February 4, 2011
Every once in a while, something sticks in my craw and I feel the need to regurgitate upon you, my compliant audience. I'll bet few if any of you know of Gideon Gono. This gentleman is the chief banker of Zimbabwe. Mr Gono and the Bernanke share the belief that the printing of money creates employment and prosperity. Mr Gono has certainly defeated the spectre of deflation in his country. Money supply is soaring, the Zimbabwe equity market is doing fine. Unfortunately, breakfast in this fair nation costs one trillion dollars - no shit.
Fast forward to the US-Zimbawbe West. We are insolvent, have an increasing deficit, zero interest rates and print $'s to buy our bonds. Since the majority of the debt has a maturation of about 4 years, in essance, we print money to buy the bonds that are being redeemed and issue more. You know, a Ponzi scheme. What will happen to our currency? Don't you love these rhetorical questions. Now many currency traders follow the DXY or UUP which are measures of the relative value of the $ against the value of the equally impaired, noncollateralized yen, euro and pound. Kind of a contemporary version of the good old Pig Party. You know, Miss Euro get a bad case of acne and now she's even uglier than Miss $. All these currencies share one thing; they are rapidly depreciating against stuff. Corn, tin, soybeans, copper, oil, uranium, wheat, etc. and of course the precious metals. (They've taken a bit of a hit recently but they'll be back.)
Unfortunately, the Bernanke doesn't care because these only contribute to the headline CPI, not the all important core CDE. Since employment sucks, (don't be mislead by the recent BLS nonsense), factory utilization is lagging and magical Hedonic accounting is in vogue, the core rate is below target and the Bernanke still anguishes about the spectre of deflation. So, your $ may buy more euros or whatnot in the future but it will buy less food, gas, utility bills, etc.
The consequence of this policy is that we all get poorer. We get away with this chicanery, for now because the $ is the reserve currency of the world. Interestingly, China, Russia and Brazil trade in their own currencies and exclude the $. Given the growth rate of their economies, what % of international trade will be conducted in non$ currencies in 5-10 years?. Suppose that OPEC, not our best buddies, wanted a basket of currencies, or heaven forbid, gold for their oil? The British pound was the reserve currency of the world until 1967. At that time, it underwent it's second devaluation in 5 years and the $ took over. More to the point, the world adjusted for this eventuality long before 1967 and most trade was conducted in the $ , not the pound. Kind of like what's happening now.
The energy policy of this country is no energy policy. You don't have to be a rocket scientist to realize what must be done. Since, like it or not, we require alot of oil, clearly we should maximize the production of this invaluable resource with in our domestic boundaries. Drill baby, drill! Secondly, we should utilize the abundant, cleaner natural gas which not only is homegrown, but is very cheap relative to oil. Without alot of fanfare, natural gas can become a very important portion of our transportation system. Finally, we should start building nuclear reactors throughout the country to generate clean, efficient utility power. These solutions are so obvious that one must speculate on why our energy policy is no policy. One could argue, with considerable veracity, that we are a nation of morons, governed by imbeciles. Certainly, electing a President devoid of any qualifications on the slogan," Yes We Can" might qualify as proof of this contention. I would be remiss, however, if I did not give the environmentalists their due. This is a powerful wellfunded lobby and they own the DNC along with the labor unions and trial attorneys. There are two generic types of environmentalists. The first group which we can dismiss readily are the true believers who want to turn us back to the Stone Age, living as Luddites.
The other group, more ominous to the health of this nation and everybit as greedy as the nastiest investment banker, are the lobbyists for GREEN ENERGY. They want to make a buck like everyone else, but since they shill for economically nonviable industies, they must be devious. The first tack is the call for government investment. If their industries were worth a shit, they would have no problem attracting private capital, but in the absence of a rational game plan, they attack the public coffers, robbing from the taxpayers. More sinister, they actively block any attempts to take the necessay steps I enumerated at the beginning of this paragraph. There is a method to their madness. None of the industries they righteously pimp for can stand on their own merits with an oil price of $100 but start to make sense at $200.
Given their success to date at thwarting a national energy plan, this horrifying scenario may well come to pass. You folks may end going GREEN, but man are you going to pay for it. Hopefully, there's enough left over for food.
-Guga
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Thursday, April 28, 2011
Brotherly Nepotism
January 17, 2011
Since my sisters will be actively managing investment income, this episode is mainly for them but I have expanded it for anyone who cares.
In short, the equity market is becoming a game of chicken. The broad consensus is for a gain of between 10 and 20 percent. Inherent in this prediction are the assumptions that the economy will expand between 3-4%, inflation will not be a problem and interest rate changes are moderate. Simultaneously,anyone with half a brain knows that ominous structural problems exist which will ultimately derail this scenario. Since it's the third year of a Presidential cycle, few believe it will be this year.
In keeping with the tradition of horrifying my sisters, let's consider these aforementioned structural problems. Consider the financial straights of state and municipal governments. Since many are on the precipice of default, their options are massive budget cuts/tax increases. Meredith Whitney, admittedly a bear, states that local government layoffs this year will approach one million workers. Alternatively, tax increases are hardly compatible with economic growth. How many will default? What effect might sizable defaults have on the financial markets? The Bernanke is already on record as stating the Fed has no intention of buying this debt. Federal "stimulus" money will stop flowing to the states in a few months and, given the makeup of this Congress, it is unlikely that taxpayer money will be available to coverup the shortfalls.
Consider the US government. The next rise in the debt ceiling will take debt to 100% of GDP. That excludes the debt of the GSE's and the nonfunded liabilities of the entitlements programs. In short, the USA is insolvent. When will it matter? Don't know but my guess is that sooner rather than later. Now we could correct this problem readily: withdraw from Iraq, Europe and leave only killer squads in Afghanistan. Repeal Obamacare, the Bush drug bill, drastically cut Medicare/Medicaid spending and put SS on a credible plan. Call me cynical, but I don't think these obvious solutions are about to happen. Could you imagine a politician of either stripe successfully running on this platform? History will regard the baby boomers as the most selfabsorbed, extravagant materialistic and financially irresponsible of all the generations of Americans. Contrary to their protestations, they desperately wish to pass on this debacle to their grandchildren but long before these children realize the imprudence of their grandparents, the situation will be corrected by the financial markets. I have stated before and will say again that the US Treasury market is the greatest Ponzi scheme in human history.
I don't know when some one says, "the emporer has no clothes" but it's going to happen well before out grandchildren have to worry about it. If I haven't depressed/annoyed you enough, consider your currency: the almighty $, the reserve currency of the world. It is the express purpose of this government to reduce the purchasing power of the $. The thought is that if the $ is worth alot less than other currencies, then the US will be able to export products more competitively. Of course, this is the express purpose of many other countries and watching them fluctuate against one another is like trying to pick the best horse in the glue factory. The consequence of this devaluation is simply that real stuff, you know gas, utility bills, food, etc cost more dollars. They haven't changed; the value of the $ has declined. Gas at the pump has risen almost 50 cents since my return to Florida. The next time you go to the gas station and pay more, say "Bernanke knows his stuff. QE2 sure has depressed our currency."
The problem with this strategy is that 5% of our economy is based on exports and 70% is due to consumption. The real question is not whether the $ will decline but will the decline be orderly or chaotic. Add to these previously discussed issues, the "normal suspects" , war, terrorist actions, natural or climatic catastrophes and you can see that I am not as sanguine about the markets as most. I remain long but with one foot out the door.
-Guga
Since my sisters will be actively managing investment income, this episode is mainly for them but I have expanded it for anyone who cares.
In short, the equity market is becoming a game of chicken. The broad consensus is for a gain of between 10 and 20 percent. Inherent in this prediction are the assumptions that the economy will expand between 3-4%, inflation will not be a problem and interest rate changes are moderate. Simultaneously,anyone with half a brain knows that ominous structural problems exist which will ultimately derail this scenario. Since it's the third year of a Presidential cycle, few believe it will be this year.
In keeping with the tradition of horrifying my sisters, let's consider these aforementioned structural problems. Consider the financial straights of state and municipal governments. Since many are on the precipice of default, their options are massive budget cuts/tax increases. Meredith Whitney, admittedly a bear, states that local government layoffs this year will approach one million workers. Alternatively, tax increases are hardly compatible with economic growth. How many will default? What effect might sizable defaults have on the financial markets? The Bernanke is already on record as stating the Fed has no intention of buying this debt. Federal "stimulus" money will stop flowing to the states in a few months and, given the makeup of this Congress, it is unlikely that taxpayer money will be available to coverup the shortfalls.
Consider the US government. The next rise in the debt ceiling will take debt to 100% of GDP. That excludes the debt of the GSE's and the nonfunded liabilities of the entitlements programs. In short, the USA is insolvent. When will it matter? Don't know but my guess is that sooner rather than later. Now we could correct this problem readily: withdraw from Iraq, Europe and leave only killer squads in Afghanistan. Repeal Obamacare, the Bush drug bill, drastically cut Medicare/Medicaid spending and put SS on a credible plan. Call me cynical, but I don't think these obvious solutions are about to happen. Could you imagine a politician of either stripe successfully running on this platform? History will regard the baby boomers as the most selfabsorbed, extravagant materialistic and financially irresponsible of all the generations of Americans. Contrary to their protestations, they desperately wish to pass on this debacle to their grandchildren but long before these children realize the imprudence of their grandparents, the situation will be corrected by the financial markets. I have stated before and will say again that the US Treasury market is the greatest Ponzi scheme in human history.
I don't know when some one says, "the emporer has no clothes" but it's going to happen well before out grandchildren have to worry about it. If I haven't depressed/annoyed you enough, consider your currency: the almighty $, the reserve currency of the world. It is the express purpose of this government to reduce the purchasing power of the $. The thought is that if the $ is worth alot less than other currencies, then the US will be able to export products more competitively. Of course, this is the express purpose of many other countries and watching them fluctuate against one another is like trying to pick the best horse in the glue factory. The consequence of this devaluation is simply that real stuff, you know gas, utility bills, food, etc cost more dollars. They haven't changed; the value of the $ has declined. Gas at the pump has risen almost 50 cents since my return to Florida. The next time you go to the gas station and pay more, say "Bernanke knows his stuff. QE2 sure has depressed our currency."
The problem with this strategy is that 5% of our economy is based on exports and 70% is due to consumption. The real question is not whether the $ will decline but will the decline be orderly or chaotic. Add to these previously discussed issues, the "normal suspects" , war, terrorist actions, natural or climatic catastrophes and you can see that I am not as sanguine about the markets as most. I remain long but with one foot out the door.
-Guga
An Empire of Debt
December 14, 2010
The Fed has just announced it's continuation of zero interest rates and the QE2 program. As I glance at the ticker, the ten year yield has risen to 3.44 and gold has moved up to 1406. What a surprise! I say that the Empire of Debt, the good old USA, is showing early signs of decay. It took quite a while for Rome to falter and implode, only because they didn't have access to a bond market. Our bond market is showing signs of stress.
Now clearly, bonds are oversold and one can expect a countertrend move in the near future but I think that a secular low in bond yields has been put in place over the past few years and yields will inexorably move up in the future. There is a wide disparity of opinions regarding how high and over what time frame this trend will occur. Bill Gross, Mr Bond, feels that yields will level out at approximately 3.5% feeling that growth will be about 2% and Inflation about 1.5%. On the other hand, there are those, those who loaded up on CDS investments prior to the implosion of 2008-9 like Paulsen, Julian Robertson and the one-eyed neurologist whose name I cann't recall, who feel that the ten year will rise to 20% within 5 years. Certainly, one's investment decisions will be predicated on which outlook one subscribes to.
I think that the Emporer has no clothes; the US is insolvent. Will we raise taxes and curtail entitlements for everyone in the near future to achieve a modicum of fiscal credibility? I doubt it. It is far more likely that the US defaults on it's debt. We did it before. In 1933, FDR changed the exchange rate for the $ from 17/ounce of gold to 35. I think Bernanke knows full well that the long term solution to the problem is to borrow in $ and repay later in wampum. Currently, there is a debate about the reasons for the bond market selloff. The consensus is that yields are rising in response to an improving economic outlook. Maybe, but in all due respect, Shelley, I am skeptical. Will most people spend more because their tax rates will not go up? Will businesses invest for the long term when everyone knows that the tax structure will be radically changed in two years?
Your President has told you that he will whack wealth and Capital in two years. The real estate market is our Achille's heel and one has to speculate that rising mortgage rates cannot be good for this area. Rising commodities, particularly food and gas cannot be good for discretionary spending. The other plausible explanation for the rise in interest rates would be increasing inflationary expectations. As proof, I offer the correlation between the TIPs market and rising yields. If the US economy is strengthening, why is the $ currently weak despite the euro's well documented problems? Gold continues in it's bull market.
To plagiarize, shamelessly, from James Grant, the price of gold = 1/n where n represents the credibility of noncollateralized paper currencies and central bankers. I suspect that the denominator of the equation will shrink with time. Therefore, I am bullish on gold. I am less so on the US Treasury market.
-Guga
The Fed has just announced it's continuation of zero interest rates and the QE2 program. As I glance at the ticker, the ten year yield has risen to 3.44 and gold has moved up to 1406. What a surprise! I say that the Empire of Debt, the good old USA, is showing early signs of decay. It took quite a while for Rome to falter and implode, only because they didn't have access to a bond market. Our bond market is showing signs of stress.
Now clearly, bonds are oversold and one can expect a countertrend move in the near future but I think that a secular low in bond yields has been put in place over the past few years and yields will inexorably move up in the future. There is a wide disparity of opinions regarding how high and over what time frame this trend will occur. Bill Gross, Mr Bond, feels that yields will level out at approximately 3.5% feeling that growth will be about 2% and Inflation about 1.5%. On the other hand, there are those, those who loaded up on CDS investments prior to the implosion of 2008-9 like Paulsen, Julian Robertson and the one-eyed neurologist whose name I cann't recall, who feel that the ten year will rise to 20% within 5 years. Certainly, one's investment decisions will be predicated on which outlook one subscribes to.
I think that the Emporer has no clothes; the US is insolvent. Will we raise taxes and curtail entitlements for everyone in the near future to achieve a modicum of fiscal credibility? I doubt it. It is far more likely that the US defaults on it's debt. We did it before. In 1933, FDR changed the exchange rate for the $ from 17/ounce of gold to 35. I think Bernanke knows full well that the long term solution to the problem is to borrow in $ and repay later in wampum. Currently, there is a debate about the reasons for the bond market selloff. The consensus is that yields are rising in response to an improving economic outlook. Maybe, but in all due respect, Shelley, I am skeptical. Will most people spend more because their tax rates will not go up? Will businesses invest for the long term when everyone knows that the tax structure will be radically changed in two years?
Your President has told you that he will whack wealth and Capital in two years. The real estate market is our Achille's heel and one has to speculate that rising mortgage rates cannot be good for this area. Rising commodities, particularly food and gas cannot be good for discretionary spending. The other plausible explanation for the rise in interest rates would be increasing inflationary expectations. As proof, I offer the correlation between the TIPs market and rising yields. If the US economy is strengthening, why is the $ currently weak despite the euro's well documented problems? Gold continues in it's bull market.
To plagiarize, shamelessly, from James Grant, the price of gold = 1/n where n represents the credibility of noncollateralized paper currencies and central bankers. I suspect that the denominator of the equation will shrink with time. Therefore, I am bullish on gold. I am less so on the US Treasury market.
-Guga
Del Boca Vista
October 17, 2010
Regrettably, I'm leaving Bend soon to return to the land of the dying and infirm and experienced some insominia. Rather than count sheep, I pondered the complex issue of what's next for interest rates.
Certainly, conventional wisdom dictates that interest rates will surely rise. Our Federal Reserve, in contrast to the actions of Paul Volker, has a mission to defeat deflation, the inverse of which is to create inflation. Printing noncollateralized $ and flooding our monetary base is the mechanism of QE2. How can this not be inflationary?
Historically, it doesn't pay to bet against the Fed. Markets are taking note: the price of gold is through the roof, commodities climb higher, the TIPS are climbing and the 30/10 spreads are rising. Since the prices of food and energy are rising, the average American is experiencing a measure of inflation. Seems like a slamdunk but hold on. Remember that the Fed controls M1 but not M2 or M3. To say that it cannot affect the velocity of money in essance means that it cannot force banks to loan or people to borrow.
Contrast the enormous fall in mortgage rates engineered by the buying of 1.25 trillion $ of these securities with the current state of our housing market. Deflation is a real threat. The folks at the Federal Reserve are justifiably worried about this issue. Look at a chart of the core CPI over the past few years; much more descent leaves us around zero. Simplistically, inflation is too much $ chasing too few goods and deflation is too much debt chasing too little cash flow. Following a two decade debt binge, I think the latter scenario most accurately describes our current plight. So the question becomes, will more $ printing reverse this trend. I doubt it. To date, money has recirculated back to the Fed in the form of bank reserves and abroad where growth opportunities exist. Large corporations are flush with cash but they're not spending. This experiment has been tried before in Japan and the inflation rate has become mired at a negative 1% and the ten year JGB yields about 1%.
I know that we're not Japan, but people have been alleging that for the past 5 years despite the progression of the similarities. The critical difference between Japan and the US is that they have savings and a capital surplus that allows them to fund their burgeoning debt. We're dependant on the kindness of strangers. What to make of these opposing forces? I think that the key, independant variable is the $. The last default of US sovereign debt was created by FDR in 1933 when he halved the value of the $ relative to gold. Our government is determined to undermine the value of our currency. The obvious salubrious effects will be an edge to our exports, raising nominal wealth in the financial markets, a perception of inflation. This policy could have untoward effects, however in igniting an allout currency war and an abrupt rather than gradual fall in the value of the $. Once again, the US defaults on its debt via a significant devaluation of the value of its debts.
At some point, the strangers who fund our debt will no longer be friendly. I have maintained for some time that the US Treasury market is the greatest bubble in human history and the issue is not if but when it deflates. Therefore, I am awaiting the appearance of the 2013 options of TBT. In the interim, I am investing in issues which should hold up in a rising interest rate environment: floaters, junk, converts Canadian oil trusts and pipelines.
-Guga
Regrettably, I'm leaving Bend soon to return to the land of the dying and infirm and experienced some insominia. Rather than count sheep, I pondered the complex issue of what's next for interest rates.
Certainly, conventional wisdom dictates that interest rates will surely rise. Our Federal Reserve, in contrast to the actions of Paul Volker, has a mission to defeat deflation, the inverse of which is to create inflation. Printing noncollateralized $ and flooding our monetary base is the mechanism of QE2. How can this not be inflationary?
Historically, it doesn't pay to bet against the Fed. Markets are taking note: the price of gold is through the roof, commodities climb higher, the TIPS are climbing and the 30/10 spreads are rising. Since the prices of food and energy are rising, the average American is experiencing a measure of inflation. Seems like a slamdunk but hold on. Remember that the Fed controls M1 but not M2 or M3. To say that it cannot affect the velocity of money in essance means that it cannot force banks to loan or people to borrow.
Contrast the enormous fall in mortgage rates engineered by the buying of 1.25 trillion $ of these securities with the current state of our housing market. Deflation is a real threat. The folks at the Federal Reserve are justifiably worried about this issue. Look at a chart of the core CPI over the past few years; much more descent leaves us around zero. Simplistically, inflation is too much $ chasing too few goods and deflation is too much debt chasing too little cash flow. Following a two decade debt binge, I think the latter scenario most accurately describes our current plight. So the question becomes, will more $ printing reverse this trend. I doubt it. To date, money has recirculated back to the Fed in the form of bank reserves and abroad where growth opportunities exist. Large corporations are flush with cash but they're not spending. This experiment has been tried before in Japan and the inflation rate has become mired at a negative 1% and the ten year JGB yields about 1%.
I know that we're not Japan, but people have been alleging that for the past 5 years despite the progression of the similarities. The critical difference between Japan and the US is that they have savings and a capital surplus that allows them to fund their burgeoning debt. We're dependant on the kindness of strangers. What to make of these opposing forces? I think that the key, independant variable is the $. The last default of US sovereign debt was created by FDR in 1933 when he halved the value of the $ relative to gold. Our government is determined to undermine the value of our currency. The obvious salubrious effects will be an edge to our exports, raising nominal wealth in the financial markets, a perception of inflation. This policy could have untoward effects, however in igniting an allout currency war and an abrupt rather than gradual fall in the value of the $. Once again, the US defaults on its debt via a significant devaluation of the value of its debts.
At some point, the strangers who fund our debt will no longer be friendly. I have maintained for some time that the US Treasury market is the greatest bubble in human history and the issue is not if but when it deflates. Therefore, I am awaiting the appearance of the 2013 options of TBT. In the interim, I am investing in issues which should hold up in a rising interest rate environment: floaters, junk, converts Canadian oil trusts and pipelines.
-Guga
The Great Disconnect
September 24, 2010
I have been asked recently about my failure to blurt out my observations of life, the economy and the financial markets recently, but frankly, I have been puzzled. No more; often wrong but never in doubt! I will title this issue, The Great Disconnect.
The economy and the fate of most Americans is about to diverge from financial markets. Let's start by examining the economic realities, (as I see them). To plagerize shamelessly from PIMCO, we are entering the new normal, at best: low growth, deflation, deleveraging, high unemployment, falling home prices and mindaltering levels of debt. Many thought that I was insane, several years ago when I said that we were heading the way of Japan. We should be so lucky. Remember that when the shit hit the fan in 1990, Japan had a huge current account surplus,(we have an enormous deficit), personal savings,(the American public is pathetically insolvent), and a strong global economy to support it's export driven economy, (Americans consume and do not produce). The majority of Americans naively assume that the federal government holds the keys to reverse this process, if only we could elect the right guys to implement the correct policies.
As I have stated previously, revisionist history leads to widely accepted misconceptions which leads to failed policies. Americans hold FDR, the New Deal, John Maynard Keynes in high regard for ending the Great Depression. For the most part, these policies were abject failures and we owe our recovery to the policies of Adolph Hitler. Nonethless, the Keynsians reign in DC,(as opposed to Europe where they have run out of money), and we await with baited breath, our next stimulus and more quantitative easing. Heaven forbid that markets be allowed to function, to clear the debris of bad debt and overvalued assets.
Americans, a profoundly illiterate group, know nothing of the Great Depression, let alone the economic history of the nineteenth century. We had economic calamities in the 1820's, 1830's 1870's 1890's and early 1900's. Why don't most people know of these events? Because they were relatively short. Why were they short? Because the government did not interfere in the economy. An interesting historical tidbit: Martin VanBuren lost the 1840 election because he refused to intevene in the downturn of the 1830's. Shortly after his loss, the economy returned to vigor. We operated under the principles of Australian economics in the nineteenth century, experienced several viscious short term economic downturns, but were able to create in aggregate, enormous economic growth, employment and a general increase the standard of living for the citizens of the country.
Many of our ancestors, including my grandfather immigrated to the US because it was a global source of jobs. These ramblings are irrelevant; our politicians,(don't doubt that Bernanke is a politician) don't subscribe to free markets and will intervene. Additional stimulus is uncertain given the Nov. elections rendering the Fed more central to the government's push to reinvigorate our economy. The consensus is that they will purchase another trillion bucks worth of Treasuries come November. What effect will this risky strategy accomplish? Sure didn't work in Japan. Conceptually, forcing interest rates down another 25 basis points will allow those who qualify to refinance, improving their monthly cash flow. Theorectically, the cost of capital will decrease for business. The reality is that printing $ will decrease the purchasing power of the $. Will that alleviate our deflationary concerns? Probably not. There will be no wage increases in the face of a glut of labor. The prices of consumer goods will continue to decline given the oversupply of productive capacity. Housing will continue to decline in value,(rental rates, under pressure, make up 1/3 of core CPI.)
What will go up in price as the $ falls? Stuff. Gold, silver, but more importantly, oil, gasoline,copper, iron ore, wheat, soybeans, etc. In short, with high unemployment, stagnant wage growth, the cost of survival, ie. the cost of food and energy, will rise. Conveniently the Fed doesn't include food and oil in their calculations of core CPI. Americans are going to get poorer. Interestingly, the financial markets will do well. If I am completely wrong, the economy takes off, the Fed doesn't intervene, the equity markets will do well.
If I am correct, all financial markets will prosper. The Greenspan put has been replaced by the Bernanke put. Hence the title, the Great Disconect; financial markets will do fine while the American public will suffer.
-Guga
I have been asked recently about my failure to blurt out my observations of life, the economy and the financial markets recently, but frankly, I have been puzzled. No more; often wrong but never in doubt! I will title this issue, The Great Disconnect.
The economy and the fate of most Americans is about to diverge from financial markets. Let's start by examining the economic realities, (as I see them). To plagerize shamelessly from PIMCO, we are entering the new normal, at best: low growth, deflation, deleveraging, high unemployment, falling home prices and mindaltering levels of debt. Many thought that I was insane, several years ago when I said that we were heading the way of Japan. We should be so lucky. Remember that when the shit hit the fan in 1990, Japan had a huge current account surplus,(we have an enormous deficit), personal savings,(the American public is pathetically insolvent), and a strong global economy to support it's export driven economy, (Americans consume and do not produce). The majority of Americans naively assume that the federal government holds the keys to reverse this process, if only we could elect the right guys to implement the correct policies.
As I have stated previously, revisionist history leads to widely accepted misconceptions which leads to failed policies. Americans hold FDR, the New Deal, John Maynard Keynes in high regard for ending the Great Depression. For the most part, these policies were abject failures and we owe our recovery to the policies of Adolph Hitler. Nonethless, the Keynsians reign in DC,(as opposed to Europe where they have run out of money), and we await with baited breath, our next stimulus and more quantitative easing. Heaven forbid that markets be allowed to function, to clear the debris of bad debt and overvalued assets.
Americans, a profoundly illiterate group, know nothing of the Great Depression, let alone the economic history of the nineteenth century. We had economic calamities in the 1820's, 1830's 1870's 1890's and early 1900's. Why don't most people know of these events? Because they were relatively short. Why were they short? Because the government did not interfere in the economy. An interesting historical tidbit: Martin VanBuren lost the 1840 election because he refused to intevene in the downturn of the 1830's. Shortly after his loss, the economy returned to vigor. We operated under the principles of Australian economics in the nineteenth century, experienced several viscious short term economic downturns, but were able to create in aggregate, enormous economic growth, employment and a general increase the standard of living for the citizens of the country.
Many of our ancestors, including my grandfather immigrated to the US because it was a global source of jobs. These ramblings are irrelevant; our politicians,(don't doubt that Bernanke is a politician) don't subscribe to free markets and will intervene. Additional stimulus is uncertain given the Nov. elections rendering the Fed more central to the government's push to reinvigorate our economy. The consensus is that they will purchase another trillion bucks worth of Treasuries come November. What effect will this risky strategy accomplish? Sure didn't work in Japan. Conceptually, forcing interest rates down another 25 basis points will allow those who qualify to refinance, improving their monthly cash flow. Theorectically, the cost of capital will decrease for business. The reality is that printing $ will decrease the purchasing power of the $. Will that alleviate our deflationary concerns? Probably not. There will be no wage increases in the face of a glut of labor. The prices of consumer goods will continue to decline given the oversupply of productive capacity. Housing will continue to decline in value,(rental rates, under pressure, make up 1/3 of core CPI.)
What will go up in price as the $ falls? Stuff. Gold, silver, but more importantly, oil, gasoline,copper, iron ore, wheat, soybeans, etc. In short, with high unemployment, stagnant wage growth, the cost of survival, ie. the cost of food and energy, will rise. Conveniently the Fed doesn't include food and oil in their calculations of core CPI. Americans are going to get poorer. Interestingly, the financial markets will do well. If I am completely wrong, the economy takes off, the Fed doesn't intervene, the equity markets will do well.
If I am correct, all financial markets will prosper. The Greenspan put has been replaced by the Bernanke put. Hence the title, the Great Disconect; financial markets will do fine while the American public will suffer.
-Guga
Humpty Dumpty and the Broken Economy
August 10, 2010
It's the time of the year when I feel somewhat melancholy because I wish that time could stand still. The climate and natural beauty of Bend are powerfully seductive and everyday is perfect. I live in the here and now and doubt that tomorrow can possibly better than today. That said, I'm grateful that I'm not a citizen of the state of Oregon. Dominated by socialist turds, (ie. progressives or liberals or whatever misleading appellation, they hide behind), we rank right up there in taxation and unemployment. The major political question seems to be do we spend our revenues on trees or welfare. Progrowth, proemployment policies are beyond their limited intellectual capacities. If I want a downer, I read the editorial page of the Oregonian. Thank God for Fox news. But I digress.
In my last discourse, I talked about the notion of deflation and the predictable spinalcord response of quantitative easing by Bernake's buddies on the Fed. To date, neither the initial 2 trillion of money printing, zero interest rates forever , the stimulus nor all the King's men have put Humpty Dumpty together again. In defense of the concept of stimulus, this was no Hoover Dam creating stimulus; PORK to medicaid, unemployment benefits,and most outrageously to maintain the employment of unionized, overpaid, nonproductive state workers. No one can accuse Obama of not delivering to those who own him....the public sector unions. Incidentally, he took good care of his buddies, the trial attorneys by excluding tort reform in Obamacare. Enough proselytizing!
A point about unemployment benefits, if you will permit. Rogoff, in his soon to be classic, This Time is Different, notes that unemployment following a financial crisis if far less severe in developing economies, lacking a welfare system. People withour govt. largess will perform different jobs for less, rather than starve. How many times have we heard that immigrants, legal or otherwise, do the work that American's refuse to perform. Irradicate unemployment benefits and we will simultaneouly cure our unemployment AND immigration problem.
Anyway, where do we go from here? We know what doesn't work. Money printing and borrow and spend seem to have limits. Will additional money printing work? An important point to make at this juncture,is that today's Fed statement indicated that they will use the proceeds of their RMBS payments to purchase Treasuries. Therefore, their balance sheet remains constant and as such does not constitute quantitative easing. It is true that allowing the RMBS to roll off their balance sheet might actually be contractionary.
The problem lies in the future economic news. If, as I believe, economic contraction continues, unemployment remains intractable, the housing market does not recover, Bernake will be under enormous political pressure to do something. At that time, he will be forced to initiate quantitative easing which means printing $ to monetize the debt. Now, the fact is that the process has not worked to date and never worked in Japan. (If Keynsian economics and quantitative easing had merit, Japan would be rivaling China in economic vitality). Consider that the banks have over one trillion $ on deposit with the Fed garnering a modest 0.25%. The problem is not the absence of $. Unfortunately, as noted previously, the Fed controls only M1. Credit markets control M2 and M3 and the absence of credit expansion yields no moneymultiplier effect. Think about it. If you had a trillionbucks and 5 trillion bucks of bad debt, what would you do? The banks are reserving these funds and praying that things improve so that they do not have to realize these losses. So I figure that the $ printing exercise will not obtain the desired effects. What of the unintended consequences? The intentional debasement of our currency will have significant consequences. Stuff, gold, food oil, copper, etc. is denominated in $ and will rise in $ price as the dollar sinks. Therefore, the cost of living increases for the American public. Don't worry because your govt. doesn't include these essentials in calculating the core CPI. The core parameters of inflation, wages, technology prices, real estate, etc. will continue to decline. Deflation in all but the essentials of life will receed. Maybe a burger will cost more than a smart phone. Corporate margins will be squeezed by higher input costs and falling output prices; unemployment will be the natural consequence of falling profit margins. Perhaps, most ominously, our creditors may resist the urge to subsidize our flagrant fiscal irresponsibility. Would you spend perfectly good money to buy the bonds of an entity which is effectively bankrupt and has a receeding currency?
I believe, at risk of being repetitive, that the US Treasury market is the greatest bubble in human history. It's not if but when. In short, I believe that the negatives far outweigh the benefits of quantitative easing. What should the government do? Absolutely nothing. Thank God that after Nov., additional fiscal stimulus will be impossible. We are in the midst of a debt induced process of delevering and liquidation. Allow the free market to transfer debt and assets from weak hands to strong hands. Happened all the time in our economy in the nineteenth century and despite some wild panics,(the subject of a future correspondence), we prospered. Long live the Austrians, say I!
-Guga
It's the time of the year when I feel somewhat melancholy because I wish that time could stand still. The climate and natural beauty of Bend are powerfully seductive and everyday is perfect. I live in the here and now and doubt that tomorrow can possibly better than today. That said, I'm grateful that I'm not a citizen of the state of Oregon. Dominated by socialist turds, (ie. progressives or liberals or whatever misleading appellation, they hide behind), we rank right up there in taxation and unemployment. The major political question seems to be do we spend our revenues on trees or welfare. Progrowth, proemployment policies are beyond their limited intellectual capacities. If I want a downer, I read the editorial page of the Oregonian. Thank God for Fox news. But I digress.
In my last discourse, I talked about the notion of deflation and the predictable spinalcord response of quantitative easing by Bernake's buddies on the Fed. To date, neither the initial 2 trillion of money printing, zero interest rates forever , the stimulus nor all the King's men have put Humpty Dumpty together again. In defense of the concept of stimulus, this was no Hoover Dam creating stimulus; PORK to medicaid, unemployment benefits,and most outrageously to maintain the employment of unionized, overpaid, nonproductive state workers. No one can accuse Obama of not delivering to those who own him....the public sector unions. Incidentally, he took good care of his buddies, the trial attorneys by excluding tort reform in Obamacare. Enough proselytizing!
A point about unemployment benefits, if you will permit. Rogoff, in his soon to be classic, This Time is Different, notes that unemployment following a financial crisis if far less severe in developing economies, lacking a welfare system. People withour govt. largess will perform different jobs for less, rather than starve. How many times have we heard that immigrants, legal or otherwise, do the work that American's refuse to perform. Irradicate unemployment benefits and we will simultaneouly cure our unemployment AND immigration problem.
Anyway, where do we go from here? We know what doesn't work. Money printing and borrow and spend seem to have limits. Will additional money printing work? An important point to make at this juncture,is that today's Fed statement indicated that they will use the proceeds of their RMBS payments to purchase Treasuries. Therefore, their balance sheet remains constant and as such does not constitute quantitative easing. It is true that allowing the RMBS to roll off their balance sheet might actually be contractionary.
The problem lies in the future economic news. If, as I believe, economic contraction continues, unemployment remains intractable, the housing market does not recover, Bernake will be under enormous political pressure to do something. At that time, he will be forced to initiate quantitative easing which means printing $ to monetize the debt. Now, the fact is that the process has not worked to date and never worked in Japan. (If Keynsian economics and quantitative easing had merit, Japan would be rivaling China in economic vitality). Consider that the banks have over one trillion $ on deposit with the Fed garnering a modest 0.25%. The problem is not the absence of $. Unfortunately, as noted previously, the Fed controls only M1. Credit markets control M2 and M3 and the absence of credit expansion yields no moneymultiplier effect. Think about it. If you had a trillionbucks and 5 trillion bucks of bad debt, what would you do? The banks are reserving these funds and praying that things improve so that they do not have to realize these losses. So I figure that the $ printing exercise will not obtain the desired effects. What of the unintended consequences? The intentional debasement of our currency will have significant consequences. Stuff, gold, food oil, copper, etc. is denominated in $ and will rise in $ price as the dollar sinks. Therefore, the cost of living increases for the American public. Don't worry because your govt. doesn't include these essentials in calculating the core CPI. The core parameters of inflation, wages, technology prices, real estate, etc. will continue to decline. Deflation in all but the essentials of life will receed. Maybe a burger will cost more than a smart phone. Corporate margins will be squeezed by higher input costs and falling output prices; unemployment will be the natural consequence of falling profit margins. Perhaps, most ominously, our creditors may resist the urge to subsidize our flagrant fiscal irresponsibility. Would you spend perfectly good money to buy the bonds of an entity which is effectively bankrupt and has a receeding currency?
I believe, at risk of being repetitive, that the US Treasury market is the greatest bubble in human history. It's not if but when. In short, I believe that the negatives far outweigh the benefits of quantitative easing. What should the government do? Absolutely nothing. Thank God that after Nov., additional fiscal stimulus will be impossible. We are in the midst of a debt induced process of delevering and liquidation. Allow the free market to transfer debt and assets from weak hands to strong hands. Happened all the time in our economy in the nineteenth century and despite some wild panics,(the subject of a future correspondence), we prospered. Long live the Austrians, say I!
-Guga
Wednesday, April 27, 2011
OPM (Other's People Money)
July 21, 2010
These are fascinating times for noneconomists to observe the battle of economic philosophies. We love John Maynard Keynes here in the states. No fiscal stimulus, no matter how inept or costly is to be maligned. Deficits don't matter. Markets are erratic and corrupt; trust in your elected politicians and their desgnated hacks, I mean regulators. No pain for the electorate is tolerable. The Europeans and particularly the British have had it with John Maynard. Dutifully following his precepts have lead to insolvency. Screw stimulus! For that matter, screw entittlements. These fools are going to start paying their bills!
Severe austerity is the word on the eastern shores of the Atlantic. Socialism is being decomissioned. As noted previously, Socialism doesn't work; it fails when you run out of other people's money. Horrors say our esteemed Keynsian economists like Paul Krugman. Paying your bills in the face of a recession is countercylical. This deplorable strategy will lead from recession to depression. Instead say they, these brilliant academics, the solution to a debt-induced delevering economic slowdown is to borrow and spend your way to prosperity. I guess we'll see who's right. The US will borrow and spend and the Europeans will cut and save. Interestingly, this is not the only time when countries in distress have adopted different solutions to their problems. In the early 90', Japan was entering it's eternal deflationary depresssion. Non other than our very own Ben Bernanke jetted across the Pacific to tell them exactly what to do: quantitative easing,(money printing), and fiscal stimulus. They followed his advice to the letter, over and over again. Consequence: deflationary depression. The Canadians were in deep dodo at the same time; bad economy and burgeoning public debt. They took the European approach; cut spending, reduced entittlements and endured the subsequent pain. They got a hell of a recession, significant unemployment but inabout 3 years the lights went on and with their fiscal situation solid, have emerged arguably the best economy of the G7.
Gentle Ben hates deflation! Back in 2003, with the CPI at 1.8%, while riding shotgun for Greenspan,(The Maestro), they took the discount rate to 1% for fear of deflation following the busting of the tech bubble. Net result: the housing bubble. Now, the CPI is 1% less than that prior alarming number, you can bet that old Ben is having some sleepless nights. Cann't lower interest rates because they're already zero. What to do? Quantitative easing!
Not so fast say I. Why not? Because it won't work. It won't work because the US has entered a liquidity trap. Remember the IS curve from your Econ 101? A downward sloping curve with interest rates as the independent variable and output as the dependent variable. The point is that declining interest rates lead to rising production. Alas, what happens when interest rates are zero and so is production/employment/housing/etc. At that point, the Fed is pushing on the proverbial string; it's out of bullets. The Japs repeatedly tried it; it didn't work. What's left; more fiscal stimulus from a bankrupt federal government? I say that the bond market has got it right; ever declining yields strongly suggest minimal economic growth and the spectre of deflation. The equity market will join the party, on the downside in time. This country, unfortunately has a flawed economic model. It's based on consumption fueled by credit(debt). We are in a multiyear process of delevering debt, liquidation of bad debt and contraction of credit. We can take the hit quickly or draw it out but wecann't escape it. The Fed controls short term interest rates; the market controls long term rates. The Fed controls the monetary base(M1) but the credit markets control M2 and M3, both of which are shrinking. Galactic levels of bad debt are in essance, the black hole of $.
-Guga
These are fascinating times for noneconomists to observe the battle of economic philosophies. We love John Maynard Keynes here in the states. No fiscal stimulus, no matter how inept or costly is to be maligned. Deficits don't matter. Markets are erratic and corrupt; trust in your elected politicians and their desgnated hacks, I mean regulators. No pain for the electorate is tolerable. The Europeans and particularly the British have had it with John Maynard. Dutifully following his precepts have lead to insolvency. Screw stimulus! For that matter, screw entittlements. These fools are going to start paying their bills!
Severe austerity is the word on the eastern shores of the Atlantic. Socialism is being decomissioned. As noted previously, Socialism doesn't work; it fails when you run out of other people's money. Horrors say our esteemed Keynsian economists like Paul Krugman. Paying your bills in the face of a recession is countercylical. This deplorable strategy will lead from recession to depression. Instead say they, these brilliant academics, the solution to a debt-induced delevering economic slowdown is to borrow and spend your way to prosperity. I guess we'll see who's right. The US will borrow and spend and the Europeans will cut and save. Interestingly, this is not the only time when countries in distress have adopted different solutions to their problems. In the early 90', Japan was entering it's eternal deflationary depresssion. Non other than our very own Ben Bernanke jetted across the Pacific to tell them exactly what to do: quantitative easing,(money printing), and fiscal stimulus. They followed his advice to the letter, over and over again. Consequence: deflationary depression. The Canadians were in deep dodo at the same time; bad economy and burgeoning public debt. They took the European approach; cut spending, reduced entittlements and endured the subsequent pain. They got a hell of a recession, significant unemployment but inabout 3 years the lights went on and with their fiscal situation solid, have emerged arguably the best economy of the G7.
Gentle Ben hates deflation! Back in 2003, with the CPI at 1.8%, while riding shotgun for Greenspan,(The Maestro), they took the discount rate to 1% for fear of deflation following the busting of the tech bubble. Net result: the housing bubble. Now, the CPI is 1% less than that prior alarming number, you can bet that old Ben is having some sleepless nights. Cann't lower interest rates because they're already zero. What to do? Quantitative easing!
Not so fast say I. Why not? Because it won't work. It won't work because the US has entered a liquidity trap. Remember the IS curve from your Econ 101? A downward sloping curve with interest rates as the independent variable and output as the dependent variable. The point is that declining interest rates lead to rising production. Alas, what happens when interest rates are zero and so is production/employment/housing/etc. At that point, the Fed is pushing on the proverbial string; it's out of bullets. The Japs repeatedly tried it; it didn't work. What's left; more fiscal stimulus from a bankrupt federal government? I say that the bond market has got it right; ever declining yields strongly suggest minimal economic growth and the spectre of deflation. The equity market will join the party, on the downside in time. This country, unfortunately has a flawed economic model. It's based on consumption fueled by credit(debt). We are in a multiyear process of delevering debt, liquidation of bad debt and contraction of credit. We can take the hit quickly or draw it out but wecann't escape it. The Fed controls short term interest rates; the market controls long term rates. The Fed controls the monetary base(M1) but the credit markets control M2 and M3, both of which are shrinking. Galactic levels of bad debt are in essance, the black hole of $.
-Guga
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