austrian63

Rising Rates, Oil Prices Could Trample Green Shoots

Oil will most likely pass the $100/bbl point before year-end. Mad-Hedge Fund Traised good points above re: the world getting smaller. It will take time for economies to adjust. In the interim, expect much higher prices for food, clothing, raw materials, along with energy and interest rates (cost of money). In essence, the scarcity of resources will become apparent except for labor.

Much higher production costs and currency devaluation will depress the dmand for labor in the U.S. There can be no gain without pain. We cannot have booms that seriously misallocate resources fueled by massive money supply growth without the pain of re-adjustment. The more our government does to prevent the short-term pain of recession the more likely we will have long-term pain. This will become more apparent as energy prices begin spiking again late this year and in 2010.

Legitimate Green Shoots, Bond Vigilantes and the Audacity of Hope

I believe this rally is the child of the massive liquidity pumped in the economy by the Fed (money created out of thin air) and by emotion (we just want to feel better). Here are a few reasons I believe this rally is not sustainable:

If you strip out the increases in government transfer payments (1) unemployment benefits, (2) COLA's in Social Security benefits, (3) COLA's in military pension benefits, etc., personal incomes were lower in April year over year.

The residential mortgage foreclosure tsunami of prime mortgages has only just begun. Not only have these losses not been adequately reserved for yet by the banks, but these are foreclosures due to continued over reliance on debt by U.S. consumers, job losses and the shrinking real incomes of working Americans.

The commercial mortgage foreclosure storm also has not yet materialized to its fullest. The losses that will be incurred by the large banks and many regionals are not yet reserved for. This does not bode well for large increases in construction spending due to the previous misallocation of resources to this sector.

Non-existant pool of real savings - Capital is the life blood of economic growth and the U.S. has inadequate "equity" capital from real savings. Our economy has appeared to thrive on debt capital in place of equity capital from real savings over the past 20+ years. While this has seemed to be rewarding it is really a symptom of a society that constantly consumes more than it produces.

Of course America embarked on this course long before President Obama took office but I believe his policies are merely a continuation of the past policies of over spending, over leveraging and over consuming, by both government (exponential increases) and individuals that got us here. It seems we have convinced ourselves that we can mis-allocate resources for decades and never suffer the consequences of adjustment back to a sustainable model (high unemployment, decreased spending and benefits, etc.).

The following events are very likely over the next 12 to 18 months:

Much higher interest rates - this will actually be positive in the long-term as it will reward saving and accumulation of capital and not incentivise borrowing or investing in questionable projects.

Dollar devaluation - never good but now unavoidable due to the U.S. government's lack of willingness to live within its means. This will also drive higher interest rates as we must pay lenders (buyers of U.S. Treasuries) higher rates to attract their funds.

Higher and sustained unemployment - due to the shortgage of real capital, a tendancy for foreign capital to flee the U.S. and go to places where it is treated better.

Oil prices in the $100/bbl to $150/bbl range. Due primarily to currency devaluation and the flight to real assets by investors to preserve their capital.

I believe those investors who allocate into real assets, including precious metals and other currencies (espicially currencies of nations with more sustainable balance sheets) will weather the storm much better than those in traditional equity and bond investments.

Bernanke Desperate, Fed Out of Ammo

Karl,

Sorry to burst your bubble re: free markets, but we don't have one. How do you know that unregulated markets lead to booms and busts when you have never lived in one?

Our market is highly regulated. In fact, the supply of money and the cost of money (interest rates) are controlled by the Fed not the free market. The Federal Reserve Bank, Fannie Mae, Freddie Mac, etc. are creatures of government not the free market. These wonderful government entities are the primary drivers behind our current boom bust cycle.

In fact, the artificially low interest rates actually contribuited to a decline in real savings while at the same time there was an increase the demand for loanable funds (debt). This created the mismatch and also created an unsustainable level of debt and misdirected resources to unprofitable (can you say "sub-prime" mortgages and new home consftruction) projects.

Good luck on curing the business cycle with more regulation. In fact, how does the government regulate the government?


On Mar 22 02:42 PM Karl Glazier wrote:

> This is a typical example of amateur economists (like Ron Paul) who
> have no idea how things work telling the experts what they are doing
> wrong.
> It's like laymen telling brain surgeons they are doing it all wrong.
>
>
> Bernanke is putting the most advanced theories into practice.
> With widespread overcapacity, increasing money supply will not lead
> to inflation, but to renewed economic growth.
> And the Fed is not out of ammunition, because they can create unlimited
> amounts of money, whatever is needed to get us growing again.
> Ron Paul's libertarianism (represented by Greenspan's refusal to
> regulate) is what got us into this mess.
> Unregulated markets lead to booms and busts.

Implications of the Fed's Purchase of Treasuries

Good article and your forecast is correct. Eventually this will end with terrible side effects. The law of unintended consequences. Dollar devaluation and high interest rates. Two years from now we will look back at the "good ole days" of 7.2% unemployment.

It's scary how our government's play book for the current recession, from spring 2008 forward, is the exact same play book used by the Hoover administation from August 1929 forward which consisted of (1) lowering the fed funds and discount rates to historical lows, (2) providing vast sums of cash to troubled financial institutions and increasing their reserves just like TARP, (3) purchasing large amounts of commercial paper and toxic assets, (4) providing funds to industry and farmers to keep up production which insured over supply and eventual price collapses, (5) passing laws that required "buy American" which reduced exports and cost jobs, etc.

The history of the great depression did not begin in 1932 but 1921 with the 8 year boom followed by the recession turned depression. History does indeed repeat itself.

Deflation Is Just Around the Corner

user 55065 hit the nail on the head. 55065, you must remember that most "experts" and writers follow the herd mentality and don't use critical thinking. Also, if they are part of the monied interests, they don't do their own grocery shopping. You are correct there is NO systemic deflation (or more appropriately no sustained decrease in the general price level). A sustained decrease in the GENERAL price level is not possible in a fiat money system.

The prices of goods and services purchased by most people on a daily basis are rising not falling. Remember, just because the herd states certain axioms over and over does not make them true. Those who are warning of deflation now never warned of the current crisis that is the unintended consequences of expansionary monetary policy. Once inflation has hit historic levels, they will be warning us of inflation.

All current policy initiatives have as their stated purpose, rflation (currency devaluation) and the ever decreasing purchasing power of the dollar will also be their unintended consequence.

Investment Ideas for an Inflationary Environment

John L.

Based on your recommendations sounds like you are preparing for increases in the general price level (remember, inlfation is an increase in the money supply which causes increases in prices in general). If rising prices are your forecast I agree. Eventually, some of the new money being created will find its way into circulation "buying things." The Fed's and the Treasury's goal is to reinflate the economy so we should all be prepared for a depreciating dollar in the near future.

RE: AlexR's comment:

Alex, of course the Fed smells inflation as they create it by printing money. That is the definition of inflation an increase in the money supply "creating money out of thin air." Inflation is ALWAYS a monetary phenomenon. How can the legitimately Fed fight inflation when they create it?