Fed's Lockhart on Economic Slowdown
Submitted by
CalculatedRisk on Tue, 07/01/2008 - 2:14pm (239 comments)
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I wonder what the "early and tentative signs" that a bottom may be forming are to which he is referring?
You wouldn't expect him, given his position, to be frank and honest about prospects, would you? He's part of the "paint as rosy a scenario as possible" establishment.
"There are early and tentative signs that a bottom may be forming in housing....must allow for an additional period of house price decline..." He's got it covered. There's a bottom, but it's not here yet.
CR
Joint Legislative Budget Committee - Monthly Fiscal Highlights
Arizona is in a full blown recession- click on the latest!
A 25% drop YOY for May tax collections!!!
Only made up with a large special fund raid!
I want a job with the WPA!!!
Someday this war's gonna end...
The "bottom" he is referring to is probably the bottoming out in sales we are seeing in some of the exurban markets in CA, & DC, as well as AZ & NV (no clue about Florida).
The bottom on price declines - havent found that yet, and may not for a while.
IMHO: The bottom forming in some housing sectors is just the first wave of knife catchers buying up foreclosures using old rental rates for calculations. Watch for the flood of rentals hitting the markets pushing rents down signifcantly (as I noted in a previous comment I am already seeing rents in the low end off by 15-20%). The good thing is that the new buyers have some skin in the game so it is more likely they will take the losses.
On the flip side, what will be the engine of (eventual) recovery? Alternative energy is about the only thing I can think of.
Or maybe a shiny new war to justify even more military-industrial stimuli?
MOT,
So true. Early in on the downside of a collapse gets destroyed.
Blowhart should be his name.
Arizona:
Sales tax collections were down (1.0)%
compared to May 2007, and were $(24.8)
million short of the monthly forecast.
Individual income tax collections were
down (52.9)% compared to May 2007 and
were $(136.8) million below forecast.
Corporate income tax collections were
down (44.4)% from May 2007, which was
$(27.1) million below forecast.
(See page 10 for detail information).
"On the flip side, what will be the engine of (eventual) recovery?"
Government spending. Lots and lots of it. /sarc
Or maybe a shiny new war to justify even more military-industrial stimuli?
It worked after the Great Depression. The problem is that the losing side is supposed to pay for it.
2nd half Windows 7 rally for 09 to save world.
Buy banks and buy tech. You'll never regret it. And buy a house too.
Just to report: the "SOLD" notice came off the house around the corner (it's still for sale) and the "Sale Pending" sign has been on the house next door for a complete 2 months now.
"And buy a house too"
and don't forget the big cars
CEO Schultz says closings will 'strengthen' U.S. store portfolio
Time to expand the empire to resource rich lands?
man there are so many trolls around here these days.
has anyone read mauldin's latest outside the box or whatever its called? it called for decreasing inflation with a very cogent, well supported argument.
"Time to expand the empire to resource rich lands?"
Consider Iceland. Lots of geothermal available, small population, and everybody is good looking.
BofA completes deal for Countrywide Financial
Expired
There are early and tentative signs that is is all contained too. I'm not impressed. Could Conjur comment please?
There is no inflation.
Inflation starts when a worker or merchant mistakes a general rise in demand for a rise in demand for his particular commodity, and responds by raising prices (or wage demands, same thing). Then his employer or customers do the same thing in response. Etc.
That is not, repeat - not - happening right now. What is happening right now is that oil producers are experiencing a rise in demand for their particular commodity, and raising prices, as are other commodity producers. There is no mistake. This isn't inflation; it's a fall in the value of the dollar relative to other currencies and a rise in commodity prices specifically.
That is all.
"That seems overly optimistic to me. It appears non-residential investment will be declining in the 2nd half of '08 (and well into '09), and consumer spending will probably decline too as the boost from the stimulus checks fades. That should lead to declining GDP in the 2nd half of '08."
but this guy named CR promised me that the recession will be mild.
Gosh, unemployment is five and change... pretty mild from where I sit.... So far he's right...
DC, which article are you referring to? Inflation seems to be a lot of Mauldin's writtings recently... wonder why;)
This guy is a retarded shill out of touch with reality; he needs to be suspended without pay god damn it! How much does a moron like this make for saying stupid shit like this? We have a systemic failure in place and this clown who essentially has a fiduciary responsibility is a lieing sack of shit that should be accountable for false and misleading information and he should be called on this! He, along with his collusion buddies who aid and abet with the PR-hype and shilling/touting that things are fine, should be shot as traitors. This is unreal that the press has increasingly smaller testicles (no offense Tanta) as our economy sinks deeper and deeper in a serious systemic failure. It is people like this that aided the destruction of America during The Great Depresssion and it is people like President Hoover Bush that are all culpable in promoting an atmosphere of dishonesty which is associated with criminal intent!
KG
ot-c&c-central valley is gonna see the other side of the hurricane now...
That story content is going to play out in many areas and it won't be big news. The 4th largest rv dealer in the US is gone!
It would be great to have or create a local business journal/publication newsfeed to get the small business news that big news outfits don't pick up.
The central valley is a great indicator of how credit contraction 08
will reinforce 09 spiral down..
ades,
it was the most recent email i got in the inbox. it had to do with what the drivers of inflation were and how with a shifting and soon to be dropping CAD, inflation should really be easing.
it was supported with many many excellent graphs.
lemme see if i can dig it up
Furthermore, his dollar crashing asshole buddy Bernanke favors Positive Inflation, which Bernanke believes in his dark heart will save America from deflation, and although he may have a point, but then Lockhart fully in step, suggests that there is nothing to worry about in his retarded conclusion, which needs to be stuffed in his shirt, while the lynch mob carries him to the hanging tree:
Eyes on inflation
In closing, let me emphasize that I'm taking the recent inflationary pressures very seriously. A path to recovery involving stronger growth but with higher and persistent inflation would fit the old adage about winning the battle but losing the war.
For that reason, in my view, the current set of circumstances calls for being especially vigilant and attentive to public and business psychology as regards costs and prices. Policy needs to react decisively against signs of the onset of formal compensating practices, including contracts, that treat inflation as a persistent realityin other words, something that must be lived with. Such signs are not apparent, and I don't expect them to materialize.
KG
Yes a war could be in the cards.
I suggest we attack their financial system. Send them our experts. Bomb 'em.
DC it must have been this one: The End of the Inflation Scare? - John Mauldin's Outside the Box E-Letter
I enjoyed it too... Very insightful, I'm quite glad one of my professors made me sign up for that last term...
...........
The Federal Reserve must "react decisively" to stop inflation pushing up wages, one of its top policy-makers said on Tuesday, dropping a clear hint about the possibility of interest-rate hikes ahead.
UPDATE 2-Fed's Lockhart: Fed must prevent wage-price spiral
| Reuters
He must be talking about China, $5 gas and rising commodity prices as the currency is debased are kicking more businesses and marginal consumers right off the bank bailout cliff. Wages aren't going very far as employment keeps falling. Just like Japan.
Short Bucky!
ades,
The End of the Inflation Scare?
by Louis-Vincent Gave
has anyone read mauldin's latest outside the box or whatever its called? it called for decreasing inflation with a very cogent, well supported argument.
dc1000
This argument?
In a world of decreased leverage, debt and housing deflation, coupled with lower food and energy costs and a higher dollar, it is possible that inflation drops below 2% by this time next year. Maybe more.
And it's possible Pam Anderson may want to marry me, but I'm not planning my life around it.
Strong dollar this time next year? Puh-leaze. The dollar has to weaken against the Yuan and the OPEC nations need to decouple from the USD to help quell worldwide inflation.
Lower energy costs does not equal cheap energy costs or food costs.
Lower housing costs doesn't immediately lead to lower OER.
The number of cattle taken to slaughter early guarantees limited supplies.
It's a contrarian thought and thought out but it's trying to draw an inside royal flush.
It's also not his primary thesis.
YMMV
DC you've been quite recently. How is the DC commerical market? I'm in SoCal and with in the last 2 months the GC I work for has been slow... I mean really really slow... Estimating is coding to overhead, thats it.... The rest of the contractors around here seem to be even worse... Its going to get real ugly here in a few months...
Re: including contracts, that treat inflation as a persistent realityin other words, something that must be lived with. Such signs are not apparent, and I don't expect them to materialize.
Did anyone send him my memo on asphalt and plastic costs going parabolic, along with every commodity, while the dollar crashes, banks melt and corporation after corporation lay off people?
This guy is an asshole shill that should be fired by American taxpayers!
ades, there ya go. i thought it was the most reasonable well-thought-out piece i've read in a while. i'm fully in their camp.
this all goes back to the initial blogosphere conversation i had with brad setser prior to RGE even existing, back when it was just a website at NYU.
I asked, how can the deepest and most liquid market in the world be "wrong". (i.e. the treasuries).
well, i dont think they were wrong then and i dont think they are wrong now.
OT (sorry) - Short term market bottom confirmed. Bloomberg A/V interviews has the following: "Prudent Bear Fund's Tice Sees `Significant Bear Market'" Cover your shorts if you haven't already!
alec,
first off - how are you valuing the dollar? its a two way trade, so vis a vis the RNMB it might be jacked but vis a vis the euro it might not.
hello, interest differentials drive currency valuations.
i think we're done cutting.
i think EBC cuts or we raise before anything else happens.
therefore, USD / EURO goes in our favor.
"he Federal Reserve must "react decisively" to stop inflation pushing up wages"
Sounds like a complete disconnect...as if this is recycled from a year or two ago...Had to laugh when stories came out a few days ago explaining the Bear Stearns situation and why the Fed acted as it did in March.
I agree, no inflation and very mild soft landing with no employment issues.
Alec,
Mauldin said he forsees a revaluation of the dollar (relative to the euro) based on one of the union countries getting in deep trouble. Italy maybe?
I think its plausible. If all the countries need to come to their aid it could beat up the euro.
Besides the euro there isnt much in the way of a world wide reserve currency... I bet the dollar strengthens in the next year...
Did anyone send him my memo on asphalt and plastic costs going parabolic, along with every commodity, while the dollar crashes, banks melt and corporation after corporation lay off people?
This guy is an asshole shill that should be fired by American taxpayers!
Anonymous | 07.01.08 - 7:26 pm | #
As a highway design engineer in a previous life, I expect state and federal highway projects to be delayed due to the rising costs of those materials you mentioned; asphalt for one. But also cement for concrete, reinforcing steel, and others.
ades,
i'm in an odd spot.
my business is busier than ever. we restructured the GC business (no BK here thank you very much. just need to keep the peanuts informed. we did our own version of a Ch 11 and moved on, back in biz and happier than ever).
each of the A and D and the GC businesses are trucking right along (rightsized mind you). and our development arm is just smoking hot.
we're delivering another building, fully leased and occupied within 2 months, in DC proper.
in the NoVa burbs, we're selling lots at a rate of 6-8 per month to NVR, Inc., the last profitable homebuilder (who stays profitable by squeezing land developers like us, but WTH).
we've got another 2.5MM SQFT of commercial to develop over the next ten years in the burbs and continue to make acquisitions in the city.
if you have patient equity, a long-term horizon, balls, and stamina, all this turmoil is nothing but a buying opportunity.
in the last two months i've closed over $55MM in C&D loans. NEW LOANS.
we're bankable, we have solid projects, credit tenants, low (in-house) building costs and we know how to play these games.
when the squeeze is on, its not me in the vice....
The 25% number is from the subtotal for May tax collections from page 10.
The devil is in the details.
Interesting part is that income tax is collapsing- both corporate and individual.
Waaaaay below projections.
What I also find interesting is that sales tax is also falling, in spite of inflation! A 1% drop instead of a 5-7% gain if all else is equall!
Ugh.
Someday this war's gonna end...
"There are early and tentative signs that a bottom may be forming...".
After rising 336% since 1998, the MID stock index, as an example, has fallen 11%, and everyone is asking if this is the stock market bottom.
After a 40 year credit binge everyone has it: Kool-aid toxicity.
BTW: Most of today's 10 year stock index charts, down 10-20%, look exactly like C-S house price charts 6 months ago. But it's all good.
has anyone read mauldin's latest outside the box or whatever its called? it called for decreasing inflation with a very cogent, well supported argument.
Well let me re-iterate Marc Faber's argument (from 2006 or so), which I find has some merit and is more nuanced that most:
The short-term problem will be deflation. He suggested there may be something akin to a depression that cuts the prices of commodites in half (for example).
The US will attempt to be monetarily responsible for a while but will ultimately give in and start printing money.
Thus will emerge the hyperinflation threat.
Nobody knows the future, but the people that have been making some of the most accurate predictions about things like housing and commodities (e.g. Marc Faber, Jim Rogers, Peter Schiff) have also been arguing that the Fed will ultimately attempt to inflate away our problems by printing money.
I think you can only judge people and theories by their ability to make predictions, and since the "money printing" crowd seems to be making better predictions than most (notably mainstream Keynesian economists), I don't think you can dismiss this as a "tinfoil hatter" argument anymore.
ac,
how would printing money help in a deflationary market?
is the printing of money to jump start the reinflation of the commodities?
TIA
.............
alec,
also, if energy just stopped rising, inflation would too. then what? a permanently high plateau?
there is no arguing against the de-leveraging of the Ibanks and the consumer vis a vis their home.
CD-
You asked about Central Valley issues, I did keep up at my former blog:
Mega site of Bible studies and information but I grew tired (the hours paid vs hours worked, was equivalent to slave labor)
Lander keeps up on the Northern Valley @:
Sacramento Land(ing) - Sacramento Real Estate Market Blog - Sacramento Housing Market News
DC,
Good stuff. How much of the strength of the market to you attribute to the placement of the capital?
I use to work for a drywaller that had an office in boston and DC. Durring the 01 recession construction in boston ground to a halt but the DC office was making money hand over fist....
Cheers!
Obviously, if the Fed started madly printing money, we'd get inflation. that I'll agree with; but the Fed hasn't done that yet (low FFR isn't "madly printing money" unless it causes massive use of bank to bank borrowing, which hasn't happened because the banks don't feel like cluttering up their balance sheets with debt to all the other banks.
As for such madly irresponsible conduct from the Fed, I'll believe it when I see it. The Fed has been arguably correct most of the time since 1981. I don't see them suddenly turning into the Weimar Republic.
cd- yes, the 4th largest RV dealer going bust is big news. Soon to be followed by the 3rd, 2nd,...
Ha Freudian slip, should have read Capitol
And neither the financial markets nor the overall domestic economy is protected from surprise events around the world.
Thats the one sentence that really got my attention.
Another cat-5 hurricane or major energy supply disruption, or both ?
I don't see them suddenly turning into the Weimar Republic.
Correct. And I argued last Sunday(?) ad nauseum w/ dryfly and others that all conditions point toward declining income - no bargaining power, no attempts to ask for raises amongst labor; and deflating stocks and real estate. Thus, there's no way to spur ever more money spending by the public - which is what happened in the German hyperinflation (they were paid twice a day, raises occurring more than once a day, etc.).
Those who cannot see the upcoming deflationary economy are blind, IMO.
Fed Governor Lockstep continues to march the sheep off the cliff. (sigh.)
By any reasonable measure of purchasing power, the euro is overvalued vs the $ and probably the Yen as well. It's not like everything is hunky-dory in euroland.
A man shot his real estate agent in the head over a 2005 deal gone bad.
Page not found - - CNBC.com
over valued euro, decreased purchasing power in the US, a sense of conservation over consumption, pressure on wages...
gee sounds like inflation to me!!!
4th largest RV dealer going bust is big news.
I'm eyeballing those cheap RV's...let me tell ya, I'm ready to buy a nice one at sharply discounted prices and go all "Grapes of Wrath". I suppose there's fruit to be picked somehere...I wonder if the "company store" will sell me gas/diesel.
Drew,
Have you seen the high end models that let you store a car on-board? Sheesh!
"Have you seen the high end models that let you store a car on-board? Sheesh!"
I need that extra space for my 12 month supply of canned food. Sorry!
Ministry of Truth writes:
IMHO: The bottom forming in some housing sectors is just the first wave of knife catchers buying up foreclosures using old rental rates for calculations. Watch for the flood of rentals hitting the markets pushing rents down signifcantly (as I noted in a previous comment I am already seeing rents in the low end off by 15-20%). The good thing is that the new buyers have some skin in the game so it is more likely they will take the losses.
excellent take on what is happening.
let me give you a good example in Santa Rosa, Calif a recent hotie for investors buying foreclosures and now hitting the rental market:
This home is on CL here is the link:
craigslist | Page Not Found
now these folks purchased this house in Jan for 780K and are renting it for $2650 month.
Dennis P. Lockhart took office March 1, 2007, as the 14th president and chief executive officer of the Federal Reserve Bank of Atlanta. In this role, Lockhart is responsible for all the Bank's activities, including monetary policy, bank supervision and regulation, and payment services.
Before joining the Atlanta Fed, he served as a member of the board of directors of several companies, including CapitalSource Inc., a REIT/finance company; Tri-Valley Corp., an independent oil, gas and mining exploration firm; and Greenfield Holdings Credit Ltd., a joint venture agribusiness finance subsidiary of DuPont Corp. and Bunge Corp.
Heces cabeza diablo del infierno, vuelve a tu tumba y salir de mi pueblo en paz!
hello, interest differentials drive currency valuations.
i think we're done cutting.
i think EBC cuts or we raise before anything else happens.
therefore, USD / EURO goes in our favor.
dc1000 | 07.01.08 - 7:28 pm | #
Very trollish opener there, Tiger.
So what happens when ECB raises 25bp Thursday?
Macro trends in Eurozone are much stronger than here.
Food & energy costs don't count towards core but eventually leak into core in a lagging manner.
Re: Lockhart & CapitalSource (Conflict of Interest):
Skyscraper fails to sell at auction
Topic Galleries -- chicagotribune.com
CapitalSource Inc., a commercial finance and investment firm based in Chevy Chase, Md., took over the M&I Plaza after a June 3 auction failed to produce a bidder willing to pay more than the firm was owed, the Indianapolis Business Journal reported...
Heces cabeza diablo del infierno, vuelve a tu tumba y salir de mi pueblo en paz!
Why would anyone give out stimulus checks if they are worried about inflation?
The velocity of money must be crashing if there is talk of more stimulus and an extension of employment benifits.
"Ministry of Truth writes:
Why would anyone give out stimulus checks if they are worried about inflation?"
What's that thing coming up in Novemeber?
Lockhart & Tri-Valley Corporation (conflict of Interest) is a publicly traded oil, gas, and mineral exploration and production company. It also has subsidiaries with production rigs to service its wells, and a drilling company to drill new wells. As a deep drilling specialist, Tri-Valley holds the North American record for the longest, fastest single bit run (10,045 feet in 116 hours on its 19,085 foot Ekho No. 1 deep well in the year 2000).
Heces cabeza diablo del infierno, vuelve a tu tumba y salir de mi pueblo en paz!
Can he not fail to see with his own eyes that his world is falling apart? The reason he is blind is because he is using the eyes of the devil!
Cratering velocity - check!
Re RV's- my father has an A-liner, one of those little chalet types of trailers. He reports that every time he goes camping this summer, he get stopped by at least two or three people who want a tour and demonstration of how to put it up. Then they shuffle off back to their big heavy fifth wheels and gas-guzzling Winnebagos the size of tour buses.
Cratering employment...check!
Cheers,
Aheadofthecurve, I don't really think the election has much to do with the stimulus. I really think it is the velocity diving that put in this emergency measure. To prevent a depression the velocity has to be kept up by spending and the easiest way is to act like a deranged Robin Hood.
Ministry of Truth: I don't have time to discuss this. I have to run to the mall...
Aheadofthecurve, I wish I could go to the mall but I can't afford the gas.
When I said run to the mall, I meant that literally
Hyperinflation@Taco Bell writes:
I agree, no inflation and very mild soft landing with no employment issues.
Hyperinflation@Taco Bell | 07.01.08 - 7:29 pm | #
LOL. I don't know what is funnier...
Somebody named 'Hyperinflation@TacoBell' talking about 'no unemployment issues' or ac's 'First Commandment of Wall Street' (Never yell 'FIRE' until safely outside).
Good day for gallows humor on CR...
Aheadofthecurve,
"When I said run to the mall, I meant that literally"
Good one.
Cheers,
geepers
thanks for someone jogging my stale mind.
PQ=MV
V is clearly crushed. i think thats what i was getting at with the demand destruction comments.
M aint exploding either.
so come on.
inflation?
dryfly,
ac's was better.
Cheers,
Ok,
I'm sorry CR (Tanta), but I have to say it,
This guy, is a massive asshole retard crook and he is highly symbolic of the corruption that is destroying America. This guy is pure evil! Look at this link below for Bermuda based Bunge, where the fucker sits on the board of a subsidiary in Bermuda, which obviously is an American IRS tax evasion conduit -- this fucker is acting as a fiduciary leader of the USA banking industry telling people of America that he thinks there is not an inflation problem here, while he works for a company that works its ass off to evade USA taxes!
This guy is The American Government and he represents the reason that America is falling apart; this is the guy with the matchbook lighting fires to burn down Rome. People should not put up with crooks like this and it is shameful that America has been disgraced by this piece of shit!
Re: Greenfield Holdings Credit Ltd
AKA: BUNGE LIMITED
http://freeadvice.brand.edgar-online.com/EFX_dll/EDGARpro.dll?FetchFilingHTML1?ID=5770782&SessionID=TM5iWSCVNXMi7g7
istory and Development of the Company
We are a limited liability company formed under the laws of Bermuda. We are registered with the Registrar of Companies in Bermuda under registration number EC20791. We trace our history back to 1818 when we were founded as a grain trading company in Amsterdam, The Netherlands. During the second half of the 1800s, we expanded our grain operations in Europe and also entered the South American agricultural commodity market. In 1888, we entered the South American food products industry, and in 1938 we entered the fertilizer industry in Brazil. We started our U.S. operations in 1923.
Traitor!
"PQ=MV"???
I think you forgot freshman Chemistry.
It's PV=nRT
Yep,
And P is flat to mildly rising so Q is falling off a cliff.
Cheers,
Aheadofthecurve,
OK, I just had a beer spitting moment. Gas law. Deflating bubble. Good one.
Cheers,
aotc,
price time quantity equals money supply time velocity
no chemistry there.....
misean,
its V thats falling off a cliff along with M
heh
aotc and misean,
if that was some inside chemistry joke, then i didnt get it.
i know where my expertise falls short and it certainly is in chemistry.
Misean, I wasn't actually thinking of a deflating bubble, but now that you mention it...
I heard a story from a friend today about Countrywide not paying the local property taxes from an escrow account for the last few months.
I'm sure we would have heard more of this if widespread... but is BofA inheriting a huge back payment obligation???
OK, I just had a beer spitting moment. Gas law. Deflating bubble. Good one.
All we need is a few fugacity constants and the numbers will all work out...
It's comical. Kudlow today presented a chart with S&P earnings growth forecasts for the rest of the year and the bonehead panelists saying "STOCKS ARE CHEAP". They failed to bring up charts that forecast earnings for the past 3 quarters 1 month ahead of earnings that missed by progressively higher margins.
Wish I could go on that show. I would ask "Then why are stocks so cheap?". Is everyone besides you insane? I thought the market was a discounting mechanism.
More discounts ahead. A lot more. That said, my move is to wait until Monday mid-day and sell SRS $120 calls, that should be in the money, for the housing bailout.
dc1000,
So is Q. Has too, as P is rising to flat. It's an equivalency. Something on the left side of the equation has to cliff dive as well.
Cheers,
the easiest way is to act like a deranged Robin Hood.
"we rob from our children and give it to the poor!"
misean,
P is going to come down as M and V continue to drop.
really.
i thought you were a deflationist?
barely-Some stocks are cheap, some are not. The trick is knowing which is which. This is no time for index investing (or index shorting) but there are some things worth nibbling at, IMO.
I agree with Lockhart's comments. I think the economy will grow slowly (2%) in the second half of 2008.
The stuff about looking for/at bottoms, however, should be saved for the former Starbucks barristas. Based on my few years of following RE prior to the boom, I don't expect see wild fluctuations. It's a business that involves building improvements on undeveloped land and then selling it or renting it. The rents should be a good percentage of the price of property to cover the trouble that comes with managing property. There won't be these wild fluctuations that people talk about.
When the American people wonder what the hell happened to their personal economies they're going to be so grateful you guys figured out it was deflation and not inflation. I can hardly wait for the TV interviews as they get the explanation the higher costs of everything they need to buy aren't inflation, the money supply hasn't expanded! Of course the costs of everything they don't need are going to fall and that will add a little spice to the video.
dc,
I am. It's just that P seems to not be moving much. So Q is. For now. That's why sales tax revenue is down, auto sales off big etc.
As this starts to hit employment, then P will start down. That's likely to be the real unfun moment in this mess.
Cheers,
how would printing money help in a deflationary market?
is the printing of money to jump start the reinflation of the commodities?
The problem with deflation is that it doesn't affect debt. So if your salary gets cut in half because your employer can only sell goods for half price due to deflation that's not a problem if you have no debt - because goods cost half as much so your half salary has the same purchasing power.
BUT if you have, say, $300,000 in debt and your salary is cut in half it effectively becomes like $600,000 in debt because deflation doesn't make the amount you owe go down. If your payments on debt were half your salary to start with, they essentially become all of your salary.
If people have a lot of debt in an economy, deflation will create waves of bankruptcies and leave people with a lot less spending money and money to take on new debt. This can make the deflation worse and turn into a sort of self-reinforcing death spiral.
Printing money and giving it to people obviously counteracts this. So this is why you hear so much about inflation as a solution.
But this kind of inflation comes with its own set of problems.
Printing money and handing it out degrades the concept of money and potentially rewards people for negative behavior.
But most dangerous perhaps, history shows that once a government starts printing money it gets harder and harder to stop as the financial system comes to expect and depend on being propped up by larger and larger injections of money. This can lead to total devaluation of the currency, collapse of the financial system, and ultimately collapse of the government issuing the currency.
Some people will go as far as arguing that this outcome is guaranteed to happen once a country adopts a fiat currency.
Today, all this talk of sending out more rebate checks is a bit unnerving IMO in that it seems to fit the next step in the pattern these "hyperinflationists" predict.
but is BofA inheriting a huge back payment obligation???
Yeah, especially from those people who thought they were scammed. As the man said,"The payback is a bitch."
Gas law. Deflating bubble. Good one.
Isn't BB trying that adiabatic expansion stuff?
Those who cannot see the upcoming deflationary economy are blind, IMO.
I am still deciding if people talking about wage-spiral are delusional or paid-for by the Feds.
So again, wages have nothing to do with inflation. Money supply does - but new money doesn't have to go to the workers.
So what if wages are not rising now. What is happening though is inflation is going to rage on and reduce purchasing power of American workers, because they have been collectively over-consuming. In a few years a typical wage will be buying 3 times less, and you will still be wondering why that did not stop inflation.
@ I don't think you can dismiss this as a "tinfoil hatter" argument anymore.
Agreed. Just wish I had the stones to follow Faber about gold.
ac,
Very true. But without destroying itself, what debt does the Fed buy to inflate. I don't know. But unlike Zim or Weimar, the gov't doesn't control the printing press. The Fed does.
Cheers,
Economic fundamentals say Americans need to become poorer.
Wages are not rising, but they are not falling either.
Therefore inflation shall persist.
the gov't doesn't control the printing press. The Fed does.
Are we back to pretending we have an 'independent' Fed?
"Of course the costs of everything they don't need are going to fall and that will add a little spice to the video."
I'd really appreciate if someone could explain to a simple biochemist what exactly are these things I don't need and name me some things I might want to buy, besides houses in some places, that are falling in price.
Thanks in advance
Missed Information,
My point is that the system works by the Fed buying and selling debt. Despite B.S. Bernutty's assertions, the Fed does not drop freshly minted dollars from helicopters.
Really. An attempt by the Fed to OBVIOUSLY monetize would send a wave of foreign held treasuries to these shores which would overwhelm markets ad drive rates on treasuries to the moon.
Rock, meet hard place. Scylla meet Charibdis.
Cheers,
Missed Information,
Your scenario doesn't work even in a textbook hypothetical economy, let alone one where 70%+ of GDP is consumption. Prices go up and up no matter how much money people are spending? What, are we at peak production of services, heading into precipitous decline, since that's the overwhelming part of consumption? dc1000bc or whatever his name is has it right for once: it's the velocity stoopid!
I'd really appreciate if someone could explain to a simple biochemist what exactly are these things I don't need
Sure.
These things will get cheaper:
Used houses, used plasma TVs, used SUVs, new plasma TVs, shoes, house cleaner fees, lawn mower fees, pool cleaner fees, babysitter fees.
However, once you become unemployed you will discover you no longer want your neighbor's plasma TV that you envied before and that he is selling now.
You will also discover that you prefer to clean your house yourself instead of paying someone to do it.
The sales tax info for Arizona really does paint a lousy picture.
Retail sales tax collection down 13.7%
Contracting sales tax down 12.0%
Restaurant and Bar down 3.7%
Utilities sales tax up 13.6%
Use sales tax up 345.3% (some sort of fluke due to a large refund last year)
So, people in AZ are spending more on utilities and less on everything else.
Does an American have a duty to defend The Constitution or flag, or is that something left up to people like Lockhart and the pirates running drugs in Bermuda?
ac,
Very true. But without destroying itself, what debt does the Fed buy to inflate. I don't know. But unlike Zim or Weimar, the gov't doesn't control the printing press. The Fed does.
Cheers,
Misean
The Fed doesn't run the country. The congress and the president do. They can create a law to start printing money tomorrow if the want to (unless there's some constitutional or other prohibition I don't know about). Ultimately they can tell the Fed to print. And historically it seems like it's politicians that come up with the money printing idea.
But even without such a law the Fed in combination with the Treasury can create all the money they want using the fractional reserve system (unless I misunderstand it):
The US government issues treasuries and the Federal Reserve buys it. This is a loan to the government and the fractional reserve system allows them to create money out of thin are to make this loan. This whole process is called "monetizing debt". This is what Japan did and is how they got their massive public debt.
Basically the Fed can loan the US government as much money as they want to mail out in tax rebate checks (for example) via this process. Presumably this money finds it's way back into bank accounts for even more fractional reserve lending (basically a multiplier effect) for the next round of government loans for $100,000 monthly tax rebate checks (per taxpayer).
There may be some restrictions on this, but I assume the can be easily legislated away. And a scared congress will do that in a heartbeat I suspect.
I'm not an expert on this subject and maybe somebody can clarify or point out if I'm wrong, but I think the basic idea here is correct.
Your scenario doesn't work even in a textbook hypothetical economy, let alone one where 70%+ of GDP is consumption.
Eh, I have seen economies contract by 70% before. And I agree Fed cannot inflate overnight with current laws, but laws can be changed (even post-factum). And I did not say that inflation is the only way forward.
What I said was that you have to choose between 3 options (or a mix of them):
(a) - very high unemployment
(b) - noticeably lower wages
(c) - inflation
Since (a) and (b) are not (yet) happening, (c) must continue. New money goes to our commodity overlords.
Missed Information: The only thing on that list I buy are shoes. The things I do buy (health care, college tuition, gas, food, property taxes) seem to be going in the other direction. But at least shoes will go down.
"More adverse alternative scenarios are entirely possible."
That must be ME!!!!
ac,
As mentioned up a few posts, there is a real problem with the Fed obviously monetizing. Of course if they did that would be hyperinflationary. But my sense is that would wipe out the FIRE system as well.
Cheers,
ac "So if your salary gets cut in half because your employer can only sell goods for half price due to deflation that's not a problem if you have no debt "
Who do you think has the greatest amount of debt and will suffer the greatest pain in a deflationary environment ?
The very same authority that has the power over the money supply. Deflation won't happen.
The strength of the Japanese currency, combined with concerns over the US weighed on export-related stocks, with Nintendo losing 0.7 per cent to Y60,200 and Nissan down 0.5 per cent at Y886.
私の友達といただきありがとうございますdumbass
The only way we can lower the American standard of living is by STAGFLATION. America uses 25% of the world's resources for 5% of the population. That means in a globalized economy, Americans need to take an 80% DROP in our standard of living.
That drop will come from holding wages stagnant while prices for things we need (food, medicine, oil) spiral upward. Americans need to get less.
Basically, take what you have now, and divide by 5.
And that reduction will not come from the wealthy (won't give it) or the poor (don't have it). It will come from the middle class, in the last great wealth transfer.
Welcome to globalization!
"consumer spending will probably decline too as the boost from the stimulus checks fades."
These numb nuts are not threw destroying the economy yet that was the first of many.
"Deflation won't happen."
barely | 07.01.08 - 9:00 pm
/cough/ Houses /cough/....
Seriously. They have fallen enough in my area that next year when I get serious I can actually pay cash instead of just a down payment...Makes 4.00 gas much more liveable...
Chris
Also, chew on this: Where will the FDIC get the $$$$ to pay the deposit insurance if a BIG bank goes down (JPM, C, BAC)?
Hint: Remember that opening scene in MASH with all the helicoptors?
Basically, the FDIC is a hyperinflationary tripwire built into the system. Now, the FDIC can not pay out. But, if they did that, it will be GENERATIONS before banking is again as we know it.
Never heard a good explination how the FDIC can pay up WITHOUT causing hyperinflation? Anyone?
The US government issues treasuries and the Federal Reserve buys it. This is a loan to the government and the fractional reserve system allows them to create money out of thin are to make this loan. This whole process is called "monetizing debt". This is what Japan did and is how they got their massive public debt.
BTW, technically monetizing debt isn't money printing in the pure sense. In the past we monetized gold (i.e a dollar was created when we dug up a new piece of gold - that dollar effectively was that piece of gold in convenient paper form). Now we monetize debt (a new dollar is created when we create new debt). So maybe that's not so bad as pure money printing (monetizing thin air), but debt can be devalued in a way that gold can't. Monetizing enough debt fast enough may have the same effect as pure money printing (I'd have to think about that one).
But again, the key thing to remember is that the US government can make all the dollars they want. How is just a formality. Don't think the Fed could ultimately stand in their way.
As an almost lone deflation forecaster on this site, what's with all the hype over accelerating inflation/hyperinflation as a result of this housing/credit mess? An obsession with gold and a view it will go up 10,000% or whatever with the former scenario? I just don't see it as a plausible analysis with current events, particularly such a lopsided opinion from commentators who've so accurately forecast the housing crash.
We have the two primary household assets deflating right now. Nothing the Federal Reserve Bank did to this point has abated that. So why such anti-deflation views as expressed here? Why is the Fed so powerful to prevent generalized deflation if it cannot prevent the two dominate asset classes form deflating?
/cough/ Houses /cough/....
Falling house prices is not an indication of deflation, it is an indication of consumption basket being quickly re-weighted.
Basically, price of anything (by itself) means nothing.
You need to look at the average consumer basket (nearly impossible to get right) and find the price of that. It is much easier to estimate money supply instead, but even that measure has been obfuscated by the Wall Street securifuckation.
These inflation/deflation debates don't ever seem to go anywhere and there never seems to be anything actionable.
For those that like this debate - here are some facts:
My opinions:
Any number of outcome scenarios.
What's everyone's best guess as to the most probable near term (6-12 month) scenario for equities, bonds and commodities?
malabar writes: What's everyone's best guess as to the most probable near term (6-12 month) scenario for equities, bonds and commodities?
My daily market call newsletter is on sale for $179.00/month. Inquiries should be sent to chuckmertz @ hotmail . com.
ac,
"Monetizing enough debt fast enough may have the same effect as pure money printing (I'd have to think about that one)."
Possibly. And honestly I don't think the inflation argument implausible. It's just that those holders of U.S. gov't debt would likely unload. Kinda like they did before Nixon closed the gold window. Only much worse. Which I don't think the Fed wants. And I really haven't seen much backbone in the gov't when the FIRE agents come knocking.
Cheers,
Deflation isn't a price thing - it is a supply of money and credit thing, right? Credit is disappearing at a crazy rate, as is the willingness to take on debt, and value of assets (houses) by which people could use as collateral to take on debt (helocs).
So, that being said, the fed must fight this deflation with everything they have. So they are going to have to print like mad, which will eventually cause crazy inflation beyond just commodities and food.
Have I got that right? Deflation is currently happening (bad), and the fed is going to save us by creating inflation (also bad).
if it cannot prevent the two dominate asset classes form deflating?
housing got stupid 2003-2006 -- suicide loans drove up prices past all reason compared to rents.
We're in the process of backing this insanity out.
The real question is whither rents? It is my thesis that deteriorating wage growth and higher underemployment and of course inflation in health, food, and energy will begin to put downward pressures on rents.
Never heard a good explination how the FDIC can pay up WITHOUT causing hyperinflation? Anyone?
RTC?
C has plenty of assets that can be sold to satisfy deposits if not liquidated at once... Prince Bandar might not be happy with the terms, but F him.
Sure.
These things will get cheaper:
Used houses, used plasma TVs, used SUVs, new plasma TVs, shoes, house cleaner fees, lawn mower fees, pool cleaner fees, babysitter fees.
| 07.01.08 - 8:54 pm | #
Just to add a few more things to the list which I had been making earlier today:
Cable TV
High Speed internet (this could be tough to do)
Kid's cell phone
Land line
Health Club membership
Kids' Karate class
And I'll think of others as the need arises!
hat drop will come from holding wages stagnant while prices for things we need (food, medicine, oil) spiral upward. Americans need to get less.
Basically, take what you have now, and divide by 5.
hmm, we agree, but I think you are ignoring the shock-absorber quality of rents (and housing values).
Rents are bid up to the point of unaffordability. Landlords will have to adjust their rents downward to keep their occupancy. Can't get blood out of a stone.
ac,
As mentioned up a few posts, there is a real problem with the Fed obviously monetizing. Of course if they did that would be hyperinflationary. But my sense is that would wipe out the FIRE system as well.
Cheers,
Misean
Again, Japan got away with just this. Their public debt (to GDP ratio) is something like 3x the size of ours because of all their monetizing. It didn't cause hyperinflation or wipe out their FIRE system (yet). So the question is why would it be different here?
It could be that our current account deficits would make it harder to get the markets to cooperate.
But another thing to remember, is that by monetizing treasury debt the Federal reserve can keep interest rates for treasuries as low as they want. Demand for treasuries drives down interest rates, and the Fed can create as much demand as needed to drive down rates where they want them.
The problem is they can't do this without consequences. Namely they might drive the value of the dollar straight into the floor doing this and cause a massive dollar flight.
This would effectively cause interest rates in real terms to skyrocket even if nominal rates were low. The Fed ultimately can't force people to lend real capital at low real interest rates. They can only control the numbers - not the real stuff.
But Japan seems to demonstrate that monetizing debt can be done without disasterous consequences (so far).
/cough/ Houses /cough/....
Had an interesting chat today with my friend who publishes the local weekly paper. He was telling me about brandnewhouses sitting empty with no takers. Seems the builder expected the buyers were going to be commute-to-the-city types, who (apparently) have decided that being close in is more important than being out where the air is cleaner.
Fuel prices are going to change America.
Oh for pity sake, Bernanke and his Positive Inflation Plan have already factored out deflation, so any discussion of some other spiral direction beside up is hogwash! We are going up and away with inflation and until we have a new Chair, up, up and away!
ac,
"But Japan seems to demonstrate that monetizing debt can be done without disasterous consequences (so far)."
Except two things.
These two items are quite significant.
Cheers,
[Cobradriver writes:
"Deflation won't happen."
barely | 07.01.08 - 9:00 pm
/cough/ Houses /cough/....]
Look, just because personal computers went down in price doesn;t mean we suffered deflation over the past 15 yrs. Once GDP goes negative we'll see what the government officials do about it. The last thing they want is to face a massive deficit that REQUIRES TAX REVENUE GROWTH to keep it manageable. Dollar weakness and inflation actually shinks the national debt. That's why we will never experience deflation. All the nonsense about FF Rate increases as the economy sinks makes me laugh. Roubini has it right. Mext move is another CUT.
"US economic growth in the second quarter of this year should be "substantially above" the 1 pct growth rate seen in the first quarter..."
LMAO, there is growth alright that pile of BS keeps getting high each day. What a hoot.
Look I'm no fancy pants economist, just a simple biochemist. All this money supply stuff makes my poor head spin. I and millions of others really just want to know if prices are going up or down. Yes a few things like phone or internet may go down; that's mostly to do with technological improvements not anything the Fed does. But aside from that, just about everything I buy is higher. Even things that are the same price, like my A/C tune-up, had a fuel surcharge tacked on.
Who do you think has the greatest amount of debt and will suffer the greatest pain in a deflationary environment ?
The very same authority that has the power over the money supply. Deflation won't happen.
Unless the markets force it on them. If foreign countries start dumping US dollars and debt if the Fed tries to inflate, they may be forced to back off if this threatens to cause the financial system to collapse.
Something like this may have forced the Fed to adopt tight monetary policy in spite of deflation during the 1930s. IIRC Paul Krugman said the Fed was forced to raise rates in the 30s despite deflation because the bond market began to collapse.
There are worse things for the Fed and the US government than deflation -- like a total collapse of the financial system, and probably the economy and government along with it, that would occur if nobody was willing to lend in US dollars (which is what a bond market collapse would mean).
"The emerging consensus among central bankers that price stability should be the
paramount goal of monetary policy has helped refocus policy discussions from
considerations regarding inflation-output tradeoffs to how best achieve the goal of low
inflation. There is, however, less of a universal agreement about which intermediate
objective provides the best vehicle for reaching this goal. Policymakers are often faced
with the task of choosing among the three intermediate nominal targets of monetary
aggregates, the exchange rate, and the inflation variable. "
Nazmi, '99 http://www.bcu.gub.uy/autoriza/peiees/tj9942.pdf
What are we targeting now if anything?
Aheadofthecurve writes: But aside from that, just about everything I buy is higher.
Where do you buy your apparel? Looked at the price of a new/used car lately? Considered renting a comparable house in the neighborhood? How much do those items weigh in your CPI basket?
I agree. Which is why it's so goddam hard to position. I'd like clear signals...but we peons don't get them. Only the friggin' insiders.
I'm betting deflation...with hedges. Shouldn't be this way.
Misean,
Everything I've read about good traders -- the people who make money and keep it -- is that they're highly flexible, always willing to change their beliefs and their bets on a dime, and are always planning contingencies if some new bit of information comes along that changes the big picture.
Not getting attached to specific ideas or positions seems to be key.
I don't think there's one "winning position" you can choose at any given time. Doing well is about awareness and reaction to change. And perhaps most important, making decisions based on reason not emotion.
I think if you're trying to decide what positions to commit to you may be asking for trouble.
You almost have to be a sociopath to do well in these markets. Commitment is the enemy just because these markets are inherently chaotic and unpredictable over time.
You've got to nuture you ideas and positions like you would your own child. And then toss them aside the second you realize they don't have a future.
My belief is that the right answer changes every day. And doing well is about dealing with that reality and developing the mentality for coping with and embracing phenomena that are largely inhuman and incompatable with the way humans spend most of their life thinking about things.
Wanna have a laugh, do a Google News search for "Fed must."
Conjure says, "A wage-price spiral? BWAHAHAHA!"
Stop it stop it mp and conjure! you're killing me...wage-price spiral....bwwwwaaaaa....too funny!
btw a friend is at Fido. 3% is the largest raise this year. put that in your wage-price spiral.
but in essence you are correct. we're looking at the signs and trying to divine the future here. and most future predictions are generally wrong. but so far, i have to hand it to the Fed for this mostly orderly unwind. let's see if it can stay orderly. all bets are off, though, if the price of oil suddenly, and steeply declines.
ipodius | 07.01.08 - 10:53 pm | #
I don't know if they have been 'good' or just 'lucky' so far - but it hasn't been as bad as it could have been or could get.
On the other hand it is getting rough in some sectors - had a friend lose his job last Friday. Another is about to see the company he owns go BK. Both directly related to economic forces outside their control.
Someday we should all play 'what if, what next'... sort of brainstorm possible outcomes from here & how the powers that be would game it. Might provide some useful road markers that will help us all going forward - help us see things our individual personal preconceptions & limited world view would normally cause us to miss. What you can see you can sometimes avoid (or better yet profit from).
Someday maybe - too tired tonight.
ac- "Doing well is about awareness and reaction to change."
Damn, ac, that was one helluva insightful comment, and well-written.
I've mentioned it before, but maybe it's worth mentioning again: there is nothing unprecedented, historically, about continually rising prices for food and fuel even as the prices of labor-intensive goods (and the commodities that go into them) collapse. See The Great Wave by David Hackett Fisher. So the whole inflation/deflation debate may be a bit of a red herring.
I understand the overall prevailing sentiment on the economy right now is extremely bearish. However, I think Lockhart's conclusion is cautiously objective and his argument, from an economics perspective imo - makes sense.
On consistent basis the theory behind the widespread recession forecast was that the decline in home values, the shrinking amount of mortgage equity withdrawal, or a credit squeeze would lead to outright decline in consumer spending....The facts persist in that, despite consumer confidence readings that are simply awful, core retail sales in the past 3+ months are up more than 10% annual/rate.
We have constrctn of biz/related buildings already up 15+% versus last year, led by hotels, utilities n power plants.
Furthermore, today's report n ISM Manufacturing index showed expansion, printing above 50 levels while private non-residential construction increased 0.2% in May. Non/Res construction, on a y/y basis, is up as well by 16+%.
Also, we are up 2.5% y/y n real gdp.
If anything , these figures are only optimistic signs of an economy that has experienced a slowdown but not a recession. I think GDP in the 2nd half of fiscal '08 will post gains based on pre-conditions for an eventual housing
recovery which is clearly taking hold, including a decline in the inventory of completed new homes and a bottom in
the pace of existing home sales.
dryfly- "Someday we should all play 'what if, what next'... sort of brainstorm possible outcomes from here & how the powers that be would game it."
CONJURE'S FUN FACTS
Conjure says, "Although the Pentagon dismissed it a few hours ago, watch for Israel to attack Iran prior to the installation of its Russian-built SA-20 air defense system."
"Have a nice day."
"core retail sales in the past 3+ months are up more than 10% annual/rate. "
are energy/fuel costs included in that 10%?
ron- "Furthermore, today's report n ISM Manufacturing index showed expansion, printing above 50 levels..."
The reason for that is that inventories increased, probably in anticipation of higher prices. The new order component fell, and has been falling for the last seven months.
"the base money supply"
are liquid treasuries money? are abs/mbs cdos money?
the debate on "in" vs "de" hinges on whether you believe the FED's revolving credit vehicles will eventually be made true.
i do not.
Missed Information writes:
Economic fundamentals say Americans need to become poorer.
Wages are not rising, but they are not falling either.
Therefore inflation shall persist.
This is a multi step process. Right now the banks/builders are getting poorer. OVer time the bankrupt banks will stop loaning to companies, and some companies dependent on bank financing will reduce wages/sack workers. As workers get poorer and/or spend more money on fuel, they buy less stuff, and stuff sellers get poorer. This keeps on going for a while...
Note that though commodity prices rose in 1930, they fell throughout the following decade.
Conjure says, "Although the Pentagon dismissed it a few hours ago, watch for Israel to attack Iran prior to the installation of its Russian-built SA-20 air defense system."
mp - you think they'll do it? I don't though I think they would if they thought they could pull it off clean (non-nuclear attack that would set Iran's bomb project back a generation). I don't think they can get it clean.
My guess is they are already well into Plan B - planning their strategy of 'middle east cold war' - with MAD as the new 'Never Again'.
Of course if Saudi Arabia (Sunni) were 'on board' & gave them the behind the scenes green light then all bets are off.
debka.com
Mysterious explosion at Iranian military facility
DEBKAfile Special Report
June 30, 2008, 6:45 PM (GMT+02:00)
DEBKAfiles Iranian sources report that an explosion Monday, June 30, at Bidganeh near the town of Shahriar 40 kilometers east of Tehran occurred at a military installation, not a civilian building as Tehran claimed.
At first, the Iranian authorities reported 15 people were killed, correcting this later to no casualties. The precise function of the targeted facility is not known. While Iran claimed the blast was caused by a gas leak, Western military sources are skeptical and believe the authorities are trying to cover up some sort of sabotage.
The reason for that is that inventories increased, probably in anticipation of higher prices. The new order component fell, and has been falling for the last seven months.
mp | 07.01.08 - 11:17 pm | #
ISM is and has been as flawed as NAR. I have never understood how folks could follow it like it was Gospel.
Ron,
pardon my french, BUT ARE YOU FUCKING HIGH?
ISM is basically flat, GDP is running at 1%(below pop. growth) constuction is shrinking.
dryfly- "- you think they'll do it?"
I think they're ready, willing, and almost able to do it.
I think they're waiting on spare parts. They're sure buying a helluva lot of jet fuel.
mp- "They're sure buying a helluva lot of jet fuel."
Here I am quoting myself, and the reason is to disclose that I have no inside sources of information beyond what I read and regurgitate from public sources.
Yeah, sure, deflation now: credit contracting, asset prices falling.
But, wait until the Chinese and Japanese get fed up with seeing their 'foreign reserves' falling in value. Then, we'll get a nice bout of inflation as they take their Treasuries off ice.
It is going to be a mess.
I sure hope the Federal government and Federal Reserve accept deflation. Hyperinflation would destroy the U.S., I'm guessing.
Here I am quoting myself, and the reason is to disclose that I have no inside sources of information beyond what I read and regurgitate from public sources.
mp | 07.01.08 - 11:35 pm | #
I wasn't asking - but understand.
Good Christian boy makes great money, starts a fund with $10 million of his own money at age 32, then veers off into unchartered (for him) investment waters; what a shame.
When Hedge Funds Bar the Door - WSJ.com
UBS
A US federal judge has agreed to allow US tax investigators to serve legal papers on Swiss banking giant UBS AG in an expanding investigation into taxpayers who may have used overseas accounts to hide assets and avoid taxes.
US tax probe can go after secret Swiss bank accounts - judge
Business - NZ Herald News
ac,
Extremely well put. We shall see.
Until then, fier gluck.
Cheers,
Oooo. I love a good **flation debate!
I see lots of debt that will/cannot be repaid. And I see levels of production worldwide that are based on spending levels that were only possible with more and more of that debt.
That collapsing debt represents lots of US dollars going to money heaven.
What kind of flation does that give us? I think we are in a transition from inflation to deflation.
I am feeling even more Argentinian.
Deflation and Inflation.
Inflation side:
Just got notice that my order for two gold buff proofs will be filled soon.
At $1199 a piece.
Two years ago that was an $800 purchase.
Deflation side- no raise.
So now we can say both sides are right.
An argentine style collapse is where we are heading.
Got hard currency? Your rich!
Got local pesos? Your poor!
Economy collapses, and a lot of stuff is sold for ridiculous cheap prices in hard currency. But folks still get paid in crappy money that is worth less and less.
It is an economy of desperation.
Someday this war's gonna end...
And, on the aggregate, a basket of goods is up less than you'd think because a lot of what you buy is cheaper. Like flat screen TVs. Phones. Computers. Funiture. Appliances. Autos.
Let's see how much of my basket that would be.
TV: bought one five years ago for 200$ (btw if I upgrade to plasma it would be 2000$ - tech advances does not always mean lower price)
Phone: had my 50$ cell phone for 3 years.
Computer: I am a geek! Upgrade components regularly and probably spend 2k every year on hardware. Much more than average person.
Furniture: usually 10k per move, average person moves once every 10 years. Make it 1k per year.
Autos: say you buy a 25k car and drive it 10 years, that makes for 2k per year.
Appliances: 500$ per year? Personally I just go to the laundry next corner.
So that totals to about 6000$ per year of items that go down in price. Doesn't seem like a big fraction of anyone's basket. And people who are poor would be spending much much less than 6k on these items.
This was my favorite part of that article:
Most of modern finance, especially securitization, is experiencing significant headwinds. But I think the big story is housing. If housing doesn't turn around, well, I don't know about a recovery. Sure could use about 300 billion. Yep. That would be nice. sigh Yep, we really need this housing thing to turn around to save the economy. If only we had 300 billion dollars -- now that would be some hope. I guess if this whole Federal Reserve thing doesn't work out, I can go back to my oil, gas, and mining exploration firm or maybe even Citibank.
For Halloween give him a trumpet
And for Christmas, buy him a drum.
bob dylan
<a href="http://bobdylan.com/moderntimes/songs/belongs.html target="_blank">She Belongs to Me
mp
"The reason for that is that inventories increased, probably in anticipation of higher prices. The new order component fell, and has been falling for the last seven months"
mp, I agree w/u there, 'prices paid' are posting new highs that's why the inflation issue must be addressed aggressively. Totally agree with u.
I also, agree the new orders index ticked down to 49.6 from 49.7 However, besides the production index, the backlog of orders index increased as well, adding to tape 47.5 from 46.0. It is true, order component been falling last seven months, but at the same time - this is the sixth month in a row that the index has beat consensus expectations. For an economy widely claimed to be heading for the abyss, this - at the very least, is rather contradictory.
My point is that the output components of the overall index were relatively benign in light of doom and gloom we have been getting lately from the financial press.
The manufacturing sector above 50, clearly contrasted favorably with the consensus expected 48.0 decline. And no matter how we cut it, that's expansion.
These improvements suggest how the economy is slowly but surely getting stronger. If we look at the avrg index level of 49.5 in Q2'08.. it is consistent with a real GDP growth rate of about 2.5% - 2.7%.
Now, these numbers while projecting slow growth are definitely not projecting contraction. If we don't contract then we can not have our economy experience recessionary levels.
Also, if relatively positive numbers and quarter/GDP growth fall under the recession definition, then we certainly are not talking about economics. That's why, among other data not mentioned here, I don't see the recession argument as a convincing probability.
At the law office I work at, no raises for staff this year, which is a first, and the partner's income down perhaps 25 to 30%. Just anecdotal....
Alec writes:
Ron,
pardon my french, BUT ARE YOU FUCKING HIGH?
ISM is basically flat, GDP is running at 1%(below pop. growth) constuction is shrinking.
Alec | 07.01.08 - 11:26 pm |"
Alec, I understand your frustration However, it seems to me - you are taking this way too seriously. I only expressed my opinion w/out offending others!!!
As far as ISM report is concerned, you have to read the report in its entirety b4 logically countering.
4822 writes:
"core retail sales in the past 3+ months are up more than 10% annual/rate. "
are energy/fuel costs included in that 10%?
4822 | 07.01.08 - 11:14 pm | # "
Sales excluding autos, building materials, and gas are up 4.5% versus last year and up at a 10+% annual rate in the past three months.
Amazingly I've been reading ISM reports for awhile since they're in my home town and have noticed that they're a bit on the optimistic side on forecasts and even the monthly reports are quite noisy.
So, to repeat;
ARE YOU FUCKING HIGH???
Ron- "That's why, among other data not mentioned here, I don't see the recession argument as a convincing probability."
Frankly, I see the ISM index as being at or near stall speed and, if I were you, I wouldn't get hung up on one data point. It's true that manufacturing is one "bright spot," relatively speaking, but it's not because of domestic demand, it's because of exports.
In fact, the only thing keeping manufacturing above water is the pitiful state of the US dollar.
So, if you're trying to convince me that the US economy is expanding, you'll have to trot out some far more convincing data.
Oh, and the fact that the ISM index has been printing above consensus does nothing for me. Sorry.
And I would feel the same way if it printed below consensus.
ISM is NAR for mfg guys... but I repeat myself.
She never stumbles,
She's got no place to fall.
She never stumbles,
She's got no place to fall.
She's nobody's child,
The Law can't touch her at all.
Alec, actually no, am not. cheerz
Fair enough mp, I guess we disagree then on the subject. cheers
ac,
"Unless the markets force it on them."
That's my whole point. Rock meet hard place. Scylla meet Charybdis.
Cheers,
Explanation: Urban Dictionary: Count it
Rents in my neighbourhood are flat, not down. My housing costs are up due to property taxes and utilities. Cars-SUVs are down, but fuel-efficient cars are up. As for apparel, just wait until fall when higher Chinese costs and shipping charges kick in.
Rents in my neighbourhood are flat, not down.
Say hello to Sebastian and O-Joe for me.
Sorry, who?
ac,
"But Japan seems to demonstrate that monetizing debt can be done without disasterous consequences (so far)."
Except two things.
These two items are quite significant.
Cheers,
Misean
I agree those issues might make harder/impossible for the US to monetize excessively.
Another thing is I think it's still possible that what Japan has done is a ticking timebomb that could blow up if this financial crisis deepens, discrediting this whole monetization process as a viable solution.
In the end I tend to think deflation is the more likely outcome because I think the markets won't let the Fed aggressively inflate without a severe backlash. But the markets might tolerate enough inflationary policy to keep the deflation mild (Japan style).
But I'm not assuming any outcome at this point. Just going to watch and wait for further developments.
Anyway, I own, and while my mortgage payments are flat, property taxes go up 6 or 7% every year and I'm not looking forward to the gas bill next winter.
ac,
"But the markets might tolerate enough inflationary policy to keep the deflation mild (Japan style)."
I agree. Which is why it's so goddam hard to position. I'd like clear signals...but we peons don't get them. Only the friggin' insiders.
I'm betting deflation...with hedges. Shouldn't be this way.
Cheers,
Deflation and massively contracting consumption. YUM! But t's not on the menu.
Companies carrying debt, consumers already carrying more debt than ever, and the government MAXED OUT. They won't allow deflation to happen. IT WOULD FORCE THE ECONOMY TO COLLAPSE. Seriously elevated inflation might get ugly but I fail to see how it would be worse than a deflationary collapse. In fact, it's arguable that we are already there (underreported CPI) without that great of a stability consequence.
targeting everything so not hitting anything.
Failure to increase reserve requrements in 2005, excessive FFR cutting in 2008 were the 2 major faults of the fed.
The former was an abject failure to make the slightest effort to prick an obvious bubble, while the latter was a sop for their earlier failure that help kill the USD in the face of mounting inflaton and a prior weakening USD.
The fed failure to raise last go 25 now forcs them to go 50bp over the next 2 meetings just to get back to their slightly accomodative stance. I doubt they will but they should.
Aheadofthecurve writes:
Rents in my neighbourhood are flat, not down
Daisy Miller's bastards move back?
BTW I think the US might have already slipped into deflation:
1) Falling House Prices
2) Falling Commercial Real Estate Prices
3) Falling Car Prices
4) Falling Stock Prices
5) Falling Bond Prices (except the highest grade stuff)
6) Falling Corporate Earnings
7) Falling Tax Revenues
8) Falling Consumer Discretionary Prices
9) Falling Rents in some places
10) Weakening wages
Again, it seems like the stuff that's going up in prices is the stuff that's still being slammed with leverage by the hedge funds -- and that's the type of thing that usually ends in collapsing prices also.
The big picture to me looks like the onset of deflation with a few pockets of hyperinflation driven by speculation and leverage that may be on its last legs. (But then again it kinda looked that way for a while in 2003 too.)
ac
excellent post.
Of course it seems over optimistic to you --- oh purveyor of pessimism.
BTW I think the US might have already slipped into deflation:
thud as head bangs against desk. what do you mean think? i've been preaching this in threads for months now, and got called every name in the book as i said this is DEFLATION not INFLATION beacause INFLATION is the expansion of money and credit. And if anyone can show me expanding money and credit i'll eat my shorts. (ha literally)
Welcome to the truth folks. Deflation. Enjoy.
Someone mentioned John Mauldin's forecasts earlier and I wanted to throw out an idea mentioned in his 2004 book Bull's Eye Investing that really turned my opinion of Bernanke.
He has a whole chapter devoted to Bernanke's famous "Helicopter Drop" speech in 2002, Deflation: Making Sure It Doesn't Happen Here. What blew my mind was how Mauldin interpreted it (I think correctly) that Bernanke believes that deflation is easy to solve with unconventional monetary policy, therefore deflation is not much of a worry to the economy.
Many here may say, "Duh!" But just consider it a moment. Read ac's comment above about how the U.S. may already be in deflation. Bernanke is behind the 8 ball on this crucial issue. He's trying to play both sides, waiting for core inflation to come down along with unemployment to go up in the data before he makes his next move. But he's already lost it, mostly because he believes it's not a real challenge. We'll see.
I want to thank you all - I'm having a barrel of fun reading all this deflation-inflation fighting and for once I'm not up to my asshole in it.
Now carry on...
[Seriously - good comments all - however it turns out it is likely to be the story of our age unless some knucklehead decides Iran would make a better story - pray it's deflation/inflation]...
There's plenty of credit creation, but not nearly enough to match the credit destruction.
Bernanke is behind the 8 ball on this crucial issue. He's trying to play both sides
No he isn't. The Fed has known for quite some time that inflation wasn't the real issue which is why they DROPPED interest rates. Price increases are not inflation. This is why Trichet is playing a very, very, dangerous game with the rates. He absolutely can NOT control "inflation" with higher rates because this is price related, and specifically, to the price of oil and commodities. What is a rate increase going to do for that besides grind the EU economy to a halt?
What the Fed is betting on is that the price of oil and commodities decrese by the end of the year, that prices recede, and that starts the recovery so that they can slowly raise the FFR before REAL inflation kicks in as things ramp up again. That's why they are unconcerned about inflation now. But won't be as soon as they see things bottom.
ipodius-So should I buy shoes now or wait?
There's plenty of credit creation, but not nearly enough to match the credit destruction.
absolutely and precisely correct. money and credit is being destroyed faster than it can be created. The definintion of deflation. And don't look to the M3 figure for this either, look at the Philly fed money supply report to see what is happening to the money supply. Also look to the credit markets.
thanks ipod.
dryfly,
its been many an inflation/deflation debate you've muddled through on this blog, for sure.
ipodius-So should I buy shoes now or wait?
that depends. are you going to wear them this season or next?
"that depends. are you going to wear them this season or next?
ipodius | 07.01.08 - 10:15 pm | # "
God-damn, you can never get a straight answer from these economists.
ipodious,
"thud as head bangs against desk. what do you mean think? i've been preaching this in threads for months now,"
Well you and the rest of us.
Alec,
"There's plenty of credit creation, but not nearly enough to match the credit destruction."
That seems to be the lynch pin. As well as foreigners not accepting monetization. We'll see. As I said I'm betting on deflation.
Cheers,
so long as my tenants hold up, i'm pretty solid for a deflationary period. with built in rent increases that will exceed inflation and interest rate resets in a deflationary period...
seems like a good time to hold income generating commercial real estate
oh and compressing cap rates (with spreads staying constant at worst)
then again, tenants could all go belly-up (and some definitely will)
dryfly,
Well at least the inflation/deflation debates are enjoyable. Unlike the political ones.
Meh.
Cheers,
God-damn, you can never get a straight answer from these economists.
ha! there was nothing straight about that answer
Now, if you fancy the hand-made italian shoes that ipodius does (did you know that Zegna shoes are made by Ferragamo? True, and usually a bit less expensive) then I'd wait for the exchange rate to be more favorable and they'll be giving them away.
If you're into the Cole Hann types, then buy away. They're always about the same price for as long as I can remember, and assembled in some low labor rate country.
If you're going to sport a pair of Todds or maybe something from Ken Cole, buy them now. They'll be horribly out of style by next year and urban folks like me will think you a roob for wearing out of date shoes
Does that help?
Actually, shoe prices are going up.
"ha! there was nothing straight about that answer :)"
There may be nothing straight about an inordinate interest in designer shoes either.
What the Fed is betting on is that the price of oil and commodities decrese by the end of the year, that prices recede, and that starts the recovery so that they can slowly raise the FFR before REAL inflation kicks in as things ramp up again. That's why they are unconcerned about inflation now. But won't be as soon as they see things bottom.
ipodius | 07.01.08 - 10:12 pm | #
The other thing they have to worry about is 'desterilization'... what happens if the dollars outside the US are dumped and come home?
Right now the SWFs & FCBs continue to hold a lot of dollar assets - but that could change - if they unloaded you'd first see an increased wave of 'deflation' as they sold USD denominated assets for dollars (even less dollars in circulation) then a renewed wave of RE-inflation as those dollars were liberated back out into the economy by converting into their native currency.
Having all those dollars outside the US in FX systems with tight raw material supplies would be 'interesting' price wise.
The biggest effect would be from the velocity component of all those liberated dollars NOT the actual supply increase (which might actually net out zero - just change in location)...
I don't see that happening because as bad as our inflation would be from liberated fiat - their end would be worse. But it could happen.
Point is there are a number of possibilities for unintended consequences and for central bankers to be smarter by half.
ipodious,
"Now, if you fancy the hand-made italian shoes that ipodius does"
Naw, I prefer New Balance running shoes.
IT gets away with a lot of shite. One of them is dressing.
Cheers,
My balls itch.
There may be nothing straight about an inordinate interest in designer shoes either.
That may be true, but lest you think otherwise, women do notice guys shoes. Many women have told me that they think guys with good shoes are sexy. And the next time you can, look around an executive suite and check out what are on the men's feet. Certainly nothing from PayLess, or bought in a strip mall.
dryfly,
"Having all those dollars outside the US in FX systems with tight raw material supplies would be 'interesting' price wise."
Yep. Been saying that for a while now.
Cheers,
Ipodius
FRB: H.6 Release--Money Stock and Debt Measures--December 3, 2009
12 months, M2 increases 6.6%
you said money supply and credit...and i cant respond to the credit question so your shorts are safe
dryfly, very true. but as you say i really don't see that happening. the dollar is finding its bottom so why would anyone dump now? if they were going to dump they would do so later on when they could get out of those positions without the steep loss. but as you say, unintended consequences.
and the Fed will have enough issues just timing this right so that the banks can re-capitalize, the economy can pick up, deflation can slow down, and they don't cause massive inflation as all of this happens, which they will do if they are late to the rate raising party.
Midean, when not traipsing around the office, i much prefer my running shoes and boat shoes. but good shoes should always be that comfortable. even dress ones
BTW I think the US might have already slipped into deflation:
thud as head bangs against desk. what do you mean think? i've been preaching this in threads for months now, and got called every name in the book as i said this is DEFLATION not INFLATION beacause INFLATION is the expansion of money and credit. And if anyone can show me expanding money and credit i'll eat my shorts. (ha literally)
Welcome to the truth folks. Deflation. Enjoy.
ipodius,
I've been here arguing deflation since early 2006.
I was pretty much the resident "deflation nutter" for a long time. I even criticized Mish when he seemd to be back of the deflation rhetoric for a while.
I just kind of lost interest and making the case over and over again when it became less contrarian over time.
I think the value of a site like this is discovery through argument, not concensus and endless mutual-confirmation.
Random Question. So under which taxonomy of money (M1/M2) does "my neighborhood's house sold for 100K more than listing, so all 10 houses on the street increased their HELOC by 100K" go?
That may be true, but lest you think otherwise, women do notice guys shoes. Many women have told me that they think guys with good shoes are sexy.
The kind of women who think guys shoes are sexy are not the kind of women who want to go on a fly fishing weekend. Nor would they sit through a season of hockey when streams are iced up.
Just sayin'...
ipodious,
"but good shoes should always be that comfortable. even dress ones ;)"
I have serious leg/foot problems. But agree. I still manage to run 10 or so miles a week. Ain't fun.
Cheers,
I was pretty much the resident "deflation nutter" for a long time.
Yup. You have credentials. I can testify to that.
ac,
"I've been here arguing deflation since early 2006."
And doing a damned fine job of it, BTW.
Cheers,
So I see the headline on Reuters is
Fed must prevent wage-price spiral: Lockhart
So the Fed is trying to put the wage-price spiral in everyones mind then do nothing about it to hopefully create the situation. I don't think we are going to see this work without organized labor like the 70's.
MOT,
"I don't think we are going to see this work without organized labor like the 70's."
We won't. Employment heading down.
Cheers,
@The kind of women who think guys shoes are sexy are not the kind of women who want to go on a fly fishing weekend. Nor would they sit through a season of hockey when streams are iced up.
You haven't met my wife (but she picks the shoes). Go Islanders.
anon 10:33
yes, but make your argument in the other direction. its the deflation of house prices that is shrinking M.
mock, the base money supply is barely positive and it has been falling. and the destruction of asset value has led to a destruction of credit on a monumental scale. the velocity of money has also slowed to a crawl.
all in all, this points to deflation. and don't look at M3 here either, because the growth in M3 points to capital moving into instutional funds, not a growth in the money supply, just a shift.
and the Fed will have enough issues just timing this right so that the banks can re-capitalize, the economy can pick up, deflation can slow down, and they don't cause massive inflation as all of this happens, which they will do if they are late to the rate raising party.
The other thing people have to remember is the difference between deflation & inflation PRESSURES (or things that would cause deflation/inflation) and the actual things (decrease/increase in supply & velocities of money & equivalents)... we could easily have severe deflationary pressures but still, at the end of the day have overall inflation IF the gov't floods the system with money. The reverse is just as possible I might add.
And we're trying to gage all this just looking at the symptoms - prices of assets, commodities, wages, etc., and a few highly aggregated & potentially massaged gov't reports (like the 'M Series').
Might as well be arguing about angels & devils.
You haven't met my wife (but she picks the shoes). Go Islanders.
Man-moth | Homepage | 07.01.08 - 10:43 pm | #
My wife is a hockey nut too but likes cheap shoes - on me. Not because they are sexy - but because they are cheap.
The Scots are thrifty. Scandinavians are cheap.
got paper?
A German company that has been supplying paper used by Zimbabwe's central bank to print bank notes said Tuesday it is stopping shipments immediately at the request of Germany's government.
Yahoo! 404 - Page Not Found
Might as well be arguing about angels & devils
YIKES! Don't! You'll tempt them! I have enough trouble saving my shorts after mock's posts!
but in essence you are correct. we're looking at the signs and trying to divine the future here. and most future predictions are generally wrong. but so far, i have to hand it to the Fed for this mostly orderly unwind. let's see if it can stay orderly. all bets are off, though, if the price of oil suddenly, and steeply declines.
one more important thing to clarify in this *flation debate.
I will concede that there is now deflation in the true sense of it. The wealth destruction in stocks and loans absolutely dwarfs the inflation in everyday goods.
However, that is the headache of bankers and other well-to-do people. So I couldn't care less, as most other people.
Those of us who earn our living (as opposed to our living times 5) are seeing price increases in everything we buy. So we are seeing rampant inflation. This is the only type of *flation worth talking and worrying about, and that's why I am firmly in inflation camp, even though I understand that (academically) deflation is underway.
If a banker earning 150k sees his investments drop from 10mln to 2mln I couldn't care less - even if said banker is me. He is still going to live fine on his 150k.
However is a salesmen earning 40k sees that he is no longer able to provide enough nutritious (not ramen) food for his 3 children, that's a big problem.
And here I will concede another points. Interest rates won't fix this problem.
Ministry of Truth- "So I see the headline on Reuters is
Fed must prevent wage-price spiral: Lockhart"
Conjure says, "A wage-price spiral? BWAHAHAHA!"
"Have a nice day."
So we are seeing rampant inflation.
See, that's the point missed, you are not seeing inflation. you are seeing specific price increases in specific areas. and they are related to a subset of items...primarily food and fuel. those will abate naturally by either a sudden over-supply, or by demand destruction. Nothing the Fed does will affect that, and nothing the government does will either.
And, on the aggregate, a basket of goods is up less than you'd think because a lot of what you buy is cheaper. Like flat screen TVs. Phones. Computers. Funiture. Appliances. Autos. If you bought a TV this year, you just saved more than the price increase in gas for the year. A car and you saved that and on the grocery bill. So that's where people start screaming that the government numbers are wrong. No, the government isn't interested in what YOU buy, it's interested in OVERALL buying and what the balance is.