Financial topics

[Higgenbotham]

http://www.marketwatch.com/story/paulso ... genumber=2

Alternate view on inflation:

Paulson said Wednesday that the firm still expects inflation in coming years and hasn't changed its position on gold, which is seen as a good hedge against strong inflation.

Through quantitative monetary easing, the U.S. government has increased the monetary base by roughly 150% since before Lehman Brothers Holdings Inc. collapsed, Paulson said.

Excessive growth in the monetary base over real economic growth creates inflation, he argued. "Unless this can be removed, it's likely to find its way into the money supply and hence inflation. We haven't changed our view."

Inflation will take a while to develop, but in three to seven years, Paulson added, he expects to see higher rates of inflation.

For the money supply to expand, there has to be economic growth and banks have to expand their assets while unemployment falls, Paulson noted. "But that's what's happening now. I wouldn't be surprised to start seeing signs of money-supply growth in coming months."

And (from page 1 of the story) Greece:

Paulson added he was concerned about a potential double-dip recession and a possible default by a Southern European nation. "I'm currently much less concerned that either those two issues will happen."

Greece's problems are much better understood now and are being dealt with, he commented.

[JLak]

In the Weimar example, Germany was required to pay annual reparations
to France and other countries. Those reparation amounts were
denominated in marks, and so they could be paid simply by printing
more marks, thus creating hyperinflation.

This is not true (http://en.wikipedia.org/wiki/London_ultimatum). Conversely, I would argue that the US situation is different because we CAN inflate out of foreign debt WITHOUT hyperinflation. Just watch as the combination of the carry trade and quantitative easing wipe out our foreign debt.
Our other unfunded liabilities that Bernanke speaks of, however, are a lot like gold debt and far larger as a fraction of GDP, but the difference is that we owe them to indolents, invalids and geriatrics, while they owed them to militarized states that ended up seizing their industrial lands. In addition, CPI lags well behind base inflation (analogous to 1920s gold price), so maybe we can take care of this too with fairly mild base inflation. On the other hand, if we start selling alternative debt denominations to pay for social programs, we're screwed in exactly the same way.

compare what the US does today to what Germany did in the 1930s, and
compare what China does today to what the US did in the 1930s

Two years ago on your suggestion I read "The Bubble that Broke the World." I recall the author blaming the 1929 crash on the German bond market because we were basically paying their reparations for them as they ran up huge debts in a vicious cycle, this time in more stable currency. The 30s were simple: their government defaulted, failed, and became socialist because it couldn't sell bonds, and the rest of the world wrote off the bond losses in a massive deflation.
I think this scenario roughly encompasses the fears of the average American Tea-Partier today.

I think Bernanke has it dead wrong

This I have to disagree with. When he speaks, think to yourself, "If I were in his position, and my goals were his, what would I say if the exact opposite were true." This is how I came to the belief that the man really is a genius, and truly knows far more about the real situation than any of the pundits. I might amend your statement to read: "I think what Bernanke 'says' is dead wrong."

The lack of liquidity is a symptom of a larger problem and that is that the system is operating at a loss.

I wouldn't say that there is a 'lack' of liquidity: http://research.stlouisfed.org/fred2/se ... BR?cid=123.
There is, however, a 'fear' of a lack of liquidity based on those losses, and interest rates are too low to provide incentive to lend.
In my understanding, this is really interesting because we're creating an economic bomb that will explode once critical mass is reached. For now, the large excess reserves hold interest rates down, which inhibits lending, which inhibits inflation, which holds asset prices down, which creates losses, which makes the banks respond by holding even more excess reserves. (Japan has been operating like this for 20 years, so I could be wrong about the next part.) It will appear that quantitative easing is only making the situation worse, but once the excess reserves get large enough so that the largest bank can inflate their own balance sheet out of losses, they will release the money. (The rest is pure fantasy) As the other banks follow, there will be madness as investors chase rising asset prices with low call rate money. Treasuries will fall precipitously as dollars flood into risky worldwide markets and the fed will be politically forced to buy them up, throwing even more fuel into the fire in a vicious cycle. Gas, and housing will rise while salaries stay flat and we lose jobs even faster in the great restructuring as Krugman realizes that inflation doesn't create jobs. Working Americans realize that they are better off on the government dole and call for greater entitlement spending. GDP drops as inflation rises. China hastens their inflation to keep pace and maintain dependency. Economists are stunned; Marxists are not. America divides into two factions: Chimerica, and the rebels supported by their former enemies, the oil-rich states of the Middle East and Russia. World war ensues, and eventually an armistice is called and the US is broken up into 4 sovereign states by treaty. (I have to indulge this sort of flapdoodle every once in a while)

[The Grey Badger]

You say that John Williams is "a respected PhD economist." So did he post this graph because he doesn't understand exponential growth, or
did he do it to intentionally deceive? Is he a moron or a liar?

The non-log chart makes a strong point. There was no net inflation until the Federal Reserve act of 1913. There was strong inflation ever since. The log chart you posted shows the same thing - even during the depths of the depression the price level didn't get back to where it was 15 years earlier.
[snip]

As far as the credibility of Williams goes, I don't think you're in a strong position to knock it. He posts numbers and graphs along with his calculations every week showing measured aspects of the economy. You on the other hand have an interesting but completely untestable theory. You are very tenuous in finding news from around the world which supports your theory, and that's what makes your site interesting to me. But you completely ignore anything which doesn't match your preconceptions, which is why I certainly wouldn't rely on your predictions for my own security and prosperity.

Oh, DO borrow and read Fischer's Long Wave - it goes into that, and runs the data clear back into the 13th century. The gist of it -- we get these waves of inflation driven by the same mechanism as the bubbles but on a longer scale. Then we get long periods of more-or-less price stability. Then people start easing up because their prosperity feels certain and eternal, and prices start slowly rising ... insert entire 20th century here ...or much of the 18th (bubble bursting ~early 1800s) and repeat. Prices always settling down at a higher level than at the end of the last wave, but then, so has the population.

IT is a capital error to theorize from only the contemporary portion of a long cycle. Somewhat similar to saying our current recession is unprecedented because "ever since 1980...."

[browner55]

John,

I heard an interesting comment from an analyst regarding the Euro. He compare the fiscal difficulties of our states (using Illinois as an example) with respect to the Dollar to those of Greece and the Euro. He said that budget problems in the states will have a similar effect of the dollar. My opinion is that he is not comparing apples to apples, as Greece is a country. Members of the European "Union" are not as friendly with each other as the states within our Union. What are your thoughts? Also, however, we did of course have the Civil War. I wonder if Southern and Northern states within our Union will have any trouble bailing each other out....

[John]

> I heard an interesting comment from an analyst regarding the
> Euro. He compare the fiscal difficulties of our states (using
> Illinois as an example) with respect to the Dollar to those of
> Greece and the Euro. He said that budget problems in the states
> will have a similar effect of the dollar. My opinion is that he is
> not comparing apples to apples, as Greece is a country. Members of
> the European "Union" are not as friendly with each other as the
> states within our Union. What are your thoughts? Also, however, we
> did of course have the Civil War. I wonder if Southern and
> Northern states within our Union will have any trouble bailing
> each other out....

I suppose the test case would be California or Michigan, but I think
any attempt to bail out either of those states, or any state, would
meet with overwhelming political opposition.

By the way, yields on Greek 10-year bonds just spiked from about 9.5%
to over 10% in the course of a couple of hours.

John

[VinceP1974]

One difference between the relationship of Germany , Greece and the EU and that of the US States is that the EU treaty specifically prohibits one nation state from bailing out another nation state.

[JLak]

One difference between the relationship of Germany , Greece and the EU and that of the US States is that the EU treaty specifically prohibits one nation state from bailing out another nation state.

The euro is a multilateral fiat from an independent central bank. I would say that the above and other stipulations of the ECB charter actually make a strong case for the survival of the Euro despite the eventual failure of the European states, while I don't think the fed has the same inherent resistance to unilateral political will. Given this theoretical strength, I'm a little bit puzzled by recent lack of strength, but I'd say that it's a confidence problem and will swing wildly the other way with massive untempered deflation at the first true state default (Greece?).

Does Europe have it right for once? That doesn't sit well with me, but I may have to admit it.

[VinceP1974]

One difference between the relationship of Germany , Greece and the EU and that of the US States is that the EU treaty specifically prohibits one nation state from bailing out another nation state.

The euro is a multilateral fiat from an independent central bank. I would say that the above and other stipulations of the ECB charter actually make a strong case for the survival of the Euro despite the eventual failure of the European states, while I don't think the fed has the same inherent resistance to unilateral political will. Given this theoretical strength, I'm a little bit puzzled by recent lack of strength, but I'd say that it's a confidence problem and will swing wildly the other way with massive untempered deflation at the first true state default (Greece?).

Does Europe have it right for once? That doesn't sit well with me, but I may have to admit it.

Well the rule is a good one.. but all indications are a big faction of the people involved with this want the rule broken. So I think it's the breaking of the rule that will be troublesome.

[gerald]

A bit off the deep end, from "zerohedge"

Alfred Pennyworth: A long time ago, I was in Burma, my friends and I were working for the local government. They were trying to buy the loyalty of tribal leaders by bribing them with precious stones. But their caravans were being raided in a forest north of Rangoon by a bandit. So we went looking for the stones. But in six months, we never found anyone who traded with him. One day I saw a child playing with a ruby the size of a tangerine. The bandit had been throwing them away.
Bruce Wayne: Then why steal them?
Alfred Pennyworth: Because he thought it was good sport. Because some men aren't looking for anything logical, like money. They can't be bought, bullied, reasoned or negotiated with. Some men just want to watch the world burn.

http://www.imdb.com/title/tt0468569/quotes

[mannfm11]

I believe there is a total misunderstanding of what the Fed did. It provided credit to banks that had no reserves when it bought the assets. The banks were already liable and most of the big ones couldn't pay each other and the smaller banks that received the proceeds of their loans. Minsky said that the banking system had basically run out of treasuries to sell for cash in the early 1970's and had gone to other means to create credit amongst themselves. Basically by borrowing in large sums in the form of negotiable CD's and other stuff. I am sure they were using repos as well within the system and not with the fed. The cash on the Fed balance sheets is in the matresses of third world countries and within the country as well. A large portion of the country has been disenfranchised from the banking system and has to hold currency instead of bank accounts. The first trillion basically didn't exist as any kind of reserves. Bank IOU's don't constitute reserves at all.

The second topic seems to be the Euro, which is a currency of a bank in Europe and not a country. There is no comparison to the states in the US. The lynchpin in Europe and with the Euro is Germany. If Germany begins to believe that it will be continually miked to keep the system together, it will withdraw and go back to marks. There is no dance in the Euro without Germany and the mark would become what the Euro is currently. Being that the Swiss and Great Britain stayed out of it in the first place, tha leaves France, not exactly the economic juggernaut of the world and the Euro fades away as anything other than the former French franc at best. France cannot support demand in the weaker countries.

Some of the broker states are in much the same shape as Greece, being looted by their public unions. It is very unlikely there will be much inflation, as the main driver of demand is phony financing around the world, not demand itself. Commodities are being gamed by the financial powers like Goldman and by the building of structures in China that there exists very little demand. None of that will last long.

The current bubble is bonds. The only thing supporting the US economy in the way of demand is deficit spending in the amount of roughly 10% GDP. Even so, we are still seeing deep recession job losses, contrary to what is being reported. Though the housing data sounded bullish today, prior to this bust, 401,000 units were the fewest ever sold in a year, when interest rates were 14% plus in 1981. Plus, we are talking seasonally adjusted and March is not the raging home sales month of the year. 460,000 is the most recent 4 week moving average of unemployment claim filings. Sure there was a large decline of long term benefit receipients, but I suspect it was caused by benefits running out,not by hiring. If you check you will find that 349K was the high water mark, save the Katrina disaster coming into 2008. There is no way we are adding jobs when unemployment is being filed at an annual rate of over 5.7 million above a moderate expansion.

Lastly, I will tell you what the money in the system is. Most think it is the currency, but it is the assets on the balance sheets of the banks. There can be no more money than that. There is all this talk of gold, like it is worth something and everything else is worthless. When it is 20 degrees and the wind is blowing 40 MPH, what is worth more, the roof over your head or a gold coin? Most of us wouldn't spend a couple of nights roughing it on the streets of their city for a gold coin.