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EJ
09-26-07, 12:25 PM
http://www.itulip.com/images/bluepill.jpgInflation versus deflation debate for Red Pill consumers

by Eric Janszen

Inflation versus deflation debate keeps contrarian economics and finance pundits pontificating for ten fabulous years. Fed flushes banks with funds and a fresh flurry of articles fills the blogosphere. Finally, the "financial economy" enters.

I’m glad to see the term “financial economy” enter the vocabulary in this inflation versus deflation discussion with a recent note I got from Aaron Krowne. We didn’t pick up on the idea until Bill Gross started talking about it in The Last Vigilante (http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2004/IO_02_04.htm) (Gross, Feb. 2004):
“I would argue the most critical reformation in the past twenty years since Volcker’s prime has been the transition of the U.S. from a manufacturing/to a service/to a finance-based economy within the span of two decades. Purists will perhaps rightly quarrel with the chronology or maybe even the logic, but it seems to me in any case that the critical difference between then and now is that profits and employment – 2/3 of the critical constituents that a Fed Vigilante must protect (inflation being the third) – are now primarily a function of the amount of debt/leverage and its cost.”
Perhaps Gross had been reading Kevin Phillips, who started writing about the Finance, Insurance, and Real Estate (FIRE) Economy in 2002. From Wikipedia (http://en.wikipedia.org/wiki/Kevin_Phillips_%28political_commentator%29):
Phillips uses the term “financialization” to describe how the U.S. economy has been radically restructured from a focus on production, manufacturing and wages, to a focus on speculation, debt, and profits. Since the 1980s, Phillips argues in American Theocracy,


"...the underlying Washington strategy… was less to give ordinary Americans direct sums than to create a low-interest-rate boom in real estate, thereby raising the percentage of American home ownership, ballooning the prices of homes, and allowing householders to take out some of that increase through low-cost refinancing. This triple play created new wealth to take the place of that destroyed in the 2000-2002 stock-market crash and simultaneously raised consumer confidence.

"Nothing similar had ever been engineered before. Instead of a recovery orchestrated by Congress and the White House and aimed at the middle- and bottom-income segments, this one was directed by an appointed central banker, a man whose principal responsibility was to the banking system. His relief, targeted on financial assets and real estate, was principally achieved by monetary stimulus. This in itself confirmed the massive realignment of preferences and priorities within the American system….

"Likewise huge and indisputable but almost never discussed were the powerful political economics lurking behind the stimulus: the massive rate-cut-driven post-2000 bailout of the FIRE sector, with its ever-climbing share of GDP and proximity to power. No longer would Washington concentrate stimulus on wages or public-works employment. The Fed's policies, however shrewd, were not rooted in an abstraction of the national interest but in pursuit of its statutory mandate to protect the U.S. banking and payments system, now inseparable from the broadly defined financial-services sector."
Or maybe Gross had been reading ex-Chase Manhattan banker, consultant to the White House and to governments ranging from Canada to China, Dr. Michael Hudson. In Saving, Asset-Price Inflation, and Debt-Induced Deflation (http://www.itulip.com/forums/showthread.php?p=6738#post6738) Hudson writes:
"The exponential growth of savings and debt takes the form mainly of loans to finance the purchase of real estate, stocks and bonds. These loans extract interest and amortization charges that divert revenue away from being spent on goods and services. The payment of debt service by the economy’s non-financial sectors interrupts the circular flow that Say’s Law postulates to exist between producers and consumers."Well, Hudson is an economist and he writes like one. It's tough going for a lay reader, but worth it if you're trying to understand how our economy really works. His most approachable piece is an update to Friedrich A. Hayek's Road to Serfdom titled New Road to Serfdom (http://www.itulip.com/forums/showthread.php?p=7343#post7343). Hudson explains that the FIRE Economy is turning us all into debt slaves.

Reading Hudson and Phillips is like taking the Red Pill. If you're not familiar with the movie The Matrix, the Red Pill is the one you take if you want to see past the surface illusion of the made-up world. Once you read Hudson and Phillips, no matter whether you agree with their solutions, it's hard to go back to seeing the economy as anything but two distinct economies: the great, big FIRE Economy and the itty bitty Production/Consumption Economy.

Inflation versus deflation: Red Pill view

For readers who've taken the Red Pill, the inflation vs deflation discussion needs to be put into the context of the FIRE and P/C Economies.
Fed monetary policy for the FIRE Economy is distinct from monetary policy for the P/C Economy.
Continuous asset price inflation is the objective of FIRE Economy monetary policy. Within the residential real estate market these policies have been effective until recently. They continue to work in the commercial real estate market, but perhaps for not much longer, starting with retail.
Low wage inflation is the primary objective of P/C Economy monetary and government policy because wages are the mechanism for transmission of inflation into the inflation cycle. Wage inflation can be managed via immigration policy, outsourcing policy to affect global wage arbitrage, and so on.
Payments within the FIRE Economy may be 100 or more times the total payments within the P/C Economy.
This does not mean that small changes in FIRE Economy growth have an out-sized impact on the P/C Economy. The opposite is true. The FIRE Economy is a 400 HP car engine in your car and the P/C economy as the 1/10th HP heater that warms your car with the waste heat from the engine.
Asset price inflation and deflation occurs within the FIRE Economy without a direct impact on wages and goods prices within the P/C Economy. For example, housing price asset inflation ran more than 10% per year between 2002 and 2005 while consumer price inflation remained in the low single digits. Conversely, asset price deflation can occur in the FIRE Economy without necessarily leading to wage and goods price deflation in the P/C Economy.
However, as the Japanese learned in the 1990s, sustained banking system dysfunction (inability to multiply money) and asset price deflation in the FIRE Economy, with asset price deflation continuing for years on end, eventually spills over into the P/C economy.It is this final point that leads us to believe in a Next Bubble, a topic we discuss with subscribers at length in the iTulip Select (http://www.itulip.com/forums/showthread.php?p=7837#post7837) area of the site. Monetary and government policy will, we believe, expand credit to re-direct capital into new areas of the FIRE Economy. Failure to do so means failure of the FIRE Economy. New bubble expansion will need to happen over the next year or two, before asset price deflation spills over into the P/C Economy as occurred in Japan in the 1990s and in the US in the 1930s, at which point both the FIRE and P/C economies become unmanageable from a monetary standpoint.

FIRE Economy Failure?

When we interviewed Dr. Hudson, (http://www.itulip.com/forums/showthread.php?p=8186#post8186) he didn't buy our Next Bubble idea. He believes that the FIRE Economy will gradually fail. He calls it the "slow crash." In that case demand declines within the P/C Economy as Japan experienced. Does that mean the US experiences deflation as Japan did? Japan was a net creditor when its FIRE Economy began a slow crash starting in 1992. The US was also a net creditor when its FIRE Economy crashed hard in the 1930s. For net creditors, as asset price deflation within the FIRE Economy spills over into the P/C Economy, the impact on interest rates and currency values is deflationary for wage and goods prices. For net debtors, on the other hand, the impact is the opposite: interest rates rise and currency values fall as capital flows reverse, ala Ka-Poom Theory (http://www.itulip.com/kapoomtheory.htm). We believe failure of the FIRE Economy therefor means inflation.

Mike (Mish) Shedlock believes the banks can't be resuscitated once the credit defaults get rolling (see Death Spiral Financing (http://globaleconomicanalysis.blogspot.com/2007/09/death-spiral-financing.html)). Rick Ackerman and Gary North are in the same camp. In Red Pill terms, they believe excessive debt levels and credit derivatives will swamp and wreck the FIRE Economy, taking the P/C Economy down with it.

I got into the topic with GaveKal CEO Lious-Vincent Gave on Sunday ( interview here (http://www.itulip.com/forums/showthread.php?p=16303#post16303)). His case for deflation in Europe is well articulated and specific: run-away asset price deflation happens because there is no euro bond market like the US and Japan have dollar and yen bond markets, each connected to a national central bank. The euro is a multinational political animal, with no centralized means to inflate.

The euro's lack of a euro bond market was first pointed out to us in our interview with Jamie Galbraith (http://www.itulip.com/forums/showthread.php?p=4834#post4834) (JK's son) earlier this year when we were asking victims of various interviews: "What sort of international monetary regime after this one turns turtle?" It was one of those slap-your-forehead moments we hope to experience at least once in each interview we conduct. Jamie said a multilateral dollar-yen-euro regime depends on the development a euro bond market–so don't hold your breath.

The Road to Inflation

The inflation versus deflation debate was re-ignited by the Fed's 50 basis point rate shock therapy last week. Readers of pundits in the deflation camp demanded to know, "The long awaited credit meltdown is here. Where's the deflation? Gold and oil are going through the roof!"

Hudson’s prediction of the decline of the FIRE Economy is more or less a traditional Marxist one, that total interest payments eventually exceed the economy’s debt carrying capacity. At some point there’s a “break in the chain of payments,” and the system collapses. Preventing such a break is what the Fed has been up to for the past few weeks, and the Bank of England is still doing for Barclays and other banks today.

No one knows whether the FIRE Economy is doomed or not. But its imminent demise has been prematurely announced many times over the past 20 years. I heard similar arguments from Marxist economics professors in college in the early 1980s. Now you can hear them from Libertarians, too.

Our Red Pill conclusion is that to keep the FIRE Economy running until the Next Bubbles get going, the Fed is willing to risk inflation in the P/C Economy, thus the 50 basis point cut while inflation is at multi-year highs and the dollar at multi-year lows. A bit of extra heat from the 1/10th HP heater is a necessary cost of preserving the 400 HP engine; once the FIRE Economy is firing on all cylinders again, P/C Economy inflation can be brought back under control. And in the unlikely case that the FIRE Economy fails, expect massive capital outflows, a collapsing dollar and inflation as Mexico experienced in the late 1980s (http://www.itulip.com/faceofinflation.htm).

Either way, we don't see wage and goods price deflation in our future.

Tulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
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metalman
09-26-07, 01:41 PM
nah, you ain't alone with the inflation and dollar as peso position. Bernstein sez:

A quick reiteration of our views on the global imbalances seems to be in
order.

Simply put, the US trade imbalances are so huge and the export base so small that the only way to solve the global imbalances is to constrain domestic US consumption. We have argued that there are basically three ways to do that: 1) raise taxes; 2) raise interest rates (or keep monetary policies tighter than they normally would be); and/or 3) depreciate the dollar so that goods produced outside the US eventually become “unaffordable” to Americans. If the markets saw that #1 or #2 were not going to be implemented, they would take care of #3.

Depreciating the currency is generally a politically acceptable route,
one often chosen by developing nations with current account imbalances (after all, what politician wants to tell voters they can't buy things?). However, it is also the route that is the least controllable. It now seems quite clear that Washington as a whole (i.e., the fiscal and monetary authorities) has chosen #3.

American markets have been focusing on assets that seek to merely maintain wealth (dollar-denominated commodities and gold, for example). At the same time, the rest of the world is investing to build productive assets and wealth.

We have many times in the past referred to the US dollar as the US peso.
This reference now seems to be a sad reality.

housequake
09-26-07, 04:54 PM
OK, it said "blue pill" before, and now it says "red pill." Did The Matrix get reset? :)

FRED
09-26-07, 05:26 PM
OK, it said "blue pill" before, and now it says "red pill." Did The Matrix get reset? :)

It says "Blue Pill" unless you take the Red Pill.


Someone broke into my apartment and replaced everything with an exact replica. I asked my roommate what happened. He said, "Do I know you?"
- Steven Wright

Andreuccio
09-26-07, 05:32 PM
It says "Blue Pill" unless you take the Red Pill.

But, but, I meant to take the blue one.

rabot10
09-26-07, 06:14 PM
But, but, I meant to take the blue one.

I don't like pills, but if things keep going as they seem to be, I mite take a hand full of each and just end it lol. Well maybe not at least until the Fat Lady sings.

I think that Gold and Silver will do well over time and that is my story and I am sticking to it. OMG i hope I am right on this one for my kids sake

metalman
09-26-07, 07:30 PM
well, i didn't get an answer to my question to mish. his "deflation" arguments are a lot of hand waving. as the dollar tanks and commodity inflation continues to rip ala kapoom, here's what yer gonna get from the deflationists like mish. "oh, no. i never said deflation. what i said was... blah."

FRED
09-26-07, 07:34 PM
well, i didn't get an answer to my question to mish. his "deflation" arguments are a lot of hand waving. as the dollar tanks and commodity inflation continues to rip ala kapoom, here's what yer gonna get from the deflationists like mish. "oh, no. i never said deflation. what i said was... blah."

Notice I just added "Chief Cynic" to your title. Select subscriber can expect similar tagging. If you don't like your tag, just tell me and I'll change it.

As for Mish...


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

metalman
09-26-07, 07:44 PM
Notice I just added "Chief Cynic" to your title. Select subscriber can expect similar tagging. If you don't like your tag, just tell me and I'll change it.

As for Mish...


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


ok, i really want "head of dept. of drugs, alcohol and firearms" but i'll settle for "chief cynic."

mish is hardcore deflationist. fer example...
The Psychology of Deflation (http://globaleconomicanalysis.blogspot.com/2006/08/psychology-of-deflation.html)

" Beginning in November, Outback plans to cut prices across its menu."

you're friggin, kidding, right? got three chinese take-out menus right here, each about six months apart, with much higher prices on each.

how about:

Deflation is in the Cards (http://www.safehaven.com/article-3010.htm) by Mike Shedlock

"Yes Readers, that is correct. The answer to the "Great Flation Question" is DEFLATION. I am not going to wimp out and say "stagflation", and rest assured it is not "inflation" which means that the "hyper-inflation" that many see coming is totally laughable."

i rest my case.

bill
09-26-07, 08:02 PM
http://www.itulip.com/images/bluepill.jpg
Our Red Pill conclusion is that to keep the FIRE Economy running until the Next Bubbles get going,

The Fed lowered interest rates to make available liquidity for financing the arm readjustment impact phase with added government reassurance. The main objective is to keep real estate assets from crashing by refinancing qualified borrowers out of arms, continuing the chain of payments under a fixed interest rate. This is the impact phase as I pointed out here http://www.itulip.com/forums/showthread.php?p=16473#post16473 as we waddle threw it over the next 18-20 months. Sure we will have pull backs and tighter money as it will clean out a few highly leveraged speculators that can’t hold on for the next fire phase, but don’t count on a long term deflation cycle.

Why not?
There is too much value left in the US not to have another fire economy expansion. Value is in US infrastructure ownership, to be purchased/operated by institutional investors and foreigners and that will fuel the next fire economy.
The economy arsonist are busy laying the ground work for the next match to be lit http://www.itulip.com/forums/showthread.php?p=9140#post9140 to start another phase of the fire economy.
Today as one example, government and companies are making plans for the next fire economy phase at the Waldorf Astoria.http://www.euromoneyseminars.com/default.asp?Page=102&eventid=ELE845&eventmenu=true&eventpassed=brochure
Take companies like BAM getting ready for future infrastructure opportunities.

<!-- toctype = X-unknown --><!-- toctype = text --><!-- text -->http://www.brookfield.com/newsroom/pressreleases/r2007/r2007-07-31.asp

Brookfield believes that the infrastructure industry will evolve like the real estate industry in which assets are commonly owned through consortiums of institutional investors and owner/operators such as Brookfield. Brookfield Infrastructure will focus on large scale transactions in which Brookfield has sufficient control to influence operations. An integral part of the strategy is participation with institutional investors in Brookfield-sponsored consortiums for single-asset acquisitions or participation as a partner in Brookfield-sponsored partnerships that target acquisitions that suit Brookfield Infrastructure’s profile.

Contemptuous
09-26-07, 09:50 PM
I don't understand. Where'd Mish go?

Seriously - Weren't we just getting warmed up? :confused:


http://www.financialsense.com/fsu/editorials/willie/2007/images/0926.h15.jpg

Mish
09-26-07, 10:19 PM
well, i didn't get an answer to my question to mish. his "deflation" arguments are a lot of hand waving. as the dollar tanks and commodity inflation continues to rip ala kapoom, here's what yer gonna get from the deflationists like mish. "oh, no. i never said deflation. what i said was... blah."

Metalman did it ever occur to you that perhaps I was busy?

I suppose I could turn the tables and say when the heck are we going to get all the hyperinflation people are calling for? Where is it? By the way, when is the last time housing fell in hyperinflation?

I was an still am calling for deflation. And I even disagreed with Gary North about it being here right now.

So you are challenging my personal reputation without merit, simply because you do not like my call. That is how it appears to me.

But if I remember your question correctly it was about velocity. Someone asked about it if it was not you.

I am aware that Shostak thinks its a useless idea. He said so in http://www.mises.org/story/918

I do not pick arguments with Shostak easily. But even if I have no measure of it, I can say that when Japan printed, there was no demand for credit and the money essentially just sat. In a fiat world unless there is borrowing and use of credit there is no inflation.

If you don't like my take perhaps you can believe Paul Kasriel



Email from Paul Kasriel
Japan experienced a deflation in recent years because the bursting of its asset-price bubble in the early 1990s created huge losses in its banking system. The Japanese banks had financed the asset-price bubble. When it burst, the debtors could not keep current on their loans to the banks and therefore were forced to turn back the collateral to the banks. The market value of the collateral, of course, was less than the amount of the loans outstanding, thereby inflicting huge losses of capital to the Japanese banks. With the decline in bank capital, the Japanese banks could not extend new credit to the private sector even though the Bank of Japan was offering credit to the banks at very low nominal rates of interest.



Banks are an important transmission mechanism between the central bank and the private economy. If the banks are unable or unwilling to extend the cheap credit being offered to them by the central bank, then the economy grows very slowly, if at all. This happened in the U.S. during the early 1930s.



U.S. banks currently hold record amounts of mortgage-related assets on their books. If the housing market were to go into a deep recession resulting in massive mortgage defaults, the U.S. banking system could sustain huge losses similar to what the Japanese banks experienced in the 1990s. If this were to occur, the Fed could cut interest rates to zero but it would have little positive effect on economic activity or inflation.



Short of the Fed depositing newly-created money directly into private sector accounts, I suspect that a deflation would occur under these circumstances. Again, crippled banking systems tend to bring on deflations. And crippled banking systems seem to result from the bursting of asset bubbles because of the sharp decline in the value of the collateral backing bank loans.



Hope this helps,


Paul



Paul L. Kasriel


Sr. V.P. and Director of Economic Research


The Northern Trust Company


50 South LaSalle Street


Chicago, IL 60603a portion of the followup interview...

Mish: What if Bernanke cuts interest rates to 1 percent?
Kasriel: In a sustained housing bust that causes banks to take a big hit to their capital it simply will not matter. This is essentially what happened recently in Japan and also in the US during the great depression.

Mish: Can you elaborate?
Kasriel: Most people are not aware of actions the Fed took during the great depression. Bernanke claims that the Fed did not act strong enough during the great depression. This is simply not true. The Fed slashed interest rates and injected huge sums of base money but it did no good. More recently, Japan did the same thing. It also did no good. If default rates get high enough, banks will simply be unwilling to lend which will severely limit money and credit creation.

No one to date has countered this logic. Not a single person. People believe in the Fed's ability to inflate. I don't for the reasons above.


Japan tried and failed. Bernanke will as well.
1) banks have to be willing to lend
2) consumers and corporations have to be willing to borrow

In a big recession with falling corporate profits and rising bankruptcies in both consumer and corporate sectors neither is likely and all it takes is one.

You are of course free to disagree. But I prefer to see a good theory as to why. As far as I am concerned unless you can come up with a better theory you are the one doing the hand waving.

Mish

metalman
09-26-07, 10:52 PM
Metalman did it ever occur to you that perhaps I was busy?

I suppose I could turn the tables and say when the heck are we going to get all the hyperinflation people are calling for? Where is it? By the way, when is the last time housing fell in hyperinflation?

you said deflation was happening in 2005 and 2006. it's 2007 and now it's a MishMash (http://www.321gold.com/editorials/shedlock/shedlock090707.html) of revisionism and doubletalk and nonsense. sorry, but that's my take.


I was an still am calling for deflation. And I even disagreed with Gary North about it being here right now. you said it was happening in 2005! what do you mean you are disagreeing with gary about it happening now?


So you are challenging my personal reputation without merit, simply because you do not like my call. That is how it appears to me.you called deflation in 2005. and 2006. and 2007. meantime gold and stocks go up and up and up. ain't the call i don't like it's the pretending to not say what you said. fess up to mistakes. everyone makes them.


But if I remember your question correctly it was about velocity. Someone asked about it if it was not you.

I am aware that Shostak thinks its a useless idea. He said so in http://www.mises.org/story/918more twaddle. i don't give a shit what shostak thinks. what do you think?


I do not pick arguments with Shostak easily. But even if I have no measure of it, I can say that when Japan printed, there was no demand for credit and the money essentially just sat. In a fiat world unless there is borrowing and use of credit there is no inflation.

If you don't like my take perhaps you can believe Paul Kasriel

http://globaleconomicanalysis.blogspot.com/2006/12/interview-with-paul-kasriel.html
does paul know you're using his rep this way? ej seems connected to a lot of folks. bet he can ask him. ej?


Email from Paul Kasriel
Japan experienced a deflation in recent years because the bursting of its asset-price bubble in the early 1990s created huge losses in its banking system. The Japanese banks had financed the asset-price bubble. When it burst, the debtors could not keep current on their loans to the banks and therefore were forced to turn back the collateral to the banks. The market value of the collateral, of course, was less than the amount of the loans outstanding, thereby inflicting huge losses of capital to the Japanese banks. With the decline in bank capital, the Japanese banks could not extend new credit to the private sector even though the Bank of Japan was offering credit to the banks at very low nominal rates of interest.

Banks are an important transmission mechanism between the central bank and the private economy. If the banks are unable or unwilling to extend the cheap credit being offered to them by the central bank, then the economy grows very slowly, if at all. This happened in the U.S. during the early 1930s.

U.S. banks currently hold record amounts of mortgage-related assets on their books. If the housing market were to go into a deep recession resulting in massive mortgage defaults, the U.S. banking system could sustain huge losses similar to what the Japanese banks experienced in the 1990s. If this were to occur, the Fed could cut interest rates to zero but it would have little positive effect on economic activity or inflation.

Short of the Fed depositing newly-created money directly into private sector accounts, I suspect that a deflation would occur under these circumstances. Again, crippled banking systems tend to bring on deflations. And crippled banking systems seem to result from the bursting of asset bubbles because of the sharp decline in the value of the collateral backing bank loans.

Hope this helps,
Paul

Paul L. Kasriel
Sr. V.P. and Director of Economic Research
The Northern Trust Company
50 South LaSalle Street
Chicago, IL 60603shame on you using this email to back up every lame deflation claim you make. what does this have to do with your claim a decline in the velocity of money = deflation? following your point that "Shostak thinks its a useless idea" meaning velocity of money data don't = deflation. don't just cover your bases, make up your mind.


a portion of the followup interview...

Mish: What if Bernanke cuts interest rates to 1 percent?
Kasriel: In a sustained housing bust that causes banks to take a big hit to their capital it simply will not matter. This is essentially what happened recently in Japan and also in the US during the great depression.

Mish: Can you elaborate?
Kasriel: Most people are not aware of actions the Fed took during the great depression. Bernanke claims that the Fed did not act strong enough during the great depression. This is simply not true. The Fed slashed interest rates and injected huge sums of base money but it did no good. More recently, Japan did the same thing. It also did no good. If default rates get high enough, banks will simply be unwilling to lend which will severely limit money and credit creation.good quote and good point. but timing is everything. maybe i'm wrong but i get the idea from reading the info here on itulip that the fed waiting too long in the 1930s and the boj too long in the 1990s. someone help me out here but i think the case is made in the deflation piece here.


No one to date has countered this logic. Not a single person. People believe in the Fed's ability to inflate. I don't for the reasons above. it ain't that simple. as this red pill piece says, if the collapse of the fire econ gets out of control, yes we get asset price deflation. but in the usa that means commodity price inflation. your analysis is primitive.


Japan tried and failed. Bernanke will as well.
1) banks have to be willing to lend
2) consumers and corporations have to be willing to borrow

In a big recession with falling corporate profits and rising bankruptcies in both consumer and corporate sectors neither is likely and all it takes is one.think you mean 'either is likely' but again, where's the evidence? the numbers? i know you're new here but we're into evidence not positions. and don't get offended because we do this to people with credentials.


You are of course free to disagree. But I prefer to see a good theory as to why. As far as I am concerned unless you can come up with a better theory you are the one doing the hand waving.i guess i've swallowed the red pill. i see all the fire economy machinery. ugh!

Mish[/quote]

Rajiv
09-26-07, 11:02 PM
Banks are an important transmission mechanism between the central bank and the private economy. If the banks are unable or unwilling to extend the cheap credit being offered to them by the central bank, then the economy grows very slowly, if at all. This happened in the U.S. during the early 1930s.

Mish: What if Bernanke cuts interest rates to 1 percent?
Kasriel: In a sustained housing bust that causes banks to take a big hit to their capital it simply will not matter. This is essentially what happened recently in Japan and also in the US during the great depression.

Mish: Can you elaborate?
Kasriel: Most people are not aware of actions the Fed took during the great depression. Bernanke claims that the Fed did not act strong enough during the great depression. This is simply not true. The Fed slashed interest rates and injected huge sums of base money but it did no good.

In Support of this argument is the following piece of history
Climbing Out of the Great Depression (http://econ161.berkeley.edu/TCEH/Slouch_Climb16.html)


What was Roosevelt's "New Deal"?

First, it was a unique moment in American political history. Usually American politics is the politics of gridlock. James Madison and company constructed the American political system so that it would be broken by design: maneuvering programs and policies through several layers of committees, two legislative houses, past the president, and into execution is very complex, and overwhelming procedural obstacles can be erected by determined opponents at almost every step along the path. Legislative majorities for one party or the other in either house of the legislature are almost always small. American is governed by increments, from the center. Between 1900 and 1950 there were times when one party had a solid majority in the House, but its majority in the Senate then was small.

The elections of the 1930s were different. Roosevelt won 59 percent of the vote in 1932--an eighteen percentage-point margin over Herbert Hoover. Congress swung heavily Democratic in both houses. The 1930s would see Democratic political dominance in the congress to an extent never before seen since the Civil War. For the first and only time, the president and his party had unshakable working majorities in both houses of the legislature.

http://econ161.berkeley.edu/Graphics/gif_files/PageMill_Resources/image8.gif

But the new majority in congress had no idea what it was to do. It was looking for direction from the newly-elected president: whatever Roosevelt sent down, the congress would probably pass.

Roosevelt had no idea what he was to do, either. But he did have a conviction that he could do something important. So was born the strategy of the New Deal: try everything you can think of to cure the depression; drop and abandon the things that do not seem to be working; push the things that do seem to be working. And the important thing was action to change how America worked for two reasons. First because action would raise hopes, and as Roosevelt said in his inaugural address:


Let me assert my firm belief that the only thing we have to fear is fear itself--nameless, unreasoning, unjustified terror.

Second because the old way of doing things was clearly broken:


We are stricken by no plague of locusts. Plenty is at our doorstep, but a generous use of it languishes in the very sight of the supply. Primarily this is because rulers of the exchange of mankind's goods have failed through their own stubbornness and their own incompetence, have admitted their failure, and have abdicated.... The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths.

.
.
.
Also on May 18, President Roosevelt submitted to congress the center-piece of his first hundred days: the National Industrial Recovery Act, or NIRA.


Businesses won the ability to collude--to draft "codes of conduct" that would make it easy to maintain relatively high prices, and to "plan" to match captacity to demand.
Socialist-leaning planners won the requirement that the government--the National Recovery Administration, or NRA--approve the industry-drafted plans.
Labor won the right to collective bargaining, and the right to have minimum wages and maximum hours incorporated into the industry-level plans.
Spenders won some $3.3 billion in public works.


But what did it all add up to? The NIRA broke the back of expectations of future deflation. The creation of deposit insurance and the reform of the banking system made savers willing to trust their money to the banks again, and began the reexpansion of the money supply. Corporatism and farm subsidies spread the pain of the Great Depression to some extent. These three policy moves kept things from getting worse, and probably made things somewhat better.

But the rest of Roosevelt's "hundred days"? It is not clear whether the balance sheet of the rest of the hundred days is positive or negative. The "economy" bill that cut spending and relief did harm. Much of financial market regulation (save deposit insurance) was simply irrelevant to the Great Depression. Farm subsidies set the American government on a path that would prove expensive and counterproductive for the next sixty years.

More important, perhaps, people relatively soon decided that they did not like the combination of "corporatist" government-business cooperation and business collusion embodied in the NRA. Consumers complained that the NRA raised prices. Workers complained that it gave them insufficient voice. Businessmen complained that the government was telling them what to do. Progressives complained that the NRA created monopoly. Spenders worried that collusion among businesses raised prices, reduced production, and increased unemployment. A committee to study the NRA headed by progressive lawyer Clarence Darrow denounced the NRA for promoting monopoly, urged a return to free competition, and then for good measure denounced competition as "savage and wolfish" and called for socialism: government nationalization of industry.

In May 1935 the Supreme Court unanimously declared the NIRA and its implementing agency, the NRA, unconstitutional. Roosevelt's experiment with "corporatism"--which crusty Democrats like Senator Carter Glass denounced as "the utterly dangerous effort of the federal government at Washington to transplant Hitlerism to every corner of this nation" was over. It was not success.

By the end of 1933 Roosevelt had shifted his attention to monetary matters: recovery was to be promoted by raising the prices of commodities in dollars, and the prices of commodities in dollars were to be raised by devaluing the dollar in terms of gold. By the end of January 1934 Roosevelt fixed the value of the dollar at 1/35 of a (troy) ounce of gold, fifty-nine percent of its pre-1933 gold-standard parity. But the full-fledged policy of monetary inflation and mammoth fiscal deficits that might have pulled the country out of the Great Depression quickly--that did pull Germany under Hitler out of the Great Depression quickly--was not tried. 1934 was a better economic year than 1933, 1935 was better than 1934, and 1936 was better than 1935, but not by much.

The slide in which each year was worse than the one before had been ended by the Depression. Some ground had been regained. But happy days were not here again.
.
.
Winners and Losers from the Depression:

Workers who kept their jobs, even with reduced hours, and financiers whose money was invested in bonds prospered during the Depression. Their nominal incomes in dollars dropped, but prices dropped even more: the baskets of goods they could buy increased. Farmers, workers who lost their jobs, and entrepreneurs who had bet their money on continued prosperity were the big losers of the Depression. Production was a third less than normal and the distribution of income had shifted toward those who kept steady employment or who had invested their financial wealth conservatively. As a result, at the nadir the standard of living of losers taken all together was perhaps half of what it had been in 1929.

Mish
09-26-07, 11:34 PM
Sure we will have pull backs and tighter money as it will clean out a few highly leveraged speculators that can’t hold on for the next fire phase, but don’t count on a long term deflation cycle.

Why not?
There is too much value left in the US not to have another fire economy expansion. Value is in US infrastructure ownership, to be purchased/operated by institutional investors and foreigners and that will fuel the next fire economy.
The economy arsonist are busy laying the ground work for the next match to be lit http://www.itulip.com/forums/showthread.php?p=9140#post9140 to start another phase of the fire economy.
Today as one example, government and companies are making plans for the next fire economy phase at the Waldorf Astoria.http://www.euromoneyseminars.com/default.asp?Page=102&eventid=ELE845&eventmenu=true&eventpassed=brochure
Take companies like BAM getting ready for future infrastructure opportunities.

<!-- toctype = X-unknown --><!-- toctype = text --><!-- text -->http://www.brookfield.com/newsroom/pressreleases/r2007/r2007-07-31.asp

How does foreigners buying US infrastructure
1) create jobs for the average Joe
2) Keep the average Joe in his house
3) prevent lots of small businesses (nail salons restaurants etc) from going bankrupt
4) Pay the overhead at large corporations like Lowe's Target Home Depot that have overexpanded
5) etc etc

even assuming such a wave of selling infrastructure were to occur. The big problem (for now) is
a) consumer debt
b) corporate debt
c) corporate over expansion
d) excessive leverage

So IF selling infrastructure occurred how does it address the above issues.

A second problem is assuming foreigners would want to buy much of our crumbling infrastructure in the first place. Not that it can't happen but didn't we just burn them tremendously on CDOs etc. Perhaps that have learned a lesson.

A 3rd and not insignificant problem is determining a fair price for it.

A 4th problem in say selling roads or whatever is that tolls will have to be charged where perhaps no tolls were charged before so in essence consumer costs will go up.

A 5th problem is believing that can happen soon enough to matter

a 6th problem is assuming the government would do this on a massive enough scale to matter in the first place

But even ignoring #2-#6 I fail to see how it solves any problems.

Mish

EJ
09-26-07, 11:38 PM
In Support of this argument is the following piece of history
Climbing Out of the Great Depression (http://econ161.berkeley.edu/TCEH/Slouch_Climb16.html)

Many forget it was the event of The Great Depression that created the political mandate to prevent a repeat: give us activist central banks and inflationary government policy! So here it is.

It's an election year. There may be recession, if that's useful to get Hillary elected as it was to get Bill elected, but no catastrophe. After that, who knows.

If you are in business, I will give you an analogy. Imagine you are VP Sales. One day your boss, the CEO, comes into your office. He says, "We are very close to closing a round of funding. If we close the funding we may survive to be a great company and make everyone rich. If we do not close the funding we will fail and never know. It's up to you."

Of course the VP Sales has the pipeline to make a huge quarter if he jams on his guys to close all the deals, but he'll blow the rest of the year.

That's what's going on now in the Fed and US government. Take it from an ex-CEO and ex-VP Sales.

p.s. No, I never did this myself, but I have had it done to me.

EJ
09-26-07, 11:53 PM
How does foreigners buying US infrastructure
1) create jobs for the average Joe
2) Keep the average Joe in his house
3) prevent lots of small businesses (nail salons restaurants etc) from going bankrupt
4) Pay the overhead at large corporations like Lowe's Target Home Depot that have overexpanded
5) etc etc

even assuming such a wave of selling infrastructure were to occur. The big problem (for now) is
a) consumer debt
b) corporate debt
c) corporate over expansion
d) excessive leverage

So IF selling infrastructure occurred how does it address the above issues.

A second problem is assuming foreigners would want to buy much of our crumbling infrastructure in the first place. Not that it can't happen but didn't we just burn them tremendously on CDOs etc. Perhaps that have learned a lesson.

A 3rd and not insignificant problem is determining a fair price for it.

A 4th problem in say selling roads or whatever is that tolls will have to be charged where perhaps no tolls were charged before so in essence consumer costs will go up.

A 5th problem is believing that can happen soon enough to matter

a 6th problem is assuming the government would do this on a massive enough scale to matter in the first place

But even ignoring #2-#6 I fail to see how it solves any problems.

Mish

Your thoughtful response brings into focus the fact that we have been developing in our respectful but open crucible of criticism the idea that the next instantiation of the FIRE Economy is alternative energy and infrastructure focused. To anyone new here, that probably sounds nuts. But the political and behavioral economic determinants and indicators (e.g., the pending legislation that bill has diligently dug up) point in that direction, plus it fits the criteria we have defined.

I know it must seem like we talk in a weird language here, but we've been at this for going on ten years, so please bear with us. No mean spiritedness here but due diligence.

bill
09-27-07, 12:05 AM
How does foreigners buying US infrastructure
1) create jobs for the average Joe
2) Keep the average Joe in his house
3) prevent lots of small businesses (nail salons restaurants etc) from going bankrupt
4) Pay the overhead at large corporations like Lowe's Target Home Depot that have overexpanded
5) etc etc

even assuming such a wave of selling infrastructure were to occur. The big problem (for now) is
a) consumer debt
b) corporate debt
c) corporate over expansion
d) excessive leverage

So IF selling infrastructure occurred how does it address the above issues.

A second problem is assuming foreigners would want to buy much of our crumbling infrastructure in the first place. Not that it can't happen but didn't we just burn them tremendously on CDOs etc. Perhaps that have learned a lesson.

A 3rd and not insignificant problem is determining a fair price for it.

A 4th problem in say selling roads or whatever is that tolls will have to be charged where perhaps no tolls were charged before so in essence consumer costs will go up.

A 5th problem is believing that can happen soon enough to matter

a 6th problem is assuming the government would do this on a massive enough scale to matter in the first place

But even ignoring #2-#6 I fail to see how it solves any problems.

Mish

Please join the Select group so you can read many of my postings and get the answers you seek.
Look at Bear Stearns potential purchasers, seems to be a lot of interest when the deal has real value.
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article2540453.ece


Shares in Bear Stearns surged 8 per cent on Wall Street yesterday on rumours that America’s fifth-biggest bank is in serious talks over the sale of a 20 per cent stake to investors including Warren Buffett.



It is thought that the Bank of America, Wachovia, the US mortgage lender, and two Chinese groups, Citic Group and China Construction Bank, were also interested in grabbing a stake in Bear Stearns.
<!--#include file="m63-article-related-attachements.html"-->

Mish
09-27-07, 12:37 AM
Alternative energy is far easier to understand. Assume for a second that we could harness fusion and have free energy that fueled the electric grid as well as all means of transportation.

We don't need no stinking wars in Iraq.
Homeowners heat and air condition their houses for free.
Big cars? No problem.
Personalized flying saucers?
Why not?

I believe if the govt left energy alone we would be much further along. The market will solve the energy crisis if govt would ever let it. Instead we have ethanol policies driving up the price of corn and everything that eats corn.

Heck if the govt would just legalize hemp it would be of far more use in producing biofuels that corn ever will. And it does not have to be planted every year either.

I am not an energy guy so perhaps this is far off base, but what if instead of wasting $trillions in Iraq the US purchased a bunch of nuclear reactors and heated the earth extracting oil from oil shale. Could that have been done for the amt of money we blew?

Still that is a huge cost. To really have an effect we need something that is nearly free. Free energy would certainly get things humming.

Selling off pieces of infrastructure doesn't work in my mind. The problem with alternative energy is that we really don't seem to be close by most peoples assessment.

The credit problem is arguably now.
Mish

GRG55
09-27-07, 05:43 AM
How does foreigners buying US infrastructure
1) create jobs for the average Joe
2) Keep the average Joe in his house
3) prevent lots of small businesses (nail salons restaurants etc) from going bankrupt
4) Pay the overhead at large corporations like Lowe's Target Home Depot that have overexpanded
5) etc etc

even assuming such a wave of selling infrastructure were to occur. The big problem (for now) is
a) consumer debt
b) corporate debt
c) corporate over expansion
d) excessive leverage

So IF selling infrastructure occurred how does it address the above issues.

A second problem is assuming foreigners would want to buy much of our crumbling infrastructure in the first place. Not that it can't happen but didn't we just burn them tremendously on CDOs etc. Perhaps that have learned a lesson.

A 3rd and not insignificant problem is determining a fair price for it.

A 4th problem in say selling roads or whatever is that tolls will have to be charged where perhaps no tolls were charged before so in essence consumer costs will go up.

A 5th problem is believing that can happen soon enough to matter

a 6th problem is assuming the government would do this on a massive enough scale to matter in the first place

But even ignoring #2-#6 I fail to see how it solves any problems.

Mish

Mish: Agree that it won't "solve" any problems, but the selling of "infrastructure" would seem to be another step in the slow transfer of wealth from debtor to creditor already underway.

As you have previously pointed out (on your blog), with each passing day there is less incentive for foreigners to buy/hold US$ financial instruments, and increasing incentive to exchange accumulating $'s for something more tangible. The actions of Arab GCC SWFs (three Canadian natural gas companies, the Dubai, Nasdaq & Qatar menage a trois over the OMX, a bid for UK's Sainsbury supermarkets, the thwarted Dubai Ports bid - just a few recent examples) are credible indications that you are absolutely correct in this regard.

If they are politically impeded from directly purchasing US assets, China and the Arabs have clearly signalled they will invest through intermediaries (Blackstone, Carlyle) or exchange $'s for another fiat currency and go hunting in the UK, Europe, Canada, Australia, wherever. Given they are unlikely to covet McMansions, some of the reasons infrastructure ownership transfer might occur include:

Much infrastructure is in public hands, suffers from years of under-investment, and therefore could transfer at bargain prices (civil servants are dealing with OPM, so what do they care?);
I expect some will transfer at zero initial purchase price under the rubric of "public-private partnerships", a fashionable concept heartily embraced by Third Way Labourites and Democrats ("...a splendid idea, Madam President...");
Public officials see a way to avoid once again the immediate need to raise taxes, deflecting the potential ire of voters. Officials seeking re-election can campaign on the dual platform of fiscal rectitude and safer bridges. Given a choice between higher taxes - to fix the crumbling infrastructure - or burning the remaining furniture to heat the house, which way do you think debt-burdened voters will lean?
Tolls will most certainly be charged. Perhaps another example of Todd Harrison's inflation in things we need, deflation in things we want?
Wall St (and the City) can generate handsome advisory and transaction fees from the process - possibly the most compelling reason to believe in this scenario (?). The tolls will be no problem for them as long as the Hamptons heliport isn't privatized.
It may not happen soon enough, or on a massive enough scale, to matter. But then what really matters? Fixing the real underlying problems or finding another way to generate outsized income for the high priests of the FIRE economy?
To turn it into a full blown mania, late in the process Wall St will have to invent a mechanism for the public to participate in a big way. My guess is that Wall St will generate another round of transaction fees as the assets are distributed to the public (and what's left of their pension plans) at inflated prices. For Wall St. this is the reason to prevent China and the Arabs from direct ownership (they never sell), and force them to funnel their money through Blackstone et. al.In respect to the larger issue of deflation vs inflation, perhaps best for all of us to keep both our eyes and mind open - the arguments are compelling on both sides, and the potential for a "monetary policy accident" that accelerates the deflationary scenario is "currently elevated" (to inject a little Fedspeak).

Charles Mackay
09-27-07, 10:26 AM
I'm not sure that all this mental masturbation over whether there will be hyperinflation or deflation and default (in US dollar terms) is useful... anymore than discussing whether there will be inflation or deflation in Peso terms.

Year 2000 was when it all rolled over. Now, if you chart stocks or houses or bonds in terms of monetary metal you will see that we clearly topped in 2000-2001. All things paper are now going down in value. If you will just hold monetary metal until houses sell for 100 oz of gold and the DJIA sells for 1 oz of gold you will then know when the bottom occurs and the next upswing is in progress.

BTW, Michael Hudson makes a nice analysis but he sure is a poor investor. "He and his wife are in CD's" he says. Well, that paper is going into the toilette!

FRED
09-27-07, 10:47 AM
I'm not sure that all this mental masturbation over whether there will be hyperinflation or deflation and default (in US dollar terms) is useful... anymore than discussing whether there will be inflation or deflation in Peso terms.

Year 2000 was when it all rolled over. Now, if you chart stocks or houses or bonds in terms of monetary metal you will see that we clearly topped in 2000-2001. All things paper are now going down in value. If you will just hold monetary metal until houses sell for 100 oz of gold and the DJIA sells for 1 oz of gold you will then know when the bottom occurs and the next upswing is in progress.

BTW, Michael Hudson makes a nice analysis but he sure is a poor investor. "He and his wife are in CD's" he says. Well, that paper is going into the toilette!

Yep. Time to update our 2001 Gold/DOW chart:


http://www.itulip.com/dowgold1900.gif

Ok, so which of you wants the title "Chief Curmudgeon" added to your title? You or Jim Nickerson?

Charles Mackay
09-27-07, 12:14 PM
Ok, so which of you wants the title "Chief Curmudgeon" added to your title? You or Jim Nickerson?

Hey, I'll take it since I'm a big H.L. Mencken fan! :D

I will follow this post with my R.E/GD chart as soon as I resize it....

FRED
09-27-07, 12:22 PM
Hey, I'll take it since I'm a big H.L. Mencken fan! :D

I will follow this post with my R.E/GD chart as soon as I resize it....

You got it!

Now who wants Chief Conspiracy Theorist?

Charles Mackay
09-27-07, 12:29 PM
OK, sorry that this will look like a "brag and moan" post but I did nail this one pretty good and part of it was luck. I sold my Seattle house in June 2001 and put the proceeds into gold based on the '69 top in Median Existing Houses priced in gold. So far it is working out precisely as forecast.

p.s. I see that John Rubino posts here now. I guess he will now know who Charles Mackay is because I corresponded with him on this information a few years ago ;) ... Hi John!

Anyway, just wait for 100 oz median existing houses and then buy!
Charles


http://webpages.charter.net/bigboard/re.jpg

GRG55
09-27-07, 12:34 PM
OK, sorry that this will look like a "brag and moan" post but I did nail this one pretty good and part of it was luck. I sold my Seattle house in June 2001 and put the proceeds into gold based on the '69 top in Median Existing Houses priced in gold. So far it is working out precisely as forecast.

p.s. I see that John Rubino posts here now. I guess he will now know who Charles Mackay is because I corresponded with him on this information a few years ago ;) ... Hi John!

Anyway, just wait for 100 oz median existing houses and then buy!
Charles


http://webpages.charter.net/bigboard/re.jpg

Would you care to plot this based on the price of a median Seattle home? The price of which I understand is still defying gravity. Another conumdrum! Call the Maestro...

Charles Mackay
09-27-07, 12:43 PM
Would you care to plot this based on the price of a median Seattle home? The price of which I understand is still defying gravity. Another conumdrum! Call the Maestro...

GRG, my former Seattle house had a 50% increase after I sold in 2001 but gold has almost tripled. The math is still on my side by a large margin.

bart
09-27-07, 12:48 PM
Mish: What if Bernanke cuts interest rates to 1 percent?
Kasriel: In a sustained housing bust that causes banks to take a big hit to their capital it simply will not matter. This is essentially what happened recently in Japan and also in the US during the great depression.

Mish: Can you elaborate?
Kasriel: Most people are not aware of actions the Fed took during the great depression. Bernanke claims that the Fed did not act strong enough during the great depression. This is simply not true. The Fed slashed interest rates and injected huge sums of base money but it did no good. More recently, Japan did the same thing. It also did no good. If default rates get high enough, banks will simply be unwilling to lend which will severely limit money and credit creation.

No one to date has countered this logic. Not a single person. People believe in the Fed's ability to inflate. I don't for the reasons above.


I've countered it a few times but not here on iTulip.

Although Kasriel is correct about base money being pumped by the Fed during the Great Depression (the light blue line below) and the Fed tried to loosen up on credit, that was pretty much all they did. They did not, for example, print cash (about 1/2 of M1) as is shown by the following chart:


http://www.nowandfutures.com/download/m1m3_1920-1940.png


They also allowed many thousands of banks to fail rather than mount rescue operations or encourage Congress to do the same. They didn't make that mistake in the '80s or '90s or recently.

They were also quite slow in lowering the discount rate from its 6% peak in 1929. It didn't get down to 2.5% until mid 1931, and then actually was moved back up to 3.5% until mid 1933.
There's more data like this too.

On Japan, I maintain that Japan simply did not try very hard (or hard enough) to offset the deflation. When they really did pump in the period 2002-3, the reaction was unmistakable - the Nikkei and real estate, etc. did bottom and start back up.

http://www.nowandfutures.com/images/boj_money.png



Basically, I believe Bernanke is much closer to being right than Mr. Kasriel... and its the only broad area in which I disagree with Mr. Kasriel.

jk
09-27-07, 12:54 PM
mish,
i just want to add one point to grg55's excellent exposition of the infrastructure argument above: there is infrastructure - highways, bridges, electrical transmission lines, sewers, water lines, gas lines, etc - in every congressional district. and there are infrastructure contractors in every district. when the economy is going into the toilet and the fed has dropped rates to zero, don't you think uncle sugar is going to find some ways to spend money to prime the pump? ted stevens got a quarter billion dollar bridge to nowhere when the economy was doing fine. what do you think he might want if his local economy were sputtering?

p.s. i know an entity that is always willing to borrow, and which can always find a lender. the government. the consumer is tapped out, corporations are leveraging up as part of private equity deals or to avoid a private equity deal. the government has plenty of debt, but it can always issue more, and if necessary that debt can be monetized. so your condition of a willing borrower and lender is met by uncle sam.

Rajiv
09-27-07, 12:59 PM
My question to you is "How did you time the 'Peak' so accurately?"

Charles Mackay
09-27-07, 01:05 PM
My question to you is "How did you time the 'Peak' so accurately?"

Rajiv, if you are talking to me... I guess it was that devil thing again... 666 oz of gold..same as in June 1969 :eek: ....kidding

bill
09-27-07, 01:35 PM
Alternative energy is far easier to understand. Assume for a second that we could harness fusion and have free energy that fueled the electric grid as well as all means of transportation.

We don't need no stinking wars in Iraq.
Homeowners heat and air condition their houses for free.
Big cars? No problem.
Personalized flying saucers?
Why not?

I believe if the govt left energy alone we would be much further along. The market will solve the energy crisis if govt would ever let it. Instead we have ethanol policies driving up the price of corn and everything that eats corn.

Heck if the govt would just legalize hemp it would be of far more use in producing biofuels that corn ever will. And it does not have to be planted every year either.

I am not an energy guy so perhaps this is far off base, but what if instead of wasting $trillions in Iraq the US purchased a bunch of nuclear reactors and heated the earth extracting oil from oil shale. Could that have been done for the amt of money we blew?

Still that is a huge cost. To really have an effect we need something that is nearly free. Free energy would certainly get things humming.

Selling off pieces of infrastructure doesn't work in my mind. The problem with alternative energy is that we really don't seem to be close by most peoples assessment.

The credit problem is arguably now.
Mish

I was hoping you would take the time to study the facts and details before drawing a 32 minute conclusion.
I do believe the economy will slide into a slow period similar to 01-02 before we see the cranking up of the next fire economy as I stated in my above post. There is no quick fix to the immediate credit problem, however when investors see value as I stated below there is not a lack of purchasing power.
By using PPP http://www.fhwa.dot.gov/PPP/ initially it is not selling infrastructure it is a partnership and the investors are getting “REAL ASSETS” not paper.
Many projects that fit the PPP criteria have already gone threw engineering, public hearing process, finalization and are ready for funding.
A few deals are already funded and under construction see page 25 in the June 07 report.http://www.usc.edu/schools/sppd/keston/research/index.html
By the way nicely said GRG55.

zoog
09-27-07, 02:24 PM
Now who wants Chief Conspiracy Theorist?

You should just assign it at random to make it look like a conspiracy.

zoog
09-27-07, 02:38 PM
First I'd like to say to Charles Mackay that I like this chart. Had never really thought to make that comparison before. Nice call.


Would you care to plot this based on the price of a median Seattle home? The price of which I understand is still defying gravity. Another conumdrum! Call the Maestro...

The Seattle (and Portland) balloon is losing some altitude (but don't tell the people in the gondola).

Interesting chart from the Seattle bubble blog (http://seattlebubble.com/blog/) comparing Seattle and Portland with Los Angeles and San Diego, using the Case-Shiller indices. There is a time-shift in the chart, using known recent history of the drops in southern California to imply what may happen in the future up here.

http://seattlebubble.com/blog/wp-content/uploads/2007/09/case-shillerhpi_westcoast200707-tn.png (http://seattlebubble.com/blog/wp-content/uploads/2007/09/case-shillerhpi_westcoast200707.png)

(Sorry, not trying to derail this into a housing discussion.)

EJ
09-27-07, 03:10 PM
mish,
i just want to add one point to grg55's excellent exposition of the infrastructure argument above: there is infrastructure - highways, bridges, electrical transmission lines, sewers, water lines, gas lines, etc - in every congressional district. and there are infrastructure contractors in every district. when the economy is going into the toilet and the fed has dropped rates to zero, don't you think uncle sugar is going to find some ways to spend money to prime the pump? ted stevens got a quarter billion dollar bridge to nowhere when the economy was doing fine. what do you think he might want if his local economy were sputtering?

p.s. i know an entity that is always willing to borrow, and which can always find a lender. the government. the consumer is tapped out, corporations are leveraging up as part of private equity deals or to avoid a private equity deal. the government has plenty of debt, but it can always issue more, and if necessary that debt can be monetized. so your condition of a willing borrower and lender is met by uncle sam.

Mish is in the same camp as Rick Ackerman. I wonder if by reading more economics they can better appreciate how government becomes the demand engine of last resort. Keep in mind also that our thinking here is informed by concepts like the Bubble Cycle (http://www.itulip.com/forums/showthread.php?p=2405#post2405) and more recently the concept of the FIRE Economy has been added. These concepts do not exist in Mish's, Rick's, or Gary North's thinking, so it's understandable that the idea of an infrastructure bubble is hard for them to swallow.

Mish
09-27-07, 03:52 PM
mish,
i just want to add one point to grg55's excellent exposition of the infrastructure argument above: there is infrastructure - highways, bridges, electrical transmission lines, sewers, water lines, gas lines, etc - in every congressional district. and there are infrastructure contractors in every district. when the economy is going into the toilet and the fed has dropped rates to zero, don't you think uncle sugar is going to find some ways to spend money to prime the pump? ted stevens got a quarter billion dollar bridge to nowhere when the economy was doing fine. what do you think he might want if his local economy were sputtering?

p.s. i know an entity that is always willing to borrow, and which can always find a lender. the government. the consumer is tapped out, corporations are leveraging up as part of private equity deals or to avoid a private equity deal. the government has plenty of debt, but it can always issue more, and if necessary that debt can be monetized. so your condition of a willing borrower and lender is met by uncle sam.

Japan built bridges to nowhere but it did not help.
All Japan got out of it was monstrous government debt somewhere between 150-250% of GDP depending on what source you believe.

It did not cure deflation, in fact it prolonged it. US banks are now doing the same: refusing to write off worthless debt.

Perhaps the Fed drags this out for another 10 years. That does not necessarily create another bubble nor does it fix existing credit problems.

Investors getting "real assets" does not help the masses and the problem is with the masses not the investor class. The problem is consumer credit and corporate credit.

Taking on massive government debt did not fix problems with corporate debt in Japan.

The problem here is much worse with leveraged financial institutions on top of massive consumer debt. There is simply no way to pay that debt back that I can see. If debt can't be serviced it will be defaulted on.

The one thing we agree on is the Fed will try.
Deflation is a psychological thing. If consumers and banks become risk adverse there is little that can be done about it. The consumer is still 3/4 of the economy.

Mish

0tr
09-27-07, 04:07 PM
OK, sorry that this will look like a "brag and moan" post but I did nail this one pretty good and part of it was luck. I sold my Seattle house in June 2001 and put the proceeds into gold based on the '69 top in Median Existing Houses priced in gold. So far it is working out precisely as forecast.

p.s. I see that John Rubino posts here now. I guess he will now know who Charles Mackay is because I corresponded with him on this information a few years ago ;) ... Hi John!

Anyway, just wait for 100 oz median existing houses and then buy!
Charles


http://webpages.charter.net/bigboard/re.jpg



Wow!
This looks like a 'best of' category. Is there a 'best of' section in itulip? Can this be nominated for 'best of' status?

bart
09-27-07, 04:39 PM
My question to you is "How did you time the 'Peak' so accurately?"


You dare to question the great Ka-Poom parallel, aka "The Hard vs. Soft Asset cycle" and invented by yours truly? :eek: :rolleyes: ;)




http://www.nowandfutures.com/images/dow_gold_oil_crb1900-current.png

GRG55
09-27-07, 04:50 PM
GRG, my former Seattle house had a 50% increase after I sold in 2001 but gold has almost tripled. The math is still on my side by a large margin.

Well done!! Gold did NOT keep up with the price of the house I sold north of the border in April 2001...

EJ
09-27-07, 05:04 PM
You dare to question the great Ka-Poom parallel, aka "The Hard vs. Soft Asset cycle" and invented by yours truly? :eek: :rolleyes: ;)




http://www.nowandfutures.com/images/dow_gold_oil_crb1900-current.png

This very interesting analysis implies the following labels:

1920 - 1929: Post WWI FIRE Economy V1.0
1930 - 1945: FIRE Economy V1.0 Crash
1946 - 1967: Post WWII FIRE Economy V2.0
1968 - 1982: FIRE Economy V2.0 Crash
1983 - 2000: Post Cold War FIRE Economy V3.0
2001 - ?: FIRE Economy V3.0 Crash

Looked at in this way, the housing bubble was part of the dissolution of the latest version of the FIRE Economy and that it's time for another world war.

Andreuccio
09-27-07, 05:22 PM
Wow!
This looks like a 'best of' category. Is there a 'best of' section in itulip? Can this be nominated for 'best of' status?

I was thinking along similar lines. There's a lot of great info here at iTulip. Most of it I read and hope to remember. This one I bookmarked.

GRG55
09-27-07, 05:30 PM
Mish is in the same camp as Rick Ackerman. I wonder if by reading more economics they can better appreciate how government becomes the demand engine of last resort. Keep in mind also that our thinking here is informed by concepts like the Bubble Cycle (http://www.itulip.com/forums/showthread.php?p=2405#post2405) and more recently the concept of the FIRE Economy has been added. These concepts do not exist in Mish's, Rick's, or Gary North's thinking, so it's understandable that the idea of an infrastructure bubble is hard for them to swallow.

Hmmm. Mish strikes me as a pretty diligent analyst, so I am having some trouble accepting that first part... Seems self explanatory - if the Fed fed (no pun intended) banks can't/won't push that stuff out their doors, and the dang fur'iners stop buying Treasuries (and everything else), the Fed will have to buy every last issue of whatever duration and get the liquidity into the economy through gu'mint programs. What jk describes is undoubtedly going to happen (continue?), but probably biased to new-build (it's a sexier vote getter, no?) as opposed to re-build - isn't that why the current crumbling infrastructure situation was allowed to develop? The thing that is missing with direct programs is an adequate income skim for the Wall St. rentiers. ;)

Today's 2.8 cover on the 5 year auction suggests there is no imminent danger of this scenario, however.

GRG55
09-27-07, 05:43 PM
This very interesting analysis implies the following labels:

1920 - 1929: Post WWI FIRE Economy V1.0
1930 - 1945: FIRE Economy V1.0 Crash
1946 - 1967: Post WWII FIRE Economy V2.0
1968 - 1982: FIRE Economy V2.0 Crash
1983 - 2000: Post Cold War FIRE Economy V3.0
2001 - ?: FIRE Economy V3.0 Crash

Looked at in this way, the housing bubble was part of the dissolution of the latest version of the FIRE Economy and that it's time for another world war.

Is there an obvious analogue to the housing/credit bubble within the early stages of previous long cycle FIRE economy crashes?

As for war, I think you are in good company. Isn't that one of the things that Marc Faber keeps bringing up?

jk
09-27-07, 05:50 PM
The thing that is missing with direct programs is an adequate income skim for the Wall St. rentiers. ;)


you, yourself, pointed to some of the opportunities for the income skim. the money goes out as part of ppp's, or funds projects which are then packaged and sold or leased to private operators who run them and extract rents. those deals will have i-bank advisors and are likely to produce debt instuments tied to the expected future income flows from the revenues, which generate further fees. then you'll have funds which hold infrastructure revenue bonds [these are for the public, i suppose], and eventually clo-like derivatives constructed from the bonds funding dicier projects. i would also expect various construction and material companies to be expanding, selling bonds, engaging in m+a, etc. there's always a way to generate fees.

GRG55
09-27-07, 05:56 PM
you, yourself, pointed to some of the opportunities for the income skim. the money goes out as part of ppp's, or funds projects which are then packaged and sold or leased to private operators who run them and extract rents. those deals will have i-bank advisors and are likely to produce debt instuments tied to the expected future income flows from the revenues, which generate further fees. then you'll have funds which hold infrastructure revenue bonds [these are for the public, i suppose], and eventually clo-like derivatives constructed from the bonds funding dicier projects. i would also expect various construction and material companies to be expanding, selling bonds, engaging in m+a, etc. there's always a way to generate fees.

I was referring to the direct government spending to contractors situation jk. But I never thought about the bond angle. Good point!

bill
09-27-07, 05:57 PM
you, yourself, pointed to some of the opportunities for the income skim. the money goes out as part of ppp's, or funds projects which are then packaged and sold or leased to private operators who run them and extract rents. those deals will have i-bank advisors and are likely to produce debt instuments tied to the expected future income flows from the revenues, which generate further fees. then you'll have funds which hold infrastructure revenue bonds [these are for the public, i suppose], and eventually clo-like derivatives constructed from the bonds funding dicier projects. i would also expect various construction and material companies to be expanding, selling bonds, engaging in m+a, etc. there's always a way to generate fees.

It’s like a real estate refinance play with plenty of equity to remodel and or build new as I said in my first post.http://www.itulip.com/forums/showthread.php?p=8414#poststop

Charles Mackay
09-27-07, 06:12 PM
Is there an obvious analogue to the housing/credit bubble in the previous long cycle FIRE economy crashes?

GRG, you are looking at EJ's chart of the paper bubbles of this century being perfectly corrected by the monetary metal. And you have seen my chart of real estate being perfectly corrected in real time. Why fight it? Credit bubbles will be perfectly deflated by the monetary metal all in the fullness of time. Trying to guess which political instruments (dollars, pesos, or Somalian "whatevers") will inflate or deflate is just pissing in the wind. Elites will separate you from your money if you play that game. You cannot know the answer to what they will do but you can know relative values and prosper nicely IMHO.



http://www.itulip.com/dowgold1900.gif

bart
09-27-07, 06:21 PM
This very interesting analysis implies the following labels:

1920 - 1929: Post WWI FIRE Economy V1.0
1930 - 1945: FIRE Economy V1.0 Crash
1946 - 1967: Post WWII FIRE Economy V2.0
1968 - 1982: FIRE Economy V2.0 Crash
1983 - 2000: Post Cold War FIRE Economy V3.0
2001 - ?: FIRE Economy V3.0 Crash

Looked at in this way, the housing bubble was part of the dissolution of the latest version of the FIRE Economy and that it's time for another world war.


Sad but true... the war and "mass human excitability" cycles I track show up strongly during the 2002-2012 period, and various other cycles like Kondratieff tie in quite well too.

The average cycle length since 1900 is about 16 years for what its worth, which would put the peak around 2016... but my gut says sooner.

Even the very off the beaten path weather cycle work by Professor Wheeler many decades ago ties in... and to "global warming" too.

http://www.nowandfutures.com/download/wheeler_weather_cycles.png

GRG55
09-27-07, 07:05 PM
GRG, you are looking at EJ's chart of the paper bubbles of this century being perfectly corrected by the monetary metal. And you have seen my chart of real estate being perfectly corrected in real time. Why fight it? Credit bubbles will be perfectly deflated by the monetary metal all in the fullness of time. Trying to guess which political instruments (dollars, pesos, or Somalian "whatevers") will inflate or deflate is just pissing in the wind. Elites will separate you from your money if you play that game. You cannot know the answer to what they will do but you can know relative values and prosper nicely IMHO.



http://www.itulip.com/dowgold1900.gif

Who said I was fighting it? Half-dozen years ago I couldn't spell "gold-bug", now even Mrs. GRG55 owns the shiny stuff (in her investment portfolio as well as her jewelry box). However, a 100% monetary metal position, as you seem to be advocating, is temperamentally unrealistic for this boy. Even if I placed that trade I know myself well enough that I wouldn't have the conviction to hold it - and lack of conviction is the main reason that Wall St elites can separate a fool from his money.

Clearly there are political responses and monetary shenanigans going on in this cycle that are unlike previous cycles (although my repeated reading of Galbraith's "The Great Crash" demonstrates an uncomfortably large number of similarities with today). Perhaps its just a facination with how this is unfolding - certainly the sequence to date has perfectly tracked history...inversion of the yield curve, subsequent steepening after the appropriate time from inversion, and now the collapse of the most egregious speculations. But what do 3 Billion people newly added to the global economy imply this time... ;)

EJ
09-27-07, 08:58 PM
Hmmm. Mish strikes me as a pretty diligent analyst, so I am having some trouble accepting that first part... Seems self explanatory - if the Fed fed (no pun intended) banks can't/won't push that stuff out their doors, and the dang fur'iners stop buying Treasuries (and everything else), the Fed will have to buy every last issue of whatever duration and get the liquidity into the economy through gu'mint programs. What jk describes is undoubtedly going to happen (continue?), but probably biased to new-build (it's a sexier vote getter, no?) as opposed to re-build - isn't that why the current crumbling infrastructure situation was allowed to develop? The thing that is missing with direct programs is an adequate income skim for the Wall St. rentiers. ;)

Today's 2.8 cover on the 5 year auction suggests there is no imminent danger of this scenario, however.

Diligent, indeed. But without traveling to Europe and Asia and Latin America and so on over decades, one has to speculate at what has been going on in those places and how they are evolving. Without having the opportunity to talk to actual leaders in the industries he is talking about (e.g., Finkel who runs a CDO company, Mayer whose wife was exec chairman of the IMF, Jim Rogers, etc.) one has no primary sources. Without experience running organizations, one has to speculate as to how institutional behavior impacts decision making.

Without primary sources or personal experience, one is limited to what one reads on the Web, and while one can do a great job of collecting that information, analyzing it and writing about it, so do many community members here. In fact, I'd argue that many here do better than most bloggers out there.

Further, many here have wide ranging professional experience in industries ranging from real estate to energy to finance to banking. Really, it's an incredible community. I feel honored every day to have so many members here with so much good sense, experience, and integrity.

To your question, government has since The Great Depression been given a political mandate to not have any more Great Depressions. WWII was the Keynesian public works project that brought the US out of The Great Depression. Personally, I'll take a bubble in infrastructure and alt energy over another world war.

GRG55
09-28-07, 06:28 AM
You got it!

Now who wants Chief Conspiracy Theorist?

Fred: There's a worthy submission from fogger over on the Why I Don't Believe in Peak Oil topic that should qualify for the above title... :)

Charles Mackay
09-28-07, 10:04 AM
Antal Fekete writes:

Can We Have Inflation And Deflation All At The Same Time?

http://news.goldseek.com/GoldSeek/1190991990.php

Jim Nickerson
09-28-07, 11:54 AM
Antal Fekete writes:

Can We Have Inflation And Deflation All At The Same Time?

http://news.goldseek.com/GoldSeek/1190991990.php

Charles,

Do you think what Fekete is writing is highly credible and likely or not?

If he is correct, what do you think one should do? Collect cash, and gold and silver coins and TBills?

c1ue
09-28-07, 01:22 PM
Wow I turn my attention elsewhere for 1 day and look what happens!

Very interesting discussion.

This might be too late - but all of the talk of GDII and Japan failed to note one major difference: the dollar as fiat currency.

In GDII - the dollar was not a fiat currency.

In Japan, the dollar was a fiat currency, but was not the fiat currency in the economy in question.

The developing thesis I am investigating is how much the fiat status of the dollar will affect policy/economic developments in the US in the next 10 years.

I actually would agree with Mish on the deflation view were the circumstances the same as before.

However, I would argue that since the US only holds a fraction of the actual dollars - specific fraction I don't know - there are 2 obvious actions that would result from the present US predicament:

1) Monetization of debt - after all, we're not just taking from our people, we're taking from non-voters too! (who also happen to hold a lot of our debt)

2) And due to 1), repudiation of the dollar due to monetization. A natural response when your debtor tries to weasel out. Dollar collapses, inflation increases due to both finished goods and raw material cost increases.

The thesis isn't about these events happening - it is about the speed.

mikew
09-28-07, 02:01 PM
heres an article about great depression 2

http://www.financialsense.com/editorials/petrov/2004/0902.html

basically says that china is the US of the great depression1 and that the current US will be the england

Charles Mackay
09-28-07, 02:34 PM
We are trying to determine (guess) whether the debt will be liquidated thru hyperinflation or default and depression ...a debate that has been raging for a very long time. There are a lot of variables in that equation and many of them are outside our domain of knowledge. What the Chinese will do?, what the OPEC countries will do?, what the exact nature of the credit default derivatives meltdown is? .. all unknown variables that can't be plugged in.

Then, on top of that we are taking it to the next level and asking if it goes inflation then what is the next bubble in the FIRE economy likely to be? If it goes deflation what are the safe havens likely to be?

Now, it seems to me that we are already in a perfectly good and solid trend RIGHT NOW that is maybe only 30% of the way along, and that is gold, commodities, and energy. A trend which is really just a different way of saying we're in a "propensity to hoard" market and it may last another decade or longer. It started in 2001 and is solidy supported by the demographics of a retiring 80 million baby boomers, the demographics of Chindia (they don't trust paper), and probably OPEC too.

If you look at the DJIA/Gold chart above, or my Houses/Gold chart, or the relative value of bonds, or fiat, or take your paper of choice, then you can see that all paper was overvalued. The bull market in paper and derivatives of paper is over. The propensity to hoard gold, commodities, and energy is just in the first innings.

Anyway, this is the way I'm playing it because it is working and I'm not smart enough to figure out the inflation/deflation debate.

BTW, gold is even record cheap in relation to energy. Take a look at my gold in barrels of oil chart below and note the record low price of gold valued in oil just before the blastoff in 2005. The commercials were heavily short according to the COT reports but if you were sitting in Riyadh you were probably saying I've got to get rid of this oil and turn it into cheap 6 barrel gold.:)




http://webpages.charter.net/bigboard/crude.jpg

Charles Mackay
09-28-07, 03:50 PM
Charles,

Do you think what Fekete is writing is highly credible and likely or not?

If he is correct, what do you think one should do? Collect cash, and gold and silver coins and TBills?

Jim, I emailed him your question... I'm hoping he will login later on.

nksantabarbara
09-30-07, 02:58 PM
Isn't the bottom line that the more credit you create, the more overexpansion you create because people take on leverage to build homes, factories, businesses and also demand increases because people take on more leverage to buy things. So it is a cycle that leades to overexpansion which then has to lead to price deflation in both assets and potentially consumer prices as supply increases. The arguments here are critically flawed for one main reason: they assume the Fed and banks act somewhat independently from one another and do what they should logaically do considering the circumstances. Is seems obvious to me that this is not the case. The Fed gives to banks certain spliffs in exchange for banks continuing to lend and propping up failing companies and keep markets running. For example, BofA bought part of Countrywide for $18 per share, when they knew that they could have bought in cheaper if they let Countrywide continue to flail for longer (maybe even could have bought it out of bankrupcy). This was clearly Fed sponsered to help lend confidence to the mortgage market. In exchange, the Fed gave serious rate cuts at the discount window and also the Fed fund target. And BofA, along with other banks, probably got advanced notification of their intent to lower rates so that they can secure positions ahead of time. You scratch my back and I'll scratch yours basically. Also their is major cross pollination from the Fed and the banks as far as jobs are concerned. Those that do as the banks want, get good jobs when they retire from the Fed (ala Greenspan). SO, in instances when banks should not be willing to lend, they do because receive spliffs from the Fed in exchange that makes it profitable. This can help the the inflation argument but only until so much capacity is built that prices begin to fall, which could take many many years for things other than housing. So I think you end up in an intermediate period for a long long time where there is inflation in some areas and deflation in whatever was the latest asset du jour. It works until the one day where it doesn't.

Contemptuous
10-10-07, 11:51 PM
Compliments to Charles Mackay for one of the most concise, far seeing and elegantly simple expositions on this website. There is a lot of condensed wisdom in this chart, and the fact it was acted on by him in completely unequivocal terms lends it yet more authority. The best of iTulip indeed.

Charles Mackay
10-11-07, 11:34 AM
Compliments to Charles Mackay for one of the most concise, far seeing and elegantly simple expositions on this website. There is a lot of condensed wisdom in this chart, and the fact it was acted on by him in completely unequivocal terms lends it yet more authority. The best of iTulip indeed.

Much appreciated Lukester! :)

GRG55
10-11-07, 03:24 PM
Compliments to Charles Mackay for one of the most concise, far seeing and elegantly simple expositions on this website. There is a lot of condensed wisdom in this chart, and the fact it was acted on by him in completely unequivocal terms lends it yet more authority. The best of iTulip indeed.

I'll echo Lukester.

But what we REALLY want to know is what chart correlation is Charles looking at right now that he hasn't told us about yet... :)

Contemptuous
10-11-07, 10:35 PM
GRG55 -

I don't know, Charles Mackay's play was planned as a ten year bet? Maybe we are required to wait patiently for a summary and a 'next play' in 2011 or 2012?

If we ask him now, he just may tell us we are early ... If nothing else we'll learn the art of waiting along with him. :rolleyes:

*T*
10-17-07, 08:48 AM
Perhaps these gold/whatever ratio graphs should be done with a log y-axis.
Then it doesn't matter which way you express the ratio since
log(dow/gld) = -log(gold/dow)

Anyways, I did a similar plot for UK ave house prices (Halifax housing index)
http://liceor.files.wordpress.com/2007/09/house-prices-in-gold.png

I will be renting for the foreseeable.

Charles Mackay
10-18-07, 04:49 PM
Perhaps these gold/whatever ratio graphs should be done with a log y-axis.
Then it doesn't matter which way you express the ratio since
log(dow/gld) = -log(gold/dow)

Anyways, I did a similar plot for UK ave house prices (Halifax housing index)

I will be renting for the foreseeable.

T, did you notice the extreme low and extreme high is almost identical to the United States? 100 oz of gold in 1980 and 660 oz of gold in '04/ '05 ... isn't that uncanny when you are dealing with local real estate and a whole different currency?

I could post the log of my chart here but the only thing that would be different is the trend lines as far as T.A. goes.

Now, you have further to fall than we do because our top was in 2001 and you are still at 550 oz.

Thanks for posting that! :D

*T*
10-19-07, 04:53 AM
T, did you notice the extreme low and extreme high is almost identical to the United States? 100 oz of gold in 1980 and 660 oz of gold in '04/ '05 ... isn't that uncanny when you are dealing with local real estate and a whole different currency?
[...]
Thanks for posting that! :D

Yep, credit is global I suppose. Would be very curious to see the same for Spain, Germany and Japan. Slightly complicated by the Euro switcheroo I suppose.

Just glad someone other than myself is interested! :p

(PS - what are these 'Credits' for?)

edit: ave price in spain approx 247000 euros = 460 oz; unable to find data on germany, japan.

Spartacus
11-04-07, 04:06 PM
hehehhehheh ...

When a couple of beauty salons were reducing their prices it was deflation (this was from a Mish article a couple of years back)

Deflation, NO question, NO doubt.

Not a limited local phenomenon, not supply and demand, NO, NO, NO - the only possible explanation was deflation beginning.

But today, for the price of oil .... every explanation BUT inflation must be considered first.

(he may be right about the petrol price, I'm not arguing that point at the moment, just pointing out the selectivity)




Oil is set to hit $100 a barrel: Is This Deflation?

Here is an interesting reader question from last week:

Mish,
Oil is set to hit $100 a barrel.
Gold is set to hit $800 an ounce.
Other commodities are periodically breaking all time highs.
Is this deflation?

My Reply:

No, of course not.
Then again the price of oil has little or nothing to do with inflation, at least in any measurable sense.

The above sentence may seem shocking to many, but before we proceed we must agree on a definition of inflation. The definition of inflation that I am using is this: Inflation is an increase in money supply and credit.

For further discussion of that definition, please see Which Comes First: The Cart or the Horse? And with the horse in front of the cart where it belongs, let's look at oil prices.

Ten Possible Factors Behind Oil's Rise
[/QUOTE]

metalman
11-04-07, 05:11 PM
hehehhehheh ...

When a couple of beauty salons were reducing their prices it was deflation (this was from a Mish article a couple of years back)

Deflation, NO question, NO doubt.

Not a limited local phenomenon, not supply and demand, NO, NO, NO - the only possible explanation was deflation beginning.

But today, for the price of oil .... every explanation BUT inflation must be considered first.

(he may be right about the petrol price, I'm not arguing that point at the moment, just pointing out the selectivity)

[/quote]

the doubletalk is too much.

buddy sent me this today. no, it isn't me. honest! who's behind this? a fellow ituliper? i wanna contribute!
Mush's Global Economic Trend Nonsense


Thoughts on the global economy, housing, gold, silver, interest rates, oil, energy, China, rabbits, yen, buckets of water, wind, freezing cold beer, euros, wall fasteners, carrots, cat pee.






http://globaleconomicnonsense.blogspot.com/

GRG55
11-05-07, 10:18 AM
Here's an interesting inflation chart (well I thought it was interesting) originally created by Jim Stack with a link to Barry Ritholtz' blog where I found it. No core inflation, eh?

Link:
http://bigpicture.typepad.com/

http://bigpicture.typepad.com/photos/uncategorized/2007/11/03/crb_ex_food_energy.png

FRED
11-05-07, 11:17 AM
Here's an interesting inflation chart (well I thought it was interesting) originally created by Jim Stack with a link to Barry Ritholtz' blog where I found it. No core inflation, eh?

Link:
http://bigpicture.typepad.com/

http://bigpicture.typepad.com/photos/uncategorized/2007/11/03/crb_ex_food_energy.png

That is a GREAT chart. Thank you for that.

GRG55
11-19-07, 05:36 AM
...with each passing day there is less incentive for foreigners to buy/hold US$ financial instruments, and increasing incentive to exchange accumulating $'s for something more tangible. The actions of Arab GCC SWFs (three Canadian natural gas companies, the Dubai, Nasdaq & Qatar menage a trois over the OMX, a bid for UK's Sainsbury supermarkets, the thwarted Dubai Ports bid - just a few recent examples) are credible indications that you are absolutely correct in this regard.

If they are politically impeded from directly purchasing US assets, China and the Arabs have clearly signalled they will invest through intermediaries (Blackstone, Carlyle) or exchange $'s for another fiat currency and go hunting in the UK, Europe, Canada, Australia, wherever...

Here they come again. Can you imagine the uproar if they were trying to buy eight percent of Intel? Reports out of the UAE this morning that Dubai property developer Emaar is running the ruler over US homebuilders.


Abu Dhabi buys stake in chip maker AMD
As oil riches flow into Silicon Valley, questions are raised
The Associated Press
updated 6:41 p.m. ET Nov. 16, 2007
<SCRIPT language=javascript> function UpdateTimeStamp(pdt) { var n = document.getElementById("udtD"); if(pdt != '' && n && window.DateTime) { var dt = new DateTime(); pdt = dt.T2D(pdt); if(dt.GetTZ(pdt)) {n.innerHTML = dt.D2S(pdt,(('false'.toLowerCase()=='false')?false :true));} } } UpdateTimeStamp('633308532785170000');</SCRIPT>
SAN FRANCISCO - With oil prices surging and U.S. stock prices slumping, chip maker Advanced Micro Devices Inc.'s sale of an 8.1 percent stake to the Abu Dhabi government's investment arm represents the latest plunge by a wealthy Middle Eastern nation into a troubled U.S. corporation.

It also raises fresh questions about the appropriateness of Middle Eastern firms owning large chunks of U.S. businesses that specialize in advanced technologies.

Sunnyvale-based AMD, the world's No. 2 microprocessor maker, needs the $622 million investment from the Mubadala Development Company to help lift the company out of a deep financial slump.
AMD has lost more than $1.6 billion so far this year, and has just $1.5 billion in cash on hand as it works to pay down $5.3 billion in debt. The financial woes have caused AMD's stock to fall more than 35 percent since the start of the year, a slide that has wiped out nearly $4 billion in shareholder wealth.

The infusion, announced Friday, is a necessary jolt for AMD is it hunts for money to fund its counteroffensive against Intel Corp., the world's largest chip maker, and amid a huge spike in investments in U.S. companies from Middle Eastern nations.

Middle Eastern investments in U.S. companies has increased more than fivefold in 2007, leaping from $4.5 billion on 32 deals last year to nearly $25 billion on 42 deals so far this year, according to data compiled by Thomson Financial.

The money invested in the past two years is more than the entire total invested from 1990 to 2005, according to the latest Thomson data. During that period, $24.8 billion in investments were made in 258 deals...

Link:
http://www.msnbc.msn.com/id/21840227/

FRED
11-19-07, 02:23 PM
Here they come again. Can you imagine the uproar if they were trying to buy eight percent of Intel? Reports out of the UAE this morning that Dubai property developer Emaar is running the ruler over US homebuilders.


Abu Dhabi buys stake in chip maker AMD
As oil riches flow into Silicon Valley, questions are raised
The Associated Press
updated 6:41 p.m. ET Nov. 16, 2007
<SCRIPT language=javascript> function UpdateTimeStamp(pdt) { var n = document.getElementById("udtD"); if(pdt != '' && n && window.DateTime) { var dt = new DateTime(); pdt = dt.T2D(pdt); if(dt.GetTZ(pdt)) {n.innerHTML = dt.D2S(pdt,(('false'.toLowerCase()=='false')?false :true));} } } UpdateTimeStamp('633308532785170000');</SCRIPT>
SAN FRANCISCO - With oil prices surging and U.S. stock prices slumping, chip maker Advanced Micro Devices Inc.'s sale of an 8.1 percent stake to the Abu Dhabi government's investment arm represents the latest plunge by a wealthy Middle Eastern nation into a troubled U.S. corporation.

It also raises fresh questions about the appropriateness of Middle Eastern firms owning large chunks of U.S. businesses that specialize in advanced technologies.

Sunnyvale-based AMD, the world's No. 2 microprocessor maker, needs the $622 million investment from the Mubadala Development Company to help lift the company out of a deep financial slump.
AMD has lost more than $1.6 billion so far this year, and has just $1.5 billion in cash on hand as it works to pay down $5.3 billion in debt. The financial woes have caused AMD's stock to fall more than 35 percent since the start of the year, a slide that has wiped out nearly $4 billion in shareholder wealth.

The infusion, announced Friday, is a necessary jolt for AMD is it hunts for money to fund its counteroffensive against Intel Corp., the world's largest chip maker, and amid a huge spike in investments in U.S. companies from Middle Eastern nations.

Middle Eastern investments in U.S. companies has increased more than fivefold in 2007, leaping from $4.5 billion on 32 deals last year to nearly $25 billion on 42 deals so far this year, according to data compiled by Thomson Financial.

The money invested in the past two years is more than the entire total invested from 1990 to 2005, according to the latest Thomson data. During that period, $24.8 billion in investments were made in 258 deals...

Link:
http://www.msnbc.msn.com/id/21840227/



Makes you wonder how the Chinese feel that oil producers get to spend their treasury bills more freely on real U.S. assets while Chinese purchases are more restricted.

GRG55
11-19-07, 03:14 PM
Makes you wonder how the Chinese feel that oil producers get to spend their treasury bills more freely on real U.S. assets while Chinese purchases are more restricted.

Well after the Dubai Ports fiasco and some of the reaction to this acquisition, I'm not sure the Chinese feel they are being treated that much differently from the Arabs.

On the other hand, perhaps the US Government places more importance on maintaining relationships with their key oil suppliers, compared to their supplier of lead painted toys? Just a thought...

bill
11-19-07, 03:20 PM
Makes you wonder how the Chinese feel that oil producers get to spend their treasury bills more freely on real U.S. assets while Chinese purchases are more restricted.

Makes the Chinese feel the hot potato dollar is getting less desirable to hold. SWF purchasing of “troubled <ST1:pUS corporations" is conformation the US </ST1:pwill not object to SWF’s purchasing distressed assets when in need of capital.

flow5
12-11-07, 11:10 AM
<TABLE><TBODY><TR><TD>Statement Regarding System Open Market Account Activity

</TD></TR><TR><TD>http://www.ny.frb.org/images/spacer.gif</TD></TR></TBODY></TABLE><TABLE><TBODY><TR><TD colSpan=2>(1) December 3, 2007</TD></TR><TR><TD colSpan=2></TD></TR></TBODY></TABLE><TABLE><TBODY><TR><TD>On Thursday, December 6, 2007, the Federal Reserve’s System Open Market Account will redeem $5 billion of Treasury bill holdings. This action is designed to give the Federal Reserve Open Market Trading Desk (the “Desk”) greater flexibility in the day-to-day management of reserve levels.
The Desk will continue to evaluate the need for the use of other tools to add flexibility to its open market operations. These may include further Treasury bill redemptions, reverse repurchase agreements and Treasury bill sales.

</TD></TR><TR><TD><TABLE><TBODY><TR><TD>Statement Regarding System Open Market Account Activity

</TD></TR><TR><TD>http://www.ny.frb.org/images/spacer.gif</TD></TR></TBODY></TABLE><TABLE><TBODY><TR><TD colSpan=2>(2) December 10, 2007</TD></TR><TR><TD colSpan=2></TD></TR></TBODY></TABLE><TABLE><TBODY><TR><TD>On Thursday, December 13, 2007, the Federal Reserve’s System Open Market Account will redeem $5 billion of Treasury bill holdings. This action is designed to give the Federal Reserve Open Market Trading Desk (the “Desk”) greater flexibility in the day-to-day management of reserve levels.
The Desk will continue to evaluate the need for the use of other tools to add flexibility to its open market operations. These may include further Treasury bill redemptions, reverse repurchase agreements and Treasury bill sales.

</TD></TR><TR><TD>--------------------------------------------------------------------- I
t said it would continue to evaluate possible further T-bill redemptions, reverse repurchase agreements and sales of Treasury bills. By not rolling over its T-bills when they mature, the Fed is actually draining money from the financial system. Yet it's doing so not only when strains persist in parts of the financial markets but at a time when it is normally doing just the opposite -- adding substantial amounts of money to the financial system. 'This is a time of year when demand for money grows substantially, both because consumers are engaged in their biggest spending spree of the year and because financial entities are engaged in activities to 'dress up' their balance sheets,' said Tony Crescenzi at Miller Tabak.
Last year the Fed bought more than 9 bln usd of securities, putting that cash into the system. Nothing like that has happened this year, so Crescenzi thinks 'it seems likely that something much bigger is on the way. 'This could take the form of a 50 basis point cut in the funds rate and a 75 basis point cut in the discount rate, or a discount rate cut of 50 basis points, if the Fed decides on a 25 basis point cut in the funds rate.'



</TD></TR></TBODY></TABLE>----------------------------------------------------------------------</TD></TR></TBODY></TABLE>
This table summarizes recent Temporary Open Market Operations. All values in $billions.

The "Sloshing" columns show the total repos that have been accepted but have not yet matured as of the date shown.

This source of the data is the NY Fed web site (http://www.newyorkfed.org/markets/omo/dmm/temp.cfm). Each time this page is loaded, that site may be accessed and because of that delays are possible.

http://www.gmtfo.com/reporeader/OMOps.aspx (http://www.gmtfo.com/reporeader/OMOps.aspx)

flow5
12-11-07, 12:02 PM
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flow5
12-11-07, 12:03 PM
Stop-out/FF Target


12/10 4.27
12/07 4.37 4.41
12/06 3.90 4.49
12/05 4.32 4.31
12/04 4.55 4.50
12/03 4.25 4.52
11/30 3.30 4.66
11/29 3.15 4.55
11/28 3.70 4.53
11/27 4.09 4.39
11/26 4.20 4.62
11/23 4.20 4.56
11/21 4.13 4.50
11/20 4.20 4.51
11/19 4.30 4.51
11/16 4.27 4.51
11/15 3.90 4.54
11/14 4.60
11/13 4.61
11/09 4.49
11/08 4.30 4.58
11/07 4.26 4.39
11/06 4.40 4.22
11/05 4.50 4.29
11/02 4.50 4.28
11/01 4.41 4.59
10/31 4.55 4.60
10/30 4.70 4.78
10/29 4.75 4.84
10/26 4.71 4.80
10/25 4.40 4.86
10/24 4.57 4.74
10/23 4.66 4.67
10/22 4.67 4.71
10/19 4.65 4.77
10/18 4.69 4.69
10/17 4.78 4.70
10/16 4.68 4.68
10/15 4.81 4.83
10/12 4.75 4.77
10/11 4.75 4.69
10/10 4.52 4.75

The FF rate is only symbolic. The repo rate is the actual money market rate. Since 11/20 there seems to already be enough of a spread to cut by .25%

flow5
12-11-07, 01:24 PM
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flow5
12-11-07, 01:27 PM
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flow5
12-11-07, 01:52 PM
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bart
12-11-07, 04:21 PM
<table><tbody><tr><td>Statement Regarding System Open Market Account Activity

</td></tr><tr><td>...http://www.ny.frb.org/images/spacer.gif
</td></tr></tbody></table>


(as of last Friday)


http://www.nowandfutures.com/images/fed_soma.png

flow5
12-12-07, 10:49 AM
-----------------------------------------------------------------------------------------------------------------------------------------------------
Percent change at seasonally adjusted annual rates M1 M2
------------------------------------------------------------------------------------------------------------------------------------------------------
Thirteen weeks ending November 26, 2007
from thirteen weeks ending:
Aug. 27, 2007 (13 weeks previous) 0.5 6.1
May 28, 2007 (26 weeks previous) -0.6 5.3
Nov. 27, 2006 (52 weeks previous) 0.2 6.4
--------------------------------------------------------------------------------------------------------------------------------------------------------

Bart: These numbers confirm the SOMA data that your graph reflects.

c1ue
12-12-07, 03:15 PM
Flow5,

I am confused by your data concerning real GDP/inflation.

It appears to indicate that almost all of 2006 was a recession with deflation.

If this understanding of said data is correct, I also cannot understand how GDP can change so suddenly between months; if construction due to real estate speculation was significantly boosted by the housing bubble and similarly construction was going full speed in 2006, how then was real GDP so negative? And how can construction activity shift so swiftly month to month? If not, then what is the activity counterbalancing the construction contribution thus causing the volatility?

If, on the other hand, your data is money or money supply related, that is more understandable but still does not resolve the conundrum of why 2006 data (pre credit crunch) is so negative. And why, if 2006 was so bad, was the Fed not cutting rates?

flow5
12-12-07, 04:07 PM
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flow5
12-12-07, 08:23 PM
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flow5
12-12-07, 08:24 PM
xxxxxxxxxxxxxxxxxxxxxxxxxxx

flow5
12-12-07, 08:26 PM
xxxxxxxxxxxxxxxxxxxxxxxx

flow5
12-12-07, 08:31 PM
xxxxxxxxxxxxxxxxxxxxxxxxxx

flow5
12-12-07, 08:33 PM
xxxxxxxxxxxxxxxxxxx

flow5
12-12-07, 08:43 PM
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flow5
12-12-07, 08:53 PM
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flow5
12-12-07, 08:58 PM
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hayfield
12-12-07, 10:15 PM
flow5- I know the first column is date, but can you tell me what the other three columns represent? Also, can you cite your source for the data?

c1ue
12-13-07, 03:40 AM
Flow5,

Thank you for the explanation.

I can see why you have this methodology from the examples you list, although, the Black Monday example seems a black sheep.

I had thought that there was no previous evidence of instability prior to the actual selling, but your data would imply an exogenous source.

I also wonder, even given that the numbers need to be relative, if specifically large negative numbers demonstrate an impact above and beyond the normal trend behaviors.

Will consider the ramifications - in particular I note the -0.85 in 10/2006 which I cannot associate with any particular negative economic event.

In contrast, Katrina in 10/2005 appeared to have a trend impact.

flow5
12-13-07, 04:59 AM
(1) The fed doesn’t publish uniform data on legal reserves
(2) The fed doesn’t watch the level of legal reserves
(3) Both the assets eligible for reserves and reserve ratios, have irregularly, been sharply reduced.
(4) There is general agreement that legal reserves are no longer binding
(5) The Financial Services Regulatory Relief Act of 2006 provides the legislation to eliminate legal reserves.

<O:p</O:p
This Act perversely intends to make the U.S. banking system more competitive internationally. Instead it will make controlling the supply of money & credit impossible. I.e., the money supply can never be managed by any attempt to control the cost of credit. E.g., New Zealand, which pioneered zero reserve requirements, recently experienced the highest rates of inflation and the highest interest rates in a 25 year period.

flow5
12-13-07, 05:10 AM
xxxxxxxxxxxxxxxxxxxx

flow5
12-13-07, 02:31 PM
xxxxxxxxxxxxxxx

flow5
12-13-07, 02:57 PM
The Fed actually cut the repo rate to 4%!!!!!!!!!!!!!!!!!!!!!!!

flow5
12-13-07, 03:01 PM
Stop-out/FF Target


12/10 4.27
12/07 4.37 4.41
12/06 3.90 4.49
12/05 4.32 4.31
12/04 4.55 4.50
12/03 4.25 4.52
11/30 3.30 4.66
11/29 3.15 4.55
11/28 3.70 4.53
11/27 4.09 4.39
11/26 4.20 4.62
11/23 4.20 4.56
11/21 4.13 4.50
11/20 4.20 4.51
11/19 4.30 4.51
11/16 4.27 4.51
11/15 3.90 4.54
11/14 4.60
11/13 4.61
11/09 4.49
11/08 4.30 4.58
11/07 4.26 4.39
11/06 4.40 4.22
11/05 4.50 4.29
11/02 4.50 4.28
11/01 4.41 4.59
10/31 4.55 4.60
10/30 4.70 4.78
10/29 4.75 4.84
10/26 4.71 4.80
10/25 4.40 4.86
10/24 4.57 4.74
10/23 4.66 4.67
10/22 4.67 4.71
10/19 4.65 4.77
10/18 4.69 4.69
10/17 4.78 4.70
10/16 4.68 4.68
10/15 4.81 4.83
10/12 4.75 4.77
10/11 4.75 4.69
10/10 4.52 4.75

The FF rate is only symbolic. The repo rate is the actual money market rate. Since 11/20 there seems to already be enough of a spread to cut by .25%


<TABLE cellSpacing=0 cellPadding=3 width="100%" border=0><TBODY><TR><TD><TABLE cellSpacing=0 cellPadding=0 width=564 border=0><TBODY><TR><TD class=pageTitleLv3 colSpan=3>Temporary Open Market Operations
</TD></TR><TR><TD colSpan=3 height=16>http://www.ny.frb.org/images/spacer.gif</TD></TR><TR><TD>To implement monetary policy, short-term repurchase and reverse repurchase agreements are used to temporarily affect the size of the Federal Reserve System's portfolio and influence day-to-day trading in the federal funds market.
</TD><TD>http://www.ny.frb.org/images/spacer.gif</TD><TD vAlign=top align=right><TABLE cellSpacing=0 cellPadding=0 border=0><TBODY><TR><TD width=20>http://www.ny.frb.org/images/v2/icons/print.gif</TD><TD>Printer version (http://www.ny.frb.org/markets/omo/dmm/tempprint.cfm)</TD></TR><TR><TD colSpan=2> </TD></TR><TR><TD width=20> </TD><TD>http://www.ny.frb.org/images/v2/icons/email.gif E-mail alert (http://service.govdelivery.com/service/subscribe.html?code=USFRBNEWYORK_19)</TD></TR></TBODY></TABLE></TD></TR><TR><TD colSpan=2>http://www.ny.frb.org/images/spacer.gif</TD><TD vAlign=top align=right width=158><TABLE cellSpacing=0 cellPadding=0 border=0><TBODY><TR><TD width=20> </TD><TD>Export to:
Excel (http://www.ny.frb.org/markets/omo/dmm/exportTo.cfm?RATETYPE=TOMO&MIMETYPE=SPREADSHEET) | XML (http://www.ny.frb.org/markets/omo/dmm/tomo/xml/v3_0/tomoXML.cfm?RATETYPE=TOMO&MIMETYPE=XML)</TD></TR></TBODY></TABLE></TD></TR><TR><TD colSpan=3>http://www.ny.frb.org/images/spacer.gif</TD></TR><TR><TD colSpan=2> </TD><TD vAlign=top align=right> </TD></TR></TBODY></TABLE><STYLE> td span {text-decoration:underline;} PRE{font-family:monospace,Verdana, Arial, Helvetica, sans-serif;font-weight:bold;font-size:1em;margin:0em; } </STYLE><TABLE width="100%" border=0 cellspace="0"><TBODY><TR><TD>Temporary Open Market Operations for December 13, 2007
Last Updated: December 13, 2007 9:51 AM
Number of Operations Today: 3
</TD></TR><TR><TD>http://www.ny.frb.org/images/v2/rule_grey_v.gif</TD></TR><TR><TD>http://www.ny.frb.org/images/spacer.gif</TD></TR></TBODY></TABLE><!--PAGEWATCH CODE=""--><TABLE width="100%" border=0 cellspace="0"><TBODY><TR><TD>

Deal Date: Thursday, December 13, 2007
Delivery Date: Thursday, December 13, 2007
Maturity Date: Friday, December 14, 2007
Type of Operation<SUP>1</SUP>: Repo
Settlement: Same Day
Term of Operation<SUP>2</SUP>: 1 Day
Operation Close Time: 09:50 AM

</TD></TR><TR><TD>http://www.ny.frb.org/images/spacer.gif</TD></TR></TBODY></TABLE><TABLE cellPadding=0 width=564 border=0><TBODY><TR><TD width="25%">Results</TD><TD align=middle width="27%" colSpan=2>Amount ($B)</TD><TD align=middle colSpan=4>Rate (%)</TD></TR></TBODY></TABLE><TABLE cellPadding=0 width=564 border=0><TBODY><TR><TD vAlign=bottom align=left width="25%">Collateral Type</TD><TD vAlign=bottom align=middle width="15%"> Submitted</TD><TD vAlign=bottom align=middle width="12%">Accepted</TD><TD vAlign=bottom align=middle width="12%">Stop-Out<SUP>3</SUP></TD><TD vAlign=bottom align=middle width="12%">Weighted
Average<SUP>4</SUP></TD><TD vAlign=bottom align=middle width="12%">High</TD><TD vAlign=bottom align=middle width="12%">Low</TD></TR><TR><TD vAlign=bottom align=left width="25%">Treasury</TD><TD vAlign=bottom align=right width="15%">
12.590</PRE></TD><TD vAlign=bottom align=right width="12%">
0.078</PRE></TD><TD vAlign=bottom align=middle width="12%"><TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR><TD align=middle> </TD><TD align=right>
4.17</PRE></TD><TD align=middle> </TD></TR></TBODY></TABLE></TD><TD vAlign=bottom align=middle width="12%"><TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR><TD align=middle> </TD><TD align=right>
4.170</PRE></TD><TD align=middle> </TD></TR></TBODY></TABLE></TD><TD vAlign=bottom align=middle width="12%"><TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR><TD align=middle> </TD><TD align=right>
4.17</PRE></TD><TD align=middle> </TD></TR></TBODY></TABLE></TD><TD vAlign=bottom align=middle width="12%"><TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR><TD align=middle> </TD><TD align=right>
4.00</PRE></TD><TD align=middle> </TD></TR></TBODY></TABLE></TD></TR><TR><TD vAlign=bottom align=left width="25%">Agency</TD><TD vAlign=bottom align=right width="15%">
24.350</PRE></TD><TD vAlign=bottom align=right width="12%">
3.057</PRE></TD><TD vAlign=bottom align=middle width="12%"><TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR><TD align=middle> </TD><TD align=right>
4.26</PRE></TD><TD align=middle> </TD></TR></TBODY></TABLE></TD><TD vAlign=bottom align=middle width="12%"><TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR><TD align=middle> </TD><TD align=right>
4.280</PRE></TD><TD align=middle> </TD></TR></TBODY></TABLE></TD><TD vAlign=bottom align=middle width="12%"><TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR><TD align=middle> </TD><TD align=right>
4.28</PRE></TD><TD align=middle> </TD></TR></TBODY></TABLE></TD><TD vAlign=bottom align=middle width="12%"><TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR><TD align=middle> </TD><TD align=right>
4.10</PRE></TD><TD align=middle> </TD></TR></TBODY></TABLE></TD></TR><TR><TD style="TEXT-DECORATION: underline" vAlign=bottom align=left width="25%">Mortgage-Backed</TD><TD style="TEXT-DECORATION: underline" vAlign=bottom align=right width="15%">
24.250</PRE></TD><TD style="TEXT-DECORATION: underline" vAlign=bottom align=right width="12%">
1.615</PRE></TD><TD vAlign=bottom align=middle width="12%"><TABLE cellSpacing=0 cellPadding=0 width="100%"><TBODY><TR><TD align=middle> </TD><TD align=right>
4.28</PRE></TD><TD align=middle> </TD></TR></TBODY></TABLE></TD><TD vAlign=bottom align=middle width="12%"><TABLE cellSpacing=0 cellPadding=0 width="100%"><TBODY><TR><TD align=middle> </TD><TD align=right>
4.280</PRE></TD><TD align=middle> </TD></TR></TBODY></TABLE></TD><TD vAlign=bottom align=middle width="12%"><TABLE cellSpacing=0 cellPadding=0 width="100%"><TBODY><TR><TD align=middle> </TD><TD align=right>
4.28</PRE></TD><TD align=middle> </TD></TR></TBODY></TABLE></TD><TD vAlign=bottom align=middle width="12%"><TABLE cellSpacing=0 cellPadding=0 width="100%"><TBODY><TR><TD align=middle> </TD><TD align=right>
4.23</PRE></TD><TD align=middle> </TD></TR></TBODY></TABLE></TD></TR><TR><TD vAlign=bottom align=left width="25%">Total</TD><TD vAlign=bottom align=right width="15%">
61.190</PRE></TD><TD vAlign=bottom align=right width="12%">
4.750</PRE></TD><TD colSpan=4> </TD></TR><TR><TD colSpan=7> </TD></TR></TBODY></TABLE><TABLE width="100%" border=0 cellspace="0"><TBODY><TR><TD align=right>http://www.ny.frb.org/images/v2/icons/arrow_up.gif Top (http://www.ny.frb.org/markets/omo/dmm/temp.cfm#TOP) </TD></TR></TBODY></TABLE><TABLE width="100%" border=0 cellspace="0"><TBODY><TR><TD colSpan=4>http://www.ny.frb.org/images/spacer.gif</TD></TR><TR><TD colSpan=7>http://www.ny.frb.org/images/v2/rule_grey_v.gif</TD></TR><TR><TD colSpan=4>http://www.ny.frb.org/images/spacer.gif</TD></TR></TBODY></TABLE><TABLE width="100%" border=0 cellspace="0"><TBODY><TR><TD>

Deal Date: Thursday, December 13, 2007
Delivery Date: Thursday, December 13, 2007
Maturity Date: Thursday, December 20, 2007
Type of Operation<SUP>1</SUP>: Repo
Settlement: Same Day
Term of Operation<SUP>2</SUP>: 7 Days
Operation Close Time: 09:40 AM

</TD></TR><TR><TD>http://www.ny.frb.org/images/spacer.gif</TD></TR></TBODY></TABLE><TABLE cellPadding=0 width=564 border=0><TBODY><TR><TD width="25%">Results</TD><TD align=middle width="27%" colSpan=2>Amount ($B)</TD><TD align=middle colSpan=4>Rate (%)</TD></TR></TBODY></TABLE><TABLE cellPadding=0 width=564 border=0><TBODY><TR><TD vAlign=bottom align=left width="25%">Collateral Type</TD><TD vAlign=bottom align=middle width="15%"> Submitted</TD><TD vAlign=bottom align=middle width="12%">Accepted</TD><TD vAlign=bottom align=middle width="12%">Stop-Out<SUP>3</SUP></TD><TD vAlign=bottom align=middle width="12%">Weighted
Average<SUP>4</SUP></TD><TD vAlign=bottom align=middle width="12%">High</TD><TD vAlign=bottom align=middle width="12%">Low</TD></TR><TR><TD vAlign=bottom align=left width="25%">Treasury</TD><TD vAlign=bottom align=right width="15%">
13.820</PRE></TD><TD vAlign=bottom align=right width="12%">
1.612</PRE></TD><TD vAlign=bottom align=middle width="12%"><TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR><TD align=middle> </TD><TD align=right>
4.00</PRE></TD><TD align=middle> </TD></TR></TBODY></TABLE></TD><TD vAlign=bottom align=middle width="12%"><TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR><TD align=middle> </TD><TD align=right>
4.019</PRE></TD><TD align=middle> </TD></TR></TBODY></TABLE></TD><TD vAlign=bottom align=middle width="12%"><TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR><TD align=middle> </TD><TD align=right>
4.02</PRE></TD><TD align=middle> </TD></TR></TBODY></TABLE></TD><TD vAlign=bottom align=middle width="12%"><TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR><TD align=middle> </TD><TD align=right>
3.65</PRE></TD><TD align=middle> </TD></TR></TBODY></TABLE></TD></TR><TR><TD vAlign=bottom align=left width="25%">Agency</TD><TD vAlign=bottom align=right width="15%">
23.250</PRE></TD><TD vAlign=bottom align=right width="12%">
8.388</PRE></TD><TD vAlign=bottom align=middle width="12%"><TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR><TD align=middle> </TD><TD align=right>
4.25</PRE></TD><TD align=middle> </TD></TR></TBODY></TABLE></TD><TD vAlign=bottom align=middle width="12%"><TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR><TD align=middle> </TD><TD align=right>
4.267</PRE></TD><TD align=middle> </TD></TR></TBODY></TABLE></TD><TD vAlign=bottom align=middle width="12%"><TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR><TD align=middle> </TD><TD align=right>
4.28</PRE></TD><TD align=middle> </TD></TR></TBODY></TABLE></TD><TD vAlign=bottom align=middle width="12%"><TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR><TD align=middle> </TD><TD align=right>
4.15</PRE></TD><TD align=middle> </TD></TR></TBODY></TABLE></TD></TR><TR><TD style="TEXT-DECORATION: underline" vAlign=bottom align=left width="25%">Mortgage-Backed</TD><TD style="TEXT-DECORATION: underline" vAlign=bottom align=right width="15%">
26.650</PRE></TD><TD style="TEXT-DECORATION: underline" vAlign=bottom align=right width="12%">
0.000</PRE></TD><TD vAlign=bottom align=middle width="12%"><TABLE cellSpacing=0 cellPadding=0 width="100%"><TBODY><TR><TD align=middle> </TD><TD align=right>
N/A</PRE></TD><TD align=middle> </TD></TR></TBODY></TABLE></TD><TD vAlign=bottom align=middle width="12%"><TABLE cellSpacing=0 cellPadding=0 width="100%"><TBODY><TR><TD align=middle> </TD><TD align=right>
N/A</PRE></TD><TD align=middle> </TD></TR></TBODY></TABLE></TD><TD vAlign=bottom align=middle width="12%"><TABLE cellSpacing=0 cellPadding=0 width="100%"><TBODY><TR><TD align=middle> </TD><TD align=right>
4.31</PRE></TD><TD align=middle> </TD></TR></TBODY></TABLE></TD><TD vAlign=bottom align=middle width="12%"><TABLE cellSpacing=0 cellPadding=0 width="100%"><TBODY><TR><TD align=middle> </TD><TD align=right>
4.20</PRE></TD><TD align=middle> </TD></TR></TBODY></TABLE></TD></TR><TR><TD vAlign=bottom align=left width="25%">Total</TD><TD vAlign=bottom align=right width="15%">
63.720</PRE></TD><TD vAlign=bottom align=right width="12%">
10.000</PRE></TD><TD colSpan=4> </TD></TR><TR><TD colSpan=7> </TD></TR></TBODY></TABLE><TABLE width="100%" border=0 cellspace="0"><TBODY><TR><TD align=right>http://www.ny.frb.org/images/v2/icons/arrow_up.gif Top (http://www.ny.frb.org/markets/omo/dmm/temp.cfm#TOP) </TD></TR></TBODY></TABLE><TABLE width="100%" border=0 cellspace="0"><TBODY><TR><TD colSpan=4>http://www.ny.frb.org/images/spacer.gif</TD></TR><TR><TD colSpan=7>http://www.ny.frb.org/images/v2/rule_grey_v.gif</TD></TR><TR><TD colSpan=4>http://www.ny.frb.org/images/spacer.gif</TD></TR></TBODY></TABLE><TABLE width="100%" border=0 cellspace="0"><TBODY><TR><TD>

Deal Date: Thursday, December 13, 2007
Delivery Date: Thursday, December 13, 2007
Maturity Date: Thursday, December 27, 2007
Type of Operation<SUP>1</SUP>: Repo
Settlement: Same Day
Term of Operation<SUP>2</SUP>: 14 Days
Operation Close Time: 08:30 AM

</TD></TR><TR><TD>http://www.ny.frb.org/images/spacer.gif</TD></TR></TBODY></TABLE><TABLE cellPadding=0 width=564 border=0><TBODY><TR><TD width="25%">Results</TD><TD align=middle width="27%" colSpan=2>Amount ($B)</TD><TD align=middle colSpan=4>Rate (%)</TD></TR></TBODY></TABLE><TABLE cellPadding=0 width=564 border=0><TBODY><TR><TD vAlign=bottom align=left width="25%">Collateral Type</TD><TD vAlign=bottom align=middle width="15%"> Submitted</TD><TD vAlign=bottom align=middle width="12%">Accepted</TD><TD vAlign=bottom align=middle width="12%">Stop-Out<SUP>3</SUP></TD><TD vAlign=bottom align=middle width="12%">Weighted
Average<SUP>4</SUP></TD><TD vAlign=bottom align=middle width="12%">High</TD><TD vAlign=bottom align=middle width="12%">Low</TD></TR><TR><TD vAlign=bottom align=left width="25%">Treasury</TD><TD vAlign=bottom align=right width="15%">
19.600</PRE></TD><TD vAlign=bottom align=right width="12%">
6.000</PRE></TD><TD vAlign=bottom align=middle width="12%"><TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR><TD align=middle> </TD><TD align=right>
3.92</PRE></TD><TD align=middle> </TD></TR></TBODY></TABLE></TD><TD vAlign=bottom align=middle width="12%"><TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR><TD align=middle> </TD><TD align=right>
3.952</PRE></TD><TD align=middle> </TD></TR></TBODY></TABLE></TD><TD vAlign=bottom align=middle width="12%"><TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR><TD align=middle> </TD><TD align=right>
4.03</PRE></TD><TD align=middle> </TD></TR></TBODY></TABLE></TD><TD vAlign=bottom align=middle width="12%"><TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR><TD align=middle> </TD><TD align=right>
3.50</PRE></TD><TD align=middle> </TD></TR></TBODY></TABLE></TD></TR><TR><TD vAlign=bottom align=left width="25%">Agency</TD><TD vAlign=bottom align=right width="15%">
20.250</PRE></TD><TD vAlign=bottom align=right width="12%">
0.000</PRE></TD><TD vAlign=bottom align=middle width="12%"><TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR><TD align=middle> </TD><TD align=right>
N/A</PRE></TD><TD align=middle> </TD></TR></TBODY></TABLE></TD><TD vAlign=bottom align=middle width="12%"><TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR><TD align=middle> </TD><TD align=right>
N/A</PRE></TD><TD align=middle> </TD></TR></TBODY></TABLE></TD><TD vAlign=bottom align=middle width="12%"><TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR><TD align=middle> </TD><TD align=right>
4.28</PRE></TD><TD align=middle> </TD></TR></TBODY></TABLE></TD><TD vAlign=bottom align=middle width="12%"><TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR><TD align=middle> </TD><TD align=right>
4.00</PRE></TD><TD align=middle> </TD></TR></TBODY></TABLE></TD></TR><TR><TD style="TEXT-DECORATION: underline" vAlign=bottom align=left width="25%">Mortgage-Backed</TD><TD style="TEXT-DECORATION: underline" vAlign=bottom align=right width="15%">
23.900</PRE></TD><TD style="TEXT-DECORATION: underline" vAlign=bottom align=right width="12%">
0.000</PRE></TD><TD vAlign=bottom align=middle width="12%"><TABLE cellSpacing=0 cellPadding=0 width="100%"><TBODY><TR><TD align=middle> </TD><TD align=right>
N/A</PRE></TD><TD align=middle> </TD></TR></TBODY></TABLE></TD><TD vAlign=bottom align=middle width="12%"><TABLE cellSpacing=0 cellPadding=0 width="100%"><TBODY><TR><TD align=middle> </TD><TD align=right>
N/A</PRE></TD><TD align=middle> </TD></TR></TBODY></TABLE></TD><TD vAlign=bottom align=middle width="12%"><TABLE cellSpacing=0 cellPadding=0 width="100%"><TBODY><TR><TD align=middle> </TD><TD align=right>
4.32</PRE></TD><TD align=middle> </TD></TR></TBODY></TABLE></TD><TD vAlign=bottom align=middle width="12%"><TABLE cellSpacing=0 cellPadding=0 width="100%"><TBODY><TR><TD align=middle> </TD><TD align=right>
4.15</PRE></TD><TD align=middle> </TD></TR></TBODY></TABLE></TD></TR><TR><TD vAlign=bottom align=left width="25%">Total</TD><TD vAlign=bottom align=right width="15%">
63.750</PRE></TD><TD vAlign=bottom align=right width="12%">
6.000</PRE></TD><TD colSpan=4> </TD></TR><TR><TD colSpan=7> </TD></TR></TBODY></TABLE><TABLE width="100%" border=0 cellspace="0"><TBODY><TR><TD align=right>http://www.ny.frb.org/images/v2/icons/arrow_up.gif Top (http://www.ny.frb.org/markets/omo/dmm/temp.cfm#TOP) </TD></TR></TBODY></TABLE><TABLE width="100%" border=0 cellspace="0"><TBODY><TR><TD colSpan=4>http://www.ny.frb.org/images/spacer.gif</TD></TR><TR><TD colSpan=7>http://www.ny.frb.org/images/v2/rule_grey_v.gif</TD></TR><TR><TD colSpan=4>http://www.ny.frb.org/images/spacer.gif</TD></TR></TBODY></TABLE><!--/PAGEWATCH--></TD></TR><TR class=printerlink><TD><TABLE width="100%" border=0 cellspace="0"><TBODY><TR><TD>Show last 25 operations ›› (http://www.ny.frb.org/markets/omo/dmm/temp.cfm?SHOWMORE=TRUE) <TD height=16> </TD></TR></TBODY></TABLE></TD></TR><TR><TD><TABLE cellSpacing=0 cellPadding=0 width=564 border=0><TBODY><TR><TD><SUP>1</SUP> Repo = Repurchase Agreement. Reverse RP = Reverse Repurchase Agreement. MSP = Matched Sale Purchase (replaced by Reverse RPs in December 2002).
<SUP>2</SUP> Calendar day count (as opposed to business day count) between Delivery and Maturity dates. Repurchase Agreements may be anywhere from overnight to 65 business days.
<SUP>3</SUP> For Repo, Stop Out Rate is the lowest rate accepted. For Reverse Repo, the Stop Out Rate is the highest rate accepted.
<SUP>4</SUP> Weighted Average refers to the weighted average rate of the accepted propositions.
</TD></TR></TBODY></TABLE></TD></TR></TBODY></TABLE>

flow5
12-13-07, 06:53 PM
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herbkarajan
12-23-07, 06:00 PM
Regarding Kasriel in Mish's post - what he is saying - dysfunctional/broken banking system = deflation.

Whoever bets on deflation is making a bet that significant part of the US banking system will fail under bad loans

If you believe Citi, JPM, Goldman and others won't be able to write down bad loans with the help of the Fed, then you have your answer

The side effects of the rescue plan on the real economy is a different story

If Mish wants to engage in a theoretical debate about 'liquidity trap' he should reread his hero's article in bloomberg from 2003
http://forums.sohh.com/showthread.php?t=317283