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St. Louis Fed Opens The "Inflationary Dragon" Pandora Box

Tyler Durden's picture




 

St. Louis Fed economist Kevin Kliesen opens the unmentionable Pandora's box of what happens if all the Fed's actions to date have been, gasp, flawed, and while containing the fallout of the financial crisis, the Fed may have well started on a new, and more dangerous path of a "destabilizing" liquidity driven inflationary explosion. Of course, to inflationists everywhere, this is a given. Deflationists may need some more convincing.

Foremost among the concerns of many is how to design a strategy that does not on the one hand raise interest rates prematurely, thereby prematurely nipping the economic recovery in the bud, while on the other hand does not keep rates too low for too long, thereby creating conditions that lead to a surge in inflation or inflation expectations. What’s needed is an effective policy to prevent the unprecedented monetary stimulus from becoming a destabilizing influence on price stability. Another key is accurately predicting inflation over the next few years.

More from Kliesen:

Some analysts believe that inflation will remain low as long as the unemployment rate stays well above its natural rate of unemployment (a measure of slack). Others, by contrast, believe that the risk of higher inflation has risen sharply because of the Fed’s large-scale asset purchase program and the advent of large, and possibly protracted, budget deficits.

In Figure 1, the path of the FOMC’s federal funds interest rate target is plotted along with the monetary base. The monetary base, which is sometimes called “high-powered money,” can be thought of as the raw material for creating money. Since both series are denominated differently, the chart indexes the series to be 1.0 in January 2007. The chart also includes vertical lines at August 2007, March 2008 and September 2008, when key events occurred in the financial crises.

A considerable amount of disagreement seems to exist among economists about the inflation outlook over the next few years. Some economists are quite worried about the potential for much higher inflation, while others are more concerned about the potential risk of inflation falling to uncomfortably low levels—or even the possibility of deflation (a fall in the aggregate price level). Much of this disagreement reflects, on the one hand, the Federal Reserve’s aggressive response to the deep recession, the financial crisis and the exceptionally large federal budget deficits, and on the other hand, the downward pressure on wages and prices that typically occurs in the aftermath of a deep recession.

 

Figure 2 depicts one way to gauge this disagreement. In Figure 2, the history of the Blue Chip forecasts of the average Consumer Price Index (CPI) inflation rate over the next five years is presented. The chart shows the average of the least optimistic inflation forecasts and the most optimistic inflation forecasts, as well as their difference (disagreement). During periods when inflation tends to be relatively high and variable, such as the late-1980s and early 1990s, there tend to be some sizable differences among forecasters about the medium-term inflation outlook. By contrast, during periods when inflation tends to be relatively low and stable, such as the mid-1990s to mid-2000s, forecasters tend to disagree less about the inflation outlook. Since early 2007, though, the level of inflation disagreement among forecasters has increased.

Indeed, and not only increased but is now at 20 year highs.

Yet possibly the most relevant topic in the paper is the discussion of the output gap. Zero Hedge previously presented thoughts from the St. Louis Fed, in "Why the" output gap" inflation model may be fatally flawed" which speculated that due to the bubble nature of the economy the excess slack as perceived by Bernanke may be completely irrelvant. It is notable that the it is the same regional Fed that created the underlying paper in that post. Could the St. Louis Fed be the biggest opponent to Bernanke's favorite metric of determining inflationary capacity in the economy? These two papers sure highlight that.

It is highly likely that this recession will induce considerable structural change in the economy. Indeed, this development already appears to be in train since many economic resources—labor and capital—that were employed in the automotive, housing and financial industries will need to migrate to industries that offer higher rates of return. One way to gauge the evolving structural change is by viewing the percentage of the labor force that is often characterized as the long-term unemployed (persons unemployed for 27 weeks or longer). As of November 2009, this percentage had risen to 3.8 percent, its highest rate in the post-World War II period.

Those who believe that the Phillips Curve framework can adequately capture the evolution of the inflation outlook over the near term must adequately account for structural changes that might have occurred in the boom and bust in asset prices. In its 2009 Annual Report, the Bank for International Settlements discussed these “bubbleinduced distortions” to current estimates of trend output growth and, hence, potential real GDP. Thus, it is conceivable that estimates of potential real GDP at the start of the recession were too large and that the structural adjustments noted above may have subsequently reduced potential real GDP from its artificially high level.

While it is probably unlikely that the fall in actual real GDP during the recession has been matched by the fall in potential real GDP, the size of the output gap might be smaller than conventional wisdom might believe. If so, those who foresee little risk to the near-term inflation outlook because of a large, persistent output gap may be too optimistic.

To borrow a Bushism, make no mistake: the last sentence is squarely directed at the Chairman, and reading between the lines indicates that the St. Louis Fed has become significantly more of an inflation hawk than previously expected.

The cautionary observations from Kliesen:

Policy is extraordinarily accommodative (see Figure 1), and the FOMC has said that “economic conditions
are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” Although low interest rates are a key part of the FOMC’s strategy to boost economic growth and cement the health of the economic recovery, there might still be a danger of inflating asset prices by encouraging investors and speculators to shift out of low-yield assets like Treasury securities into higher-yielding assets like commodity contracts or other tangible financial assets.

But we thought the Fed's monetary policy has no impact on asset price bubbles. Didn't the Chairman himself say so a few days go. The St. Louis Fed squarely disagrees with this assesment:

Fed Chairman Ben Bernanke and other senior Fed officials are quite confident that they have the tools and the determination necessary to prevent an unwelcome acceleration in inflation or inflation expectations. Unlike previous episodes, though, the magnitude of the policy responses to the financial crisis and the Great Recession suggests that the FOMC’s margin of error seems much smaller than at any time in the Fed’s history.

And if history is any indication, it is a virtual certainty that Bernanke will commit an error once again in his monetary policy calculations. The only question is what the magnitude of the error will be, and how dire the bubble-popping implications become once the asset-price inflation episode comes to an abrupt end.

Full St. Louis Fed paper:

 

 

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Wed, 01/06/2010 - 14:04 | 184583 phaesed
phaesed's picture

I am SOOOO going to dig into this through the rest of the day and tonight and provide something for ya. But what I want to re-iterate is exactly what you emphasized:

there might still be a danger of inflating asset prices by encouraging investors and speculators to shift out of low-yield assets like Treasury securities into higher-yielding assets like commodity contracts or other tangible financial assets

This is the proverbial "nail on the head". Unless the PPT is disbanded and natural price discovery occurs, we will have a hyper-inflationary depression (a.k.a. stagflation). If the PPT continues and Treasuries are completely shunned as an asset class, any form of recovery, either through natural price discovery or Government stimulus, will fail.

THIS IS PART OF WHY I AM BASHING THE TREASURY BASHERS. I also bash the PPT because the price elevation is unsustainable for the vast majority (ie those of us who aren't rich thanks to being overpaid or mommy & daddy).

Anyways, more by tonight/tomorrow. Thank you for posting this

ps... people should also consider the above quote as: If Americans are unwilling to pay for their own recovery and continue to move their cash offshores to the same countries as the ones Obama is begging for cash, expect this country to fail. Expect higher taxes, expect higher prices, expect more poverty. We hold our own fate in our own hands, this is the crux of Keynes "Animal Spirits" quote and the ex-post ante theory of interest.

Wed, 01/06/2010 - 15:20 | 184660 phaesed
phaesed's picture

Still reading this before I head out to the gym - Damn this is a good review, I'll have to read more of his works:

"Economists use numerous methods to forecast inflation. Some economists believe that the growth rate of the moneys upply is an accurate predictor of inflation. According to this view, popularized by monetarists, the inflation rate will ultimately be determined by the growth rate of the money supply relative to the growth rate of real GDP. When money growth exceeds real GDP growth - what Milton Friedman and others have commonly denoted as too much money chasing too few goods - the inflation rate will increase"

Amazing how Austrian and Monetarist economic theories produce essentially the same argument - growth rate of money supply as an indicator of inflation, but differ only in attribution: Monetarists say it's a weaker real GDP, Austrians say it's a weaker dollar. I hate to break it to you, but a weaker real GDP is the same damn thing as a weaker dollar.

<This is the best analysis I have read in a lonnnngggggg time that was written in the past year>

 

"According to an August 2009 survey, nearly two-thirds of professional forecasters surveyed by the Fed Reserve Bank of Philadelphia use some variant of the Phillips curve to forecast inflation. The Phillips curve is now often known as the New Keynesian model."

- Funny thing. Phillips didn't discover the link between inflation and employment. Irving Fisher provided the empirical evidence but Phillips took credit, it should also be noted, this was the golden era of Monetarist economic theory when academic economists enjoyed great subsidies from the Central Banking authorities. Essentially it's only when prices are rising that jobs will hire people, this is why inflation is cumulative, but you're not ready to understand that yet because you'd have to understand that prices for assets are upwards-sticky even when real valuation is lowered when interest rates rise.... if you don't understand that, you don't understand actual monetary economic theory, you're playing around and confusing people.

"As yet, though, the unemployment rate remains below its post-Word War II peak of 10.8 percent, which was reached in November and December 1982"

- Followers of John Williams Shadowstats will understand that in 1982 the methodology for calculating CPI changed. But yet the Fed uses the Phillips curve to determine proper employment.

 

If you don't know the history of the author you don't know what you're reading
If you don't know the history of the author you don't know what you've read

-KRS-One - The Real Holy Place

 


Wed, 01/06/2010 - 16:14 | 184764 Shameful
Shameful's picture

I'm not expert on Austrian theory, but I am familiar with it and I believe you are mischaracterizing it by grouping it with Monetarist.  The Austrian idea is money is a natural occurrence and springs up naturally from the people.  Now as to inflation any money creation by the gov in the Austrian school is inflationary completely independent of the GDP (regardless of any increase or decrease).  The idea being that as productivity (GDP) rises the money will be worth more and buy more goods.  This would be deflationary and create form of natural savings in the money.  This of course rarely occurs in a state run system because it is simply to easy to inflate the monetary supply through printing or a fractional reserve banking system (changing reserve requirements).

I also disagree with the concept that only when prices are rising that business will hire.  What if by hiring more people I can bring down the cost of production and increase my profit margins?  What about the increased production brought by hiring more people and producing more product.  Increasing total profitability even if variable costs are going up along with supply.  Your comment seems to leave out the possibility of any cost savings or increased profitability by expanding operations in an efficient manner.  If people hire when price go up then why didn't Wiemar Germany or Zimbabwe have 100% employment, prices doubled every few hours?  The reason being is inflation is bad for economic stability.  With inflation a business person is basically fed bad data and forced to make business decisions based on bad data.  Historical information goes out the window with inflation, and the higher the inflation the worse the historical inflation is for comparison purposes.  And don't get me started on accounting and inflation, basically we have to take it as faith that the dollars value is static...I wish.

Wed, 01/06/2010 - 17:59 | 184922 BorisTheBlade
BorisTheBlade's picture

I also disagree with the concept that only when prices are rising that business will hire. What if by hiring more people I can bring down the cost of production and increase my profit margins? What about the increased production brought by hiring more people and producing more product.

I think you are right to disagree, look at the good ole' days:

The standard 4-seat open tourer of 1909 cost $850, when competing cars often cost $2,000-$3,000; in 1913, the price dropped to $550, and $440 in 1915. Sales were 69,762 in 1911; 170,211 in 1912; 202,667 in 1913; 308,162 in 1914; and 501,462 in 1915. In 1914, an assembly line worker could buy a Model T with four months' pay.

http://en.wikipedia.org/wiki/Ford_Model_T#Price

Hence, deflation doesn't discourage producers from creating more product, more likely it motivates them to produce product more efficiently and make up the loss from deflating prices through the higher output.

However, those behind the printing presses today couldn't care less about the level of production, their ultimate goal is to redistribute wealth through a hidden taxation, which inflation essentially is, wipe away the debts of those who should be bankrupt in a purely deflationary environment and ... I don't know, keep their friends in business.

Wed, 01/06/2010 - 21:27 | 185118 phaesed
phaesed's picture

Funny you should pick Henry Ford, he also paid his workers higher salaries than his competitors and produced a better product. It was after the 1921 collapse he began to give in to the "iron fist" mentality... most likely shareholder induced, but I'm not expert on cars or automotive history nor intend to be :)

Thu, 01/07/2010 - 01:42 | 185258 laughing_swordfish
laughing_swordfish's picture

Not shareholder induced.

Ford did not go public until 1956

Thu, 01/07/2010 - 05:18 | 185285 BorisTheBlade
BorisTheBlade's picture

If not Ford, then look at any cellphone maker most recently, they operate within the similar environment, if only more competitive. Point is, producers can operate within the deflationary environment, it is mostly banks with 40:1 leverage who are afraid of it.

Thu, 01/07/2010 - 05:45 | 185290 phaesed
phaesed's picture

+1

Thu, 01/07/2010 - 09:15 | 185324 Shameful
Shameful's picture

That's a good point.  Could also look at computer component manufacturers.  They are in a race with each other to constantly make a better and better product, cheaper and cheaper.  And we have seen that the computer sector is fully capable of generating profit despite having to constantly offer better and better goods at the same or lower prices.

Wed, 01/06/2010 - 19:18 | 185004 phaesed
phaesed's picture

Austrian theory and price inflation makes no attempt to differentiate exogenous (bank created funds - credit) and endogenous (monetary stock a.k.a. high power money in the paper presented by Kliesen).

 

However the relation between Monetarist and Austrian theory is as follows, although I have to go through a few steps to translate english to math... yes I know, I actually use numbers.

Monetarist

Too much money chasing too few goods.

An increase in the money supply with an existing set of good that is not increasing between times 0<=t<=1

Money(t=0) < Money(t=1)

0 < Money(t=1)/Money(t=0)

let Money(t=1)/Money(t=0)=X

therefore the increase in the money supply is a coefficient greater than 0

now, let Price(t=0), let the increase price at t=1 be an equivalent increase to the money supply

  i.e. Price(t=1)/Price(t=0)=P(X)

So according Monetarist theory, inflation is the rise in price so that Price(t=1)/Price(t=0) is equal to X.

 

Inflation in an Austrian sense is a weakening in the value of the US dollar by an increase in supply (which is why it must be pegged to an asset according to the theory) Without numbers, this is a bit more difficult to understand, fortunately for me, my background is in math and abject poverty :)

So essentially

An increase in the monetary supply creates a weakening value of the dollar, which causes a rise in prices.

More succinctly

The increased quantity of dollars causes an increase in prices.

  Money(t=1) > Money(t=0)

But since the idea is that the currency is pegged as a stable value, let Value = the value of the money supply (real GDP, but that's a bit further down the road)

   (Money(t=1) = ValueMoneySupply(t=1)) = (Money(t=0) = ValueMoneySupply(t=0))

but ValueMoneySupply(t=0)=ValueMoneySupply(t=1) = ValueMoneySupply

(sorry I know all the variables are confusing, it's part of why Rothbard, Mises and the ilk hated to use numbers)

So to correctly compare the two I have to rearrange the variables a bit

   Money(t=1) - ValueMoneySupply = 0

   Money(t=0) - ValueMoneySuppy = 0

Rearranged to give an equivalence you get this:

   (Money(t=1) - ValueMoneySupply) = (Money(t=0) - ValueMoneySuppy)

Since ValueMoneySupply remains static, the Fed's equations translates to Austrian theory as a logical contradiction, namely that if:

  Money(t=1) > Money(t=0)

then the value of the money supply must shrink on the individual level, namely Value(FRN(t=0)) > Value(FRN(t=1))

Following me? It gets circular.

Now if Value(FRN(t=0) produces a price P at time=0, the price at time = 1 must be greater because the real value of the asset has not changed, hence let Q = the quantity of FRN(t=0) required to purchase the asset at time t=0

P(t=0) = Q*FRN(t=0)

but since Value(FRN(t=0)) > Value(FRN(t=1)), the price of the asset at t=1 must be a coefficient greater than 0, relatively equal to the increase in the money supply (let U equal the increase in the money supply & be greater than 0)

 

therefore

P(t=1) = U*Q*FRN(t=1)

So how do the two relate??

Essentially X from the monetarist set set of equations is the equivalent of U from the Austrian set of equations.

The only difference is that the Austrian theoretical viewpoint is from the MICROECONOMIC level, namely at the individual FRN while the monetarist set is from the MACRO level.

Okay, ask me the questions on that and then I can go on to why stupid modern economic theory is searching for a stable price level. I'd also like to note that somehow the monetarist viewpoint believes that wages will eventually increase to compensate for the rise in money supply.... which we all know is bs.

*whew*

Wed, 01/06/2010 - 20:44 | 185086 Shameful
Shameful's picture

To me it's the problem with the perception of inflation as okay. As you point out the monetarists think that wages will rise. We are in agreement that is false. Inflation is a tool to rob those who are not politically connected IE everyone but the rich and powerful and their cronies.

I never cared for macro economics. To much of a belief that controlling a thing would make it better then letting the system flow. I've yet to see a math model that takes all human action into account. And if one is found that man will rule the planet. Would be like finding the formula in Foundation (the novel).

Wed, 01/06/2010 - 21:14 | 185110 phaesed
phaesed's picture

Modelling the future is stupid, but using a model to understand the present and the past? That's just common sense.

" And if one is found that man will rule the planet."

Don't want to sound too religious, but that's kind of what the bible states. The son of man who is unpure who finds and speaks the name of god which was lost during the destruction of the temple of Jerusalem.

 

Thu, 01/07/2010 - 09:32 | 185335 lookma
lookma's picture

Hi phaesed,

Maybe it would be good to learn about Austrian theory from someone who understand it?

Wed, 01/06/2010 - 15:35 | 184700 phaesed
phaesed's picture

My god, I can't believe you didn't quote this part.

"Gauging the deficit's potential effect on inflation depends on how it is financed. To see this, consider the governement's budget constraint. In its simplest form, the constraint stipulates that if the deficit is not financed by higher taxes, it must be financed in one of two ways: (i) by issuing debt to the public, which includes foreign holders of U.S. Treasury securities; or (ii) by selling government debt to the central bank, which is the Federal Reserve. The latter, also called monetization of the debt (italics mine), increases the monetary base (high-powered money) and, thus, the money supply. For example the Federal Reserve announced March 18, 2009, that it would buy up to $300 billion of Treasury securities (beyond its existing holdings at the time). These purchases, which were designed to "help improve conditions in private credit markets," were not sterilized - that is, they were allowed to increase total bank reserves and, thus, the monetary base."

So, higher taxes will come no matter what, but the implications of higher taxes are worse if the INTEREST COSTS of our debt is raised. Consider my argument from yesterday.

From a Macroeconomic perspective, if you demand higher yields (as an American), you're effectively demanding higher tax rates.

--------------------------------

Our tax dollars pay the coupons on treasury bonds.

Higher yields mean we need to make higher payments.

Higher payments mean we need to pay out more dollars.

Paying out more dollars means we need to obtain higher tax revenues.

Higher tax revenue requirements mean higher taxes which effectively would hit the upper classes more than the lower classes in revenues

- (despite the poor paying the higher interest rates at the margin for interest costs in company expenses passed on to the consumer).

--------------------------------

So NOW, let's look at this from a microeconomic perspective.

--------------------------------

The American investor gets a higher yield.

The coupon rate has now increased. (Fr (face* rate) at time 1 > Fr (face* rate) at time 0)

The amount taxed has now increased. (TaxRate * Fr (face* rate) at time 1 > TaxRate * Fr (face* rate) at time 0)

But due to higher interest costs, the tax rate has increased (TaxRate at time 2 > TaxRate at time 1)

Therefore the Return on Investment has decreased (CouponPayment - FR*TaxRate(2)) < (CouponPayment - FR*TaxRate(1))

- <assuming the increase in taxation exceeds the increase in yield, this may not be the case, but if you consider your aggregate income, the case becomes clearer>

So, since American's are demanding higher yields to invest in their own country, they are demanding a lower return after taxes.

The American investor now receives a lower total yield.

--------------------------------------

But there's more.

Do foreign entities pay taxes on American Treasury bonds? I don't mean foreign investors, I mean Foreign Central Banks?

Somehow, I doubt it.

SO, Foreign Central Banks have a TaxRate=0, therefore (FR*TaxRate(2) = FR*TaxRate(1)) = 0

Effectively, Foreign Central Banks receive a higher payment, meaning a larger outflow of capital from the United States or more succinctly, the American Taxpayer.

Wed, 01/06/2010 - 15:37 | 184707 phaesed
phaesed's picture

I'm sorry for pushing this topic TD, but you *KNOW* why.

Wed, 01/06/2010 - 16:32 | 184783 Shameful
Shameful's picture

Okay I agree that it would cost Americans as a whole more to have treasury yields higher.  But the alternative is monetization as the Fed becomes the the market for Treasuries as yields don't keep up with other investments in much the same manner the fed is the market in MBS.  They are not priced properly because of interference in the market.  This will do very bad things to the dollar.

In one case we have an honest rise in taxes and accept higher yields.  Hoping and praying our insane government will at least slow spending in the face of mounting rates.  After all why not spend when the rates are low, the "market" is telling them that they love the massive deficits. 

In the other we try to stick the bill to the foreigners and other dollar holders melting the dollar into slag.  Now if you have a plan to melt the dollar and get us out scott free I'd love to hear it.  But I know our government and policies and think Americans would have to be crazy to buy US debt.  We know we aren't good for it.  Many of us non professional traders (like myself) would love a return on investment, but more then that we want to protect our capital in this time of uncertainty.  Investing in Treasuries tells me I will get low yields and flirt with the idea that the FED will destroy my investment at it's whim.  So under these conditions where the iceberg has already hit the Titanic why would I be busy trying to get a better suite on the ship when I should be running towards the life rafts?

Wed, 01/06/2010 - 18:34 | 184966 phaesed
phaesed's picture

Many comments and responses on yours to come (thank you for responding and creating a discussion - that's what I was after), but you left one option out. Invest in treasuries despite the Fed's actions. Unless Americans all chip in and buy our debt, this recovery will fail and we will see John Williams thesis unless the banks decide to liquidate. Unfortunately our Government won't allow any bank to liquidate (see GMAC for proof). The stupidity of our administration will be our downfall (Read Obama's willingness to obey Ruben & Summers, 2 of the 3 idiots who got us in this)

Wed, 01/06/2010 - 20:01 | 185038 Shameful
Shameful's picture

Unacceptable.  Why not simply ask people to take money out of their accounts and light it on fire?  That way the money is out of circulation and the Fed can allocate newly printed to where it is needed?  This is an absurd example but in effect this si what you are suggesting.

How about this.  American’s invest their capital abroad and we enter the hyper inflationary nightmare.  Those who prepared get to eat and build anew, those who did not suffer.  Under your plan the smart savers would cast themselves into the fire to buy the spenders a few more moments of glorious spending.

The spending will not stop.  The dollar will take stress till it breaks and we all suffer worldwide.  Then those of us with capital can try to build a better place here.  Though for full disclosure I’m planning on leaving the States as soon as I finish school…which is in another 1.5-2.5 years so I might be wiped out in the meantime.

 

Wed, 01/06/2010 - 20:20 | 185059 phaesed
phaesed's picture

But don't you get it? By investing in treasuries you increase the probability that you will not see hyperinflation (let's face it, the market is starting to sputter already) and you will not see exorbitant tax rates.

This is the ex-post ante theory of interest, the part that post-keynesians understand but the majority of economists have no clue because it requires more than a single move ahead in a chess game.

And hey, I'm puerto rican and moving back home.... we see income tax rates go to 50% plus? I see my hometown of San Juan again

Wed, 01/06/2010 - 20:30 | 185070 Shameful
Shameful's picture

How? If spending will continue to ratchet up, especially under low yields how will it improve my chances to avoid a hyper-inflationary collapse? Will it delay it, sure, but how much do I need to pay for how long?

The event is built into the cake because of the government, their junkies. We are simply talking about when it will happen. And the argument of "Invest your money into this burning building because maybe it won't burn down all the way if you do!" is not likely to get many takers.

If the gov was different I would agree with you, but lets face facts they will waste every penny they can lay their hands on and if they can't get enough they'll print it. After all don't you think the Gov will step in and ramp up spending once we start to double dip?

Glad you got a solid path out. I'm going to try to leverage my skills and take some foreigners job.

Wed, 01/06/2010 - 21:18 | 185111 phaesed
phaesed's picture

The problem that you are having with the reasoning is the belief that a lower interest rate creates more paper money (a.k.a. high powered money in the above work), it doesn't, rather it creates more exogenous money (a.k.a. credit) by increasing treasury bill valuations which are the deposit base of banking institutions which are then used to be loaned out in fractional banking. When the rate of interest rises, the deposit base shrinks along with the treasury bill valuations, this is how banks can find themselves over-extended.

 

Wed, 01/06/2010 - 21:41 | 185131 Shameful
Shameful's picture

I never said that. Dollars come from a printing press and then again through fractional reserve lending. Interest rates can trap dollars from moving around, or at least moving at lower velocities.

I'm pointing out that the rational of the politician will be "See the market is telling us it will fund our debt at low levels! The market must want more of our debt, lets give it to them!" There is little political backlash to spending if financing is cheap, people will ignore it. Look at the poor decisions people made with crazy low credit terms during the boom. At a higher rate of financing the public will give stiffer resistance to the spending.

The point of my argument is as long as the Fed Reserve is willing to purchase Treasuries, which it is openly doing, then that will increase the amount of printed dollars in circulation. My doing so it weakens all dollars including those paid by coupon and eventual principal repament.

Those dollars don't leave the system unless the Fed sells the asset it bought and receives at least par on them. Do you see the fed shrinking it's balance sheet and being able to get par level? Is such a feat even possible with the toxic waste it has(MBS)?

As long as we don't have a free market, and instead have the 800lb invulnerable gorilla buying what it wants while ignoring the market we cannot find the proper level for treasuries that will force a political solution to the spending problem. Because if they jack taxes high enough to pay for the current level of spending and promises then we will face the highest tax rates in history and capital will run screaming out the door, as will many people. It will bring a collapse but the system, and it will only get worse the longer we extend and pretend.

Wed, 01/06/2010 - 22:09 | 185149 phaesed
phaesed's picture

Ahhh, "Interest rates can trap dollars from moving around"

Not necessarily, in fact the infamous "velocity of money" is highest when rates are higher... not when they are lower. The higher rates lag the higher velocity to some degree at the start of the cycle, but then lead the higher velocity at the end.

 

The Fed can only purchase so many treasuries, the MBS situation though? That's an entirely different animal, and while they are monetizing these securities with TALF proceeds and the like, it's all through exogenous (credit based) methods, not actual printing, that's resulting from the higher issuance.

And highest tax rates in history?

Married Couples filing Jointly - http://www.truthandpolitics.org/top-rates.php

1913 7%

1917 67% for those making over $2,000,000

1925 25% for those making over $100,000

(funny... low tax rate, stock market crash... hrmmmmmmmmmmmmmmmmmmmmmmmmm)

1932 63% for those making over $1,000,000

1944 94% for those making over $200,000

1951 - 1963 - 91% for those making over $400,000

1971 70% for those making over $200,000

1982 50% for those making over $85,600 - GO Reaganomics!

For 1988-1990, some taxpayers faced a 33% marginal tax rate in an income bracket above the one cited for the 28% rate. However, the marginal rate returned to 28% above this 33% bracket. That is, for all sufficiently high incomes, 28% was the marginal rate.

1994 39.6% for those making over $250,000 (now that's probably the same as 85k in 82, but hey)

2003 35% for over 311,950

 

Americans are spoiled rotten and fucking crybabies these days.

Wed, 01/06/2010 - 22:19 | 185164 Shameful
Shameful's picture

The only rational I could see behind a high velocity at the same time as high relates is inflation fears. But without a central bank or ability for the state to print it's way out those fears should be mitigated. A natural interest rate would cure a lot of the velocity issues, to bad we can really have one because of government interference worldwide.

As to the tax rates, sure there were higher before. The facts speak for themselves, but go a step further. What was the REAL value of those dollars then? Even with Gov booked inflation it was quite substantial. When priced in gold(picked because it's popular) it's downright absurd how much purchasing power those dollars would represent then, it's about purchasing power.

As to the Fed it can only purchase so many treasuries...only as many as are issued and sold on the market. But really that's hardly a limit. Otherwise there are no rules that say they can't and even if there was so what no audit. They could tell us they have magic beans and pixie dust on the books and we would have to believe them.

For example if we had a 95% tax rate for everything over 1 billion dollars a year it would affect few people. Now lets assume they got to town and print massive amounts of money and all of a sudden "middle class" workers make more than 1 billion a year, that's a pretty substantial bite when the real purchasing power never increased.

Edit, looks like you got a bit in there about inflation before I posted this :)

Wed, 01/06/2010 - 22:22 | 185167 phaesed
phaesed's picture

Tax rates are tax rates... you don't care about purchasing power, you care about someone taking 70% of your check.

Additionally, that would mean the tax rates were even HIGHER then than they are now if you consider purchasing power because those dollars could have purchased SUBSTANTIALLY more than they do now. Consider if you lost the equivalent of a months rent in a weekly check. That'd suck.

Wed, 01/06/2010 - 22:38 | 185183 Shameful
Shameful's picture

I have to disagree. Look at the lot of the medieval peasant. His tax rates were not sever compared to many tax rates today, but they had many tax revolts. The reason it brought them below a breaking point, particularity during war. Because purchasing power and productivity was lower a higher tax rate was literally the difference between life and death.

Now to address the modern era those older tax rates hit disproportionately few people. This is addressed by the inflation. If we had rates jump to 50% for the 80k married crowd you would see massive anger. Why because that is hitting a lot more people then it would have before and because of cost of living and family expenses some would lose their homes, a breaking point.

Also perceptions change, back then that might have been seen as rich after all now, marginally middle class. My dad is in the construction biz and has told me "Shameful if you told me as a kid that I would be making the money I'm making now, I would have thought I'd be driving a Porsche not a 1990 GM pickup". Again inflation.

I'm not supporting those old tax rates or our current ones but we need to keep current salaries and past salaries in mind when we compare the two and look to see who was really affected.

Wed, 01/06/2010 - 22:50 | 185193 phaesed
phaesed's picture

. Look at the lot of the medieval peasant. His tax rates were not sever compared to many tax rates today, but they had many tax revolts.

 

WHAT??????????

You mean your "Lord" coming through and having a nice little time bending your wife and/or daughter over (hell, sometimes it was your SON) and then taking 90% of your crops wasn't severe? Ya lost me on that one. Also, you made that same argument earlier and had it quickly disproved my friend. Provide proof for the argument.

Wed, 01/06/2010 - 23:35 | 185219 Shameful
Shameful's picture

Here is a reference to paying bout 10% and it being ruinous. Again it was quite severe because the people were so close to poverty and starvation. http://www.the-orb.net/textbooks/muhlberger/14c_economy.html

"The parliament was not unaware that this was ruinous for the poor, whose family income was often 20 shillings a year or less. A family with two adults would have to pay ten percent of their yearly income." Around 1370-1380 about the Poll tax.

http://www.taxworld.org/History/TaxHistory.htm has some goodies but not many hard rates.

http://books.google.com/books?id=Cdbs_VnoTM8C&dq=england+tax+rates+histo... has some numbers around Napoleons era 10% cap in income tax England, and of course other taxes, like today

I have some sources about the serfs but most do not break down by exact percentages. It does not how the taxes where light on them compared to the rich but that it wold lead to their starvation. Again because people were closer to abject poverty. The poor then certainly did not have a problem with being obese. Hungry people will fight. Americans are still fat and happy and won't even think of trying to limit taxes till they get hungry.

90% rates and lords taking people for their pleasure are mostly in the realm of stories. Did it happen, sure, but if a lord tried it he would have a revolt on his hands. And if you look at the history of the way back wars and tax revolts went hand in hand as the tyrant...errr...lord tried to squeeze the peasants to fund his campaigns.

I by no means want to life in that awful time. I am merely pointing out that more by % is taken now then in the distant past as if the same % was taken the people would have simply starved. I would argue more is taken as % from a greater number of people now then was probably done at most times in American history as well.

As an aside I've read some books that point to the Black Death as the birth of the Renaissance. The death opened up a lot of farmland and made labor more in demand. Populations was high for the farming techniques then and some people were forced onto marginal land and were dancing the razors edge of starvation, the mass death cleared a lot of people and made the lords negotiate with the serfs for less taxes. This increased money to the lower classes and helped give rise to the merchant classes. Not super applicable just find it a historical oddity.

Wed, 01/06/2010 - 16:02 | 184741 Shameful
Shameful's picture

Alright explain to me why hyper-inflationary depression and buying US treasuries is a good mix?  You yourself say that unless the PPT is disbanded and we have price discovery this will occur.  If this occurs will the coupon we get on hold a treasury beat this hyper-inflation or will it be destroyed in an orgy of dollar devaluation?  Do you really think that they will stop manipulating prices because it's the right thing to do?

I'm in total agreement that unless we have natural price discovery and unless the gov gets out of the way a recover will fail.  But you seem to think that this will happen, I disagree.  Those who have the reigns of power will not give them up, and in either their greed or hubris will watch the whole system burn before they let power slip from their hands.  They believe central control works and history must be forced to prove them wrong.  I hear this in academia "this time is different" or "We have learned form the past, and so we must tread down this road once more.  But it's never really different, the song remains the same.

As to Americans paying for the recover how about this.  Would you lend a heroin addict money?  Would you lend a heroin addict money, if you have a history of lending him money, then watching him buy smack with it and shoot up all the while telling you that he's good for it?  Would you think that addict was a good candidate for a loan?  Would you think that giving that addict money was a sound investment?  Now tell me how the spending policy in America is any different then the actions of a junkie.

The problem is not Americans not willing to fund our recover, it's because we have spending addicts who control the purse.  If you give them money they will spend it and come asking for money, regardless of how much you give them.  Nothing on earth is greater then a bureaucrats ability to waste money through infinite corruption.  Americans are sending their money offshore because they are worried what will happen when the junkie can't get an easy fix from the Chinese or from having the Fed cut the drugs before dropping them off (monetizing). These Americans are just trying to protect themselves from the horror unleashed by our own government.

Also I mean no offense to junkies and addicts out there, I'm sure most of you are far better people then our leaders over the past few decades.

Wed, 01/06/2010 - 18:39 | 184975 phaesed
phaesed's picture

No, a hyper-inflationary depression will destroy our nation and we will have another American revolution, an extremely violent one that will have a media blackout. For a prime example, look to Iran.

 

The PPT must be disbanded, but you're right, our leaders don't want to change. By evolution or revolution, I support the evolution and that's why I study economic theory, but I'm also ex-military and have a survivalist loner bend and have my rifle and desert eagle. I prefer evolution, but revolution would be a hell of a lot more fun because all the richie rich silver spooners will have no clue what to do.

Wed, 01/06/2010 - 20:06 | 185045 Shameful
Shameful's picture

We are in total agreement here, but since the system will not willingly change the change will only happen when the system breaks.  To stall the break is more ruinous because it places us all in a worse situation when the break occurs.  Again having said that if they could stall it 3 years I would fall on my knees and cry tears of joy because it would give me time to get my family and my money out before it happens, but I do not expect to be so blessed.

I’m not a fighter, I’m just some computer nerd with some books smarts and a fear of his government.  I wouldn’t even be on this website but I’m doing my best to preserve what capital I have and to better guide my family through the crisis I see coming.  Trust me I would rather be reading a tech blog instead of having to face the tale of economic ruin.

 

Wed, 01/06/2010 - 20:21 | 185062 phaesed
phaesed's picture

I find this all infinitely fascinating because Americans are effectively engineering their own demise by moving cash abroad.

Problem is it's the poor who suffer, not the rich.

Wed, 01/06/2010 - 20:38 | 185076 Shameful
Shameful's picture

Of course the rich will not suffer, they rarely do. And the demise has been long in the making, since before I was born.

And if you are intimating I am rich your wrong. I'm the first person in my family to graduate college on either side. My father was basically a war refugee and my mom was poor white trash. Growing up I didn't have a lot either but my family are all savers so I refuse to see what little we have worked and scrapped and saved destroyed by fat cat bureaucrats! Right now I'm going to school full time, while holding down a full time job and helping to support my sister and her family. I want no pity but a lot of us working stiffs are trying to protect what little bit we got in life. If I thought that kicking in my savings would help this country I would, but I know it would be spent on hookers or bankers not building this country back up.

Wed, 01/06/2010 - 21:25 | 185115 phaesed
phaesed's picture

Oh please don't think anything in here was directed at you... none of this was trying to be snarky towards any individual, it's my own general views and the actual theory as I learned it from the works of Fisher, Wicksell, Hayek, Rae, Cournot, Menger, Mises, Friedman, etc, etc....

I am in your debt because you gave me a chance to sound out the theory in a fuller scope. What I find incredible is that no other economist has said shit in regards to this all, not a word on higher tax rates, not a word on lower yields... either I make absolutely no sense to them or they are keeping shut for some other reason. However if I am making sense to you, then the sense to them should be clear, either erroneous or not. So if it's erroneous, why haven't they refuted it? Too busy? Not likely, especially considering nobody even considered Treasury bills as a cash replacement for banking deposit bases.

As for the entire higher prices argument? A business owner tries to "buy cheap" and "sell high", if prices are dropping, how can they sell higher? Hence we have a fatally flawed economic model in place, I never said I agreed with it, I just said that's the way it is. Prices should be LOWERED as technology is perfected so technology is affordable and plentiful for all instead of "limiting" production to keep a stable price level like your business was the diamond cartel.

Wed, 01/06/2010 - 21:58 | 185145 Shameful
Shameful's picture

No in most ways I agree with you except we differ on treasuries. My inherent distrust of the gov tells me that they will kill my investment and waste my money on hookers, bankers, and murdering people worldwide. So I probably am seeing the world in my own bias.

Now I have heard the higher taxes argument but not from economists. Oddly enough I've heard it from a few offbeat political commentators. The statement was roughly "We need higher taxes to pay for the services we have that we are financing on debt". I don't know why economist aren't talking about it, but it is not a popular topic. For example Obama made a tax promise because people like the promise of no new taxes for the lower earners, sure it was a lie but it sounded good and people want to hear it (not a barb at the Blue team, I am disgusted by and hate both the Blue and Red teams).

We are able to fund this massive warfare welfare state on the backs of inflation and borrowing, both are largely invisible to your average American. Taxes are a lot more visible. If the people to be forced to pay for it directly and honestly they would refuse rather quickly but they see it as painless or that they can pass the buck to the next guy or the next generation. That needs to end and we need to pay our own way NOW. In that way we agree we both think that American's need to pay their own way. However I think that if we did it honestly and owned up to it we would force the political elite to either cut the spending and promote fiscal responsibility or face a revolution. Simply asking people to buy bonds will not work, because it will not force discipline. I think paradoxically it will allow our leaders to be even more irresponsible. Look at Japan, their citizens bought a LOT of Japanese debt and look where it got them. Their gov is/was massively irresponsible because it was allowed to be. Now they face EPIC public debt and finally their savings rate has been brought down to about where ours is.

What we have is a rotted mansion with a cracked and flooded foundation. It was great once, indeed may be great again but first needs to be torn down and completely rebuilt.

Wed, 01/06/2010 - 22:18 | 185160 phaesed
phaesed's picture

"No in most ways I agree with you except we differ on treasuries. My inherent distrust of the gov tells me that they will kill my investment and waste my money on hookers, bankers, and murdering people worldwide. So I probably am seeing the world in my own bias."

Ahhh, you just made me like you a lot there.

You're right... but the difference is I spent two years of my life researching economic theory to understand what I do now and have read over 100,000 pages or so in that time. From modern day to David Ricardo and Adam Smith & Cantillon's era. The most difficult part for most economics majors - the mathematics, just happened to be covered since I worked as an actuary when I found myself broke during my senior year (my motorcycle stolen, my workplace shutdown and my apartment complex got bought out and they evicted everyone - in a matter of a 2 week period) and refused to take on debt for graduate school. But your point of view is EXACTLY what the bankers want... you to distrust the system so they can manipulate your opinion to their ends.

The enemy of your enemy is not your best friend, they have their own agenda and most often will be your enemy as well in this "it's all about me" era.

 

 

Wed, 01/06/2010 - 22:28 | 185171 Shameful
Shameful's picture

But the banks are the government. It's clear that the gov has the banks best interest at heart, and why not the banks bought them. There is still a market in buying politicians. How could not trusting the banks or their lackeys in the government work to their advantage? I will not play their games along side people who are not aware of their tricks, so how does that harm me? Is there a great profit to be made by running with the herd off the cliff?

If there was a disconnect between banking and government I could see your point but I don't understand what you are trying to get across.

Also I'm fully aware that the enemy of my enemy is not my friend. This world is by and large one huge competition for resources. Just because I may have an mutual opponent does not mean that I trust that other person to have my best interests at heart. Trust must be earned not given.

Wed, 01/06/2010 - 22:34 | 185177 phaesed
phaesed's picture

Don't you see how you're buying into their mantra though?

CNBC states every 15 minutes that "Treasuries are a bubble"

Clearly there IS an agenda.

Wed, 01/06/2010 - 22:52 | 185197 Shameful
Shameful's picture

I don't watch TV.

I don't like Treasuries because of our government and central bankers. You still have not shown me how either party will see the light. That they will stop their corruption and theft, cut the bankers off, cut the needless spending and wars, and finally get America's finances in order. We are seeing an increase of looting not a decrease, the trend is bad. Again I must point out you would not lend money to a junkie unless you had collateral, and what is the collateral of the treasury? The full faith and credit of the US. Well that's about the same as the junkie giving you his word. After all I can't take defaulted or devalued treasuries to DC and ask for Federal land now can I?

And the agenda is clear to me anyway the media wants the public in stocks. The gov wants people in stocks, probably the Fed to. Why? Because we are now measuring economic conditions based on the DoW and S&P. Also it churns the market which is good for banks and brokers for commissions, record bonuses this year and all. If those numbers are good the then economy is good, or so the claim goes. But what about treasuries, well again that is when Zimbabwe Ben ponies up the the table. Be buys his amount, foreigners swallow their fear and take a another shot (less and less as time goes it seems at least in long term notes), and then Ben back-doors some more monetization through the Household bucket. This is the cycle and it will work till it doesn't. Eventually the Japanese or the Chinese will get gun-shy and walk away form the table. Hell Japan may do it to fund their own massive debt problem. What happens when the foreigners catch on to the monetization? Now I understand you call for Americans to pick up the slack but we really can't and even if we could how would that change the situation? All it would do is turn Americans into the chumps drinking at the bar rather then the Chinese.

Thu, 01/07/2010 - 05:47 | 185291 phaesed
phaesed's picture

But that's the point... Shalom wants us to invest in Treasuries like he wants a strong dollar.

Thu, 01/07/2010 - 09:12 | 185322 Shameful
Shameful's picture

Huh?  Why would he give a damn?  He can buy treasuries or not.  I think he would prefer Americans to go in and buy them, after all that lets him juggle the time-bomb a bit more effectively, and milk America a bit longer.  It's not about a strong dollar or Americans buying treasuries, it's about pillage.  Our leaders are in pillage mode and that's what's happening.  If they could pillage and keep the dollar strong there is no reason they would not, however the 1st and really only goal is wealth distribution from the middle and bottom to the top.  As you pointed out the coming storm will be terrible on the poor and not so bad on the rich. 

I think old Benny Boy is indifferent to both the idea of Americans buying treasuries or a strong dollar.  In pillage mode why would it matter to him, he's got another turn at the tiller of the ship of fraud.

Why would Ben be afraid of Americans buying treasureies, why wouldn't he want that?  After all he could overwhelm the dollar anyway with devaluation.  As it stands now he could(is?) buying any asset in sight so even if all Americans put 90% of their discretionary income into savings and buying all the American treasury paper and American financial securities they could Old Ben could start speculating in housing in Spain or picking up land in eastern Europe, or joining the bubble in Chinese real estate.  There is NOTHING restraining him and his abuse of the dollar so tell me how could we prop up the dollar when has the complete freedom to devalue at will?  As long as he holds the printing press he holds all the cards, you don't fight the Fed because they have an infinite amount of dollars at their disposal.  Okay maybe not infinite, only as many dollars as it would take to buy all the debt and assets on Earth, so close enough for government work.

Wed, 01/06/2010 - 14:08 | 184593 lsbumblebee
lsbumblebee's picture

I see. Now we have "recovery buds".

"Green shoots" is so last year.

Wed, 01/06/2010 - 14:21 | 184609 Anonymous
Anonymous's picture

I am so sick of people that have a public forum that experts say matters are so completely out to lunch.

Recovery?

Are you kidding? People that have steady government jobs and work on Wall St or in Washington are full of it. This country is DOA. It is over. There is only misery out there.

Jobs? none that pay a decent wage in the private sector are to be had in any quantity. Green jobs? That's a prevarication.

The only thing keeping the masses from rioting is the unemployment check. You lose that and all bets are off.

These experts can take the spus, the yield curve and Dr. Copper and stick it where the sun doesn't shine, all three are manipulated to give the appearance of recovery. PERIOD!

Wed, 01/06/2010 - 14:27 | 184618 Internet Tough Guy
Internet Tough Guy's picture

Doesn't anyone ever ask Bernanke to explain how Zimbabwe managed to have such high inflation with a massive 'output gap'?

Wed, 01/06/2010 - 14:37 | 184626 Bam_Man
Bam_Man's picture

$4.00+ a gallon gas by June is guaranteed, along with Ben Shalom repeating "inflationary pressures are unlikely to persist" ad nauseum.

This time around it won't require $147/bbl oil to send the economy back to the floor on its ass. $90-$95 should be all it takes.

Start buying your 10 year Treasuries now.

 

Wed, 01/06/2010 - 14:51 | 184635 Sancho Ponzi
Sancho Ponzi's picture

Squinting hard, I can see prices for non-durable goods going up. What I cannot imagine is how the labor market in general and average wage in particular can recover enough to push housing and cre prices up to non-bubblicious levels, and that's Ben's only hope.

Me thinks Ben is toast.

Wed, 01/06/2010 - 14:53 | 184647 Bam_Man
Bam_Man's picture

Ben Shalom and his Fed accomplices have now managed to squeeze the entire "bubble-bust-bailout" cycle into a two year timeframe.

Quite an accomplishment.

And next time around, it will be 15 months or less.

Wed, 01/06/2010 - 15:08 | 184669 cougar_w
cougar_w's picture

Yup. And if they can compress the cycle enough bubble and bust and bailout will all happen at the same time, overlapping.

Wed, 01/06/2010 - 15:13 | 184672 Anonymous
Anonymous's picture

Next time? I swear that muted roar I hear getting louder sounds a lot like the falls.

Wed, 01/06/2010 - 14:59 | 184655 Sancho Ponzi
Sancho Ponzi's picture

oops, meant to say bubblicious levels

Wed, 01/06/2010 - 14:56 | 184651 Anonymous
Anonymous's picture

http://www.businessinsider.com/geithner-china-will-keep-funding-us-and-w...

Geithner = "We are not monetizing the debt"

Federal Reserve = "We are monetizing the debt"

Gold = "They are monetizing the debt"

Wed, 01/06/2010 - 15:51 | 184723 Anonymous
Anonymous's picture

Kliesen says "from becoming a destabilizing influence on price stability." This is a great example of someone being redundant. Why didn't he just say "from destabilizing prices," or "from influencing price stability?"

Wed, 01/06/2010 - 15:53 | 184724 Charley
Charley's picture

This dovetails with Krugman notes, "Crises". The usual exit from a financial crisis typically involves some means of devaluing domestic capital and labor to the extent necessary to produce a surplus current account balance. No such exit is possible for the American economy, because it owns the world reserve currency. No matter how far the dollar falls, the import gap will widen and industrial capacity will move offshore.

Wed, 01/06/2010 - 15:54 | 184727 Charley
Charley's picture

How do you say f**ked in Chinese?

Wed, 01/06/2010 - 16:09 | 184753 Yophat
Yophat's picture

Deflation will rule the day....all their injections don't come close to matching the implosions in credit.

Wed, 01/06/2010 - 17:42 | 184899 Anonymous
Anonymous's picture

Deflation is but the midwife of hyperinflation, bub.

Wed, 01/06/2010 - 21:42 | 185132 Yophat
Yophat's picture

Only when the government actually does the printing.....Not when debt is the source of money printed by private banks.....then deflation is the end result!

Wed, 01/06/2010 - 16:43 | 184804 Anonymous
Anonymous's picture

"Higher yields mean we need to make higher payments.

Higher payments mean we need to pay out more dollars.

Paying out more dollars means we need to obtain higher tax revenues."

Or we could cut spending.

No Sarc button which make either I or my statement that much more foolish.

Wed, 01/06/2010 - 16:59 | 184828 Anonymous
Anonymous's picture

The notion that Fed employed economists define inflation as a rise in the aggregate price level and deflation as a fall in.... is very disturbing, as it implies that said economists do not fully comprehend the connection between the amount of credit outstanding (at least in a system with a fiat currency) and the phenomenon of in/deflation. One way or another, the Fed appears bent on destroying American's wealth.

Wed, 01/06/2010 - 17:37 | 184887 trav7777
trav7777's picture

Gosh these economists and bankers are fools.

Don't they understand that credit is a supply and demand instrument?

There is not much demand for credit because there is NOTHING TO DO WITH IT THAT WILL GENERATE A RETURN!

There's a REASON why ALL the "growth" in the past 5-10 years was in FIRE ponzis.

Their notion that labor will migrate away from the only industries that provided ANY return and into others that provide "higher returns" simply serves to underscore their incompetence and ignorance.  There ARE no such industries!

The Fed and economists haven't realized that growth has ended.  They still think they can drop rates and everyone will start borrowing at 0% to fund economic activity that generates a 1% return or something.  The problem is, look around the business landscape.  I've challenged people on other threads, where is the profitable venture out there that doesn't rely on a gov't subsidy to make it profitable?

We're so dramatically overcapacitied that just *not* losing money appears to be the best you can do.  The Fed won't be able to inject money without giving it away, paying people to take it.  Negative rates, here we come.

Wed, 01/06/2010 - 22:41 | 185181 Jefferson
Jefferson's picture

The Fed and Treasury are fully aware there are no more legitimate investment opportunities available in the real economy. Only ponzi schemes to separate the idiot population from its property. They have seen this moment coming for decades and have prepared accordingly. Unlike Madoff they have an escape plan.

Do not mistake cunning for incompetence.

 

 

 

Wed, 01/06/2010 - 17:50 | 184910 Anonymous
Anonymous's picture

A great post on Mish's Global Economic Trends to ask FedChair B et al, explain how you missed the last bubble?
Crickets....

Wed, 01/06/2010 - 18:28 | 184959 RSDallas
RSDallas's picture

It is highly likely that this recession will induce considerable structural change in the economy. Indeed, this development already appears to be in train since many economic resources—labor and capital—that were employed in the automotive, housing and financial industries will need to migrate to industries that offer higher rates of return.

Herein lies the difference in this melt down versus the 1980's & early 2000's.  The workers were able to hop from one high flyer to another high flyer.  1980's - From Real Estate & Oil to technology in the 1990's.  Then in the early 2000's from technology right back into real estate.  This time there are no high flyers to migrate to.  As a matter of fact the American (displaced) worker is settling for 25 to 50% of what his prior return was. 

It appears to me that another difference this time is that it seems that this meltdown has had a far more devastating effects on the middle class worker and entrpenure than any other meltdown.  I just don't think Wall Street realizes this.  Especially if they aren't associated with the middle class on a day to day basis. 

I don't know guys I just don't see the green shoots. I see the multi nationals getting better but not the small business person, the plumber, the framer, the retail shop owner, the day care owner, the restraunt owner, the small to medium sized manufacturer etc etc etc.

 

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