It's Inflation, Stupid 11 comments
Nicholas Jones
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My patience for utter stupidity and incompetence is growing slimmer with each passing day. I've gotten extremely sour and impatient with the morons that love to hear their own voices and have others think of them as capable of independent thought. The problem is that I'm completely surrounded by it. It doesn't matter if it's local media, mainstream financial media, a friend of the family, or the janitor at work.
For those who do like to discuss these things with me, or while I'm within earshot, they've probably noticed my disdain by the tones of my voice or simply my body language. I don't do these things on purpose, but I no longer consciously try to subvert these subtle actions. I've simply reduced my responses to near one word answers and avoid anything that might entice the person I'm talking to into extending the conversation any longer than need be.
I'm not here to make friends; I'm here to, first and foremost, make money off the changing financial trends, and secondly, to inform those who are willing enough to denounce the psycho babble heard daily on CNBC, and want to hear the rare, but honest and brutal truth regarding the financial/economic past, present and future. If this doesn't suit you, then read someone else...PLEASE!!
Which "Flation" Is It
As you can tell I'm a little irked today. The source of today's particularly pleasant mood is due mainly in part to the ever growing group of deflationist believers. Everyone who preaches these thoughts in an arena where people listen are criminals and everyone who believes these thoughts has let their lack of any intelligence whatsoever allow them to fall victim to the sociopathic politicians, fat cats, and talking heads.
The reason for pushing these ridiculous notions is to calm the potentially massive public backlash that would exist if the citizens of this country were actually informed.
Juicing the Printing Press
Let's look at this from a practical stand point.
The Federal Reserve has already lent over $2 trillion through its different lending facilities. The recipients of this money have not been released. Bloomberg has recently filed a suit under the U.S. Freedom of Information Act to find out who this money was going to. The Fed has denied access to the information. This does not pertain to the topic of inflation, but is another example of outright criminal behavior undertaken by the authorities.
Anyways, since the middle of Sept. to the beginning of November, the Fed has increased facilities lending by $1.23 trillion marking an increase of some 138%...in just 12 weeks!
After Lehman Brothers went bankrupt, regulators entered panic mode. For those who don't know, when regulators panic, they hop in their expensive Mercedes, or Lincolns, or whatever fancy cars they drive, and head straight to the printing presses. They flip the switch from "Jesus was printing a lot of money" to "Holy Hell warp speed," and that's exactly what they did.
By the end of October, year over year money supply growth was 38%. For those of you who don't know, when everything is shaken out, money supply growth exactly equals price inflation. Anyway, the last time the money supply was growing at something remotely close to the 38% figure was in 1939 when money supply growth was 28%.
Little did we know that we were just getting started. Once the first week of December rolled around, the Federal Reserve really kicked it into gear. In December 2007, the monetary base was $836 billion. In December 2008, the monetary base is $1,479 billion. That's a growth of 76% year over year.
There's an interesting little twist here. Leading up to the Lehman Brothers collapse, the Federal Reserve held the monetary base relatively steady. This means that the majority of the staggering 76% money supply growth has taken place in the last three months. That's an annual rate of approximately 300%.
(Some figures and statistics provided by William Engdahl.)
HELLO!?! Is there anybody in there? The Federal Reserve is printing money multiples faster than anything we have ever seen. If you want to peer into the crystal ball on what the U.S. is going to look like in a few years, have a look at Zimbabwe. What's really interesting is that we haven't seen anything yet. Wait till the bottom really drops out.
All in all, while writing this article I've calmed down a bit. In actuality, I should be thanking all the deflationists and those who pimp those theories. You can continue to buy your near zero yielding U.S. Treasuries with the belief that you are gaining any sort of real return. I should be thanking you. After all, I need someone to be on the other side of the trade while I short those worthless pieces of garbage.
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This article has 11 comments:
You are very right to be so angry with the rah rah rah sis boom bah crowd! Thank you!
Wouldn't it be appropriate for you to understand and respect different opinions about issues regarding us all. Like you said, some make mistakes and other get rich by that. So spare us your egocentric thoughts. Enjoy quietly.
But even so, we all know inflation is the (eventual) outcome, you should you not exclude the deflationary forces in the economy that seem to be fought reasonably well at the moment by our FED Chairman.
I should remind you of the Japan situation. Global economy was not as bad as it is today. Japan at the time, put in ~50 to 150 billion dollars worth of yen into the economy every few months. For decade(s) it didn't work. Ok, the situation was significantly different as we both know in their policies.
But, this time, the whole world is on its butt in recession. Consumers won't jumpstart the economy. Not here and not in the rest of the world. Everybody is saving. People aren't stupid after the gigantic loss in confidence in the world. C'mon.
The monetary deflationist talk will grow. Because the economies have to contract, as they are inflated. And the more the FED pumps in, the longer it will take. You'll see.
We need a correction, a 'depression-like' correction to get the tar out of the bodies of the economies. Its rotten, its oily and greedy. Call it a severe recession, it doesn't matter. This is gonna take a year of 5 minimum. Maybe 10 who knows.
All I see is deteriorating conditions and a world that can't handle a quick correction this time. It all about confidence, and your article denotes sensitivity for failure. I smell fear from your article.
Just let it come. I hope you don't have any debt? I don't.
Good article; good thought above. How does an average investor short U.S. Treasuries? What vehicle(s) is/are available to the retail investor?
Thanks in advance for educating me! ;-)
I've wrestled with much of the debate about the "flations" , and have come to the conclusion that a reader of tealeaves is just as wise about the situation.
I am employed and debt free.
As my savings are my pension pot, I have gone to what I consider a safe port, gold.
I have gone long and large. If there are no profits being made out there then there's none to be had I'm afraid.
I find most in the gold bug category very boorish in their ideas.
What is your view on gold. I expect a clear opinion from you.
The solution to your problem is simply to invest in commodities of any kind and wait for your profits.
Why do you care what the Yahoos think?
Direct purchases of debt by the Fed, on the other hand, could be immediately inflationary, because unlike Treasury that has to tax and borrow money out of the economy in order to get money to spend or buy anything, the Fed merely creates the money as 'lender of last resort'. Which correctly translates to, 'money creator of the USA'.
TARP money that bought preferred shares to recapitalize big banks, whose common share values collapsed with the rest of the stock market which reduced the K on their balance sheets' A=K+L {Assets = Capital + Liabilities}, merely restored those banks' asset:capital ratios to acceptable multiples. This just allowed them to continue holding the amount of loans/assets they already had on their balance sheets without the threat of being declared insolvent.
Those banks are also shedding assets on the left side of their balance sheets by calling in payment or selling loans which further reduces their need for capital on the right side of their sheets. Most of the L [liabilities] is customers' deposit account balances and people draw down their deposits to payout their loans so A and L usually decline in synch which reduces money supply which makes loan repayments (whether forced or voluntary) a deflationary phenomenon. This happened in 1929 when margin calls forced selling of stocks to get money to payout margin loans.
Calling loans reduces money supply when money is taken from the economy to repay the loans. In our fractional reserve system the loan money was created by the originating bank and repaying the loan eliminates the money, so making a loan increases MS (inflates) and repaying a loan decreases it (deflates).
Selling those loans to Treasury merely changes the carrier. The new money was injected into the economy when the loan was originally made. Selling the loan to Treasury after the fact has no effect on the money supply. The private banker who originated then sold the loan now holds a Treasury bond as an asset instead of the loan. Treasury had to remove money from the economy (tax or borrow) to fund the bond, so Treasury takes out $X and puts in $X with no change to MS.
If the loans are risky then the risk is transferred from private bankers to the taxpayer. If Treasury buys commercial paper because no private bank will renew business's operating loans or other previous debt, that merely transfers the banking function from private to public hands.
As far as which kind of assets banks presently prefer to hold, they would rather have Treasuries paying zero or negative interest than private loans whose capital might never be repaid, let alone paying interest. Bankers are eager to trade their crappy loans for what they think are less crappy Treasuries.
The Fed is a private bank too, but the Fed holds as collateral the entire US economy by way of Treasury's power to tax you to repay the Fed. Recently the Fed has radically increased its purchases of debt from the even-more-private financial system. Commercial banks don't have the power to tax Joe to get payment for Jim's bad debt. Indirectly, the Fed does have that power.
A bank that sells loans to the Fed now owns a Fed note rather than the loans. But this Fed note is not an "Asset" to the private banker. It is not a loan the banker has made. It is not old money that has already been injected into the economy which is owed to the bank. It is new money that the Fed created and paid to the private bank in exchange for the value of the loans that the Fed bought. The private bank now owns this newly created Fed money which it is free to hold, invest, spend, or payout as dividends. Or $10 million CEO bonuses.
The Fed won't tell Bloomberg who it's been giving this new money to, but the big Wall St Fed-affiliated banks have been using it to buy up smaller banks. So it looks like this new money is being used to consolidate banking power in the US. I don't think that's inflationary, at least not in the short term. As for the future, you'll have to ask Citi, JP Morgan et al what they plan to do next with their renewed lending power.