As my pen name suggests, I am very much concerned about bonds, and rate of return, however, if you look back in history, at severe dislocations of the past, you can see a couple steps further out. The Great Depression was marked by a general rise in prices as we slid into the depression, commodities jumped. As it became clear this one was severe commodities collapsed and the ecomomy fell into deflation. It has happened since, but on a less obvious scale. I believe it will happen again. When? Probably 2009.
I think this will be a protracted downturn with extended slow growth coming in 2009. With rates so low and commodities being driven by global demand, inflation will roar ahead. This will force the Feds hand to raise rates, I say 4th quarter of 2008-1st quarter of 2009, to combat inflation. Once rates start to go up, GDP will not grow at any reasonable rate. The areas of the market that were protected by the rate cuts will be more exposed to losses. This is Darwins theory of survival of the fittest applied to the financial markets.
In any case, the tightrope analogy seems a misleading way to frame the issue, in that it presupposes that there exists a choice for the fed funds rate that would somehow contain both the solvency and the inflation problems.
I would have to agree.
I would add that I think we make the additional mistake of looking at the economy solely in terms of whether it is growing or shrinking, and not in terms of whether it has the structural stability to maintain its current momentum.
IMO focusing entirely on growth is how you get situations where consumers in a given economy consume more than is produced or, alternatively, where growth in capital spending far outpaces growth in consumption.
This can lead to nasty looking graphs like this (note the lack of drop shadows).
BV you seem to be suggesting that there aint much Ben can do.
I truly believe that monetary policy can do little but ease the pain at this point but by all means let him fire away we can pick up all the bodies later.
Soon, Ben may need a helicopter to carry him away.
Where do you make money going long these days? Agriculture, Precious Metals and oil so the hedge funds are flocking to them in hopes of a pig payoff. I am really wondering if we are just having a blow off top on commodities as demand has been slowing. OPEC is not increasing supply because there is plenty of supply for the current demand. As for runaway inflation, is it possible to have the price/wage spiral like we had in the 70's without the union clout?
I also think Bernanke has chosen a little more inflation
If he has, he's chose the wrong kind IMO -- he needs the type of inflation that increases real incomes. Currently we're getting precisely the opposite.
Inflation is a lagging indicator. Let Hamilton tell us where we will be in a year, and he would be providing something other than the obvious.
You have a classic deflationary spiral happening, and yet we worry about inflation. Please show me where you see a rise in monetary base or credit? Explain how GM's buyout of workers with new workers making half as much is inflationary. Did you really think Circuit City was the only company cutting wages?
We have a 10 week supply of wheat. It's going up, but that is not inflation. It is rising against ALL currencies so please no mumbo-jumbo about the falling dollar. It's a classic demand supply issue as any economist should be able to tell you.
ac, I agree - we need wages to increase, especially wages from median income households. Otherwise house prices will have to fall much further to bring the price to income ratio back into a more normal range.
Aggregate income gains don't help if all the gains go to a small group.
CR, everyday you rightfully mention that days destruction of credit, yet think Ben might choose a bit more inflation? This is a complete disconnect with reality. Ben my friend cannot force lenders to lend or borrowers to borrow. The pendulum has reversed.
I dont think wages will increase enough to compensate for the ramp up in inflation, in the next year or so. There will be more wirtedowns and this will help the further deterioration of the housing market. More fuel to the fire.
"The Fed chief must be worried that a recession in the present instance would precipitate major financial instability, in which case perhaps the choice between paying now and paying later argues in favor of the later."
There is no choice. If he does not act now there may not be a later.
More and more people are finally starting to realize the distinct possibility of a complete financial breakdown resulting in a revalued currency. Hoarded dollars will become virtually worthless if this were to happen.
SPECTRE Of Deflation, for the most part I've stayed away from the inflation vs. deflation arguments.
Has the Fed chosen a little more inflation in the short term? I think that is correct. Whether that leads to a more serious deflationary problem in the future, I don't know.
What I see is deflation in housing and high-value-added domestic discretionary goods (autos, e.g. where GM won't be affected by an axle plant strike because it has 150 days' supply of pickup trucks. Ouch.) Inflation on low value-added goods and imports, due to dollar devaluation and commodity inflation.
At this point the US had better hope that its share of world trade is still large enough that it can drag the world economy into recession, putting the brakes on commodity inflation. Because if it isn't, the yuan and oil are going to get pegged to the Euro, and American pensioners are going to be banging on pots on the National Mall.
Schnaps
Perhaps BV is too vague. A bond vigilante is someone who sells treasury bonds when evidence of inflation shows because of loss of real return. In a by-gone era, they restrained the fed's ability to do rate cuts, now it is a muddier issue.
Well arguments about whether we'll have inflation or deflation largely revolve what you CALL a decrease in broader measures of the money supply combined with rising prices. Most of the money that is likely to disappear wasn't chasing consumer goods anyway, it was chasing higher rates of return through the "magic" of higher leverage.
ac, I agree - we need wages to increase, especially wages from median income households. Otherwise house prices will have to fall much further to bring the price to income ratio back into a more normal range.
The thing is, I don't see businesses having any incentive to increase wages. Union influence has waned considerably and there is a larger available labor pool that would work for the least wages. Housing WILL collapse further for most of the areas, I think, before this is all over.
How do you know that the current rise in commodity prices is entirely due to demand and not HF or IB specultation?
I would not be suprised to see the Treasury Department raise the tax rate on commodity(most notably oil future contracts) gains to some onerous rate of 60+ percent to eliminate the speculators. In fact, they should be doing that right now but they are still just a little too naive to understand the severity of what is currently happening right now and what could happen.
Isn't inflation a possiblity though if the Fed can pump up the money supply fast enough? I've been on the deflation bandwagon on the evidence the Fed was failing to build the money supply, but that may not be true any more.
From Lee Adler's newsletter...
The Fed kept up the pace of the fastest 3 week expansion of the monetary base in the past 7 years. Outside of the week after 9/11/01, nothing else is even close.
Hamilton joins Roubini and Gross in the "just cut rates and all will be well eventually" camp. Cutting from 5.5% to 3% as of now has done zilch, zero, nada, for the credit issues. Why would another 200bps make any difference at all? At some point, probably this summer, rates will be at 0.5%-1% and still there will be problems. The underlying issue of insolvency cannot be helped by rate cuts. When this finally become accepted, that is when the markets are going to go down and go down hard. Until then, rate cut euphoria will dominate.
A "little" inflation is rather like being a "little" pregnant. When inflation starts to rise it usually has the momentum to keep going until it is savagely killed with cripplingly high interest rates.
And lowering short terms rates has already shoved up long term rates. We need more of that?
Blonde Vigilante writes:
...The Great Depression was marked by a general rise in prices as we slid into the depression, commodities jumped. As it became clear this one was severe commodities collapsed and the ecomomy fell into deflation...
Blonde Vigilante,
I hadn't realized there was an initial rise in commodity prices. That's really interesting and seems to jive with current circumstances. Can you offer any further reading on the matter?
I think Steel is definitely headed for a big whacking later this year, and all the bulk commodities and energy soon after that. Maybe agriculture last...
CR, how do they choose that outcome when in fact they are contracting money supply and credit is being vaporized faster than it can be created? They are the tail of the dog, and only set the FFR. The market decides where rates should be, and the FED has to defend it's target through Repos.
I would love to get Hamilton over here to answer some simple questions. What happens to a 2% Treasury when money supply contracts at 2% to 3% per year? Should help the actual yield, no?
By the way, great site with you and Tanta doing yoemans work on this unfolding crisis. Best wishes to you as weel!
I like this quote from one of the comments at Econbrowser:
"Many Fed Chairman before this have thought they could improve the economic outlook with "just a little whiff of inflation", and the reputations of none have survived to tell the tale."
"I would not be suprised to see the Treasury Department raise the tax rate on commodity(most notably oil future contracts) gains to some onerous rate of 60+ percent to eliminate the speculators."
Quincy
A little problem call the Constitution, the Tresury can not raise or lower anybody's taxes, only Congress can do that. Why pick on commodities as opposed to stock or bond trading? How is trading in S&P futures significantly different from buying or selling S&P index funds? How is trading in Copper futures significantly different from trading in S&P 500 futures?
Bob_in_MA writes:
Blonde Vigilante writes:
...The Great Depression was marked by a general rise in prices as we slid into the depression, commodities jumped. As it became clear this one was severe commodities collapsed and the ecomomy fell into deflation...
Blonde Vigilante,
I hadn't realized there was an initial rise in commodity prices. That's really interesting and seems to jive with current circumstances. Can you offer any further reading on the matter?
I think Steel is definitely headed for a big whacking later this year, and all the bulk commodities and energy soon after that. Maybe agriculture last...
Bob_in_MA | 02.29.08 - 11:36 am
the question is will the rest of the world follow or sit it out???
If it is just you then there will be a silver lining to it ( as i wish it will)..
Try The Great Crash by John Kenneth Gailbraith. It is mostly free of personal opinion, except his forward which highlights how people will be ready to sacrifice you when you suggest caution.
What we import will inflate. What we don't import will have to correspondingly deflate.
If what we don't import deflates, business income drops, and wages can NOT go up.
If wages can't go up (and they won't), we'll consume less, and domestic prices will come down still more.
If our depression spreads (and it will) then the global depression will decrease consumption and demand for commodities, and the cycle will break, and the sun will shine again. In 5 years? 10? Probably we'll come out of it in 15 or so.
Oh, and gold will be king. As the dollar drops, the world will look to a "currency" independent of ANYONE's control. The other commodities will drop in price as global demand weakens. But gold will be "consumed" (as an international currcency) more, not less.
If you believe in deflation, then you must view the rise in gold & commodities as irrational.
During the great depression, commodites got absolutely crushed.
Me, I take Ben at his word that he will not allow deflation. Besides the fed, a profligate government can easily prevent deflation under a fiat regime. Our 150B stimulus plan can be repeated over and over. If Zimbabwe can inflate, so can Washington. This view, I believe, explains the recent rise in commodities.
Dirk van Dijk writes:
"I would not be suprised to see the Treasury Department raise the tax rate on commodity(most notably oil future contracts) gains to some onerous rate of 60+ percent to eliminate the speculators."
Quincy
A little problem call the Constitution, the Tresury can not raise or lower anybody's taxes, only Congress can do that. Why pick on commodities as opposed to stock or bond trading? How is trading in S&P futures significantly different from buying or selling S&P index funds? How is trading in Copper futures significantly different from trading in S&P 500 futures
Another catch 22 : you can not be for free market capitalism and then moan when you are the loser...
and you cant just select part you dont like either... regulation was ment to soot the hardest fallout togheter with socail policies as we try in europe ( because we learned from the past) but you cant have a socialism phobie and then try to manipulate the market it isnt possible..
Isn't Hamilton a college professor, not that there's anything wrong with that as Jerry and George would say?
I wonder what it feels like to be tenured? To know that you have a paycheck week after week regardless of what the economy does. Must be really neat. In fact, for Hamilton, inflation is truly his dear friend.
When inflation starts to rise it usually has the momentum to keep going until it is savagely killed with cripplingly high interest rates.
Ben alluded to this phenomenon yesterday with "inflation expectations remain stable". The effective size of the money supply is driven by a number of factors, including the fed funds rate, the fed open market operations, economic activity, and inflation expectations. The latter two combine to create money velocity; Ben was commenting how over the last decade expectations have become entrenched as "low", or of price stability. This helped hold inflation in check.
I do not think it will take very long for those expectations to be reshaped into moderate, high, and uncertain - precisely the sort of expectations that drive inflation in the first place. We are already a year into glaringly obvious price increases in food and energy, and especially once we start seeing $4 per gallon gasoline, and the effects of loose monetary policy are felt, inflation expectations will be difficult to bring back down.
It remains to be seen how much the reduced economic activity will offset those factors.
It seems quite obvious that Ben is willfully choosing inflation - dancing with the devil. The dollar charts tell us all we need to know about inflation. Whether this is to provide election year economic stimulus, or to avert deflationary systemic collapse, or both, I do not know.
One thing is sure: If we end up with entrenched inflation, it will take years of wringing to get it out of the economy, and it seems to me that the real risk is the loss of the dollar's status as reserve currency. Presumably, though, that is better than systemic collapse.
To echo Angry Saver's question, if the Fed starts taking any old thing as collateral or starts monetizing ten-year notes, won't he be able to pump enough money into the economy to avoid deflation and keep the inflation rally going?
I mean, if he is willing to throw caution to the wind and savers under the bus, can't he avoid the deflationary scenario?
Thanks I will. I'm sure I read it years ago, but I'm younger than that now... Sorry, that just slipped out.
the question is will the rest of the world follow or sit it out???
...
Yoringe
Yoringe,
I think what we'd be talking about would be world-wide by definition. I'm not saying that's what's going to happen.
Either the rest of the world weather's this OK and we get whammed with really bad inflation. Or the proverbial $hit hits the fan world-wide.
I can easily see China going from boom-to-bust very quickly. There must be all sorts of mis-priced assets there, given cover by the general super-growth. And China's exports are still growing faster than GDP.
I would not be suprised to see the Treasury Department raise the tax rate on commodity(most notably oil future contracts) gains to some onerous rate of 60+ percent to eliminate the speculators.
Angry Saver, not at all. We have had our inflation in assets instead of wages. Now the assets are deflating and what is left is debt.
We will see rising prices, not inflation, on things we must have, and deflation on damn near everything else. Commodities will correct in due time if they aren't required for survival.
A resurgence of inflation? It's already here. I go to a decent bakery to get bread. The price of a loaf of bread has increased 33% in the last year, to $4.00 a loaf. This is the kind of bread your mother used to make; you know, toasted it will stand up to a good buttering from refrigerated butter. My baker tells me the price will go higher as his cost of flour continues to rise.
Meat is just out of sight. I used to get a good BBQ steak for me and my family of four for about $10 just a couple of years ago. Not it's $25.
Health care costs are like a runaway train. The cost of the health insurance continues to escalate each year, while the amount paid by the insurer as a percentage of the overall bill continues to shrink and the deductibles and amount paid by me continues to increase.
It really doesn't matter what segment of the economy a person looks at - inflation is already here. It can only get worse with Bernanke's rate cuts, petroleum cost increases, and continued fall of the value of the dollar.
I don't buy this resurgence of inflation stuff. It's been surging for a while, and augurs to get worse.
Where is you evidence of deflation under a fiat regime? The fed has total control over deflation. Inflation is a different story. Especially CPI inflation.
I would not be suprised to see the Treasury Department raise the tax rate on commodity(most notably oil future contracts) gains to some onerous rate of 60+ percent to eliminate the speculators.
That's the smartest thing I heard all day.
i think it would kill your whole system.. dont forget it is build on TRUST!!!
see what happens to economies who so blatant try to manipulate in the long term...(breaching contracts, nationalis private buisness,Venezuela anyone??))
BTW there is enough money out there its just nobody would invest it in a loser and another thing is speculators are the bread and Butter of capitalism .. to weed them out is to destroy the system..
IMO, the decision was all about the domestic economy versus the dollar. Bernanke has decided to let the dollar go to hell in a handbasket and infuse the economy while Paulson spouts strong dollar rhetoric.
If anyone here believes the FED is out to destroy itself, I have some bridges to nowhere to show you.
But don't you have to give some creedence to Bernanke's previous comments about adding liquidity and avoiding deflation at all costs? I think he has already screwed up royal, but that does not mean his lifelong academic focus on deflation couldn't make things worse.
I am a novice, but if it's one thing I do know, it's that the Fed doesn't care about the cost of your bread or steak (after all you can eat hamburgers on lettuce wrap says Greenspan!), they only care what the proles get paid.
If the Proles get a few dollars more an hour-- that's inflation risk.
Speaker73, as soon as I see an expansion of monetary base or credit, gitty-up. Until then they can say whatever they like, and what keeps everyone relatively calm. When the FED Chairman openly discusses bank failures, I have a hard time getting excited about our economy. Follow what they do and not what they say.
We aren't going Weimar Republic folks. The FED knows what we know. It's suicide for our economy.
--
Let us first figure out who Burn-ass-ke (on the hot seat with fire underneath) is helping and who is he hurting. He is helping the banks who have dug a big hole for themselves with their bad practcies, as much as he can, and hurting most of the rest (at least 90% of Americans).
But how is a born-and-bred American dope to figure out such a simple thing?
There are consequences to letting banking and finance Crooks take control of the economy, including control of the USG and the Fed, and there will be consequences to breeding dopes who have been rendered politically impotent. The dope is happy to have the privilege of voting for one of the agents of the Crooks for the Presidency.
You will see what I mean in another year or two. Only a morn would want to be the President during the Greater Depression. No wonder we have no smart people in the race now. It would be blind leading the blind faithful (dopes, of course).
"If the Proles get a few dollars more an hour-- that's inflation risk."
Conjure and I see absolutely no inflation risk on the domestic wage side.
The real problem will arise, as I've said here before, if OPEC cuts back production to re-price in dollar terms. If something like that happens then, yes, you're going to have some serious inflation.
all of you voive your opinions and some are great nut lets face it.
WE ARE ALL F***D.
Now I kno wht the NRA wants guns. There will be anarchy if this plays out like nourile roubini and others talk about. Better get prepared. When the masses get away from watching CNN and see that there local bank went broke and there is no moore fdic funds left all hell will break loose.
If you follow the Capitalist theorie the losers who miscalkulated have to go bust to go forward thats how it works...
Your problem is just the loser is wall street and your leaders dont like it a bit and try to manipulate themselfes out of this to keep there skin dry!!!!
The guys who are doing the policie decision have to kill them self to sort it out !! talk about sepuku economics but thexy will not do it...so all will suffer..
In a bear market, when business sales decrease, and particularly when insurance companies are taking hits to investment porfolios, 'inflation' appears since the companies that know you need them more than they need you will make up for the losses by inflating prices. This happens after disasters as well.
Until the stock market is once again controlled by bulls, you can expect this price 'inflation' to continue...ie: stagflation.
Commodities will correct in due time if they aren't required for survival.
SPECTRE Of Deflation | 02.29.08 - 11:55 am | #
What commodities are not required for survival? Food is, so that covers the Ag complex (ok I could make due w/o OJ, but coffee no way). Base metals? Not if we are going to have a civilization (hey even in the bronze age they needed copper and zinc). Energy? not if you want to transport anything or stay warm. So what thats traded on the Merc do we have left, PM's and financial futures.
The commodities price question is the litmus test for the 'decoupling' theories. If it becomes evident that other countries will follow the US into a slowdown (call it what you will), then commodities prices will collapse.
The sole argument for those high prices now is essentially a speculative one: demand in China and India, etc., will continue in spite of a US slowdown.
But isn't this exactly what you are talking about?
The Fed kept up the pace of the fastest 3 week expansion of the monetary base in the past 7 years. Outside of the week after 9/11/01, nothing else is even close.
Now perhaps the credit contraction is happening much faster then the Fed can create new money. If that's the case, I'm back on the deflation bandwagon. But I don't know how to make that comparison. If someone does, I'd be a greateful student.
Saul -
I made my prediction last year that by Xmas 2009, we would have seen at least one major riot in a major U.S. city. I still think that is a safe bet.
Yoringe writes: i think it would kill your whole system.. dont forget it is build on TRUST!!!
Trust on who? brokers? appraisers? bankers? rating agencies? regulators?
CONgress?
It is trust that got us in this mess in the first place.
no it isnt. the overarching trust is that all runs on capitalism. if you start to run around screaming because you are this time the loser no one will invest anything in you in the FUTURE!!!your diapointed trust was to believe you are the default winner or that there are no losers or it isnt you who are the loser..sorry read KARL MARX to get it..
Dirk van Dijk writes:
Commodities will correct in due time if they aren't required for survival.
SPECTRE Of Deflation | 02.29.08 - 11:55 am | #
What commodities are not required for survival? Food is, so that covers the Ag complex (ok I could make due w/o OJ, but coffee no way). Base metals? Not if we are going to have a civilization (hey even in the bronze age they needed copper and zinc). Energy? not if you want to transport anything or stay warm. So what thats traded on the Merc do we have left, PM's and financial futures.
Dirk van Dijk | Homepage | 02.29.08 - 12:12 pm | #
Why will I need industrial metals if we go Depression? Oil and food are a different set of animals. You damn well better have those at any price. Everything else gets taken down.
It's getting to be pretty obvious to everyone, (lookit w's $600 rebate an see if that doesn't convince you that even the last child gets it) that the consumer, who could follow the command to spend in 2001, is not up to the task now.
Or later when the next $600 rebate is reinstalled to redress that pesky uneven distribution of wealth.
Anyone who gives this Inflation Scare a moments consideration will see that it can only be supported by able consumers...not the new GM employees, or anyone exposed to global labor arbitrage.
$4/load of bread works now, but $10/loaf bread prolly produces that Hungry Mob.
wally writes:
The commodities price question is the litmus test for the 'decoupling' theories. If it becomes evident that other countries will follow the US into a slowdown (call it what you will), then commodities prices will collapse.
The sole argument for those high prices now is essentially a speculative one: demand in China and India, etc., will continue in spite of a US slowdown.
wally | 02.29.08 - 12:14 pm | #
AMEN!! why should commodities fall??
Its a global market place and the stuff goes to the highest bidder!!
if your money gets keeping worth less you have to pay more etc...if you dont have the money cut back...but it doesnt mean somebody else isnt willing to buy and pay..
Dirk van Dijk, and I don't want to hear about the 1.2 billion people in China. They are 1.2 billion poor people in China who spend one third their income on food to our 8%.
Don't look now, but demand for Gold is down over 70% in India. Who exactly eats Gold anyway? If I have food for my family, I'm damn sure not selling it to you for Gold because it just sits there in the pot looking pretty while my kids scream from hunger. Get real!
Regarding the hyperinflation vs. deflationary collapse, here are a few sage words:
SOME say the world will end in fire,
Some say in ice.
From what Ive tasted of desire
I hold with those who favor fire.
But if it had to perish twice,
I think I know enough of hate
To know that for destruction ice
Is also great
And would suffice
I've been all over bonds, especially treasuries for a decade. Not because I like them, they were just cheaper than over priced equities. Plus, I just don't have the stomach for commodities. I saw too many peole lose money that way in the 1970s. The volitility and taxes kill you.
Its not that hard. Just never over pay. Especially for commodities.
I used to own three quarries. Trust me when I tell you, the demand and pricing for commodities can and does turn on a dime. Whats worse, as a commodity producer, your fixed cost are really a killer during a slowdown. Profits evaporate as fast as demand does. Fixed costs can actually increase if you foolishly expanded into a boom.
Think of the home builders or specuvestors. Demand disappears, but the costs of ownership don't.
I don't want to hear about the 1.2 billion people in China. They are 1.2 billion poor people in China who spend one third their income on food to our 8%.
Let's say you're right about 1.1 billion of those people. That's still 100 million people who are now eating steak once or twice a week. Want to guess what that does to the price of grains? Anyone who thinks China is still full of poor people just hasn't been reading. It's impossible for that much development to happen without some people getting rich.
All the malinvestment must and will be destroyed as has been the case forever. There is no getting around this anymore than the fact that PE Ratios will undershoot the mean moving forward. It is written in stone.
We lost 6 trillion in asset value during the dot com bust, yet there was no deflation in CPI or money supply. Similar thing in Japan during their alleged deflation.
SPECTRE Of Deflation writes:
All the malinvestment must and will be destroyed as has been the case forever. There is no getting around this anymore than the fact that PE Ratios will undershoot the mean moving forward. It is written in stone.
thats the crux of it. its just that the malinvestors this time are the alphas on top who are making the policy too and just dont want the loss to materialize...
Hey Ralph, maybe Ed was talking to you while you read my post. Food and oil is demand/supply. PERIOD! We have 10 weeks worth of wheat, so throw inflation/deflation out the window on food and fuel.
Let me repeat again, we will have inflation [rising prices] for things we must have, while everything else is deflationary toast. It doesn't mean that even food and fuel will not fall, but rather in absolute terms they fall less than everything else.
Go to Dr. Housing Bubble for articles on the Great Depression. It ain't pretty, and damned if we didn't just repeat it.
The immorality of "a little inflation is ok" gets up my nose - I mean price inflation here - Bernanke is his testimony made it quite clear that he regards his mission as keeping prices stables - i.e. price inflation down - his buddy Kohn also recognises that easing has brought the US$ down - for some reason these idiots can't seem to make the connection of lower US$ == higher prices of imports and of goods that are globally traded and thus have their prices globally set - i.e. higher domestic price inflation...
Anyways this all affects the poorest of the nation most and also wage earners whose wages are not keeping up with price inflation, quite apart from the global wages arbitrage that has gone on.
It also affects savers who aren't sophisticated enough and worldly enough to know what's silently happening to their money and WHAT TO DO ABOUT IT if they do understand it.
The immorality of the Fed absolutely staggers me - twas ever thus.
Yeah Yeah I bleed not for myself (I know what to do and saw it coming ) but for others - sometimes its appropriate to do so.
People are running from a liquidity trap and in the process laying the groundwork for systemic collapse from hyper-inflation. Bush with his denial of a housing bubble which was his baby, with The Ownership Society, fails to see the reality of that bubble and the recession and inflation, and as such, we are headed for a global tsunami of hyper-inflation offset by a liquidity trap. This is not good people, call your retarded senators and congress-tards, cause this is going to crash soon!!!
Yesterday on the New York Mercantile Exchange, oil surged $2.95 to $102.59 a barrel, a new high in nominal terms. After rising 12% this month, oil prices are now just below their inflation-adjusted peak of $103.76 set in 1980.
But oil has been a laggard compared with other commodities. So far this year, natural-gas prices are up 26%, coal is up 56%, platinum up 41%, wheat up 32% and cocoa up 38%.
Instead, commodities have been riding a wave of investment money diverted from stocks and bonds by investors chasing better returns. A weaker dollar, lower interest rates and fears of inflation have added momentum to the rally.
"People are wondering where they should put their money. Treasury bonds are overpriced, they're scared to death about equities, and they're even afraid of money markets," says Shawn Rubin, a senior adviser at Smith Barney. "So everybody is asking about commodities."
There's no bubble in commodities. China's steel demand is forecast to grow 11% this year alone. Likewise oil demand growth is far exceeding supply growth, and is expected to for, well, forever. We are transitioning from a world with about 1 billion living in the developed world (the "West") to about 4 billion (the "West", China, India, and a couple smaller countries). That's putting a staggering pressure on commodity supplies. In some cases (oil, wheat, some of the rarer metals) there's just not enough on the planet to increase use 4x and prices must soar. Even where there's plenty (e.g. iron) there are issues with increasing production rapidly enough.
Are bonds toast? Mine are all increasing in value.
Angry Saver | 02.29.08 - 12:39 pm | #
In an earlier post I highlighted the fact that bonds do quite well when money supply is contracting. Did you miss it, or ignore it like my example you previously requested.
What bugs me is this foolish attempt to maintain housing, equity and loan values. It hurts more than it helps. We could use a deflation, they just won't allow it. They have the ability to tax the prudent in the short term. Greenspans 1% rates are proof of this.
Hence the name Angry Saver. Years ago, I would have called myself cautious investor.
The real standard of living in the US must fall as the debt bubbles deflate. The Feds choice is hold interest rates steady and cause a recession which hurts workers and producers, or reduce interest rates hurting savers retirees. So far, the Fed is opting for inflation. We will see the international response to this choice unfold in the weeks agead.
Go look at when all the various 'commodities' all took off in the stock charts....same time as the FED started cutting. This is not related to some new pent-up demand that started last aug/sept, it is just a currency play just like gold.
Moody's still reviewing Ambac for possible downgrade - By Alistair Barr
Last update: 12:40 p.m. EST Feb. 29, 2008
SAN FRANCISCO (MarketWatch) -- Moody's Investors Service said on Friday that it's still reviewing Ambac Financial for a possible downgrade because the bond insurer currently doesn't have enough capital to keep its Aaa rating. "Based on an updated assessment of Ambac's mortgage risk, Moody's believes that Ambac's capital exceeds the minimum Aaa standard but falls below the Aaa target level," the agency said in a statement. However, Ambac is trying to raise new capital and Moody's was supportive of that effort. "Ambac is actively pursuing capital strengthening activities that, if successful, are expected to result in the company meeting Moody's current estimate of the Aaa target level," the agency said. "Moody's continuing review will focus on both the further refinement of, and execution of, those capital plans." Ambac shares fell 2% to $11.52 during afternoon trading on Friday.
I find these endless debates over inflation vs. deflation odd. Bernanke can certainly chopper in enough money to inflate, and he can certainly halt enough open market operations to deflate. So all this is about trying to mindread/second-guess somebody who thinks a big part of his job is to obscure his intent.
My personal guess is that Bernanke's biggest goal is keeping the banking system healthy. That requires a steep yield curve (so lowish rates and some inflation) but not high inflation, which kills the banks between high current rates and low 30-year fixed loans they've put out. So I expect moderate inflation, slighly over what we've got now. But this is a pretty precarious prediction given Bernanke's enormous leeway. How can people be so certain of his intent?
I think it's pretty simple. In the very long term like 10-20-50 years, Gold will not rise much because it is not agricultural, and oil won't either if we become a cleaner planet. Agricultural will. However in the 2-3 years, gold must rise as per the dow/gold ratio, oil must rise because of energy issues, and ag commodities will fall because of slowing economies.
"Anyone who gives this Inflation Scare a moments consideration will see that it can only be supported by able consumers...not the new GM employees, or anyone exposed to global labor arbitrage. $4/load of bread works now, but $10/loaf bread prolly produces that Hungry Mob."
I don't know about Mobs, but it guarantees a profound shift in the political landscape, one which the Kleptocracy can't control. They're finally shat in their own nests far beyond redemption.
SPECTRE wrote, "Angry Saver, it was a little something called the "Great Depression"
ummm, not exactly a fiat currency at the time. and as for there being "1.2b poor people in china" the current numbers are about 300m plus, roughly the size of the US, living distinctly middle class lives.
Angry Saver, The Great Depression once Gold was confiscated. We then had little pieces of paper that were supposedely backed by Gold although for some strange reason you couldn't actually own any. They inflated 30% plus with that little move although we weren't truly Fiat until Nixon. It didn't work by the way until we entered the War.
I'm going by what I see, and not what they say. They know expanding the monetary base permanently would take us down the Weimar Road. They routinely expand and contract through Repos, but that is a different beast.
I find these endless debates over inflation vs. deflation odd. Bernanke can certainly chopper in enough money to inflate, and he can certainly halt enough open market operations to deflate.
But read a bit about liquidity traps (e.g. Krugman 1999) and you'll see that not only does the Fed have to do something now, but the market has to believe that it can credibly keep doing it for long enough to make a difference (e.g. to long bond holders). In a country that requires $5B/day in foreign investment and running a 300MM/day war, whose consumers are already spending every discretionary dollar etcetera etcetera, what exactly can he do, and keep doing for long enough to matter?
What exactly will China do with all it's overcapacity, and workers with nothing to do? Do you Chinistas really believe that China goes up forever just like housing? Damn!
By trying to stretch this whole drama out, the FED is actually delaying 1930's type deflation, and thus it will make financial security (survival) almost impossible for everyone w/o huge savings accounts. Speculators are keen to this and are hedging to leverage what small savings they have under the assumption that there will be no quick bust without some tell-tale signs first (like a big bank failure).
There is absolutely, ridiculously massive overcapacity developing in China? Why? Because it is inherently government-mandated, and there is currently no market restraint.
I think I read they are building 50 ports or something obscene like that. Same goes for airports and other infrastructure.
Even if the U.S. economy were exploding, they would not be able to utilize all of their capacity. With a U.S. recession, the overcapacity will be even more stark. China is going to be a disaster, plain and simple. And I suspect their problems will make American problems look like child's play.
OT but I am annoyed that exactly a week ago the market took off like a rocket at 3:30 on a rumour of a plan to save Ambac that would be announced Monday or Tuesday. But it never happened because S&P afirmed the AAA rating. It is now Friday - still no plan - and now Moody's says it is reviewing them for a downgrade.
I want to know what the plan is. It must have a name like all the other plans. Surely I am not the only one who will be unimpressed if there is yet another 3:30 rumour that there will be a plan so that Moody's will also confirm the AAA rating?
Operation Saaave AAAmbac, to be announced, say, Wednesday?
Fool me once, shame on you Ambac. Fool me twice, shame on me.
"I don't think we're headed into a recession. But there's no question we're in a slow down and that's why we acted with over $150 billion worth of pro-growth economic incentives, mainly money going into the hands of our consumers... The purpose is to encourage our consumers - to give 'em money - to help deal with the adverse effect of the decline in housing values. Consumerism is a significant part of our GDP growth and we want to sustain the American consumer, encourage the American consumer."
We used to be called American Citizens, but today we are Consumers. Truly depressing.
A big problem with our measure of inflation is how housing is counted. So from 1999 to 2005, inflation was a good bit higher than reported because the CPI was using some sort of rental equivalent which was rising much slower than housing prices. Now the drop in housing prices is not reducting CPI. This is a tough problem to solve - both the inflation problem and the measurement problem.
"Bernanke can certainly chopper in enough money to inflate, and he can certainly halt enough open market operations to deflate."
No, he can not and that is the problem. Ben can make interest rate low. But people with money are not willing to lend the money out. All the headline we heard regarding muni auction rate security, variable rate note etc. are a form of credit contraction and taking money out of the economy. Fed cutting short term rate can counter act some of the effect but not all of them. Why would you think we are slowing down? If money is rampage in the economy, we should be short of material, labor and everything in between. The raise in oil, metal and ag products are driven by foreign purchase not US. Just think if C or WB or MER were to BK in this environment, what would it do to the counter parties of all their risk and hence the eocnomy? I agreed with the assesment that we are not in a position to make any choices. Either we lower rate agressively or we won't have a financial systems as we know it...
I have been studying Keynesian theory and the latest post about consumption brought up an interesting question. If commodity prices go up, does consumption increase or decrease? My thought is that if commodity prices go up eventually consumption will go down and that should lower GDP.
I can't help but feel that the inane politicos and technocrats in DC are playing their last encore here.
Listening to Bubbles Bernanke's testimony was almost painful because it was so clear that he was either totally lying or telling half-truths. Not to mention hardly anyone was in attendance at those hearings. No doubt our "leaders" were too busy trying to get re-elected or dining with their lobbyist friends to care about the collapse of the American financial system.
The Bush administration is terrified of the word recession and somehow thinks we're just in a "slowdown", and like Nicholas II, Bush won't be able to see the trees for the forest until it's almost over.
I think by the end of this there's going to have to be major political unrest in this country. Hoover's Bonus Army will look like a troupe of boy scouts compared to what would descend upon Washington if there's massive bank failures, hyper price inflation, as the deflationary debt spiral plays out. Honestly I wouldn't be surprised to see the US as a federal entity to go the way of the Soviet Union and just implode. I think all bets are off at this point.
And if there's not political unrest, it means that Bubblevision has truly transformed this country into a nation of total sheep, far more sucessfully than the propaganda in the USSR ever did.
and it seems to me that the real risk is the loss of the dollar's status as reserve currency. Presumably, though, that is better than systemic collapse.
Eric
The loss of the dollar's status as reserve currency is not a far reach anymore. It is more probable than before. If it happens and we start racking up debt in some other currency than our own, then that would confirm systemic collapse (at least to me). Everything would be a new game and not for the better.
We used to be called American Citizens, but today we are Consumers. Truly depressing.
SPECTRE Of Deflation
SPECTRE, you are so sweetly naive. Is G. Bush still able to hurt your feelings? I thought we all realized when he flew over New Orleans that he was a big fly over in everything.
las, I'm no polyanna when it comes to what is as opposed to how I would like it to be. It was a commentary on our own culture which allowed this to happen. We always get the govt. we deserve, but it doesn't mean I can't feel badly for our children and grandchildren. Leave this a better place...we have failed miserably.
Speaker73, 2/3 of GDP is consumerism. If that doesn't curl one's toes, nothing will. To think after WW II we were a manufacturing giant, but let it go so that we could buy cheap crap from China. We allowed them to industrialize so that we must now compete with our new rulers for scarce resources is the most glaring irony. It makes me sick, but we did it to ourselves, and we will now sleep in the very dirty bed we made.
SPECTRE,
I agree w/ you actually. As a citizen it would be inspiring to pitch in and make sacrifices. But as a consumer, that just means someone else sees us a means to an end.
There is little doubt that these are rocky times, but don't you think we could all help ourselves to a little dose of moderation in the condemnations/calls for collapse of American society. It is true that the structure of our economy has changed a great deal since the 1950's, but just because there are now other major manufacturing centers around the world does not mean that we have become completely impoverished. For one, the level of general technical knowledge is now much higher than it was following WWII, and access to that knowledge has become incredibly easy and much cheaper. Design and data analysis become more valuable in a world where information is abundant, not less, and last I checked America was still doing a pretty decent job at innovation. I'm not saying that we will escape the present situation unscathed, or even that we won't have a period of significant, painful adjustments to our material standard of living; however, I think calls for bread lines and mass vagrancy are a bit premature.
I don't know why some people worry about deflation here in the US. If general prices were to go down, you'll just see US consumers pick up their buying sprees. It is ingrained in the American culture to spend till you drop. The only deflation scenrio that will transpire is if the US economy have a total meltdown where everyone loses their job.
I agree with what you say. I thought when the towers went down in Manhatten we would be asked to sacrifice and to work harder to support any efforts to go after the perpetrators and to defend ourselves. Instead we were asked to shop and go on as if there was no war etc. That seemed inflationary and so did the actions of federal reserve etc.
However I do not see a wage/price inflation spiral. in 2008 to get the company stock to go up you layoff people and cut their wages and benefits. It is a different world than the 1970s. As things get tighter there will not be a wage increase, there will be cutbacks and stagnant wages or concessions to keep jobs here in the USA. However some commodities will go up in price. If oil is in fact at maximum production and getting set to decline in production then that should keep upward pressure on price of oil and some other commodities. There are shortages in copper, wheat, etc. The contraction will occur while there resource constraints and increasing demand overseas (China and India) for commodities, with increasing prices.
The consumer will max out and get near retirement and poof there goes some of the demand. However if supply is also not able to meet the decreasing USA demand but overall worldwide increase in demand then the USA economy suffers a long period of little growth while others who make the stuff the USA consumer and the world's consumers buy other countries continue to improve economically, because they started from a much lower standard of consumption and have cash to afford to buy because they have not blown it all, on a big mortgage and a SUV payment, two currently depreciating assets.
So we will have deflation and inflation and depression. A rapid realignment of worldwide wealth.
"As a citizen, it is inspiring to pitch in and make sacrifices. But as a consumer, it just means somebody else sees you as a means to an end."
Oh boy Las are you ever right.
And that's why, painful and cataclysmic as it may be, I have more fear of TPTB saving this financial system (read DEBT system), than allowing it to collapse completely.
It's the financial/debt system that has turned us from citizens to consumers.
Speaker73, sorry for not answering on the post concerning Lee's thoughts. I can't tell what Lee is looking at because it's for paid subscribers.
We have ramped Repos to 61 billion recently, but we have also been in the 20 billion range as well. I want to see permanent injections that they can't suck out of the system at will.
Tafy auctions are injecting money into the system at a rapid clip but note that the number of bidders is increasing by auction and the bid to cover likewise. Credit Crunch isn;t getting better. Totaslly agree with Spectre that deflation is the real threat as the last time I checked the Fed Flow of Funds Statement, it was public equity and home equity the comprise ALL the "wealth" of America. Inflation works if companies can raise prices to offset the margin impact, but doesn;t work if no-pone can afford to buy the goods. Hence agree with post that there will be a riot somewhere as companies try and go down this road. It will fail. Therefore fundamentally, there is no sound reason to believe equities should go up. Peak margins at the moment and double digit multiples do not portend well for stocks - Buffet was buying in the seventies in the mid single digits. Housing is simply unaffordable and that debate is closed. 6x vs. 2x a la 1970s works. So remind me again how the infate our way out of this. Worked well in Turkey and Zimbabwe, no?
Cash is not a bad place to be in such an environment provided your not in the banks that fail. Othereise, foreign bonds in safe currency with fiscally responsible governments. If you truly belive dollar is going to tank, you can be sure the return trip trade will not hurt you.
As my pen name suggests, I am very much concerned about bonds, and rate of return, however, if you look back in history, at severe dislocations of the past, you can see a couple steps further out. The Great Depression was marked by a general rise in prices as we slid into the depression, commodities jumped. As it became clear this one was severe commodities collapsed and the ecomomy fell into deflation. It has happened since, but on a less obvious scale. I believe it will happen again. When? Probably 2009.
I think this will be a protracted downturn with extended slow growth coming in 2009. With rates so low and commodities being driven by global demand, inflation will roar ahead. This will force the Feds hand to raise rates, I say 4th quarter of 2008-1st quarter of 2009, to combat inflation. Once rates start to go up, GDP will not grow at any reasonable rate. The areas of the market that were protected by the rate cuts will be more exposed to losses. This is Darwins theory of survival of the fittest applied to the financial markets.
In any case, the tightrope analogy seems a misleading way to frame the issue, in that it presupposes that there exists a choice for the fed funds rate that would somehow contain both the solvency and the inflation problems.
I would have to agree.
I would add that I think we make the additional mistake of looking at the economy solely in terms of whether it is growing or shrinking, and not in terms of whether it has the structural stability to maintain its current momentum.
IMO focusing entirely on growth is how you get situations where consumers in a given economy consume more than is produced or, alternatively, where growth in capital spending far outpaces growth in consumption.
This can lead to nasty looking graphs like this (note the lack of drop shadows).
BV you seem to be suggesting that there aint much Ben can do.
I truly believe that monetary policy can do little but ease the pain at this point but by all means let him fire away we can pick up all the bodies later.
Soon, Ben may need a helicopter to carry him away.
"Inflation is your friend".
"I can protect myself from my enemies; may God protect me from my friends."
where's that Ambac bailout rumor when you need it?
As my pen name suggests
/scratches head
Where do you make money going long these days? Agriculture, Precious Metals and oil so the hedge funds are flocking to them in hopes of a pig payoff. I am really wondering if we are just having a blow off top on commodities as demand has been slowing. OPEC is not increasing supply because there is plenty of supply for the current demand. As for runaway inflation, is it possible to have the price/wage spiral like we had in the 70's without the union clout?
I also think Bernanke has chosen a little more inflation
If he has, he's chose the wrong kind IMO -- he needs the type of inflation that increases real incomes. Currently we're getting precisely the opposite.
Ministry of Truth, how do you have price/wage spiral if people cannot afford to miss a single paycheck?
Will we see a drop in median income this year due to job losses? People moving to commission only? I bet we will in CA.
Ministry of Truth, how do you have price/wage spiral if people cannot afford to miss a single paycheck?
Give people "tax rebates" for twice their yearly income.
Inflation is a lagging indicator. Let Hamilton tell us where we will be in a year, and he would be providing something other than the obvious.
You have a classic deflationary spiral happening, and yet we worry about inflation. Please show me where you see a rise in monetary base or credit? Explain how GM's buyout of workers with new workers making half as much is inflationary. Did you really think Circuit City was the only company cutting wages?
We have a 10 week supply of wheat. It's going up, but that is not inflation. It is rising against ALL currencies so please no mumbo-jumbo about the falling dollar. It's a classic demand supply issue as any economist should be able to tell you.
ac, I agree - we need wages to increase, especially wages from median income households. Otherwise house prices will have to fall much further to bring the price to income ratio back into a more normal range.
Aggregate income gains don't help if all the gains go to a small group.
Best Wishes.
Walking the plank is a better analogy.
CR, everyday you rightfully mention that days destruction of credit, yet think Ben might choose a bit more inflation? This is a complete disconnect with reality. Ben my friend cannot force lenders to lend or borrowers to borrow. The pendulum has reversed.
I dont think wages will increase enough to compensate for the ramp up in inflation, in the next year or so. There will be more wirtedowns and this will help the further deterioration of the housing market. More fuel to the fire.
"The Fed chief must be worried that a recession in the present instance would precipitate major financial instability, in which case perhaps the choice between paying now and paying later argues in favor of the later."
There is no choice. If he does not act now there may not be a later.
More and more people are finally starting to realize the distinct possibility of a complete financial breakdown resulting in a revalued currency. Hoarded dollars will become virtually worthless if this were to happen.
Translation: the Fed is now irrelevant.
SPECTRE Of Deflation, for the most part I've stayed away from the inflation vs. deflation arguments.
Has the Fed chosen a little more inflation in the short term? I think that is correct. Whether that leads to a more serious deflationary problem in the future, I don't know.
Best Wishes.
What I see is deflation in housing and high-value-added domestic discretionary goods (autos, e.g. where GM won't be affected by an axle plant strike because it has 150 days' supply of pickup trucks. Ouch.) Inflation on low value-added goods and imports, due to dollar devaluation and commodity inflation.
At this point the US had better hope that its share of world trade is still large enough that it can drag the world economy into recession, putting the brakes on commodity inflation. Because if it isn't, the yuan and oil are going to get pegged to the Euro, and American pensioners are going to be banging on pots on the National Mall.
Schnaps
Perhaps BV is too vague. A bond vigilante is someone who sells treasury bonds when evidence of inflation shows because of loss of real return. In a by-gone era, they restrained the fed's ability to do rate cuts, now it is a muddier issue.
Well arguments about whether we'll have inflation or deflation largely revolve what you CALL a decrease in broader measures of the money supply combined with rising prices. Most of the money that is likely to disappear wasn't chasing consumer goods anyway, it was chasing higher rates of return through the "magic" of higher leverage.
CalculatedRisk wrote:
ac, I agree - we need wages to increase, especially wages from median income households. Otherwise house prices will have to fall much further to bring the price to income ratio back into a more normal range.
The thing is, I don't see businesses having any incentive to increase wages. Union influence has waned considerably and there is a larger available labor pool that would work for the least wages. Housing WILL collapse further for most of the areas, I think, before this is all over.
Brian23-
How do you know that the current rise in commodity prices is entirely due to demand and not HF or IB specultation?
I would not be suprised to see the Treasury Department raise the tax rate on commodity(most notably oil future contracts) gains to some onerous rate of 60+ percent to eliminate the speculators. In fact, they should be doing that right now but they are still just a little too naive to understand the severity of what is currently happening right now and what could happen.
Thanks for the clarification. Here I was thinking you were one of Charlie's Angels or something.
Isn't inflation a possiblity though if the Fed can pump up the money supply fast enough? I've been on the deflation bandwagon on the evidence the Fed was failing to build the money supply, but that may not be true any more.
From Lee Adler's newsletter...
The Fed kept up the pace of the fastest 3 week expansion of the monetary base in the past 7 years. Outside of the week after 9/11/01, nothing else is even close.
Crowding Out- The Unreported Crisis- WSE Pro | The Wall Street Examiner
BV.
speaking of pen names, in the world of CR, there's no 'c' in Shnaps.
Hamilton joins Roubini and Gross in the "just cut rates and all will be well eventually" camp. Cutting from 5.5% to 3% as of now has done zilch, zero, nada, for the credit issues. Why would another 200bps make any difference at all? At some point, probably this summer, rates will be at 0.5%-1% and still there will be problems. The underlying issue of insolvency cannot be helped by rate cuts. When this finally become accepted, that is when the markets are going to go down and go down hard. Until then, rate cut euphoria will dominate.
A "little" inflation is rather like being a "little" pregnant. When inflation starts to rise it usually has the momentum to keep going until it is savagely killed with cripplingly high interest rates.
And lowering short terms rates has already shoved up long term rates. We need more of that?
Blonde Vigilante writes:
...The Great Depression was marked by a general rise in prices as we slid into the depression, commodities jumped. As it became clear this one was severe commodities collapsed and the ecomomy fell into deflation...
Blonde Vigilante,
I hadn't realized there was an initial rise in commodity prices. That's really interesting and seems to jive with current circumstances. Can you offer any further reading on the matter?
I think Steel is definitely headed for a big whacking later this year, and all the bulk commodities and energy soon after that. Maybe agriculture last...
CR, how do they choose that outcome when in fact they are contracting money supply and credit is being vaporized faster than it can be created? They are the tail of the dog, and only set the FFR. The market decides where rates should be, and the FED has to defend it's target through Repos.
I would love to get Hamilton over here to answer some simple questions. What happens to a 2% Treasury when money supply contracts at 2% to 3% per year? Should help the actual yield, no?
By the way, great site with you and Tanta doing yoemans work on this unfolding crisis. Best wishes to you as weel!
I like this quote from one of the comments at Econbrowser:
"Many Fed Chairman before this have thought they could improve the economic outlook with "just a little whiff of inflation", and the reputations of none have survived to tell the tale."
Sounds to me ben wants the cake and eat it too... Catch 22 where ever you look...
"I would not be suprised to see the Treasury Department raise the tax rate on commodity(most notably oil future contracts) gains to some onerous rate of 60+ percent to eliminate the speculators."
Quincy
A little problem call the Constitution, the Tresury can not raise or lower anybody's taxes, only Congress can do that. Why pick on commodities as opposed to stock or bond trading? How is trading in S&P futures significantly different from buying or selling S&P index funds? How is trading in Copper futures significantly different from trading in S&P 500 futures?
Bob_in_MA writes:
Blonde Vigilante writes:
...The Great Depression was marked by a general rise in prices as we slid into the depression, commodities jumped. As it became clear this one was severe commodities collapsed and the ecomomy fell into deflation...
Blonde Vigilante,
I hadn't realized there was an initial rise in commodity prices. That's really interesting and seems to jive with current circumstances. Can you offer any further reading on the matter?
I think Steel is definitely headed for a big whacking later this year, and all the bulk commodities and energy soon after that. Maybe agriculture last...
Bob_in_MA | 02.29.08 - 11:36 am
the question is will the rest of the world follow or sit it out???
If it is just you then there will be a silver lining to it ( as i wish it will)..
Please excuse this if it's a dumb question.
Do we know for certain, in any given time frame, how much money the govt. is printing?
Is there any check or limit to how much money they can print in any given time frame?
Bob_in_MA
Try The Great Crash by John Kenneth Gailbraith. It is mostly free of personal opinion, except his forward which highlights how people will be ready to sacrifice you when you suggest caution.
What we import will inflate. What we don't import will have to correspondingly deflate.
If what we don't import deflates, business income drops, and wages can NOT go up.
If wages can't go up (and they won't), we'll consume less, and domestic prices will come down still more.
If our depression spreads (and it will) then the global depression will decrease consumption and demand for commodities, and the cycle will break, and the sun will shine again. In 5 years? 10? Probably we'll come out of it in 15 or so.
Oh, and gold will be king. As the dollar drops, the world will look to a "currency" independent of ANYONE's control. The other commodities will drop in price as global demand weakens. But gold will be "consumed" (as an international currcency) more, not less.
All,
If you believe in deflation, then you must view the rise in gold & commodities as irrational.
During the great depression, commodites got absolutely crushed.
Me, I take Ben at his word that he will not allow deflation. Besides the fed, a profligate government can easily prevent deflation under a fiat regime. Our 150B stimulus plan can be repeated over and over. If Zimbabwe can inflate, so can Washington. This view, I believe, explains the recent rise in commodities.
Also, Japan's deflation was almost non-existent.
Dirk van Dijk writes:
"I would not be suprised to see the Treasury Department raise the tax rate on commodity(most notably oil future contracts) gains to some onerous rate of 60+ percent to eliminate the speculators."
Quincy
A little problem call the Constitution, the Tresury can not raise or lower anybody's taxes, only Congress can do that. Why pick on commodities as opposed to stock or bond trading? How is trading in S&P futures significantly different from buying or selling S&P index funds? How is trading in Copper futures significantly different from trading in S&P 500 futures
Another catch 22 : you can not be for free market capitalism and then moan when you are the loser...
and you cant just select part you dont like either... regulation was ment to soot the hardest fallout togheter with socail policies as we try in europe ( because we learned from the past) but you cant have a socialism phobie and then try to manipulate the market it isnt possible..
Isn't Hamilton a college professor, not that there's anything wrong with that as Jerry and George would say?
I wonder what it feels like to be tenured? To know that you have a paycheck week after week regardless of what the economy does. Must be really neat. In fact, for Hamilton, inflation is truly his dear friend.
When inflation starts to rise it usually has the momentum to keep going until it is savagely killed with cripplingly high interest rates.
Ben alluded to this phenomenon yesterday with "inflation expectations remain stable". The effective size of the money supply is driven by a number of factors, including the fed funds rate, the fed open market operations, economic activity, and inflation expectations. The latter two combine to create money velocity; Ben was commenting how over the last decade expectations have become entrenched as "low", or of price stability. This helped hold inflation in check.
I do not think it will take very long for those expectations to be reshaped into moderate, high, and uncertain - precisely the sort of expectations that drive inflation in the first place. We are already a year into glaringly obvious price increases in food and energy, and especially once we start seeing $4 per gallon gasoline, and the effects of loose monetary policy are felt, inflation expectations will be difficult to bring back down.
It remains to be seen how much the reduced economic activity will offset those factors.
It seems quite obvious that Ben is willfully choosing inflation - dancing with the devil. The dollar charts tell us all we need to know about inflation. Whether this is to provide election year economic stimulus, or to avert deflationary systemic collapse, or both, I do not know.
One thing is sure: If we end up with entrenched inflation, it will take years of wringing to get it out of the economy, and it seems to me that the real risk is the loss of the dollar's status as reserve currency. Presumably, though, that is better than systemic collapse.
To echo Angry Saver's question, if the Fed starts taking any old thing as collateral or starts monetizing ten-year notes, won't he be able to pump enough money into the economy to avoid deflation and keep the inflation rally going?
I mean, if he is willing to throw caution to the wind and savers under the bus, can't he avoid the deflationary scenario?
Blonde Vigilante,
Thanks I will. I'm sure I read it years ago, but I'm younger than that now... Sorry, that just slipped out.
the question is will the rest of the world follow or sit it out???
...
Yoringe
Yoringe,
I think what we'd be talking about would be world-wide by definition. I'm not saying that's what's going to happen.
Either the rest of the world weather's this OK and we get whammed with really bad inflation. Or the proverbial $hit hits the fan world-wide.
I can easily see China going from boom-to-bust very quickly. There must be all sorts of mis-priced assets there, given cover by the general super-growth. And China's exports are still growing faster than GDP.
Quincy k writes:
Brian23-
I would not be suprised to see the Treasury Department raise the tax rate on commodity(most notably oil future contracts) gains to some onerous rate of 60+ percent to eliminate the speculators.
That's the smartest thing I heard all day.
.
Angry Saver, not at all. We have had our inflation in assets instead of wages. Now the assets are deflating and what is left is debt.
We will see rising prices, not inflation, on things we must have, and deflation on damn near everything else. Commodities will correct in due time if they aren't required for survival.
A resurgence of inflation? It's already here. I go to a decent bakery to get bread. The price of a loaf of bread has increased 33% in the last year, to $4.00 a loaf. This is the kind of bread your mother used to make; you know, toasted it will stand up to a good buttering from refrigerated butter. My baker tells me the price will go higher as his cost of flour continues to rise.
Meat is just out of sight. I used to get a good BBQ steak for me and my family of four for about $10 just a couple of years ago. Not it's $25.
Health care costs are like a runaway train. The cost of the health insurance continues to escalate each year, while the amount paid by the insurer as a percentage of the overall bill continues to shrink and the deductibles and amount paid by me continues to increase.
It really doesn't matter what segment of the economy a person looks at - inflation is already here. It can only get worse with Bernanke's rate cuts, petroleum cost increases, and continued fall of the value of the dollar.
I don't buy this resurgence of inflation stuff. It's been surging for a while, and augurs to get worse.
Spectre of Deflation,
Where is you evidence of deflation under a fiat regime? The fed has total control over deflation. Inflation is a different story. Especially CPI inflation.
Angry Saver, it was a little something called the "Great Depression".
Angry Saver,
Um, ever hear of this place we call "Japan?"
Beano writes:
Quincy k writes:
Brian23-
I would not be suprised to see the Treasury Department raise the tax rate on commodity(most notably oil future contracts) gains to some onerous rate of 60+ percent to eliminate the speculators.
That's the smartest thing I heard all day.
i think it would kill your whole system.. dont forget it is build on TRUST!!!
see what happens to economies who so blatant try to manipulate in the long term...(breaching contracts, nationalis private buisness,Venezuela anyone??))
BTW there is enough money out there its just nobody would invest it in a loser and another thing is speculators are the bread and Butter of capitalism .. to weed them out is to destroy the system..
If anyone here believes the FED is out to destroy itself, I have some bridges to nowhere to show you.
IMO, the decision was all about the domestic economy versus the dollar. Bernanke has decided to let the dollar go to hell in a handbasket and infuse the economy while Paulson spouts strong dollar rhetoric.
He can worry about the dollar later.
Spectre -
If anyone here believes the FED is out to destroy itself, I have some bridges to nowhere to show you.
But don't you have to give some creedence to Bernanke's previous comments about adding liquidity and avoiding deflation at all costs? I think he has already screwed up royal, but that does not mean his lifelong academic focus on deflation couldn't make things worse.
In. By.:
I am a novice, but if it's one thing I do know, it's that the Fed doesn't care about the cost of your bread or steak (after all you can eat hamburgers on lettuce wrap says Greenspan!), they only care what the proles get paid.
If the Proles get a few dollars more an hour-- that's inflation risk.
angry saver, I don't think Zimbabwe has to worry about financing debt.
Speaker73, as soon as I see an expansion of monetary base or credit, gitty-up. Until then they can say whatever they like, and what keeps everyone relatively calm. When the FED Chairman openly discusses bank failures, I have a hard time getting excited about our economy. Follow what they do and not what they say.
We aren't going Weimar Republic folks. The FED knows what we know. It's suicide for our economy.
--
Let us first figure out who Burn-ass-ke (on the hot seat with fire underneath) is helping and who is he hurting. He is helping the banks who have dug a big hole for themselves with their bad practcies, as much as he can, and hurting most of the rest (at least 90% of Americans).
But how is a born-and-bred American dope to figure out such a simple thing?
There are consequences to letting banking and finance Crooks take control of the economy, including control of the USG and the Fed, and there will be consequences to breeding dopes who have been rendered politically impotent. The dope is happy to have the privilege of voting for one of the agents of the Crooks for the Presidency.
You will see what I mean in another year or two. Only a morn would want to be the President during the Greater Depression. No wonder we have no smart people in the race now. It would be blind leading the blind faithful (dopes, of course).
Jas
"If the Proles get a few dollars more an hour-- that's inflation risk."
Conjure and I see absolutely no inflation risk on the domestic wage side.
The real problem will arise, as I've said here before, if OPEC cuts back production to re-price in dollar terms. If something like that happens then, yes, you're going to have some serious inflation.
all of you voive your opinions and some are great nut lets face it.
WE ARE ALL F***D.
Now I kno wht the NRA wants guns. There will be anarchy if this plays out like nourile roubini and others talk about. Better get prepared. When the masses get away from watching CNN and see that there local bank went broke and there is no moore fdic funds left all hell will break loose.
If you follow the Capitalist theorie the losers who miscalkulated have to go bust to go forward thats how it works...
Your problem is just the loser is wall street and your leaders dont like it a bit and try to manipulate themselfes out of this to keep there skin dry!!!!
The guys who are doing the policie decision have to kill them self to sort it out !! talk about sepuku economics but thexy will not do it...so all will suffer..
Yoringe writes: i think it would kill your whole system.. dont forget it is build on TRUST!!!
Trust on who? brokers? appraisers? bankers? rating agencies? regulators?
CONgress?
It is trust that got us in this mess in the first place.
Innocent Bystander,
In a bear market, when business sales decrease, and particularly when insurance companies are taking hits to investment porfolios, 'inflation' appears since the companies that know you need them more than they need you will make up for the losses by inflating prices. This happens after disasters as well.
Until the stock market is once again controlled by bulls, you can expect this price 'inflation' to continue...ie: stagflation.
Commodities will correct in due time if they aren't required for survival.
SPECTRE Of Deflation | 02.29.08 - 11:55 am | #
What commodities are not required for survival? Food is, so that covers the Ag complex (ok I could make due w/o OJ, but coffee no way). Base metals? Not if we are going to have a civilization (hey even in the bronze age they needed copper and zinc). Energy? not if you want to transport anything or stay warm. So what thats traded on the Merc do we have left, PM's and financial futures.
--
Blonde Vigilante,
I have been the biggest bond bull for a very long time (Treasuries only, of course, because I wouldn't trust Corporate Crooks).
I agree with your analysis. I am sorry that it wouldn't do much for your reputation here.
Jas
The commodities price question is the litmus test for the 'decoupling' theories. If it becomes evident that other countries will follow the US into a slowdown (call it what you will), then commodities prices will collapse.
The sole argument for those high prices now is essentially a speculative one: demand in China and India, etc., will continue in spite of a US slowdown.
Spectre -
But isn't this exactly what you are talking about?
The Fed kept up the pace of the fastest 3 week expansion of the monetary base in the past 7 years. Outside of the week after 9/11/01, nothing else is even close.
Now perhaps the credit contraction is happening much faster then the Fed can create new money. If that's the case, I'm back on the deflation bandwagon. But I don't know how to make that comparison. If someone does, I'd be a greateful student.
Saul -
I made my prediction last year that by Xmas 2009, we would have seen at least one major riot in a major U.S. city. I still think that is a safe bet.
Beano writes:
Yoringe writes: i think it would kill your whole system.. dont forget it is build on TRUST!!!
Trust on who? brokers? appraisers? bankers? rating agencies? regulators?
CONgress?
It is trust that got us in this mess in the first place.
no it isnt. the overarching trust is that all runs on capitalism. if you start to run around screaming because you are this time the loser no one will invest anything in you in the FUTURE!!!your diapointed trust was to believe you are the default winner or that there are no losers or it isnt you who are the loser..sorry read KARL MARX to get it..
Dirk van Dijk writes:
Commodities will correct in due time if they aren't required for survival.
SPECTRE Of Deflation | 02.29.08 - 11:55 am | #
What commodities are not required for survival? Food is, so that covers the Ag complex (ok I could make due w/o OJ, but coffee no way). Base metals? Not if we are going to have a civilization (hey even in the bronze age they needed copper and zinc). Energy? not if you want to transport anything or stay warm. So what thats traded on the Merc do we have left, PM's and financial futures.
Dirk van Dijk | Homepage | 02.29.08 - 12:12 pm | #
Why will I need industrial metals if we go Depression? Oil and food are a different set of animals. You damn well better have those at any price. Everything else gets taken down.
The rise in most commodity prices is insidious as the cost is imbedded in products that are difficult to value "on-the-spot."
The exception is oil, in the form of gasoline, where prices are posted on 1-foot-high numbers on many street corners.
That's why oil prices are the lightening rod of commodities; often causing consumers to ignore other commodity prices until a "Doh" moment.
It's getting to be pretty obvious to everyone, (lookit w's $600 rebate an see if that doesn't convince you that even the last child gets it) that the consumer, who could follow the command to spend in 2001, is not up to the task now.
Or later when the next $600 rebate is reinstalled to redress that pesky uneven distribution of wealth.
Anyone who gives this Inflation Scare a moments consideration will see that it can only be supported by able consumers...not the new GM employees, or anyone exposed to global labor arbitrage.
$4/load of bread works now, but $10/loaf bread prolly produces that Hungry Mob.
wally writes:
The commodities price question is the litmus test for the 'decoupling' theories. If it becomes evident that other countries will follow the US into a slowdown (call it what you will), then commodities prices will collapse.
The sole argument for those high prices now is essentially a speculative one: demand in China and India, etc., will continue in spite of a US slowdown.
wally | 02.29.08 - 12:14 pm | #
AMEN!! why should commodities fall??
Its a global market place and the stuff goes to the highest bidder!!
if your money gets keeping worth less you have to pay more etc...if you dont have the money cut back...but it doesnt mean somebody else isnt willing to buy and pay..
Dirk van Dijk, and I don't want to hear about the 1.2 billion people in China. They are 1.2 billion poor people in China who spend one third their income on food to our 8%.
Don't look now, but demand for Gold is down over 70% in India. Who exactly eats Gold anyway? If I have food for my family, I'm damn sure not selling it to you for Gold because it just sits there in the pot looking pretty while my kids scream from hunger. Get real!
Regarding the hyperinflation vs. deflationary collapse, here are a few sage words:
SOME say the world will end in fire,
Some say in ice.
From what Ive tasted of desire
I hold with those who favor fire.
But if it had to perish twice,
I think I know enough of hate
To know that for destruction ice
Is also great
And would suffice
R Frost
Jas
I've been all over bonds, especially treasuries for a decade. Not because I like them, they were just cheaper than over priced equities. Plus, I just don't have the stomach for commodities. I saw too many peole lose money that way in the 1970s. The volitility and taxes kill you.
Its not that hard. Just never over pay. Especially for commodities.
All,
I used to own three quarries. Trust me when I tell you, the demand and pricing for commodities can and does turn on a dime. Whats worse, as a commodity producer, your fixed cost are really a killer during a slowdown. Profits evaporate as fast as demand does. Fixed costs can actually increase if you foolishly expanded into a boom.
Think of the home builders or specuvestors. Demand disappears, but the costs of ownership don't.
I don't want to hear about the 1.2 billion people in China. They are 1.2 billion poor people in China who spend one third their income on food to our 8%.
Let's say you're right about 1.1 billion of those people. That's still 100 million people who are now eating steak once or twice a week. Want to guess what that does to the price of grains? Anyone who thinks China is still full of poor people just hasn't been reading. It's impossible for that much development to happen without some people getting rich.
All the malinvestment must and will be destroyed as has been the case forever. There is no getting around this anymore than the fact that PE Ratios will undershoot the mean moving forward. It is written in stone.
Spectre,
We lost 6 trillion in asset value during the dot com bust, yet there was no deflation in CPI or money supply. Similar thing in Japan during their alleged deflation.
You and Mish must be smoking some wierd stuff.
SPECTRE Of Deflation writes:
All the malinvestment must and will be destroyed as has been the case forever. There is no getting around this anymore than the fact that PE Ratios will undershoot the mean moving forward. It is written in stone.
thats the crux of it. its just that the malinvestors this time are the alphas on top who are making the policy too and just dont want the loss to materialize...
From April 2006,
Blogger: Blog not found
Hey Ralph, maybe Ed was talking to you while you read my post. Food and oil is demand/supply. PERIOD! We have 10 weeks worth of wheat, so throw inflation/deflation out the window on food and fuel.
Let me repeat again, we will have inflation [rising prices] for things we must have, while everything else is deflationary toast. It doesn't mean that even food and fuel will not fall, but rather in absolute terms they fall less than everything else.
Go to Dr. Housing Bubble for articles on the Great Depression. It ain't pretty, and damned if we didn't just repeat it.
Spectre,
Are bonds toast? Mine are all increasing in value.
Angry Saver, it will be much worse, but by all means what can I sell you?
Angry Saver, you didn't reply to my example you requested. Didn't like the answer?
The immorality of "a little inflation is ok" gets up my nose - I mean price inflation here - Bernanke is his testimony made it quite clear that he regards his mission as keeping prices stables - i.e. price inflation down - his buddy Kohn also recognises that easing has brought the US$ down - for some reason these idiots can't seem to make the connection of lower US$ == higher prices of imports and of goods that are globally traded and thus have their prices globally set - i.e. higher domestic price inflation...
Anyways this all affects the poorest of the nation most and also wage earners whose wages are not keeping up with price inflation, quite apart from the global wages arbitrage that has gone on.
It also affects savers who aren't sophisticated enough and worldly enough to know what's silently happening to their money and WHAT TO DO ABOUT IT if they do understand it.
The immorality of the Fed absolutely staggers me - twas ever thus.
Yeah Yeah I bleed not for myself (I know what to do and saw it coming ) but for others - sometimes its appropriate to do so.
-K
Hello
People are running from a liquidity trap and in the process laying the groundwork for systemic collapse from hyper-inflation. Bush with his denial of a housing bubble which was his baby, with The Ownership Society, fails to see the reality of that bubble and the recession and inflation, and as such, we are headed for a global tsunami of hyper-inflation offset by a liquidity trap. This is not good people, call your retarded senators and congress-tards, cause this is going to crash soon!!!
Yesterday on the New York Mercantile Exchange, oil surged $2.95 to $102.59 a barrel, a new high in nominal terms. After rising 12% this month, oil prices are now just below their inflation-adjusted peak of $103.76 set in 1980.
But oil has been a laggard compared with other commodities. So far this year, natural-gas prices are up 26%, coal is up 56%, platinum up 41%, wheat up 32% and cocoa up 38%.
Instead, commodities have been riding a wave of investment money diverted from stocks and bonds by investors chasing better returns. A weaker dollar, lower interest rates and fears of inflation have added momentum to the rally.
"People are wondering where they should put their money. Treasury bonds are overpriced, they're scared to death about equities, and they're even afraid of money markets," says Shawn Rubin, a senior adviser at Smith Barney. "So everybody is asking about commodities."
There's no bubble in commodities. China's steel demand is forecast to grow 11% this year alone. Likewise oil demand growth is far exceeding supply growth, and is expected to for, well, forever. We are transitioning from a world with about 1 billion living in the developed world (the "West") to about 4 billion (the "West", China, India, and a couple smaller countries). That's putting a staggering pressure on commodity supplies. In some cases (oil, wheat, some of the rarer metals) there's just not enough on the planet to increase use 4x and prices must soar. Even where there's plenty (e.g. iron) there are issues with increasing production rapidly enough.
Angry Saver writes:
Spectre,
Are bonds toast? Mine are all increasing in value.
Angry Saver | 02.29.08 - 12:39 pm | #
In an earlier post I highlighted the fact that bonds do quite well when money supply is contracting. Did you miss it, or ignore it like my example you previously requested.
Spectre,
What bugs me is this foolish attempt to maintain housing, equity and loan values. It hurts more than it helps. We could use a deflation, they just won't allow it. They have the ability to tax the prudent in the short term. Greenspans 1% rates are proof of this.
Hence the name Angry Saver. Years ago, I would have called myself cautious investor.
Fair Economist, forecast like housing was forecast to go up forever? Eccuse me if I call BULLSHITE' on that expectation.
Bernanke again does not answer the question.
YouTube - Ron Paul Schools Ben Bernanke Yet Again on Currency Devaluation 2-27-08
The real standard of living in the US must fall as the debt bubbles deflate. The Feds choice is hold interest rates steady and cause a recession which hurts workers and producers, or reduce interest rates hurting savers retirees. So far, the Fed is opting for inflation. We will see the international response to this choice unfold in the weeks agead.
Fair Economist,
Go look at when all the various 'commodities' all took off in the stock charts....same time as the FED started cutting. This is not related to some new pent-up demand that started last aug/sept, it is just a currency play just like gold.
Moody's still reviewing Ambac for possible downgrade - By Alistair Barr
Last update: 12:40 p.m. EST Feb. 29, 2008
SAN FRANCISCO (MarketWatch) -- Moody's Investors Service said on Friday that it's still reviewing Ambac Financial for a possible downgrade because the bond insurer currently doesn't have enough capital to keep its Aaa rating. "Based on an updated assessment of Ambac's mortgage risk, Moody's believes that Ambac's capital exceeds the minimum Aaa standard but falls below the Aaa target level," the agency said in a statement. However, Ambac is trying to raise new capital and Moody's was supportive of that effort. "Ambac is actively pursuing capital strengthening activities that, if successful, are expected to result in the company meeting Moody's current estimate of the Aaa target level," the agency said. "Moody's continuing review will focus on both the further refinement of, and execution of, those capital plans." Ambac shares fell 2% to $11.52 during afternoon trading on Friday.
I missed it, what was your example?
I find these endless debates over inflation vs. deflation odd. Bernanke can certainly chopper in enough money to inflate, and he can certainly halt enough open market operations to deflate. So all this is about trying to mindread/second-guess somebody who thinks a big part of his job is to obscure his intent.
My personal guess is that Bernanke's biggest goal is keeping the banking system healthy. That requires a steep yield curve (so lowish rates and some inflation) but not high inflation, which kills the banks between high current rates and low 30-year fixed loans they've put out. So I expect moderate inflation, slighly over what we've got now. But this is a pretty precarious prediction given Bernanke's enormous leeway. How can people be so certain of his intent?
Dirk,
I think it's pretty simple. In the very long term like 10-20-50 years, Gold will not rise much because it is not agricultural, and oil won't either if we become a cleaner planet. Agricultural will. However in the 2-3 years, gold must rise as per the dow/gold ratio, oil must rise because of energy issues, and ag commodities will fall because of slowing economies.
Food and oil have been soaring for years. You're right that there may well be a bubble going on in many other commodities.
"Anyone who gives this Inflation Scare a moments consideration will see that it can only be supported by able consumers...not the new GM employees, or anyone exposed to global labor arbitrage. $4/load of bread works now, but $10/loaf bread prolly produces that Hungry Mob."
I don't know about Mobs, but it guarantees a profound shift in the political landscape, one which the Kleptocracy can't control. They're finally shat in their own nests far beyond redemption.
Fair Economist,
Bernanke could not have been clearer - he can and will prevent deflation. The only question left is the extent of the inflation.
SPECTRE wrote, "Angry Saver, it was a little something called the "Great Depression"
ummm, not exactly a fiat currency at the time. and as for there being "1.2b poor people in china" the current numbers are about 300m plus, roughly the size of the US, living distinctly middle class lives.
Angry Saver, The Great Depression once Gold was confiscated. We then had little pieces of paper that were supposedely backed by Gold although for some strange reason you couldn't actually own any. They inflated 30% plus with that little move although we weren't truly Fiat until Nixon. It didn't work by the way until we entered the War.
I'm going by what I see, and not what they say. They know expanding the monetary base permanently would take us down the Weimar Road. They routinely expand and contract through Repos, but that is a different beast.
http://goodatdrinkingbadatlife.b...bust- sizes.html
300 million people who are expanding as they consume more food.
I find these endless debates over inflation vs. deflation odd. Bernanke can certainly chopper in enough money to inflate, and he can certainly halt enough open market operations to deflate.
But read a bit about liquidity traps (e.g. Krugman 1999
) and you'll see that not only does the Fed have to do something now, but the market has to believe that it can credibly keep doing it for long enough to make a difference (e.g. to long bond holders). In a country that requires $5B/day in foreign investment and running a 300MM/day war, whose consumers are already spending every discretionary dollar etcetera etcetera, what exactly can he do, and keep doing for long enough to matter?
Blogger: Blog not found
fixed link
What exactly will China do with all it's overcapacity, and workers with nothing to do? Do you Chinistas really believe that China goes up forever just like housing? Damn!
By trying to stretch this whole drama out, the FED is actually delaying 1930's type deflation, and thus it will make financial security (survival) almost impossible for everyone w/o huge savings accounts. Speculators are keen to this and are hedging to leverage what small savings they have under the assumption that there will be no quick bust without some tell-tale signs first (like a big bank failure).
The scariest part of this mess is that we were far better off structurally during The Great Depression than we are today.
Today we are the beggar nation.
Have to agree with Spectre on this one....
There is absolutely, ridiculously massive overcapacity developing in China? Why? Because it is inherently government-mandated, and there is currently no market restraint.
I think I read they are building 50 ports or something obscene like that. Same goes for airports and other infrastructure.
Even if the U.S. economy were exploding, they would not be able to utilize all of their capacity. With a U.S. recession, the overcapacity will be even more stark. China is going to be a disaster, plain and simple. And I suspect their problems will make American problems look like child's play.
OT but I am annoyed that exactly a week ago the market took off like a rocket at 3:30 on a rumour of a plan to save Ambac that would be announced Monday or Tuesday. But it never happened because S&P afirmed the AAA rating. It is now Friday - still no plan - and now Moody's says it is reviewing them for a downgrade.
I want to know what the plan is. It must have a name like all the other plans. Surely I am not the only one who will be unimpressed if there is yet another 3:30 rumour that there will be a plan so that Moody's will also confirm the AAA rating?
Operation Saaave AAAmbac, to be announced, say, Wednesday?
Fool me once, shame on you Ambac. Fool me twice, shame on me.
From President Bush yesterday,
"I don't think we're headed into a recession. But there's no question we're in a slow down and that's why we acted with over $150 billion worth of pro-growth economic incentives, mainly money going into the hands of our consumers... The purpose is to encourage our consumers - to give 'em money - to help deal with the adverse effect of the decline in housing values. Consumerism is a significant part of our GDP growth and we want to sustain the American consumer, encourage the American consumer."
We used to be called American Citizens, but today we are Consumers. Truly depressing.
Consumerism is a significant part of our GDP growth
He actually used the word "consumerism"? That truly is so insane that it sounds like a parody.
A big problem with our measure of inflation is how housing is counted. So from 1999 to 2005, inflation was a good bit higher than reported because the CPI was using some sort of rental equivalent which was rising much slower than housing prices. Now the drop in housing prices is not reducting CPI. This is a tough problem to solve - both the inflation problem and the measurement problem.
"Bernanke can certainly chopper in enough money to inflate, and he can certainly halt enough open market operations to deflate."
No, he can not and that is the problem. Ben can make interest rate low. But people with money are not willing to lend the money out. All the headline we heard regarding muni auction rate security, variable rate note etc. are a form of credit contraction and taking money out of the economy. Fed cutting short term rate can counter act some of the effect but not all of them. Why would you think we are slowing down? If money is rampage in the economy, we should be short of material, labor and everything in between. The raise in oil, metal and ag products are driven by foreign purchase not US. Just think if C or WB or MER were to BK in this environment, what would it do to the counter parties of all their risk and hence the eocnomy? I agreed with the assesment that we are not in a position to make any choices. Either we lower rate agressively or we won't have a financial systems as we know it...
I have been studying Keynesian theory and the latest post about consumption brought up an interesting question. If commodity prices go up, does consumption increase or decrease? My thought is that if commodity prices go up eventually consumption will go down and that should lower GDP.
I can't help but feel that the inane politicos and technocrats in DC are playing their last encore here.
Listening to Bubbles Bernanke's testimony was almost painful because it was so clear that he was either totally lying or telling half-truths. Not to mention hardly anyone was in attendance at those hearings. No doubt our "leaders" were too busy trying to get re-elected or dining with their lobbyist friends to care about the collapse of the American financial system.
The Bush administration is terrified of the word recession and somehow thinks we're just in a "slowdown", and like Nicholas II, Bush won't be able to see the trees for the forest until it's almost over.
I think by the end of this there's going to have to be major political unrest in this country. Hoover's Bonus Army will look like a troupe of boy scouts compared to what would descend upon Washington if there's massive bank failures, hyper price inflation, as the deflationary debt spiral plays out. Honestly I wouldn't be surprised to see the US as a federal entity to go the way of the Soviet Union and just implode. I think all bets are off at this point.
And if there's not political unrest, it means that Bubblevision has truly transformed this country into a nation of total sheep, far more sucessfully than the propaganda in the USSR ever did.
I guess we shall see.
and it seems to me that the real risk is the loss of the dollar's status as reserve currency. Presumably, though, that is better than systemic collapse.
Eric
The loss of the dollar's status as reserve currency is not a far reach anymore. It is more probable than before. If it happens and we start racking up debt in some other currency than our own, then that would confirm systemic collapse (at least to me). Everything would be a new game and not for the better.
re: "then you must view the rise in food and commodity prices as irrational..."
It sounds pretty bubbly here...
Commodity Prices Surge, As Investors Seek a Haven
Commodity Prices Surge, As Investors Seek a Haven - WSJ.com
We used to be called American Citizens, but today we are Consumers. Truly depressing.
SPECTRE Of Deflation
SPECTRE, you are so sweetly naive. Is G. Bush still able to hurt your feelings? I thought we all realized when he flew over New Orleans that he was a big fly over in everything.
las, I'm no polyanna when it comes to what is as opposed to how I would like it to be. It was a commentary on our own culture which allowed this to happen. We always get the govt. we deserve, but it doesn't mean I can't feel badly for our children and grandchildren. Leave this a better place...we have failed miserably.
The article assumes that the inflation-unemployment trade-off is iron clad, which it is not.
Speaker73, 2/3 of GDP is consumerism. If that doesn't curl one's toes, nothing will. To think after WW II we were a manufacturing giant, but let it go so that we could buy cheap crap from China. We allowed them to industrialize so that we must now compete with our new rulers for scarce resources is the most glaring irony. It makes me sick, but we did it to ourselves, and we will now sleep in the very dirty bed we made.
SPECTRE,
I agree w/ you actually. As a citizen it would be inspiring to pitch in and make sacrifices. But as a consumer, that just means someone else sees us a means to an end.
There is little doubt that these are rocky times, but don't you think we could all help ourselves to a little dose of moderation in the condemnations/calls for collapse of American society. It is true that the structure of our economy has changed a great deal since the 1950's, but just because there are now other major manufacturing centers around the world does not mean that we have become completely impoverished. For one, the level of general technical knowledge is now much higher than it was following WWII, and access to that knowledge has become incredibly easy and much cheaper. Design and data analysis become more valuable in a world where information is abundant, not less, and last I checked America was still doing a pretty decent job at innovation. I'm not saying that we will escape the present situation unscathed, or even that we won't have a period of significant, painful adjustments to our material standard of living; however, I think calls for bread lines and mass vagrancy are a bit premature.
I don't know why some people worry about deflation here in the US. If general prices were to go down, you'll just see US consumers pick up their buying sprees. It is ingrained in the American culture to spend till you drop. The only deflation scenrio that will transpire is if the US economy have a total meltdown where everyone loses their job.
Spectre,
I agree with what you say. I thought when the towers went down in Manhatten we would be asked to sacrifice and to work harder to support any efforts to go after the perpetrators and to defend ourselves. Instead we were asked to shop and go on as if there was no war etc. That seemed inflationary and so did the actions of federal reserve etc.
However I do not see a wage/price inflation spiral. in 2008 to get the company stock to go up you layoff people and cut their wages and benefits. It is a different world than the 1970s. As things get tighter there will not be a wage increase, there will be cutbacks and stagnant wages or concessions to keep jobs here in the USA. However some commodities will go up in price. If oil is in fact at maximum production and getting set to decline in production then that should keep upward pressure on price of oil and some other commodities. There are shortages in copper, wheat, etc. The contraction will occur while there resource constraints and increasing demand overseas (China and India) for commodities, with increasing prices.
The consumer will max out and get near retirement and poof there goes some of the demand. However if supply is also not able to meet the decreasing USA demand but overall worldwide increase in demand then the USA economy suffers a long period of little growth while others who make the stuff the USA consumer and the world's consumers buy other countries continue to improve economically, because they started from a much lower standard of consumption and have cash to afford to buy because they have not blown it all, on a big mortgage and a SUV payment, two currently depreciating assets.
So we will have deflation and inflation and depression. A rapid realignment of worldwide wealth.
"As a citizen, it is inspiring to pitch in and make sacrifices. But as a consumer, it just means somebody else sees you as a means to an end."
Oh boy Las are you ever right.
And that's why, painful and cataclysmic as it may be, I have more fear of TPTB saving this financial system (read DEBT system), than allowing it to collapse completely.
It's the financial/debt system that has turned us from citizens to consumers.
las writes:
SPECTRE,
I agree w/ you actually. As a citizen it would be inspiring to pitch in and make sacrifices.
Absolutely. Someone will be sacrificed by citizen's pitchforks.
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Speaker73, sorry for not answering on the post concerning Lee's thoughts. I can't tell what Lee is looking at because it's for paid subscribers.
We have ramped Repos to 61 billion recently, but we have also been in the 20 billion range as well. I want to see permanent injections that they can't suck out of the system at will.
Tafy auctions are injecting money into the system at a rapid clip but note that the number of bidders is increasing by auction and the bid to cover likewise. Credit Crunch isn;t getting better. Totaslly agree with Spectre that deflation is the real threat as the last time I checked the Fed Flow of Funds Statement, it was public equity and home equity the comprise ALL the "wealth" of America. Inflation works if companies can raise prices to offset the margin impact, but doesn;t work if no-pone can afford to buy the goods. Hence agree with post that there will be a riot somewhere as companies try and go down this road. It will fail. Therefore fundamentally, there is no sound reason to believe equities should go up. Peak margins at the moment and double digit multiples do not portend well for stocks - Buffet was buying in the seventies in the mid single digits. Housing is simply unaffordable and that debate is closed. 6x vs. 2x a la 1970s works. So remind me again how the infate our way out of this. Worked well in Turkey and Zimbabwe, no?
Cash is not a bad place to be in such an environment provided your not in the banks that fail. Othereise, foreign bonds in safe currency with fiscally responsible governments. If you truly belive dollar is going to tank, you can be sure the return trip trade will not hurt you.
Let's say you're right .
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