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When at the age of twelve, at the time of the Russian revolution, I first heard the Communist principle that Man must exist for the sake of the State, I perceived that this was the essential issue, that this principle was evil, regardless of any methods, details, decrees, policies, promises, and... More
  • Bernanke's half truth 0 comments
    Dec 10, 2010 12:55 PM | about stocks: UNP, GS
    Last Sunday Ben Bernanke was given a softball interview on 60 minutes by Scott Pelley.  It wasn't even an interview, it was 10 minutes of a free advertising - PR campaign.  When you see Ben Bernanke or President Obama go on 60 minutes, you know they are getting desperate as public support for their policies are falling.  In the interview Bernanke made two controversial comments.  "He's not printing money", and he's "100% sure" he can control inflation.  The comments are disingenuous at best and their validity depends on your definition of inflation and certainty.
    One myth that's out there is that what we're doing is printing money.  We are not printing money.  The amount of currency in circulation is not changing.

    Saying he didn't print more money for circulation is true but it's a misleading statement.  QE2 involves trading one asset for another and not printing new money or creating a new asset.  He's hoping the banks do the creating of money.  Bernanke is trading (cash) an asset for bonds ( an asset).  Bernanke's hope is to give banks more cash so that they lend it and expand the money supply and economy.  He can print or trade assets all he wants but he can't force banks to lend and he can't force overleveraged borrowers to borrow.

    What is money?
    M0 & M1 have to deal with how much money the Fed is creating:
    - They've been doing up during the depression and won't increase from QE2

    M3 has to deal with how much money people have:
    - M3 has gone down during the Depression but he's hoping QE2 will increase M3.

    Note:  The Fed stopped reporting M3, go figure

    The U.S. lost trillions of dollars worth of value in real estate and the stock market.  If you want a quick gauge of the money supply, look to see if the value of your home, investment accounts, and cash in bank.  If it's up then we have inflation if it's down we have deflation.   Even with Ben's printing the US economy lost trillions in nominal value.

    Credit expansion (bank lending) expands the money supply.
    In 1929 people were going on 10% margin to buy stocks.  New propserity after The Great War in the roaring 20's made robust high tech industries like the railroads sure bets.  Popular economists said we were recession proof and lending stardards were weak.  Grandpa could have put down $100 bucks to buy $1,000 dollars worth of Union Pacific railroad stock. 

    Fast forward to Party like it's 1999 during the Tech bubble.  "The internet is going to change the way we live".  We were recession proof.  Even though the internet changed the way we live that doesn't mean Pets.com is worth a billion dollars.  In 2006 housing "couldn't go down".  Remember, " they aren't building anymore land", "people need a place to live", "housing is the best investment" and "don't get priced out of the market"?  Anybody with a pulse got a loan.  The wide swing in housing - most people's largest expense  -  led traditional measures like CPI understated inflation where as now CPI is understating deflation. 

    If a bank collects a million dollars in deposits, government regulators allow them to legally lend 10x that.  When a bank collects 1 million in reserves and lends out 10 million, that's where the money supply is truly expanding.  They have 1 million real dollars but put 10 million dollars into consumers hands due to fractional reserve banking.

    When credit is created, the bank lending the money is taking a risk that the borrower will pay them back.  When you are buying an overpriced house you can't afford that is a huge risk.  The fact that banks weren't keeping the loans, but dumping them off to Fannie, Freddie or somewhere else helped degenerate lending standards.  "Who cares if Mr. and Mrs. Jones can't afford this house, if we are just doing to dump the loan off to the suckers and Phoney and Fraudie"?  Too many people that shouldn't have bought homes did, builders responded by building unnecessary homes.  It's called mal-investment and is extremely counterproductive.  There are many players you can point the finger at but it was a party living off of Ben Bernanke's keg.

    We do have Deflation
    Over the last 12 months, the index for all items less food and energy has risen 0.6 percent, the smallest 12-month increase in the history of the index, which dates to 1957.

    The food index has risen 1.4%, with both the food at home index and food away from home index rising the same 1.4%".

    The energy index has risen 5.9% over that span with the gasoline index up 9.5%.


    Yes energy costs have risen despite record capacity in the oil industry.  On top of that we are swimming in natural gas in the U.S.

    Is that inflation you can believe in?  Whatever inflation there is in the economy it's entirely due to speculation.  This inflation is being created by investment banks like Goldman Sachs being given money by the Federal Reserve.

    Commodity prices always revert to prices near production costs.  Let's take sugar.  Prices have doubled in the last six months.  Producers are scrambling to plant more cane and sugar beets while consumers are looking for cheaper substitues or cutting back.  The higest costs of production with sugar are 15 cents per pound and the price is nearly double that.

    So what's going to happen?  Not much for a while.  The extra supply will probably be siphoned off by the speculators at first.  However supply and demand data at some point will scare off said speculators and when they look to dump, look out below.  Speculation induced inflation always ends in disaster.  Always has always will. 

    Quantitative stealing hurting the poor/middle class
    Inflation is a hidden form of taxation.  It benefits government, wealthy, well connected who print and touch the new money first at the expense of those who touch the new money last.  Wealthy people tend to own assets that rise in value with inflation, where as poor/middle class people tend to own cash that loses purchasing power with inflation.  It punishes savers and rewards borrowers and spenders.  Inflation is better described as a "reduction in purchasing power" instead of a "rise in prices".  The shop keeper isn't really rising prices, it's the Fed.  The shop keeper is just responding to watered down money and businesses are the ones that are often scapegoated by greedy governments.  The dollar has lost 97% of its value since the Fed took over in 1913.

    We currently have 10% unemployment, 20% underemployment and 42% of the people out of work have been out of work for over 6 months.  You mean to tell me with a straight face that inflation is good for them?  Defenders of the Fed will bring up the myth of the deflationary spiral to scare and trick people out of common sense.  Deflation is the after effects of of the massive credit expansion/easy money that we saw from Greenspan/Bernanke. 

    Bernanke being 100% right
    This goes back to Bernanke being desperate to go on 60 minutes.  Public support for the Fed is falling.  It was a PR campaign.  A quick youtube search documents how he's been so wrong in the past.  To say that he's 100% sure of anything takes some serious Chutzpah.  Bernanke went on 60 minutes to quell the masses, the fact that the "journalists" bought it is amazing.  People wonder why there is a market for wikileaks.  The traditional media isn't doing their job.  When you have pinheads like Scott Pelley conducting interviews then Julian Assange is the natural response.  Who is John Galt?

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    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Themes: Macro View, The Economy, Commodities Stocks: UNP, GS
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