Scary Drop in Velocity of Money: Is Deflation Knocking? 66 comments
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Last week the government released their first revision to 2Q 2009 Gross Domestic Product (GDP). It was surprising that there was no revision to the initial negative 1.0% numbers. At economic turning points, a lot of wacky things affect the initial sampling and estimates; these are presumably corrected when the actual data is revised.
I have an issue over the way GDP is used to measure our economy. Nothing is wrong with the concept of GDP – but it just does not measure enough economic activity.
GDP only measures what economists think is the “good” or productive part of our economy. Banking and equities trading are a major portion of our economy but are not in GDP. Existing home sales are not in GDP either.
America is a mature economy. It does not require the same amount of new infrastructure as a developing economy. We can be just as prosperous in remodeling or repairing existing housing as building new housing.
This point is brought into sharp focus if you visit Holland or England. “New” does not mean better.
And just because things are not produced (the “P” in GDP) does not mean that it does not benefit the economy. Take for instance the trading and banking economies of Singapore and Hong Kong.
With this first revision to 2Q 2009 GDP, enough data was available to the NIPA tables to take a more complete look at economic activity. The methodology being used is explained here.
In summary, GDP is a subset of the National Income and Product Accounts (NIPA) tables. These tables are an effort by the government to tabulate the income and expenses of America – private citizens, corporations, and government. GDP only uses the part of the NIPA economic flow that traditional economists believe is ‘real’ growth (i.e. final goods and services). One half of our economic activity is ignored by GDP.
The NIPA data gives a more complete picture of total economic activity.
Yet, even the NIPA tables are imperfect. Certain economic activities are missing here including the Federal Reserve’s creation of money.
In comparing the QoQ results of the NIPA total income to its Frankenstein child GDP, both show major improvement in 2Q 2009 compared to 1Q 2009. Even the percentage improvement was similar.
This graph illustrates the similarities of the two measures, GDP and NIPA. There is a significant correlation between looking at the total economy (NIPA) and a portion of the economy (GDP). This should come as no surprise as all of GDP’s data is a subset of NIPA. But both GDP and NIPA were positive in 4Q 2007 when the recession began. Neither economic indicator was forewarning the recession.
Money Supply and Velocity of Money
The NIPA total income is the annualized income of America. All the dollars which can be spent today in America (and the rest of the world) is called M1. M1 excludes all dollars which are locked up (like CDs) or in any way must be converted to be able to be used. M1 is dollars which can be spent at this instant.
Using the NIPA with M1 money supply to determine velocity of money, there was a change in trend in 4Q 2007. As NIPA total income captures more of the economy, it is a more comprehensive metric. Velocity of money is normally used as an indication of inflation.
When velocity trends down, this usually indicates receding inflationary pressures.
As the Federal Reserve’s mandate is to control inflation but at the same time keeping the economy performing at the highest potential possible, a change in the velocity of money trend also indirectly indicates a change in the economy.
Velocity of money is continuing its downward trend which began in 4Q 2007. Some believe we are experiencing deflation. For sure, there is no apparent inflationary pressure.
But this begs the question, as the fall in velocity in 2Q 2009 was approximately the same as 3Q 2008 when the economic maelstrom was being revealed – is a recovery underway?
At economic turning points, indicators act like they are in the Bermuda Triangle. But this velocity of money drop was not a mild movement – but a significant change. This raises the issue of liquidity trap. Here is Wikipedia’s definition of liquidity trap:
The term liquidity trap is used in macroeconomics to refer to a situation where a country's nominal interest rate has been lowered nearly to or equal to zero to avoid a recession, but the liquidity in the market created by these low interest rates does not stimulate the economy to full employment. In this situation, any further increase in the money supply will not stimulate the economy any further. This is because any further injection of liquidity will no longer lower the nominal interest rate, as the nominal interest rate cannot drop below zero. This situation can lead to price deflation, which, according to many schools of economic thought, will make a recession even more severe
This could be another marker that deflation is grabbing hold. Please, I know prices do not seem to be falling but that is not all of what deflation is about. Consumer price roll backs may never occur in modern day deflation cycles due to global trading.
Deflation:
- is related to a sustained reduction in the velocity of money. Velocity of money has been declining for 18 months in earnest.
- is caused by a collapse in demand – check, this is present in the new normal.
- causes a transfer of wealth from borrowers and holders of illiquid assets, to the benefit of savers and of holders of liquid assets and currency. Think of all the boomers who are selling houses and equity for cash.
The M1 is not affected much by the Fed’s smoke and mirrors. The selling off of equities and houses – and leaving the money in cash is probably the proximate cause of the rise of M1. The government and the Fed do not want you to have this cash.
Look for more incentives to spend your cash, and more penalties if you do not spend. Bernanke has said we will have inflation. If you have cash, you are de facto an enemy of the people.
Be careful out there.
Hat tip to Steve at MEMETICS & MARKETING for editing support.
Disclosures: None
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This article has 66 comments:
Consumers are putting themselves to sleep. They are now in the 'preservation of capital' mode, they are sleeping, they are sitting on their hands. The seduction of money means nothing to the 'preserver/saver' mentality. Spending is a sin now; taking out a loan is a form of insanity. Why? Because the future is getting dark.
Deflation comes. Deflation is a form of justice. When the fish aren't biting, the fishermen go hungry. (Where is the power now, Mister Bernanke?)
My elderly mother who lives off interest income is being punished by our central banker, as are all people who lived within their means and accumulated savings. Banana Ben should at least acknowledge that, due to the misguided policies of the Federal Reserve for 30 years which encouraging indebtedness, that he has no real solution to our predicament.
2.bp.blogspot.com/_vIR...
Instead, they paper over problems, allow banks to submit fraudulent financial statements, and promote govt giveaways hoping to create the illusion of prosperity. So far, most people aren’t buying the BS as reflected in higher savings and lower spending. It’s about time!
"Certain economic activities are missing here including the Federal Reserve’s creation of money."
... printing money is an economic activity?
On Sep 03 09:02 AM DJIA5000 wrote:
> It's a problem of money itself and the value of money. On one side
> people cut spending like crazy and it leads to deflation, on the
> other corn or wheat or sugar producers will rather commit a suicide
> than sell their crop for free, they don't look at the US$ as any
> value at present, that's why they want much more paper for real commodities.
> This is very ugly situation, it will lead in the end to high inflation.
Steven,
Great article.
The drop in velocity IS deflationary, and MAY suggest that we are in a liquidity trap. But I think it's more likely that the drop in velocity reflects deleveraging at banks, which have tons of toxic waste on the books, and which hesitate to foreclose on homes since this leads to immediate write-offs. This leaves banks in a never-never land where garbage remains on the balance sheet and velocity remains depressed. It also means that home prices are VERY misleading, due to the foreclosure overhang.
I must respectfully disagree, however, with the idea of including equities trading in GDP. I don't see how this reflects economic activity in the usual sense of the word.
_________________________
Basehitz:
I regret to hear about your elderly mother who lives on interest income. Low interest rates from the Fed are bailing out banks, but punishing savers. Your mother is being punished for her thrift.
I believe that Americans are deeply anxious about the future of the country BEYOND the recession. Soaring deficits will only grow worse after 2015, and job creation is crippled by outsourcing and high health care costs. People fear that the American Dream is over, which I wrote about here: seekingalpha.com/artic...
This anxiety explains why the health care debate quickly became an ugly, nearly violent, partisan debacle. Americans are worried, and fear does strange things.
Rob
Oil, when supply and demand are close to balance, will go up $4 for each 1% drop in the dollar, now. However, when we get a bearish oil report it may only go up $2 for a 1% drop or really bearish, not much at all. Seldom has oil been going down when the dollar is going down.
When the dollar was at 72, oil was at $145. When the dollar rallied to 89 or so, oil dropped to $34 or so. Then the dollar dropped to 79 or 11% and oil has risen near $40 so the extra supply has kept it a little lower.
If the dollar should fall to 72 again, we will have $100 oil even if their is an oversupply of oil.
The same will happen with wheat or copper. A falling dollar will make raw materials we import rise. Also, grains that are sold globally will rise because farmers will be paid for a grain that can be exported into the global market where the weak dollar will make their price much higher.
Thus, we can be in a depression, no demand, no velocity of money, falling asset prices and have food and energy going up as well as medical costs because we import a lot of things we used in the medical sector. Lipitor and Zucor, for example come from Ireland. Rubber gloves come from Malaysia and China.
The idea that exports are helped with a falling dollar, is faulty in several ways. First the raw materials cost more. Transportation to the ports and ships go up with rising energy prices. Electric prices go up. So, much of the "advantage" is lost and if it is an export that is also sold domestically, the domestic sales drop as wages and other factors cut back spending here.
A strong, stable currency is "best" and we don't have that.
The early recipients of the new money today (i.e. creditworthy borrowers) are pouring that money into stocks and commodities rather than goods and services. The traditional measures of inflation ignore this, and suggest there is no inflation problem.
Velocity of money is a rather useless concept. As long as money supply is growing -- there is inflation, and it is damaging. It represents an unfair redistribution of purchasing power to the lucky early recipients from those less fortunate (i.e. savers and those with poor credit).
What are scores of millions of Americans and scores of thousands of businesses afraid of? I suggest 4 things
1. They fear that equity, bond , and real estate markets are being systematically and ruthlessly distorted, manipulated and subverted by Big Govt and Big Money to serve the personal power agendas and financial interests of the few and the favored at the expense of the many. They fear that money put into these traditional asset classes will be stolen by the Bosses.
2. They fear that the economic and social policies of the Govt will lead to more , many more, job losses and business failures and class warfare will increase. All they have to do is observe the experiences of friends, family, neighbors and professional acquaintances
3. They fear that when they want credit for emergencies or to finance cash flow imbalances (caused by Govts and Big businesses squeezing small and medium vendors, independent contractors, project workers etc via unjust payment and collection practices or by revenue or income seasonality) or to finance expansion, that the credit will be unfairly withheld or be priced at extortionate levels ; they also fear that existing credit facilities will be suddenly and capriciously reduced or eliminated
4. Above all they fear the US Govt.
The Govt that was desigened, originally, to protect their personal and property rights is now the biggest, daily and advancing threat to these rights.
The nastiest problems will hit us when a REAL recovery begins to occur- when Helicopter Ben has to hit the rate hike gas pedal as fast as he hit the printing press pedal. Exactly one Fed chair ever had the balls to do it, and Ben won't do it. This is the equivalent of the velocity of money returning to "normal" pre-crash levels (I would argue by your chart that we're only approaching historical trends NOW...) while the money supply remains where it is. Bad news. And throw on top of it the pent-up demand of deferred purchases, upgrades, and capital reinvestment. Gasoline on the fire...
Each day we remain in a liquidity trap-induced deflation cycle is one degree worse the inflation will be at the end of the cycle. And you are correct that this deflation does not show up in price levels- it's especially nasty. Your mortgage costs more in real terms, but your gas and bread do as well. Fun times.
On Sep 03 09:19 AM londres wrote:
> hang on, are you saying ...
>
> "Certain economic activities are missing here including the Federal
> Reserve’s creation of money."
>
> ... printing money is an economic activity?
On Sep 03 09:19 AM londres wrote:
> hang on, are you saying ...
>
> "Certain economic activities are missing here including the Federal
> Reserve’s creation of money."
>
> ... printing money is an economic activity?
On Sep 03 11:09 AM User 353732 wrote:
> What are scores of millions of Americans and scores of thousands of businesses afraid of?
======================
I would add that 78 million boomers and 37 million retirees just saw their retirement nest eggs hit. Some were in home equity and others in stocks that got hammered.
Either way, they are trying to regain a level of comfort with their retirement nest eggs. That means cutting spending, saving, paying down debt. Given that between the two, that is over 1/3 of our population, it is a huge paradigm shift in consumer thinking.
Smaller homes, fewer discretionary items, more fear at investing in a rally, etc. This will be with us for years according to those who study the spending habits of people as they age and/or have cataclysmic events like this hit them. This didn't just hit their retirement nest egg but how they think about the future.
Before the use of debt, consumer spending was about 62% or so of GDP. Only massive use of debt got it up to 70% and that day is never coming back in our lifetime. We will be lucky to just drop to 62% and if that 62% is of a smaller GDP, it is even worse.
That doesn't mean the market won't go up. The number of companies that are international and taking part in a global recovery (if it lasts) are high and converting earnings into a devalued dollar could keep the market in a trading range.
While we could have a major additional down leg in the market, it would probably need a loss of faith in the global recovery. As long a international companies are actually growing earnings, I don't see a test of the old low. But, again, that is only if the global recovery is not an illusion and the jury is still out on that.
" I must respectfully disagree, however, with the idea of including equities trading in GDP."
If we follow the author (Steven Hansen) logic, Madoff has made a gigantic contribution to the GDP and well-being of American people. What a pity he was caught and even punished for his nobel deeds.
IF the idea is to gain insight into inflation or deflation.
In the global economy, inflation/deflation is a relative outcome based upon the behavior of many currencies, not just dollar.
Another if...
IF important currencies share a similar change in M1 velocity with dollars, does this work to forestall inflation?
I will have to think about this. I keep seeing the situation Japan has been saddled with for the last 20 years, with unsalable and insanely over-priced commercial real estate creating false numbers on the balance sheets of the entire national economy.
Will the impact of the subprime assets riding parasitically on the major banks just become an anchor holding back growth, or will the mechanisms set forth to relieve this load really succeed in some reasonable time frame?
But half of the ending points you make are a little baffling. Like your statement "Think of all the boomers who are selling houses and equity for cash." Where on earth do you live?
Steven your profile says you retired in 1995 to sail the world and are in Asia. If you were still living in the USA you'd see what I see.
1st. not one Boomer I know cashed in their house at the housing peak to buy a tent or boat to live in bliss. Had you waited 10 years your houses increase in value who have paid for that boat because the jumbo gains happened 10 years after you sold your home. No research shows boomers sold their 4,000 sq. ft. home to down size to a 1,200 sq. ft. condo. at the 2005-07 peak.
2nd. I agree with 80% of your thinking especially: "Look for more incentives to spend your cash, and more penalties if you do not spend." thats spot on the money as over the last 10 years if you had your money in an American bank or MMF you'd agree SPENDERS have been rewarded at the expensive of SAVERS who get a stinking low 1/4% in Mutual Fund Money Market Funds.
but then you say,"This could be another marker that deflation is grabbing hold. Please, I know prices do not seem to be falling but that is not all of what deflation is about. Consumer price roll backs may never occur in modern day deflation cycles due to global trading" I realize you are an engineer but name me one national know Economist who would agree with that statment.
Steve by definition deflation means prices fall. You can't say modern day deflation means prices may not fall.
As a technician I think the dollar index is showing signs of basing. The extreme bearish sentiment in the dollar is now equal to the bearish sentiment of stocks on march 9, when the market bottomed... Prerequisite levels for a huge reversal.
All recessions are painful, this one somewhat more than some others, yet not even close to the Great Depression, as some hyperbolic commentary would have us believe. And, all recessions are temporary, notwithstanding the suggestion that this will last for years or decades and that we may never recover.
If anything is "different" this time, it's that there's never been anything remotely approaching the expansion of the monetary base that's occurred/occuring this time. It could not be more different in magnitude than past recessions and is diametrically opposite the Great-Depression experience, where the money supply decreased.
It's only because we're still in or close to the nadir of the recession that the monetary impact has not been realized in the economy and prices. As the recovery advances, the velocity of money will increase and, simultaneously, lots of now-dormant capital will start to fly off the sidelines, both in consumption and seeking better investment returns. Demand always precedes supply, so it would be normal for manufacturers, who have ratcheted back inventories and production severely, to get caught in a demand/supply squeeze, at least initially.
Unless the government is able to rein in the vast oversupply of capital it's launched into the system, inflation could ramp up very quickly, as soon as monetary velocity increases. It's nice to hear them say they'll do that, but the track record of governments and politicians, regarding taking goodies away from people rather than providing them, is not very impressive.
Personally, I believe the time to start developing inflation hedges is now, before the outcome is obvious. I favor energy and chemical companies, both common and preferred issues, because they will advance in a recovery, whether inflation shows up sooner or later.
Imagine the Gov't makes known to the public that it has printed $5 Trillion BUT it will be hoarded in a vault that will never be opened. It will never be made available to the public or private sector and the gov't itself can only tap this resource in the most dire of emergencies.
What happens to the price of dollars? Does the mere knowledge of the existence of such a sum of dollars cause inflation even though it will almost never be touched and used?
Or does the fact that it is indeed inaccessible negate the fact that it exists in terms of its effect on money supply and inflation?
I really have no idea, but I tend to think that the mere knowledge of its existance will offer some downward pressure on the dollar..
> The "old normal" is not coming back. There are not enough years to
> recover, via the stock market, the retirement money lost. Likewise,
> with interest rates at zero, baby boomers see that counting on interest
> income is foolish. They are saving every penny they can to have a
> comfortable retirement, and they are not putting it in the stock
> market (fool me once, shame on you...fool me twice, shame on me).
> Bernanke can call them unpatriotic (a very Bush-Cheney thing to do),
> but they will keep saving and stashing under the mattress. The old
> American consumerist is dead and it ain't coming back.
______________________...
Excerpted from chapter 2, “Credit and Credibility” report by Richard Karn:
…A number of President Obama’s economic team served in the Clinton administration and were involved in a range of policy decisions that have enabled some of the most egregious financial misbehavior in American history, including what proved to be significant impetus for increased sub-prime lending and blocking derivative regulation. As the Obama administration has already demonstrated beyond a shadow of doubt, whatever rescue plans the new administration institutes next rely not only on the continuance but also the expansion of the established interventionist monetary policies that has landed us in this predicament. In other words, more of the same—only harder…much harder.
Since no one on the planet consumes as profligately as Americans, emerging markets, especially China, will make a lot of noise but continue to buy US Treasuries to help get Americans back on their feet financially, for there are no other ‘consumers of last resort’ and China can only stockpile so many commodities in anticipation of a rebound that can only go so far without the participation of the world’s largest economies. And that puts the notion of decoupling in a co-dependent light and lays the groundwork for a whole new dynamic…
In addition to this global perspective, Richard Karn reiterates that for as bad as the US has sunk in the derivatives debacle, the EU and others swallowed even greater percentages causing them to continue to look to the US for leadership.
Seems to me the US is being treated as Kobe beef cattle. We just may not be fat enough for slaughter yet. And I for one don’t trust my handlers.
Just because many / most other nations use the same system doesn't mean is the correct system over the long term, as we shall learn...
There are parts of consumer digressionary like say hockey tickets where deflation is simply going to crush pricing. Things which have less over supply will feel the affects of inflation first. Look at gold closing in on $1,000. Where is your deflation now?
Yes, printing money is an economic activity. It is taking an amount of paper worth $100 and putting it through a process that makes it worth $1,000,000. Whoops $990,000. Whoops $980,000. Whoops...
On Sep 03 09:19 AM londres wrote:
> hang on, are you saying ...
>
> "Certain economic activities are missing here including the Federal
> Reserve’s creation of money."
>
> ... printing money is an economic activity?
Great article and great comment stream. One thing is clear, in spite of the scepticism of some commenters: There are many things that are different this time. If we can't get outside of the box to do some of our thinking, the cover of the box might close and leave us all in the dark.
If V goes to zero faster than M goes to infinity, then both sides of the equation will head toward zero, meaning deflation.
Of course,.we'll have inflation if M wins the race (assuming that T doesn't bail us out), but that's not necessarily the more likely case..
On Sep 03 04:02 PM Mike Kane wrote:
> government inflation numbers don't include energy or food, so they have always been bunk anyway...
===============
And with substitution and hedonic adjustments they are usually 4% below reality.
Cost of living wage increases have not kept up with real CPI increase for over 2 decades. Thus, even if we have some deflation, we don't have enough to even get wages back to the buying power they use to have.
Also, it won't be domestic demand that drives prices higher. It will be the 2 billion middle class consumers (buying power not standard of living) that determine the price of oil, wheat, corn, copper, imported goods, etc.
It will be the global economy that determines our fate. It will be the global lenders that determine the value of the dollar.
The U.S. is so far in debt that it is no longer in control of its destiny and the world knows it. That is why BRIC nations are buying IMF bonds with dollars to encourage SDR's be used more as a currency.
The U.S. policies are so bad that foreign nations know the debt they buy from us is high risk debt or will be at some point soon. While most are trying to slowly let the dollar down so as to not collapse the value of the dollars they hold, they are all moving away from the dollar.
The number of non-dollar contracts and trade deals and currency swaps has been growing. At some point we will hit a time when somebody panics and starts selling and then the dollar dominoes will fall.
We are continuing on with the decades old monetary and economic policies that got us in this mess because like any ponzi scheme, you only have two choices. Keep the scheme going until it collapses or end it and face the pain ending it causes.
Top post, Michael Clark writes: “If the price of oil is going up and people are driving less and not buying oil, how can oil keep going up.” His answer is: “Manipulation”.
No wise guy here, but is this general wisdom correct? I do not think so. Prices – or better costing and pricing – of consumer goods can take on a life of their own, not necessarily linked with inflation/deflation (of money supply, debt, credit creation).
Sure, if less buyers are showing up at my gas station, I may try to keep on selling the same quantity of oil by lowering the price. But so does my buddy across the road. At some point, though, we are both unable to cover our fixed cost and stop the ruinous competition and actually increase prices to try to restore our margin in order to pay our bills – based on less oil sold.
All the way upstream, the same may happen: transport cost, storage, refining, repairs and maintenance cost must be distributed over – or covered by – a smaller cake of oil sold, hence cost per unit sold go up and prices may be adjusted – up.
When times are tough and governments are lacking money, it is also know that they increase taxes, royalties. So my cost go up even though I sell less oil.
And lets not forget: Cost may increase, irrespective of the quantity of oil sold, due to ever increasing environmental, safety, health concerns and related laws and regulations.
The same can affect a multitude of everyday products, construction, manufacturing, services. Hence the consumer sees prices going up although more foreclosed houses are lining his street and jobs are lost at a fast clip. He lives inflation during depressing, deflationary times.
Have a good day
Because oil is a global commodity priced in dollars, we suffer every time the dollar falls.
There is more going on, however, more and more of the old oil fields are reporting faster than expected declines in production. New fields in deep water require $70 oil in many cases before the risk/return ratio justifies drilling. Drilling also goes up as the dollar goes down due to all the foreign spending to drill in the fields we don't control.
We have exploration and drilling companies moving to Switzerland to get away from U.S. government policies.
There are also, more and more contracts being made to tie up new discoveries and take that oil off the spot market by China and India and possibly others so that they have a guaranteed supply. However, the reduces the oil we bid on in the spot market and will eventually cause oil shortages here if we don't find more of our own oil to use or make similar contracts.
Any global recovery leads to speculation on oil too. If there is a global recovery, whether we take part or not, there will be supply problems. Supply is just dropping too fast and while demand was dropping faster, it will come back faster than supply too. Many look for oil higher than $145 if there is a global recovery.
If we stay in a depression, then there will be more oil for the emerging markets. This year for the first time, they passed the developed nations in demand for oil since they didn't drop demand as much as the developed nations did and they are still growing.
This is a huge shift in economic power and due to decades of bad monetary, economic and trade policy we have shot ourselves in the foot.
deflation is good for everyone except the banks, and the banks say 'what is bad for me is bad for you.' i say, since the banks thrive during inflation, they should be able to use those profits to get through deflationary periods in order to end the Inflationary Death Spiral (not to mention suffer a little).
2) "Given that between the two, that is over 1/3 of our population, it is a huge paradigm shift in consumer thinking."
3) "Smaller homes, fewer discretionary items, more fear at investing in a rally, etc. This will be with us for years"
4) "While we could have a major additional down leg in the market, it would probably need a loss of faith in the global recovery." ========================
Jan,
1) Other age groups will have more time to re-group. But, this group will have insufficient time or NO time to recover the hit they have taken!
2) Yes, this a paradigm shift. There are those who say this is NO different to other economic slowdowns, but that disregards the facts. The US economy is in the process of lossing 2 of its 3 driving forces (of the last 200 years). With Oil & Population factors already in the process of Peaking, Innovation is now the last new frontier.
3) Falling Housing prices & lower Consumer demand are principal causes of this slowdown, or are they merely symptoms? I suggest that a rapidly aging population and a steadily reducing total population GROWTH RATE, may provide many of the basic cause behind many of the symptoms. Then, throw Oil, which Peaked around 2005 and there is a economic double whammy, of once in history proportions!
4) as you correctly point out, even though the US is still the pre-dominant Global economic force, if the rest of the world picked up, then all would be well.
That said, there are two major problems!
First, the US GDP is as big as the next 3 countries GDP combined, which means there is NO de-coupling likely, at this time.
Second, the rest of the developed world and including the BRIC countries, have the same major problems, Population Aging, slowing total population growth rates & Peak Oil!
So, leaving aside the spin of self-interested party's, THE QUESTION is, "WHAT IS THE CIRCUIT BREAKER THAT WILL RE-START ECONOMIC GROWTH?
On Sep 03 01:58 PM Tack wrote:
> So many people seduced by the 'this time it's different" philosophy.
... And, all recessions are temporary, notwithstanding the suggestion that this will last for years or decades and that we may never recover. >
I agree with most of what you say, but I'm not so sure about the above, which began your reply. It may be true, but I don't think we can count on it just because that has what has happened in prior recessions. As you note, the circumstances now are different than they were during the Depression, but they are also different than in prior recessions.
I hope we pop out of it quickly, but I'm afraid we have some systemic problems that will likely be giving our economy headwinds rather than the tailwinds we've enjoyed previously. For instance, we have a very large debt load that is growing at a historic rate, with a lot of baby boomers about to retire, transforming a very large portion of our population from producers and taxpayers, to a net drain on government assets.
Similarly, the industrial revolution was fueled by cheap energy, and it appears at the moment that energy may become significantly more expensive as a much larger percentage of the world population vies for shrinking supplies of more difficult, and more expensive to extract resources.
Maybe some new technological breakthrough will come and rescue the day when we need it most, but I don't think it is a given. I'm reminded of the video clip of Bernanke fluffing off the warnings of a potential housing bubble by remarking that housing prices had never dropped in the history of our country. I think that illustrates that the past is no absolute guarantee of the future no matter how much we wish it were so.
A lot of people don't seem to get that there are 2 different kinds of things subject to inflation/deflation. Consumer Price Inflation is a nonentity in our present troubles. Throughout the years of inflating asset bubbles the Fed and the world's central bankers, despite repeated warnings from BIS chief economist William White and his crew, kept their eyes firmly fixed on CPI and saw that it was flat. So the central bankers saw "clear sailing" when in fact massive bubbles were forming first in tech stocks then in real estate.
New money in the form of bank loans tends to inflate asset prices, not consumer prices. About 75% of the total money in existence was created by banks as mortgage loans. During Greenspan's 2000s we saw a tremendous increase in mortgage lending which inflated the housing bubble. All that money coming into the economy put money in people's pockets and exuberance in their hearts so they leveraged up their consumption even more. This created bubble demand for all kinds of consumables, and the stores that sell them, and the commercial real estate where the stores are located.
This debt-fueled real estate bubble is what is now deflating because too many of those borrowers cannot make their payments. Those houses and strip malls are the collateral for all the mortgages the banks made, and a bank's collateral is its "assets". The price of those assets has been rapidly deflating.
Remember, there are 2 sides to 'debt'. The borrower has debt. The person who the borrower bought a house or a car or whatever from has the money. The money did not disappear from the economy. Buyers have debt, sellers have money.
All the people who built and sold all that real estate and other bubble consumer goods have cash in the bank. Depositors' balances are the main category of a bank's "liabilities". When a bank's assets are worth less than its liabilities that bank is technically "insolvent", because if the bank had to immediately liquidate assets to pay out its depositors' balances the bank would not be able to raise enough money.
Bank's are required to hold a capital cushion to cover this difference. As the value of their collateral fell, regulators required banks to accumulate a greater cushion against potential insolvency.
FDIC deposit insurance prevents old fashioned 'runs' on banks where depositors who fear their bank is insolvent scramble to get their money out before the bank runs out of money. And just because a bank is technically insolvent does not mean it needs to be shut down and its assets sold to solvent banks. If a bank's mortgage customers are making their payments then it really doesn't matter if the house they're paying on is worth less than the mortgage, because the owner doesn't plan to default or sell the house in a depressed market so the bank will not realize the paper loss of the house's value.
My point is that the inflation all occurred in bubbling asset prices, not CPI, and the deflation is now occurring in those same assets. We should not even be looking at CPI in the present context because it just confuses our idea of what it is we are dealing with today. We are dealing with asset deflation and its consequences for the banking system.
But you are comparing apples to oranges, instead of apples to apples-- or debt recessions to debt recessions. This is not a garden variety recession, as when the economy simply over-expands and needs to contract somewhat. This is the most massive debt bubble the world has seen, and the deleveraging will continue for years. It simply takes a long time to unwind so much bad debt, and the government is stalling (but not helping) the process, With or without government interference, the deleveraging will continue.
Inflation is not likely to be an issue as long as CRE is collapsing, homes are being foreclosed on at record rates, and unemployment is 16% and rising (No, it is not 9.5 %. Everybody knows it but we pretend that the government is not lying-- even though we only have to glance down a few lines of the employment data.)
Retailers do not have any pricing power at this time. Most of them are just trying to churn their inventory and keep some cash flowing through the company. And everybody is doing it, because nobody wants to forfeit market share which they will never regain.
Yes, the government has increased the money supply. But at this time, there is no velocity. But what is being overlooked here is that we have a credit economy. And it is the credit supply that has been severely contracted. It is not enough to compare money supply to money supply. The credit contraction has been huge.
It's not different at all this time. And deflation is not knocking-- it is standing in your living room.
On Sep 03 01:58 PM Tack wrote:
> So many people seduced by the 'this time it's different" philosophy.
>
>
> All recessions are painful, this one somewhat more than some others,
> yet not even close to the Great Depression, as some hyperbolic commentary
> would have us believe. And, all recessions are temporary, notwithstanding
> the suggestion that this will last for years or decades and that
> we may never recover.
>
> If anything is "different" this time, it's that there's never been
> anything remotely approaching the expansion of the monetary base
> that's occurred/occuring this time. It could not be more different
> in magnitude than past recessions and is diametrically opposite the
> Great-Depression experience, where the money supply decreased. <br/>
>
> It's only because we're still in or close to the nadir of the recession
> that the monetary impact has not been realized in the economy and
> prices. As the recovery advances, the velocity of money will increase
> and, simultaneously, lots of now-dormant capital will start to fly
> off the sidelines, both in consumption and seeking better investment
> returns. Demand always precedes supply, so it would be normal for
> manufacturers, who have ratcheted back inventories and production
> severely, to get caught in a demand/supply squeeze, at least initially.
>
>
> Unless the government is able to rein in the vast oversupply of capital
> it's launched into the system, inflation could ramp up very quickly,
> as soon as monetary velocity increases. It's nice to hear them say
> they'll do that, but the track record of governments and politicians,
> regarding taking goodies away from people rather than providing them,
> is not very impressive.
>
> Personally, I believe the time to start developing inflation hedges
> is now, before the outcome is obvious. I favor energy and chemical
> companies, both common and preferred issues, because they will advance
> in a recovery, whether inflation shows up sooner or later.
This housing mess would have been long taken care of if it were not for the real estate taxes.
All those that cry inflation are premature as to assessing the true risk in the markets.
I believe Bernanke has a true understanding that the first priority is to protect against asset deflation when it comes to implementation of monetary policy.
Want the proof? Why isn't gold trading at $3,000 per troy ounce--and why did it barely clip $1,000 in the height of the credit crisis/market crash during 2008?
On Sep 03 11:26 PM Mr. Ed, Jr. wrote:
> No, we are not seduced by the "This time it's different" philosophy.
>
>
> But you are comparing apples to oranges, instead of apples to apples--
> or debt recessions to debt recessions. This is not a garden variety
> recession, as when the economy simply over-expands and needs to contract
> somewhat. This is the most massive debt bubble the world has seen,
> and the deleveraging will continue for years. It simply takes a long
> time to unwind so much bad debt, and the government is stalling (but
> not helping) the process, With or without government interference,
> the deleveraging will continue.
>
> Inflation is not likely to be an issue as long as CRE is collapsing,
> homes are being foreclosed on at record rates, and unemployment is
> 16% and rising (No, it is not 9.5 %. Everybody knows it but we pretend
> that the government is not lying-- even though we only have to glance
> down a few lines of the employment data.)
>
> Retailers do not have any pricing power at this time. Most of them
> are just trying to churn their inventory and keep some cash flowing
> through the company. And everybody is doing it, because nobody wants
> to forfeit market share which they will never regain.
>
> Yes, the government has increased the money supply. But at this time,
> there is no velocity. But what is being overlooked here is that we
> have a credit economy. And it is the credit supply that has been
> severely contracted. It is not enough to compare money supply to
> money supply. The credit contraction has been huge.
>
> It's not different at all this time. And deflation is not knocking--
> it is standing in your living room.
>
>
The reason why all the vast expansion of the money supply isn't impacting circulation and velocity is that the banks have stockpiled vast sums (alltime record levels of liquidity, in fact), for two reasons: 1) to cover the "paper" devaluation of their capital because of the overdepreciated market in debt securities of all kinds, much of which they have taken huge reserves against, and 2) because, contrary to the media's repetitive stories about banks' "refusals" to lend, their has been a large contraction in loan demand, both by businesses and consumers, who have been paying down debt.
The problem arises when recovery begins to ensue and confidence increases, causing asset values to be bid up, as we're seeing in the stock market, and --yes, even those supposed "toxic" loans that have been marked down into oblivion. When that happens, the banks will find their "toxic" assets suddenly not so toxic (that's why they haven't wanted to sell them for a pittance, too, but that's another story), and they will be reversing lots of unneeded reserves and finding themselves awash in extra capital that they'll want to deploy and on which they'll want better returns than now.
Unless the government acts very expeditiously, we'll see the confluence of returning consumer demand with the banks' pockets full of extra cash, just waiting to be deployed in new lending and investment. All that moribund capital that many are saying has no effect, now, will be moving into motion and flooding into the general economy. That will necessarily cause inflation unless the money supply is reduced.
The idea that the massive increase in money supply will remain perpetually stagnant is the major fallacy in the anti-inflation argument.
On Sep 03 11:26 PM Mr. Ed, Jr. wrote:
> No, we are not seduced by the "This time it's different" philosophy.
>
>
> But you are comparing apples to oranges, instead of apples to apples--
> or debt recessions to debt recessions. This is not a garden variety
> recession, as when the economy simply over-expands and needs to contract
> somewhat. This is the most massive debt bubble the world has seen,
> and the deleveraging will continue for years. It simply takes a long
> time to unwind so much bad debt, and the government is stalling (but
> not helping) the process, With or without government interference,
> the deleveraging will continue.
>
> Inflation is not likely to be an issue as long as CRE is collapsing,
> homes are being foreclosed on at record rates, and unemployment is
> 16% and rising (No, it is not 9.5 %. Everybody knows it but we pretend
> that the government is not lying-- even though we only have to glance
> down a few lines of the employment data.)
>
> Retailers do not have any pricing power at this time. Most of them
> are just trying to churn their inventory and keep some cash flowing
> through the company. And everybody is doing it, because nobody wants
> to forfeit market share which they will never regain.
>
> Yes, the government has increased the money supply. But at this time,
> there is no velocity. But what is being overlooked here is that we
> have a credit economy. And it is the credit supply that has been
> severely contracted. It is not enough to compare money supply to
> money supply. The credit contraction has been huge.
>
> It's not different at all this time. And deflation is not knocking--
> it is standing in your living room.
>
>
Because there are 35 million others waiting for your spot.
A 2 or 3 trillion dollar injection into the economy isn't going immediately offset the close to 10 trillion dollar contraction due to the recent, massive losses.
Deflation first. Then, sure, inflation.
On Sep 03 10:37 AM Jan Paul wrote:
> Oil, wheat, copper, etc. are sold in dollars and bid on globally.
> Thus, if the dollar is falling to other currencies the price will
> go up even if they bid the same in their currency before they convert
> that bid to dollars to make the purchase.
>
> Oil, when supply and demand are close to balance, will go up $4 for
> each 1% drop in the dollar, now. However, when we get a bearish
> oil report it may only go up $2 for a 1% drop or really bearish,
> not much at all. Seldom has oil been going down when the dollar
> is going down.
>
> When the dollar was at 72, oil was at $145. When the dollar rallied
> to 89 or so, oil dropped to $34 or so. Then the dollar dropped to
> 79 or 11% and oil has risen near $40 so the extra supply has kept
> it a little lower.
>
> If the dollar should fall to 72 again, we will have $100 oil even
> if their is an oversupply of oil.
>
> The same will happen with wheat or copper. A falling dollar will
> make raw materials we import rise. Also, grains that are sold globally
> will rise because farmers will be paid for a grain that can be exported
> into the global market where the weak dollar will make their price
> much higher.
>
> Thus, we can be in a depression, no demand, no velocity of money,
> falling asset prices and have food and energy going up as well as
> medical costs because we import a lot of things we used in the medical
> sector. Lipitor and Zucor, for example come from Ireland. Rubber
> gloves come from Malaysia and China.
>
> The idea that exports are helped with a falling dollar, is faulty
> in several ways. First the raw materials cost more. Transportation
> to the ports and ships go up with rising energy prices. Electric
> prices go up. So, much of the "advantage" is lost and if it is an
> export that is also sold domestically, the domestic sales drop as
> wages and other factors cut back spending here.
>
> A strong, stable currency is "best" and we don't have that.
On Sep 03 09:19 AM londres wrote:
> hang on, are you saying ...
>
> "Certain economic activities are missing here including the Federal
> Reserve’s creation of money."
>
> ... printing money is an economic activity?
On Sep 03 10:58 AM conceptwizard wrote:
> The economy is experiencing system-wide deleveraging and deflation
> is now visible in every sector of the economy. Exports are down YOY,
> so is trucking. Railroad freight is off 18 per cent year-over-year.
> Department stores, building materials, restaurants, furniture sales,
> appliances, travel, retail, outdoor equipment, tech; down, down,
> down, down, down and down. You name it; it's down. Consumer credit
> is plummeting and personal savings are up. Industrial production
> is down, PPI down. Capacity utilization has slipped to 68.5 per cent.(another
> record) There's so much slack in the system, inflation could be low
> for years. Commercial real estate--a $3.5 trillion industry--is plunging
> faster than residential housing. Corporate bond defaults are at record
> highs, Treasury yields are flat, and the dollar index is teetering
> at the brink. It's a wasteland.
Short: solar, wind. They just don't have a chance against the $0.04 / kWh of fusion plants.
long: put options on TLT. won't be immediate, but it will happen that interest rates rise.
On Sep 03 10:06 PM perceptions_now wrote:
> So, leaving aside the spin of self-interested party's, THE QUESTION
> is, "WHAT IS THE CIRCUIT BREAKER THAT WILL RE-START ECONOMIC GROWTH?
The FED has flooded the system with money but the banks are hoarding it as well as individuals.
The velocity of money has dived because people are losing their careers; not just their "job".
People who have worked for 20-30 years in a career are getting laid off to increase company profits in the short term. The banks have tightened lending and raised fees and interest rates. This means people have less to spend, even if they have a job. Unless, of course, they want to go into more debt...
We've had a blip up in housing and in employment...in June and July...hmmm...kind of like a blip up in sales during Christmas? An $8,000 tax credit didn't hurt, nor did FHA guaranteeing loans up to $750,000 (crazy).
Deflation is the front end, as every entity and individual contracts. Eventually, interest rates will have to go up to discourage debt borrowing and to inflate away current debt. The dollar will drop even if it is the reserve currency. However, the run up in gold and China signaling an exit from the dollar are not good signs either.
The whiplash of inflation or hyperinflation will eventually come around if the FED does not pull back. The problem is, in the next two years there is not a politcally expedient time for doing this.
the dollars downward spiral. Anyone familar with
a sand pile to which not one more grain could be
added without collapsing the pile onto itself. The
CASCADE effect is not where you want to be.
On Sep 04 04:27 AM DaMamba wrote:
> That is why i think the fed/government is incentivised to let the
> markets crash.
Your velocity figure is wrong. Income velocity is a contrived figure. It's the transactions velcocity of money that represents the actual exchange of money.
i guess the disagreement is the fact you do not consider income as a transaction. yet, in the NIPA tables income = expenses. would you not consider an expense as a transaction?
i only used the income side because it is easier to derive. and using income is an acceptable method to derive GDP:
"GDP can be defined in three ways, all of which are conceptually identical. First, it is equal to the total expenditures for all final goods and services produced within the country in a stipulated period of time (usually a 365-day year). Second, it is equal to the sum of the value added at every stage of production (the intermediate stages) by all the industries within a country, plus taxes less subsidies on products, in the period. Third, it is equal to the sum of the income generated by production in the country in the period—that is, compensation of employees, taxes on production and imports less subsidies, and gross operating surplus (or profits)."
so the only argument is what portion of our total account table should you use to derive money flow.
you would prefer i stuck with the portion of the account table which is GDP. But yet the government cannot decide exactly what should be in GDP - look at their revision to GDP in the last quarter.
i feel it is better to look at raw numbers - and then start excluding data if it is determined to be unsuitable for a particular analysis.
you are free to use GDP in your velocity analysis and i will not consider it incorrect as it is what it is - a partial view of economic activity divided by a total of money supply.
Limiting PT to GDP or NIPA or some other income type measure gives us a velocity number that is not really what we are after, not particularly meaningful and is only comparable to V in the same analysis for other periods. However, even that, viewed as a sampling, may not be particularly useful when we seek to get a fix on the true velocity of money in the economy.
the printing of money has made the M2 useless as a measure. i did a separate analysis using the M2 and it moves around too much (especially during this recession where the fed flooded the market with liquidity prior to the recession taking hold). try it yourself.
if you go to my original article on this subject seekingalpha.com/artic... you will see the graph showing graphically the correlation between using the M1 for velocity calculations and economic cycles. whether some text book disputes whether this is the way you should be calculating velocity of money - my position is that it does work.
the whole purpose of my articles is to open your mind to economics. it is not a science. if it were, we would not have had our great recession. formulas in economics are an expression of concept - belief that the answer produced can be relied upon for economic comparisons will invariably lead to incorrect conclusions.
and there is even debate on the meaning of the results of velocity of money calculations.
so this is not an empirical topic, there is no "correct" or right way as all ways have limitations and are subject to interpretation. I have a problem with the text book ways to calculate velocity of money as they have been providing erroneous results since 2000.
Maybe over the next 10 years, my suggested method will not work - who knows? anyway, for me the fun is going through the logic process, presenting alternate views for consideration, and getting feedback from knowledgeable commenters like you.
The moral is that business takes care of itself and its own bottom line -- everything else be damned.
Deflation is actually what we need. We've had 20 years of price inflation in the name of global expansion. We need to contract prices and work on eliminating debt. Interest rates have to go up. We should have begun raising rates in 1999 slowly.
In line with the economic breathing pattern:
1965: contraction begins. Begin raising interest rates slowly in 1963.
1983: expansion begins. Begin raising interest rates slowly in 1981.
2001: contraction begins. Begin raising interest rates slowly in 1999.
2019: expansion begins. Begin raising intrest rates slowly in 2017.
Of course no politician will raise interest rates and contract the economy if an election is coming on. That is why the Fed is independent (supposedly). The Fed is supposed to be independent of the politicians -- but also independent of the bankers. The Fed can be the leader, without regard for the election cycle.
To lead the expansion-contraction curve, the Fed would have to see that the contraction cycle is JUST AS VITAL as the expansion cycle. The Greenspan-Bernanke cult view the contraction cycle as an enemy that must be defeated at all costs. That is why they have turned a normal deflation cycle into a global depression that will disrupt the world and overthrow governments and probably generate wars. Rise and fall; breathe in (inspire) and breathe out (expire) -- think about the meaning of the words 'inspire' and 'expire'. Contraction is the time of inspiration; expansion is the time of expiration (we are expiring right now). Day and Night. Act and Rest. That is the law.
We need a new business model. And we need a healthy dose of protectionism. The global business model had two goals: (1) Cheap production and labor costs -- and lax regulations for safety, workers' rights, workers' benefits, so they transfered operations to the third World, where a bribe is all it takes to win government friendship; (2) to break the back of American (and European) labor. All the high-minded talk about one-world was a smoke-screen. Business wanted: low costs and high profits. They forgot one thing. If they are impoverishing American workers, who will buy their over-priced products. Well, if the banks and government kept debt cheap, then they could not only break the back of American labor, they could also turn the American worker into a debt slave. What a beautiful system, a two-edged knife, that worked overseas and at home.
For those who say all we need to save America is a return to power of Republicans, let me remind them that the Republican business model (to which democrats enrolled, seduced by bribery and enriched campaign coffers) brought us to ruin. Free business, let them govern themselves, keep government from regulating business. That is the Republican mantra. But business has proved that it has no conscience, that profit is its ONLY concern.
We really can't expect big business to create quality jobs for Americans now, since their goal has been and still is to export costs and jobs to improve their bottom line. That's why we need a healthy dose of protectionism, to re-create the American economy, putting American workers back to work, and regenerating America's manufacturing sector. New tax laws that punish companies for exporting jobs will be a good first start; after we prune back banks, insurance companies, and any and all corporations that are 'too big to fail' without dragging down America with it. After the tree gives its fruit, prune it back so it will be fruitful during the next season of growth.
We idly sit back and watch Japanese and German and Swedish and Korean cars sell in America while our own industry goes bankrupt. What can we do? The ideology says that we need to keep the playing field level. We all know the playing field isn't level; that all countries put their own industries first. But, still, we pretend that the system is fair -- and watch our industries decline; and we say, 'that's fate I guess'. And we keep buying Japanese and German cars. We don't need to do that.
Another reason American business costs are so high is the cost of health-care for American companies. National health-care is necessary for American business. Look at Japan, Taiwan, Europe, England, China..they all have national health-care that costs a fraction of what Americans pay for health-care. We're not spectacularly more healthy than these other people in other countries. Japanese and Taiwanese and French live longer than we do. Why are we paying so much, and getting so little back; and bankrupting our companies at the same time with health-care costs?
We've been programmed by the Republicans to equate National Health Care with Atheism, with 'loss of freedom' -- come on, bankruptcy from medical costs and death from lack of care is a REAL loss of freedom; national health care is only loss of money for doctors, insurance and drug companies -- and politicians, through bribery and campaign contributions.
Protectionism changes the world. It will make export-driven low-resource countries (Germany, Japan, etc.) more desperate, and probably more politically unstable and aggressive. But I'm not sure it is our destiny to put German and Japanese interests ahead of our own? We've taken on a huge debt buying other people's products. And we've ceased being a producer society in the process.
On Sep 04 02:41 PM ebworthen wrote:
> Short version: Great Depression II is imminent.
>
> The FED has flooded the system with money but the banks are hoarding
> it as well as individuals.
>
> The velocity of money has dived because people are losing their careers;
> not just their "job".
>
> People who have worked for 20-30 years in a career are getting laid
> off to increase company profits in the short term. The banks have
> tightened lending and raised fees and interest rates. This means
> people have less to spend, even if they have a job. Unless, of course,
> they want to go into more debt...
>
> We've had a blip up in housing and in employment...in June and July...hmmm...kind
> of like a blip up in sales during Christmas? An $8,000 tax credit
> didn't hurt, nor did FHA guaranteeing loans up to $750,000 (crazy).
>
>
> Deflation is the front end, as every entity and individual contracts.
> Eventually, interest rates will have to go up to discourage debt
> borrowing and to inflate away current debt. The dollar will drop
> even if it is the reserve currency. However, the run up in gold
> and China signaling an exit from the dollar are not good signs either.
>
>
> The whiplash of inflation or hyperinflation will eventually come
> around if the FED does not pull back. The problem is, in the next
> two years there is not a politcally expedient time for doing this.
However I Must Disagree With This Statement Of Yours:
"We've been programmed by the Republicans to equate National Health Care with Atheism, with 'loss of freedom' -- come on, bankruptcy from medical costs and death from lack of care is a REAL loss of freedom; national health care is only loss of money for doctors, insurance and drug companies -- and politicians, through bribery and campaign contributions." - Michael Clark
"Bribery" will not be removed with the passing of laws that do not address "Bribery".
As Structured/Discussed => Governmental Health Care Will Be Detrimental.
Treat The Disease Not The Symptoms.
Things Are "Askew" Because "Government Has Tipped The Scales". Incentive For Dubious Act Is Written Into "Loop Holes And Laws".
I do not want "Government Run Health Care" In ANY FORM => Government Does Nothing Well.
Government Is To "Referee" And Never "Run" Any Service.
Yes => "The Ref Seems To Have Left"; Or Joined The Highest Paying Team.
On Sep 06 03:07 AM Michael Clark wrote:
> Excellent comment EBWorthen. How many bankers, financial officers
> lost their jobs? Who is creating new jobs for them? McDonalds?
> The whole idea was that we could give up manufacturing jobs to Asia
> and keep the information jobs (finance, insurance, etc.) for Aemricans...except
> now we're doing away with the finance jobs also.
>
> The moral is that business takes care of itself and its own bottom
> line -- everything else be damned.
>
> Deflation is actually what we need. We've had 20 years of price
> inflation in the name of global expansion. We need to contract prices
> and work on eliminating debt. Interest rates have to go up. We
> should have begun raising rates in 1999 slowly.
>
> In line with the economic breathing pattern:
> 1965: contraction begins. Begin raising interest rates slowly in
> 1963.
> 1983: expansion begins. Begin raising interest rates slowly in 1981.
>
> 2001: contraction begins. Begin raising interest rates slowly in
> 1999.
> 2019: expansion begins. Begin raising intrest rates slowly in 2017.
>
>
> Of course no politician will raise interest rates and contract the
> economy if an election is coming on. That is why the Fed is independent
> (supposedly). The Fed is supposed to be independent of the politicians
> -- but also independent of the bankers. The Fed can be the leader,
> without regard for the election cycle.
>
> To lead the expansion-contraction curve, the Fed would have to see
> that the contraction cycle is JUST AS VITAL as the expansion cycle.
> The Greenspan-Bernanke cult view the contraction cycle as an enemy
> that must be defeated at all costs. That is why they have turned
> a normal deflation cycle into a global depression that will disrupt
> the world and overthrow governments and probably generate wars.
> Rise and fall; breathe in (inspire) and breathe out (expire) -- think
> about the meaning of the words 'inspire' and 'expire'. Contraction
> is the time of inspiration; expansion is the time of expiration (we
> are expiring right now). Day and Night. Act and Rest. That is
> the law.
>
> We need a new business model. And we need a healthy dose of protectionism.
> The global business model had two goals: (1) Cheap production and
> labor costs -- and lax regulations for safety, workers' rights, workers'
> benefits, so they transfered operations to the third World, where
> a bribe is all it takes to win government friendship; (2) to break
> the back of American (and European) labor. All the high-minded talk
> about one-world was a smoke-screen. Business wanted: low costs and
> high profits. They forgot one thing. If they are impoverishing
> American workers, who will buy their over-priced products. Well,
> if the banks and government kept debt cheap, then they could not
> only break the back of American labor, they could also turn the American
> worker into a debt slave. What a beautiful system, a two-edged knife,
> that worked overseas and at home.
>
> For those who say all we need to save America is a return to power
> of Republicans, let me remind them that the Republican business model
> (to which democrats enrolled, seduced by bribery and enriched campaign
> coffers) brought us to ruin. Free business, let them govern themselves,
> keep government from regulating business. That is the Republican
> mantra. But business has proved that it has no conscience, that
> profit is its ONLY concern.
>
> We really can't expect big business to create quality jobs for Americans
> now, since their goal has been and still is to export costs and jobs
> to improve their bottom line. That's why we need a healthy dose
> of protectionism, to re-create the American economy, putting American
> workers back to work, and regenerating America's manufacturing sector.
> New tax laws that punish companies for exporting jobs will be a good
> first start; after we prune back banks, insurance companies, and
> any and all corporations that are 'too big to fail' without dragging
> down America with it. After the tree gives its fruit, prune it back
> so it will be fruitful during the next season of growth.
>
> We idly sit back and watch Japanese and German and Swedish and Korean
> cars sell in America while our own industry goes bankrupt. What
> can we do? The ideology says that we need to keep the playing field
> level. We all know the playing field isn't level; that all countries
> put their own industries first. But, still, we pretend that the
> system is fair -- and watch our industries decline; and we say, 'that's
> fate I guess'. And we keep buying Japanese and German cars. We
> don't need to do that.
>
> Another reason American business costs are so high is the cost of
> health-care for American companies. National health-care is necessary
> for American business. Look at Japan, Taiwan, Europe, England, China..they
> all have national health-care that costs a fraction of what Americans
> pay for health-care. We're not spectacularly more healthy than these
> other people in other countries. Japanese and Taiwanese and French
> live longer than we do. Why are we paying so much, and getting so
> little back; and bankrupting our companies at the same time with
> health-care costs?
>
> We've been programmed by the Republicans to equate National Health
> Care with Atheism, with 'loss of freedom' -- come on, bankruptcy
> from medical costs and death from lack of care is a REAL loss of
> freedom; national health care is only loss of money for doctors,
> insurance and drug companies -- and politicians, through bribery
> and campaign contributions.
>
> Protectionism changes the world. It will make export-driven low-resource
> countries (Germany, Japan, etc.) more desperate, and probably more
> politically unstable and aggressive. But I'm not sure it is our
> destiny to put German and Japanese interests ahead of our own? We've
> taken on a huge debt buying other people's products. And we've ceased
> being a producer society in the process.
On Sep 04 12:00 AM C.S. Jefferson wrote:
> Deflationary pressure isn't knocking, it's here! It's been steadily
> eroding liquidity in the markets by not allowing the ol' Ponzi scheme
> of floating outrageous debt to equity ratios based on paper assets!
>
>
>
> All those that cry inflation are premature as to assessing the true
> risk in the markets.
>
> I believe Bernanke has a true understanding that the first priority
> is to protect against asset deflation when it comes to implementation
> of monetary policy.
>
> Want the proof? Why isn't gold trading at $3,000 per troy ounce--and
> why did it barely clip $1,000 in the height of the credit crisis/market
> crash during 2008?