Alexander Mizan

The Unsustainable Lie of Inflation

Paco,

I tend to agree with you that the government in the last few decades (probably since Nixon took us off the gold standard completely) has shown consistent euphoria in printing dollars and devaluing the currency vis-a-vis real goods. I also agree that real wealth is derived from efficiencies, technological and educational, not from economic policies.
Yet, I think you should reexamine your thesis when it comes to controlled inflation coupled with responsible fiscal and monetary policies.Studies in history, psychology and economics have clearly shown that the best environment to operate an economy is in fact controlled inflation.
The reason for this is that an economy can only grow when people are willing to spend money. An economy where people expect money to be worth more in the future than the present is going to be inherently stagnant. Due to game theory, the people who save while the rest are spending are better off, but if all of us were saving and nobody spending we would have a phenomenon of a protracted recession or depression.
That would result in economic contraction and lack of productive investment because nobody would be willing to invest or consume. With lack of productive investments, you would not see the technological breakthroughs that do in fact bring progress, prosperity and eventually wealth to a society as a whole.
I think the problem lies herein and if we exclude the last 2 years, I think the Fed has been a responsible actor in managing monetary policy. The underlying problem lies in the fact that the last 20-30 years, the percentage of REAL productive investment in technology, R&D, education etc has declined vis-a-vis consumption.
This is a direct result of government policies that focused more on maintaining consumption rather than investment and unfortunately that is the responsibilty of the government and sorry to say the people that voted for it. I can still recall a previous President calling for the American People to "go out and shop". And this comment is not partisan. I think the leaders available that can re-focus on the long-run well-being of their voters are greatly diminished compared to the 40s, 50s and 60s but that has to do more with the people who elect them. Unlike Nazi Germany, we do live in a free country, so the ultimately responsiblity falls on the shoulders of the American people who fail to vote out the incumbents and ask for REAL change.

Celebrating the 'Recovery': I'm Disgusted

Very good points but your article seems like you are sitting on the sidelines and complain. I don't like it either but as Bernanke said and you state, the Feds are in control.
They will unfortunately keep bailing us because we, as voters, are either indiffernt, complacent or just sitting pretty and simply quiet co-conspirators in this game.
American voters are just too fat and happy and once someone is born with a golden spoon in mouth, one is very hard to go back to hard work. The Senators & Congressmen are merely reflecting this weakness. They want to get reelected so the listen to the voter's pulse that does not want any pain and simply wants to postpone the day of reckoning.
And so the story goes. Bernanke said the governemnt has the power to do that, will exercise this power. Eventual victim will be the dollar and our lifestyle vis-a-vis what it used to be 10 years ago and vis-a-vis the rest of the world. America will still be the most affluent country in the world but this time a little poorer than it used to be...

Portland General: Profiting from 'Static Electricity'

Nice trade suggestion.

To Monetize or Not to Monetize: Who Cares?

Fed lends money to banks throught the discount window at the discount rate (fed funds rate + 50 bp)

Banks right now instead of lending it out to businesses, individuals etc are afraid. Instead they are hoarding it. They don't really lock the Ben Franklins in vaults. What they do is Buy Treasuries at ridiculously low rates (10-year is now trading at 2.40%). The Fed is basically forcing them to borrow at the window due to the so called "target rate" and they do that by buying the treasuries themselves in competition with the banks. I guess some people here argued that they do that to make them so unattractive so that the banks start lending to real causes again. That's Monetization and it does hurt the currency. Simple laws of supply and demand. Someone also called it very accurately displacement.

So, as of right now the excess monetary supply has not yet hit the real goods market (main street) and that's why we are not seeing any signs of inflation. But at some point the banks will realize that it's stupid to buy T-bills at these stupid levels and find "better" return scenarios in other investments. The spreads between the G-bonds and the C-bonds will close and the corporate market will get flooded with money. That will be the bottom and possibly (if the fed doens't start raising rates quick and drain the market off the excess supply) the start of runaway inflation like some pundits accurately claim. Obama seems to be on top of that (thank god Bush is out) as I heard him talking about it in an interview the other day.

So, watch out for the corporate bond market and watch those spreads. Once the banks flood that market with money, it's like a show of confidence that there will be no bankruptcies, defaults etc and a sign that they are tired of the 2.5% unheard-of yield in the 10 year.

Next step: The companies basically take all this cheaply borrowed money and start spending it in investments, goods, you name it. Then you have too much money chasing too little goods (i.e. inflation), unless of course you have the political muster to stop the bubble, which I haven't seen anyone so far do...

And as far as Gold: I doubt the world is coming to an end. You'll know of WWIII when you see trade barriers going up but we are not even close to that... I would rather much go with Yen or Euro or Commodities...

Is the U.S. Solvent?

I am not sure but from what I remember from my Macro class in college it should go something like this:
1. Fed lends money to banks throught the discount window at the discount rate (fed funds rate + 50 bp)
2. Banks right now instead of lending it out to businesses, individuals etc are afraid. Instead they are hoarding it. They don't really lock the Ben Franklins in vaults. What they do is Buy Treasuries at ridiculously low rates (10-year is now trading at 2.40%). The Fed is basically forcing them to borrow at the window due to the so called "target rate" but that's a topic for another discussion.
So, as of right now the excess monetary supply has not yet hit the real goods market (main street) and that's why we are not seeing any signs of inflation. But at some point the banks will realize that it's stupid to buy T-bills at these stupid levels and find "better" return scenarios in other investments. The spreads between the G-bonds and the C-bonds will close and the corporate market will get flooded with money. That will be the bottom and possibly (if the fed doens't start raising rates quick) the start of runaway inflation like some pundits claim.
So, watch out for the corporate bond market and watch those spreads. Once the banks flood that market with money, it's like a show of confidence that there will be no bankruptcies. The companies basically take all this cheaply borrowed money and start spending it in investments, goods, you name it. Then you have too much money chasing too little goods (i.e. inflation).

My two cents.



On Jan 09 09:51 AM Long John Silver wrote:

> When the Fed starts buying up all the new Treasuries that need to
> be issued, exactly how does that result in monetizing the debt? I
> know intuitively that this must be correct, but technically, how
> does the money that the Fed gives the Treasury get into circulation?
> Is it through government expenditures (e.g., procurement on contracts,
> Social Security payments etc?). Insights?
>

Why the U.S. Should Learn from China's Foresight

Great article and excellent comments from everyone. I am a European living in the US for the last 11 years...
I came here because this country use to export hope. It used to export jeans, music, cars, movies, Coke, computers. Even if you are a fan of guns & ammo, it used to do that too. We produce less and less by the day. Instead of debating the automobile bailout but approve the banking bailout in a second, maybe we should have let the banks falter and maybe think of how we can save the auto industry (never mind with the fools in place, we cannot even do that) because they actually produce something, albeit broken at the time...

Well, the good old US of A is still the biggest superpower in the world. Both economically and militarily, so for the next 5-10 years, we will just keep seeing erosion of the middle class, greater wealth disparity and decline of our relative standard of living vis-a-vis other countries, primarily Asia. The vehicle for doing this would most likely be the massive, yet gradual, depreciation of the dollar. The fed and the government HAD TO choose between:

A) Depression-era unemployment and credit destruction so large, which in the 30s eventually led to greater problems such as trade barriers, rise of fascism and communism (yes, those forces were strong in the US as well if you look at the history books) and eventually WWII

B) Slow destruction of the dollar, so that the average American does not realize that his purchasing power is declining compared to the rest of the world. In fact, what is happening now if only acceleration of what has been happening in the last 15 years. Just faster continuation of the trend.

So, how can you blame the Govt? If you had to make that choice, I am sure you would choose B as well. Who would want millions of people to suffer. You could have riots, hunger and most importantly a quick change in those who are holding office!!

But the long-term (10-20 years) is a whole different story and it's all in the numbers. Crystal Clear! We are 5% of the world's population consuming 40% of the global resources. I don't need to speak about Asia's population, population growth and what they will need to consume to bring them to parity with our standard of living.

So, here are my thoughts:

1. In the best case scenario, our standard of living will decline and theirs will go up. That will happen slowly and the rebalancing will take place via dollar depreciation. No major run on the currency. They will keep investing in Treasuries but also start investing in their own economies. If we are lucky, once we get out of the recession, our government will be smart and politically skillful enough to raise rates ala Paul Volcker in the 80s to reign in the money supply. At the same time, we will be smart enough as Americans to start living within our means, start producing more and consuming less. Eventually, China WILL become the world's largest economic power. That is inevitable (barring scenario #2). We will probably still live a little better than them but the disparity will not be as large as it is now. We will have to adjust our lifestyles to live within our means, and some industries will return to the US.

2. In the worst case scenario, the US govt will implement a policy of segniorage to purposely devalue the dollar and therefore its debts to foreigners. China will keep investing in infrastructure and its people. By pure numbers, it will be come the largest economic power. At some point, the foreigners will demand higher rates from the US for its Treasuries because they will have the better options of investing in their own economies. There will be rivalry and we will feel as if we are being dethroned as the de-facto superpower. In reality, the US will still be the most powerful military power the world has ever seen BUT it will not be the most power economically. Sounds familiar? If one reads any history, one would know what this is the most likely scenario for a great power to start a war: to restore its economic power by brute force.

At this point, moneywise, we are relative losers either way but I am just praying for the best case scenario... And if we have to make a small sacrifice for other people in the world live better than they used to, so be it. I'll just settle with one instead of 2 cars in my driveway knowing that the great American Dream became International. And when I see Jefferson, Hamilton & Franklin in the other world, I'll tell them they were the winners!

U.S. Dollar: The Trade of the Decade

PATHETIC!

You are talking about future appreciation in the assets the Govt is buying (Uncle Sam is buying on the cheap) and then in the immediate paragraph afterwards you are talking about deflation, crashing commodities prices and a stong dollar and savings rate.

Write a new article when you start making sense and stop contradicting yourself. Oh, and can you sell me some Yuan futures vs. the Dollar. I cannot buy them as a small investor in the currency market becuase of restrictions but if you are so eager, then maybe we can trade off the books.

America's Real Wealth

The United States and Western Europe have dominated and monopolized free democratic governance for decades or centuries. As someone who grew up in Western Europe and moved to the US at a young age to pursue the American Dream, I can 100% understand your viewpoint. Nevertheless, it seems that times have changed. The Chinese have finally caught up. After centruries of one kind of repression or another (Opium Wars of Britain, Mao's despotic regime), the China of today has empowered its people. Same with the rest of Asia and many countries under Soviet rule after WWII. Take a look at the back page of the Economist. You will see that the countries that run constant budget & trade deficits are always the same. The same thing happens with the ones that run the surpluses. I'll leave the Petro-countries out of the list here, but look at Germany, Japan, China, Scandinavia and the Asian Tigers. People actually work there. In the US, nobody works any more. We all consume.

I pray and hope that you are right. That the American People will stand up to the challenge. But both the regular folk and our leaders have repeatedly failed to live up to that challenge since the end of the Cold War. It finally seems that when other Peoples get a shot at democracy & capitalism, they are better than Americans. It's just that they didn't have that chance before ever in their lives.

It's the end of the Empire!

11 Places to Find Foreclosed Real Estate

Hi all REO seekers,

In response to Bret's request: Here's another link with a long and comprehensive list of Bank REOs all over the country:
marketplacelists.com/R...

Enjoy,
Alex.