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Cause for Concern: No Change from the Fed

I see from the comments that other people are just as doubtful as I am about the words of the Fed. I don't understand why people hang on these words. During the height of the housing bubble, BB said, 'We are not in a housing bubble.' This is during a bubble that he helped create (some of the credit has to go to Alan Greenspan). From that I conclude he is either incompetent or dishonest. Or both.

A guy is walking down the street when he sees a man on fire. He rushes over and says, "Sir! Sir! You're on fire!" The burning man says, "On fire? Let me check. My models don't show anyone on fire. Therefore I can't be on fire." The passerby says, "Oh, a macro economist. Never mind."

What really puzzles me, though, is why he is still in his job. He created a disaster and then ignored or didn't recognize it. At the first opportunity he should be gone. Finding a replacement who isn't just as bad could be a problem, but we should at least try.

We're behaving like a battered woman. We know that statistics say that we are likely to die at the hands of our abuser, but we don't flee because we are more comfortable with the known abuse than the unknown.

The real problem isn't the chairman of the Fed however, it is that the Fed exists. Our system was designed by financial interests in order for the rich to steal from the poor. And it works great for that. Sort of like those programmers who used to take the fractions of pennies from interest calculations and put them in their own bank accounts. Except it uses inflation to steal from everyone else and give it to the banks. And the periodic blowups are also a result of that faulty design. The system is unstable because it is a positive feedback system; and it controls the wrong variable, interest instead of money supply.

Oh well, it is kind of fun to watch a slow motion train wreck like this. Something to tell my descendants about, a once in a lifetime occurrence. :-^

Cause for Concern: No Change from the Fed

They're hoping the horse will talk.

Two thieves are brought before a king. He says, "Take them out and hang them". One of them says, "Wait, your Majesty. If you give me a year I can get your horse to talk. I swear it." The king say, "OK, you have your chance."

When they are alone again, the other thief says to the thief that said he can get the horse to talk, "What do you mean, you can get the horse to talk? You don't know anything about making horses talk." The first thief says, "A lot can happen in a year. The king might die, I might die, and who knows, maybe I can make the horse talk."

Market Rallies on Geithner's Appointment: Why?

Good question. While watching the thrashing of this crisis, a certain view has crystallized for me. What is called the 'smart' money is in fact not very smart. It should rather be called the 'system' money or the 'groupthink' money.

As you say, the appointment hasn't really changed anything. And the $700 billion stimulus package being bruited about only confirms that the Obama (our Hugo Chaves el norte) braintrust doesn't have a clue either (what do you expect, they're Keynsians too). The underlying problems haven't disappeared and aren't being addressed. And they really exist, they aren't just a lack of confidence, a figment of the imagination.

So there will be a relief rally as people hope that things are going to go back to the way they were. Unfortunately, that can't last long term, because reality is asking for payout. And it only accepts cash on the barrelhead. And there isn't any. About 3 trillion dollars of value has evaporated in the US economy. Who's going to pay? The answer seems to be our descendants and international central banks.

Extreme Anxiety in the Anxious Index

On Nov 17 05:38 PM market ace wrote:

> Who are the 25% of forecasters that do not see a recession in the
> next quarter? They must be Bush economists.

Actually they are followers of the new messiah. They think that once he waves his arms, the recession will disappear. ;-)

"And lo, they were crying in the wilderness, and he said unto them, I will lead you to the promised land. And they believed upon him, and annointed him, and praised him, crying 'The one has arrived, the one has arrived'."

The End of the Economy As We Know It?

On Nov 11 11:37 AM stoneweapon wrote:

> Until a society is willing to except a limitation on individual wealth,
> the boom bust cycle will continue to repeat itself. Trust cannot
> be achieved in a society that worships its wealthy class.
>
I suggest that it is a limitation of *inherited* wealth that is required. Let everyone make as much money as they can during their life. And let them give their children as much education and life training as they desire. But tax any wealth passed to their children at 95% or 99% so that the children have to make it on their own. This removes the concentration of wealth, and the formation of webs of corruption that we see so prevalent in our culture today. I don't think we worship the wealthy, it is the wealth that everyone is worshiping, the lifestyle it buys.

Of course, this also requires that corporations be isolated from the political process, as it is easy for the officers to subvert them to their own ends. They need to be forbidden from any participation in the political process. That doesn't mean their officers can't participate with their own money and on their own behalf, just that resources of the corporation can't be used.

What SW Richmond has described above is owed partly to the influence of these two factors on our political economy.

Would their lack fix all the problems with our system? No, there are other factors that need to be fixed as well.

Governance of corporations is out of the control of their shareholders, and they are no longer under control.

Our congress has become unresponsive to the voter. We have taxation without representation.

Our money supply is managed to the benefit of the financial class. The mechanism needs to be redesigned.

We have an unsustainable entitlement system. We have to learn to live within our means.

Our legal system is a morass, incapable of being navigated. We need twighlight clauses on all laws so they have to be reexamined periodically for relevance. And laws should be enforced to intent, not letter. The job of congress should be to debate the intent of a law and state it plainly. Let the legalese be written by subcontracted lawyers.

And many more. Just because the founding fathers had the vision to create a system that lasted this long doesn't mean it is perfect and doesn't need revision as society and technology change. We've come to worship things the way they are, as if they are sacrosanct. That way lies decay and stagnation.

Our misfortune stems from the fact that the people who should lead that effort, our congress, is decadent and incompetent and subverted. We need some sort of plebiscite process to force congress to act when enough of the populace are aroused enough to demand it through petition.
Currently our alternatives are to continue as things are or armed insurrection. The plebiscite allows middle ground.

Dealing With the Crazy Swings

There are a lot of people out there who use trading systems that use buy and sell points.

The market behavior recently could be looked at as a way of stripping wealth from those people. I'd need to see numbers in order to determine if it is deliberate or random. Hedge funds would have those kinds of numbers and the capacity to analyze them. That is, is it cost effective, is there an edge?

There was someone on here advertising that everyone should have trailing exit points of some kind in many groups a few days ago.

Hmmmm.

The U.S. on the Precipice

TonyC-SA wrote:
...Yes, I know they are not actually saving and their contributions are redistributed to the elderly. ...

This is another way of describing a ponzi scheme. If you have any mathematics at all, you know what happens to a monotonically increasing series - it tends to infinity. That is why ponzi schemes are illegal, they are guaranteed to reach a collapse point.

So I agree with huangjin on this. They should have been abolished by someone with insight a long time ago. Currently they have put us on the hook for 54 trillion dollars in unfunded liabilities. What is going to happen when those liabilities aren't met? Will it be worse than what would have happened if all those people got to keep the ponzi payments they made to others and spent them in the economy?

SS and medicare looked like they worked for a long time. But all they were doing was making the eventual collapse more severe. A ponzi scheme is a ponzi scheme, whether it is run by the government or a private entity. No net good can come of it.

As far as people not taking responsibility for their lives, well, that is what they were promised; life, liberty and the pursuit of happiness. And you exaggerate. Many people *do* think to the future, and *do* provide for themselves in old age. Under the current system, they pay not only for themselves, but for the irresponsible too. Kind of like the way the responsible are paying for the speculators in the mortgage meltdown with the federal bailouts. Of course, the death of SS and medicare would be the death of unbridled consumerism as well.

If society wants these benefits, make it explicit. Put in place a death tax of 100% and use the proceeds to fund programs like social security and medicare. That fixes the level of funding. No ponzi scheme, no guarantees. Everyone knows that whatever they leave behind when they die goes to support other people at the end of their lives, and that the only support they can expect is what those who die leave behind.

Global Stock Markets: We All Fall Down!

Yes, thanks. That was a lot of nice information consolidation, I imagine it took quite a lot of work to bind it into a coherent picture.

And that picture isn't pretty. Unrelentingly grim seems to be a more apt description. And yet, I don't think we're at a bottom yet. I get the impression the 'crowd' is just waiting for the turn up so they can jump back on the escalator. We haven't had a downturn this severe for a long time, but I've read that the bottom is always a time of capitulation. If that is true, definitely *not* at the bottom here.

Given the breadth of the bad news, it also seems that this is a global phenomenon, a working out of the imbalances in the system. How can there be a developed economy with zero interest rates for over a decade? How can the country driving industrial growth in the world have a severely undervalued currency and fund its customers with loans for over a decade? How can commodity prices shoot the moon with no effect on the world economy?

Can the players prop it up for a while longer? They are certainly trying. But sayings about straws and camel's backs come to mind. The one item too many being juggled. Interesting times.

Path Dependency in the EU and U.S. Economies

I agree that there are different responses, and your viewpoint probably has some validity. But the other factor here is the different perception of what inflation is. Within the general public, and it seems for some economists and central bankers, any price rise is inflation. I think this is a flawed definition. "Inflation is always and only a monetary phenomenon". That is, only the debasement of a currency yields inflation.

For example, imagine there are two farmers living next door to each other. One produces milk and eggs, the other produces bacon. They barter with each other and trade 2 gallons of milk and 2 dozen eggs for 5 pounds of bacon. At the farm gate each can sell the bartered produce for 10 dollars.

First scenario. The government doubles the amount of money in circulation with all other things being equal (that famous economic caveat :-) ). The two farmers still barter at the same level, but now they sell at the farm gate for 20 dollars. This is inflation, a monetary phenomenon.

Second scenario. The money supply remains the same, but an article comes out in a scientific journal that bacon is an aphrodisiac. Demand for bacon increases dramatically, and the bacon farmer can sell his bacon at the farm gate for 30 dollars. The barter is now changed as well. The milk and eggs farmer has to trade 6 gallons of milk and 6 dozen eggs for 5 pounds of bacon. This isn't inflation, it is demand shift. The value that people place on bacon has shifted. The extra money being spent on bacon is money that isn't being spent on other goods.

What has this to do with central bank interest rates. Well, many central banks are mistaking the second scenario for the first scenario. They see rising prices and immediately assume there is inflation of the monetary sort. So they raise interest rates to slow the growth of the money supply (what an inefficient mechanism, but that is another explanation for another time). However, they are crippling their economies for nothing. What is occurring is a shift in demand that is causing a reallocation of resource distribution and thus a price increase. In the example above, they are trying to prevent the price of bacon from tripling because of an increase in demand. This is counterproductive and will be ineffective in curbing price increases, while unfortunately being effective at slowing growth in the economy.

Scarcity of supply or increase in demand is not inflation. If they persist in the folly of treating it as such, it won't end well for the world economy, and in particular it won't end well for their economy.

There is a special case, the countries that have their currency pegged to the US dollar. They are importing the inflation of the US dollar, and there is really nothing they can do in monetary terms to counter that. Their only effective recourse is to decouple their currency from the US dollar.

And in truth, there is really little the US central bank can do about it either. The US dollar is finding its market equilibrium as the distortion of being the world's reserve currency is slowly removed because the US economy is slowly losing its dominance in the world economy. It is difficult to tell the actual rate that the US central bank is debasing the US dollar because they have stopped publishing statistics about the growth of the money supply that would show it clearly, but it is clear that there is some level of debasement going on as well as the equilibrium adjustment.

Options Trader: Thursday Outlook

You think a socialist is going to fix America??? Really? LOL

It doesn't matter who is elected. They won't be able to do anything about this because it is systemic, driven by forces beyond the control of the US. Our dominance of the world economy is ending. The best they will be able to do is be a good steward to the birth of a new order. Good luck with that, given the selfishness and incompetence of congress.

Options Trader: Thursday Outlook

You think a socialist is going to fix America??? Really? LOL

It doesn't matter who is elected. They won't be able to do anything about this because it is systemic, driven by forces beyond the control of the US. Our dominance of the world economy is ending. The best they will be able to do is be a good steward to the birth of a new order. Good luck with that, given the selfishness and incompetence of congress.

Inflation: Pass It Through

Inflation is when prices rise because a currency is being debased. It is not about prices rising because of demand or supply shifts in a market. The commodity markets are experiencing huge price gains mostly because of demand increase, not a debasing of the currency, though the US dollar has been debased and is being debased to pay for our deficits. My guess would be that about 25% of the price increase is because of debased US$ and the rest is demand shift up the supply curve.

Gold is subject to inflation also. At the time the Spanish were plundering the new world, gold and silver were the currencies in Europe. The sudden influx of all the gold and silver from the new world caused massive inflation to occur. They debased the currency. Because the supply of gold has increased at a much slower rate than economic production, if we were on the gold standard we would be experiencing deflation. That's because a unit of gold would come to represent more and more production, so could buy more and more.

Inflation is very tempting to those who issue currency, as they get something for nothing. Politicians and debtors especially benefit from inflation.