Aristophanes

U.K. Begins Quantitative Easing

On Mar 13 03:43 PM Adrienne Gonzalez wrote:

> Dirk,
>
> Zimbabwe is a convenient reference to any attempt by any central
> bank to "stimulate" via the printing press.

The historical data suggests Japan is a more accurate reference.

Right now you get two opinions about inflating the money supply in this crisis in Western countries:

1) It will automatically lead to inflation, even hyper-inflation. This is an economic law. Buy real gold. Get a firearm.

2) It will do nothing, except maybe shave some deflation, as we saw with Japan. This is the historic reality. Germany did something similar when absorbing East Germany and the economic effects were not inflationary.

I go with the latter because that's what the data suggests. We've had enough theories gone wrong in this crisis, it's time to look at some facts. Comparing modern, Western nations to Zimbabwe or Weimar Germany is to miss decades of history and massive structural differences.

Why Alternative Energy Can't Be Ignored

On Mar 12 10:07 AM Adolf wrote:

> I hate
> to break it to you but if you take the 35%+ of oil we use for that
> off the market we have a HUGE supply glut. Regardless of your misguided
> "peak" theories.

I hate to break it you but there is a phenomenal difference between a production glut and a reserve supply glut.

If you are future-pricing something, the longer the timeframe, the more the the reserve is a factor in the equation.

It's the oilmen talking about "peak oil". It's their phrase.

Did someone here mention hydrogen? Could you fly to the Sun and get me some?
I'll wait.

Everything You Ever (Or Never) Wanted to Know About the Fed

The author wrote:

"If you find yourself buying cigarettes and beer with a $10k note, things have probably slipped a bit……"

A daily $10k beer and cigarettes run and you'll look like Keith Richards.

That's slippage.

The Economics of the Past Won't Solve the Problems of the Present and Future

On Mar 13 08:52 PM austrian63 wrote:

> What's even harder to accept is the fact that Bernanke's old boss
> Alan Greenspan and Benanke himself caused the bubble by growing the
> money supply.

I don't blame the Fed for causing the debt problem. I see that the US economy was expanding and productivity was rising. Unfortunately, the GDP gains from the productivity increase was not funnelled back to the labour pool. Household income stagnated, so the political solution was to allow for expanded debt via the money supply. For the last decade wages have gone backwards. Families are poorer even accounting for inflation.

Easy credit, weirdo mortgage products, securitization, and uber-cheap imports were substitutes for passing on the gains of productivity through wage increases. We were told it was more efficient for the new "ownership society" to bet debt against our houses as a means of growing net household wealth.

Then we used the Fed even more to paper over (literally) this wage/productivity gap. If you strangle your middle class, there will be economic catastrophe. This will happen again unless the proceeds of economic activity are better distributed.

> When's the last time you made a mess but did not know you made the
> mess?

Spilled some milk from the fridge last night. My sock found it the next morning.

It's a Winter Warming Spell - But More Snow Ahead for Markets

Solid, comprehensive list. I like the demographic additions. They are more tremendously important because they feed into every other issue, like water from snow.

Overall, the biggest negative pessimisms are:

1) Is there still hidden or systemic risk, especially within the financial services sector? Is all the data there? Is it correct? Is there another Bernie Madoff? Will the Russian oligarchs default on some hidden plays? Will hedge fund redemptions sink some major players?

2) Will there be international turmoil to add tot he general misery? Could Iran or North Korea or Israel make things much, much worse (Anyone notice how, when oil prices go down, Mideast news fades a lot? I guess oil money sponsors many things).

3) Is there a dynamic sector on the horizon to pick up the unemployment pieces? Because we know that business will not be "as usual", so housing construction, financial services, municipal services, etc. will all be in the doldrums. Moore's Law is a diminishing return. Pretty much leaves health care and old age homes.

Why China Will Continue to Buy U.S. Treasuries

Recycle their current T-Bills. Yes. Purchase new long bonds. No.

Holding the US$ and ability to deficit finance hostage? Priceless.

Wealth Destruction on a Global Scale

Paper "wealth", like a bond, only has true value upon redemption, preferably at term.

The real wealth created was supposed to be created from the initial investment so long as the capital was put it something productive. Instead, the investment capital was not used to multiply the effects of the capital, but was blown on consumption. Our glorious "investor class" did not make sure that the productivity returns were actually being used to foster further gains. It was good enough it all went into a landfill. That's bad business, poor investing, and lousy policy.

So the bubble was the difference between the short term attempts to magnify the value of these investments through heavy cycling and bizarre product repackaging ripe with systemic risk (quarterly returns leading to oversize bonuses), while the long term value was disparaged. Call it leverage if you like, but the entire hedge fund industry built to "beat the historical average" was simply 12 guys in a rowboat all rushing from one side to the other chasing a single red herring. Eventually the boat tipped over and the drowning started.

All these bond and equity values tanking are just future overly optimistic predictions that did not work out. Real estate is the most painful and becomes magnified because it just sits there with a price history look awful for a generation. It's killing the short term horizon because it is securitized. It is going to be a severe drag on the economy for a very long time.

Do Zombie Banks Walk Among Us?

Brilliant analogy.

On Mar 13 08:47 AM pacman1947 wrote:

> Jeffrey,
> Let's just say for the argument that I represent a company that needs
> $250 billion of seed money to create an industry that will generate
> 10 million new jobs around the world, and over 6 million at home.
> It will need to purchase nearly 100,000 square miles of desert and
> midwestern wastelands, windy mountain tops in deserted areas, and
> all our old shipyards that once built fleets of warships and commercial
> vessels. We would want to open vast new tracts of the Mesabi range
> to iron ore mining and plant billions of trees for ultimate harvesting
> twenty years from now. It will need to reopen old steel mills and
> modernize them to produce billions of tons of steel. It will need
> to reopen our concrete and cement plants, and modernize them as well,
> and then build thousands of new industrial facilities all over this
> land. The net wealth created would generate trillions in new GDP
> and create a sustainable industrial base for generations and millions
> of permanent living wage jobs.
>
> Now, we gave away ten times that much to Zombies that can't produce
> anything other than excuses. They are truly the walking dead.
>
> Priorities are not what they should be, Matt.

Household Debt: The 'Prisoner's Dilemma'

The author wrote:

"The increased leverage just happened—it was not planned."

But the entire point about resetting mortgages is planned—and in a disturbing # of cases, not communicated to the borrower in contractually understandable language.

This is like filling a bathtub full of naked razor blades, jumping rolling around, and the putting iodine on the cuts…then blaming the iodine for the pain!

I think the stimulus spending has little to do with the financial markets. The markets are like a barometer, and the stimulus package is thought of as an umbrella. The main goal is to forestall greater unemployment. Will it work? Probably a little. It might even be measurable. Overall, it will disappoint.

Also, yes, households are "scared". Good. Frightened people often choose a more rational path.

Was Milton Friedman Right About the Euro?

Only the strong nations (Germany, France) could afford to leave. And they won't. The smaller players would bristle with trade defenses and the interruption globally would be the equivalent of the Smoots-Etc.

Ironically, this crisis might, in the mid- to long-term strengthen the Euro by forcing the delinquent countries to get their finances (and demographics) into shape.

The author asks:

"Was Milton Friedman Right About the Euro?"

Well, he was wrong about everything else ;-)

Update on Sovereign Risk

The move from long term bonds to short term T-Bills is a political message, in much the same way that overnight borrowing's collapse sent a message to Bear Sterns and Lehman.

The Economics of the Past Won't Solve the Problems of the Present and Future

The author wrote:

"Modern economics since the days of John Maynard Keynes has relied on statistics from past data to adjust the valves of monetary and fiscal policies."

Ah, but modern investing strategies by the "quants" on the bank payroll came up with future prediction models. And these have failed so badly everything is in distress.

Historical data cannot predict, but it can frame scenarios and form the basis for tempered reaction and policy—as long as one understands it, especially the politicians.

That's why Bernanke gets scorn for being spineless. As a Depression era economic historian he should have seen a bubble. They are historically predictable and the math looks pretty much the same. Yet Bernanke did not see and did not act.

Mark-to-Market Triggered This Recession; It Will Also Trigger the Recovery

On Mar 13 06:07 AM Moon Kil Woong wrote:

. Furthermore their leveraging
> themselves 30x or so made them less like a bank and more like a casino
> broker.

Actually, casino brokers are extremely conservative in their leverage. The game is always in their favour. By law.

GE's Immelt Thinks for Himself: U.S. Not Shifting to a Service Economy

A major reason why American companies have competition issues is the intractable health care problem. The administrative drain on a company's bottom line is staggering. Get that yoke off the back of private employers and efficiencies will increase significantly, especially in manufacturing. Why is a medium-sized manufacturer burdened with the process of being sophisticated shoppers for health care. It's not their business.

So it's about time the US just got its act together and made health care insurance (not necessarily delivery) a public good. This would increase the economy of scale and merge the dilemma of Hippocratic services and public policy with proper accounting and budgeting. What a boost in confidence to battered American businesses and households at a time when everyone is craving security.

Grand Illusion: The Federal Reserve (Part 3)

On Mar 12 08:17 AM James Quinn wrote:

> I completely agree with your statements about the pie not being sliced
> fairly. The rich get richer and the poor get poorer. Why?

Consensus is good. According to Obama, we don't "disparage wealth". Maybe some wealth should be disparaged in the same way poverty should be discouraged.

I completely agree with you that the Fed is a problem, but I believe it is the wrong target. Get a grip on the wage/productivity gap and the Fed will become less a political tool. Since the Greenspan worship era (and Volcker had some contribution to this lovefest) the Fed has been used or been complicit in trying to paper over more fundamental problems concerning the wage/productivity tension. It's like blaming the painter for a cracked foundation. Worse, politics is using the painter to fix the underlying problems. When you need a hammer, you get a hammer, not a paintbrush.

> Williams stats should show a dramatic deflationary drop from 2008
> onward, but guess what - median household income will plunge also
> due to the massive unemployment that is underway.

Not quite true.

Households with employment will do OK—in fact, with deflation, they'll be in better shape. Those who are employed and looking to buy land will be in terrific shape locking in a low 30-year. Unfortunately, that means job losses will hit staggering levels before wages will decline. Households with no employment go to zero. So the measure of median household income is less important than the complete loss of customers on the demand side.

Wages decline slowly, if at all as most manufacturers realize this will lead to less product being sold and a death spiral sets in. Adam Smith noted this as a consequence of capitalism's focus on specialization. The entire coat is useless if the button maker is not getting his due. Stable wages are a key component of capitalism's mutual support network. Yes, there can be abuses; it's a big, complex system. The UAW is an abuse, as are Wall St. bonuses.

Throughout capitalism's history, business prefers modest, controlled inflation where the real price benefits accrue through productivity, technological advantage, trade and economies of scale. Business does not want to reduce its own consumer base through wage declines. That makes it impossible to pay back investors after suppliers are paid. Henry Ford again.

Is the CPI being gamed? Absolutely. Is it off by as much as shadowstats says? It cannot be. If you extrapolate Williams' chart data it would appear to be that he is only using a multiplier to shift the numbers upwards, and there are other valid criticisms of this math. He provides a decent service by demonstrating how the CPI methodology has been politicized. Macro-economically and metaphorically this is like asking the fellow doing the crown moulding to help the painter fix the foundation. It's not the real issue.

> The other fact that supports my contention that median households
> have not made enough income to keeps up with their costs is the astronomical
> increase in household debt since 1971. Why would people need to borrow
> and carry credit card balances if they were making enough income
> to keep up with their costs?

The Japanese and Koreans have seen even greater per capita standard of living increases than Americans since the 1970's, and they have done so without significant personal debt. They also have much higher personal taxes and virtually no natural resources. This can be said of many European nations as well. So the issue cannot simply be one of US monetary policy.

The US business and political climate is extremely hostile towards wage gains and income distribution. It is seen by the "investor class" as a deprivation of capital. The issues are political, ethical, and cultural, and therefore much harder to identify and solve. The prime lesson from this crisis is: if you underpay your middle class and then create and sell hazardous debt to cover up the gap in earnings, the economic catastrophe will be gigantic. It will get worse if you print money to cover up the gap again, but messing with the money supply did not cause this mess. This whole focus on the role of the Fed is a blinding distraction.

I did find one area that has experienced real price inflation over the last while, and that is in healthcare. It is rapidly outstripping normative inflation, as well as wages, but is an odd case in the more technology adds cost as much as it increases productivity. A universal insurance system would actually create a better economy of scale because right now the costs for the uninsured are borne at higher margins than if there was pre-existing, mandatory insurance. As with the cultural difference towards cash shown by Asians countries and their savings rates, a cultural thing like the Hippocratic Oath means that those without the means still get the service, and the cost distribution is disturbingly inefficient and immoral. I am just demonstrating that structural issues like ethics and culture can have major economic effects that trump monetary policy by shrunken little gurus like Greenspan.

Still I reiterate that your argument stating 95% of real purchasing power has been lost is nowhere near valid. The math simply does not show that. Not in the real world and especially not when comparing value (nutrition, automobile safety, prescription drugs, computing power) over time. Even the demographic data backs this up showing we live longer and are, surprisingly, healthier (there's always exceptions, like diabetes). Worldwide it is the same with much less famine despite a booming population. Any hypothetical statement without historical data comparing real prices over the decades measured against each unit of worker productivity is just that, hypothetical. The reality is we are materially better off now than 20 years ago, and, even with wage stagnation, capitalism's efficiencies have raised our living standards. Fix the wage/productivity gap and greater economic security will be the result and there will be no need to manipulate the money supply or the CPI.

Thank-you for the discussion. Even if we disagree, every contribution is good for democracy.

And if you think my posts are too long. So what? Are you going to invest using Twitter feeds?