Financial topics

[malleni]

...

For instance, you concluding that EU may see deflation, but US will see hyperinflation, when the conditions in both areas are similar.

That is in my point of view and of course - using the same sources as you (or anybody on forum) could use i.e. the Net - absolutely wrong "conclusion" you made.
The "conditions" between EU and US are so different that it actually "search" a new topic, but I promise you - I explain (certainly, in my point of view) on the "Financial topics".

So as I promised to you I would try to explain in my point of vuew those differences between US and EU.
Actually I already tried in short on the previous discussion, but this time would be more in detail:

1. ECB vs FED mandate
ECB has NO mandate to bail out any of the countries or banks (as the meter of facts)... Simply - the Maastricht Treaty as base for the European Union prohibits the "stimulus injections" by purchasing the government debt of the eurozone's member states.
http://www.eurotreaties.com/maastrichtext.html
in short:
http://en.wikipedia.org/wiki/Maastricht_Treaty
So... ECB, in difference to FED has just one mandate according this treaty - to fight inflation.
There were hard fight in PARIS, May 7:
http://www.guardian.co.uk/business/feedarticle/8513677
You can find in this article some information about quantitative easing (i.e. money printing) which happened last months in EU.
Apparently FED has no such restrictions.

2. Money printing i.e. buying of Treasuries ECB vs. FED
Obviously that was very difficult to find a "minimal consensus on " between member states on this isue.
This minimal consensus consider: "the bank cut its key interest rate by 25 basis points to 1.0 percent and said it would for the first time buy 60 billion euros in covered bonds.
Until now - ECB did not start to buy any of this bonds and in mean time very strong disagreement from Germany become even stronger...
" The ECB's security purchases will amount to just 0.6 percent of the euro zone's Gross Domestic Product, compared with 9 percent in Britain and 12 percent in the United States..."
But even with so small amount as 0.6% of GDP - the resistance is huge...Even from political side:
- Merkel critical of central banks
http://www.bostonherald.com/news/intern ... 7&srvc=rss

On the other side FED (US) has already bought 430 billion mortgage backed-securities and $123 billion treasuries.... (for now!)

3. Exit strategy ECB vs FED
"... inflation hawks want the ECB to agree on an exit strategy from monetary easing even before starting asset purchases ."
Obviously poor ECB President Jean-Claude Trichet - must think even about it.
Mr. Bernanke has no such problem... Simply, the US (FED) has no exit strategy.

4. Difference in economy Eu vs US
The large parts of EU (especially Germany) but even France (and Austria ) are still very productive and making real goods. The danger existed couple years ago that Germany copied "US model" and would outsource everything - but fortunately this bad trend is broken and for example Germany is still one of the biggist exporter of high quality goods.
US on the other side not only outsourced almost everything and transformed its economy in a stupid "debt based consumer spending economy".
You can only imagine where will the impact of State securities can make more damage...
On US economy, of course.

5. Organizational problem
ECB in difference to FED must search for "a minimal consensus" of ALL member states.
This automatically implied a big problem to make a decision which at least one country strongly - dislikes.
In this case Germany - since they have very fresh picture about Wiemar Germany in 1930-ties.

FED has much less bureaucracy and easy way to make any decision they want... Congress or Senate are not any kind of problem since FED need not to explain them anything to them.
Somebody put this video here and perhaps in case you did not see it:
http://www.youtube.com/watch?v=PXlxBeAv ... r_embedded
Anyway, not everything is bad in US.
It looks like now Obama administration decided to "check" little bit more what FED did... (finally!)http://www.bloomberg.com/apps/news?pid= ... refer=news
BUT to avoid this kind of disgrace (Somebody put this video here and perhaps in case you did not see it:)
http://www.youtube.com/watch?v=PXlxBeAv ... r_embedded
FED decided to prevent it and hire a professional lobbyist:
http://www.bloomberg.com/apps/news?pid= ... M&refer=us

6. State finances, debt, budget deficit, trade deficit with China...
It was already quite much of this material here too, but in short:
- yes, some member states of EU (Spain, Ireland, Greece for example) will suffering quite much next couple years. To be honest even other EU members are prepared to suffer. As said too - not only that they are prepared on it - they do not want (can not!) to implement "money printing" neither. Those countries were fiscally reckless and are now burdened by huge amount of debt. They want to print away their problems but Germany will never allowed it on "FED way".
- In difference to US the EU HAS already developed social system net for all citizens as well as medical care for everybody! With other words - EU member can only try to prepare citizens on "impact" and try to make it - soft.
- deficit with China is low in comparison with US which opening EU more possibilities.
On the other side huge (never decreasing!) US trade deficit with China - dragging US just deeply down. It is impossible burden for both countries, but for me is it quite obvious what will happen.
Namely - Each dollar China earn in US is transformed in fresh printed Yuan. Without trade deficit (and dollar peg) - nothing will happened!
Since enormous trade deficit with China (about 40 billions/ month!) - China accumulated enormous dollar reserves with time...
On the other side, Chinese government (Central bank) is printing more money to "fill up" this difference.
While China's ability to keep accumulating US reserves is endless, its ability to keep its money supply under control is not.
We already here discusses a possibility of hyperinflation in China.... It looks now that at least inflation is underway there:
http://www.chinadaily.com.cn/bizchina/2 ... 960254.htm
http://news.xinhuanet.com/english/2009- ... 466512.htm
http://www.chinadaily.com.cn/bizchina/2 ... 960103.htm
http://news.xinhuanet.com/english/2009- ... 391213.htm
http://www.chinadaily.com.cn/bizchina/2 ... 950156.htm

You can imagine what China regime will do in situation "out of control" inflation to choose:
1. to save the dollar or
2. to save themselves?

As conclusion:
This is (in my point of view), besides "destruction of confidence" in dollar - a main reason for high possibility of strong inflation in US (and perhaps even dollar destruction)
On the other side you could understand that ECB and EU have little possibility to inflate... (even less than US had in 1930ties)... That is the main reason to believe that near future of EU is strong - deflation.

[kochevnik]

John - big props for your post today - I think you nailed it pretty well. I think you handled the whiner pretty well too Gee what a surprise - someone sends a nasty gram blaming YOU for the mistakes that they alone are responsible for - I can't believe there are people like that out there today /sarcasm.

I agree with you that the BEST CASE scenario is that we are mimicking 1929-1932. Here is a good chart of that period with the 200 MA :

http://www.marketmonograph.com/a/goodma ... rf1929.gif

If you notice it pings off that 200 MA till it hits bottom. I think today's market could possibly be the same. We hit 932 about a month ago (May 8th I believe) and now are at 940 with an intraday pop up to 948 or so on the SPX). The 200 MA is now around 922 right now so we are just over it a bit :

http://tinyurl.com/pr9zrz

Comparing the two charts, and the fact that we have gone only about 10 points up in a month PLUS the fact that the bond market has had a dislocation in the last week - I'ds say all of these could portend the break downward I have been waiting for. I'm significantly short /ES right now so talking my book of course If we mimic 1929 we should see a temporary bottom at about 20 percent of the top which would be about 300 SPX - clearly not out of the question considering we were down at 666 just 3 months ago. Another little data point - we have now retraced the ENTIRE move from 940 to 666 and back to 940 again. And add a nice double top now and at the beginning of 2009.

Could we go up some more from here - sure - anything is possible when Goldman Sachs is responsible for 30+ percent of daily market volume. But I would have to say with the stall that has just occurred plus the 50+% rise in 10year rates in the last few months, we could be at a turning point.

We WILL go well under 666 again - I have no doubt in that regard. Jenga structures ALWAYS collapse. The only question is how high they get before they do.

kochevnik

[aedens]

I think you are forgetting a couple of basic economic principles. First of you are missing the second half the major economic equation: Supply (production) needs Demand (consumption). Just because somebody is not on the production end, doesn't mean they are not contributing to the economy. Capital flow is very important, and producers need to see return for their production. Secondly, Labor is not the only factor of production. The three factors of production are Land (natural resources), Labor (I include entrepreneurship in Labor), and Capital (or capital Goods). When you work, invest, use (or let others use) your resources (for production or consumption), or consume, then you are contributing to the economy.
It is also important to remember that the way we fund many of the social programs, and the poor tax structure in the US is as big a part of it. Though many of the programs could use an overhaul, have better alternatives, or should just be eliminated.
So called free market basic above..... scary and typical today
So many holes I will try to boil it down and the current warped GeoPolital view I see to date we work in to brief.

VATs = Expanding Corruption as we know and see it is self evident. Or name one thing do date they have done right
in Washington, Berlin, or Moscow over the last 15 years other than waste true capital and what is there key word to date? Capitalization

The deadweight loss will be the economic benefit forgone and grow by more customers due to the monopoly pricing being fostered as we speak. The main use of indifference curves is in the representation of potentially observable demand patterns for individual consumers over commodity bundles(consumption). The theory of indifference curves was developed by Francis Ysidro Edgeworth, Vilfredo Pareto and others in the first part of the 20th century. The theory can be derived from ordinal utility theory, which posits that individuals can always rank any consumption bundles by order of preference. The general stress on forward shifting, and neglect of backward-shifting, in economics, is due to the disregard of the Austrian theory of value, and its insight that market price is determined only by the interaction of an already produced stock, with the subjective utilities and demand schedules of consumers for that stock. The market supply curve, therefore, should be vertical in the usual supply-demand diagram. The standard Marshallian forward-sloping supply curve illegitimately incorporates a time dimension within it, and it therefore cannot interact with an instantaneous, or freeze-frame, market demand curve. The Marshallian curve sustains the illusion that higher cost can directly raise prices, and not only indirectly by reducing supply. And while we may arrive at the same conclusion as Marshallian supply-curve analysis for a particular excise tax, where partial equilibrium can be used, this standard method breaks down for general sales taxation. The standard held up by these economists, a standard apparently so self-evident as to need no justification, was that the sum of tax changes be "revenue neutral." But they never told us what is so great about revenue neutrality. And of course, by cleaving to such a standard, the crucial question of total revenue was deliberately precluded from the discussion. In their original Laffer-curve manifestation, now happily consigned to the dustbin of history, the supply-siders maintained that the tax rate that maximizes tax revenue is the "voluntary" rate, and a rate that should be diligently pursued. It was never pointed out in what sense such a tax rate is voluntary or what in the world the concept of "voluntary" has to do with taxation in the first place. In their form to ever instruct us why we must all uphold maximizing government revenue. Surely, for free-market proponents, one might think that minimizing government depredation of the private product would be a bit more appealing. On the contrary later, Say declares, "the value paid to government by the taxpayer is given without equivalent or return; it is expended by the government in the purchase of personal service, of objects of consumption." Say goes on to denounce the "false and dangerous conclusion" of economic writers that government consumption increases wealth. Say noted bitterly that "if such principles were to be found only in books, and had never crept into practice one might suffer them without care or regret to swell the monstrous heap of printed absurdity." But unfortunately, he noted, these notions have been put into "practice by the agents of public authority, who can enforce error and absurdity at the point of a bayonet or mouth of the cannon. Writes Say: Taxation deprives the producer of a product, which he would otherwise have the option of deriving a personal gratification from, if consumed . . . or of turning to profit, if he preferred to devote it to an useful employment. . .
J. B. Say's policy recommendation was crystal clear and consistent with his analysis. "The best scheme of public finance is, to spend as little as possible; and the best tax is always the lightest." Given the context of the day where is capital going? Obviously the wrong way is it not given the facts to date. Name one fact where the Government is efficient. It is not or will be given over misnomers we see ensuing today. Eventually, the government spends the money on its own needs, so that "in the end . . . this value is consumed; and then the portion of wealth, which passes from the hands of the taxpayer into those of the tax-gatherer, is destroyed and annihilated." Say sees that taxation creates two conflicting classes, the taxpayers and the tax-gatherers. Were it not for taxes, the taxpayer would have spent his money on his own consumption. Firmly, if people seen the fact from the fiction to VAT in due proper context it would be not be a thought in a free society. The understanding is a lost focus as to capital and labor having core responsibilities. Here I will digress to a previous post.

US Business = Rent-dissipation. It describes what happens when possible investment capital is invested in the political class rather than on customers as we see unabated. When this happens, the wealth creation process is hampered considerably. So can we agree to disagree on the current path but observe how we can and could (and probably should) bounce in time. The story will be it does not matter if the cat is black or white but which one catches the mouse and the CCP told us this point blank. If you have noticed
Putin who is pushing VAT also has followed on scope and size if you make the grade. The non producing elements of Leviathan “are tested and graded” as such to be viable in there Capital shift markets “note see it on there production and currency direction”. Lately, Hill policy is play both sides of the “economic” fence since they are the Broker of last resort and they let this mess escalate by capital theory misnomers which Hayek clearly warned us to. Winners and Loser’s which clearly the consumer should have “are” controlled since Government is the problem, and should be only in the defense business to basic security issues. From peer review to date we see predicated business cycle being rents and demand’s soft on existing GeoCorporate accounts moving forward. In a historical context the irony is the renowned British economist John Maynard Keynes, concluded his famous book, The General Theory of Employment, Interest and Money, which was published in 1936: "The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist." Keynes also told somewhat said verbatim, yes this is true and countered with go send your children to the mines. The irony is they mined debt “FEDS also” and will walk away as we are the bag holders in servitude as the road to serfdom “Hayek”. Remember the story of the mule that paid attention only after being walloped by a two-by-four? The Democratic-controlled state Legislature is still like that.
Bottum line is Civilization by the inability of ALL Govenments no matter the form it assumes in every state in history has fallen into a Debt crises that has always caused taxes to be higher and lead to a waterfall effect whereby the state became so weak it failed itself since taxation destroyed the civilazation and capitalism. History always provides changes takes place in the shortest amount of time. Will western society listen before its to late? The last bubble caused dead capital investments and no national wealth at all. Phase one was allowing Marxism to fade away and our battle to stop taxes dead in its tracks to reverse capital consumption loss by the Govenment to date. Given the onslaught of housing resets oncoming and the nonproductive capital loss it enables we are still dead in our tracks to date. As for the comment (for production or consumption), or consume, then you are contributing to the economy -is the problem which who is taking and depriving funds out the true economy in the first place in a proper context? The implosion sending interest rates higher will be the mortgage resets upcoming, and furthering the stall to restart is capital locked in Government bonds rather than real investments which the consumer cannot control in since he should decide who produces what in the first place. According to Moscow - we have copy of Detriot now - and we see malinvestment's which the public in a classical view blames everyone else but the person they see in the mirror every morning like it or not to the scope of spending on the Hill. There policy is to hire. The Government will always blame the private sector and never admit out of self interest that it will hunt down those in the private sector to sacrifice since it is always that way. The more rulers cannot cover its debt the more it will push its people to serfdom since the power does belong to them.

“Now we have a government resorting to using military force to spearhead development of the Amazon,” said Paul McAuley, an environmental activist in the Amazonian city of Iquitos with Christian Brothers, a Roman Catholic lay order. “This cannot be a strategy that is sustainable.”
http://www.plosone.org/article/info%3Ad ... ne.0002932
http://abcnews.go.com/International/Wir ... 068&page=3
panem et circenses

"Review of Austrian Economics," 1994, Volume 7, No. 2, pp. 75–90.

For a fuller treatment, and a discussion of who is being robbed by whom, see Murray N. Rothbard, Power and Market: Government and the Economy, 2nd ed. (Kansas City: Sheed Andrews & McMeel, 1977), pp. 120–21.

deadweight loss, indifference curves, ordinal utility theory, consumption bundles, revenue neutral

[Samir]

I didn't say free market principles, I said market principles. It basically means using the efficacy of markets in public policy, analyzing the economic consequences of various polices, and observing the actual economic effects after implementation of public policy. Perfect markets are actually pretty interesting. They are more stable than what we currently have, bu there is little growth. Markets fluctuate at equilibrium rather than the large boom and bust situation we have today. There may be some long term growth trend, as larger economies become more sustainable, but nothing beyond that. Now that all assumes on conditions are perfect and every human (or at least the market overall) acts perfectly. Now everything obviously is not perfect. That being said, while I don't support central planning, I don't necessarily support totally unregulated markets. Granted I think right now the government is too involved in markets, and very inefficient. I also think the government should look for other ways beyond taxation to generate revenue.

Now about the VAT. While what you said is true about a VAT, specially at higher rates, it isn't necessarily true at lower rates. The effect of the VAT on economic efficiency or activity depends on many factors. One factor is obviously the tax rate. Another factor is the supply and demand curve of any given good. Goods with demands that are less sensitive to price changes won't affected much, and goods with demands that are sensitive to price will be greatly affected. So a fair rate could have very little ill effect on the economy. Match it with an efficient policy and you may have a net positive effect. In the proposal all/most of the revenue from the VAT was used pay for a Universal Healthcare Voucher. This voucher would be used to by people to buy health insurance in the market. I have no clue who this creates Tax-Payer and Tax-Gather class as everyone pays and everyone receive the UHV. The benefits of the tax go directly to the people to pay for their healthcare costs. You can still buy "more' healthcare if you have the means and need/want. I also don't see how money the government gives to it's people is just simply annihilated. Even the money used to pay government workers end up back in the economy (trough consumption of said worker). The only way the government can be destroying capital is if they are using it to pay debt (which they shouldn't be in, but unfortunately are). I also never understood how people in a democracy could just blame the government as if it is "the other". We are all parts of the government, we as a society need to take responsibility.

[aedens]

I feel your missing the aspect of contract and property rights. Broader context is more focused than your theory I am sorry to point out to failed state statuses you allure to. Note the realism of the posited chart. This should focus your attention to what we been bitchin about even in the corporate realm since Mr. Markets takes no prisoners and is defined by malinvestment of capital and you think theory will fix this? Many here understand your conveyance and we fired them... Trust me we understand policy and look where really are?

I didn't say free market principles, I said market principles. It basically means using the efficacy of markets in public policy, analyzing the economic consequences of various polices, and observing the actual economic effects after implementation of public policy. Perfect markets are actually pretty interesting. They are more stable than what we currently have, bu there is little growth. Markets fluctuate at equilibrium rather than the large boom and bust situation we have today. There may be some long term growth trend, as larger economies become more sustainable, but nothing beyond that. Now that all assumes on conditions are perfect and every human (or at least the market overall) acts perfectly. Now everything obviously is not perfect. That being said, while I don't support central planning, I don't necessarily support totally unregulated markets. Granted I think right now the government is too involved in markets, and very inefficient. I also think the government should look for other ways beyond taxation to generate revenue.

Now about the VAT. While what you said is true about a VAT, specially at higher rates, it isn't necessarily true at lower rates. The effect of the VAT on economic efficiency or activity depends on many factors. One factor is obviously the tax rate. Another factor is the supply and demand curve of any given good. Goods with demands that are less sensitive to price changes won't affected much, and goods with demands that are sensitive to price will be greatly affected. So a fair rate could have very little ill effect on the economy. Match it with an efficient policy and you may have a net positive effect. In the proposal all/most of the revenue from the VAT was used pay for a Universal Healthcare Voucher. This voucher would be used to by people to buy health insurance in the market. I have no clue who this creates Tax-Payer and Tax-Gather class as everyone pays and everyone receive the UHV. The benefits of the tax go directly to the people to pay for their healthcare costs. You can still buy "more' healthcare if you have the means and need/want. I also don't see how money the government gives to it's people is just simply annihilated. Even the money used to pay government workers end up back in the economy (trough consumption of said worker). The only way the government can be destroying capital is if they are using it to pay debt (which they shouldn't be in, but unfortunately are). I also never understood how people in a democracy could just blame the government as if it is "the other". We are all parts of the government, we as a society need to take responsibility.

[StilesBC]

I have recently moved 50% of my speculative portfolio to shorts. My preferred vehicle is Dec '10 LEAP puts at the 500 strike. 43% in 13 weeks is probably enough to be considered sufficiently convincing in elliott wave terms to be a "wave 2" rally. Sentiment extremes are present as well as negative divergences in some of the major indices.

And while the technical picture is shaping up, the consumer is getting increasingly squeezed in spite of the recent attempt by the media to self-perpetuate a recovery via optimism and talk of "green shoots". I wrote about this today:

On Consumer Deleveraging

Comments welcome as always.

[Samir]

I feel your missing the aspect of contract and property rights. Broader context is more focused than your theory I am sorry to point out to failed state statuses you allure to. Note the realism of the posited chart. This should focus your attention to what we been bitchin about even in the corporate realm since Mr. Markets takes no prisoners and is defined by malinvestment of capital and you think theory will fix this? Many here understand your conveyance and we fired them... Trust me we understand policy and look where really are?

In my opinion the Government upholding contracts and property rights by rule of law is an example of regulation. It is the use of coercive force to prevent coercive force. I just spoke specifically about VATs and public policy. I wasn't giving a full theory board economic theory. The chart is interesting. It isn't well labels, but I'm assuming it is for the US private labor markets? IT shows the influence of technology and globalization on our labor markets. Our labor simply cannot compete with foreign labor when it comes to production. Much of this has to do with ineffective policy. Though I do not see this trend reversing. In fact this will probably be the story in most countries. Instead of competition with foreign labor markets, we'll have competition with robotic labor. We'll have to adapt or suffer. I like your description of market failures. The fact they exist as such does sort of disprove the classic example of the Uber-Rational Human. This is where I think things like Generational Dynamics or behavioral economics come into play. Generational Dynamics helps us understand that the lack of aversion to risk taking in the Boomer and Xer generations, combined with the phenomena of "lens-cap stupidity" of the Boomers and the hubris/nihilism of the Xers lead to mismanagement of capital.

[mannfm11]

First of all John, that was a good post about the management and extortion in the financial business. You might note how hard the banks are trying to get out of the TARP. I forget the guys name, but the man who wrote "The Best Way to Rob a Bank is to Own One" contends that the whole game was a crime and that the government can't afford to take these guys over or replace the management because the mess is too big. If you have paid attention to the earnings reports of these big institutions, you might note that they are making their money again out of trading. Martin Armstrong says the only way these guys make money is out of market manipulation which would indicate they are doing something illegal. Note that Goldman called for a $200 oil price right at the top. Goldmans calls are always noted and rarely right and more likely a call to help them sell out. We are looking at $70 oil in light of a glut right now. Armstrong claims he is in jail because his forecasts were so good. In any case, it appears to me that those than can are trying to get the government out of this mess. I believe 70% of this was the regulators and others trying to keep the lid on how broke Citi was, which might indicate how broke the entire game is. The news term was that banks were afraid to lend to each other, but in my opinion Citi was in a big enough mess to tie up the entire system. I recall reading in the summer of 2007 that Citi had a $400 billion fed funds liability and BAC was in the $300 billion range as well. That was enough interbank lending risk to freeze up the entire system. Throw in a few European banks and there would be enough risk imbalance in the creation of deposits worldwide to create a mess.

There is an inflation/deflation debate going on here and some of you might know I am the deflation debate champ. I don't get into the topsoil nonsense everyone seems to engage in, but instead the cause and effect. My contention is the basic reserve idea is not as big a limit on lending as capital requirements. The books on money and banking were written at a time when banks were carrying much more in the way of capital bases. The Fed has been put in place, not to cure the problems we have seen lately, but to encourage them. Thus the real problem is over-extention. This entire game has its roots in the GSE's and Wall Street, the GSE's including FNM, FRE, the Fed and Sallie Mae.

It is my contention that there is only one short term way for there to be hyperinflation, 2 if you count the US government defaulting. I believe that the dollar is bank paper and the banks are going to hold the governments feet to the fire when the time comes and that for the time being the banks are more interested in their own survival. But, the missing component is the public participating in the financing game, by public I mean mom and pop, mainstreet America. While home prices were going up, the public was dancing to the tune. The party was continued with sub-prime financing, which allowed a lot of speculators to get involved in the game as well. The model was based on the idea the price was going to go up forever, so the model is inflation, not deflation. This fly in the sugar bowl was not only ignored, but made the lynchpin of the Wall Street models. Thus, by the time the lender got the subprime mortgage back, the price of the house would be high enough to limit the loss on the toxic portion. By the time the guy retired, the stock market would be high enough that the minimal additions to the pension plans would be adequate to fund his pension. The whole model is based on inflation.

This time it is different. I finally read something that backs my theory that money does not exist inside banks. I read the Murray Rothbard book, "The Mystery of Banking" in which he made a statement that confirmed this. Instead, banks create money, not lend it or possess it. Instead, they create a massive ponzi scheme. Stanford was probably doing what all banks do and maybe was more legitimate in doing what he was doing than Citi or BAC. You couldn't ask any of them for your money if enough people asked them because it doesn't exist. Even their insider game fell apart, which is what a credit crunch is. Citi or BAC couldn't any more sustain a bank run of over 5% to 10% of their deposits than they could withstand an atomic blast on their headquarters. In fact, Stanford might have been more legitimate than Citi or BAC.

My point here wasn't to cover for Stanford, but to paint the true picture of what is going on. It appears that the players want to get the game back to normal, bidding up oil in an oversupplied market, bidding up copper and other commodities in a deep recession, like recovery is right around the corner. All under the guise of Bernanke calling green shoots when what is really coming out is green s**t. I believe his money printing, the qualitative easing is nothing more than a veiled attempt to replace the money lost through recapitalizing the banks. Again, there isn't an account where this cash rests in the money supply and these purchases are merely an attempt to replace the deflation caused by massive capital losses in the banking system. There will be blood from this, but it won't be hyperinflation in the short run like all are playing it to be.

The article John wrote yesterday and the deflation game play hand in hand with each other. Banks are making their money now by trading and it won't be long they will be trading against themselves. The oil game is going to come down to when enough commerials decide to let the longs have their oil and their gasoline. The gasoline game can be solved pretty fast just by running the refineries a little faster or by some foreign operation bringing in gasoline and making delivery. The real game is diesel, which is now priced less than gas, showing the real depth of the economic decline. There is more. I believe these gains are going to turn to losses. Also, the mark to market suspension isn't going to cover up the real losses in these assets for very long. It is clear that if the Fed and government could put enough money out there, many of these assets would come back, but this would done at the expense of a 2% or 3% or 4% increase in the cost of the government borrowing money and maybe the loss of the governments credit rating. Put 4% onto $10 trillion and you get $400 billion, which is the cost of buying nothing on the government if this happens. It is in fact the payment to the fiddler by those that thought the entertainment was free.

Few realize this deflation battle has been going on since 1991. The difference this time is there isn't a stock market trend to inflate, a housing price trend to inflate or a foreign market game to inflate. We are left with the small market of commodities along with gold and silver. Few understand the stock market trend was a result of inflation the first time around, a peak followed by massive inflation followed by disinflation. Consumer prices tripled while the stock market went sideways and dividends to over 6%. It was the disinflation trend that created this bull market and the world took it to an extreme. China itself was a bull market phenomenon in that stock investing took money around the world. Also, inflation or the battle on deflation came with a cost, American industry which was also driven out by left wing regulation. The carbon taxes will finish industry for the US forever and be nothing more than one more Wall Street trading game.

The point I am trying to make is who is going to be there to close the trades that have been opened? See, the subprime borrower is gone and the guys just above him are either being pushed out of the credit markets, are out of home equity to spend or out of credit and are now paying. Is the game now to take the money of the next layer of society through more trading schemes? These guys can all buy commodities until the cows come home, but they can't consume them and eventually will have to liquidate them. The inflation trade is still being done.

I don't know if I am making sense or not, but if you are buying to resell, a new buyer has to come onto the scene or the producers have to cooperate and not overproduce. But, if price is overstating demand, the producers will continue to overproduce because the price being paid is a surplus price. The only trade they know how to make is the inflation trade because there isn't a deflation trade being taught.

The models are all based on increasing prices. The retirement plans are based on the absurd inflation trade in stocks, that they go up some 9% or 10% a year forever from some depressed level of pricing. The mortgage game is based on the same thing, that houses go up and this in fact bails out the weak loans. There has been speculation in housing all the way down from the top and there is an even more massive overhang of supply to liquidate now than there was 2 years ago. Yet, we find that not one major homebuilder has gone broke? Is this merely one more piece of ponzi finance?

I believe it was Hyman Minsky who coined the phrase Ponzi finance. One more bag pass is being attempted as we read, but the bag is empty. The Chinese are doubting the bag, but they have their own bag to pass and we can't take theirs. Walmart has a bag to pass, Wall Street has a bag to pass, the pension funds have a bag to pass, one that Wall Street already passed them and home sellers have bags to pass. In the meantime, 625,000 unemployment claims are being bulled as recovery because they aren't the 675,000 that made up a one week peak. I guess it doesn't occur to them that this amounts to over 30 million claims a year if projected.

The very idea of hyperinflation in dollars is outside the realm of being likely to happen. It would take a concentrated effort by all parties to effect such an end game. Somehow the hyperinflation camp believes you do dances without music, which is what hyperinflation would be, because the whole world dances to the music of the dollar. There isn't an exit to sell all the bonds of the US, nor is there a party on either side of both oceans willing to commit financial suicide. Even if the US decided to have hyperinflation, it would be stopped immediately by the fact that there would be no gasoline at the corner gas station. The Chinese can't sell our bonds, but they don't have to buy any more of them over the short term, which is probably why the interest rate on treasuries is going up and the price of commodities as well. The housing recovery will stall and if Bernanke attempts more qualitative easing, we will merely see rates go higher, not lower. The rulers of the game are cornered and the bag can't be passed.

[gerald]

I think John is right, the stock market will fall. Look at the situation the boomers are in.
Many are invested in the stock market personally or through their pension plans. When it falls, it may not recover for many years, negatively impacting their retirement plans. Many when younger, in order to raise their families, bought the largest homes they could afford with the understanding that real estate only goes up in value. Part of the premise was that at retirement they could sell at a nice profit, downsize into a small house and use the left over profit for retirement. However, the younger cohort is smaller and less affluent. Compounding this problem is the large over hang in the supply of unoccupied homes, and the boomer second homes. Where will the demand for this real estate come from? It is more common today for homes to be on the market for well over a year. There is also a doubling up occurring in the housing market. In the 1930's homes sold for pennies on the dollar or were abandoned. This does not look good for the boomers or the banks.

[wvbill]

This time it is different. I finally read something that backs my theory that money does not exist inside banks. I read the Murray Rothbard book, "The Mystery of Banking" in which he made a statement that confirmed this. Instead, banks create money, not lend it or possess it. Instead, they create a massive ponzi scheme.

Based on your previous comments, I, also, have been reading Rothbard's book. He does not refer to the banks printing money -- He calls it counterfeiting.

If the average person only knew how the banking system worked, he would be in the streets with arms.

I, also, recommend the book.

Bill