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FRED
02-28-08, 09:11 PM
http://www.itulip.com/images/rickwins.gifThe deflation case: caught, gutted, poached and eaten

Oh, no! Not the Inflation vs Deflation debate again!

by Eric Janszen

The Fed’s greatest challenge is that the need to create an inflationary firebreak between crashing asset prices and the real economy has become so obvious that Wall Street money managers are starting to pile into the inflation bet en masse.

Among the items in my inbox this morning was a column by my friend Rick Ackerman. Published today under Rick’s Picks below the tag line – paradoxically, in light of the column that follows – “Phenomenally accurate forecasts” is the article “Reality-Check for Inflationists.”

The note was dropped as bait for me and others on the email list to enjoin the seemingly endless inflation versus deflation debate that I promised myself I’d not go back to after the last exchange with others in the same camp as Rick. Yet here I am biting like a Yellowstone trout on a curly tail grub. I just can’t help myself. Also on the mailing list was my friend Mike Shedlock, among other contrarian bloggers of various political persuasions, who are variously believers in either an imminent deflationary spiral or hyperinflation.

iTulip, it is worth mentioning, has for years tried to carve out a political position best labeled by one of our members as Libertarian Pragmatist. We are pro-entrepreneur and so libertarian leaning yet our views on free markets are informed by the historical fact that the concentration of wealth and power that develop in free market systems inexorably leads to conflicts of interest, market failure and crisis. If things get bad enough politicians are exhorted by voters to kill the entrepreneurial golden goose in the same shotgun blast that socialist policy aims to take out crony capitalist fat cats. The slaughter of both geese and cats may follow soon after November elections, depending on how much unemployment is created by the recession that is being produced by the credit excesses of the past seven years.

From my perspective as an entrepreneur, after running two venture capital backed companies and now the modest iTulip, Inc. empire, for a total of 20 years' start-up company experience, and also from three years on the money side of the table funding start-ups via venture capital, I conclude: the left needs to learn the critical importance of entrepreneurs in the economy and that the measure of any economy’s health and promise is the degree of accommodation its tax laws, financing environment, and financial markets offer entrepreneurs. After all, it is not government or large corporations that drive invention and economic growth, and it is always small business that pulls a nation out of recession; entrepreneurs take enough risk in the marketplace without taxes and other impediments thrown in their path by government.

The right, on the other hand, needs to learn the importance of respect for the poor, the uneducated, the folks not born on third base. I don’t mean coddling or hand-outs, I mean policies that convey respect and more effectively produce greater equality of opportunity without trying to produce equality of result. The epitome of what I don’t like about the attitude of the right toward the poor is summarized in Margaret Thatcher’s comment that any man who finds himself riding a bus to work at the age of 26 can count himself a failure. The man or woman competently attending Thatcher’s bed pan in her final days will not arrive at hospital in a Ferrari, and an optimist might hope that Thatcher in those final days have some appreciation for the orderly’s care, and if she is thinking clearly and honestly with some prodding may be able to make the philosophical leap to extend that appreciation to all working people, those who do their jobs – important and unglamorous – yet are not compensated well enough to buy a car.

Respect.

But I digress. Back to Rick’s latest deflation versus inflation fishing expedition. So far the fishing’s been catch-and-release. Let’s see if we can’t land this baby once and for all and have it for dinner.

If you are a subscriber you can read Rick’s column here (http://www.rickackerman.com/). I’ll post the relevant bits.
A Reality-Check For Inflationists

Can you see the sky from where you are sitting right now? If not, go outside and look directly above you. Are there any $100 bills wafting your way? We didn’t think so. So much for the theory that “Helicopter Ben” would shower America with printing press money if something ever went seriously wrong with the economy. And no one could doubt right now that the economy is indeed in serious trouble -- so serious, apparently, that even the optimists are starting to admit that they see no end to falling real estate prices, one of our bigger problems.

So the question naturally arises, why is the Fed letting this happen? Haven’t we always been told that the central bank would never, ever let the economy collapse – that it would pull out all the stops to prevent it? Well, the fact is, the Fed has been pulling out all of the stops – most recently yesterday, when its chairman admitted that no policy other than more easing is being contemplated in an effort to reverse the country’s steepening plunge into recession.

Like the inflationists, we have never doubted the Fed would attempt anything and everything in its power to prevent a financial disaster like the one that is currently unfolding. Where we long ago parted company with the inflationists was on the question of whether the central bank’s efforts would succeed. For as long as we can recall, the inflationists/monetarists have reassured us that the “Fed would never let it happen.” However, we became convinced more than a decade ago that debt had grown far too large to manage. That it appeared to be manageable until recently was due solely to the misplaced trust of both borrowers and lenders. Once that trust began to erode, we reasoned, no monetary stimulus short of hyperinflation could possibly reverse the trend. Nothing we’ve seen so far has changed our mind.

Evidence Accumulates

So, what Helicopter Ben appears to have achieved using measures that even we would concede are hyperinflationary is: nothing. The banks might be able to pass themselves off as solvent, provided the auditors are in on the con. But merely making the lenders appear not to be bankrupt has done absolutely nothing to achieve what the Fed had set out to do –i.e., re-kindle the housing boom. In fact, even though mortgage rates have trended lower, the lenders have been under great pressure to tighten their standards. The result is that, on balance, demand from home buyers has continued to fall.

A ‘Crushing’ 5% Mortgage?

We predicted here long ago that, at some point, a seemingly “low” 5% mortgage would become a crushing burden on borrowers. That day has arrived. For if the underlying asset itself –i.e., one’s house – is depreciating in value by as little as, say, 2% per year, that would subject the borrower to a real-rate burden of 7%. Even hedge funds aren’t returning that kind of money these days. Far from it. So just imagine what kind of burden tens of millions of homeowners face as they become suppliers -- to someone else -- of 7% yields.

For inflationists, it’s time to face the music: The Fed can no more reverse debt deflation than it can reverse global warming. As to the theory that a hyperinflation lies ahead, this crackpot idea is so absurd that we would not dignify it by taking the other side of the argument. For what it implies, after all, is that we – you and I, and our neighbors – will eventually get to pay off our $250k mortgages with the money we receive from selling our homes for quadrillions of dollars. Yeah, sure. But until it happens, the spurious logic of inflationists and monetarists deserves no claim on our attention. The notion that the Fed could somehow ameliorate the staggering burden we face in having to pay off tens of trillions of dollars of debt is proving to be one of the most dangerous ideas ever to gain sway over our economic lives.
That captures part of the argument. Again, I encourage readers to read the whole column here (http://www.rickackerman.com/).

Dear Rick,

The argument is not between your expectation of a deflation spiral resulting in negative CPI and falling all-goods prices, the standard definition of deflation, versus hyperinflation resulting in greater than 20% annual CPI and rapidly rising all-goods prices, the standard definition of hyperinflation. Framed that way, both sides will lose; neither outcome will come to pass.

We agree: the Fed cannot do anything to stop asset price deflation. As we forecast in Dec. 2005 (http://www.itulip.com/housingbubblecorrection.htm), housing prices will fall for another five to seven years.

We disagree: you are entirely focused on the relationship between demand for goods and the money supply. You are not considering the demand for money versus the supply of money. The Fed can manage and so far has managed the debt deflation by lowering the denominator in the equation that determines all-goods prices: the supply of money relative to demand.

With so much debt overhang, the iTulip forecast since 1999 (Ka-Poom Theory) is that after asset inflations eventually end with asset price deflation the Fed without the constraint of a gold standard is not going to throw the economy into a depression by doing what it did in the early 1930s under the gold standard: failing to supply enough money to meet demand in the so-called “real economy.” The Fed continues to manage the money supply to exceed demand even as both goods supply and demand are falling during this recession.

Why are they doing this? They have no choice but to follow policies that are now producing inflation. Perhaps the Fed hopes the recession will eventually produce enough unemployment and loss of pricing power by wage earners to prevent nascent wage inflation from closing the inflation loop, thus inflation pressures will abate. Pure speculation, of course, that gives the Fed far more credit for foresight than has been demonstrated in the recent past, not to mention that if the folks at the Fed in fact believe this they are nuts. The root of the inflation we are experiencing is a weak dollar and rising import prices, especially energy.

Energy demand has been declining in the US along with all OECD nations where prices are not subsidized by government as they are in China, India, and oil producing countries where demand is as a result rising. On net oil demand globally has since 2004 increased 2% per year yet prices have skyrocketed. An economist who believes that recession will reduce inflation in the face of ongoing dollar depreciation is at the disadvantage that no supporting evidence whatsoever exists to support the belief. He or she should instead take a look at the experience of every other indebted nation on earth that has ever attempted to use currency depreciation as a long term policy tool. The result is always the same: inflation.

You see, the Fed’s greatest challenge is that the need to create an inflationary firebreak between crashing asset prices and the real economy has become so obvious that Wall Street money managers are starting to pile into the inflation bet en masse. (See Shayne McGuire: The Early Innings of a Gold Boom (http://www.itulip.com/forums/showthread.php?p=28675#post28675).)

The Fed will continue to get lots of help in this firebreak effort from a depreciating dollar. Check it out: the dollar was pushing 73 today. Not that long ago 80 was the End of the World yet here we are, still standing, and the dollar is still falling.

This is the essence of the “Poom” argument, that all of the money needed to produce all-goods price inflation has already been printed and resides overseas in foreign government and private accounts. It’s the money we spent on the wars, entitlements, and everything else. A tidal wave of inflation is held back only by dollar demand created by co-dependent governments (http://www.itulip.com/economicMAD.htm) overseas. The surprise that I did not anticipate is that the “Ka” disinflation and “Poom” inflation are happening simultaneously.

How well have our respective forecasts held up since March last year when you and I debated?

At the time you and Mike were both calling for “deflation” by which at the time you said you meant all-goods price deflation. Housing prices will crash and haircuts and cars and so on will get cheaper. I see you’ve modified that somewhat and now refer to “debt deflation” versus CPI deflation but you need some help with the debt deflation term as well. Monetary inflation with loan restructuring is one of two possible forms of debt deflation, the other being monetary deflation, loan defaults and write-offs. Of course loan restructuring and loan defaults and write-offs can happen at once, but loans tend more to be rolled over during periods of inflation than they are written off.

I tried to explain to you then that from a monetary management standpoint asset prices within the FIRE Economy and all-goods prices within the Production/Consumption Economy are from a monetary management standpoint managed separately by the Fed. We learned this last year from an economist named Dr. Michael Hudson. (We did a follow-up interview with Dr. Hudson recently, published tomorrow.) Now I get the distinct impression that his opinion has been discounted in economics blog circles, largely libertarian, because Hudson’s policy solutions are anathema to fans of small government. I don’t agree with a lot of Dr. Hudson’s prescriptions but no one is better qualified to explain how the monetary system and economy actually work. You don’t have to buy into the big government solutions to appreciate the depth of his experience and understanding. Figure his political economic model into the models we’ve been talking about on iTulip for years and you can develop a highly tuned forecast of future economic developments.

I don’t see a hyperinflation happening in the US as in Argentina in the 1990s. Again, that’s a false choice: deflation or hyperinflation. Unlike the Argentine peso, the US dollar is a reserve currency and US debts are denominated in dollars. If you think of the dollar as a common share of USA, Inc. – James Sinclair over at JS Mineset came up with that analogy years ago – think of the dollar decline process as major shareholders in China, Japan, and oil producing countries slowly selling out their positions rather than engaging in panic selling leading to a price crash.

As long as long term interest rates remain below the rate of inflation, commodity prices will continue to rise until the debt deflation runs its course. You point to 5% mortgage rates. There you have the impetus for the commodity price increases: you’re losing money on bonds earning 5% when true CPI inflation, versus the phony numbers, is over 5%. This is why so much money is flowing into commodities. How will this end? Do you see a Paul Volcker standing by ready to crank rates above 6% or whatever the CPI really is as real estate, stocks and bonds get pulled down by asset price deflation? What, you don’t think the Fed learned it’s lesson from the 1930s or Japan in the early 1990s? Short rates are going to zero and long rates, driven by liquidity, will continue to fall. As long as they do inflation and commodity prices will continue to rise.

Which reminds me, April 9, 2008 I’ll be on a panel at a wealth management services event (http://www.hedgeworld.com/events/reutersadvicepoint/20080409/breakouts.cgi) at the New York Athletic Club with Barry Ritholtz of The Big Picture and Henry Blodget of Silicon Alley Insider. With blog title entries like Boneless Bernanke: Why Ben Has to B.S. Congress and Ben Bernanke and Arthur Burns: Separated at Birth something tells me Henry and I are going to being agreeing more than arguing.

A year ago in our debate I told you that asset prices – specifically real estate, mortgage bonds, corporate bonds and stocks – were going to fall and that as a consequence of the Fed’s response to falling asset prices we’d see commodity price inflation take off.

To your credit you told your readers to not buy gold because in a commodity price deflation gold prices fall. Not that this was particularly profitable advice but at least it’s consistent with your expectation of falling all-goods prices. Mike on the other hand also expects falling goods prices but for some reason at the same time recommends gold. Very odd.

So here are the facts: Since our debate a year ago the market for funny mortgages blew up, housing prices are collapsing, unemployment is rising in 48 states, and the US economy is by any serious account in recession, all in line with what you and I agreed on at the time. But... also when we talked, silver, gold, platinum, and oil were trading at $13, $650, $1040, and $70 respectively. Now they are trading at $19, $960, $2130, and $100. (Wish I’d bought more silver and platinum!)

Now for that lure you dangled in front of us: Here we are a year later with deflating asset prices and inflating commodity prices and you're declaring victory?

Let’s face it. Your forecast of CPI price deflation a year ago was incorrect, defective, erroneous, misguided, and wrong.

Consider this deflation fish caught, gutted, poached and eaten. Wonder what the other guys are going to say?

iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
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metalman
02-28-08, 11:56 PM
The surprise that I did not anticipate is that the “Ka” disinflation and “Poom” inflation are happening simultaneously.

uh, oh. "ka" has been called off? i was coming to the same conclusion.

jtabeb
02-29-08, 12:14 AM
That was quite nice. I especially like the sardonic wit that accompanied the piece. I needed a good laugh we all do.

Great job assisting your readers discern objective reality from the smoke and mirrors peddled by the MSM.

Thank You.

I hope every one reads this and digests it's true meaning ( the depth of insight on this piece is truly 20,000 leagues under the sea )

Kudos.

I hope every one who is on this site gets the big picture presented here.

The Mogambo Guru was right, BUY gold and silver and oil
(and uranium and alt-e, infrastructure).

We're freaking doomed! (at least we can all be rich AND doomed, though:rolleyes:)

Ugh!

GRG55
02-29-08, 01:53 AM
The Deflation Case: Caught, Gutted, Poached and Eaten

by Eric Janszen

...iTulip, it is worth mentioning, has for years tried to carve out a political position best labeled by one of our members as Libertarian Pragmatist. We are pro-entrepreneur and so libertarian leaning yet our views on free markets are informed by the historical fact that the concentration of wealth and power that develop in free market systems inexorably leads to conflicts of interest, market failure and crisis. If things get bad enough politicians are exhorted by voters to kill the entrepreneurial golden goose in the same shotgun blast that socialist policy aims to take out crony capitalist fat cats. The slaughter of both geese and cats may follow soon after November elections, depending on how much unemployment the recession produced by the excesses of two asset bubbles creates by then.

From my perspective as an entrepreneur, after running two venture capital backed companies and now the modest iTulip, Inc. empire, for a total of 20 years company start-up experience, and also from three years on the money side of the table funding start-ups via venture capital, I conclude: the left needs to learn the critical importance of entrepreneurs in the economy and that the measure of any economy’s health and promise is the degree of accommodation its tax laws, financing environment, and financial markets offer entrepreneurs. After all, it is not government or large corporations that drive invention and economic growth, and it is always small business that pulls a nation out of recession; entrepreneurs take enough risk in the marketplace without taxes and other impediments thrown in their path by government. ...

Not directly related to inflation vs deflation, but to one of your opening comments...

Beyond taxes and financing, there is at least one other critical ingredient that entrepreneurs need...a society in which there is no stigma attached to honest failure after taking risk...a society that accomodates failure within its entrepreneur cohort, and allows them to try again instead of condemning them to a lifetime sentence in the penalty box.

In my view, this, more than any other factor, is what has set the USA apart from most everywhere else in the world. The Middle East societies, where I have been living for the past 7 years, are the complete antithesis of the USA in this respect. And it shows in spades.

The economies continue to be dominated by state owned firms. An enormous percentage of the population is employed by, or supported through social subsidy, by the state. The private businesses are overwhelmingly family "trading" companies - companies based on a business model of importing everything needed and reselling it locally - cars, food, building materials, everything. In many cases, such as automobiles, the government business licensing system re-enforces a monopoly franchise, with attendant high margins, for the benefit of the favoured merchant families. Losing any of your family money in an unsuccessful business venture (instead of at the casino in Monaco) is regarded as a stain on the family reputation, and most often carries rather severe ongoing negative social consequences for the culprit.

The Gulf states conservative-leaning interpretation of Islam, with its prescriptive governance of daily life, exacerbates the situation. Globalization is presenting the region with new pressures and challenges, but my own observation is that the entrepreneurial gap between the Gulf and the increasingly diverse and dynamic economies in the rest of Asia is widening.

This inability to accomodate failure, thereby actively discouraging risk-taking, is a social issue with multi-generational cultural and religious roots. It cannot be easily changed. Although the Gulf societies present the extreme example, good for illustration purposes here, in all my travels I have yet to observe anywhere that compares with the USA in this regard.

This is the potentially enduring competitive advantage that the USA has over most everyone else - and it's the primary reason I continue to express more optimism about the fate of the US economy than some others on this site. I say "potentially" because two well known trends are disturbing even my optimism:

The undeserved and unwarranted enrichment of executives who are terminated for failing to perform. It is one thing to not punish failure; quite another when failure results in more immediate and greater personal reward than success (in the form of years at the helm, grinding out good results); and
The Administrations' seemingly over-eager response to Wall Street's pleadings, and overt policy moves to limit the financial consequences of risk for the wealthiest, which cannot but ultimately undermine the substrate which supports the vital entrepreneurial sub-set of the US economy.

herbkarajan
02-29-08, 03:24 AM
when credit is destroyed, real money supply *may* contract (CPI deflation) this is because people can no longer convert assets into real cash. The nasdaq crash of '01 was highly deflationary because people had less money in their brokerage accounts and less money to spend. Similarly, right now, people have less real money because their accounts containing junk bonds are marked down and home equity lines are reduced. Preventing asset price deflation from spreading into 'real' economy is the Fed's job. They do this by devaluing the dollar and thus proping up asset prices. Stock market benefits from lower currency, the run up in gold and oil is purely speculative and may or may not continue even if the dollar keeps heading lower. The key is the lower dollar it will continue to fall as long as the assets prices are in danger.

Chris
02-29-08, 03:41 AM
The man or woman competently attending Thatcher’s bed pan in her final days did not arrive at hospital in a Ferrari, and an optimist might hope that Thatcher in those final days had some appreciation for the orderly’s care, and if she was thinking clearly and honestly with some prodding may have been able to make the philosophical leap to extend that appreciation to all working people, those who do their jobs – important and unglamorous – yet are not compensated well enough to buy a car.

Eric, Margaret Thatcher isn't dead.

GRG55
02-29-08, 06:16 AM
The Deflation Case: Caught, Gutted, Poached and Eaten

Oh, no! Not the Inflation vs Deflation debate again!

by Eric Janszen

The Fed’s greatest challenge is that the need to create an inflationary firebreak between crashing asset prices and the real economy has become so obvious that Wall Street money managers are starting to pile into the inflation bet en mass...




On Rick's part this seems inconsistent:

On the one hand he says Uncle Ben has avoided excessive use of the printing press (perhaps he's bought into Mish's argument that money supply has not been growing)...



"Are there any $100 bills wafting your way? We didn’t think so. So much for the theory that “Helicopter Ben” would shower America with printing press money if something ever went seriously wrong with the economy"

...but then he goes on to say (emphasis mine)...

"So, what Helicopter Ben appears to have achieved using measures that even we would concede are hyperinflationary is: nothing."If Rick thinks what the Fed has done so far is hyper-inflationary that would suggest he's having some serious trouble with his definitions.



On EJ's part the first and last excerpts below seem, to me, to be in conflict:

On the one hand EJ says (emphasis mine)...


There you have the impetus for the commodity price increases: you’re losing money on bonds earning 5% when true CPI inflation, versus the phony numbers, is over 5%. This is why so much money is flowing into commodities.

...with which I completely agree. For the first time in more than 2 decades bond investors are faced with a Federal Reserve Board that is cutting rates not into a dis-inflationary environment, but in a clearly inflationary one. This is a key difference between the Greenspan era rate cuts and the situation today.

Which could be why this happened...as Ka-Poom more accurately models the Greenspan era case history (?)...


The surprise that I did not anticipate is that the “Ka” disinflation and “Poom” inflation are happening simultaneously.


Bond investors are now confronted with the rather unfamiliar situation of having to seek capital-intensive inflation hedges, at the same time the Fed is cutting rates :eek:; capital-intensive because of the gargantuan size of global bond markets (compared to equity markets), and the enormous amount of money that is trying to be redeployed. This is also why those who still expect commodities to collapse as the recession progresses will find they are wrong. They have not figured out that the "rules" from the Greenspan era rate cut cycles have changed. I agree with EJ that until the bond market anticipates that the Fed will reverse policy, and start to fight inflation, flows out of the bond market and into capital-intensive inflation hedges will continue. This is why I remained way long, and continued to add (on the dips) to oil, natural gas, coal, uranium, precious metals, selected base metals, other "stuff", and the companies gobbling tons of capital to produce more of this "stuff", in spite of looming recession concerns (however, stupid me, I completely overlooked the ag sector).


[Just as an aside, I am going to make a prediction here that, although Bernanke is no Paul Volker, he is going to surprise the hell out of a lot of people by becoming more of an inflation hawk, for a period of time, than most of us are expecting. Rates won't go to zero in a straight line, and that is how he is going to clobber the commodity inflation trade, at least temporarily, at his first opportunity.]



[Edit added: And when Ben puts on that black mask and mugs the commodity and gold markets, the uninformed pundits will explain it was just stupid speculators in an overdue reaction to the recession. In fact it will need to be a shallow recession with minimal increase in official unemployment to give Captain Inflation the opening he needs to pause the rate cuts, threaten a resumption of rate increases, cut the legs out from under the inflation hedge trade, and temporarily restore some inflation-fighting credibility and breathing room for the Fed. Only if the recession morphs into something very serious, very quickly, will the Fed be stuck]
Where I disagree with EJ (or at least do not understand the logic) is this part...


Short rates are going to zero and long rates, driven by liquidity, will continue to fall. As long as they do inflation and commodity prices will continue to rise.

...because it seems to me that as long as real rates are negative, and money is exiting the bond market due to rising inflation expectations, long bond rates will be under upward pressure, and won't fall. Liquidity across the credit sector is drying up. Even the infamous "recycling" of US$ by Asian Central Banks into US debt instruments, which was so much a part of keeping longer rates suppressed, is now being replaced by the SWF search for equity in assets instead.

If long rates indeed continue to fall, isn't there much less incentive for bond investors to sell their bonds and buy commodities? :confused:

GRG55
02-29-08, 06:42 AM
when credit is destroyed, real money supply *may* contract (CPI deflation) this is because people can no longer convert assets into real cash. The nasdaq crash of '01 was highly deflationary because people had less money in their brokerage accounts and less money to spend. Similarly, right now, people have less real money because their accounts containing junk bonds are marked down and home equity lines are reduced. Preventing asset price deflation from spreading into 'real' economy is the Fed's job. They do this by devaluing the dollar and thus proping up asset prices. Stock market benefits from lower currency, the run up in gold and oil is purely speculative and may or may not continue even if the dollar keeps heading lower. The key is the lower dollar it will continue to fall as long as the assets prices are in danger.

I could not disagree more. The run up in capital-intensive commodities and resource extraction companies is a deliberate and rational response to the Fed being forced to cut rates in an already inflationary environment.

c1ue
02-29-08, 09:59 AM
Quote:
<TABLE cellSpacing=0 cellPadding=6 width="100%" border=0><TBODY><TR><TD class=alt2 style="BORDER-RIGHT: 1px inset; BORDER-TOP: 1px inset; BORDER-LEFT: 1px inset; BORDER-BOTTOM: 1px inset">Originally Posted by herbkarajan http://www.itulip.com/forums/images/buttons/viewpost.gif (http://www.itulip.com/forums/showthread.php?p=28892#post28892)
when credit is destroyed, real money supply *may* contract (CPI deflation) this is because people can no longer convert assets into real cash. The nasdaq crash of '01 was highly deflationary because people had less money in their brokerage accounts and less money to spend. Similarly, right now, people have less real money because their accounts containing junk bonds are marked down and home equity lines are reduced. Preventing asset price deflation from spreading into 'real' economy is the Fed's job. They do this by devaluing the dollar and thus proping up asset prices. Stock market benefits from lower currency, the run up in gold and oil is purely speculative and may or may not continue even if the dollar keeps heading lower. The key is the lower dollar it will continue to fall as long as the assets prices are in danger.

</TD></TR></TBODY></TABLE>
I could not disagree more. The run up in capital-intensive commodities and resource extraction companies is a deliberate and rational response to the Fed being forced to cut rates in an already inflationary environment.

GRG,

The bond market's buying into commodities may be logical given the dramatic lowering of rates, but this does not automatically mean that increasing commodity prices are driven by fundamentals.

The question which I still do not considered settled is whether the increases in commodity prices are truly representative of underlying economics rather than sector rotation.

This is not to say there is not money to be made in the oil/gold run up, but knowing what true 'sea level' is makes exit decisions much more accurate once the money tide abates.

After all, even the massive Internet money flows eventually abated - and only those firms with real businesses retained much of their previous value. Even for these, few of them have come close to their salad Y2K prices.

Oil is thus better in many respects than gold as it is a fungible commodity - gold is driven far too much by 'investment demand'.

One item which I do not see studied much is the dynamics of capital destruction.

As the Economist noted quite some time ago, a single cent invested at the time of Christ's birth would yield a ball of gold larger than the Earth by now, but the reason this has not happened is that there are periodic episodes of wealth destruction.

Inflation is only one of these methods; I have been studying the various historical analogs to understand both the methods and dynamics of how wealth destruction can occur.

It is because of this study that I am not so eager to jump on the gold/oil bandwagon, but have preferred to choose investments in areas where underlying economic growth is higher and in businesses with structural monopolies thus pricing power - but also with flexibility engendered by having labor as the highest single cost.

dcarrigg
02-29-08, 10:01 AM
Eric, Margaret Thatcher isn't dead.

Ha!...I was about to go look this up, because I didn't remember an obituary. Thanks Chris.

Here's another great Thatcher quote by the way:

"No one would remember the Good Samaritan if he'd only had good intentions; he had money as well."

Please, noble lady, while I'm crossing the British country side with this house upon my back, might I have a little of that trickle from the top?

No? Oh well, just keep trudging along.

FRED
02-29-08, 10:08 AM
Eric, Margaret Thatcher isn't dead.

Editing error. My bad. Changed the tense back.

metalman
02-29-08, 10:26 AM
Editing error. My bad. Changed the tense back.

wishful thinking? the uk was an economic basket case when she joined up, no? many credit north sea oil and other luck.

akrowne
02-29-08, 11:05 AM
Maybe not. Remember when commodities (mostly energy) crashed in late 2006 and stayed down till late 2007?

Yeah, I think that was "ka". Blink and you might have missed it.

EJ
02-29-08, 11:48 AM
Where I disagree with EJ (or at least do not understand the logic) is this part...

...because it seems to me that as long as real rates are negative, and money is exiting the bond market due to rising inflation expectations, long bond rates will be under upward pressure, and won't fall. Liquidity across the credit sector is drying up. Even the infamous "recycling" of US$ by Asian Central Banks into US debt instruments, which was so much a part of keeping longer rates suppressed, is now being replaced by the SWF search for equity in assets instead.

If long rates indeed continue to fall, isn't there much less incentive for bond investors to sell their bonds and buy commodities? :confused:

This is a hot topic of debate within the hedge fund community. The general consensus is that managers bailing out of non-AAA rated corporates are not moving money from corporates into commodities but rather to the "safety" of government bonds, staying within the fixed income asset class. The perception of relative low default risk is creating a premium over inflation risk, so bond prices on the long end are rising and yields falling (http://www.bloomberg.com/markets/rates/). How are commodity prices related? One theory I like is that hedge funds are buying into commodities to hedge the inflation risk in their bond positions.

GRG55
02-29-08, 12:49 PM
This is a hot topic of debate within the hedge fund community. The general consensus is that managers bailing out of non-AAA rated corporates are not moving money from corporates into commodities but rather to the "safety" of government bonds, staying within the fixed income asset class. The perception of relative low default risk is creating a premium over inflation risk, so bond prices on the long end are rising and yields falling (http://www.bloomberg.com/markets/rates/). How are commodity prices related? One theory I like is that hedge funds are buying into commodities to hedge the inflation risk in their bond positions.

I would expect that many of the institutional fixed income and pension fund managers are required to maintain investments in the bond/fixed-income universe. In that respect moving to sovereign debt is understandable.

And hedge funds that actually hedge something would be a welcome development...:rolleyes:

FRED
02-29-08, 01:01 PM
I would expect that many of the institutional fixed income and pension fund managers are required to maintain investments in the bond/fixed-income universe. In that respect moving to sovereign debt is understandable.

And hedge funds that actually hedge something would be a welcome development...:rolleyes:

Did we say "Hedge Fund"? We meant Unregulated Speculative Investment Pool (USIP).

GRG55
02-29-08, 01:05 PM
GRG,

The bond market's buying into commodities may be logical given the dramatic lowering of rates, but this does not automatically mean that increasing commodity prices are driven by fundamentals.

Commodities are not being driven by pixie dust. However, the primary fundamentals driving commodities today are not the same as the fundamentals that started this cycle in the aftermath of the 2001 recession.


The question which I still do not considered settled is whether the increases in commodity prices are truly representative of underlying economics rather than sector rotation.

Sector rotation? Well if that is what you think then we have had the longest period of multi-year sector rotation into an asset class that I can ever recall - and although I am not the age of Buffett or Russell, I have been around a few years... :)


This is not to say there is not money to be made in the oil/gold run up, but knowing what true 'sea level' is makes exit decisions much more accurate once the money tide abates.

After all, even the massive Internet money flows eventually abated - and only those firms with real businesses retained much of their previous value. Even for these, few of them have come close to their salad Y2K prices.

Oil is thus better in many respects than gold as it is a fungible commodity - gold is driven far too much by 'investment demand'..

Well as far as I know gold is a fungible commodity also. But I accept your point that oil has useful purposes other than solely as a financial speculation or store of value. And I've held oil for much longer than precious metals, perhaps because of the same reasoning. Please note that my comment was not restricted to just oil and gold, but all catagories of capital intensive commodities and the producers.


One item which I do not see studied much is the dynamics of capital destruction..

Well we may get our chance to watch this up close and soon, if my expectation that Bernanke will draw a line in the sand on inflation comes about.


It is because of this study that I am not so eager to jump on the gold/oil bandwagon, but have preferred to choose investments in areas where underlying economic growth is higher and in businesses with structural monopolies thus pricing power - but also with flexibility engendered by having labor as the highest single cost.

Cannot disagree with your general philosophy in this regard C1ue. My experience is the best investment returns I ever made (in every respect, not just financial) were those times I invested in myself.

c1ue
02-29-08, 03:50 PM
GRG,

Your investment philosophy is quite sound - merely different than mine.

We're all in a world where there is no single right answer.

As for Bernanke drawing a line in the sand - I would posit that it is more likely he gets fired and Volcker II comes in.

Burns did not get much chance to fix his 'errors'.

But of course, it is not clear to me that Volcker II could do what Volcker original got away with.

donalds
02-29-08, 05:26 PM
Any possibility that the increase in money supply reflects the movement out of Commercial Paper, etc., going into Fed. account that show up as money supply.

As for commodities, any possibility that as economic and financial conditions deteriorate further, speculators will unwind their positions to cover margins, bringing down commodities in a fast dash, greatly filtering out the crowded trades?

Any possibility that the above unwinding mirrors (in a feedback loop) the unwinding of the yen carry trade, further exacerbating the commodities unwinding, and thus further drying up of liquidity?

Any possibility that as the recession deepens and unemployment grows, declining aggregate income results in significantly reduced spending, coming at the same time that the global uncoupling theme loses all steam?

Any possibility that as the shadow finance economy shrinks further and things like the CDO market continue to wither away that lending and borrowing will largely evaporate, leading to less liquidity, less velocity, and consequently less cash in circulation?

Any possibility that as the US deficit grows under strains of declining local, state and fed. tax revenues that the Treasury is forced to push forward an oversupply of treasuries for which Fed monetization can't over compensate for?

Any possibility that as the US plunges deeper into a consumer-driven recession, it is accompanied by a loss of incentive of FCBs to buy US Treasuries, forcing up US interest yields and thus forcing down even more borrowing and lending, exacerbating the credit/debt crunch and rising insolvency?

Any possibility that as goods inflation in China, M. East, etc., goes higher, that pressures to unpeg from the dollar rises as well, further reducing their interest in buying Treasuries backed by a weakening dollar?

Lets say an at least some of the above is true and in combination materializes. Would U.S. inflation still grow and expand at a level that quantifies as debt deflation?

FRED
02-29-08, 06:30 PM
Any possibility that the increase in money supply reflects the movement out of Commercial Paper, etc., going into Fed. account that show up as money supply.

As for commodities, any possibility that as economic and financial conditions deteriorate further, speculators will unwind their positions to cover margins, bringing down commodities in a fast dash, greatly filtering out the crowded trades?

Any possibility that the above unwinding mirrors (in a feedback loop) the unwinding of the yen carry trade, further exacerbating the commodities unwinding, and thus further drying up of liquidity?

Any possibility that as the recession deepens and unemployment grows, declining aggregate income results in significantly reduced spending, coming at the same time that the global uncoupling theme loses all steam?

Any possibility that as the shadow finance economy shrinks further and things like the CDO market continue to wither away that lending and borrowing will largely evaporate, leading to less liquidity, less velocity, and consequently less cash in circulation?

Any possibility that as the US deficit grows under strains of declining local, state and fed. tax revenues that the Treasury is forced to push forward an oversupply of treasuries for which Fed monetization can't over compensate for?

Any possibility that as the US plunges deeper into a consumer-driven recession, it is accompanied by a loss of incentive of FCBs to buy US Treasuries, forcing up US interest yields and thus forcing down even more borrowing and lending, exacerbating the credit/debt crunch and rising insolvency?

Any possibility that as goods inflation in China, M. East, etc., goes higher, that pressures to unpeg from the dollar rises as well, further reducing their interest in buying Treasuries backed by a weakening dollar?

Lets say an at least some of the above is true and in combination materializes. Would U.S. inflation still grow and expand at a level that quantifies as debt deflation?

Are any of these events dollar positive? No. Then they are all inflationary.
Quantum's Jim Rogers says US 'out of control' (http://business.timesonline.co.uk/tol/business/economics/article3451136.ece)

Leo Lewis, Asia Business Correspondent

Jim Rogers - who co-founded the now closed Quantum Fund with George Soros - told 750 global fund managers in Tokyo today that, America is “completely out of control”, there will be a 20-year bull market in commodities and that prices will be in turmoil.

And he also warned that it “made sense” if global competition for resources ended in armed conflict.

Mr Rogers told delegates to the CLSA investment forum that the prices of all agricultural products would “explode” in coming years and that the price of gold, which hit an all-time high of $964 an ounce yesterday, will continue its surge to as much as $3,500 an ounce.

Gold would continue to rise, the analyst Christopher Wood told fund managers, “because it is the exact opposite of a structured finance product”.

In a blistering attack on US monetary policy and the “helicopter cash drop” responses of the Federal Reserve, Mr Rogers described the American dollar as a “terribly flawed currency”.

He said that the plan by Ben Bernanke, the Fed Chairman, to “crank up the money-printing machines and run them until we run out of trees” had exposed America’s weakest point to her rivals and enemies.

Contemptuous
02-29-08, 06:51 PM
... Jim Rogers - who co-founded the now closed Quantum Fund with George Soros - told 750 global fund managers in Tokyo today that, America is “completely out of control”, there will be a 20-year bull market in commodities and that prices will be in turmoil.

Hear! Hear! Tough to bet against a Jim Rogers macro thesis. He may have made a wrong call or two (e.g. Russia in the 2000's) but he is a wily player. Also worth noting that Ty Andros's description of the near future is in lock-sync with what Jim Rogers describes.

As this plays out at some point Rick Ackerman and Mish are going to be doing some acrobatics - hanging off the chandeliers to continue interpreting this as a global or even US net deflationary outcome. The pundit armchair may not be warm enough yet, but if 'waves of global goods-price deflation' had been my platform for the past four or five years, I'd be quietly looking for some rhetorical exit from that public position by 2010, lest my ability to manoeuver within that argument were reduced to the size of a handkerchief.

_________

Edit: Donalds - I recommend reading some of Mr. Andros' articles to add to, or broaden the picture on commodities inflation - he draws a panoramic, global picture. These commentaries are all brimming with intelligence and astute reads on the macro trend. At least I found it excellent reading. If you are unfamiliar with his comments, you can review a complete set of his articles at the Safehaven website (safehaven.com). Just go to the archives and look up "Ty Andros". The global inflationary bias comes into very sharp focus in his collected letters. Gary Dorsch is also excellent on the same themes. The quality, depth and breadth of their collected comments present a powerful case.

donalds
02-29-08, 07:30 PM
Fred says:

"Are any of these events dollar positive? No. Then they are all inflationary."

So that's it; it all rest on what happens to the dollar.

As one who has invested on the bet of a declining dollar (much of it in foreign bonds - harkening back to Eric's book), and having made 25% in doing so, I fully understand the reasoning behind a declining dollar. But I can't help but think that there must be more to the inflationist theme - than all things hinging on the dollar continuing it's fall.

Seems to me there is still something to be said about the safe haven phenomenon. Won't the unwinding of the excesses in speculative trades result in supporting the dollar, at least to a degree? Is investing overseas all that attractive even when global stock markets come down significantly, and will putting one's money in commodities still prevail even in the face of a global economic decline? Perhaps all this hinges not so much on what happens with the dollar but on the belief in global decoupling.

I'm just trying to figure this all out. I don't find the inflationist theme very convincing, but when I do find it at least somewhat compelling, I find them at iTulip. Perhaps in time I'll be convinced. But I'm not there yet.

WDCRob
02-29-08, 07:42 PM
Just my opinion, but it seems to me that while we may still be in the early phases of an unwinding, it HAS started.

And during that start the dollar has collapsed and inflation seems to be soaring.

I haven't heard a good argument yet why inflation would stop unless something changes the underlying dynamic. Bernake hasn't even reached into his magic bag of tricks yet really.

DrYB/C
02-29-08, 08:47 PM
EJ,

The fish was tasty; thanks for the mind food, but can one fish really feed the multitude plus the prophet?? I think not…in my opinion, there is no and never was a Testament Jesus.

Since I’m sure you’re still hungry, and since I like the way you cook, let’s continue fishing; however, be warned: the two species we are trying to catch are masterfully elusive…I repeat, masterfully illusive…and neither you, nor I, nor any of the other readers, may be able to land them, much less gut, poach or serve them up for all to eat (let’s hope we don’t starve first):

1. Q: Major Dollar Inflation or Dollar Hyper Inflation??
A: Hyperinflation.



2. Q: War (International Conflict: the world paints itself blood red before it paints itself forest green)

or

Peace (The old, dying U.S. takes its final calming bubble bath, yet this time it exits the tub clean

[and green with an envy so overpowering that it causes it to cease its voracious overconsumption of the world’s resources and turn itself into the world’s greatest and greenest underconsumer, recycling and reusing every single consumptive item so many times over that its consumption/production ratio effectively becomes zero. It even learns how to recycle its food by studying the nurturing habits of female pelicans and their chicks].

Why the behavior change??

Because the Chinese and Middle Easterners who bathed it were so kind and generous in their behavior toward the dying old greedmonger that the greedmonger had to prove it could be a thousand times kinder and a million times more generous before it passed into oblivion….it was a contest for moral superiority, and the U.S. would not die before it had won; it even hedged against its death with life-default swaps to ensure/insure it would win before taking its last breath…luckily, it achieved its goal of moral superiority before its rather unassuming death, for the swaps turned out to be worthless)??
A: War

I think I can hook these fish, using the following logic to underwrite my argument:

a. Sociological fact: populations revolt when freedom is taken away.
b. Under the current international currency regime, the U.S. population consumes the rest of the world’s goods and services for free (in reality, it isn’t consuming them for free, as the costs have been deferred until now, but the deferment had the feel and appearance of freedom, so I will characterize it as such) or for very little cost relative to the products the U.S. produces to trade for the goods and services it consumes; this method of consumption is a massive and massively temporary freedom only possessed by the U.S.
c. The value of dollar pegged foreign currencies, of gold, and of commodities is inversely proportional to U.S. consumptive freedom.
d. More inflation=more loss of U.S. consumptive freedom, yet U.S. must hyperinflate, at this point, to prevent a debt hyperdeflation. The simultaneous occurrence of “Ka” and “Poom” indicate the truth of this statement.
e. But hyperinflation=destruction of U.S. consumptive freedom, yet hyperdeflation = destruction of U.S. consumptive freedom.
f. In terms of outcomes, hyperinflation=hyperdeflation=loss of consumptive freedom by U.S.
g. Since, in terms of outcomes, hyperinflation=hyperdeflation=loss of consumptive freedom by U.S, the only course of action that may provide an alternate outcome= revolt by U.S., i.e. war for direct control of the natural resources (mainly oil) that will allow U.S. to maintain its consumptive freedom, since indirect control of these resources by the U.S. via dollar hegemony will soon be relinquished via hyperinflation or hyperdeflation (which are, again, in turns of outcomes, the exact same thing), unless the U.S. acts to prevent the relinquishing before it occurs; moreover,
h. The U.S. ruling class (FIRE economy owners) and the U.S. upper class (non-financial mega-corporations and politicians) are mega risk takers, given the relative ease with which they can socialize the costs of taking risks. They will take the risks associated with a war for hegemonic resource control rather than take no risks and be guaranteed to pay the costs associated with the loss of international hegemonic power and the freedom that comes along with said power. The speed at which they will move toward war is directly proportional to the increase in value of dollar pegged foreign currencies, of gold, and of commodities.
i. In other words, if U.S. fails to go to war, it is guaranteed to lose its status as world hegemon; if it goes to war, it may win or it may lose. If it loses, it ends up in the same place it would have been if it hadn’t gone to war: a debt slave to its creditors, with a massive loss of consumptive freedom. But, if it wins, it maintains its position as King of the World-Hill, with more power than it possessed before it went to war. It will choose war.

Comments please!!

GRG55
03-01-08, 01:38 AM
Fred says:

"Are any of these events dollar positive? No. Then they are all inflationary."

So that's it; it all rest on what happens to the dollar.

As one who has invested on the bet of a declining dollar (much of it in foreign bonds - harkening back to Eric's book), and having made 25% in doing so, I fully understand the reasoning behind a declining dollar. But I can't help but think that there must be more to the inflationist theme - than all things hinging on the dollar continuing it's fall...

The dollar may be the epicentre, but I agree it isn't the only issue. Last summer the world was watching news pictures of the lines outside UK's Northern Rock branches. I doubt a single person in any of those lines gave a moment of thought to the US$. What crossed my mind then was the question "If I had just removed all my savings from Northern Rock, what would I do with it?" Go across the street and open a deposit account at Barclay's? Not likely. Put it into US$. Not likely, given the recent experience with cable...


Seems to me there is still something to be said about the safe haven phenomenon. Won't the unwinding of the excesses in speculative trades result in supporting the dollar, at least to a degree? Is investing overseas all that attractive even when global stock markets come down significantly, and will putting one's money in commodities still prevail even in the face of a global economic decline? Perhaps all this hinges not so much on what happens with the dollar but on the belief in global decoupling.

I'm just trying to figure this all out. I don't find the inflationist theme very convincing, but when I do find it at least somewhat compelling, I find them at iTulip. Perhaps in time I'll be convinced. But I'm not there yet.

The dollar support argument on unwinding is the same as Richard Russell's "US$ synthetic short" argument.

If you expect a "global economic decline" then you certainly do not want to be in commodities.

GRG55
03-01-08, 06:47 AM
GRG,

Your investment philosophy is quite sound - merely different than mine.

We're all in a world where there is no single right answer.

As for Bernanke drawing a line in the sand - I would posit that it is more likely he gets fired and Volcker II comes in.

Burns did not get much chance to fix his 'errors'.

But of course, it is not clear to me that Volcker II could do what Volcker original got away with.

Bernanke won't get fired. There's enough uncertainty in the US financial markets already; they aren't so stupid that they will add to that by dumping the head of the big kahuna Central Bank in mid-crisis. This isn't the same as the 1970's.

Ben is going to prove to be a bigger inflation hawk sometime in the next year or so, than most currently expect. Helicopter Ben is actually doing a reasonable job given his policy options and the situation he's facing. THe USA may come out of this mess better than Europe.

touchring
03-01-08, 08:35 AM
Inflation hawk? What can Ben do to force down oil prices? Impose import curbs?

All this inflation is an excuse, i only see a coordinated effect by OPEC to ensure high oil prices. High oil prices will flow down the system and cause inflation in everything else from food to metals to services.



Bernanke won't get fired. There's enough uncertainty in the US financial markets already; they aren't so stupid that they will add to that by dumping the head of the big kahuna Central Bank in mid-crisis. This isn't the same as the 1970's.

Ben is going to prove to be a bigger inflation hawk sometime in the next year or so, than most currently expect. Helicopter Ben is actually doing a reasonable job given his policy options and the situation he's facing. THe USA may come out of this mess better than Europe.

simon galbraith
03-01-08, 09:33 AM
"The epitome of what I don’t like about the attitude of the right toward the poor is summarized in Margaret Thatcher’s comment that any man who finds himself riding a bus to work at the age of 26 can count himself a failure."

This is a misquotation, Margret Thatcher said and thought no such thing. http://en.wikiquote.org/wiki/Margaret_Thatcher#Misquotations

On your first statement Margret Thatcher was very much in agreement: "We have inherited a tax system that was deliberately weighted against success. There was neither sense nor equity in such a system. Success at every level needs encouragement not harrassment. Already we have made major tax changes and we shall return to this theme in future budgets." http://www.margaretthatcher.org/speeches/displaydocument.asp?docid=104167

In the same speech she offers some sage advice "we are committed to getting inflation down by essentially a monetary policy. The aim is to restore sound money. A situation where the currency of the realm can be a store of value as well as a means of exchange."

EJ
03-01-08, 11:49 AM
"The epitome of what I don’t like about the attitude of the right toward the poor is summarized in Margaret Thatcher’s comment that any man who finds himself riding a bus to work at the age of 26 can count himself a failure."

This is a misquotation, Margret Thatcher said and thought no such thing. http://en.wikiquote.org/wiki/Margaret_Thatcher#Misquotations

On your first statement Margret Thatcher was very much in agreement: "We have inherited a tax system that was deliberately weighted against success. There was neither sense nor equity in such a system. Success at every level needs encouragement not harrassment. Already we have made major tax changes and we shall return to this theme in future budgets." http://www.margaretthatcher.org/speeches/displaydocument.asp?docid=104167

In the same speech she offers some sage advice "we are committed to getting inflation down by essentially a monetary policy. The aim is to restore sound money. A situation where the currency of the realm can be a store of value as well as a means of exchange."

Hard to say exactly why this quote stuck to her. She is also quoted making statements that contradict the sentiment.

"We want a society where people are free to make choices, to make mistakes, to be generous and compassionate. This is what we mean by a moral society; not a society where the state is responsible for everything, and no one is responsible for the state."

I agree with most of what she has to say. Many of her observations are succinct and accurate.

"There is no such thing as Society. There are individual men and women, and there are families."

I can especially relate to this one, as readers no doubt can attest.

"I love argument, I love debate. I don't expect anyone just to sit there and agree with me, that's not their job."

This is sound advice.

"Democratic nations must try to find ways to starve the terrorist and the hijacker of the oxygen of publicity on which they depend."

This is brilliant.

"Europe will never be like America. Europe is a product of history. America is a product of philosophy."

Margaret Thatcher Quotations (http://womenshistory.about.com/od/quotes/a/m_thatcher.htm)

Thanks for jogging me to take another look at Maggie's words.

FRED
03-01-08, 12:36 PM
Rick and EJ had the following exchange by email after this was published.

Rick Ackerman: Thanks for your thoughtful response, my friend, but you’ve made it w-a-a-y too easy for me to dismiss nearly all that you’ve said with an imperious wave of the hand. For nowhere in your argument do you even mention the word “borrow” – which, in the absence of wage increases, is exactly what consumers would have to do in order to push prices for goods and services significantly higher.

Eric Janszen: This is a fundamental flow in the deflationistas argument.

First, commodity price inflation is a leading indicator of wage inflation.

Second, yes money is borrowed into existence by consumers and by businesses. But it is also borrowed into existence by the government. What occurs when the credit markets become dysfunctional and consumers and business reduce borrowing, the government steps in... unfortunately for holders of dollars. We depict the process this way.

Before credit bust and recession:


http://www.itulip.com/images/moneyflows.gif

After credit bust and recession:


http://www.itulip.com/images/moneyflowsCreditBust.gif

Third, you cannot have a commodity price deflation in a depreciating currency. The yen appreciated during Japan's modest deflation (never exceeding 2% in a year) and the severe US 1930s deflation, at least until FDR took the US off the gold standard and flushed the dollar down the toilet. Can you explain to me how a deflation in a weakening currency is possible or give me a single example in history when that's happened, or are you predicting that the dollar is somehow going to strengthen in spite of all the debt liabilities against it?

RA: But using what as collateral? Housing is spent for that purpose, and that is why prices for all goods and services tied to the consumer economy must ultimately fall.

EJ: Asset price deflation. Recession. Inflation. Ask any Russian who lived through the transition of the Soviet economy to oligarch capitalism in the early 1990s.

RA: Yes, we do have speculative torrents of cash flowing from paper assets into hard goods, as you’ve noted, and this has been driving inflation at many levels. But you act as though the value of the financial assets from which the speculative money is coming will remain constant. In fact, most of those paper assets are going to be acknowledged as worthless within a year or two, simply because they already are worthless, or very nearly so. At that point, whence will come the money to bid oil to $200 a barrel, or wheat to $50 a bushel? I hope you don’t try to argue that, in the coming economic depression, physical demand for oil and wheat will take up the slack.

EJ: Ka-Poom Theory says all the money needed to produce a massive inflation resides in the accounts of foreign central banks and private institutional and individual investors. As they sell dollar denominated assets, the sell dollars and buy local currency. Further, the borrowing that the US government used to be able to do this way did not monetize US debt on US accounts so it was not inflationary. Now evidence is that both are happening: foreign lenders are "diversifying" (i.e., selling) and the US government is monetizing to cover the expense liability: military spending, 23 million Americans on the government payroll (founding fathers spinning in their graves), and other Argentina-esque liabilities.

Meanwhile, as corporate bonds and other fixed income fall in value, fund managers move into "safe" government securities pushing up prices and yields down; these do not reflect the inflation premium because of demand so they hedge the inflation by buying commodities.

RA: You stated that “as long as long term interest rates remain below the rate of inflation, commodity prices will continue to rise until the debt deflation runs its course.” This mixes and conflates too much for me to parse, but there is no mistaking that you have implicitly dismissed the potential for deflation to tighten its death-grip on the economy. And when you talk off-handedly about deflation running its course, you neglect to consider a crucial implication of that process -- i.e., that the real (i.e., inflation-adjusted) cost of borrowing will become far too high to support even modest speculation, let alone sustain for yet more years a commodity mania such as we are currently witnessing.

EJ: You and I have talked about this before. Your hang-up is with the term deflate. All it means in economics terms is decrease. For example it is correct to say that the dollar is now deflating against gold and the euro or that gold and euros are inflating against the dollar. Both are correct. Debt deflates when debt levels decrease. As asset prices are largely credit versus cash financed, a debt deflation implies asset price deflation.

The inflation is coming from rising import prices, especially energy. Just read the headlines:

Energy, food push January's PPI 1% higher (http://tinyurl.com/37og5g)

Year-over-year increase highest since 1981; monthly core PPI up 0.4%

Why?

US Dollar Crashes Below Support (http://www.howestreet.com/articles/index.php?article_id=5827)

What is happening is almost incomprehensible, so I do not blame you and Mike for not getting it.

Our frigging government has allowed a situation to develop wherein wage earners are, so far, not seeing rising wages but the prices of everything... gasoline, heating oil, taxes, health care, interest rates... are rising while their wages remain stagnant due to labor competition via sourcing. At least things have been cheap at Walmart but soon that won't be true anymore either as the yuan rises against the dollar. We use the following chart at iTulip to show how price inflation is distributed.


http://www.itulip.com/images/personalconsumption10-2008.gif

J6P is getting royally screwed. I just got back from my local coin dealer who told me once again that the same dynamic has been in place for about a year in a half: working class folks come in to sell their coin collections and jewelry to raise cash to pay the bills. While I was there a woman came in to sell jewelry. She told me if she didn't she'd lose her house. She was selling to raise money to pay taxes on her house! Meanwhile, my coin dealer friend is selling gold coins in $100,000 batches to wealthy folks who have enough money to protect themselves.

See, unlike the 1970s when the savings rate was 8% to 10% the savings rate has been zero for years. Last time we had a period of inflation J6P has some savings to convert to hard assets. Not this time. He's broke. So J6P has to sell inflation hedges while the top 5% buy.

It just doesn't get any uglier from a political standpoint. You'd have to go to Argentina in the last crisis there to see the same dynamic of poor wealth and debt distribution and rising inflation as a currency tanks. To be blunt it pisses me off. But at least we've been able to warn our readers it was coming.

RA: Finally, and most crucially, you seem not to understand that borrowing power alone is what has sustained inflation, and that it has begun to dry up so precipitously as to all but guarantee a quick end to this last fling of inflation. Also, for obvious reasons, you keep your distance from the deflationary implications of the real estate collapse, saying only that it would continue for at least another five years (!!). But if Fed stimulus continues to drive up prices for everything but housing, that is hardly a recipe for inflation; rather, it portends only a more spectacular bust when prices at the pump reach $5, and eggs $12 a carton.

EJ: In a healthy economy consumers and businesses are borrowing money into existence. This is true under a gold standard or not. The Fed's balance sheet without constraint of a gold standard can in theory expand it's balance sheet infinitely, unfortunately.

You say: "Portends only a more spectacular bust when prices at the pump reach $5, and eggs $12 a carton."

You have been calling for all-goods price deflation. Don't you mean "prices at the pump reach $1, and eggs $0.50 a carton." What, now you're calling for inflation?

Welcome to the inflation team!

grapejelly
03-01-08, 12:54 PM
This is a hot topic of debate within the hedge fund community. The general consensus is that managers bailing out of non-AAA rated corporates are not moving money from corporates into commodities but rather to the "safety" of government bonds, staying within the fixed income asset class. The perception of relative low default risk is creating a premium over inflation risk, so bond prices on the long end are rising and yields falling (http://www.bloomberg.com/markets/rates/). How are commodity prices related? One theory I like is that hedge funds are buying into commodities to hedge the inflation risk in their bond positions.

Sovereign bond prices on the long end are rising a bit but I wonder for how long...Meanwhile, I think a lot of hedge fund money has been moving into oil. I think oil is around US$100 per barrel because of the flight out of financial assets.

I can see a pile-in to precious metals soon. There may be a bit of a correction as the Euro falls agains the US$ (I expect this to happen)...but not for long.

touchring
03-01-08, 01:05 PM
You mean the action has not even started for gold? :eek:




I can see a pile-in to precious metals soon. There may be a bit of a correction as the Euro falls agains the US$ (I expect this to happen)...but not for long.

Slimprofits
03-01-08, 01:13 PM
link (http://voice.paly.net/view_feedback.php?id=10714)

The price of tuition among private universities increased by 6.3 percent this year, while public colleges increased tuition by a drastic 6.6 percent, according to The College Board.


And the alternative is to delay attending or not attend at all. Of course, unemployment is rising in what did Fred say, 46 states?

donalds
03-01-08, 01:44 PM
"Some will raise the point that the money supply is growing rapidly, by some measures, but I would counter that by other measures it is not. And please do not suggest, as some do, that the soon-to-be $180 billion Term Auction Facility, by which the Fed provides liquidity to banks, is proof of monetary inflation. It is not. The Fed "sterilizes" the money they inject through the use of the TAF, so that while they inject money into banks, they take a similar amount from the economy as a whole. Over the last few years, we have had little growth in the base money supply, and certainly nothing to get worked up over."

From John Mauldlin's email letter, yesterday (Friday).

donalds
03-01-08, 02:07 PM
More from Mauldin:

"Today, there is little inflationary pressure coming from wage growth. Until that happens, I doubt the Fed will worry too much about inflation getting away from them."

"So, taking the longer view, we have two very serious deflationary forces at work in the economy that could lead to a serious recession if not dealt with, and the likelihood that the inflation numbers that are causing heartburn today will moderate by the end of the year."

Welcome to the deflation team!

Contemptuous
03-01-08, 02:26 PM
Xxxxxxxxxxxxxxxxxxxxx

Moved

FRED
03-01-08, 02:26 PM
And the alternative is to delay attending or not attend at all. Of course, unemployment is rising in what did Fred say, 46 states?

Rising unemployment in 46 states, flat in 2, falling in 2 Nov. to Dec. 2007.

California state GDP makes it the 7th largest nation in the world, on a par with Spain, Italy, and China. (http://en.wikipedia.org/wiki/Economy_of_California)

Zeroing in on California, unemployment by county, rising in 50 of 58 counties between Dec. 2006 and Dec. 2007.


http://www.itulip.com/images/CAunemploymentmap0208.gif
California unemployment by county (Source: Bureau of Labor Statistics and iTulip.com)

http://www.itulip.com/movies/unemploymentMovie.swf
Recession by state 1978 to 1999 (Source: Economagic)

Contemptuous
03-01-08, 02:28 PM
Ackerman's comment may begin to appear increasingly as "pretzel logic" as commodities prices continue their ascent. At which point does it begin to recognize it's own convolution?

<< But if Fed stimulus continues to drive up prices for everything but housing, that is hardly a recipe for inflation; rather, it portends only a more spectacular bust when prices at the pump reach $5, and eggs $12 a carton. >>

Of course - eventually there is a "big all assets down bust". But if that final bust represents a scant 5% of the entire economic trajectory of this economic decline at the very end, what actionable use is it, while the other 95% of the decade (or two) is spent sweating it through the long-drawn-out process where purchasing power gets so degraded it only buys $10 a gallon gas, and $20.00 a carton eggs?

What use is it, for an economic analyst to micro-analyse the "approaching inevitable washout bust" when 95% of the entire decade (or 2 decades?) instead patently displays the progression to $20 a carton eggs?

metalman
03-01-08, 02:46 PM
More from Mauldin:

"Today, there is little inflationary pressure coming from wage growth. Until that happens, I doubt the Fed will worry too much about inflation getting away from them."

"So, taking the longer view, we have two very serious deflationary forces at work in the economy that could lead to a serious recession if not dealt with, and the likelihood that the inflation numbers that are causing heartburn today will moderate by the end of the year."

Welcome to the deflation team!

how much gold/silver/platinum did you buy back in 2001 when itulip was saying: inflation, ho!

let me guess: none. right? missed the whole trip so far, right? hoping deflation will take everyone back to your level, perhaps?

just guessing.

else the stuff you say makes no sense, assuming you agree with muddle-through mauldin. translation of his muddle-through theory: "on the one hand this, on the other hand that". classic.

"we have two very serious deflationary forces at work in the economy that could lead to a serious recession".

asset price deflation!
asset price deflation!
asset price deflation!
asset price deflation!
asset price deflation!

repeat after me.

asset price deflation!
asset price deflation!
asset price deflation!
asset price deflation!

debt financed shit... real estate, etc. in local currency... dollars.

recession = commodities price deflation? not always.

where's those itulip charts... ah, here they are...

argentina 1988 - 1991... falling real gdp in dollars, rising nominal gdp in reals, and rising inflation. peg real to dollar 1992.

http://www.itulip.com/images/argentinaGDPinflation.gif

http://www.itulip.com/images/argentinaGDPinflation2.gif

usa 2008 - 2011... falling real gdp in gold, rising nominal gdp in dollars, and rising inflation. peg dollar to, what, euro
or gold in 2012?

get it?

sheesh!

Contemptuous
03-01-08, 02:54 PM
Mauldin's analysis of this market is a LUG NUT. Give him an "F" for sound actionable advice here.

Used to read Mauldin regularly - but he has palled somewhat, due to discovering a vague irritation with the mixture of "on the one hand this, but on the other hand that" analysis, interspersed with copious preening in his personal travel diaries, which he regularly posts for reader's admiration. His readers are regaled with breezy updates in every letter he posts, of the well heeled junkets he undertakes, from New York to London, to Paris, to Johannesburg, to safaris in Tanzania, back to tour Prague and Warsaw - so that we seem to be getting prepped for a blow by blow account of his eventual "grand coup", a dinner with her Majesty Queen Elizabeth.

Enough already Mr. Mauldin - concentrate on getting the biggest actionable call right (readers should seek to protect themselves from inflation, not deflation, and soon!). We can all catch up with your peripatetic travel at our own discretion maybe if we are all agog about it, by discreetly calling your secretary?

____________

February 29, 2008

Thoughts from the Frontline Weekly Newsletter - Stagflation and the Fed

Memo from the Fed: Inflation? What Inflation?

The inflation numbers for January were high. The Consumer Price Index (CPI) rose 0.4% in January, which means a rise of 4.4% over the last 12 months. If you annualize the 3-month trend, it is 6.8%. By the way, that 3-month average is a useful tool for discerning trends, so the trend in inflation is not good.

Just last August, annual inflation was 1.9%, including food and energy. Notice the rise since then. Also notice the rise in core inflation (2.5%) and the 3-month trend of 3.1%. This is clearly above the Fed's comfort zone of 2%, although good friend Paul McCulley makes a good case that the comfort zone should be higher.

Bernanke practically promised more rate cuts at this week's

But how can they cut if inflation is high and rising? Bernanke and Kohn made it clear that the think the #1 task right now is to fight the recession/slowdown in the economy. They are not going to let a little inflation keep them from that goal, nor are they worried about the dollar.

But won't that guarantee a repeat of the '70s and require a new Volker to come in and cause a deep recession to bring inflation back down?

I don't think so. To understand why not, we have to look at just what inflation is and how it works its way into the economy. There are significant differences from the 70's and today.

Some will raise the point that the money supply is growing rapidly, by some measures, but I would counter that by other measures it is not. And please do not suggest, as some do, that the soon-to-be $180 billion Term Auction Facility, by which the Fed provides liquidity to banks, is proof of monetary inflation. It is not. The Fed "sterilizes" the money they inject through the use of the TAF, so that while they inject money into banks, they take a similar amount from the economy as a whole.

Over the last few years, we have had little growth in the base money supply, and certainly nothing to get worked up over.

[ Comment : What does Mauldin's sophistication count for if he cannot think his way out of this conceptual box?? Look for the inflationary flags abounding on the ground (are they observable or not today?), and work your way back from there to more accurately locate the inflation mechanisms! Rethink your premise Mr. Mauldin - the rampant inflation data on the ground, or the action in commodities suggest you might at least consider rethinking your premise! ]

But what if the Fed decided that inflation was a problem and decided to go ahead and raise rates and shove the economy into recession. Would that reduce oil prices? A little, as demand would weaken. But oil prices are not a result of monetary inflation or low interest rates. They are a result of rising demand for energy, particularly from Asia, and flat supply. The Fed has no control over oil prices.

Damn the Inflation Torpedoes! Full Speed Ahead!

So, let's look at why the Fed is not focusing on inflation, despite the numbers from last week. First, they truly think that inflation is going to come down on its own this year, and I agree.

As I have written for some time, it would be a very strange recession indeed, for inflation to be persistent, particularly with two major bubbles slowly collapsing before our eyes. The housing bubble is only beginning to be felt. It is clearly going to have a negative effect on consumer spending, and that is not a climate for demand-led inflation. It is just the opposite.

Again, this is not an inflationary force. It is just the opposite. As I have argued for over a year, the subprime crisis will not be contained. It is going to spread. The shoe will drop. Count on it.

Further, if you look at core goods prices, that is everything but food and energy, inflation is 0.2% over the last year. Yes, I know that we have to eat and buy gas, but in the '70s everything was going up.

And that included wages. Today, there is little inflationary pressure coming from wage growth. Until that happens, I doubt the Fed will worry too much about inflation getting away from them. That is not to say that it couldn't happen, but we would have to see wages and goods prices rise to convince the Fed inflation is an issue.

[ Comment : "On the one hand this, but on the other hand that" ... Mauldin leaves his own conclusions vague, ascribes all the above conclusions to the FED, and so further hedges his own already "safely agnostic" positions here ]

And one last point. Notice in the table above that inflation started picking up in August as food and energy costs rose. In six months, the year over year comparisons will be from a much higher base. Unless you think oil is going to $150 a barrel by the end of the year, energy inflation will be much lower. That does not mean prices will come down, though they may. In fact, I expect them to in the short run.

But if oil is $100 a year from now, then that will mean there was zero inflation in gasoline over the preceding 12 months. Remember, we measure inflation in annual terms.

The same with food. We are having massive dislocations in food availability due to using land to grow corn to make ethanol. These things will sort themselves out, and I expect that food prices will be flat to down from here for the next 12 months.

[ Comment : "On the one hand Mauldin believes soaring oil prices are "a result of rising demand for energy, particularly from Asia, and flat supply", yet on the other hand he chooses to believe rising food prices are only due to ethanbol?? ... You can't have it both ways Mr. Mauldin! Here he glosses right over soaring agri-prices as another symptom of underlying global inflation. "They are only due to Ethanol"! --- And this gem : "I expect that food prices will be flat to down from here for the next 12 month" Indubitably a brilliant call Mr. Mauldin!" -- And now for some much anticipated travel itinerary updates? ]

So, taking the longer view, we have two very serious deflationary forces at work in the economy that could lead to a serious recession if not dealt with, and the likelihood that the inflation numbers that are causing heartburn today will moderate by the end of the year.

At least, that is the bet at the Fed. As I wrote last week, they are very concerned about the credit crisis. They are going to bring rates down, and I think it likely they will go below 2%. They may stay there longer than we now think if I am right about a protracted and slow Muddle Through recovery. I would not be surprised if I am writing about deflation by the end of the year.

[ Comment : " likelihood that the inflation numbers that are causing heartburn today will moderate by the end of the year. -- At least, that is the bet at the Fed" = Mauldinspeak > "On the one hand this, but on the other hand that" ... Mauldin hedges his bets here ]

I have kids at home waiting for me to take them out, so I am going to hit the send button. Have a great week, and remember, it is only a recession. We will get through this and back to solid growth, just as we always have. That is what free markets do.

Your still thinking we have just begun a bear market analyst,

donalds
03-01-08, 04:04 PM
For a (much) less than superficial analysis of what took place during the crisis in Argentina, see:

http://www.newleftreview.org/?view=2410

FRED
03-01-08, 04:12 PM
how much gold/silver/platinum did you buy back in 2001 when itulip was saying: inflation, ho!

let me guess: none. right? missed the whole trip so far, right? hoping deflation will take everyone back to your level, perhaps?

just guessing.

else the stuff you say makes no sense, assuming you agree with muddle-through mauldin. translation of his muddle-through theory: "on the one hand this, on the other hand that". classic.

"we have two very serious deflationary forces at work in the economy that could lead to a serious recession".

asset price deflation!
asset price deflation!
asset price deflation!
asset price deflation!
asset price deflation!

repeat after me.

asset price deflation!
asset price deflation!
asset price deflation!
asset price deflation!

debt financed shit... real estate, etc. in local currency... dollars.

recession = commodities price deflation? not always.

where's those itulip charts... ah, here they are...

argentina 1988 - 1991... falling real gdp in dollars, rising nominal gdp in reals, and rising inflation. peg real to dollar 1992.

http://www.itulip.com/images/argentinaGDPinflation.gif

http://www.itulip.com/images/argentinaGDPinflation2.gif

usa 2008 - 2011... falling real gdp in gold, rising nominal gdp in dollars, and rising inflation. peg dollar to, what, euro
or gold in 2012?

get it?

sheesh!

No need to go to the Argentine extreme. The Great US Inflation, as discussed in the report Understanding the Evolving Inflation Process, U.S. Monetary Policy Forum, Jul 2007 (pdf, 77 pages, very technical) (http://www.itulip.com/Select/usmpf_2007.pdf) shows inflation rising through the early 1970s recession in the US.


http://www.itulip.com/images/USGreatInflation.gif

metalman
03-01-08, 04:22 PM
For a (much) less than superficial analysis of what took place during the crisis in Argentina, see:

http://www.newleftreview.org/?view=2410

i'll take that as a "no" you didn't buy any gold in 2001 or 2002 or 2003 etc. because every year deflation was... just around corner.

the new left review article on argentina is very interesting... thanks for posting it. very detailed account. but it's weak on the point i'm making.

"The economy contracted steeply, with GDP falling by a record 16.3 per cent in the first quarter of 2002, and manufacturing output by almost 20 per cent."

the data in the itulip graph show that nominal gdp growth in the real was up during the period. the reason that's important is that we are hearing that the usa is not in recession yet and in nominal gdp terms that is correct. but so what? it ain't true in euro terms or gold terms.

donalds
03-01-08, 05:32 PM
That's right, metalman, didn't buy gold in 2001-2003. Sunk most of what I had in oil (or related) stocks, like Flour, Transocean, Oxy, etc., and did quite well, thank you.

When i get an itchin to listen in on the gold bugs I go to financialsense.com podcast to catch a whiff of the hyperinflation depression coming. Don't usually get through the entire thing though . . . the belly laugh soon turns to a belly ache.

Contemptuous
03-01-08, 05:34 PM
Jim Puplava at Financialsense will give you a lot better guidance than your globetrotting Mr. Mauldin I'll wager.

bill
03-01-08, 05:48 PM
RA: whence will come the money to bid oil to $200 a barrel, or wheat to $50 a bushel? I hope you don’t try to argue that, in the coming economic depression, physical demand for oil and wheat will take up the slack.

It's a global multi trillion us dollar problem.
I call it the "resource theater".
http://www.bloomberg.com/apps/news?pid=20601087&sid=ayLlqabQeAgA&refer=home


Buffett Says U.S. Trade Imbalance Lures Sovereign Wealth Funds

By Josh P. Hamilton
March 1 (Bloomberg) -- Billionaire investor Warren Buffett stepped into a debate about the emergence of sovereign wealth funds, saying the government-controlled firms are fueled by U.S. spending overseas, not political motives.
``This is our doing, not some nefarious plot by foreign governments,'' Buffett, the chairman of Berkshire Hathaway Inc., said yesterday in his annual letter to shareholders. ``Our trade equation guarantees massive foreign investment in the U.S. When we force-feed $2 billion daily to the rest of the world, they must invest in something here.''
Countries including China, Russia and Dubai have deployed record central bank reserves to set up funds wielding as much as $2.9 trillion. Firms from Singapore, Korea, Kuwait and Abu Dhabi bought stakes during the past four months in Citigroup Inc., the biggest U.S. bank by assets, and Merrill Lynch & Co., the world's biggest brokerage. Officials from the U.S. Treasury Department and the Securities and Exchange Commission have said there's a risk government-controlled funds may invest to achieve political, rather than commercial, ends.
``He's right that we're the ones that created the problem in the first place,'' said Mohnish Pabrai, who manages $600 million at Pabrai Investment Funds in Irvine, California. ``The U.S. is better off if foreign governments buy Treasuries, because we have a printing press for them, but if I were running China's money, I'd be buying U.S. companies, oil reserves, hard assets too.''


Expect more of this from our gov.

http://www.reuters.com/article/politicsNews/idUSN2857281920080228?feedType=RSS&feedName=politicsNews


Rep Frank to offer home-buying bill within weeks

Thu Feb 28, 2008
By John Poirier
WASHINGTON (Reuters) - A key House Democrat plans to introduce legislation in the coming weeks that would allow the U.S. government to buy homes whose values have dropped below the cost of the mortgage, an aide said on Thursday.

GRG55
03-01-08, 06:06 PM
It's a global multi trillion us dollar problem.
I call it the "resource theater".
http://www.bloomberg.com/apps/news?pid=20601087&sid=ayLlqabQeAgA&refer=home



Expect more of this from our gov.

http://www.reuters.com/article/politicsNews/idUSN2857281920080228?feedType=RSS&feedName=politicsNews




``He's right that we're the ones that created the problem in the first place,'' said Mohnish Pabrai, who manages $600 million at Pabrai Investment Funds in Irvine, California. ``The U.S. is better off if foreign governments buy Treasuries, because we have a printing press for them, but if I were running China's money, I'd be buying U.S. companies, oil reserves, hard assets too.''

The Chinese tried to buy a US company with oil reserves a few years back. Didn't work. We'll see how long it takes before they try it again.

GRG55
03-01-08, 06:09 PM
Inflation hawk? What can Ben do to force down oil prices? Impose import curbs?

All this inflation is an excuse, i only see a coordinated effect by OPEC to ensure high oil prices. High oil prices will flow down the system and cause inflation in everything else from food to metals to services.

He could start by ending the rate cuts. Next start to build the case publicly for rate increases. The former action and latter threat will be enough to clobber oil (and most other inflation hedges), as the US$ exchange rate will start to go the other way.

Will he do it? Not until the Fed feels that the major banks have "fixed" their balance sheets (Bernanke does not want to emulate Mervyn King). If the US$ continues to hit the skids, and commodities, especially food, start to run away, he will have to act to at least temporarily halt the slide.

Your view that OPEC has any control over oil prices is just plain wrong. They completely lost control when oil went contango in mid-2004. They have been desperately trying to figure out a way to get it back ever since. Without success.

donalds
03-01-08, 07:16 PM
Lukestar says:

"Jim Puplava at Financialsense will give you a lot better guidance than your globetrotting Mr. Mauldin I'll wager."

Hey, Luke, just because I place a quote from Mauldin doesn't make me a Mauldinistat. I find the guy an elitist. His muddle through is rubbish, as far as I can tell.

As for Puplava, he's all yours. The guy has ultimate faith in the Fed and government to inflate us out of the mess, at least this time, but ultimately succumbing to Bismarkian depression.

The notion that the Fed and federal government has the power to deflate debt and re-start credit creation is is based on assumptions, unless back by factual and empirical analysis. This analysis must account for how Fed monetization will succeed in a global bond market - combined with an analysis that explains how the US government will have the ability to subsidize in the face of ever increasing deficits as local, state and federal tax revenues decline ever faster.

As for this factual and empirical analysis . . . still waiting.

c1ue
03-02-08, 09:13 AM
Bernanke won't get fired. There's enough uncertainty in the US financial markets already; they aren't so stupid that they will add to that by dumping the head of the big kahuna Central Bank in mid-crisis. This isn't the same as the 1970's.

You may be right, but then again...

Bernanke is counting on the domestic situation not getting so bad that there will be calls for someone's head by the end of the year.

I'm not so sure.

At some point there will be a popular reaction against rising prices across the board - the recent oil price spike translated into gasoline prices might just be the trigger.

At that point, a sacrificial goat will be needed much as Burns was expended.

Given that GW is already outgoing, there is no benefit from his departure.

And I don't think Paulson is as tasty a morsel thrown to the masses as Bernanke.


Ben is going to prove to be a bigger inflation hawk sometime in the next year or so, than most currently expect. Helicopter Ben is actually doing a reasonable job given his policy options and the situation he's facing. THe USA may come out of this mess better than Europe.

I think he may try, but in my view he's done the following since he began:

1) Tried to educate Congress that the Fed isn't all powerful
2) Tried to inventively fix the banking crisis without credit pumping, but failed
3) Thrown in the towel and gave his buds what they wanted: cheap money and too bad for everyone else.

You apparently seem to feel the past Fed actions were all part of a grand plan, I simply don't agree.

Under my thesis, Bernanke is going to drop interest rates as close to zero as he thinks the foreign dollar holders can tolerate. But, since these foreigners have now been convinced that the US really is going to throw them and their dollar holdings under the inflation bus, the easy goods-for-dollars carry trade is going to be terminated abruptly unless the US relaxes its restrictions on foreigners buying control of US companies and hard assets.

Since the very people who are causing the US easy money policy are the controllers of said assets, I don't see this happening.

Inflation thus will moderate, but by then prices will be so high as to be irrelevant. Bernanke will be sacrificed on the altar of expediency and another patsy brought in.

Unfortunately, the extant problems won't be solved by this Central American religious rite.

Thus the Volcker of 2011 will be a composite of an Arab, a Chinese, a Russian, an Indian, and a Brazilian banker (not central), and the anti-inflation policy will be carried out via a cessation of the goods for worthless dollars trade.

Europe will be embroiled with its own problems and not be a factor - the entire Germany & France vs. the Mediterranean will devolve into an ugly fracas of political posturing as the necessary weakening of the Euro will be slowed by the need for the currency deficit EU portions to keep strong purchasing power.

GRG55
03-02-08, 11:34 AM
You apparently seem to feel the past Fed actions were all part of a grand plan, I simply don't agree.


I don't know where you get the idea that I think the Fed is operating on some "grand plan"? The Fed has demonstrated repeatedly that when it is necessary for it to be opportunisitic, it will behave that way.

And, as I tried to explain in recent posts, if the Fed gets the opportunity to stop the rate cuts, and turn hawkish (instead of being forced to by circumstances - still a real possibility in the event of a US$ free-fall) it will take that opportunity, and the journey to the zero-bound that you expect may be severely interrupted (but not necessarily cancelled) for some period of time.

Contemptuous
03-02-08, 05:34 PM
... You [ Ackerman] say: "Portends only a more spectacular bust when prices at the pump reach $5, and eggs $12 a carton." ... You have been calling for all-goods price deflation. Don't you mean "prices at the pump reach $1, and eggs $0.50 a carton." What, now you're calling for inflation? ... Welcome to the inflation team!

Perhaps the following brief data might serve as a book-end for this thread?

We could even put a nice engraved brass plaque underneath this datum and frame it for posterity - the "gutted deflation case", entitled "actionable hints and epistemological methodology - concerning the presence or absence of inflation in all-goods prices - 2008"

> Prices are skyrocketing: The U.S. Department of Labor reported that wholesale prices soared 1% in January. That was three times more than economists forecast. And it bumped the inflation rate for the preceding 12 months to 7.4% — the worst since the fall of 1981.

> Oil prices are soaring: Oil topped $103 per barrel — up more than 1,000% since we first wrote that prices were set to skyrocket.

> Gold is exploding higher: It hit still another all-time high of $976 per ounce in Hong Kong Friday morning — more than triple the price it was when we first began forecasting this new gold market ... and only a scant $24 away from the historic $1,000 mark.

> Nearly all commodity prices are through the roof: The Reuters CRB Index, which tracks 17 key commodities prices, has soared a staggering 18% just since late January.


Mr. Ackerman, what ever are we to do with this irksome data?

metalman
03-02-08, 06:48 PM
Perhaps the following brief data might serve as a book-end for this thread?

We could even put a nice engraved brass plaque underneath this datum and frame it for posterity - the "gutted deflation case", entitled "actionable hints and epistemological methodology - concerning the presence or absence of inflation in all-goods prices - 2008"

> Prices are skyrocketing: The U.S. Department of Labor reported that wholesale prices soared 1% in January. That was three times more than economists forecast. And it bumped the inflation rate for the preceding 12 months to 7.4% — the worst since the fall of 1981.

> Oil prices are soaring: Oil topped $103 per barrel — up more than 1,000% since we first wrote that prices were set to skyrocket.

> Gold is exploding higher: It hit still another all-time high of $976 per ounce in Hong Kong Friday morning — more than triple the price it was when we first began forecasting this new gold market ... and only a scant $24 away from the historic $1,000 mark.

> Nearly all commodity prices are through the roof: The Reuters CRB Index, which tracks 17 key commodities prices, has soared a staggering 18% just since late January.

Mr. Ackerman, what ever are we to do with this irksome data?

rick (waving his hands around to distract you): what about debt deflation? huh? if i stop talking about price deflation like i used to and slip the word "debt" in front of it no one will notice. he-he. i still get to use the word "deflation" and... i'm right! there is debt deflation, right? you said so yourself.

itulip: no, silly. the most popular form of debt deflation is expanding the money supply to allow the repayment of debt with depreciated dollars ala ka-poom ala 2001 (or whenever). true then, true now.

rick: ok, i'll shut up now. (http://www.itulip.com/hungry.wav)

jk
03-02-08, 08:46 PM
1.

"There is no such thing as Society. There are individual men and women, and there are families."
that’s why we don’t worry about crowd phenomena around here, huh? I prefer the saying that the iq of a group equals the highest iq of any member divided by the number of people in the group. An exaggeration, no doubt, but it says crowd phenomena are real. Similarly, there’s no such thing as social trends, huh? And so on.


2. deflation v inflation and The melting of the monetary ice-caps
global warmists worry about the rise of sea level once big chunks of ice melt. In similar fashion, the vast frozen reserves of u.s. financial instruments held by foreign c.b.’s are “melting” into circulation, raising our monetary sea-level.

3. Grg55’s fed tightening “once the banks are made whole” [or words to that effect]
This scenario is contingent on the banking problems being, relatively speaking and to coin a phrase, “contained.” On the other hand, I am of the view that the rot in the banking/credit system goes much deeper than has been revealed to date, and the abcess will be lanced to release a putrid mass of bad paper and counterparty failures. I think bernanke would likely love grg’s posited opportunity, but I don’t think he’ll get it.

4. the unit of account and “inflation” and “deflation”
I’m with metalman, who brings us back to the point that you can have all-price inflation and all-price deflation simultaneously depending on your unit of account. Are we counting in dollars, euros, yen, real, gold, bushels of wheat, fixed commodity baskets or those huge round stone wheels that they use somewhere or other? Tell me that, then we can talk inflation or deflation.

5. let’s not assume that all prices move in the same direction
whatever the unit of account, there is no law saying that all prices must move the same way. In fact, such coordinated and unanimous movement seems pretty unlikely. The inflation-deflation debate usually treats global pricing as unitary, but it seems to me that a benefit of ej’s model is that it disaggregates the economy. Real estate prices down. Most equity prices down. Leveraged financial instruments down. Commodities up, but not necessarily all commodities. This is an area that remains for analysis.

6. the problem of wages
the paper from the cleveland fed says that inflation has caused increased wages more than vice versa. But we still need to elucidate the mechanism for that to happen under current conditions, or if we can’t elucidate the mechanism, at least find the evidence for that happening. Aggregated compensation figures hide the disproportionate distribution of incomes and, I would guess, the even more disproportionate distribution of income increases. ej’s story of the poor selling the family jewelry while the rich buy precious metals captures the issue. I think the issue of wage inflation is key. Mauldin’s piece is correct, I think, in saying that the fed will tend to feel retlatively sanguine about inflation IN THE ABSENCE OF WAGE INFLATION.

metalman
03-02-08, 11:00 PM
4. the unit of account and “inflation” and “deflation”
I’m with metalman, who brings us back to the point that you can have all-price inflation and all-price deflation simultaneously depending on your unit of account. Are we counting in dollars, euros, yen, real, gold, bushels of wheat, fixed commodity baskets or those huge round stone wheels that they use somewhere or other? Tell me that, then we can talk inflation or deflation.

thx but can't take credit. learned it here years ago.


6. the problem of wages
the paper from the cleveland fed says that inflation has caused increased wages more than vice versa. But we still need to elucidate the mechanism for that to happen under current conditions, or if we can’t elucidate the mechanism, at least find the evidence for that happening. Aggregated compensation figures hide the disproportionate distribution of incomes and, I would guess, the even more disproportionate distribution of income increases. ej’s story of the poor selling the family jewelry while the rich buy precious metals captures the issue. I think the issue of wage inflation is key. Mauldin’s piece is correct, I think, in saying that the fed will tend to feel retlatively sanguine about inflation IN THE ABSENCE OF WAGE INFLATION.

yes, but who's wages? working class j6p's wages or the rent extracted via the debt serf system? that latter inflation = good, the former bad. in fact fire inflation isn't even measured. no fire cpi and if it were measured the higher it was the better.

Contemptuous
03-03-08, 12:06 AM
The Subtle Art Of Neo-Epistemological Forecasting -


290

281

288

GRG55
03-03-08, 07:02 AM
3. Grg55’s fed tightening “once the banks are made whole” [or words to that effect]
This scenario is contingent on the banking problems being, relatively speaking and to coin a phrase, “contained.” On the other hand, I am of the view that the rot in the banking/credit system goes much deeper than has been revealed to date, and the abcess will be lanced to release a putrid mass of bad paper and counterparty failures. I think bernanke would likely love grg’s posited opportunity, but I don’t think he’ll get it.




Wrong on the first point. The banks won't be "made whole" for quite some time, and some will never be made whole - - ever. The Fed knows this. And after Bernanke's comments last week, we know they know this:

"Feb. 29 (Bloomberg) -- The credit-default swap market had its worst two months on record amid investor concern that mounting losses on securities linked to home loans will trigger bank failures...Federal Reserve Chairman Ben S. Bernanke said yesterday some smaller banks will probably fail and unemployment will rise, fueling concern that a recession is inevitable..."As long as the US$, gold and the publicly visible commodities (food and fuel) price behaviour doesn't get completely out of control, the Fed has the luxury of buying time for the financial sector to continue to repair itself. I agree they want a still lower US$ (note that Boeing couldn't land the air tanker defense contract even at this exchange rate!!! :( ) and will tolerate higher commodity prices - but only to a point.

Who is lining up and eager to lance that abcess? When will "they" do it? What is their motive? Who benefits? Anyone? Not that it won't happen, but "The market can remain irrational longer than..."

Money now smells blood and I'll bet the short dollar, long commodity positions are piling up rapidly as market speculators do what they always do...push a trend to excess to see how far they can profitably take it. What do you think the Fed and the other Central Banks will do if the moves in the US$, grain, and maybe oil go parabolic? Deliberately lance that abcess? Stand aside? Order lunch? Call Sikorsky?

I think they take a stand. Force some losses on the less nimble traders, take the froth off the inflation trade, and buy themselves more time to deal with the putrid mess nobody wants to admit to.

The Fed has a dual mandate. And all the other major Central Banks have some sort of inflation target band. Investors who are long commodities and precious metals (like me), and who ignore this, or underestimate these Central Banks, do so at their potential peril IMO.

By the way, is that a CAPITAL "G" I see at the start of your point 3? Wow. You can't assume that anything will remain constant these days... :)

FRED
03-03-08, 09:03 AM
Wrong on the first point. The banks won't be "made whole" for quite some time, and some will never be made whole - - ever. The Fed knows this. And after Bernanke's comments last week, we know they know this:

"Feb. 29 (Bloomberg) -- The credit-default swap market had its worst two months on record amid investor concern that mounting losses on securities linked to home loans will trigger bank failures...Federal Reserve Chairman Ben S. Bernanke said yesterday some smaller banks will probably fail and unemployment will rise, fueling concern that a recession is inevitable..."As long as the US$, gold and the publicly visible commodities (food and fuel) price behaviour doesn't get completely out of control, the Fed has the luxury of buying time for the financial sector to continue to repair itself. I agree they want a still lower US$ (note that Boeing couldn't land the air tanker defense contract even at this exchange rate!!! :( ) and will tolerate higher commodity prices - but only to a point.

Who is lining up and eager to lance that abcess? When will "they" do it? What is their motive? Who benefits? Anyone? Not that it won't happen, but "The market can remain irrational longer than..."

Money now smells blood and I'll bet the short dollar, long commodity positions are piling up rapidly as market speculators do what they always do...push a trend to excess to see how far they can profitably take it. What do you think the Fed and the other Central Banks will do if the moves in the US$, grain, and maybe oil go parabolic? Deliberately lance that abcess? Stand aside? Order lunch? Call Sikorsky?

I think they take a stand. Force some losses on the less nimble traders, take the froth off the inflation trade, and buy themselves more time to deal with the putrid mess nobody wants to admit to.

The Fed has a dual mandate. And all the other major Central Banks have some sort of inflation target band. Investors who are long commodities and precious metals (like me), and who ignore this, or underestimate these Central Banks, do so at their potential peril IMO.

By the way, is that a CAPITAL "G" I see at the start of your point 3? Wow. You can't assume that anything will remain constant these days... :)

EJ writes in:


With so much riding on the inflation bet, vigilance bordering on paranoia is called for. That said, with statements like these, it's difficult to see how the Fed will be able to engineer a serious and sustained decline in oil prices.
Oil prices won't fall under $60-$70: Naimi (http://www.reuters.com/article/businessNews/idUSL0245799820080302)
Sun Mar 2, 2008 9:03am EST

ALGIERS (Reuters) - Oil prices won't fall below $60 to $70 a barrel as this is the minimum level at which alternative fuels are economically viable, Saudi Oil Minister Ali al-Naimi said in remarks published on Sunday by Algeria's APS news agency.

"From now there's a line below which prices won't fall," the official agency quoted him as saying in an interview with Petrostrategies magazine.

He said this involved "the marginal cost of production of alternative fuels, whether that's biofuels or tar sands" which had a threshold "between $60 and $70", APS reported.
I met with the largest investment bank in the Middle East in NYC a couple of months ago. They were offering a product to funds interested in GCC equities exposure. Their investment thesis was well summed up by one of the hedge fund managers in the room as "long oil." With oil already over $90, everyone was skeptical. But what if oil producers are in fact committed to holding supplies below demand to maintain prices over the price of alternatives in order to support a US Alternative Energy boom? What if that's the new political arrangement with the west?

jk
03-03-08, 09:33 AM
Wrong on the first point. The banks won't be "made whole" for quite some time, and some will never be made whole - - ever. The Fed knows this. And after Bernanke's comments last week, we know they know this:

"Feb. 29 (Bloomberg) -- The credit-default swap market had its worst two months on record amid investor concern that mounting losses on securities linked to home loans will trigger bank failures...Federal Reserve Chairman Ben S. Bernanke said yesterday some smaller banks will probably fail and unemployment will rise, fueling concern that a recession is inevitable..."As long as the US$, gold and the publicly visible commodities (food and fuel) price behaviour doesn't get completely out of control, the Fed has the luxury of buying time for the financial sector to continue to repair itself. I agree they want a still lower US$ (note that Boeing couldn't land the air tanker defense contract even at this exchange rate!!! :( ) and will tolerate higher commodity prices - but only to a point.

re the fed tolerating commodity prices- i think high commodity prices will be viewed as ultimately deflationary, a "tax" on consumption, not inflationary, in the absence of wage inflation.



Who is lining up and eager to lance that abcess? When will "they" do it? What is their motive? Who benefits? Anyone? Not that it won't happen, but "The market can remain irrational longer than..."
who lanced the subprime bubble? a margin clerk who demanded more collateral from 2 bear stearns funds. that's what started the ball rolling iirc.


Money now smells blood and I'll bet the short dollar, long commodity positions are piling up rapidly as market speculators do what they always do...push a trend to excess to see how far they can profitably take it. What do you think the Fed and the other Central Banks will do if the moves in the US$, grain, and maybe oil go parabolic? Deliberately lance that abcess? Stand aside? Order lunch? Call Sikorsky?
as food and energy go higher, ben will worry about consumption of other goods going lower as j6p is squeezed, not to mention his mortgage resetting next month.


I think they take a stand. Force some losses on the less nimble traders, take the froth off the inflation trade, and buy themselves more time to deal with the putrid mess nobody wants to admit to.

The Fed has a dual mandate. And all the other major Central Banks have some sort of inflation target band. Investors who are long commodities and precious metals (like me), and who ignore this, or underestimate these Central Banks, do so at their potential peril IMO.
there is a reason for the big inflation-deflation debates we hold. there are a lot of deflationary forces, mainly a lot of debt, a lot of leverage. ben is an expert on the great depression and the japanese deflation. the dual mandate gets tossed overboard when there is a threat of deflation, a threat of the fed funds rate reaching the zero bound. the g7 issued a warning about disorderly dollar depreciation, i know, but i can't see more than a coordinated currency intervention someday. and that will hit commodities, temporarily.

i think the real risk to the commodity trade is a big-time deflation scare, a deeper recession than anyone expects, or at least some data that points in that direction. THEN there will be a sell-off of commodities, including pm's.


By the way, is that a CAPITAL "G" I see at the start of your point 3? Wow. You can't assume that anything will remain constant these days... :)

i composed the post in microsoft word and then pasted it. word did automatic capitalization following a period. accidents happen.:p

metalman
03-03-08, 09:55 AM
can i butt in?


re the fed tolerating commodity prices- i think high commodity prices will be viewed as ultimately deflationary, a "tax" on consumption, not inflationary, in the absence of wage inflation.

no. you're sounding ackermishian! high prices cannot be deflationary. deflation: reduction in the money supply resulting in a decline in the general price level. inflation: rise in the money supply resulting in an increase in the general price level. any other definitions are nonsense hand waving.

the question is: can fire econ interests maintain political influence over the fed to keep the inflation pain directed toward the politically weak in american society?


who lanced the subprime bubble? a margin clerk who demanded more collateral from 2 bear stearns funds. that's what started the ball rolling iirc.yeh, same as every bubble... someone started selling.


as food and energy go higher, ben will worry about consumption of other goods going lower as j6p is squeezed, not to mention his mortgage resetting next month.so what's j6p gonna do about it? vote? bwah ha-ha ha ha ha-ha ha, ho ho, ho! pick yer fire econ candidate...

from...

Forget the Fed - Part II: Politics of FIRE (http://itulip.com/forums/showthread.php?t=1952)


http://www.itulip.com/images/firecandidates.jpg

gee, look who got pushed out of the race first?


there is a reason for the big inflation-deflation debates we hold. there are a lot of deflationary forces, mainly a lot of debt, a lot of leverage. ben is an expert on the great depression and the japanese deflation. the dual mandate gets tossed overboard when there is a threat of deflation, a threat of the fed funds rate reaching the zero bound. the g7 issued a warning about disorderly dollar depreciation, i know, but i can't see more than a coordinated currency intervention someday. and that will hit commodities, temporarily. you ain't following this are you? not price deflation forces, debt deflation forces! monetary inflation is a form of debt deflation. the japanese owe money to themselves... are a net creditor. the us has a natural mechanism of debt deflation via inflation: trillions of bonars overseas. we've been over and over this for years.

now the us is pushing its inflation problem onto the world. when does the world say "uncle"? how do they say uncle? those are the questions. rogers thinks it all goes to shit in acrimonious shitstorm of political/currency crisis. don't know if ej's taken a position on that recently but his interview with galbraith and others way back in 2006... inevitable... transitions to new currency regimes are never smooth or pretty.


i think the real risk to the commodity trade is a big-time deflation scare, a deeper recession than anyone expects, or at least some data that points in that direction. THEN there will be a sell-off of commodities, including pm's.that's dopey. deflation scare... that was fall 2006. over. you blinked. you missed it. right here...

http://www.itulip.com/forums/showthread.php?t=428

where itulip said ka-poom this time is too tough to trade...

The implications of poor distribution of wealth are less obvious. What happened in the 1930s will likely happen again. In a recession, a small minority of the nation's population that garners most of the income and holds most of the nation's wealth and assets cannot generate enough demand to re-employ the majority. As the credit bubble winds down, the US government will find itself with a politically similar challenge as in the 1930s: How to get the wealth spread around and the economy going again? But inflation is much easier to create today without the constraints of the gold standard. Stubborn adherence to the gold standard was in fact blamed for much of the pain, and The Great Depression could have been avoided if only the Fed had been free to print money and buy stuff, just as they are today.

Conclusion

The economic, monetary, financial market, and political antecedents are all in place for a Ka-Poom event. As I mentioned last week, the disinflationary part of the event appears to have started, but no one can say how far it will go before policy makers reverse course, making the transition difficult to time and trade.

GRG55
03-03-08, 09:56 AM
EJ writes in:


With so much riding on the inflation bet, vigilance bordering on paranoia is called for. That said, with statements like these, it's difficult to see how the Fed will be able to engineer a serious and sustained decline in oil prices.
Oil prices won't fall under $60-$70: Naimi (http://www.reuters.com/article/businessNews/idUSL0245799820080302)


Sun Mar 2, 2008 9:03am EST



ALGIERS (Reuters) - Oil prices won't fall below $60 to $70 a barrel as this is the minimum level at which alternative fuels are economically viable, Saudi Oil Minister Ali al-Naimi said in remarks published on Sunday by Algeria's APS news agency.



"From now there's a line below which prices won't fall," the official agency quoted him as saying in an interview with Petrostrategies magazine.



He said this involved "the marginal cost of production of alternative fuels, whether that's biofuels or tar sands" which had a threshold "between $60 and $70", APS reported.
I met with the largest investment bank in the Middle East in NYC a couple of months ago. They were offering a product to funds interested in GCC equities exposure. Their investment thesis was well summed up by one of the hedge fund managers in the room as "long oil." With oil already over $90, everyone was skeptical. But what if oil producers are in fact committed to holding supplies below demand to maintain prices over the price of alternatives in order to support a US Alternative Energy boom? What if that's the new political arrangement with the west?




It is against my nature to be making the kinds of musings I have posted in the past few days. My investing method is to buy what is cheap and hold it until it is dear. Many of the oil positions I hold today were purchased back in 1999 and 2000 when everyone was ga ga over tech, and nobody wanted petroleum. However, the vigilance bordering on paranoia description is exactly how I feel for the first time this decade.
To be clear, I do not expect the Fed to be able to engineer a "serious and sustained decline in oil" or any consumed commodity. My concern is Central Bank reaction to a near term parabolic overshoot that is not driven by fundamentals, but is purely a short term financial "event". No matter how well the rationalization is presented, wheat limit-up EVERY DAY in a week is no longer being driven by fundamentals. This is money smelling blood. If, for example, bond holders are hedging with commodities, they will not hesitate to close those hedges if there is any hint the Fed decides it needs to deal with skyrocketing grain and gasoline because of public and political considerations. This is, after all, an election year...and powerful as Wall St is, they cast only a small number of the total votes in November.
The absolute change is not important. A steady doubling of oil over the next, say four years that supports the US led Alternate Energy Bubble will be tolerated, and perhaps even quietly welcomed. A doubling of oil by the end of this summer, in concert with a collapsing US$ is a political nightmare. The latter will prompt a Fed and global Central Bank response IMO, before it gets to that extreme. It's all about first-derivative, rate-of-change.
The thesis of a "new political arrangement with the west" is intriguing. The benefit to the GCC producers is the security of high revenues to fund their massive social programs that the unrepresentative governments here must have to keep everyone happy. Entitlement expectations are growing very, very rapidly. Inflation is rampant. Subsidies for everything from petrol to baby food are expanding rapidly. A collapse in oil prices would be potentially devastating to social stability, and the political grip the Ruling Families hold. Now that the threat from Saddam has been permanantly removed, there may be a new symbiosis, along the lines you suggest, developing between the Gulf states sub-set of OPEC and the west/USA, that is less military and more economic in nature?

dcarrigg
03-03-08, 01:41 PM
Editing error. My bad. Changed the tense back.

Not a problem. I needed a little inspiration for my avatar :)

brucec42
03-03-08, 03:42 PM
I'm wondering how gold can't continue to rise as more money is printed.

But more importantly, looking longish term, how can we expect our dollars to be anything but diminished in real value when our government has what, 50 trillion in unfunded obligations that apparently it is mathmatically all but impossible for them to meet in the coming years?

To me, the obvious solution is that they will just pay people what they owe them, but in new peso-like dollars. You'll be able to cash a $1,000 savings bond and go buy a pack of gum with it.

In that event, what could you own besides gold and commodities that would keep up with this drop in the value of the paper currency?

Gold sounds magical and mysterious and a lot like UFO sightings, until you start thinking "what else can I buy to store value in?" Homes? Maybe in 5 years or so when they bottom out and return to the normal values and oversupply is absorbed.

Land? Possible if you know where to buy and have connections to use government to make your cheap land worth more in the future, but overall, not a ton of demand for that during a long economic downturn.

Are there any currencies that are not depreciating rapidly or that won't if ours collapses?

Stocks? Can they possibly keep up with the currency drop even w/o a recession and adjustment from our over-consuming, over borrowing ways?

I think gold has a long way to go up before anyone decides its a mania and its price collapses. Something better will have to replace it first. Any ideas what that might be?

GRG55
03-03-08, 05:08 PM
I'm wondering how gold can't continue to rise as more money is printed.

Perhaps your question is rhetorical, but I'll rise to the bait.

Throughout the 1980's and 1990's money was printed. And in no small quantities. Look what happened to the purchasing power of the US$ (and most other paper currencies) over those 20 years. If you wanted to buy a roof over your head in 2001, when gold hit bottom, it cost you a hell of a lot more in nominal terms than it did in 1981 - and that's before the housing bubble really got started. Over two decades, gold did nothing but head south (as did silver, platinum, base metals, oil, natural gas, coal, aluminum, uranium...), with periodic and brief rebounds that only served to disillusion all but the most ardent gold bugs. Perhaps money printing by itself isn't the only consideration?


But more importantly, looking longish term, how can we expect our dollars to be anything but diminished in real value when our government has what, 50 trillion in unfunded obligations that apparently it is mathmatically all but impossible for them to meet in the coming years?

To me, the obvious solution is that they will just pay people what they owe them, but in new peso-like dollars. You'll be able to cash a $1,000 savings bond and go buy a pack of gum with it.

"We can guarantee cash benefits as far out and at whatever size you like, but we cannot guarantee their purchasing power"
--Alan Greenspan responding to a question from Senator Jack Reed (D) of Rhode Island, February 2006 --


Are there any currencies that are not depreciating rapidly or that won't if ours collapses?

I have been invested in the Yen and Swissie since Dec 2006. Early, but now finally well in the money. The Swissie may now be vulnerable to a sympathy fall alongside the Euro, but the Yen still appears a reasonable bet. In both cases the interest they pay is essentially zero, so they have no room to play the "let's devalue the currency through rate cuts" game. They can use other means to devalue, but those are much more difficult, and involve bellying up to the bar and buying bonars.

metalman
03-03-08, 05:39 PM
and another thing... you will readily acknowledge that the gummit is lying about cpi inflation, about "productivity", about gdp, etc.

what makes you so darn sure the gummit ain't also lying about wage inflation? hmmmm?

itulip diggers... get digging on the data!

GRG55
03-03-08, 06:37 PM
and another thing... you will readily acknowledge that the gummit is lying about cpi inflation, about "productivity", about gdp, etc.

what makes you so darn sure the gummit ain't also lying about wage inflation? hmmmm?

itulip diggers... get digging on the data!

Good point. I don't live in the USA, but I'm prepared to make a small wager that wages in many sectors are going up faster than folks realise.

Has the fellow that fixes your car raised his rates in the last year?

Just askin'

metalman
03-03-08, 07:32 PM
Good point. I don't live in the USA, but I'm prepared to make a small wager that wages in many sectors are going up faster than folks realise.

Has the fellow that fixes your car raised his rates in the last year?

Just askin'

absolutely. got friends bragging about their income, how much they made last year. maybe that fed report posted here is right... wage inflation lags other inflation. curious to see how that holds up as unemployment rises.

that's my story and i'm sticking to it: we've already had wage inflation, the gummit lied about it, now they hope the recession will kill it.

fed to j6p: fuck you! lose your job! do your part to control inflation!

Contemptuous
03-03-08, 10:00 PM
GRG55 -

Do you like our American vernacular? We Americans do this kind of thing really well. I know, it's tough for you Canadians to affect this same style of vernacular, because Canadians are all born with the 'good mannered gene'. We don't do those kinds of genes down on our side of the border though.

Even our Central Bank talks to us differently than your Central Bank would ever dare talk to Canadians. It's a uniquely American thing. :D


fed to j6p: fuck you! lose your job! do your part to control inflation!

GRG55
03-04-08, 02:02 AM
GRG55 -

Do you like our American vernacular? We Americans do this kind of thing really well. I know, it's tough for you Canadians to affect this same style of vernacular, because Canadians are all born with the 'good mannered gene'. We don't do those kinds of genes down on our side of the border though.

Even our Central Bank talks to us differently than your Central Bank would ever dare talk to Canadians. It's a uniquely American thing. :D

Can't speak for the manners of our Central Bankers, but you are correct...we Canadians like to think of ourselves as kinder, gentler, well mannered, Peace Keeper, boy/girl scout types. But every now and then the screech ( http://www.screechrum.com/ ) gets to us. And we go wild...

http://www.geocities.com/jeniegirl27/IFAWdeadsealsonice.jpg


http://www.geocities.com/jeniegirl27/IFAWfieldofsorrowlarge.jpg

c1ue
03-04-08, 01:37 PM
I'm not seeing any wage inflation.

The wages I will be paying my caregivers is the same as they were being paid 3 years ago.

Out of the goodness of my heart, that and the ability to steal the better ones away from my competitors, I'm offering health benefits.

But the lack of wage inflation isn't hard to understand - just posit that the official unemployment numbers are completely unrepresentative of fact.

The actual lack of employment is probably over 10% - and that doesn't lend itself well to pay raises.

Of course, there are a few areas where supposed productivity warrants the money, but good luck maintaining that over the full course of the next 10 years.

FRED
03-04-08, 11:17 PM
I'm not seeing any wage inflation.

The wages I will be paying my caregivers is the same as they were being paid 3 years ago.

Out of the goodness of my heart, that and the ability to steal the better ones away from my competitors, I'm offering health benefits.

But the lack of wage inflation isn't hard to understand - just posit that the official unemployment numbers are completely unrepresentative of fact.

The actual lack of employment is probably over 10% - and that doesn't lend itself well to pay raises.

Of course, there are a few areas where supposed productivity warrants the money, but good luck maintaining that over the full course of the next 10 years.

Excellent point and observation. Riddle me this.

1) There has been significant inflation over the past few years and the CPI understates it.

2) Inflation cannot increase without wage inflation.

3) Nominal wages are flat and real wages are declining.

All of three of the above assertions listed cannot be true. One or more of them must be wrong.

We are working three hypotheses:

1) CPI-W adjusted wage inflation is higher than reported because inflation measures used to deflate wage rates are higher than reported.

2) Distribution of income gains means high levels of inflation among top wage earners has a disproportionately strong tendency to transmit inflation into the price complex.

3) The inflation cycle does not need rising wage inputs, that rising import prices due to a depreciating currency are sufficient.

GRG55
03-04-08, 11:43 PM
I'm not seeing any wage inflation.

The wages I will be paying my caregivers is the same as they were being paid 3 years ago.

Out of the goodness of my heart, that and the ability to steal the better ones away from my competitors, I'm offering health benefits.

But the lack of wage inflation isn't hard to understand - just posit that the official unemployment numbers are completely unrepresentative of fact.

The actual lack of employment is probably over 10% - and that doesn't lend itself well to pay raises.

Of course, there are a few areas where supposed productivity warrants the money, but good luck maintaining that over the full course of the next 10 years.

Yet at the same time we are hearing reports that fruit and vegetable growers in California and Washington states cannot get enough pickers, and have to pay significantly more for those they can find.

Is this solely a function of the crackdown on illegal immigrants? Or are there other factors at work too?

My network of US and Canadian based engineering friends are buying BMWs and complaining the dealers are cranking up the Maintenance Dept charges at double digit rates (my heart goes out to them :)). No recession in that sector. At least not yet...

Jim Nickerson
03-05-08, 01:07 AM
Yet at the same time we are hearing reports that fruit and vegetable growers in California and Washington states cannot get enough pickers, and have to pay significantly more for those they can find.

Is this solely a function of the crackdown on illegal immigrants? Or are there other factors at work too?

My network of US and Canadian based engineering friends are buying BMWs and complaining the dealers are cranking up the Maintenance Dept charges at double digit rates (my heart goes out to them :)). No recession in that sector. At least not yet...

You might suggest to them that they buy Lexuses (Lexi?). I had an Lexus SUV for 5 years, and it had NOTHING GO WRONG WITH IT OVER THAT TIME. After being ripped at the Lexus dealer a couple of times, I started taking it 2 blocks from my house to a real mom and pop outfit whom I trust more than the Lexus dealership for fairness and routine maintenance. Saved a bundle and if it ever hurt my SUV I couldn't detect it.

GRG55
03-05-08, 09:20 AM
You might suggest to them that they buy Lexuses (Lexi?). I had an Lexus SUV for 5 years, and it had NOTHING GO WRONG WITH IT OVER THAT TIME. After being ripped at the Lexus dealer a couple of times, I started taking it 2 blocks from my house to a real mom and pop outfit whom I trust more than the Lexus dealership for fairness and routine maintenance. Saved a bundle and if it ever hurt my SUV I couldn't detect it.

I have a Toyota product over here for the same reliability reasons. 6 years old; only maintenance so far is oil, filters and plugs, and one recharge of the AC system). But what the damn dealer charges for that little bit of work always makes me feel as though I am buying my vehicle back from him. Good thing gas is still cheap here.

c1ue
03-05-08, 10:20 AM
My network of US and Canadian based engineering friends are buying BMWs and complaining the dealers are cranking up the Maintenance Dept charges at double digit rates (my heart goes out to them :)). No recession in that sector. At least not yet...

How were the network's wages doing when oil was $20/barrel?

Or from 1991 to 2001?

Just curious - this would separate the $100/oil price bonus from the inherent oil industry profitability bonus.

As for BMWs - that is a very unreliable statistic. In the Bay Area, it seems every 3rd car is a Merc of BMW; when your house costs $5000/month, a $1000 car payment is only keepng up with the Joneses.

GRG55
03-05-08, 11:24 AM
How were the network's wages doing when oil was $20/barrel?.

Or from 1991 to 2001?



That's just the point. I'll repeat. There are parts of the US economy, ignored for the better part of 25-30 years, that are now doing very, very well. Phone any farmer in Nebraska if you think I'm kidding.


Just curious - this would separate the $100/oil price bonus from the inherent oil industry profitability bonus.

Last summer marked my 30th year in the petroleum business. Have ridden the economic, corporate and career cycle up and down. I've watched companies make money when the prices were down and times were hard, and others so bad they destroy shareholder value even today. The primary differentiator between the two? How well they allocate their capital, in a ludicrously capital-intensive industry.

Buffett doesn't like commodities. Sounds like you may not either, for the same reasons? Fine. Nevertheless, Buffett's success, and yours also, will depend a great deal on how well you apply your capital.

How is oil any different from, say, the California defense industry, construction, auto manufacturing, forest products, banking, technology and a myriad of other sectors in a diversified economy? The US has apparently already tried the strategy of exporting every job but hamburger flipper and hair cutters. Doesn't work, does it? Long neglected industries are having their moment in the sun. It won't last forever, but it will last much longer than most Wall St. analysts expect.


As for BMWs - that is a very unreliable statistic. In the Bay Area, it seems every 3rd car is a Merc of BMW; when your house costs $5000/month, a $1000 car payment is only keepng up with the Joneses.

BMWs in my cohort are actually a very reliable statistic. When you work in a deep cyclical industry like petroleum, you tend to develop more conservative spending habits. It is only recently that my circle of friends have started to beleive they can actually afford the entry cost and ongoing opex of a BMW.

sadsack
03-05-08, 01:38 PM
Excellent point and observation. Riddle me this.

1) There has been significant inflation over the past few years and the CPI understates it.

2) Inflation cannot increase without wage inflation.

3) Nominal wages are flat and real wages are declining.

All of three of the above assertions listed cannot be true. One or more of them must be wrong.

We are working three hypotheses:

1) CPI-W adjusted wage inflation is higher than reported because inflation measures used to deflate wage rates are higher than reported.

2) Distribution of income gains means high levels of inflation among top wage earners has a disproportionately strong tendency to transmit inflation into the price complex.

3) The inflation cycle does not need rising wage inputs, that rising import prices due to a depreciating currency are sufficient.

Fe! Fi! Fo! Fum!
I smell a whiff of inflation!

The yield on 5 Year TIPs has fallen below zero three days ago and hasn't yet come up for air. I saw this linked on CalculatedRisk:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aauzfi.0WIWc&refer=home



March 4 (Bloomberg) -- Yields on five-year Treasury Inflation-Protected Securities fell below zero for a third day on investor speculation that inflation will quicken as the U.S. economy slows.

Yields on the securities, known as TIPS, dropped to minus 0.036 percent on Feb. 29, according to Barclays Capital Inc., the biggest dealer of the securities. It was the first foray below zero since five-year TIPS were first sold in 1997, according to the firm, one of the 20 primary dealers that trade directly with the Federal Reserve.

c1ue
03-05-08, 05:36 PM
BMWs in my cohort are actually a very reliable statistic. When you work in a deep cyclical industry like petroleum, you tend to develop more conservative spending habits. It is only recently that my circle of friends have started to beleive they can actually afford the entry cost and ongoing opex of a BMW.

So it is safe to say that oil industry employee raises lagged the average from 1991 to 2001?

I don't know - just was wondering...

I can say that my (former) portion of the tech industry had raises that were great from 1995 to 2005, but the last 2 years have been terrible.

Even discounting a pretty low starting point, I was fortunate enough to experience a quadrupling of salary from 1995 to 1998.

I would not be surprised to see something similar with the oil industry at the likely beginning of a good decade.

jk
03-05-08, 09:09 PM
Excellent point and observation. Riddle me this.

1) There has been significant inflation over the past few years and the CPI understates it.

2) Inflation cannot increase without wage inflation.

3) Nominal wages are flat and real wages are declining.

All of three of the above assertions listed cannot be true. One or more of them must be wrong.

We are working three hypotheses:

1) CPI-W adjusted wage inflation is higher than reported because inflation measures used to deflate wage rates are higher than reported.

2) Distribution of income gains means high levels of inflation among top wage earners has a disproportionately strong tendency to transmit inflation into the price complex.

3) The inflation cycle does not need rising wage inputs, that rising import prices due to a depreciating currency are sufficient.
the statement that is wrong is that inflation requires rising wages. rising wages aren't necessary if there is another source of funds to support consumption.
you forgot to include the effect of the housing atm and foreign financial flows as a form of vendor financing. who needs increased wages when you can just charge something against your heloc? the key question is whether wages will pick up now to allow more inflation, now that the housing atm is closed.

zoog
03-05-08, 10:13 PM
the statement that is wrong is that inflation requires rising wages. rising wages aren't necessary if there is another source of funds to support consumption.

you forgot to include the effect of the housing atm and foreign financial flows as a form of vendor financing. who needs increased wages when you can just charge something against your heloc? the key question is whether wages will pick up now to allow more inflation, now that the housing atm is closed.

Ah, well now that's a good point. More interesting than my thoughts but here's my two cents anyway.


We are working three hypotheses:

1) CPI-W adjusted wage inflation is higher than reported because inflation measures used to deflate wage rates are higher than reported.

If it's politically advantageous to under-report price inflation so people don't feel like their living costs are skyrocketing out of control, then why would the government under-report wage inflation which purports to show how much money people are making? Wouldn't they want to over-report that? Seems like they'd want to make the case that even though there is a "mild" amount of price inflation, wages are rising faster so the inflation is quite manageable for Joe Sixpack.



2) Distribution of income gains means high levels of inflation among top wage earners has a disproportionately strong tendency to transmit inflation into the price complex.
I like this one just because I'm not a top wage earner, so naturally I feel like they're making too much money. But it seems unlikely to me that there are enough of them and they are spending enough money to inflate prices on everything from basic commodities on up.



3) The inflation cycle does not need rising wage inputs, that rising import prices due to a depreciating currency are sufficient.This seems like the blindingly obvious answer... which doesn't mean it's the correct answer but it would be my pick. Of course, it could be more complex than just currency depreciation. Perhaps there is wage inflation in other parts of the world, and they are buying more stuff, and that is contributing to higher prices as well (both as consumers with more money and as a factor in rising production costs passed on). Maybe (likely, really) production of various commodities and finished goods is not keeping up with worldwide demand, regardless of how much demand or how much buying power people have here in the US.

GRG55
03-05-08, 10:14 PM
So it is safe to say that oil industry employee raises lagged the average from 1991 to 2001?

I don't know - just was wondering...

I can say that my (former) portion of the tech industry had raises that were great from 1995 to 2005, but the last 2 years have been terrible.

Even discounting a pretty low starting point, I was fortunate enough to experience a quadrupling of salary from 1995 to 1998.

I would not be surprised to see something similar with the oil industry at the likely beginning of a good decade.

Don't have any data for individual wages, but total employment/payrolls in the upstream black-oil sector of the industry continued to decline significantly as oil prices ended the decade of the 1990's near mulit-year lows (setting the stage for the talent shortages today). Those working in the upstream (exploration and production) natural gas sector in North America fared somewhat better as nat gas prices were in the toilet about 1993 and bounced back nicely over most of the remainder of the decade.

The constant corporate restructurings and layoffs, starting with the oil price collapse in 1986, created a generation of employees in the upstream industry that became wary of job loss, and in many cases talent left the sector permanently because the job uncertainty proved too much, even though wages generally held up (it's rare to have actual wage cuts, more usually wage and benefit freezes in the tough times, for those that keep their jobs). That's why most of my friends haven't owned BMWs, and it seems most who are buying them now are paying cash.

The area that tons of money was made in the decade of the 1990s was the emergence of the merchant energy trading companies - Enron et al. Although the rise and fall of these companies was overshadowed by the near concurrent rise and bust of TMT, these companies found and exploited a real market inefficiency and minted a lot of money for their owners and employees, but unfortunately greed and stupidity caused their leaders to corrupt the business model...and the rest is history.

World Traveler
03-05-08, 11:56 PM
I worked in oil idustry from 70's to my recent retirement. I remember the 70's oil boom in Houston well. It was a great time, jobs aplenty, rising wages, and a booming local economy.

And a lot of oil industry equipment manufacture was done in Houston at that time, so lots of those type jobs too.

The easiest way to describe the current Houston economy is probably better than the most of the U.S., but far from booming, nothing remotely like the 1970's.

Reason, I believe, is what I saw firsthand and have heard from many friends. Many of the bigger oil companies have off-shored big chunks of their non-Upstream activities in the last 10 years. And by that I mean, Information Technology, Accounting, Financial analysis, Procurement, Payables, Receivables, etc. I've even heard of an oil company that now processes and supports its U.S. payroll and benefits activities from South America, etc., etc.

So jobs for back office and Downstream activities are not booming and wages consequently are not going up in any significant way.

Upstream (Exploration and Production), though, is another story. Salaries in Upstream are going up as oil companies compete for engineers and others who can find oil or help get it out of the ground or deepwater.

Also, there is no boom in oil equipment manufacturing here. There doesn't seem to be much of that left in Houston.

BiscayneSunrise
03-06-08, 02:44 AM
Fred,

I believe # 3 is the answer.

Isn't the dictionary definition of inflation simply an increase in the money supply resulting in the loss of value of the currency?

Throw in the traditional definition of too many dollars (from around the world) chasing too few goods and you get inflation here at home despite the average wage earner in the US not getting raises.

Greenspan used to say that increasing productivity held down inflation but that model only works with things like technology especially when that industry was nascent. It's harder to squeeze productivity out of commodities when you are faced with peak production problems. The law of diminishing returns forces inflation, especially when aggravated by soaring worldwide demand

BiscayneSunrise
03-06-08, 02:48 AM
Long neglected industries are having their moment in the sun. It won't last forever, but it will last much longer than most Wall St. analysts expect.


Agreed. It's fun to watch the incredulous talking heads on CNBC rail against the rising gold price. They just want to close their eyes to reality and wish the FIRE economy back to its glory days.

GRG55
03-06-08, 09:37 AM
The deflation case: caught, gutted, poached and eaten

Oh, no! Not the Inflation vs Deflation debate again!

by Eric Janszen

The Fed’s greatest challenge is that the need to create an inflationary firebreak between crashing asset prices and the real economy has become so obvious that Wall Street money managers are starting to pile into the inflation bet en masse...

What happens if the ECB doesn't play ball?

Trichet's press conference today left me with the impression, from his tone not so much his words, that the ECB intends to hold the line on interest rate cuts. He made it very, very clear, answering several similar questions from different reporters, that the ECB does NOT have a dual mandate and that it's only mandate is price stability. At one point he made a pointed and deliberate contrast between his situation and the Federal Reserve Board dual mandate ("The ECB has a single needle compass...").

Emphasis mine...



Trichet Says Anchoring Inflation Is Highest Priority



By Brian Swint


March 6 (Bloomberg) -- European Central Bank President Jean- Claude Trichet (http://search.bloomberg.com/search?q=Jean-%0AClaude+Trichet&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1) said policy makers are focused on keeping expectations about future price increases in check.



``The firm anchoring of medium- to long-term inflation expectations is of the highest priority to the Governing Council,'' Trichet said at a press conference in Frankfurt today after the ECB kept its key rate (http://www.bloomberg.com/apps/quote?ticker=EURR002W%3AIND) at 4 percent. ``The current monetary policy stance will contribute to achieving'' this goal.



Record oil prices, higher credit costs and the euro's 17 percent gain against the dollar in the past year are slowing economic growth in the 15-nation euro region. At the same time, inflation is running at 3.2 percent, the fastest pace since the euro's debut in 1999.



``Uncertainty resulting from financial turmoil remains high,'' Trichet said. ``The economic fundamentals are sound. We emphasize that maintaining price stability over the medium term is our prime objective.''



The 21-member rate-setting council was unanimous in leaving interest rates unchanged today, Trichet told reporters. When asked if investors' expectations for lower interest rates were misplaced, he said: ``We're not underwriting the present future- market interest rates.''



The ECB today revised up its inflation forecasts to 2.9 percent from 2.5 percent for 2008 and said inflation will stay above the 2 percent ceiling in 2009, Trichet said.



The bank also cut its predictions for growth to 1.7 percent for this year and 1.8 percent for 2009, compared with a December forecast of 2 percent and 2.1 percent.


http://www.bloomberg.com/apps/news?pid=20601087&sid=aDTUDeyMlCrc&refer=home

FRED
03-06-08, 09:40 AM
What happens if the ECB doesn't play ball?

Trichet's press conference today left me with the impression, from his tone not so much his words, that the ECB intends to hold the line on interest rate cuts. He made it very, very clear, answering several similar questions from different reporters, that the ECB does NOT have a dual mandate and that it's only mandate is price stability. At one point he made a pointed and deliberate contrast between his situation and the Federal Reserve Board dual mandate ("The ECB has a single needle compass...").

Emphasis mine...



Trichet Says Anchoring Inflation Is Highest Priority

By Brian Swint
March 6 (Bloomberg) -- European Central Bank President Jean- Claude Trichet (http://search.bloomberg.com/search?q=Jean-%0AClaude+Trichet&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1) said policy makers are focused on keeping expectations about future price increases in check.

``The firm anchoring of medium- to long-term inflation expectations is of the highest priority to the Governing Council,'' Trichet said at a press conference in Frankfurt today after the ECB kept its key rate (http://www.bloomberg.com/apps/quote?ticker=EURR002W%3AIND) at 4 percent. ``The current monetary policy stance will contribute to achieving'' this goal.

Record oil prices, higher credit costs and the euro's 17 percent gain against the dollar in the past year are slowing economic growth in the 15-nation euro region. At the same time, inflation is running at 3.2 percent, the fastest pace since the euro's debut in 1999.

``Uncertainty resulting from financial turmoil remains high,'' Trichet said. ``The economic fundamentals are sound. We emphasize that maintaining price stability over the medium term is our prime objective.''

The 21-member rate-setting council was unanimous in leaving interest rates unchanged today, Trichet told reporters. When asked if investors' expectations for lower interest rates were misplaced, he said: ``We're not underwriting the present future- market interest rates.''

The ECB today revised up its inflation forecasts to 2.9 percent from 2.5 percent for 2008 and said inflation will stay above the 2 percent ceiling in 2009, Trichet said.

The bank also cut its predictions for growth to 1.7 percent for this year and 1.8 percent for 2009, compared with a December forecast of 2 percent and 2.1 percent.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aDTUDeyMlCrc&refer=home


The Wall Street Journal put it well yesterday saying the Fed's policy has been as a man showning up at the black tie dinner in a Halloween costume.

GRG55
03-06-08, 09:48 AM
The Wall Street Journal put it well yesterday saying the Fed's policy has been as a man showning up at the black tie dinner in a Halloween costume.

No kidding. Look at this...



N.Z. Dollar Rises After Bollard Says Rate to Remain at Record

By Emma O'Brien and Ron Harui
March 6 (Bloomberg) -- New Zealand's dollar advanced after the central bank said the nation's benchmark interest rate will remain at a record high.

The local dollar gained after Reserve Bank of New Zealand (http://www.rbnz.govt.nz/) Governor Alan Bollard kept borrowing costs unchanged at 8.25 percent, saying that inflation will ensure rates stay at ``current levels for a significant time.'' New Zealand's debt has attracted investors because the rate is the highest after Iceland's among economies rated Aaa.

``Inflation is the dominant problem so cuts are a very, very long way off,'' said Brendan O'Donovan (http://search.bloomberg.com/search?q=Brendan+O%26%2339%3BDonovan&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1), chief economist at Westpac Banking Corp. in Wellington. ``The interest-rate differential is going to stay wide so that's supportive of the currency.''
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a7N7Wu9zS29MAnd this...



Australian Dollar Gains as Prices of Commodity Exports Increase

By Chris Young and Ron Harui
March 6 (Bloomberg) -- The Australian dollar gained as prices of commodities the nation exports such as gold increased, boosting the outlook for the nation's economic growth...

...The Australian dollar's status as a favorite of so-called carry trades was enhanced yesterday when the central bank raised its benchmark interest rate to a 12-year high of 7.25 percent...
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aHmLwzjpWsEQAnd this...



BOE Keeps Benchmark Interest Rate Unchanged at 5.25%

By Jennifer Ryan
March 6 (Bloomberg) -- The Bank of England kept its benchmark interest rate unchanged as accelerating inflation prevented policy makers from cutting borrowing costs to shore up economic growth.

The nine-member Monetary Policy Committee, led by Governor Mervyn King (http://search.bloomberg.com/search?q=Mervyn+King&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1), kept the bank rate (http://www.bloomberg.com/apps/quote?ticker=UKBRBASE%3AIND) at 5.25 percent, as predicted by 59 of 60 economists in a Bloomberg News survey. One forecast a quarter-point reduction. The central bank reduced the benchmark in December and February.

Surveys this week showed factories and service companies raised prices at the fastest pace on record last month, and the central bank predicts inflation (http://www.bloomberg.com/apps/quote?ticker=UKRPCJYR%3AIND) may accelerate above 3 percent this year. That makes it harder for policy makers to cut interest rates to protect the economy as house prices fall. Home values slipped 0.3 percent in February, HBOS Plc (http://www.bloomberg.com/apps/quote?ticker=HBOS%3ALN) said today...
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a2ciYddEps1wAnd this...




China Has Room to Raise Rates, Governor Zhou Says



By Li Yanping


March 6 (Bloomberg) -- China's central bank Governor Zhou Xiaochuan (http://search.bloomberg.com/search?q=Zhou%0AXiaochuan&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1) said he'll consider raising interest rates to tame the fastest inflation in 11 years.



``There is still room for further interest-rate increases,'' Zhou said today at the annual meeting of China's legislature in Beijing. Any decision is complicated by the U.S. Federal Reserve cuts to borrowing costs and the government's goal of increasing consumer spending, he said.



China's Premier Wen Jiabao (http://search.bloomberg.com/search?q=Wen+Jiabao&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1) said yesterday curbing inflation is his top priority. Zhou, who's raised the benchmark one-year lending rate to a nine-year high of 7.47 percent, needs to cool prices without triggering a sharp slowing of the world's fourth- largest economy.


http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a0_RYdn_7hVE

So the question is still...Does the Fed decide to draw a line in the sand and arrest, at least temporarily, the fall in the US$ and knock the economy and commodities on the head?

FRED
03-06-08, 10:29 AM
No kidding. Look at this...


N.Z. Dollar Rises After Bollard Says Rate to Remain at Record

By Emma O'Brien and Ron Harui
March 6 (Bloomberg) -- New Zealand's dollar advanced after the central bank said the nation's benchmark interest rate will remain at a record high.

The local dollar gained after Reserve Bank of New Zealand (http://www.rbnz.govt.nz/) Governor Alan Bollard kept borrowing costs unchanged at 8.25 percent, saying that inflation will ensure rates stay at ``current levels for a significant time.'' New Zealand's debt has attracted investors because the rate is the highest after Iceland's among economies rated Aaa.

``Inflation is the dominant problem so cuts are a very, very long way off,'' said Brendan O'Donovan (http://search.bloomberg.com/search?q=Brendan+O%26%2339%3BDonovan&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1), chief economist at Westpac Banking Corp. in Wellington. ``The interest-rate differential is going to stay wide so that's supportive of the currency.''
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a7N7Wu9zS29MAnd this...


Australian Dollar Gains as Prices of Commodity Exports Increase

By Chris Young and Ron Harui
March 6 (Bloomberg) -- The Australian dollar gained as prices of commodities the nation exports such as gold increased, boosting the outlook for the nation's economic growth...

...The Australian dollar's status as a favorite of so-called carry trades was enhanced yesterday when the central bank raised its benchmark interest rate to a 12-year high of 7.25 percent...
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aHmLwzjpWsEQAnd this...


BOE Keeps Benchmark Interest Rate Unchanged at 5.25%

By Jennifer Ryan
March 6 (Bloomberg) -- The Bank of England kept its benchmark interest rate unchanged as accelerating inflation prevented policy makers from cutting borrowing costs to shore up economic growth.

The nine-member Monetary Policy Committee, led by Governor Mervyn King (http://search.bloomberg.com/search?q=Mervyn+King&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1), kept the bank rate (http://www.bloomberg.com/apps/quote?ticker=UKBRBASE%3AIND) at 5.25 percent, as predicted by 59 of 60 economists in a Bloomberg News survey. One forecast a quarter-point reduction. The central bank reduced the benchmark in December and February.

Surveys this week showed factories and service companies raised prices at the fastest pace on record last month, and the central bank predicts inflation (http://www.bloomberg.com/apps/quote?ticker=UKRPCJYR%3AIND) may accelerate above 3 percent this year. That makes it harder for policy makers to cut interest rates to protect the economy as house prices fall. Home values slipped 0.3 percent in February, HBOS Plc (http://www.bloomberg.com/apps/quote?ticker=HBOS%3ALN) said today...
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a2ciYddEps1wAnd this...



China Has Room to Raise Rates, Governor Zhou Says
By Li Yanping
March 6 (Bloomberg) -- China's central bank Governor Zhou Xiaochuan (http://search.bloomberg.com/search?q=Zhou%0AXiaochuan&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1) said he'll consider raising interest rates to tame the fastest inflation in 11 years.
``There is still room for further interest-rate increases,'' Zhou said today at the annual meeting of China's legislature in Beijing. Any decision is complicated by the U.S. Federal Reserve cuts to borrowing costs and the government's goal of increasing consumer spending, he said.
China's Premier Wen Jiabao (http://search.bloomberg.com/search?q=Wen+Jiabao&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1) said yesterday curbing inflation is his top priority. Zhou, who's raised the benchmark one-year lending rate to a nine-year high of 7.47 percent, needs to cool prices without triggering a sharp slowing of the world's fourth- largest economy.
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a0_RYdn_7hVESo the question is still...Does the Fed decide to draw a line in the sand and arrest, at least temporarily, the fall in the US$ and knock the economy and commodities on the head?

That's what keeps us up at night. On the other hand, from the front page of today's Wall Street Journal:

Liquidation Fears Squeeze Stocks
Stocks fell as missed margin calls compounded fears of securities liquidation and the dollar hit fresh lows against the euro. Oil prices eased after climbing close to $106 a barrel. 10:16 a.m.

Carlyle Adds to Fears of Forced Sales
Carlyle Capital added to worries about forced liquidations of residential mortgage-backed securities after failing to meet margin calls on its $21.7 billion portfolio. 7:33 a.m.

New Spasm Jolts Credit Markets
Despite repeated doses of medicine from central banks, short-term lending markets around the world are struggling again. The renewed turmoil marks the latest fallout from the deflation of U.S. housing values and the subprime-mortgage crisis.
The Bank of Japan in 1990 and the Fed in the early 1930s tried to raise interest rates during credit contractions to protect the currency. Didn't work out well.

We need to see signs that the credit crisis is not spreading and deepening before worrying too much about the Fed changing direction.

Fed will maintain course and speed toward zero until the credit crisis clears.


http://www.itulip.com/images/fedplanepath.jpg

Jim Nickerson
03-06-08, 10:30 AM
No kidding. Look at this...



N.Z. Dollar Rises After Bollard Says Rate to Remain at Record

By Emma O'Brien and Ron Harui
March 6 (Bloomberg) -- New Zealand's dollar advanced after the central bank said the nation's benchmark interest rate will remain at a record high.

The local dollar gained after Reserve Bank of New Zealand (http://www.rbnz.govt.nz/) Governor Alan Bollard kept borrowing costs unchanged at 8.25 percent, saying that inflation will ensure rates stay at ``current levels for a significant time.'' New Zealand's debt has attracted investors because the rate is the highest after Iceland's among economies rated Aaa.

``Inflation is the dominant problem so cuts are a very, very long way off,'' said Brendan O'Donovan (http://search.bloomberg.com/search?q=Brendan+O%26%2339%3BDonovan&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1), chief economist at Westpac Banking Corp. in Wellington. ``The interest-rate differential is going to stay wide so that's supportive of the currency.''
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a7N7Wu9zS29MAnd this...



Australian Dollar Gains as Prices of Commodity Exports Increase

By Chris Young and Ron Harui
March 6 (Bloomberg) -- The Australian dollar gained as prices of commodities the nation exports such as gold increased, boosting the outlook for the nation's economic growth...

...The Australian dollar's status as a favorite of so-called carry trades was enhanced yesterday when the central bank raised its benchmark interest rate to a 12-year high of 7.25 percent...
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aHmLwzjpWsEQAnd this...



BOE Keeps Benchmark Interest Rate Unchanged at 5.25%

By Jennifer Ryan
March 6 (Bloomberg) -- The Bank of England kept its benchmark interest rate unchanged as accelerating inflation prevented policy makers from cutting borrowing costs to shore up economic growth.

The nine-member Monetary Policy Committee, led by Governor Mervyn King (http://search.bloomberg.com/search?q=Mervyn+King&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1), kept the bank rate (http://www.bloomberg.com/apps/quote?ticker=UKBRBASE%3AIND) at 5.25 percent, as predicted by 59 of 60 economists in a Bloomberg News survey. One forecast a quarter-point reduction. The central bank reduced the benchmark in December and February.

Surveys this week showed factories and service companies raised prices at the fastest pace on record last month, and the central bank predicts inflation (http://www.bloomberg.com/apps/quote?ticker=UKRPCJYR%3AIND) may accelerate above 3 percent this year. That makes it harder for policy makers to cut interest rates to protect the economy as house prices fall. Home values slipped 0.3 percent in February, HBOS Plc (http://www.bloomberg.com/apps/quote?ticker=HBOS%3ALN) said today...
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a2ciYddEps1wAnd this...




China Has Room to Raise Rates, Governor Zhou Says

By Li Yanping
March 6 (Bloomberg) -- China's central bank Governor Zhou Xiaochuan (http://search.bloomberg.com/search?q=Zhou%0AXiaochuan&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1) said he'll consider raising interest rates to tame the fastest inflation in 11 years.

``There is still room for further interest-rate increases,'' Zhou said today at the annual meeting of China's legislature in Beijing. Any decision is complicated by the U.S. Federal Reserve cuts to borrowing costs and the government's goal of increasing consumer spending, he said.

China's Premier Wen Jiabao (http://search.bloomberg.com/search?q=Wen+Jiabao&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1) said yesterday curbing inflation is his top priority. Zhou, who's raised the benchmark one-year lending rate to a nine-year high of 7.47 percent, needs to cool prices without triggering a sharp slowing of the world's fourth- largest economy.
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a0_RYdn_7hVESo the question is still...Does the Fed decide to draw a line in the sand and arrest, at least temporarily, the fall in the US$ and knock the economy and commodities on the head?

Nice substantive post, GRG, I think if the equity markets were to be much lower--say have taken out the November lows--in 12 days, then the Fed will cut probably 0.5% as that is the last number I read somewhere the Fed futures were indicating. The FOMC is spineless in my opinion and is unwilling to allow the needed medicine to be taken by the economy. If the market were to substantially rally from here, who knows, they might not do anything.

FRED
03-06-08, 10:38 AM
Nice substantive post, GRG, I think if the equity markets were to be much lower--say have taken out the November lows--in 12 days, then the Fed will cut probably 0.5% as that is the last number I read somewhere the Fed futures were indicating. The FOMC is spineless in my opinion and is unwilling to allow the needed medicine to be taken by the economy. If the market were to substantially rally from here, who knows, they might not do anything.

Application of the same medicine that caused two major recessions and repaired the economy in the early 1980s will lead to a depression today. The most significant difference between today versus 1980 is that the majority of US households have negative net worth vs sufficient savings to weather a lengthy recession.


http://www.itulip.com/images/cashvsliabilities.gif

The median US household has enough savings net of liabilities at current rates to support 18 weeks of cash flow vs 30 just eight years ago.


http://www.itulip.com/images/cashflow.gif

Such fragile balance sheets mean US households are in no state to experience the medicine that is needed to manage inflation fueled by a declining currency.

It is a dire conundrum.

Jim Nickerson
03-06-08, 10:50 AM
Application of the same medicine that caused two major recessions and repaired the economy in the early 1980s will lead to a depression today. The most significant difference between today versus 1980 is that the majority of US households have negative net worth vs sufficient savings to weather a lengthy recession.


http://www.itulip.com/images/cashvsliabilities.gif

The median US household has enough savings net of liabilities at current rates to support 18 weeks of cash flow vs 30 just eight years ago.


http://www.itulip.com/images/cashflow.gif

Such fragile balance sheets mean US households are in no state to experience the medicine that is needed to manage inflation fueled by a declining currency.

It is a dire conundrum.

Well consider a dying patient with a fatal disease, how much might this country spend to keep it going, if the country were a doctor? Perhaps it is a depression that is most needed to allow all the craziness that has occurred to be corrected and a new footing established. Ain't nothing in this country really going to change until is it hog-tied and forced to take its medicine without consideration for the subsequent pain of having done so, but only that do I think will start things to get truly better.

GRG55
03-06-08, 10:52 AM
Nice substantive post, GRG, I think if the equity markets were to be much lower--say have taken out the November lows--in 12 days, then the Fed will cut probably 0.5% as that is the last number I read somewhere the Fed futures were indicating. The FOMC is spineless in my opinion and is unwilling to allow the needed medicine to be taken by the economy. If the market were to substantially rally from here, who knows, they might not do anything.

The Fed just looks out on a limb now. Marc Faber, in the Bloomberg interview you recently posted, agrees with your sentiments about the FOMC and Bernanke ("He will destroy the Dollar")

However, Finster posted an item (on his "stagflation" thread) yesterday from a Fedhead speaking in London that caught my attention. Maybe it was the inflation-sensitive European audience he was catering to, but said Fedhead acknowledged that maybe, just maybe, a slowing economy and slowing inflation may not go hand-in-hand. This sort of hint gets my sensors tingling. Gold, silver, oil and grains on the verge of going parabolic don't do anything to calm the nerves either. ;)

Judging by the change in tone of commentators (very few now trying to sugarcoat it), this credit crisis now out in the open for all to see. Is there anyone on the face of the earth, even Hank Paulson, that believes that monolines desperate to raise capital deserve the AAA ratings the agencies continue to accord them? Anyone?

Wow. What an Orwellian world... :p

bill
03-06-08, 12:56 PM
The Feds new open "lets talk to the people policy" is not by accident it was planned as a tool to be more involved as they cranked up of the control lever. The feds years of monetary expansion were well planned and to think they don’t have a plan to control the aftermath of such monetary expansion would be naive.
The feds main objective will be to keep the liquidity flowing, thus dollar tanks, inflation continues, public is strapped with debt and no savings, credit harder to obtain, job loss and a country with no savings and little industry. What’s next? LIQUADATION at some point of pain.
Maybe the fed can partnership with government and purchase assets to reflate their value.
Maybe a good partnership match would be the Feds open transparent policy with SWF since SWF need all the transparency support they can get. We can call it “Print and Repudiation Inc.”.

<!-- toctype = X-unknown --><!-- toctype = text --><!-- text -->

c1ue
03-06-08, 06:22 PM
The Feds new open "lets talk to the people policy" is not by accident it was planned as a tool to be more involved as they cranked up of the control lever. The feds years of monetary expansion were well planned and to think they don’t have a plan to control the aftermath of such monetary expansion would be naive.
The feds main objective will be to keep the liquidity flowing, thus dollar tanks, inflation continues, public is strapped with debt and no savings, credit harder to obtain, job loss and a country with no savings and little industry. What’s next? LIQUADATION at some point of pain.
Maybe the fed can partnership with government and purchase assets to reflate their value.
Maybe a good partnership match would be the Feds open transparent policy with SWF since SWF need all the transparency support they can get. We can call it “Print and Repudiation Inc.”.

Hear, hear.

I second Bill's statement - Bernanke is fully channeling Burns right now.

Cut 'til you drop.

0.5% at next meeting.

FRED
03-06-08, 06:40 PM
Hear, hear.

I second Bill's statement - Bernanke is fully channeling Burns right now.

Cut 'til you drop.

0.5% at next meeting.

Look familar? From the iTulip "About" page:

http://www.itulip.com/Pics/FedFuture.gif
http://www.itulip.com/Pics/NixonBurns.gifhttp://www.itulip.com/Pics/JacobArthur.gif

WDCRob
03-06-08, 07:04 PM
Fred, EJ, other people smarter than me...

Is there any way Bernake would be prevented from pulling out all the stops to inflate this problem away? In other words, is it possible that he could decide to go full out per the (in)famous Helicopter speech, but be stopped by others?

GRG55
03-07-08, 03:11 AM
Fred, EJ, other people smarter than me...

Is there any way Bernake would be prevented from pulling out all the stops to inflate this problem away? In other words, is it possible that he could decide to go full out per the (in)famous Helicopter speech, but be stopped by others?

I think what you are asking is - How does the rest of the world respond if there is now a real US Dollar crisis?

Do they start dumping the US Dollars they have accumulated? (who will take them, and in exchange for what?) Do they step in and try to save the value of their existing stash of US Dollars (and their export market) through a coordinated effort to buy more? What sort of political pressures might arise in the USA, in an election year, if Americans see a continued rapid decline in King Dollar? What if the Fed does a rapid, short term reverse on inflation, to put the fear-of-gawd in the short-of-US$ trade (which seems to be pretty well everyone now)?

Interesting times indeed.

And I remain convinced the possiblity of a counter-trend, counter-intuitive "surprise" is growing. But possibilities are by no means certainties.

bill
03-07-08, 09:49 AM
Keep the "liquidity flowing"

http://www.bloomberg.com/apps/news?pid=20601087&sid=ar4ar6mZHJAM&refer=home
March 7 (Bloomberg) -- The Federal Reserve plans to boost the amount of loans it plans to make to banks this month to offset a deepening credit crunch threatening to tip the U.S. economy into a recession.
The central bank increased the size of auctions of four- week funds to banks planned for March 10 and March 24, to $50 billion each from $30 billion previously. The Fed also said in a statement in Washington today that it will make $100 billion available through repurchase agreements.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aJcGRsXmyltU&refer=home
U.S. Unexpectedly Lost 63,000 Jobs in February (Update3)

By Shobhana Chandra
March 7 (Bloomberg)
Minutes before the figures were released, the Fed said it will expand two short-term auctions this month to $100 billion to address ``heightened liquidity pressures'' in markets.
The Fed chairman referred to ``downside'' risks for the economy four times, including ``the possibilities that the housing market or the labor market may deteriorate more than is currently anticipated and that credit conditions may tighten substantially further.''
Investors project the Fed will lower the benchmark interest rate by at least half a point between now and its next meeting on March 18, futures prices show.
Fed Outlook
The central bank's regional economic survey this week said ``the hiring pace slowed in various sectors and labor markets loosened somewhat in many districts,'' as economic growth cooled in eight of 12 regions since the start of 2008

DrYB/C
03-08-08, 08:40 PM
The Fed will eventually arrest the dollar’s fall, but not until it is forced to take action, which leads us to the following question: What will force the Fed to take action:

a. commodity price inflation so high it reduces consumer spending to nothing except the bare essentials, i.e. consumer staples, or

b. “signs that the credit crisis is not spreading and deepening??”

Well, either:
1) a. and b. will occur simultaneously, or,
2) a. will occur before b. or
3) b. before a.

“The current recession has been set off by the simultaneous bursting of property and credit bubbles….Those two economic sectors collectively peaked at 78 percent of gross domestic product, or fully six times the share of the sector that pushed the country into recession seven years ago." (http://www.nytimes.com/2008/03/05/opinion/05roach.html?ref=opinion)

So, the American consumer is consumptively and, in many cases, financially bankrupt b/c his declining home value, high debt burdens, and negative savings has destroyed his ability to devour Chinese, Japanese, other Asian, and Middle Eastern imports, and, even if he were solvent, he couldn’t borrow to continue his voracious consumption, because, with the exception of the Fed, the credit/debt creation apparatus is broken beyond short-term repair.

Moreover, in this particular economic case, the inflated-asset-value-derived-consumption-based-economy case, the credit crisis cannot be halted until the consumer is made solvent, and the consumer can’t be made solvent, until his home values are re-inflated or the entire economy is restructured toward production instead of consumption.

With the exact credit creation mechanism that was used to inflate home values destroyed, home values will not re-inflate for quite some time. Additionally, the credit/debt creation apparatus that still exists, which is different from the exact credit creation mechanism that was used to inflate home values, is currently in no shape to support a restructuring of the economy toward production instead of consumption. Moreover, court cases are being filed and will be won or lost in a manner that ensures the credit/debt creation apparatus that still exists will only extend credit on the most responsible and risk free terms possible, which will only slow the restructuring of the economy. So, in the short to mid term, the consumer will not only, at a minimum, remain insolvent, but will, in all probability, see his levels of insolvency increase, as more debts become due that he can’t pay due to declining real income, negative savings and lack of access to credit.

The Fed can’t prevent the insolvency inflation, aka debt deflation, because it can’t, without the help of the private banking system’s fraudulent, inverted-pyramidal-Ponzi-debt securitization/derivatives apparatus, create credit on the scale needed to support a halt and a reversal of the deflation. And if the government tries a truly substantial rescue of the housing market to halt the deflation, the bond market will revolt. So the debt deflation will continue until all debts are discharged, which is a process that will become very interesting in the near future, as it will most likely lead to war on an international scale.

If the Fed’s actions are futile, then where will the credit it does extend eventually find itself?? That credit, along with not-so-insignificant amounts of the dollar credits possessed by the current account surplus countries, will find itself in other currencies that actually have value, or in short term cash equivalent securities, or in commodities, or in other hard assets. Why would anyone make major investments in a bankrupt economy that is clearly demonstrating exactly how bankrupt it is via its crashing housing and credit markets??

Again, since the sheer scale of the bust engulfs 78% of the U.S. economy, it should be obvious that the Fed’s normal growth inciting policies, without the help of the private sector’s securitization/derivatives apparatus, will be irrelevant. This is why the smart money has quickly moved into commodities, gold, and other currencies. It knows the Fed will inflate--which is why M3 is no longer published and why Bernanke was chosen to head the Fed in the first place--and it also knows the Fed can’t inflate enough to solve this national insolvency problem. It also knows the Bernanke Fed will inflate in a manner that will drastically reduce the value of the dollar, even more than it has already been reduced.

It will take many, many years for the U.S. to reach solvency again, yet it will not take many, many years for commodity-based inflation to get out of control, simply because those individuals in-the-know recognize that the U.S. is insolvent, and will all attempt to allocate their financial dollar resources in a manner that will ensure those resources maintain their value, i.e. they will allocate those resources toward commodities, etceteras, while the U.S. undergoes an insolvency-based debt deflation

The flight to these dollar-based commodity resources will exacerbate the U.S. debt deflation, as more of the U.S. consumers’ meager dollar resources will be diverted toward the purchase of basic needs goods that will be increasing in cost due to commodity inflation, while less of their meager dollar resources will go toward discretionary purchases, e.g. clothes, electronics, automobiles, etceteras. More importantly, the increasing prices of commodities, and the fight to own them versus rapidly depreciating dollars, will began to place countries in protectionist and war-like stances toward each other, as countries all across the world begin to suffer stagflation.

I believe Bernanke will respond to simultaneously increasing asset-and-discretionary-goods-deflation and consumer-staples-inflation with more monetary stimulus, as his entire career has been predicated on his supposed understanding of how to avoid another Great Depression: Inflate, Inflate, Inflate.

Eventually, when the U.S. is completely and totally exhausted financially, inflation has become structural, and, consumers can barely afford even consumer staples because of their inflated prices, the smart money aka MCFCs (Money Creation and Flow Controllers), will make the markets move in a manner that forces the Bernanke Fed to raise rates, the economy will collapse, and we will go to war to pull out of the depression.

The reason I believe events will occur in this manner is:

a. The MCFCs found it necessary to force the U.S. to reduce its massive consumption of the world's resources (5% population, 20% world resource consumption) in order to clear the path for the creation of a somewhat fascist green world economy, and those MCFCs, plus their brain trusts, have cleverly and surreptitiously created this outcome by bankrupting the country.

b. Quite naturally, no country that was consuming the world's resources as freely as the U.S. was, due to dollar hegemony and its military machine, will simply slide into a subservient position on the world stage without a fight, so the MCFCs and their intelligence resources will instigate a war they can control, with the U.S. as aggressor. This war should ideally be designed to destroy a good portion of the world's basic consumables in order to drive up their prices (just as the ethanol production meme is doing right now with corn prices, even though it's quite obvious the EROEI of producing ethanol using corn is very low to negative; therefore, on a mass scale, corn-based ethanol is an inadequate fuel source or substitution; however, using corn so inefficiently is a very efficient and clever way to drive up food prices), as such action would be necessary to kill off a portion of the world's population via famine, and begin a series of rolling famines. The world population is simply too large to support the creation and maintenance of a semi-totalitarian green economy that will be acceptable on a mass scale; the easiest way to solve this problem is to reduce the population through controllable wars, famines, and rolling occurrences of controllable epidemic/pandemic disease. Look for all these controlled events to occur, most likely in that order, as it is most logical, in the near to mid-term future.

It should be obvious, after reading these statements, that 2) is the solution to the question of when the Fed will arrest the dollars fall. I suggest you not believe any of what you have just read, but pay attention to events on the world stage while keeping the information contained in this message in the back of your head as a far out possibility, and see how those events play out. I guarantee they will occur in a manner similar to my prognostications.

p.s.

“The US policy response has reduced the chance of global growth slowing enough to ease the inflation in natural resource prices. A phase of commodity disinflation is what is needed to prevent economic participants from concluding that rising prices are a one way bet. Since the appropriate size of the stimulus cannot be calibrated with any precision, the aggressive reflation runs the risk of providing a monetary accommodation to the inflationary supply shock. Longer term, a more severe contraction in demand is likely to become necessary to re-anchor inflation expectations.
Indeed, in a global economy, where individual central banks' control over inflation is limited, the costs of re-anchoring straying inflation expectations are likely to be punitive. Even if the stimulus proves insufficient, policymakers will still have sent a strong signal in support of existing price levels. This explicit statement of policy priorities is unlikely to be lost on consumers and businesses.”
http://www.ft.com/cms/s/0/4f25cd52-eb1f-11dc-a5f4-0000779fd2ac.html?nclick_check=1

Jim Nickerson
03-08-08, 10:43 PM
I guarantee they will occur in a manner similar to my prognostications.


Whew! Feel better? I hope you do. We don't often get many guarantee's around here. Why should anyone believe you?

Slimprofits
03-10-08, 03:02 AM
Inflation’s Last Gasp (http://www.rickackerman.com/commentary/2008/InflationsbrLast_Gasp.html)



By: Rick Ackerman

...Looking on the bright side, albeit superficially, we would hazard a prediction that inflation won’t be much of a problem eight to ten months from now. The bad news is that it will be because deflation has taken its place. We recently had an exchange of e-mails with hardcore inflationist Eric Janszen of iTulip.com who sees this as most unlikely. Eric sees stagflation ahead, but we have already explained why that would be a relative dairy-tale scenario compared with the full-blown wage-price-asset deflation that lies ahead. Another point of disagreement concerns whether commodity prices can continue to rise even if physical demand collapses in a global recession. Eric argues that commodity price-inflation is a leading indicator of wage inflation, and that wages are therefore all but ordained to play catch-up. Our response is that this commodity inflation is very different from all others before it simply because it has been fueled, not by physical demand, but by torrents of speculative capital fleeing rapidly deflating financial assets. If ever there were a trend that could not continue for long and which is likely to end in a crash, this is it.

Big Fat Raises for Autoworkers?

As for the odds of a wage spiral, it is something we are unable to imagine, even if Eric remains all but certain that economic theory will make it so. If it turns out we are wrong, then a year from now we should see airline employees and autoworkers getting fat raises to help them pay for $6 gasoline and $4 cartons of eggs. But we think Eric’s logic goes off the deep end when it addresses the shortfall of consumer borrowing that has begun to push the country into deep recession. He says the government will take up the slack: “What occurs when the credit markets become dysfunctional and consumers and business reduce borrowing, the government steps in.” Anyone who actually believes that the government will be able to revive this economy by “stepping in” must imagine that the next WPA will have lots of cushy jobs for unemployed bond traders, LBO specialists, arbitrageurs and Ferrari dealers.

Vaporous Assets

Eric makes a further point, that you cannot have commodity price deflation in a depreciating reserve currency. That is of course true by definition, but we believe that long before the dollar depreciates to the point where Americans can no longer afford to import much of anything, its de facto status as the world’s reserve currency would have shifted to another currency, or perhaps even to gold. Eric also likes to define economic inflation and deflation as, respectively, an increase, or a decrease, in the money supply. Fair enough. But as far as we’re concerned, such definitions are utterly useless to anyone who would seek to prepare for the very difficult times that lie ahead. We suggest that you think of deflation as an increase in the real burden of debt, since that is symptomatically how we will experience it until the speculative mania in commodities breaks, ushering in a precipitous deflation globally of assets, wages and prices.

Anyone who sides with Eric and the inflationists implicitly believes not only that those fat raises for airline employees and autoworkers are coming, but that our homes are about to increase in value dramatically. Trust us on this: hyperinflation is not coming, and debtors will not ultimately be bailed out by a depreciating dollar. Vastly more powerful deflationary forces are already well in motion, drawing irresistible power from the implosion of tens of trillions of dollars worth of vaporous financial assets. The impending credit collapse is about to smother the last-gasp inflation that has been pushing commodity markets into a speculative frenzy. If you expect the economy to somehow muddle along, as Eric evidently does, you will be dangerously unprepared for the catastrophe that lies just ahead.

Gasoline and egg prices double by the end of the year and it is deflation? I don't understand how this could make logical sense to anyone.

touchring
03-10-08, 05:43 AM
This war should ideally be designed to destroy a good portion of the world's basic consumables in order to drive up their prices (just as the ethanol production meme is doing right now with corn prices, even though it's quite obvious the EROEI of producing ethanol using corn is very low to negative; therefore, on a mass scale, corn-based ethanol is an inadequate fuel source or substitution; however, using corn so inefficiently is a very efficient and clever way to drive up food prices), as such action would be necessary to kill off a portion of the world's population via famine, and begin a series of rolling famines. The world population is simply too large to support the creation and maintenance of a semi-totalitarian green economy that will be acceptable on a mass scale; the easiest way to solve this problem is to reduce the population through controllable wars, famines, and rolling occurrences of controllable epidemic/pandemic disease. Look for all these controlled events to occur, most likely in that order, as it is most logical, in the near to mid-term future.


Wow, another conspiracy theory. :eek:

DrYB/C
03-10-08, 04:43 PM
You shouldn’t believe me, Jim; but you should pay attention to the long term economic and stratified social/behavioral implications of facts contained in readily available public sources:

a.

http://www.washingtonpost.com/wp-dyn/content/article/2008/03/09/AR2008030900916.html?hpid=topnews

How will this change the price of water over the next 25-30 years, once it becomes a major media meme, and consequently, a public issue?? And how will it affect public sentiment, and thus public behavior, in relation to the purported causes of drinking water contamination?? How will the costs of solving this problem be dispersed?? What’s the relationship between the cost of water and the cost of producing food products??

b. Is this article:

http://www.washingtonpost.com/wp-dyn/content/article/2008/03/09/AR2008030901867.html

related to the previous article?? If so, how (in terms of cost dispersion within and between micro and macro economies, the natural tendency of all living entities toward entropy, and entropy’s relation to finance, economics, and all levels of governance/politics)? Is the information contained within the article more scientific or more propagandistic?? How will the information redefine your behavior in the next 25-30 years, whether by choice or by the force of men and women more powerful than you??

c. How are energy flux, finance, costs, economics, entropy, and all levels of governance/politics interrelated? How does what’s implied, in terms of its effect on the mid-term and long-term behavior among distinct socioeconomic groups, by this article

http://www.bloomberg.com/apps/news?pid=20601087&sid=aqcXY9R7AbkY&refer=home

relate to information contained in the other two articles? And how does it relate to the aforementioned interrelationships??

As I said in the first sentence, don’t believe me. Do gather information, analyze it to the best of your ability, and come to conclusions. It’s what I do; I just happen to be extremely confident my conclusions are correct. Time will tell.

DrYB/C
03-10-08, 04:45 PM
As the future slithers towards us, we will soon find out if it is a coral or a milk snake. I vote coral:

http://www.msnbc.msn.com/id/23552526

DrYB/C
03-10-08, 07:29 PM
Would simultaneously increasing asset-and-discretionary-goods-deflation and consumer-staples-inflation, destined to become much worse,

http://www.reuters.com/article/bondsNews/idUSN0832645120080308 ,


necessitate the following:

http://online.wsj.com/article/SB120511973377523845.html ??


1. Conspiracy or

2. Outed-but-once-secretive and illegal activity by government agents of very smart and extremely wealthy men who want to ensure order, and thus control of their wealth, is maintained in a collapsing economy??

Wait…1 and 2 are the same thing, aren’t they??

Jim Nickerson
03-10-08, 11:30 PM
You shouldn’t believe me, Jim; but you should pay attention to the long term economic and stratified social/behavioral implications of facts contained in readily available public sources:


As I said in the first sentence, don’t believe me. Do gather information, analyze it to the best of your ability, and come to conclusions. It’s what I do; I just happen to be extremely confident my conclusions are correct. Time will tell.

Thanks, DrYB/C. Extreme confidence in anything versus guarantees are two different things. Thanks for continuing your thoughts. You write well and obviously have thought about these things that concern you.

There is a ton of stuff for everyone to read who can bear to try. Why not draw some conclusions about whatever you think? Perhaps others have time to attempt to solve riddles, but I, for one, generally don't. Keep thinking and posting. Nearing 67, I ain't personally too worried about what may worry a lot of others here that may be 25-30 years off.

Slimprofits
03-11-08, 12:58 AM
I thought of Ackerman today while paying $3.61 for regular, as opposed to $3.51 two weeks ago and $3.45 a week before that and dad reports that prices are up to $3.25 in N.E. Massachusetts...And that really sucks for him, as he drives his car for a living and his gasoline allowance isn't going up at the same rate.

Meanwhile, our profits dropped by 18% from 3rd quarter '07 into 4th quarter '07 and 1st quarter '08. There is no joy in Babbittville.

At this very moment I am listening to a radio commercial for nomoneymove.com that tells me I'm throwing money away by renting instead owning a home. What year is this again?

c1ue
03-12-08, 04:37 AM
DrYB/C,

I was with you until you started saying the MCFCs were bankrupting the US in order to promote a green world economy.

And why would they give a rat's butt about 'green'?

The rich have always ignored normal events - knowing full well that their money and power mean that even should the glaciers return, that they'd ski to the tropics on the bare asses of the serfs.

Contemptuous
03-13-08, 12:17 AM
Moved To Bottom Of Thread

Contemptuous
03-13-08, 12:22 AM
After a 50% up-move on gold in a mere six months, this is what passes for analysis by Mr. Ackerman - gold's "muted, uninspiring message to the markets".? He appears to be taking a single week's "dull price action" in gold, and speculating about deflationary harbingers in a "flat gold price". Meantime the copious references to "extremely inflationary implications of the Fed's latest rescue plan give the unmistakeable impression the deflation message is getting obscured in a cloud of smoke amongst the newly discovered "inflationary signals". Mr. Ackerman appears to be covering his ass - a time hallowed practice followed when one begins to uncomfortably surmise one may be boxed into a corner.

Take it away Mr. Ackerman ...
-
So Why Did Gold Barely Budge?


For edition of March 12, 2008

<F>A tediously dull gold market appeared yesterday to shrug off the extremely inflationary implications of the Fed’s latest rescue plan for the banking system. The central bank sent shares soaring on Wall Street with the announcement that it will set aside $200 billion of Treasurys to lend to banks and securities dealers. The unsubtle subtext was that the central bank would accept as collateral for such loans any worthless or nearly worthless scraps of paper the borrowers might have lying around. That would represent a radical and unprecedented augmentation of the Fed’s role as lender of last resort, especially since no one believes that the initial, $200 billion will prove to be much more than the ante in this global-stakes game.
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<F>Considering the news, gold’s yawning reaction was most puzzling. Is it possible that bullion finally agrees with the theory, broached here with increasing urgency in recent months, that deflationary forces emerging in the financial sector have grown too powerful to be countered by loose monetary policy, no matter how profligate?

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Mr. Ackerman then hauls out the "straw man arguments" again - obliquely implying to readers that those disagreeing with his view are proponents of "hyperinflation" with subtle undertones of hysteria implied within such wild eyed contrary views to his own. Point is, no-one here ever suggested to Mr. Ackerman the argument was for "hyperinflation". The suggestions made to him were for "high and continuous inflation". The "hyper" reference is his embellishment to pump up the straw man against which his arguments may find a foil. Pardon my bluntness, but this closing paragraph has "cover your ass" written all over it. "Gold may do well in a deflation" !!! LOL!

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No Hyperinflation<O>
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<F><F><F>That is what we expect, and it implies there will ultimately be no hyperinflation. However, as long as the threat of one seems real, gold and silver quotes are likely to remain firm. But the threat could vanish quickly if and when the speculative blowoff that has seized commodity markets ends, presumably taking the stock market with it. Even then, precious metals are bound to outperform other classes of investment assets and hold their purchasing power. [ CYA !!] But it nonetheless remains a possibility that this will come about because their price has fallen less steeply than that of other assets and investables.

Full article here: http://www.rickackerman.com/commentary/2008/So_Why_Did_GoldbrBarely_Budge.html

zenith191
03-19-08, 03:15 AM
Are we counting in dollars, euros, yen, real, gold, bushels of wheat, fixed commodity baskets or those huge round stone wheels that they use somewhere or other? Tell me that, then we can talk inflation or deflation.


The islanders of Uap call them fei