value of the currency crashed, Harvard, instead of costing 30 grand, cost 50 grand a year. So the middle class, the kids are hurt, they're coming back from school. Some are joining the army to help out. People have turned in gold necklaces that meant a lot, gold baseballs, souvenirs, trying to melt them down for money, trying to help the country. You know, even middle class people who were just kind of clawing their way up and have kind of finally made it, you know, good working conditions, a nice house, are now, you know, living on the floor of their relatives because they can't pay the rent."

Jordan alludes to what Camdessus meant by "...the spirit of sacrifice, the sense of community and solidarity..." It wasn't only the $58 billion loan from the IMF that pulled Korea out of the abyss. As this San Jose Mercury News article (http://www2.gol.com/users/coynerhm/korea_crisis_behind.htm) noted in December 1, 1999:

"The recovery may be partly a reflection of South Koreans' determination to overcome the crisis. At the height of the financial turmoil, millions of Koreans sold or donated 222 tons of rings, necklaces and other gold trinkets worth $2.2 billion to aid the bailout."

"I sold two gold rings and one necklace,'' said Lee Suk-ja, a housewife. "It was a small amount, but I take a great pride in taking part in helping the country in time of need.''

Imagine that. You're out of work or may be soon. Many of your friends are. What do you do? Do you sell your valuables to pay your bills? No, you sell them and give the proceeds to the government to help your country, your fellow Koreans. You can argue how much these $2.2B helped versus the $58B IMF loan and other steps, but this display of sacrifice by the individual to the group had to have a major positive psychological impact.

What's remarkable about the Korean crisis experience is both how quickly the nation fell from prosperity into despair and how quickly it got back out again. The US can fall just as quickly into despair. How quickly can it climb out again? That depends on the antecedents.

In the highly leveraged, crisis prone Globologna Economy (http://www.itulip.com/glossary.htm#G), everyone gets their turn in the barrel. Maybe it will be the USA's turn next time. If so, will the people of the US display the "...the spirit of sacrifice, the sense of community and solidarity..." shown by a homogenous, egalitarian Korean society dominated by a large middle class?

Three reasons why a Korean Crisis Solution will not likely work for the US:
The IMF doesn't have enough money to bail out the US and the country is already in debt up to its eyeballs to most countries that have money to lend and a fair number that do not.
American citizens don't have enough gold to contribute meaningfully to the cause and those that have it got it to protect their wealth from an irresponsible government not donate it to that government. How many Americans will in a crisis feel that giving money to their government is the same as giving it to their fellow American?
The US is not a homogenous, egalitarian society dominated by a large middle class. The US is a socially stratified society with a shrinking middle class. The US has become the most unfair society on earth. (http://brokerwatchdog.com/)What will the US solution look like when the nation, inevitably, gets the crisis that it has been on its hands and knees begging for these last four years while it builds up massive debts on its national and household balance sheets, sheds equity in property and exports productive capacity overseas?

What can the US government do in case of a serious economic crisis like Korea's in the late 1990s? The tax cut and deficit spending bullets have been fired. The asset inflation game has played out in a housing bubble and bubbles in other assets. All the "wealth" that the US can print has been printed, and paid for with loans from energy and goods exporting nations. All the fiscal stimulous that can be generated by deficit spending has been applied, less debt that the US has to monetize and, in a world of $74 oil, create massive inflation.

Liquidity is the last bullet in the gun. It will be fired and there will be another asset inflation, like the 1996 - 2000 stock market bubble and the 2001 - 2005 housing bubble. But where?

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Jim Nickerson
07-11-06, 01:21 AM
EJ:

I truly do not understand why "there will be another asset inflation, like the 1996 - 2000 stock market bubble and the 2001 - 2005 housing bubble."

If inflation is a problem which I think it is, and if interest rates are going up which they appear to be, and if America is up to its neck now in debt which it appears to be, even if liquidity (which I take to mean more available credit--which may wrong) is available, who is going to be getting loans? And if people, institutions cannot get loans, from where will come the funding for another bubble?

Someone gently clue me in, please.

Ann
07-11-06, 10:54 AM
EJ:

I truly do not understand why "there will be another asset inflation, like the 1996 - 2000 stock market bubble and the 2001 - 2005 housing bubble."

If inflation is a problem problem which I think it is, and if interest rates are going up which they appear to be, and if America is up to its neck now in debt which it appears to be, even if liquidity (which I take to mean more available credit--which may wrong) is available, who is going to be getting loans? And if people, institutions cannot get loans, from where will come the funding for another bubble?

Someone gently clue me in, please.

It must have looked that way in 1994 when banks basically didn't make any loans for something like 6 mo. and again in 2001 when the dot coms and telcos were laying everyone off and south of Market in San Fran was a ghost town. Now it's M&A, hedge fund and housing bubble city. The Fed can induce private persons and institutions to make and take loans no matter how much debt they already have. This guy Bernanke has talked about the Fed printing money to buy "across the yield curve." They'll buy 10yr bonds, buildings, houses, stocks, whatever. Think they won't do it? You bet they will! The moolah flying around will be like Kim Sun-il's rockets: once they go up who knows where they'll come down!

WDCRob
07-11-06, 12:08 PM
Bernanke has talked about the Fed printing money to buy "across the yield curve." They'll buy 10yr bonds, buildings, houses, stocks, whatever. Think they won't do it? You bet they will!

If I understand it correctly the BOJ lowered rates to ZERO and still couldn't get Japanese consumers to spend/take on debt. Is that right?

Is so...if the housing market crashes and equities drop why would the American scenario different from the experience of Japan?

bart
07-11-06, 03:35 PM
If I understand it correctly the BOJ lowered rates to ZERO and still couldn't get Japanese consumers to spend/take on debt. Is that right?

Is so...if the housing market crashes and equities drop why would the American scenario different from the experience of Japan?


Because the Fed and the Bank of Japan are different. The BoJ didn't try very hard until about 2003.

EJ
07-11-06, 05:28 PM
Bart's got it right. The BoJ waited too long, as shown in this Fed report: Preventing Deflation: Lessons from Japan’s Experience in the 1990s (http://www.federalreserve.gov/pubs/ifdp/2002/729/ifdp729.pdf).


http://www.itulip.com/images/japanratesCPI.png


During the stock bubble in 1999, the Fed made it very clear that they were not going to get behind the curve when the US bubble popped the way the BoJ did in the early 1990s when Japan's bubble popped, and the way the US Fed did in the early 1930s. They understood (and, really, the BoJ should have known) that once you let the rate of inflation fall below 0, interest rate policies are like controls on an airplane that's stalled... they just flap around uselessly. You need some kind of airspeed to use the flaps and alerons, and quickly dropping the nose and heading toward the ground is the way to get it. Of course, that assumes you have enough altitude to pull up before you hit the ground. That's what the Fed has been gaining for the past 18 rate hikes.

Back in 1999 I was explaining to the deflationists that if investors want to hedge either inflation or deflation risk they should worry more about inflation because the Fed was more likely to succeed too well than fail or pull off a perfect execution of the maneuver. I did, which is why I backed up the truck and bought PMs in 2001.

Do I think the Fed is kidding when they say they'll print their way out of the collapse of the housing and other asset bubbles that have resulted from the previous printing expedition? No. I think they are just as serious this time as last time, if not more so. But I believe they are likely to get more than they bargained for, as oil was under $20 last time vs $74 today.

Keep in mind as you read the arguments regarding what is and isn't money -- gold, paper currency, bonds, etc. -- there is only one money that matters: oil. All others are proxies for it, in a kind of layer cake of purchasing power risk with oil at the base, gold next, and so on, ending with the least collateralized.

Corporate Plebe
07-11-06, 05:37 PM
All this bubble, stagflation and international conflict could be affecting my love-life....as I read about Bill Clinton and Bill Gates in Africa today, I ask you all if the next bubble can be with pharmaceuticals?

WDCRob
07-12-06, 10:56 AM
Thanks for the detailed explanation.

I don't always follow the technical details here (the commentary on Peak Risk made only partial sense after three or four readings), but the basics are clear enough -- even if they only provoke more questions.

Like...

If I've understood this right, people are arguing that the drops in rates after 1987?, 1994/5, 2000 and presumably 2007/8 have only served to inflate one or more asset bubbles.

And that sooner or later inflation will arrive so strongly (probably due to the combination of low rates and high oil prices) that the only way out will be to raise rates rapidly and to extremely high levels. Crushing the economy.

So isn't the ultimate effect of the whipsawing rates game to delay the pain and intensify it when it does come? i.e. doesn't the long-term outcome from this sort of whipsawing between rapidly rising rates and rapidly falling rates eventually HAVE to be deeply recessionary?

Or is my intuition here completely off-base?

Charles Mackay
07-12-06, 12:49 PM
All this bubble, stagflation and international conflict could be affecting my love-life....as I read about Bill Clinton and Bill Gates in Africa today, I ask you all if the next bubble can be with pharmaceuticals?

That's an interesting thought... especially since the $1.5 B per year from Buffett has to be spent in the year it's donated.:)

jk
07-12-06, 02:18 PM
So isn't the ultimate effect of the whipsawing rates game to delay the pain and intensify it when it does come? i.e. doesn't the long-term outcome from this sort of whipsawing between rapidly rising rates and rapidly falling rates eventually HAVE to be deeply recessionary?

Or is my intuition here completely off-base?

the outlook is recessionary only if you assume that the fed will willingly and knowingly put the u.s. into what would likely be the worst recession since the 1930's. up to now that title ["worst since the 1930's"] i believe applies to volcker's recession. but when volcker pushed rates through the roof we didn't have the debt levels and leverage that are currently in the system.

i think it's more likely that we will have a prolonged stagflationary period of the fed at times half-heartedly attempting to control inflation, but too scared to really do the job. the authorities' hope will be that we somehow "grow out of it."

bart
07-12-06, 09:58 PM
EJ:

I truly do not understand why "there will be another asset inflation, like the 1996 - 2000 stock market bubble and the 2001 - 2005 housing bubble."

If inflation is a problem which I think it is, and if interest rates are going up which they appear to be, and if America is up to its neck now in debt which it appears to be, even if liquidity (which I take to mean more available credit--which may wrong) is available, who is going to be getting loans? And if people, institutions cannot get loans, from where will come the funding for another bubble?

Someone gently clue me in, please.

Hi Jim,

It doesn't appear that anyone took a shot at your questions.

I'm not sure, but I think the answer to your questions is time related. It sure looks like we're headed for a slowdown now and credit demand may drop a lot, but its the period after that where I believe we'll be hit with much higher inflation.

But consider for example what would happen even right now with loan demand if suddenly it was easy for the average citizen to borrow in yen at 1-2%. I'm not suggesting that its about to happen, just trying to make the box bigger. Another possibility could be 50 or 100 year mortgages.

My basic point is that the "financial establishment" has shown quite the ability to come up with "newer and greater" products to continue the game for many decades. I recall for example how many quite conservative folk responded to 30 year mortgages being introduced in the '50s - they were looked upon almost literally in horror.

As far as what liquidity is, this is my favorite definition:
"A synonym for money and/or credit creation, as in 'excess liquidity', and is simply another way to spin that its not relative inflation (or deflation) created by central bank activity and its effects."

Gentle enough?

bart

Jim Nickerson
07-12-06, 11:16 PM
Hi Jim,

It doesn't appear that anyone took a shot at your questions.

I'm not sure, but I think the answer to your questions is time related. It sure looks like we're headed for a slowdown now and credit demand may drop a lot, but its the period after that where I believe we'll be hit with much higher inflation.

But consider for example what would happen even right now with loan demand if suddenly it was easy for the average citizen to borrow in yen at 1-2%. I'm not suggesting that its about to happen, just trying to make the box bigger. Another possibility could be 50 or 100 year mortgages.

My basic point is that the "financial establishment" has shown quite the ability to come up with "newer and greater" products to continue the game for many decades. I recall for example how many quite conservative folk responded to 30 year mortgages being introduced in the '50s - they were looked upon almost literally in horror.

As far as what liquidity is, this is my favorite definition:
"A synonym for money and/or credit creation, as in 'excess liquidity', and is simply another way to spin that its not relative inflation (or deflation) created by central bank activity and its effects."

Gentle enough?

bart

Thanks, Bart, a good answer. I worry at being taken as dense, which I can tolerate, and thus having someone pounce on my deficit in economics and finance in some unkind manner.

Prechter was referenced in http://www.financialsense.com/fsu/editorials/2006/0712.html as raising a "subtle, but very important point - the Fed does not print money per se, it issues credit, and there is a big difference. Credit can simply disappear, while currency that has been printed cannot." The latter sentence by the author in the URL, Nystrom.

I understand this to mean inflation can be stoked by just credit creation through the Fed. Reserve. Your point of those who loan money coming up with new and imaginative way to induce people to borrow is enlightening, and I guess there are other ways too.

bart
07-12-06, 11:45 PM
Thanks, Bart, a good answer. I worry at being taken as dense, which I can tolerate, and thus having someone pounce on my deficit in economics and finance in some unkind manner.

Prechter was referenced in http://www.financialsense.com/fsu/editorials/2006/0712.html as raising a "subtle, but very important point - the Fed does not print money per se, it issues credit, and there is a big difference. Credit can simply disappear, while currency that has been printed cannot." The latter sentence by the author in the URL, Nystrom.

I understand this to mean inflation can be stoked by just credit creation through the Fed. Reserve. Your point of those who loan money coming up with new and imaginative way to induce people to borrow is enlightening, and I guess there are other ways too.


I know what you mean about being pounced on, this is the internet and planet earth... and basically I'm just glad that I came across as intended.

That apparent Prechter comment is one of my pet peeves, not that it doesn't have some truth too (and I don't mean to pick on Prechter, the issue is widespread).
Its just at least somewhat deceptive in the sense that when one is talking about money creation and the Fed, its not that simple.

Some examples and there are others as you surmised:

1. While the Fed doesn't literally print the currency, they do authorize its printing by a bureau of the US Treasury.

2. Credit is created not only by the Fed but also by commercial and other banks, and there are fractional reserve effects too.

3. Currency is less than 6% of M3, the largest measure of money and even doubling the amount in circulation would "only" increase M3 by about 4-5%.

4. Money creation and measurement as a broad area must include not only bank/fed/credit card/commercial/real estate credit, but also M1 through M3, fractional reserve effects, changes in reserve requirements, value of stock and bonds, etc etc etc. And I'm assuming here that "money" is being used here as an agreed upon and easily tranferable medium of exchange.

So in other words, yes of course credit can disappear fast but so can a lot of other things like stock or bond values... and I'll get down off my soap box now. ;)

EJ
07-15-06, 03:49 PM
the outlook is recessionary only if you assume that the fed will willingly and knowingly put the u.s. into what would likely be the worst recession since the 1930's. up to now that title ["worst since the 1930's"] i believe applies to volcker's recession. but when volcker pushed rates through the roof we didn't have the debt levels and leverage that are currently in the system.

i think it's more likely that we will have a prolonged stagflationary period of the fed at times half-heartedly attempting to control inflation, but too scared to really do the job. the authorities' hope will be that we somehow "grow out of it."

September 1999, my guess for the next bubble was to be in commodities.

http://www.gold-eagle.com/editorials_99/ej091399.html

Looks like I missed a bubble -- housing -- but if things keep going as they have in the Middle East, I may get my commodities bubble after all.

jk
07-15-06, 06:10 PM
September 1999, my guess for the next bubble was to be in commodities.

http://www.gold-eagle.com/editorials_99/ej091399.html

Looks like I missed a bubble -- housing -- but if things keep going as they have in the Middle East, I may get my commodities bubble after all.

the fed got off easy in this last go-round because the bls had figured out a way to make rising house prices invisible to their measures of inflation. the credit could flow via mortgages and heloc's to support continued consumption, but owner's equivalent rent was held down by the increase in home purchases.

at first, the increased flows into commodities could be ignored because it was either not part of the "core" number, or it appeared only in producer prices as industrial inputs. the global labor arbitrage kept reducing manufacturing costs so that industrial input cost increases didn't flow through to consumer prices.

now commodity price increases, especially energy cost increases, are flowing through. fuel surcharges for shipping and delivery are beginning to push up the cost of goods and services, and the rises at the pump - although not part of the "core"- are used to justify other price increases.

hedonics, geometric weighting and sticking with the "core" still help keep the reported numbers down, just not enough. they could now switch the housing component back to home prices instead of owner's equivalent rent. that would "help" [keep the number down]. any other ideas for number manipulations in our future?

i have one more thought of what might keep the inflation number down. gas and oil prices continue to rise, and likely food prices will continue to rise as well, reflecting the natural gas used to manufacture fertilizer and the increased embedded energy costs of growing, processing and transporting the food. [i know i'm shocked every time i see the total at the checkout register at the supermarket.] thus food and gasoline and heating will take up an increasing percentage of people's budgets. since these are not part of the core, there will be a smaller amount of spending on other things [perhaps even a recession], dropping demand and inhibiting prices of everything that IS in the core! when we spend all our income on food, heating and cooling our shelters and transportation, there will be no money left to jack up the prices of anything else, and inflation will be tamed. oh happy day.

bart
07-15-06, 06:20 PM
...
any other ideas for number manipulations in our future?
...



The BLS has been working on something called CPI-C.
Check out page 34 at http://www.bls.gov/ore/pdf/st050290.pdf to see some "interesting" differences between it and CPI-U.

jk
07-15-06, 10:14 PM
The BLS has been working on something called CPI-C.
Check out page 34 at http://www.bls.gov/ore/pdf/st050290.pdf to see some "interesting" differences between it and CPI-U.
i saw the numerical differences between the indices at your link, bart, and then i tracked down this link:
http://www.cbpp.org/5-18-04bud.htm
which made clear to me what the cpi-c is about: the use of "the substitution effect" in calculating cpi, and the use of this "superlative" index [that's really what it's called!] to allow the government to screw social security recipients and anyone else with benefits keyed to inflation.

i forgot to mention "substitution" in my rant, above, about these numbers. you know: steak is too expensive so you buy chicken, chicken is too expensive so you buy cat food. the index really does need to incorporate the fact that you have indeed lowered your cost of living by switching to cat food, so inflation is not so bad as long as the next bubble isn't in cat food.

bart
07-15-06, 10:43 PM
i saw the numerical differences between the indices at your link, bart, and then i tracked down this link:
http://www.cbpp.org/5-18-04bud.htm
which made clear to me what the cpi-c is about: the use of "the substitution effect" in calculating cpi, and the use of this "superlative" index [that's really what it's called!] to allow the government to screw social security recipients and anyone else with benefits keyed to inflation.

i forgot to mention "substitution" in my rant, above, about these numbers. you know: steak is too expensive so you buy chicken, chicken is too expensive so you buy cat food. the index really does need to incorporate the fact that you have indeed lowered your cost of living by switching to cat food, so inflation is not so bad as long as the next bubble isn't in cat food.


Thank you for explaining it in other than four letter words.

I just couldn't bring myself to keep my temper when describing the various heinous Orwellian methods that the BLS uses and proposes using to "calculate" the CPI.

I suspect and have heard rumors that there will be some "substitutions" done with energy prices in the future since they currently do not have any "adjustment" factors for mass transit or walking or bicycling or the likely return of the 55mph speed limit, etc.