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EJ
10-11-08, 12:29 PM
http://www.itulip.com/images/maginotinflation.jpgThe Fed's Maginot Line

Central bank intervention and inflation: One thing leads to another

A popular misconception holds that central bank interventions in banking crises and financial markets panics in the form of liquidity injections are in and of themselves inflationary. Not so. These policies indicate a path decided, a choice in an economic policy fork in the road – a trap, if you will. We first identified the Federal Reserve's "inflationary decision making process" back in 1999.

Sadly it is neither difficult to discern nor complicated to explain. It is a well worn path taken by governments that have made a compounding series of policy errors. They are eventually backed into a corner, unable to finance expenses; lacking the will to reduce them, abandoned by allies due to economic or other troubles at home, the printing press its last defense of political obligations.

It starts when government determines in a recessionary environment, such as occurs after the collapse of an asset price bubble – as in tech stocks in 2000 or housing in 2007 – that high interest rates are politically unpalatable; they slow economic recovery and sharpen recessions in the short term. Recessions lead to rising unemployment, and unemployment mass produces unhappy voters. The printing comes under many names – reflation, deflation fighting, economic stimulus, or "emergency" actions taken without political cover of modern economic theory du jour.

Rather than allow markets to set interest rates at a natural higher equilibrium level among the factors of supply and demand for debt and inflation and default risk, the bank intervenes with liquidity – a fancy name for cash – to keep rates low. If the central bank does more than its trade partners on its own the result is both low interest rates and a weakened currency, as we have seen in the US since 2001 despite efforts by US trade partners to limit the dollar's fall with purchases of dollar denominated financial assets, mostly treasury bonds but, disastrously, also asset backed securities and Fannie Mae and Freddie Mac agency debt, which left the US five years later in the unfortunate position of needing to buy the discounted securities back with fully valued treasury bonds.

The weak dollar policy has never been acknowledged but the result is often pointed to by politicians and politically motivated economists as providing a fortunate boost in the US export sector, and lauded by the Treasury and Fed as effective economic stewardship. The inflation that inevitably resulted, especially in imported energy but all commodities, is the seed of a greater inflation that will follow, even as wages deflate in the recessionary economy.

Unconventional Policy

The extraordinary and unconventional policy responses of the US central bank were widely broadcast in policy papers issued by the Fed in the early 2000s under the heading of "fighting deflation." Like the Maginot Line that ably defended France against a direct attack by Germany across the German or Italian border at the start of WWII but failed when Germany attacked from Belgium instead, the Fed's deflation defense leaves the US vulnerable to an inflation invasion arriving from foreign shores as higher import costs, and whipped up by a lack of palatable options to fund government as tax revenues and foreign borrowing decline.

Poor Zimbabwe did not owe the world trillions in its own currency and so did not hold its trade partners hostage to cooperate in "unconventional coordinated interventions" designed to keep a stricken and fatally flawed global financial system alive that every day seems to beg to be allowed to die in peace.

Zimbabwe's fate was sealed back in 2003 when it embarked on its own "unconventional" methods of fighting bank failures and economic collapse.

The road to Inflation

Make no mistake: the US is on the road to inflation, and has been from the time it determined in the early 1980s to extend American purchasing power by means of foreign borrowing and domestic asset price inflation. The political will needed to get off the inflation path previously arrived in the late 1970s in the person of Paul Volcker. He worked in the background for many years to build consensus among US allies for the drastic measures taken in the early 1980s to kill The Great Inflation before it developed into a hyper-inflation. Is there a new Volcker out there, working with leaders in Asia and Europe and across the US, building consensus for a global currency appreciation, to get off the short term politically expedient of depreciation in order to avoid the long, difficult task of trade and monetary realignment?

The market action this past week votes: no. Stocks are pricing in continued leaderless, ad hoc responses by national governments, currency blocks, and trade blocks, although the G7 today issued a statement that major industrialized countries planned to do something or other together, drastic and soon, but not certain exactly what. A global financial system predicated on free capital flows and winner-take-all as the Asians learned during the 1997-98 currency crisis turns out to not lend itself to a process of geo-political reconciliation and shared economic sacrifice in a crisis. I can hear the Asian leaders say, "You want us to contribute to a global bailout pool now that you are in trouble? Remember the tens of billions your currency speculators pulled out of our economies ten years ago, throwing our economies into sudden recessions, while we kept our capital markets open at your insistence? We do. Count that as our share to your pool today."

As local and federal property and income tax revenues collapse in the US along with property prices and incomes, the Federal government will come under increasing pressure to print to fund all manner of "fixed" expenses – fixed in the sense that no politician wants to give up foreign or domestic spending commitments, from military outlays to health care entitlements to pension fund guarantees.

The blundering is by no means confined to the US. In Germany, where the ratio of public debt to GDP is even higher, older citizens who are keenly aware of the historical results of bad leadership in times of economic crisis (http://www.dw-world.de/dw/article/0,2144,3698865,00.html)

The statement below of Dr. G Gono, Governor, Reserve Bank of Zimbabwe, 30 April, 2008 grimly testifies to the likelihood the US, like Zimbabwe, may soon relearn that the "discredited textbook dogmas" that the Zimbabwe central bank and now the US central bank abandoned were conventions for a reason: every divergence from them, while politically expedient in the short term, is always a long run economic disaster.

By matter of degree and speed, the process that causes a nation to lose purchasing power varies with scale, political organization, institutions of government and industry, relations with trade partners, history, and culture – the full composite of the political economy. But one lesson always holds true: a leader, as JK Galbraith once said, is one who confronts directly the fundamental anxiety of his nation in his time. Ours have for more than 30 years avoided ours by means of papering them over with new forms of credit produced by increments – junk bonds, CDOs, and other products of financial engineering. As the mirage of extended purchasing power through finance dissolves into the night, they leave behind liabilities and expectations to be met by the same leaders but with the remaining machinery of low finance, the old fashioned type, the one that simply prints money. - Eric Janszen

FIRST QUARTER MONETARY POLICY STATEMENT: A FOCUS ON FOOD, FOREIGN EXCHANGE GENERATION, PRODUCER VIABILITY AND INCREASED SUPPLY OF BASIC COMMODITIES
BY DR G GONO, GOVERNOR, RESERVE BANK OF ZIMBABWE, 30 APRIL 2008

1. INTRODUCTION AND BACKGROUND

1.15 Banks, including those in the USA and the UK, are now not just talking of, but also actually implementing flexible and pragmatic central bank support programmes where these are deemed necessary in their National interests.

1.16 That is precisely the path that we began over 4 years ago in pursuit of our own national interest and we have not wavered on that critical path despite the untold misunderstanding, vilification and demonization we have endured from across the political divide.

1.17 Yet there are telling examples of the path we have taken from key economies around the world. For instance, when the USA economy was recently confronted by the devastating effects of Hurricanes Katrina and Rita, as well as the Iraq war, their Central Bank stepped in and injected life-boat schemes in the form of billions of dollars that were printed and pumped into the American economy.

1.18 A few months ago, the USA economy confronted a severe mortgage crisis, which threatened to spark an economy-wide recession.

1.19 The USA Central Bank again responded by injecting over US$160 billion between December, 2007 and March, 2008, to provide impetus to the American economy and prevent a worse crisis from happening.

1.20 A look at the recent developments in the UK equally reveals how increasingly, leading central banks in the global economy are bailing out troubled economic sectors to achieve macroeconomic and financial stability.

1.21 Faced with a yawning threat of systemic bank failures on the back of the aftermaths of that country’s mortgage crisis, the Bank of England was directed by its Government to intervene by providing a £50 billion lifeline to the UK’s banking sector.

1.22 Here in Zimbabwe we had our near-bank failures a few years ago and we responded by providing the affected Banks with the Troubled Bank Fund (TBF) for which we were heavily criticized even by some multi-lateral institutions who today are silent when the Central Banks of UK and USA are going the same way and doing the same thing under very similar circumstances thereby continuing the unfortunate hypocrisy that what’s good for goose is not good for the gander.

1.23 Those who yesterday did not see the interconnection between sanctions and the politics of this country as they sought conventional and dogmatic textbook methods of moving this economy now have good cause to reflect on these examples of quasi-fiscal interventions by the central banks in the USA and the UK and review their dogmas in the interest of adopting more flexible and dynamic approaches informed by the exigencies of the economic situation on the ground.

1.24 Our economy is and has been in trouble for over ten years and our extraordinary interventions by whatever name have helped to keep the wheels of this economy moving.

1.25 Even though our efforts have been criticized and derided clearly for undisguised political reasons, we are proud that we had the courage to do something that made a positive difference when it would have been far too easy for us to appear reasonable by doing nothing and thereby make the situation worse.

1.26 As Monetary Authorities, we commend those of our peers, the world over, who have now seen the light on the need for the adoption of flexible and practical interventions and support to key sectors of the economy when faced with unusual circumstances.

1.27 Of course, in the short-term such interventions are without doubt inflationary but in the medium to long-term they trigger and propel economic growth and development that everyone craves for.

1.28 One such universal unforeseen contingency, which now needs our urgent attention and intervention through unconventional means and without resorting to discredited textbook dogmas, is the unfolding global food and energy crisis.

Of course, the USA is not analogous to a tiny African nation without the long traditions of economic development and organization that the US enjoys. But a few facts about the Zimbabwe hyperinflation run counter to common misconceptions, such as the relationship between inflation and employment in periods of high inflation. Also, as GDP declines during the US recession and the Federal government increases deficit spending to bail out the financial sector, stimulate the economy, and fund state and local governments (http://www.latimes.com/business/la-fi-calif3-2008oct03,0,5726760.story?track=rss) to compensate for declining tax revenues, the ratio of national public debt to GDP is likely to explode over the next two years.


http://www.itulip.com/images/zimbabweinflation.gif
Inflation was manageable until 2001.
http://www.itulip.com/images/zimbabwecurrentaccount2004-2008.gif
Current account balance spiked, declined, then spiked the year
before the hyperinflation started.

http://www.itulip.com/images/zimbabwepublicdebt2000-2008.gif
Total public debt was 115% of GDP the year before
the hyperinflation started. US public debt was 40% of GDP
in 2007. (Does not include $60 trillion in Medicare and
Social Security obligations.) Public debt has increased by
$500 billion per year since 2003. When GDP falls during recession
next year while spending increases to stimulate the economy,
we expect that ratio to rise to 60% of GDP by the
end of 2010.
http://www.itulip.com/images/zimbabwereserves2004-2008.gif
As issuer of the world's primary reserve currency, the US
ranks 23rd in currency reserves, behind Poland, Turkey,
Mexico, and Libya.
http://www.itulip.com/images/zimbabweunemployment2000-2008.gif
The Zimbabwe economy had been in serious trouble for
many years before the hyperinflation. Unemployment
rose from 50% to 80% after the hyperinflation started.
We hope these data help to dispel the persistent myth that
high unemployment necessarily leads to low inflation.

http://www.itulip.com/images/zimbabweRealgdp2001-2008.gif
Real (inflation-adjusted) GDP growth fell in the years
before the hyperinflation.

http://www.itulip.com/images/zimbabweoilconsumption2003-2008.gif
Oil demand remained high but consumption fell because
oil priced in Zimbabwe's currency became very expensive.
http://www.itulip.com/forums/../images/zimbabweoilimports2000-2008.gif
Oil imports fell.

http://www.itulip.com/images/zimbabwemil2003-2008.gif
The main reason governments print money is to pay for "critical"
liabilities such as the military that foreign borrowing nor finance
nor taxes will fund.

Source: CIA World Factbook (https://www.cia.gov/library/publications/the-world-factbook/)


iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
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phirang
10-11-08, 12:41 PM
The Fed is far from clueless: they are instruments in the effort to further USD seignorage.

Notably, the USD is controlled by a private, opaque entity: The Fed.

This hasn't been a collapse: it's been a demolition, clearing the low-income housing for McMansions. :)

The next bubble: whatever helps further USD seignorage and consolidate control of global banking. Infrastructure, new-deal? Issuing bonds for new assets in the US helps move more US paper abroad.

Bubbles, busts... there's are the weapons that the Fed uses to drill more dollars into the wallets of the world.

Even the Japanese are going to start taking orders from the Fed post-MS acquisition.

serge_oc
10-11-08, 03:15 PM
Will difference between spread and physical gold price continue to grow?

Or will it abate?

What really drives it and what's likely to happen with this difference (vs what's not)? And Why?

Sorry for too many questions, I am sure many are trying to figure this one out...

metalman
10-11-08, 03:32 PM
Will difference between spread and physical gold price continue to grow?

Or will it abate?

What really drives it and what's likely to happen with this difference (vs what's not)? And Why?

Sorry for too many questions, I am sure many are trying to figure this one out...

paper gold market diverged from physical gold market.

bullion...

2001... spot $270, 1oz gold bullion coin + 2% premium = $270

2008... spot $850, 1oz gold bullion coin + 6% premium = $909

$20 lib circ. (near bullion)...

2001... spot $270, 1oz $20 lib coin + 10% premium = $397

2008... spot $850, 1oz $20 lib coin + 36% premium = $1330

but... you cannot get $20 lib at any price.

Contemptuous
10-11-08, 06:42 PM
The Fed is far from clueless: they are instruments in the effort to further USD seignorage. Notably, the USD is controlled by a private, opaque entity: The Fed. This hasn't been a collapse: it's been a demolition, clearing the low-income housing for McMansions. :) The next bubble: whatever helps further USD seignorage and consolidate control of global banking. Infrastructure, new-deal? Issuing bonds for new assets in the US helps move more US paper abroad. Bubbles, busts... there's are the weapons that the Fed uses to drill more dollars into the wallets of the world. Even the Japanese are going to start taking orders from the Fed post-MS acquisition.

Phirang - Your thesis of highly intelligent and "masterfully planned" collusive actions by the FED and it's primary agent money center banks is so full of holes it's a marvel to me that you suspend your own capacity to criticize and stress test your own theses before adopting them wholesale. Beware master theorems which seek to encompass all events into a single master plan. They are overhwelmingly false, but it requires a willingness to entertain self-doubt in order to spot the weak points. If you look at the entire history of how we got here in the past decade, stumbling from one money-goosing experiment to the next with the Fed going absolutely haywire over the stupidest things such as Y2K, it is painfully obvious that 9/10 ths of their method is STUPIDITY.

Make a list of all their critical policy errors in the past decade - those of the FED and also of their corollary money center banks. Lots of decisions they've made that have critically WEAKENED their own position and options going forward. Yet you constantly depict these as components of a master plan. Only problem is this supposed master plan at every step increasingly debilitates them, suggesting clearly their present predicament, and the power grabbing solutions they are putting forward are merely desperate reactions, and cannot represent the fruit of a carefully thought out strategy.

Consider the following, before you interject "masterful" into any or your descriptives, let alone prognoses:

Their getting bailed out by the taxpayer was by no means a foregone conclusion. Their "master plan" meanwhile has blown up 3/4 of the old brokerages on Wall Street. If you devise a global USD denominated financial takeover plan which blows up 3/4 of your brethren and craters Wall Street as part of it's modus operandi, at the end of which your presumed "coup carried out upon the American Republic" - is the public money bailout - what sort of risk/reward "master plan" does this portray? I suggest it's such a poor risk/reward that any wily central banker who concocted this as a way to extort power from global finance would be even more stupid than these bumblers actually are.

You reiterate everywhere on these pages with apparent knowing wisdom that they are "masterful", what part of "masterful" does the above trajectory of large bank auto-destructs suggest to you? While Wanker Banker Paulson is apparently "masterfully plotting", various of his financial brethren, at Lehman, Bear Stearns, Morgan Stanley, AIG, even Bank of America and JP Morgan eventually, are all tottering into the ditch or getting BLOWN UP outright, along the way. If this is part of the "masterful planning" you are darkly hinting at, it continues to appear singularly inept, with the trademark last minute "seat of the pants" improvisational style we've all come to recognise

What you overlook therefore, is that along with putting the US up against the wall with a gun at it's head, they have also succeeded in utterly destroying their own Wall Street with their repackaged mortgage products peddled to the world. Some strategic genius there, eh? Your thesis meanwhile seems that by stuffing all of these mortgage backeds down the world's throat they brilliantly have paved the way for a global checkmate via refurbished USD and this wonderfully stable new paradigm called "mutually assured financial destruction". Has anyone posed these questions to you regarding your thesis? If not, why not? The questions about "cost benefit analysis" in this supposed global master plan seem to leap out at you from this history, no? How about a little more stringency of analysis before tabling these ambitious assertions?

According to your thesis that this was "all planned", we are to understand that this new circumstance, is preferable to the position Wall Street brokerage banks occupied before the advent of the CDO and the mortgage derivative, and the cosequent implosion of all this bad paper? If I recall correctly, prior to these fireworks, they really were lords of the world from their secure Wall Street firms perches, no? The idea that what they have wrought now was worth all of this swathe of destruction involves a rudimentary net cost benefit analysis so weak as to verge upon specious. Proponents of this idea are being foolish, because the former status of these firms was infinitely preferable (and indeed more genuinely powerful) than their present desperate straits.

Look at the trajectory - from secure and majestic thriving Wall Street Brokerage firms to this smouldering wreckage - if this grand scale folly does not define the truly wretched extent of their "brilliant strategic capability", what does? These brilliant and evil geniuses staging a masterful PUTSCH of the American financial landscape, are the very same FED that engaged in yet other, truly epic monetary antics for patent idiocies - such as ramping up gargantuan, highly corrosive money supply in terror at the prospect of Y2K! The answer is there in broad daylight for level minded people to see, these guys are bumblers and bunglers, not masterful geniuses of coercion.

Bottom line: Any claque of bankers and financiers stupid enough to have cooked their own goose so thoroughly by wallowing in that securitized debt binge, such that they blew up three quarters of Wall Street, have "stupid and supremely shortsighted" written all over them. They have irremediably discredited their entire American banking industry after all, which is to their complete detriment. These guys at the FED and Treasury are far more likely, stupefied that America has rolled over and accepted Paulson's outrageous and hastily ginned up plan, as they had no idea of the extent or brutal randomness of the implosion that was unfolding all around them even among their own brethren.

Add in all of these monumental missteps up in NET TERMS, and most (not all!)rational minds would recognise they were improvising and merely reacting helplessly, every step of the way.

Yes it's been a naked grab for more power - but that does not make it anybody's description of masterful. It is important to keep one's feet planted firmly on the ground. I think your own feet are beginning to float upwards an inch or two off of terra firma with these gothic extrapolating "master plan" theories. What got them to this place first and foremost is bungling. Who can plausibly argue otherwise when they've blown most of themselves up in the process? Based strictly on their own previous hugely destructive track record, they are quite evidently NOT master planners. Do we now see a crop of geniuses sewing up this newfound American banker hegemony? I sure as heck don't.

American banker hegemony is laughable after this enormously self-destructive trajectory.

The last thing to blow up in their faces will be the US dollar (although your own thesis really takes flight and soars with the eagles on that point, imagining the USD will represent their final masterful trump card). No. Give it six months, or two years. The USD will crash and burn, for inexorable reasons an 11th grader could list in a homework assignment. Some master plan they have concocted then, blowing off their related banker firm arms and legs in the process, and with that as the grand finale! :rolleyes:

Back to the drawing board!

ricket
10-12-08, 12:41 AM
Back to the drawing board!

Epic Post. Just simply Epic...

marvenger
10-12-08, 03:02 AM
yeah that was pretty good. I still feel that there's some guys at the top that feel in control of bumbling though, wheather they are or not I'm not sure, but there does seem to be certian banking families that always seem to do well out of these crises, and a lot of the other bumblers probably know they're bumbling but they want to play the high risk high reward game.

dbarberic
10-12-08, 10:32 AM
So this is it... huh?

The final Poom.

baw
10-12-08, 10:32 AM
The response to inflation is this chart used to show that the reserves are not being converted to cash and loaned out into the real world. Here chart via a quote>

Anyone who suggests that last week's ballooning reserve deposits represent inflationary pressure or the Fed monetizing the deficit simply doesn't know what they're talking about. Banks are sitting on the reserves, not withdrawing them as cash. When markets settle down, the Fed can and will absorb those reserves back in with sterilizing sales of Treasury securities, just as it did in 2001 or after the more modest spike in August 2007. Providing new reserves aggressively is absolutely and unquestionably the way the Fed needs to respond to this kind of development. Is the deflation/inflation debate similar to the heaven/hell debate?. http://www.econbrowser.com/archives/2008/10/reserves_oct_08.png

WDCRob
10-12-08, 10:43 AM
I believe the iTulip position is that the dollars needed to bring on massive inflation already exist. Banks don't need to lend or convert their current reserves to cash.

All that needs to happen is for the dollar's decline to precipitate dollar repatriation from overseas.

D-Mack
10-12-08, 10:54 AM
There will always be a von Mannstein


Fall Gelb, the masterplan from the German General 'Erich Von Mannstein' was the basis for the attack of western Europe. A major attack through the Belgian Ardennes (which was thought to be impossible), outstepping the strong French 'Maginot Line' on the borders of Germany and France. It was by this maneuver that the German forces could conquer large parts of the open area in northern France easily and strike forward to the French coast with great speed.

It was because of this plan that Holland suddenly became strategic important. There was great danger for an attack from Holland into the back of the advancing German forces. Besides, Germany desperate needed the Dutch airfields to supply it's advancing forces. During the raid on Holland history was written. Never before so many paratroopers landed in such short time on enemy territory. All of Germany's Airlanding forces (2 divisions from who no one knew the existence) including the major part of Germany's air force, was put into action in The Netherlands. They were put in action to capture the Dutch Airfields and the Royal Family.

Holland was attacked by Armygroup B under the command of the legendary Field Marshall Fedor von Bock.

...


http://www.marketgarden.com/2010/UK/page1.html





And I don't know much aout the geopolitics of Africa, but Zimbabwe and Sudan(oil) are of interest to the major powers and especially for China.

They have gold and somehow are still not able to get something going



Zimbabwe's small-scale gold mines output falls drastically
(Xinhua)
Updated: 2007-03-18 19:58


The Zimbabwe Miners' Federation (ZMF) President George Kawonza was quoted as saying the decline in the production of the metal was also due to the police operation "Chikorokoza Chapera," which is presently being implemented to eliminate illegal gold panning activities.

"Production levels have been reduced. We used to produce four tons a month, but we are only producing 600 kg per month at the moment," he said.

Kawonza said the continued increase in the price of fuel on the parallel market and an unrealistic fixed gold price of 16,000 Zimbabwe dollars (64 U.S. dollars) had made operations of the small-scale miners difficult.

Kawonza said operation Chikorokoza Chapera, which had resulted in the closure of most small-scale mining operations, had also impacted on operations.

He said the exercise had discouraged investment from identified partners from Asian countries such as China, India and Pakistan because of the uncertainty it brought and called on the government to re-open small-scale mines.

Mining contributes up to 4.5 percent of gross domestic product (GDP), 5 percent of employment and 16 percent of total foreign currency earnings.


....

Gold is integral to Zimbabwe's economy as it accounts for more than 72 percent of foreign currency receipts.

...
http://www2.chinadaily.com.cn/world/2007-03/18/content_830476.htm

baw
10-12-08, 10:57 AM
Thanks for your comment. I have been thinking along those same lines. However, what about counterfitting. I know it sounds like a conspiracy theory, but what would prevent that from happening overseas. That could really put alot of currency into circulation over many years. Maybe this is a stupid question, but I haven't seen any discussion whether it could happen or how we could prevent it.

FRED
10-12-08, 11:17 AM
The response to inflation is this chart used to show that the reserves are not being converted to cash and loaned out into the real world. Here chart via a quote>

Anyone who suggests that last week's ballooning reserve deposits represent inflationary pressure or the Fed monetizing the deficit simply doesn't know what they're talking about. Banks are sitting on the reserves, not withdrawing them as cash. When markets settle down, the Fed can and will absorb those reserves back in with sterilizing sales of Treasury securities, just as it did in 2001 or after the more modest spike in August 2007. Providing new reserves aggressively is absolutely and unquestionably the way the Fed needs to respond to this kind of development. Is the deflation/inflation debate similar to the heaven/hell debate?. http://www.econbrowser.com/archives/2008/10/reserves_oct_08.png

This article begins: "A popular misconception holds that central bank interventions in banking crises and financial markets panics in the form of liquidity injections are in and of themselves inflationary. Not so. These policies indicate a path decided, a choice in an economic policy fork in the road – a trap, if you will."

The challenge in the debate is that there are three camps:

1) Commentators who know nothing about economics and use the wrong terms in the wrong way. They have formed an Internet based economics cargo cult (http://en.wikipedia.org/wiki/Cargo_cult) that picks graphs off the Fed's site and deifies the images as representing their god Inflation or Deflation, depending on whether they own gold and silver or not. It's inflation if they do, deflation if they don't.
2) Commentators who know nothing about economics and use the right terms but in the wrong way. They pose as economists and need only know more than their readers do to get away with it. Their interpretations of Fed charts are motivated by the need to sell the fund or other product offered by the management that is writing the commentator's paycheck.
3) Commentators who know something about economics and use the right terms in the right way. That's us. We've played whack-a-mole with the other two camps for ten years. We expect they will keep coming back until they realize that inflation is a political-economic process, resulting from a complex mix of politically motivated economic orthodoxy, history, and accumulated error, not some kind of purely mechanical process. There are mechanical processes involved, but they are too complex to explain to lay readers without boring them to death.

Here is a paper, for example, that explains how an inflation can turn into a hyperinflation.
Cointegration and Cagan's model of hyperinflation under rational expectations

by Tom Engsted

WHEN MONEY AND PRICES ARE INTEGRATED of order two, I(2), and shocks to money demand or velocity are stationary, then the Cagan (1956) monetary model of hyperinflation has the implication that real money balances cointegrate, in the sense of Engle and Granger (1987), with the rate of inflation. As a result, one can estimate the interesting parameter in the model, the semielasticity of the demand for real balances w.r.t. expected inflation, super-consistently in a cointegrating regression without having to specify the exact expectations formation process. In addition, simultaneity or omitted variables bias vanishes asymptotically. In a recent paper in this journal, Taylor (1991) makes use of these insights in a reexamination of some of the classic interwar European hyperinflations, and although the results are mixed, he generally finds support for the Cagan model with stationary velocity shocks.

In the present paper I show, in the next section, that by making the stricter assumptions of rational expectations and no bubbles, an additional cointegrating relationship can be derived from the Cagan model, namely that real money balances cointegrate with money growth. I then show how, under these assumptions, the Cagan specification imposes testable restrictions...The mechanisms of inflation and hyperinflation are not intuitive and do not lend themselves to casual discussion among lay people. The models used by 99% of the commentators are simply too primitive to be useful. Rather than try to explain papers such as the above to readers, we have over the years attempted to explain inflations bottom up, by how they are experienced by the people living in them, as we do in Confusion reigns: A crisis-driven global rush to dollar liquidity is not deflation. (http://www.itulip.com/forums/showthread.php?p=52818#post52818)

A nation operating on fiat currency can experience inflation spirals with virtually no functioning banks, no credit, no lending, no borrowing, 80% unemployment, and declining output. It has happened over and over. Deflation spirals, on the other hand, are exceedingly rare, even during the gold standard era before 1934, and non-existent since.

Our experience over the years is that deflationists are allergic to facts. Most in the inflation camp doesn't understand economics. It's a mess.


http://www.itulip.com/images/indlationhistory1801to2000.gif

mickeyc21
10-12-08, 07:35 PM
My margin account has been slashed!
I have been wondering if this would happen but to actually see it is shocking. My currency trading account has had its margin slashed from 100:1 to 20:1! Without any notification which is obviously illegal.
This takes my positions from an average leverage of 3% which is a very conservative play to 16% which is getting very dangerous.
People that had higher leverage than me and are not paranoid enough to check their accounts on the opening of the currency markets will get margined out of even winning positions if they have high leverage and their positions temporarily move against them.
I will be posting updates on www.slycapital.com

Your brokers are in survival mode - beware!

magicvent
10-12-08, 07:55 PM
EJ --

What do you think the impact of the worldwide banking interventions will be on the market beyond one week? Also, I just heard that China is going to use its reserves to stabilize the currency market. How long will they continue to do this?

labasta
10-12-08, 08:07 PM
Yeah, they can't get something going because they can't get the farms going lol.

I imagine it was the farms which formed the backbone of Zim's real economy. Ignore the rule of law and property rights and everything else is window dressing.

Gold could get it going if they gold backed the currency at the same time as having the rule of law which allowed property laws to be upheld. Would take a while to build up as nobody would trust them for a couple of decades. (mmmm... the disappation of trust... sound familiar?) Without the latter, the people will just be as poor whether they have 1 zim dollar or 10 gazillion.

Instead, Zim's resources are elite owned and pilfered in a trickle down economy which only includes their military and anyone with connections to government (expenditure). Their Swiss bank accounts (which could now be insolvent because of the banking crisis lol!) get the rest (profit).


In a nutshell, it's just the elite giving the finger to the people.

Africa is the ultimate example of a 100% trickle down economy. It seems America is following this path at a tremendous rate. If it really wants to stop the crisis, it has to go from the bottom up (this all depends on how selfish, scared and individually detached America's elite really are).

If it does not, then America will become two countries, one where resources are pilfered to support the military (mmm... sounds familiar too) and one, which exists entirely on the black economy, which will be much more successful than Zimbabwe because of the rule of law.

If property rights and the rule of law can be maintained in the West, then the real threat to the Elite is the loss of power through their issuance of money and credit. The black market could spawn an era of a new beginning. The (new) elite will be the land owners and gold hoarders. Perhaps the old elite are positioning themselves to become the new elite as we speak.

Although, I would say, in such an event the new powerful will be more localised, rather than national, as everything breaks down to its immediate surroundings.

However, if martial law is announced, then Zimbabwe here we come.

Martial law, is the elite's way fo saying we will remain in power no matter what. Then, I'm afraid, the human experiment is over and darkness will reign, unless there is a revolution.

Let's just pray there are some people in powerful positions who care. The intention is enough, even if they get it wrong first, they will eventually get it right. If the intention isn't there, then we are screwed.

bda_guy
10-12-08, 08:53 PM
Anyone who suggests that last week's ballooning reserve deposits represent inflationary pressure or the Fed monetizing the deficit simply doesn't know what they're talking about. Banks are sitting on the reserves, not withdrawing them as cash. When markets settle down, the Fed can and will absorb those reserves back in with sterilizing sales of Treasury securities, just as it did in 2001 or after the more modest spike in August 2007. Providing new reserves aggressively is absolutely and unquestionably the way the Fed needs to respond to this kind of development. Is the deflation/inflation debate similar to the heaven/hell debate?.

After having read full article on "Econbrowser", the argument as I can figure is as follows:

1) There have been a number of lending facilities that have pumped money/treasuries into the financial system which are backed by various forms of (increasingly risky) collateral. The credit may available is based on the value of the collateral less some haircut, depending on the riskiness of the collateral.

2) To the extent that money has been used (instead of treasuries), the Fed has sold additional treasuries into the market (having obtained the additional treasuries from the Treasury on a temporary loan basis) to absorb money from the system by an offset close to equal to what was provided by through the lending programs. Therefore, there has been no significant influx of new money actually in the system.

3) By pumping the system with treasuries while keeping the currency within the system flat, this helps increase bank reserve ratios (since more credit is given to treasuries than the supporting collateral) but does not have an inflationary impact.

4) At the point in time when the market starts to stabilize, treasuries can be withdrawn. I believe that a key assumption here is that the prices on the underlying collateral have also stabilized (maybe even risen) and the market starts to function again so that the banks have a more reliable place that they can sell these assets into. Therefore, there would be no need to change the amount of money in the system since money would flow out of treasuries and back into the assets that the collateral is comprised of.

5) The excess treasuries that the Fed borrowed from the Treasury would be returned, the money level would remain at a stable level and all would be fine.


Ok, so that's my understanding of how this all works. The key assumptions are that (1) the banks that borrow money/treasuries under these various lending facilities return the money/treasuries (+ interest) back when they're due, and (2) there will be some stabilization of the prices on the underlying collateral.

To the extent that a participating bank defaults on one of these lending facilities, the Fed now has significant credit risk which was not considered within the original article. If the collateral ends up being worth less than the hair-cutted values that were considered when posted to the lending facility, the Fed will be on the hook for any deficiency. Unless the Fed plans to default on the treasuries, the only way that they can buy back the treasuries from the market would be for the Treasury to increase the money supply which is obviously inflationary.

As to my second point, it is vastly important for the prices of the underlying collateral to firm up such that companies can sell them into the market at the level at which they are carrying them on their balance sheet. If the value of the assets used as collateral continue to deteriorate, the capital of the companies holding this stuff will also deteriorate. The need for all of these credit lending facilities will be required as long as the financial health of the companies participating remains weak. If banks fail, this adds turmoil to the currently dysfunctional marketplace and increases the credit risk assumed by the Fed.

All of the central bank market actions work on the premise of supplying an ever increasing supply of high quality, liquid assets in the form of treasuries (or other gov't bonds) while trying to keep the aggregate money supply constant. However, if the fundamentals that underlie the collateral continue to deteriorate (ie. home prices continue to decline), the collateral value will continue to decline increasing the Fed's credit risk leading to substantial credit losses. At that point, the Fed will be reduced to only two options, default on gov't treasuries or increasing the amount of currency in circulation. Neither option is good and both are inflationary since defaulting on treasuries will lead to a mass exodus of capital from the US and a declining USD.

Therefore, it is vitally important that banks return to health and a liquid market supporting the risky forms of collateral forms once again. However, neither appear to be coming back anytime soon. But that's not going to stop the Fed and other central banks from providing support through TARP, equity injections, etc. to prime the pump until either stability is restored or everything goes to hell!

metalman
10-12-08, 09:31 PM
My margin account has been slashed!
I have been wondering if this would happen but to actually see it is shocking. My currency trading account has had its margin slashed from 100:1 to 20:1! Without any notification which is obviously illegal.
This takes my positions from an average leverage of 3% which is a very conservative play to 16% which is getting very dangerous.
People that had higher leverage than me and are not paranoid enough to check their accounts on the opening of the currency markets will get margined out of even winning positions if they have high leverage and their positions temporarily move against them.
I will be posting updates on www.slycapital.com (http://www.slycapital.com)

Your brokers are in survival mode - beware!

wow! other here are worried about brokers. here's data. thanks for the link to your blog. will follow.

GRG55
10-12-08, 09:36 PM
The Fed is far from clueless: they are instruments in the effort to further USD seignorage.

Notably, the USD is controlled by a private, opaque entity: The Fed.

This hasn't been a collapse: it's been a demolition, clearing the low-income housing for McMansions. :)

The next bubble: whatever helps further USD seignorage and consolidate control of global banking. Infrastructure, new-deal? Issuing bonds for new assets in the US helps move more US paper abroad.

Bubbles, busts... there's are the weapons that the Fed uses to drill more dollars into the wallets of the world.

Even the Japanese are going to start taking orders from the Fed post-MS acquisition.

Maybe that's why they are reconsidering? Or want a better deal? :)



Mitsubishi and Morgan Stanley Renegotiating (http://www.nytimes.com/2008/10/13/business/13morgan.html?_r=2&ref=business&oref=login&oref=slogin)
By ANDREW ROSS SORKIN (http://topics.nytimes.com/top/reference/timestopics/people/s/andrew_ross_sorkin/index.html?inline=nyt-per)
</NYT_BYLINE>Published: October 12, 2008

<NYT_TEXT>Morgan Stanley (http://topics.nytimes.com/top/news/business/companies/morgan_stanley/index.html?inline=nyt-org) was racing to salvage a crucial investment from a big Japanese bank on Sunday in an effort to allay growing fears about its future — negotiations so critical to the financial markets that they have drawn in both the Treasury Department and the Japanese government...

</NYT_HEADLINE><SCRIPT language=JavaScript type=text/JavaScript>function getSharePasskey() { return 'ex=1381550400&en=0e88a71090515d1b&ei=5124';}</SCRIPT><SCRIPT language=JavaScript type=text/JavaScript>function getShareURL() { return encodeURIComponent('http://www.nytimes.com/2008/10/13/business/13morgan.html');}function getShareHeadline() { return encodeURIComponent('Mitsubishi and Morgan Stanley Renegotiating');}function getShareDescription() { return encodeURIComponent('Mitsubishi was pressing for more favorable terms on Sunday after Morgan Stanley lost nearly half its market value during last week’s stock market plunge.');}function getShareKeywords() { return encodeURIComponent('Subprime Mortgage Crisis,Mitsubishi UFJ Financial Group Inc,Morgan Stanley,Treasury Department');}function getShareSection() { return encodeURIComponent('business');}function getShareSectionDisplay() { return encodeURIComponent('Business');}function getShareSubSection() { return encodeURIComponent('');}function getShareByline() { return encodeURIComponent('By ANDREW ROSS SORKIN');}function getSharePubdate() { return encodeURIComponent('October 13, 2008');}</SCRIPT>

vinoveri
10-13-08, 09:08 AM
I fall off the planet for 2 years, come back to discover that everything is "back to normal", credits is everywhere, global GDP growing, inflation is <4%, the DJI is 17k AND the U.S. fiscal budget deficit is $1.5 Trillion per year and the total U.S. debt is $20 Trillion.

Why is this not a somewhat probable if not likely scenario? Although the credit/debt game has to end at some point, but what's to prevent it from continuing for another 20 years. All it would seem to take is a major increase in the U.S' credit limit and continued cash advances from the ROW.

Although I tend to agree with from pure common sense and intuition the notion that real capital comes from real savings, it would seem to me that recent history has shown that this idea of "Confidence" is the key to the credit Ponzi scheme, and as long as one thinks the scheme is still in its early stages, greed will drive participation; i.e. paper and fictitious wealth are "real" as long as there is "confidence" in the system.

phirang
10-13-08, 09:11 AM
I fall off the planet for 2 years, come back to discover that everything is "back to normal", credits is everywhere, global GDP growing, inflation is <4%, the DJI is 17k AND the U.S. fiscal budget deficit is $1.5 Trillion per year and the total U.S. debt is $20 Trillion.

Why is this not a somewhat probable if not likely scenario? Although the credit/debt game has to end at some point, but what's to prevent it from continuing for another 20 years. All it would seem to take is a major increase in the U.S' credit limit and continued cash advances from the ROW.

Although I tend to agree with from pure common sense and intuition the notion that real capital comes from real savings, it would seem to me that recent history has shown that this idea of "Confidence" is the key to the credit Ponzi scheme, and as long as one thinks the scheme is still in its early stages, greed will drive participation; i.e. paper and fictitious wealth are "real" as long as there is "confidence" in the system.

Your intuition is good! It will likely be the case.

GRG55
10-13-08, 11:13 AM
Your intuition is good! It will likely be the case.

All except the < 4% inflation guess. It'll be there only if the BLS keeps fiddling with the measurement criteria. Not out of the question, of course, but increasingly difficult to do while maintaining that "confidence thing"...;)

Andreuccio
10-13-08, 04:40 PM
I fall off the planet for 2 years, come back to discover that everything is "back to normal", credits is everywhere, global GDP growing, inflation is <4%, the DJI is 17k AND the U.S. fiscal budget deficit is $1.5 Trillion per year and the total U.S. debt is $20 Trillion.

Why is this not a somewhat probable if not likely scenario?

C'mon, be real.

What are the odds you fall off the planet? :D

c1ue
10-13-08, 05:45 PM
I fall off the planet for 2 years, come back to discover that everything is "back to normal", credits is everywhere, global GDP growing, inflation is <4%, the DJI is 17k AND the U.S. fiscal budget deficit is $1.5 Trillion per year and the total U.S. debt is $20 Trillion.

Why is this not a somewhat probable if not likely scenario? Although the credit/debt game has to end at some point, but what's to prevent it from continuing for another 20 years. All it would seem to take is a major increase in the U.S' credit limit and continued cash advances from the ROW.

It won't happen because the ultimate cause of the problem: securitized lending, is broken and a replacement has yet to be found.

The actions of the US and other G7 governments will temporarily alleviate the consequences of the securitization debacle, but the fundamental securitization mechanism must be replaced for the free credit to again flow. Unless you think Europe will buy crap MBS bonds again?

Even a return to the 1985 model of banking won't do; that would still mean losing 2/3rds of the previously available credit (or more).

If you think things are bad now - just wait to see what happens when government guaranteed loans are being made by banks capitalized with government capital.

That will be a very short but spectacular bubble.

vinoveri
10-14-08, 10:08 AM
It won't happen because the ultimate cause of the problem: securitized lending, is broken and a replacement has yet to be found.

The actions of the US and other G7 governments will temporarily alleviate the consequences of the securitization debacle, but the fundamental securitization mechanism must be replaced for the free credit to again flow. Unless you think Europe will buy crap MBS bonds again?

Even a return to the 1985 model of banking won't do; that would still mean losing 2/3rds of the previously available credit (or more).

If you think things are bad now - just wait to see what happens when government guaranteed loans are being made by banks capitalized with government capital.

That will be a very short but spectacular bubble.

Now that Fannie and Freddie are nationalized, nothing would seem to limit there ability to buy and hold mortgages, and provide whatever terms they choose. In fact, what's to prevent them from having their charter modified (or another GSE created) to take on other debt,e.g., car loans, credit cards, student loans. Nationalization is a really radical change to the system - it's really difficult to get your arms around the extent of what can now happen.

and the vicious cycle is now a self-fulfilling circle
1) Treasury sells bonds to banks
2) Fed buy bonds from banks and voila credit
new 3) Fed borrows from Treasury

The national debt can go to the moon as all this happens.

The only check it would seem is the credit-worthiness of the U.S. And by whom and when that will be challenged (if ever) is anybody's guess.

Slimprofits
10-14-08, 10:50 AM
U.S. now in recession, says Volcker (http://www.financialweek.com/apps/pbcs.dll/article?AID=/20081014/REG/810149993/1036)



Mr. Volcker was asked by a member of the audience if the massive infusion of liquidity by the Federal Reserve could lead to inflation or stagflation.

“It’s not going to be a problem in the short run. Inflation doesn’t flourish in the face of recession,” he said.

“It’s something we have to worry about when we get out of this recession.”

c1ue
10-14-08, 11:56 AM
The national debt can go to the moon as all this happens.

The only check it would seem is the credit-worthiness of the U.S. And by whom and when that will be challenged (if ever) is anybody's guess.<!-- / message -->

Credit worthiness is exactly how the Alt-A debacle was created.

Some arbitrary score set by a ratings agency whom you pay for said score doesn't mean squat - and this has been fully revealed.

The point is - every 1$ of debt the US piles up must be matched by a Treasury or corporate or some type of bond sale to someone. Even before this latest crisis, more than half of purchases were from foreign central banks.

Why again will the foreigners continue to purchase?

I can see some purchasing as a quid pro quo to retire some of the bad MBS debt, but I still cannot fathom a reason beyond that.

DrYB/C
10-14-08, 05:03 PM
Cointegration and Cagan's model of hyperinflation under rational expectations

by Tom Engsted

WHEN MONEY AND PRICES ARE INTEGRATED of order two, I(2), and shocks to money demand or velocity are stationary, then the Cagan (1956) monetary model of hyperinflation has the implication that real money balances cointegrate, in the sense of Engle and Granger (1987), with the rate of inflation. As a result, one can estimate the interesting parameter in the model, the semielasticity of the demand for real balances w.r.t. expected inflation, super-consistently in a cointegrating regression without having to specify the exact expectations formation process....

As it plays out in the real-world (?):

1. Icelandic Shoppers Splurge as Currency Woes Reduce Food Imports http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aVFtDRGwcc50

2. Icelanders Sink Under Foreign-Currency Loans as Krona Plunges http://www.bloomberg.com/apps/news?pid=20601068&sid=am95H4YHyr50&refer=economy

3. U.K. Used Anti-Terrorism Law to Seize Icelandic Bank Assets http://www.bloomberg.com/apps/news?pid=20601102&sid=aXjIA5NzyM5c

4. The Next World War? It Could Be Financial. http://www.washingtonpost.com/wp-dyn/content/article/2008/10/10/AR2008101002441_pf.html

Related:

a. China snaps diplomatic, military contacts with US http://in.news.yahoo.com/20/20081007/1424/twl-china-snaps-diplomatic-military-cont.html

b. Russia stunned by UN-NATO cooperation deal http://en.rian.ru/russia/20081009/117635210.html

c. Medicines shortage looms as winter approaches http://business.timesonline.co.uk/tol/business/industry_sectors/health/article4931435.ece

vinoveri
10-14-08, 05:06 PM
The point is - every 1$ of debt the US piles up must be matched by a Treasury or corporate or some type of bond sale to someone. Even before this latest crisis, more than half of purchases were from foreign central banks.

Why again will the foreigners continue to purchase?

I can see some purchasing as a quid pro quo to retire some of the bad MBS debt, but I still cannot fathom a reason beyond that.

Neither can I unless they have no where else to go or to avoid economic MAD?

What I don't understand is if the gov with fiat money system can create money out of thin air why does this newly created money need to be associated with a creditor? What is the significance of the fed's balance sheet for instance, if it can get new funding at any time from the treasury?
With a nationalized banking system, what's to prevent the gov from asserting anything it wants in reference to it's balance sheet, that of the banks, who owns who what, etc? It's back to the confidence game again. I don't get it.

donalds
10-14-08, 07:47 PM
For those of you who would like to expand your understanding of inflation and Volcher, or at least gather in a differing perspective, listen to this audio of an interview with York University, Toronto, Political Economy professors:

http://www.leftbusinessobserver.com/Radio.html

donalds
10-14-08, 07:49 PM
In the above, I failed to add that one needs to click on to the October 4th broadcast.

GRG55
10-14-08, 11:04 PM
It won't happen because the ultimate cause of the problem: securitized lending, is broken and a replacement has yet to be found.

The actions of the US and other G7 governments will temporarily alleviate the consequences of the securitization debacle, but the fundamental securitization mechanism must be replaced for the free credit to again flow. Unless you think Europe will buy crap MBS bonds again?

Even a return to the 1985 model of banking won't do; that would still mean losing 2/3rds of the previously available credit (or more).

If you think things are bad now - just wait to see what happens when government guaranteed loans are being made by banks capitalized with government capital.

That will be a very short but spectacular bubble.

I'm waiting for the day we see a government owned bank foreclose on a government loan to a delinquent government employee who bought the house from the RTC [and remortgaged it one too many times]...

Rajiv
10-14-08, 11:10 PM
You can embed the broadcast by using the Big M tag as below

http://shout.lbo-talk.org/lbo/RadioArchive/2008/08_10_04.mp3

DrYB/C
10-15-08, 12:15 PM
Cointegration and Cagan's model of hyperinflation under rational expectations

by Tom Engsted

WHEN MONEY AND PRICES ARE INTEGRATED of order two, I(2), and shocks to money demand or velocity are stationary, then the Cagan (1956) monetary model of hyperinflation has the implication that real money balances cointegrate, in the sense of Engle and Granger (1987), with the rate of inflation. As a result, one can estimate the interesting parameter in the model, the semielasticity of the demand for real balances w.r.t. expected inflation, super-consistently in a cointegrating regression without having to specify the exact expectations formation process....

1. Iceland Cuts Key Interest Rate to 12% From 15.5% (Update2) http://www.bloomberg.com/apps/news?pid=newsarchive&sid=azrp3E_O4HNE

As expected: first the price, then the aggregates (as they attempt to monetize the increasing economic costs of currency price disequilibrium during the process of disequilibrium reversion to equilibrium).

As stated in my first itulip.com post, dtd 2/29/2008, our current malaise will end in hyperinflation and war.

FRED
12-02-10, 03:25 PM
We are working on an update to this article. The demand for money could collapse as the economy improves. Then the Fed has to find ways to withdraw liquidity very quickly. This may be easier said than done.

ThePythonicCow
12-02-10, 04:12 PM
We are working on an update to this article. The demand for money could collapse as the economy improves. Then the Fed has to find ways to withdraw liquidity very quickly. This may be easier said than done.
Antal Fekete has an excellent discussion of inflation, deflation and the fallacies of the Quantity Theory of Money.

A couple of his more recent efforts can be found at

A Critique Of The Quantity Theory Of Money (http://www.safehaven.com/article/13063/a-critique-of-the-quantity-theory-of-money), and
Hyperinflation or Hyperdeflation? (http://www.safehaven.com/article/16755/hyperinflation-or-hyperdeflation).

I recommend this work to your consideration.

marvenger
12-02-10, 07:37 PM
Isn't it only rich bankers who have money now?