Letting the Reinflation Genie Out of the Bottle 24 comments
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"Quantitative easing" is a new terminology that is fast gaining favor in Washington. Expressed in more prosaic terms, it means that the printing presses are working overtime in a desperate attempt to reflate the ailing US economy.
Will policy makers exhibit the necessary good judgment to know when it is time to put the brakes on for this massive injection of liquidity?
The track record for the Fed on previous judgments regarding whether it was appropriate to move away from overly lax monetary policy is not encouraging.
Discomfort from some sections of the market about the degree of publicly underwritten asset price resuscitation is starting to reveal itself in coordinated inter-market strategies. There is a rather interesting loop which moves from a position of increases/decreases in traders’ appetite for risk. The safe haven play has been in the ascendancy for most of the last few weeks but now there are glimpses of the hyper-inflation play at work.
Expressed in very simplified terms, this side of the risk aversion spectrum looks like this: Less risk aversion -> higher US equities prices -> lower long term Treasury prices -> lower appetite for US dollars -> higher gold, oil and other hard asset prices.
Needless to say, this is a loop that could ultimately become very destructive and could result in an unmanageable period of extreme commodity based inflation. But we certainly have a way to go before that unfortunate spiral kicks in.
Every once in a while though, during plateau periods of cheerful sentiment when traders seem to get glimpses of the green shoots of recovery and believe that the worst of the recession has already been discounted, the loop will cause some to worry about what the next critical scenario for markets might look like. It is not a pleasant scenario.
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This article has 24 comments:
And this money will not improve the economy. It will only improve balance sheets. The "economy" we brought into the 21st century was and is unsustainable. If they succeed in reinflating the bubble, it will just pop again and take the bailout monies with it.
I hope I'm wrong. I hope what the "government agents" are doing works. But I can see no logical underpinnings that would suggest the current bailout plan will do anything other than postpone the eventual crash.
We should hope so. Watch the velocity of money. It has been dormant. When it starts to move up, in conjunction with the massive liquidity, then the genie could escape the bottle, and the inflation trade will be on. Long GLD / short TLT, for example, may produce spectacular winners, but the economic consequences would be ugly. Perhaps better to preserve capital or make small gains in a stable economy, than to make occasional windfalls in an unstable one.
On Nov 26 09:42 AM axelrod608 wrote:
> The reflation myth is so silly. Financials (and other companies)
> have $Trillions, MANY $Trillions of losses. In essence, there is
> no limit, or a VERY high limit, to the amount of new "liquidity they
> can absorb.
>
> And this money will not improve the economy. It will only improve
> balance sheets. The "economy" we brought into the 21st century was
> and is unsustainable. If they succeed in reinflating the bubble,
> it will just pop again and take the bailout monies with it.
>
> I hope I'm wrong. I hope what the "government agents" are doing works.
> But I can see no logical underpinnings that would suggest the current
> bailout plan will do anything other than postpone the eventual crash.
What happens is not less consumption, but more consumption because the cost of everything increases by the hour. You get your money and go spend it immediately on goods before it loses value. Things disappear immediately from the shelves.
We're past peak in re oil production, so costs will also be out of control due to energy costs. Demand destruction? Not worldwide. And depletion rates are incredible--9.1 percent year over year according to the International Energy Agency.
Definitely buy precious metals--gold and silver. Gold is the only thing that's held up for me this year.
Simple accountant said:
"Perhaps better to preserve capital or make small gains in a stable economy, than to make occasional windfalls in an unstable one."
Agreed, the only problem is, we don't get to choose between a stable and unstable economy. The economic gurus make that call, and they are clearly (and have been for years) opting for an unstable one.
In fact, even if they changed their mind at this point, I think we are far beyond the point of no return.
Inflation has winners and losers. Some winners are:
1. Anyone with huge debt. The debt is repaid with dollars of lower value.
2. Anyone with hard assets: real estate, commodities, etc. However, some might argue that these, on average, simply stay even, protecting the holders from inflation.
Some losers are:
1. Lenders and bond holders. They are receiving devalued dollars in repayment.
2. Anyone of fixed income, such as seniors and retirees. Social security is indexed for "inflation", but the official inflation number seriously underestimates the actual cost increases for seniors, such as health care and other services.
3. Wage earners. Wage increases tend to lag inflation.
4. Stock investors. Stocks have underperformed in periods of high inflation, especially on an inflation adjusted basis.
On balance, high inflation has more losers than winners.
A low level of inflation (1%, 2% or even 3%) is a condition that often accompanies an expanding economy and the balance between winners and losers shifts to more winners.
I hope this over-simplified discussion of inflation pluses and minuses is useful.
On Nov 26 09:42 AM User 55065 wrote:
> For a economy-idiot like me, can someone explain why having some
> 20-30% inflation of prices and wages be so dreadful. If wages magically
> went up by, say 25%, most of the home loans and credit card loans
> will suddnly become payable by the consumers. And then of course
> prices will also go up by 25-30%, and all that has to happen is decreased
> future consumption and we could be OK? So in future even with 25%
> higher incomes, we all consume 20% less food, 20% fewer cars and
> fuel etc, that is the new reality any way, can the wiser crowd shed
> some light on inflation for us?
You brief it well and it is clear and correct.
There not much of a doubt in my mind, that there is going somekind of an inflation, a devaluation of the currency, it's mainly a matter of knowing When ?
The next point and more important is :
Do we want to be losers or winners ?
Since there so much of everyone money given away to banks by bailouts, there is no shame to increase what we owe to banks, now and pay them later.
Time is everything afterall.
No rush to pay faster your mortage or any of your loans.
Time to invest ? Calls on commodities, selling Puts. Oil, Gold, Silver.
Time to quit bonds ?
If it doesn't work, will you be worst than other ?
You don't probably realize that, by only reading these threads makes you weeks in advance on the mainstream medias. If you're not in finance, and even if you are, you talk about what is written here with collegues; the vast majority of people won't even understand half of your saying.
Financial illetracy is also a great plague.
You listen CNN, and a gorgeous girl tells you that even you 401K is down 33 % since three months, there no worry if you are young and don't retire from 20 years from now.
That is total BS. better sell at the beginnig, let it drop and buy it back
lower no matter your age, a lost is a lost.
Mainstream medias vows to inform you, but control you at the first
thing.
Freedom comes with knowledge.
Thank to MSM and proxies given by finance illetracy; Many portfolio managers who eat caviar two month ago will probabilly doing so two years from now, and they don't care about who is gonna get the balloney.
I just want to cover my ar... by myself, and actually i do it better than my pension plan management.
Good luck to you all
God bless
Gilbert.:
On Nov 26 12:14 PM jlounsbury59 wrote:
> User 55065 - - -
>
> Inflation has winners and losers. Some winners are:
> 1. Anyone with huge debt. The debt is repaid with dollars of lower
> value.
> 2. Anyone with hard assets: real estate, commodities, etc. However,
> some might argue that these, on average, simply stay even, protecting
> the holders from inflation.
>
> Some losers are:
> 1. Lenders and bond holders. They are receiving devalued dollars
> in repayment.
> 2. Anyone of fixed income, such as seniors and retirees. Social security
> is indexed for "inflation", but the official inflation number seriously
> underestimates the actual cost increases for seniors, such as health
> care and other services.
> 3. Wage earners. Wage increases tend to lag inflation.
> 4. Stock investors. Stocks have underperformed in periods of high
> inflation, especially on an inflation adjusted basis.
>
> On balance, high inflation has more losers than winners.
>
> A low level of inflation (1%, 2% or even 3%) is a condition that
> often accompanies an expanding economy and the balance between winners
> and losers shifts to more winners.
>
> I hope this over-simplified discussion of inflation pluses and minuses
> is useful.
Surely unregulated Wallstreet is to blame for producing lax credit and junk financial products that were gobbled up after the Dotcom implosion. But, won't just pumping gobs of cash and credit into our poorly regulated financial system leave us pretty much where we were eight years ago.... borrowing to exist and still buying the tons useless or carbon hungry junk flooding out of Asia and Detroit?
I think Americans are tired of our role in the international balancing act fostered by previous administrations passively allowing the exportation of our industries and jobs for increased profits and the growth of emerging nations. What we need is a little bit of selfish US job stimulation from a top-down, neutral public investment in new energy products that unshackles us from the gang of fossil fuel pirates sucking at out throats. This would be just the ticket to massive new US domestic job stimulation providing we don't export the business to the far east for development and production. We should demand that domestic energy development go forward and be put into the realm of a "critical domestic survival status" not exportable for foreign development or production! I'm not suggesting a Hooveresque solution to the current situation but a reasonable approach that will actually massively stimulate the US economy and provide decent paying jobs - of course at the expense of Exxon, Walmart, et al ---unless they want to jump on board. Can it work???
Did Microsoft crap in the woods? Translated: Did the personal computer simulate the economy and a new age? Yes it did and so can an explosion of new clean energy development. But, let's be realistic, unless our whole economy turns into a massively decimated wreck - to the tune of The Great Depression squared, do you really see this happening. NO! Why? Because gov. is "for sale", always for sale and would simply squash programs detrimental to their Wallstreet, Detroit, the Seven Sisters interests along with the myriad of other friendly imbedded leverage partners. Gov. has demonstrated this time and time again, ad nauseum.
So then, what's in it for us? Well okay, "if" we can sell our homes, pay off our credit cards and look for really, really cheap housing, along with a burger flipping job, then maybe, just maybe life will go on.... now of course, with the bankers owning the US at 10 cents on the dollar thanks to the $700,000,000,000 Wallstreet bailout.
Who was it, that said,... "It's not that I'm too cynical, it's just that I'm not cynical enough!!!" Amen to that.
On Nov 26 09:42 AM User 55065 wrote:
> For a economy-idiot like me, can someone explain why having some
> 20-30% inflation of prices and wages be so dreadful. If wages magically
> went up by, say 25%, most of the home loans and credit card loans
> will suddnly become payable by the consumers. And then of course
> prices will also go up by 25-30%, and all that has to happen is decreased
> future consumption and we could be OK? So in future even with 25%
> higher incomes, we all consume 20% less food, 20% fewer cars and
> fuel etc, that is the new reality any way, can the wiser crowd shed
> some light on inflation for us?
Generally, the Fed "lends" money to banks in exchange for "assets" that are worth considerably less that their nominal value. Both sides know it. The banks get clean treasuries; the Fed gets tarnished securities that are worth some percent (90%? 50%? 10% 0%) of their face value. Supposedly, the banks will redeem these crippled securities at face value when "things get better". Actually, this has been going on for a year or more, and the deals just get rolled over, extended. Bottom line, the Fed has bought a bunch of reduced-value assets, and the taxpayers will eventually take the loss.
When you have 10-20 trillion dollars of stock market and real estate losses, the government can hand out a lot of dollars without creating inflation. I think those running the show see this as a positive thing, kind of like giving a transfusion to an emergency room patient. As long as he keeps bleeding, pumping blood into him isn't going to make him explode.
I think the Fed/Treasury hope they can do this for just long enough to rebalance the economy, preventing deflation without causing inflation, because they haven't really increased the amount of money in the economy. The problem is, where do all those dollars come from? Yep, "quantitative easing", AKA creating new money. Borrowing existing dollars won't work because it would send interest rates to the moon. Creating new money is the only way.
I'm sure Bernanke and Paulson are much smarter than I about how to do this. Maybe they'll get away with it -- just replace some part of the lost money and pick up the game where we left off. Somehow, I don't think it's going to work out that conveniently.
Because control of inflation is one of the few controls in the hands of the state the cognoscenti want to use it to solve the current problem. It will do more harm than good. Worse the harm will come quickly, while any good will drift in last.
Fast harm will come from the collapse of the dollar. The dollar is already weak and wasting trillions will weaken it further. Even if the money is not spent there is substantial risk to the dollar in any severe recession. As the dollar is destroyed as a store of value, (which is what the inflationists want) there is even less reason to hold it.
There is ample cash sloshing around to create inflation now, but investors are not confident that the wave has started, so they hold back. Increasing the amount of cash won't start the wave it will just make it bigger when it comes. Then what?
Creating Inflation won't avoid a recession, instead we will then need a recession to regain control of inflation. Does no-one remember the 1970's?
What inflation is designed to do is to make debts shrink in relation to assets. There are other means to do this. Inflation is our worst choice.
Governments used to control interest rates. They could again. Reducing the interest rate on a mortgage causes it to shrink. The homeowner has more incentive not to sell. This would help the property market recover. This lever is capable of delicate control.
The effect on the mortgagee is the same. He loses. A smart Government might compensate him in some way.
Then we might have two hammers.
Want real capital? Raise interest rates, and encourage savings. Anything else is just telling lies about math.
>User 55065: For a economy-idiot like me, can someone explain why >having some 20-30% inflation of prices and wages be so dreadful. If >wages magically went up by, say 25%, most of the home loans and >credit card loans will suddnly become payable by the consumers. And >then of course prices will also go up by 25-30%, and all that has to >happen is decreased future consumption and we could be OK? So in >future even with 25% higher incomes, we all consume 20% less food, >20% fewer cars and fuel etc, that is the new reality any way, can the >wiser crowd shed some light on inflation for us?
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