Ministry of Truth writes:
Well if the economy is humming along as well as we are told, then lowering inflation should be our only problem.
Ministry of Truth | 05.07.08 - 12:35 am | #

dilbert dogbert writes:
I think the Fed only worries about wage inflation. There is not going to be any wage inflation.
Inflation in everything else is self correcting.
dilbert dogbert | 05.07.08 - 12:38 am | #

Yal writes:
Instead of pumping these trillions the Fed and the govrement should find others ways of helping the banking system survive.

Why not tax the assets of oil countries held in the US ?

after all this is where the money was going and this is where it can come back from.
Yal | 05.07.08 - 12:40 am | #

REBear writes:
This is the same kind of talk we heard after the Jan rate cut.
REBear | 05.07.08 - 12:42 am | #

s0mebody writes:
He's not even on the FOMC committee. Maybe tough talk out of the Fed members is Ben's idea of fighting inflation.
s0mebody | 05.07.08 - 12:48 am | #

Anon123 writes:
The FED is all talk. They would not dare raise rates with the state of housing and economy being so poor.

This is the same FED that got scare by some bad trade from 1 trader in France in January. Ben and Co. are a bunch of wimps.

Kind of reminds me of Paulson Strong Dollar policy LOL

Like they say in the hood -
"The Fed is all show and no blow!" LOL
Anon123 | 05.07.08 - 12:50 am | #

incessant_din writes:
This just proves that the Fed knows what it's doing. The concerns are there, but when it comes time to take action, it takes the short-term fix.
incessant_din | 05.07.08 - 12:53 am | #

godihatejargon writes:
We can survive a bump in inflation to the mid single digits - if this is 4,5,6 or even 7 or 8% for a short time is this a big deal? We survived the 80's a lot better than the 30's. So we should all go with the flow and recognize that the bailing out of Bears, Freddie, Fannie, BofA and Merrill are all costs along the way to minimizing unemployment at the cost of a bit of inflation. So be it. The alternative's less appealing.
godihatejargon | 05.07.08 - 1:06 am | #

poopscooperforlife writes:
smells like stagflation to me.
poopscooperforlife | 05.07.08 - 1:07 am | #

Napolean writes:
Now I know they will be cutting again, for sure.
Napolean | 05.07.08 - 1:21 am | #

ugh writes:
We will all be ZIRP
ugh | 05.07.08 - 1:25 am | #

Anon writes:
Read and pass along ASAP!

http://www.treas.gov/press/relea...eases/ hp945.htm
Anon | 05.07.08 - 1:29 am | #

REBear writes:
Toyota raising prices on some models in US this month as sagging dollar weighs on profits
REBear | 05.07.08 - 1:32 am | #

RE writes:
I haven’t seen hardly anyone mention the expansion of the money supply in the Dollar Zone. Looking at the Fed only is not solving the problem.

By being the biggest debtor nation with a huge current account deficit and by having very willing lenders that don’t want their currencies to appreciate significantly or at least at a quick pace, the Dollar Zone is expanding its money supply at very rapid pace. I don’t see how Fed policy will address that issue unless it is combined with a concurrent reduction of the trade deficit and C/A.

Some of the key credit suppliers, clearly the Gulf States and China, are unable to sterilize their incoming dollars. There simply isn’t enough interest in their local government bonds leading to severe inflationary pressures. As they consume the same commodities and in many cases even subsidize them domestically, this leads to unchecked demand in dollar “equivalent” currencies.

Unless this changes rather soon, I simply don’t see the Fed in a position to change inflation expectations unless they drastically raise rates to whack the trade deficit into shape, an action that is incredibly unlikely in my view.
RE | 05.07.08 - 1:41 am | #

tj & the bear writes:
Apologies if posted previously:

More Than Half of 2006 Vintage Now Underwater, Zillow Says

http://www.housingwire.com/2008/...er-zillow-says/
tj & the bear | 05.07.08 - 1:44 am | #

doctor boxtor writes:
OT, Kinda:

WaMu's Suspect Mortgage Pool

I have been tracking a particular Washington Mutual (WM) Alt-A mortgage pool for several months. The pool is known as WMALT 2007-0C1.

http://globaleconomicanalysis.bl...tgage- pool.html

Professor Sedacca commented "Buried in the $2 billion investment Bank of America (BAC) made in CFC was the fact that BAC has 'last look' to buy the company. That was the main reason for that deal, me thinks. So I imagine common shareholders get little if anything, preferred holders get potentially wiped out and some subordinated debt holders could get smoked as well. The same could be said for Washington Mutual(WM)."

Indeed. And if Bank of America is investigating Countrywide Alt-A pools that look anything like the above, they cannot possibly be liking what they see.
doctor boxtor | 05.07.08 - 1:47 am | #

doctor boxtor writes:
I LOVE SIFMA!! They are helping us!

Re: There was general consensus among committee members that a well-defined series of "Fails Best Practices" outlined by SIFMA and TMPG, which defined such parameters as margining of fails, cash settlement procedures, and initiatives related to pair-offs and security-delivery, would be extremely beneficial.

To supplement this "Best Practices" set of procedures, the Committee was supportive of a Treasury Fails Monitoring Committee that would be comprised of senior funding and cash market participants. This committee would be established to assess market conditions in this arena, make those issues transparent to the broader market, and recommend practices aimed at dealing with the issues if they became outside the bounds of normal market activity.

This Fails Monitoring Committee, alongside of traditional Treasury Department surveillance, and potentially increased Treasury position disclosure (although some suggested that this could have harmful market-effects), should provide for the ability to monitor and influence appropriate market behavior.

The majority of the Committee feels as if subtle activity by the Treasury such as moral suasion, timely reporting of abnormal market activity, and otherwise regular market surveillance, will also help provide for efficient and normal market conditions to exist.
doctor boxtor | 05.07.08 - 1:55 am | #

sterlingerl writes:
I don't want to turn this thread into a political debate, but is it possible that the current administration could continue cutting rates down to say, ZIRP, by end 2008 to save the markets and be able to say "no recession here", leaving the Fed under the next administration powerless save for TAF-style moves, thus ensuring whoever gets in, whether it is a democrat or a conservative-lite McCain, a single term only before they wrest power back?
And if this is possible, would it not make sense to go long gold and other inflation hedges, at least until everything blows up in 2009?
sterlingerl | 05.07.08 - 1:59 am | #

doctor boxtor writes:
At the February 2008 Quarterly Refunding, we discussed settlement failures in the Treasury market with our Treasury Borrowing Advisory Committee (TBAC), a committee sponsored by SIFMA and comprised of some of the finest, most experienced professionals in the financial market place. As you know, settlement failures, or fails, occur when a party selling a security fails to deliver the security to the buyer on the agreed upon settlement date. Settlement failures, occur for a variety of reasons including errors in the back office and miscommunications, and are generally small and resolved quickly.

Larger, more chronic fails can occur due to wide-scale operational disruptions or financial market conditions, such as when interest rates reach low levels.

Treasury and the TBAC discussed the potential risk of chronic fails in a lower interest rate environment, a risk that we believe impairs liquidity and threatens to raise our cost of borrowing. In addition, we asked market participants to pursue market-oriented solutions, adapt and implement practices for such a situation, and report back to us regarding their progress.

Over the past twelve weeks, we have seen rates drop quickly, the demand for Treasury securities skyrocket, and a rapid increase in fails to deliver in the Treasury market. In a short time period, we entered an interest rate regime in which the cost associated with fails declined significantly - and, perversely, weakened the financial incentive to rectify a fail. While the cost of failing to deliver may be low for a single market participant, the aggregate cost can be high when it potentially impairs the overall system, and such behavior is certainly not consistent with professional best practices.

This week, at the May 2008 Quarterly Refunding, we asked the TBAC for their view on actions taken by market participants to date. Committee members were encouraged by the collaborative efforts undertaken by the private sector industry groups to formulate viable solutions to address chronic fails, and members broadly accepted that the initiatives outlined by SIFMA and TMPG would improve market practices for fails monitoring and remediation in the near-term.
doctor boxtor | 05.07.08 - 2:04 am | #

christofay writes:
godIhatejargon, you missed it by the wrong decade. The stagflation decade was the 1970s. And it is a bit too recent to miss that.

As to inflation, it is already in the mid single digits. According to shadow stats its already 10 % + according to older methods of measuring price increases.

Wages & salaries of course are frozen so every blip up reduces potential for savings by that much. It is due to the frozen wages & salaries that we were jumping all over ourselves with investing in the tech bubble and the housing bubble, it was the only way for the middle class to claw back some money. It was illusionary.
christofay | 05.07.08 - 2:06 am | #

christofay writes:
sterlingerl: Yes, the Cheney Administration default program is to kick it down the road at this point, do anything to delay the date the recession is declared.

Also, clarify where the candidates stand

McCain: more con man nonsense

Clinton: conservative mclite

Obama: last hope, but unknown qualities

Ron Paul: too much honesty, plus, unfortunately, too much bigotry

If you are a regular wage & salary man, you have been in recession this entire decade
christofay | 05.07.08 - 2:17 am | #

sterlingerl writes:
christofay, agreed. But I guess what I am suggesting is much more sinister. Basically, sacrifice America now in terms of inflation, standing v. the rest of the world, strength of the dollar, ad so on, just to ensure the (very) long term survival of the neo-con agenda. Oops, sorry too political I'll stop now...
sterlingerl | 05.07.08 - 2:34 am | #

eh writes:
I 'seriously' doubt there will be rate hike.
eh | 05.07.08 - 3:00 am | #

beachblvd writes:
Is Hoenig one of the inflation hawks or does he normally vote for every rate cut? If he is one that changed his mind this might mean something.
beachblvd | 05.07.08 - 3:04 am | #

beachblvd writes:
Oops, TFA says he has already voted against the last cut.
beachblvd | 05.07.08 - 3:06 am | #

anoninCA writes:
We are all Vallejo now.

http://ap.google.com/article/ ALe...R_C1UgD90GL0IO0
anoninCA | 05.07.08 - 3:24 am | #

econo drama writes:
'If this increases to $120 or $150 a barrel in the long-term this has serious implications for the strength of the wider economy,' said Hetal Mehta, an economist at the Ernst & Young ITEM Club. 'If it hits $200 a barrel as one Opec minister recently predicted then frankly all bets may well be off,' she added.

The ITEM research analyses how varying oil prices will impact on different economic indicators.

With oil prices climbing to $150 a barrel, ITEM is forecasting that economic growth for 2009 would be trimmed from the current prediction of 1.5 percent GDP growth to a weak 1.1 percent.

For the following year, when many commentators, including ITEM, are currently predicting a strong recovery to 2.7 percent GDP growth, high oil prices could cut that to below 2 percent, the report added.

A long-term $200 a barrel oil price would cut growth in 2009 to 0.9 percent GDP growth and 1.2 percent in 2010.

A higher oil price will have an impact across the whole economy. One of the main factors driving the predicted recovery in 2010 is increased consumption as high street spending picks up.

See also: NDP – Net Domestic Product - NDP = GDP - depreciation The GDP minus depreciation on a country's capital goods. This measure allows users of the country's national accounts to estimate how much the country has to spend just to maintain their current GDP. Ifthe country is not able to replace the capital stock lost through depreciation, then GDP will fall. In addition, a growing gap between GDP and Net Domestic Product indicates increasing obsolescence of capital goods, while a narrowing gap would mean that the condition of capital stock in the country is improving. Alsoreferred to as capital consumption allowance because it is the amount of capital stock that has beenconsumed over a one-year period and equals the amount a business would have to put aside to repair and replace deteriorated capital. NDP is gross private domestic investment minus an estimate of the wear and tear on the existing capital stock. Net investment therefore measures the change in capital stock over a one-year period
econo drama | 05.07.08 - 3:41 am | #

lunatic fringe writes:
If the Fed cared about inflation I think it would be reported more honestly. I really think all they care about is that people are beginning to question their policies and the actual effects.

I'm tired of the Fed apologists. The Fed governors talk all day out the side of their mouths about caring about inflation and moral hazard and have yet to do anything but knuckle under to the lure of quick fix and Wall Street.

I hear applause for the Fed "saving the financial system" from collapse by bailing out Bear Stearns but the truth of the matter is that situation wouldn't have arisen if they could actually do their job in the first place. And how come Jamie Dimon under oath said that JP Morgan would have been fine if Bear went bankrupt? Systemic collapse my ass.

Screw those guys. Abolish the Fed.
lunatic fringe | 05.07.08 - 3:42 am | #

econo drama writes:
The Fed does care about inflation. They want positive inflation, which is related to printing more cash and decreasing the value of the dollar, with a trade off being that higher cost of goods increases profits for wall street. Look at walmart and proctor gamble and a string of companies that are raising costs for consumers, but in so doing, they add growth to earnings from inflation. Sure, it's just a different way to burn money, but as The fed prints more money, more money is burned up by inflation and the end result is higher priced goods that are de facto and priced into the system.

By the way, this consumer inflation will result in higher stock prices!
econo drama | 05.07.08 - 3:49 am | #

onpermvaca writes:
"Inflation in everything else is self correcting"

Not if it's caused by monetary policy. Permanent inflations are always caused by monetary policy.

People, wake up. When dealing with liars, watch what they do, not what they say. The FED will inflate until there are riots in the streets. It's the only thing they know how to fight a massive asset deflation.
onpermvaca | 05.07.08 - 3:59 am | #

onpermvaca writes:
BTW. Read what Bernanke wrote about the Zero Lower Bound, and you will understand why inflation, or even hyperinflation, will be the future. He wants a big negative real interest rate. He doesn't have to get it via rate cuts. He can get it via the "inflation buffer".
onpermvaca | 05.07.08 - 4:08 am | #

JoeB writes:
Someone brought up Vallejo - which is declaring bankruptcy. Vallejo spends 74% of its total budget on police and fire salaries. You wouldn't believe how many cops and fireman are paid over $100K per year - same with San Francisco. I know it's not pc to critize these guys - but we are not getting our money's worth from these high salaries. Government spending is out of control - at all levels.
JoeB | 05.07.08 - 4:57 am | #

sterlingerl writes:
Hi CR, have their been any changes to the calculation methodology for inflation expectations since 1975, as there has been for the calculation of inflation itself. And if so, how might this impact the picture? Thanks.
sterlingerl | 05.07.08 - 5:08 am | #

kett82 writes:
From WSJ:

Fed Seeks Approval to Pay Interest to Banks
By GREG IP
May 7, 2008

"...If they earned interest from the Fed, banks would have no incentive to lend out excess reserves for less. "

and this "...In addition, the Fed could theoretically combat the credit crunch by buying securities or extending loans without limit without causing the federal-funds rate to fall to zero, something that could fuel inflation or distort markets."

Please let me know how these moves are not inflationary?

Thanks!
kett82 | 05.07.08 - 5:56 am | #

Angry Renter.com writes:
Actually, inflation may be overstated!

http://www.nytimes.com/2008/05/0...ml? ref=business

That said, there is one way in which the official numbers were clearly understating inflation. To track housing costs, the Consumer Price Index analyzes rents, not home prices. (Why? Long story.) And rents didn’t go up anywhere near as much as house prices during the real estate boom. So the index missed the huge run-up in home values that made life harder on anyone trying to buy a first home.

Since 2006, of course, home prices have been falling. But rents have kept rising slowly, which means that, as far as the Consumer Price Index is concerned, housing has somehow gotten more expensive during the real estate crash.

So when the new inflation numbers come out next week, they will indeed be misleading. They will be artificially high.
Angry Renter.com | Homepage | 05.07.08 - 6:21 am | #

cars writes:
The fed guy states the obvious, but the fed's actions are first to rescue the financial institutions that blew it. That's going to take a while.

Then politics is a big part of the Fed's actions under Bernanke. Loyalty to party is first, and he was tested thoroughly during his stint at the White House. He's afraid rising interest rates now will hurt the banks and he's not going to let that happen. But a year from now, when the elections are already over, he'll do (if he is still there) what needs to be done regarding inflation from a monetary policy angle.

Now, why doesn't the White House deal with commodity inflation on its own, burst that bubble? Paulson will not let them. It's the last money grab before they are all gone from political power.
cars | 05.07.08 - 7:05 am | #

Banker writes:
I agree that the next move in rates is up, and I think sooner then later.

Banker
Banker | Homepage | 05.07.08 - 7:13 am | #

tieornot writes:
What has been very interesting to observe is the step-function change in reactions to the Fed interest rate cuts.

It used to be a closed system......you cut interest rates, lower rates incentivized investment and business activity, and (at some later point), inflation would rear its ugly head due to competition for scarce resources with a more vibrant economy. When inflation got too bad, the Fed increased rates again. This was (under Greenspan) the "fine tune " approach.

Academic theory holds that currency price adjustments are a function of supply and demand of currency stocks, as well as real interest rate differentials between countries. In the closed model above, a lower dollar wasn't that big of a deal as the Fed was trying to jump-start domestic activity. In fact, a devalued dollar may actually be of help as it would make domestically produced goods more saleable overseas (i.e. increasing exports), and whatever the resultant inflation for a devalued dollar (higher prices for imports) - wouldn't generally show up until much later. Fix the domestic problem now.

Fast forward to 2008.......Fed cuts rates......investors do not like to have their dollars devalued....now there exists (for the first time) the ability to monetize dollars into something else other than cash, stocks, and bonds......namely commodities. Investors take dollars "out of dollars" and invest them in gold, oil, wheat, etc.......this new demand immediately drives up the prices of these commodities......instantly causing inflation (and hightened "inflation expectations" for all of you Fed hounds).

The closed model is dead. I wonder if they know it?
tieornot | 05.07.08 - 7:24 am | #

stealthwii writes:
The Fed will only get concerned is people are outside their homes with pitchforks and torches.

Otherwise its all talk from them.
stealthwii | 05.07.08 - 7:33 am | #

bzb writes:
tiernot,

This "the ability to monetize dollars into something else other than cash, stocks, and bonds" existed around 2000 also. At that time people started moving into housing, which eventually led to the present crisis. WIth commodities, I guess, the effect is more immediate.
bzb | 05.07.08 - 7:51 am | #

sequoia512 writes:
People thought inflation would help stocks in the 70's. It didn't pan out then I doubt it will now.
sequoia512 | 05.07.08 - 7:58 am | #

ipodius writes:
...which is related to printing more cash and decreasing the value of the dollar

here we go again. please explain the stats you have that indicated the Fed is "printing" because every stat I look at, including the shadow ones, indicate that money and credit is being destroyed faster than it is being created. That is NOT NOT NOT inflationary and it does NOT NOT NOT indicate printing. I'll keep saying this until someone actually indicates that they read instead of just blowing off their mouths in an inaccurate post.

tieornot, that was an excellent post. and yes, the question is how does a central bank now deal with this more fluid situation? especially since we're seeing that interest rates charged now seem to be disconnected from the Fed's policy...both on the consumer level and on the inter-bank level.
ipodius | 05.07.08 - 8:25 am | #

jim a writes:
Sterlingirl: The fed govenors are appointed to long, staggered terms to avoid just those sorts of shenanigans.
jim a | 05.07.08 - 8:30 am | #

Pondering the Mess writes:
The Fed has no clue what it is doing, and inflation will continue to skyrocket. But just so long as wages don't raise - can't have that! - all will be well in their Twilight Zone version of reality. And, at the same time, they'll probably tell you that inflation will "fix" the housing mess. Not without wage inflation, it won't! But I am sure $4 a gallon gas is good for the economy!
Pondering the Mess | 05.07.08 - 8:37 am | #

Bizarro writes:
Productivity and labor costs both up 2.2% in first quarter. Looks like rates should be moving up. AIN'T GONNA HAPPEN.
Bizarro | 05.07.08 - 8:37 am | #

wally writes:
I think Hoenig meant to say that there is increased expectation of price increases.

I don't know anybody who has increased expectation of their wages increasing or the house value zooming.

Measured in American working hours, the dollar buys as much or more as it did seven years ago.
wally | 05.07.08 - 8:39 am | #

Turbo writes:
The financial system in the US is destroying money faster than the Fed is currently printing it, and is highly deflationary if it continues. The blame for the current bout of global inflation really rests with the Asian, Russian and Middle Eastern central banks that are allowing their domestic money supplies to explode via their on-going policies of unsterilized USD intervention, though it presently seems to be very fashionable to blame the Fed for all the ills of the world.

On a happier note, I wonder what percentage of Q1 gdp was created by people auctioning off their possessions to pay the bills?

http:// articles.moneycentral.msn...ayTheBills.aspx
Turbo | 05.07.08 - 8:40 am | #

zinc writes:
The Fed has insured an inflationary spike with the banking bailout. The only real effect has been a collapse of the world's reserve currency, igniting inflation across the competitive devaluation world.

If free trade existed and the US was more energy efficient, exports from the newly competitive US would help alleviate the impact. But, free trade only exists in the minds of acdemia and the US government.

Interest rates for US bound fixed income investors are negative as the Fed continues it's policy of shifting risk to savers by manipulating the risk return horizon. IMO, this is unsustainable in the medium (short?) run. The likely outcome is the collapse of the income short, American consumer. The rest of the world seems to be unable to sustain consumerism and all hell is likely to break loose if (when) a world wide slowdown gains momentum.
zinc | 05.07.08 - 8:47 am | #

kurtyboy writes:
Letting inflation happen is the simplest way to lower wages--just keep 'em sticky on the downside. This can happen in the current trend [i]towards[/i] inflation because overseas labor is taking up slack.

It is an inevitability of globalization, I think, that US wages normalize to world trends.

Perhaps this is the long view of the central bank...
kurtyboy | 05.07.08 - 8:47 am | #

the_economist writes:
Chart of M3

http://www.nowandfutures.com/key.../ key_stats.html
the_economist | 05.07.08 - 8:49 am | #

poszi writes:

because every stat I look at, including the shadow ones, indicate that money and credit is being destroyed faster than it is being created.

Which ones?
From Shadow Stats: M1 is flat, M2 is growing fairly rapidly 6%+ and M3 is soaring 16%+. Except M3, you can get the same stats from stlouisfed.org.

MZN is soaring 15%+.

One can argue that Fed directly controls monetary base which is growing albeit slower than before.

Where is the contraction?

I'd say Fed actions are not directly inflationary, yet but as more and more crap is put on the Fed balance sheet, the more and more money is backed not by government debt but by fictitious "investment-grade" debt. This is inflationary because they replaced good money (treasuries) by bad money (ABSs). And soaring money supply except of the monetary base support this argument.

However, what the commodity market is indicating is very high probability that Fed would start direct monetization. And then, all the current arguing will be moot.
poszi | 05.07.08 - 8:53 am | #

Yal writes:
Turbo,

The way I see it (and I may be 100% wrong) these countries you mention want to continue exposrt boom to the US. So they don't wish their local currency to become too strong.

Based on that they follow BB with easing in order to keep their dollar peg. So this is why I do blame BB for the mess.

I don't have full data to know if this hypothesis is correct.
Yal | 05.07.08 - 8:55 am | #

energyecon writes:
OT, 'pologies if repost:


Vallejo, California City Officials Vote to File for Bankruptcy
By Michael B. Marois

May 7 (Bloomberg) -- Vallejo, California's city council voted to go into bankruptcy, saying the city doesn't have enough money to pay its bills after talks with labor unions failed to win salary concessions from fire fighters and police.

The city council's unanimous decision makes the San Francisco suburb the largest city in California ever to file for bankruptcy and the first local government in the state to seek protection from creditors because it ran out of money amid the worst housing slump in the U.S. in 26 years.

The city of 117,000 is facing ballooning labor costs and declining housing-related tax revenue that have left it near insolvency. The city expects a $16 million deficit for the coming fiscal year that starts July 1. Under bankruptcy protection, city services would keep running. It would freeze all creditor claims while officials devise a plan for emerging from bankruptcy.

[snip]
energyecon | 05.07.08 - 9:02 am | #

ipodius writes:
The Fed has insured an inflationary spike with the banking bailout.

Again no no no. These operations are sterilized as they've creatively used their balance sheet to perform them. Again, before you post something, look it up.

Also, the publication of M3 was stopped, so any calculation of it is performed ex-offcial. There have been many good discussion about how to look at the money supply on various blogs and in various publications. The money supply has been shrinking, as credit and money are being destroyed faster than the Fed can put it into circulation. Ponzi, if you just look at those figures, you're missing the other side of the ledger. The money supply is NOT expanding at all.
ipodius | 05.07.08 - 9:03 am | #

Shylock writes:
This is probably a huge concern for the Fed.
Why? I thought the Bear Stearns bonus checks already cleared, times is good on Wall Street.
Shylock | 05.07.08 - 9:04 am | #

the golden age of burlesque writes:
"if you just look at those figures, you're missing the other side of the ledger."

Where one would find what?
the golden age of burlesque | 05.07.08 - 9:06 am | #

Pondering the Mess writes:
A couple of points:

- The Fed is not really sterilizing dollars if they are swapping Treasuries or other forms of "real money" for nearly worthless crud while claiming the crud is actually worth 90-cents or more on the dollar. If a Lexus dealer (or whatever) started accepted rotten bananas on a 1 per 1 basis when compared to dollars when buying a car, wouldn't that distort the economy and anger anyone who considered a Lexus or a dollar valuable?

- As for shrinking money supply, that may be, but I still see: high inflation in needs, no wage increases, housing is still overpriced, the stock market is still overvalued, and the crooks are still overpaid. Maybe there's a ton of money vanishing in some Level 3 accounting bin somewhere, but in the "real world" where we're all stuck living, prices are going up (or in the case of housing, not going down much at all) and salaries are not. That is inflationary.
Pondering the Mess | 05.07.08 - 9:09 am | #

byzantine_ruins writes:
Ponzi, if you just look at those figures, you're missing the other side of the ledger. The money supply is NOT expanding at all.

Show me the money.
byzantine_ruins | Homepage | 05.07.08 - 9:11 am | #

Turbo writes:
Yal - Correct, in that many of the world's emerging market countries do not want their currencies to appreciate too much to maintain exports. However, many of these economies are booming, and their CB's are keeping real interest rates at extremely negative levels, which is stoking inflation. The US economy is in or near recession, and it's banking system is a disaster - the US needs low rates (though I'd argue below 3% is over doing it at the moment). It's not Bernanke's fault that most of the emerging world is engaged in a mercantalist currency war to maintain exports to the US, and allowing their money supplies and ultimately inflation to zoom upwards.
Turbo | 05.07.08 - 9:12 am | #

ipodius writes:
Here is a great link to a disscussion of the subject by Mish. http://globaleconomicanalysis.blogspot.com/2008/ 04/mzm-m3-show-flight-to-safety.html

I don't always agree with Mish, but this was an excellent post on the subject complete with nifty charts and great analysis.
ipodius | 05.07.08 - 9:15 am | #

Turbo writes:
Price inflation without wage inflation can only result in recession. The 2000's really are shaping up to be sort of a lost decade for the median American - even with too low official inflation numbers, the real income of the median American household did not recover from the 2001 recession, and that median income loss has begun to accelerate downwards again over the past 6 months.
Turbo | 05.07.08 - 9:17 am | #

Francois writes:
sterlingel,
"Oops, sorry too political I'll stop now..."

On the contrary, we need to talk more about it; the reason being that politics has led the economy into this mess.

Consider the following: financial sector is now 41% of ALL profits of the S&P while being only 18% of its capitalization.

It is not hard to see why: with very lax rules, more and more favorable laws and inexistent oversight, politics has foster a "because-we-can-damnit" attitude in the financial sector.

That is NOT the doing of the market, but a dismal failure of the political leadership to do its job; regulates (as sensibly as possible) for the greater good.
Francois | 05.07.08 - 9:24 am | #

ipodius writes:
The 2000's really are shaping up to be sort of a lost decade for the median American

One thing I'm willing to give to the fringe posters is the notion of "global wage arbitrage". In the past, wages rose with prices, because internal pressures (union negotiations, demand) had much more of an impact. Now, with the advent of communications technology, that pressure has lessened. So a re-balancing, of sorts, is occurring. And this is a two-way phenomenon.

On the one hand, you have no immediate pressure that would cause wages to rise across most levels. On the other, you have severe pricing pressure on companies that has probably kept most prices far below what they would have risen, had these global supply chains not existed. This recession is the result of higher prices failing to induce higher wages, and so consumers have no choice but to pull back, causing demand slack and corporate issues. The one thing that is disconnected, because of necessity, is fuel. And to an extent food.

So, in my view, the dynamics have changed, and until some new balancing mechanism takes over things won't look much better.
ipodius | 05.07.08 - 9:25 am | #

Turbo writes:
I hope you're not lumping me into the fringe poster category Ipodius? I'm a mildly center-right, banker type, but it's starting to bother me that wage arbitrage is negative if you fall in the bottom 99% of the income scale, but massively positive for the top 0.1%. There's a little more going on here than global wage arbitrage. Eventually even the sheeple will learn an alternate use for the pitch fork.
Turbo | 05.07.08 - 9:35 am | #

byzantine_ruins writes:
Thanks, ipodius!
byzantine_ruins | Homepage | 05.07.08 - 9:44 am | #

franz writes:
Fed is trying to talk tough to support the dollar while pushing off the require interest rate raise. Fed will hold off on rasiing the rates until after summer. They will try to offset the housing deflation with other consumer inflation. Unfortunately, they are trying to inflate a consumer balloon that is losing air from asset deflation and increased cost (bills, debt, gas, education, health care, food, etc). Wall Street will finally get it a little late and market will start to move down later this year.
franz | 05.07.08 - 9:44 am | #

ipodius writes:
Not at all Turbo! :) It's just a facile sort of thing to toss out, but i'm admitting that it actually in something to think about in context. And it actually affects the middle class more than any other socio-economic segment, because those sort of semi-skilled and skilled jobs (think programmers, xray techs, medical transcriptionists, data entry clerks, help desks, etc) are the exact jobs that are easy to move while creating more managerial, data architect, and other higher-skilled opportunities.

You can't outsource walmart workers, so those become the jobs that are left, unless a big bump in education and skill occurs. Something that is not likely to happen to those people 10 to 20 years into the job market.
ipodius | 05.07.08 - 9:46 am | #

Angry Saver writes:
The inflation debate is complicated. Mish misses many of the important points. For one, Mish NEVER talks about output - a critical variable.

For instance, if money supply is increasing at 6% while output is increasing at 7% then it is NOT an inflationary environment. Of course Mish would state that since the money supply is increasing, we have inflation.

One other point. If real household wages are declining while household expenses are increasing, it's inflationary regardless of money supply measures. And don't start going on about asset price increases. We know how fleeting that appreciation is when you try & cash it in.
Angry Saver | 05.07.08 - 9:53 am | #

JS writes:
Pending home sales is released today. Bets that it will be up over last month yet down like 30% yoy and the market will hear the words "up" and rally?
JS | 05.07.08 - 9:54 am | #

vader writes:
ipodius

data architect can be off-shored too.

As to the other higher skilled jobs, the folks in China and India as well as most third world nations are looking for the same thing: Higher skilled workers. This results in 4 year grads with $80,000 school debt doing sub $15.00 jobs.
vader | 05.07.08 - 9:56 am | #

burnside writes:
Angry Saver, are you talking about monetary inflation here?

It seems to me you are generally focussed on price inflation, and it's a distinction with a difference. If you'll be specific, I believe many of these arguments would lose their foundations.

Mish is addressing monetary inflation. You are not.
burnside | 05.07.08 - 9:58 am | #

Kicker writes:
That is NOT NOT NOT inflationary and it does NOT NOT NOT indicate printing. I'll keep saying this until someone actually indicates that they read instead of just blowing off their mouths in an inaccurate post.

That's true, but it's possible that current inflation is the result of past mistakes.

The Federal Reserve increased the rate of money supply growth in '96 (Greenspan's productivity miracle) and dramatically in '01. It may be that all the impact of that new money flowed into asset prices and was "sterilized".

Now that dollar as a store of value is in doubt it may be that all that "sterilized" money is flowing into real goods and services. If that's the case, merely keeping the monetary base stable may be inflationary.

Personally, I view prices as a lagging indicator and that without wage inflation (unlikely) or decoupling (unlikely) prices will eventually fall.

But, I'm looking over my shoulder.
Kicker | 05.07.08 - 10:01 am | #

Angry Saver writes:
Burnside,

Mish is somking some funny weed imo. His own chart show increases in ALL measures of money supply.

Mish starts with the conclusion of deflation and then adjusts the facts to meet his views.
Angry Saver | 05.07.08 - 10:03 am | #

burnside writes:
Angry Saver,

I am with you to the extent that I see increases in debt, in credit, in leverage reflected in the stats.

I compare those to the discreet evidence of writedowns, margin calls, the reduction or elimination of credit lines and the gross exaggerations of level 3 accounting and, while I'm not personally prepared to quantify how they balance against one another, I am far less assured than you are that the destruction of 'wealth' in these various guises is not sufficient to cancel or exceed any new monies entering the economy.
burnside | 05.07.08 - 10:11 am | #

boob writes:
ipodius writes:
The Fed has insured an inflationary spike with the banking bailout.

Again no no no. These operations are sterilized as they've creatively used their balance sheet to perform them. Again, before you post something, look it up.


Ipodius what exactly is the fed sterilizing? they are swaping the full faith and credit of treasury for "AAA" assets. Your argument about credit being destroyed faster than being printed rests on an implicit assumption that the collateral at the Fed isn;t what they say they are. So you are in agreement with mish on this point. His deflation thesis is essentially the M2M fiction. Hard to disagree with this frankly.

Rather it is the endgame that matters. You assume as the Fed does that this is a passing flu. That by hiding the garbage for a peirod of time buyers will eventually arrive. Further you assume that the Govt='t is capable of bailing out the 13T housing market. both are fictions. So what can the Fed do? All roads lead to monetization.

Finally, check out Krugmans multiple equilibrium chart. it is overly simplistic but it makes a very logical point. You assume that even in the face of credit destruction the Fed via its not so "creative" auctions can restore the markets to the unstable high equilibrium. In fact you seem to asume that this is indeed the market clearing equilibrium, which is another fiction. Even incurable cancer goes into remission, but the ending is foretold.
boob | 05.07.08 - 10:14 am | #

Angry Saver writes:
Burnside,

You sound like Mish. Asset price decreases are not necessarily deflation. After the tech bust, national wealth decreased enormously, but money and credit (as well as CPI) increased. That stuff Mish is smoking prevents him form seeing the forest through the trees.

Bernanke claims that in a fiat regime, inflation is always possible. I believe him. So does my budget.

We printed 150 billion last week for refunds.
Angry Saver | 05.07.08 - 10:21 am | #

Anonymous writes:
Watch what they do, not what they say. Bottom line they don't give a rats ass and inflation has been going up ever since the FED was created in 1913, currency debasement is their number one job.
Anonymous | 05.07.08 - 10:22 am | #

Angry Saver writes:
Anonymous,

I agree. Ninety five years of fed sponsored inflation and suddenly I'm supposed to expect deflation? WTF. We're not even on the glod standard anymore.
Angry Saver | 05.07.08 - 10:26 am | #

Chris writes:
anon: shame on you for spilling the beans. That stuff is not for public consumption. Anyhoo, I remember when the government thought inflation was too low, back in the 1960s, around 1%. A bit more, they said, would pep up the economy. So Johnson went to war and we had a pepped up economy.
Chris | 05.07.08 - 10:27 am | #

sanity clause writes:
This is how I know inflation is bad: buying apples at the grocery store yesterday, I said something about how the price was up from last week, and my four-year-old tells me, "Yeah, dad, just like gasoline. Keeps going higher."
sanity clause | 05.07.08 - 10:30 am | #

dryfly writes:
I agree that the next move in rates is up, and I think sooner then later.


I agree, I expect to see rate increases fairly soon (say by summer?) - I think they believe the patient (financial community) is stable enough to move out of the ER (rate cuts) and ready for the surgery & rehab (slow gradual rate increases)...

It will dramatically 'slow the recovery' but that isn't a terrible thing... if it becomes more 'sustainable'.

dryfly | 05.07.08 - 10:31 am | #

idoc writes:
no way they raise rates before the elections. would tank the stock mkt which is unacceptable. they could have held rates steady this last meeting but the fear of whats going on behind the scenes in the credit mkts prevented them from doing the prudent thing.
idoc | 05.07.08 - 10:33 am | #

burnside writes:
I do sound like Mish. That's because he and I are talking about monetary, and not price inflation.

But I see you make no distinction and may as well stop blackening pixels.
burnside | 05.07.08 - 10:33 am | #

Angry Saver writes:
Burnside,

ALL of Mish's charts show an increase in the money supply. His own charts for cryin out loud. To get around this fact, he points to level 3 assets.

The whole point I'm making is that Bernanke is right. A determined central bank under a FIAT regime can always generate positive inflation.

If the fed has to change the rules they will. TAF, TSLF, PDCF, Level 3 assets.

Under a gold standard, Mish would be spot on. We don't have a gold standard.
Angry Saver | 05.07.08 - 10:39 am | #

Turbo writes:
"A determined central bank under a FIAT regime can always generate positive inflation."

Japan 1992 - 2007??

A liquidity trap can still occur in a fiat money regime if the banking system is so damaged that it can't expand lending, even with the central bank trying to force money into the system. Pushing on a string anyone?

The financial system reminds me of the cancer patients I used to see huddled outside in their hospital gowns having a smoke in the dead of winter in Toronto. They may not be on their death beds, but they're still in the cancer ward, and they don't appear to have learned a damn thing.
Turbo | 05.07.08 - 10:52 am | #

Anonymous writes:
No way in hell these asshats would raise rates in an election year even this BS is jaw boning with no substance.
Anonymous | 05.07.08 - 10:55 am | #

Angry Saver writes:
Turbo,

Japan actually had positive inflation for all but a few very brief periods during the time period from 1992 - 2007.

But I agree their economy stunk. That to me raises an important question. Maybe Japan should have just allowed deflation. Take your medicine and start again.
Angry Saver | 05.07.08 - 10:56 am | #

poszi writes:
Japan 1992 - 2007??

They didn't have Bernanke :)

Turbo,

Japan didn't try hard enough. Seriously. They didn't try to expand the money supply very hard. And they didn't have deflation, either, just no significant inflation.

You can always have hyperinflation if you want. It's worse than the problem you want to solve but you can. Send everyone $60000 stimulus check instead of $600 and "borrow" money from the Fed. Voilà. Instant inflation. A lot of countries went this path and it works very well in destroying the purchasing power of the currency.
poszi | 05.07.08 - 11:07 am | #

Turbo writes:
Angry Saver, I think the BoJ had a bit of a wring the speculation out of the system mentality for the first couple of years of the bust, and didn't really become proactive until deflation set in. The current situation in the US is tough because the banking system really is a mess (I live it every day), and credit is the lifeblood of an economy, but the Fed has taken moral hazard to theatre of the absurd levels.
Turbo | 05.07.08 - 11:08 am | #

kis writes:
While it is true that the price of gas and food is increasing, most individuals are LOSING access to credit and cash as their assets depreciate.

If my fuel and grocery bills go up by $200 per month, but I'm loosing $10k a month on my house, and my HELOC has been shut off... isn't that a mostly deflationary situation??? The destruction of money seems FAR greater than the increase in prices.
kis | 05.07.08 - 11:13 am | #

Ben Frank'll Tank Bernanke writes:
Can you address the stockpiles of cash and currency in debit accounts that were mothballed for a long time suddenly coming into play? Zum beispiel, Iraq - Sadaam - Opec Nations - China etc. Even I have several K stashed which I haven't touched for many years (dumb I know, shoudda bot glod!), but say 500 Million people had 1K in long stored reserve but when inflation hits like in commodities or even deflation concentrates PPP -- it will smoke out a lot of paper money. We have a lot of liquidity laying low and a lot of money out of circulation. If TPTB drive it back into the market what would be the effects in today's context?
Ben Frank'll Tank Bernanke | 05.07.08 - 11:17 am | #

Angry Saver writes:
Turbo,

U.S. financial companies are a total mess. Absent the fed's historic measures, many (especially IB's) would be insolvent.

Strangely, many know this and don't care. The asset inflation game is clearly not over.

The bottom 90% of income earners are taking it on the chin via inflation & stagnant wages. Deflation would help the bottom, but harm the top.

So it goes.
Angry Saver | 05.07.08 - 11:17 am | #

Angry Saver writes:
Kis,

That's the killer. Family budgets are getting crushed. Wages are flat, but monthly expenses (gas, insurance, food, etc.) are increasing. No more borrowing either.

This is much worse for the middle class than the 1970s inflationary period. During the 1970s, labor had much more power to demand wage increases.
Angry Saver | 05.07.08 - 11:21 am | #

Turbo writes:
Poszi - better check your facts on Japan. They didn't recognize the seriousness of the situation until they were three or four years in, but 12 years of rates at 0.5% or less, mild deflation most years since 1998 (and Japan includes energy in cpi), and an attempt to pump the money supply up by 30% from 2002 - 2007 by leaving trillions of Yen on deposit in the domestic banking system and taking crap as collateral that makes the Fed look like a bastion of prudence in comparison sounds like a full monetary assault to me. Monetary inflation without a willing banking system and wage inflation will probably at best only cause a temporary spike in inflation. The current situation in the US has elements of monetary and commodity inflation, but with asset and real wage deflation. Predicting which will win out in the end is kind of like betting on cancer versus heart disease.
Turbo | 05.07.08 - 11:23 am | #

sterlingerl writes:
Amusing article that argues for inflation and blatant deception w.r.t. govt stats. He has a hyperbolic writing style but raises some interesting points. Worth a read...
http://www.marketoracle.co.uk/ Ar...rticle4617.html
sterlingerl | 05.07.08 - 11:24 am | #

Angry Saver writes:
Turbo,
Bushido (from wikipedia): It originates from the samurai moral code and stresses frugality, loyalty, martial arts mastery and honour unto death.

Big cultural difference between Japan and U.S./Europe too.
Angry Saver | 05.07.08 - 11:26 am | #

Turbo writes:
Angry Saver - the bottom 90% is heavily in debt, so deflation kills them as well. The American middle class is caught in the jaws of a vice, and getting squeezed from both sides. Asset deflation increasing the debt burden on one hand, and cost of living inflation without wage increases on the other. An ugly picture.
Turbo | 05.07.08 - 11:28 am | #

kis writes:
btw, Ben's playbook to avoid a ZIRP liquidity trap is specifically to create the perception of inflation while using non-traditional lending schemes to actively prevent deflation. He's already told us what he is trying to do, years ago. Look at what they are doing, not what they are saying now.
kis | 05.07.08 - 11:30 am | #

Turbo writes:
I used to live in Japan. Part of the reason Japan has been mired in a low growth situation for so long is that it's a very consensual society, that seeks to spread the burden of change around. In the US, that burden only seems to be distributed if it starts to impact the extremely wealthy.
Turbo | 05.07.08 - 11:31 am | #

RE writes:
Excellent point, Turbo. With Dollar Zone money supply growing at a very quick pace that vise of the lower 90% will only get tightened.
RE | 05.07.08 - 11:32 am | #

Angry Saver writes:
Turbo,

It IS really ugly.

But. The deflation would stem from the bottom 90% walking away from their debts and starting over.

Many would be better off - no/lower debt and lower prices.
Angry Saver | 05.07.08 - 11:32 am | #

John Stark writes:
As the dollar weakens, import prices rise here irrespective of wages. Fortunately, we only import energy, clothing, electronics, cars, and a few other incidentals.

The weakened dollar also increases the prices of commodities priced in dollars, but we can all cut back on consumption of food, metal etc.

Then, as we learn to expect rising prices for everything, we spend our dollars as fast as we can, and we hoard stuff to "save" on the coming higher prices. That ncreases demand and boosts prices some more.

Right now I've got an extra cache of rice and pasta. Stock up now, before you get priced out of the market forever.
John Stark | 05.07.08 - 11:34 am | #

Sebastian writes:
sterlingerl asked: "Hi CR, have their been any changes to the calculation methodology for inflation expectations since 1975, as there has been for the calculation of inflation itself. And if so, how might this impact the picture? Thanks."

I spent most of yesterday analyzing the inflation picture, and came up with a few stats.

Over the past 20 years, 1988-2008, nominal GDP (not "real", hopefully shutting-down the argument that the numbers are wrong because inflation isn't being measured "properly") has grown at a CAGR of 5.71%.

Over the same time-period, M2 has grown by 5%. (That's right: Nominal GDP has grown slightly *faster* than money supply. Doesn't really support problemmatic inflation.)

Over the previous 20 years, 1968-1988, nominal GDP grew by a CAGR of 9.37%, while M2 grew at 8.84%.

A couple of conclusions can be drawn from this, IMO.

One, that when you step-back and look past the short-term "noise" in the numbers, current inflation looks a lot tamer than the rhetoric would suggest.

Second, the arguments by such sites as Shadow Stats that current inflation is "understated" because of changes in methodology is unadulterated bullshit.:)

Levels of inflation have *actually* been lower over the past 20 years than they were in the previous 20 years, and it doesn't have anything to do with methodology.

So, time to put my head in the noose again.:)

The Fed has possibly one more easing to do this year, but whether they do that or not...here it comes...the Fed will *not* be tightening this year.

Further (could you tighten that noose just a bit, it's not quite right yet), inflation on this cycle is peaking and will end the year lower (or at least no higher) than it is now.


Sebastian
Sebastian | 05.07.08 - 11:46 am | #

Angry Saver writes:
Sebastion,

From 1995 through 3/2008, MZM grew at an annual tate of 8.9% vs. nominal GDP growth of 5.3%.

This excessive monetary growth was not captured in CPI inflation as much of the money flowed into housing which was removed from the CPI during the 1980s.

We've printed too many dollars vs. our economic output. We have ab inflation problem.
Angry Saver | 05.07.08 - 12:00 pm | #

Anonymous writes:
sorry but Mish is full of shit and so are you Ipodious...

Looking for something that does not exist and then cheerfully declaring that since "i can't find it it doesn't happen" is just typical for someone who tries to school people into research.

One more time:

Fed allows (just about anyone now) banks to set the value of it's crap collateral at whatever it likes....gives out CASH at the fake values (if they were real-just like the BSC example-then why the weekly need to create more acronym styled bailouts) and that cash is then lobbed at the markets...

How you can't see that as instant money creation is a function of your inability to see things for what they are.

It is creating money when it is done out of thin air...via the many "auctions" that allow crap to be traded for cash. Your "evidence" is the commodities and equities bubble

You and Mish are still looking for the "evidence" when it occurs right under your noses....

Show me how this would be done without the "help" of the Fed......

You are totally FOS.

Ciao
MS
Anonymous | 05.07.08 - 12:09 pm | #

Yal writes:
Market down, and TNX and IRX both up.

if hot money leaving how come dollar is up ?
Yal | 05.07.08 - 12:10 pm | #

Angry Saver writes:
Here's an interest narative showing how Bernanke has been wrong on inflation. Really wrong. The bond markets have been wrong too.
http://seekingalpha.com/article/...ion-to- moderate

Blind faith.
Angry Saver | 05.07.08 - 12:12 pm | #

Sebastian writes:
Angry Saver said: "From 1995 through 3/2008, MZM grew at an annual tate of 8.9% vs. nominal GDP growth of 5.3%...."

If you compare MZM to M2, you'll see that MZM is far more volatile.

Also, there's considerably more historical data available for M2, encompassing a greater variety of economic conditions.


Sebastian
Sebastian | 05.07.08 - 12:16 pm | #

Angry Saver writes:
Sebastion,

http://research.stlouisfed.org/f...red2/series/ MZM

Here's 25 years of MZM data. That's enough for me. And my wallet.

I don't buy your volatility arguement either.
Angry Saver | 05.07.08 - 12:21 pm | #

FFDIC writes:
Bernanke Wants Fed to Pay Interest on Bank
"Federal Reserve Chairman Ben S. Bernanke, seeking ways to stabilize money markets, will ask Congress for authority to pay interest on commercial-bank reserves this year, a person familiar with the discussions said. The central bank isn't authorized by Congress to begin making such payments until 2011."
http://www.bloomberg.com/apps/ne...NdvI& refer=home
FFDIC | 05.07.08 - 12:30 pm | #

Sebastian writes:
Angry Saver said: "I don't buy your volatility argument either."

Of course not.:)

Compare MZM to M2, using the "Percent Change from Year Ago" in the "Units" pull-down. It's quite a bit more volatile.


Sebastian
Sebastian | 05.07.08 - 12:31 pm | #

Yal writes:
FFDIC:

for now we are not talking about a large sum of money BB wants to pay.

But once he has the authority - what is going to be his next step - this is the part I don't understand.
Yal | 05.07.08 - 12:34 pm | #

ipodius writes:
We've printed too many dollars vs. our economic output. We have ab inflation problem.

*thud**thud**thud*

that's the sound of me banging my head against the wall

And Mish my be full of crap on many things, but he's spot-on in his analysis here. Again, I choose to stick by the definition that inflation is the expansion of money and credit. And that post follows that train of thought very, very well. In the end, the growth of M3 does not cover the simultaneous destruction.
ipodius | 05.07.08 - 12:36 pm | #

Angry Saver writes:
Sebastion,

Volatility isn't the issue. Excessive money supply growth is the issue. Whether the growth is volitile or not, 10 years of excessive growth is inflationary. If stocks & real estate are richly valued, eventually the money will hit commodities & CPI.

From 1980 to 1998 MZM grew at ~ 5.1% (roughly the same as nominal GDP). From 1998 through 3/2008, MZM grew at 3.5% over GDP. This fact debunks your arguement about money supply growth matching GDP growth.

We have an inflation problem AND a bank solvency problem. SCARY STUFF!
Angry Saver | 05.07.08 - 12:41 pm | #

EZRider writes:
I wonder if the deflation shown in 2003 was the housing market trying to correct itself which the Fed prevented from happening.
EZRider | 05.07.08 - 12:42 pm | #

Angry Saver writes:
Ipodius,

Mish destruction arguement is half baked. If a builder borrows $1,000,000,000 and builds a condo tower, the money is introduced into the economy. Exactly how does the money get destroyed?

If the tower defaults and sells for 50% off, the 1 billion was still spent into the system.

THUD THUD THUD.
Angry Saver | 05.07.08 - 12:45 pm | #

Anonymous writes:
or more importantly the value of collateral ( that is totally suspect ) and the cash that is given to the banks based on that valuation.

That money is put into the system in the same way as the example AS alluded to.

But they keep the same argument that states "I can't find it so it doesn't exist"

There are several examples of lip service to a "strong dollar policy" but very little evidence of such.

So since you can't find any evidence of a strong dollar policy i guess the following chart doesn't exist:

http://stockcharts.com/h-sc/ui? s...id=p26888917839

Nice try

Ciao
MS
Anonymous | 05.07.08 - 12:55 pm | #

Sebastian writes:
Angry Saver said: "Volatility isn't the issue."

It is if that's the only way you can get your argument to work, by using a highly-volatile number to extrapolate an even larger number.

Watch and see.


Sebastian
Sebastian | 05.07.08 - 12:56 pm | #

Yal writes:
The place where money is created is when new debt is created.

The place where money is destryed is where debt is not paid.
Yal | 05.07.08 - 12:56 pm | #

kis writes:
the 1 billion was still spent into the system

Your argument is that there is a pent up inflationary pressures due to all the money injected into the system over the last few years?

But where is it? US savings rates are negative. Is it all sitting overseas or in the trust funds of the top 1%? Because J6P doesn't have it anymore to spend. His money supply and credit are GONE. How is that going to stoke inflation?
kis | 05.07.08 - 12:58 pm | #

ipodius writes:
THUD THUD THUD.

Keep doing that angry until you stop conflating price inflation with monetary inflation. someday, you'll see the difference.

If a builder borrows $1,000,000,000 and builds a condo tower, the money is introduced into the economy. Exactly how does the money get destroyed?

So that bank calls the loan on this condo tower and then retires it and doesn't lend the amount back out. What happens then? CW just pulled all the HELOCs in the Las Vegas area. What happened to that "borrowed" money? You just got a margin call for 10,000. What happened to that money?
ipodius | 05.07.08 - 1:01 pm | #

Optimistic-Joe writes:
Sebastian is spot on (again). Inflation will moderate this year. While oil prices went up to new ATHs, the AG sector and PMs are lagging (intermarket bearish divergence). Watch for the other shoe (oil) to drop soon, too. Also, it'sa already all over the medias, which is obviously the best contra indicator. You get advice to stock up on everything in yahoo.

O-Joe
Optimistic-Joe | 05.07.08 - 1:03 pm | #

Angry Saver writes:
Yal,

That's Mish's argument. It doesn't necessarily work that way. If I borrow a million and blow it at the craps table and don't pay the money back, a bank takes a hit to its ledger, but the money that was created stays in the system.

Money creation not matched to output is inflationary in my view. Just look at Zimbabwe. Lots of money creation, no output.
Angry Saver | 05.07.08 - 1:04 pm | #

Angry Saver writes:
Ipodius,

Think it through. The money does NOT get destroyed in the manner or to the extent that Mish suggests.
Angry Saver | 05.07.08 - 1:11 pm | #

ipodius writes:
Angry of course it does. This is a fractional reserve system. The money supply expands and contracts accordingly.
ipodius | 05.07.08 - 1:12 pm | #

Angry Saver writes:
Ipodius,

No. I disagree. Show me when the money supply has EVER contracted since we left the glod standard.

http://research.stlouisfed.org/f...red2/series/ MZM

Mish has some great insights. He seems like a real good egg. I think his deflation conclusion is off base though.
Angry Saver | 05.07.08 - 1:15 pm | #

poszi writes:
Yal,

The place where money is created is when new debt is created.

True.

The place where money is destryed is where debt is not paid.

No. Money (or rather credit) is destroyed when the debt is paid off. Either the usual way or when it is written off (i.e., paid from bank's capital). Default is not necessary for credit destruction.
poszi | 05.07.08 - 1:16 pm | #

wally writes:
Every time there is a discussion like this there is always a confusion of definitions; people talking at cross purposes is 75 percent of the 'debate'.

FWIW, I agree with those who think the Fed will not raise rates this year. In fact, if the numbers really start to look bad, they will continue to cut.
wally | 05.07.08 - 1:17 pm | #

Yal writes:
poszi,

You are correct. I missed that part.
Yal | 05.07.08 - 1:25 pm | #

Another angry saver writes:
Bernanke is a traitor. How are people in their 20s and 30s supposed to save for their first homes? If you're looking to put 30% down on a $400k home, you need $120k. If you make $40k per year and save 25% of your income, an 8% inflation rate will destroy the purchasing power of that savings faster than you can earn it back!

Put us back on the gold standard; silver standard; anything. One dollar equals one liter of oil. One gram of copper equals one cent. Anything is fine. Just don't force people to exchange their labor for government promises. We all know what those are worth in the long run.
Another angry saver | 05.07.08 - 1:26 pm | #

Interesting Times writes:
Mish has some great insights. He seems like a real good egg. I think his deflation conclusion is off base though.
Angry Saver | 05.07.08 - 1:15 pm | #

AS - I'm with you on the inflation.

Here's where I pause:
- banks aren't lending nearly as fast as before
- the velocity of money is now almost completely stopped
- the M2 is there phsysically, but no one is spending

Where are we then? (serious question to all)
Interesting Times | 05.07.08 - 1:32 pm | #

ipodius writes:
Show me when the money supply has EVER contracted since we left the glod standard.

The glod standard has nothing to do with it. AS, when the Fed wishes to decrease or increase the money supply (set the FFR), it performs open market operations. It contracts all that time.
ipodius | 05.07.08 - 1:40 pm | #

Angry Saver writes:
Interesting Times,

We definitely deserve a deflation. But the $150B stimulus package and 2% or lower funds rates will prevent the natural outcome.

I see a consumer retrenchment, slower growth and higher than anticipated inflation. Not good news. Really hard on the middle and lower income groups.
Angry Saver | 05.07.08 - 1:41 pm | #

Angry Saver writes:
Ipodius,

Come on now. Any type of rolling average shows that money supply doesn't contract.

Here's two more Mish thoughts you might want to re-think. Why would anybody buy glod in a deflationary environment? Makes no sense to me. Also, since money & credit are always expanding, why hasn't gold continually increased in value?
Angry Saver | 05.07.08 - 1:47 pm | #

Anonymous writes:
>>It contracts all that time.>>

Show us....

again you present a statement as a fact.....


Please show us...

Ciao
MS
Anonymous | 05.07.08 - 1:52 pm | #

Malaclypse writes:
"Why would anybody buy glod in a deflationary environment? Makes no sense to me. "

They would not, unless they were making a mistake.

"Also, since money & credit are always expanding, why hasn't gold continually increased in value?"

Since gold has not always increased in price (not necessarily the same thing as value), that implies that money does not always expand.
Malaclypse | 05.07.08 - 1:53 pm | #

ipodius writes:
AS, how? If you don't conflate prices with money and credit, you're just incorrect.

And the issue is that everyone is thinking inflation. There is PRICE inflation, but NOT monetary inflation. So that's why those buying glod are going to get a rude surprise soon.

Why do you think the Fed is DROPPING the FFR? It doesn't fear inflation at all, although I'm sure they're happy to have people think that inflation is an issue. They fear the DEFLATIONARY forces they see right now. And the interesting case is you have asset price deflation on a massive scale, and PRICE inflation going on at the same time. mp and conjure have been saying this too for quite some time. The main force to be reckoned with right now is asset price deflation as evidenced by the destruction of money and credit, best seen in house prices.
ipodius | 05.07.08 - 1:53 pm | #

ipodius writes:
Let me ask you a question AS, how does the Fed control the FFR?
ipodius | 05.07.08 - 1:54 pm | #

Angry Saver writes:
Ipodius,

I'm enjoying the debate. And I admit I may be wrong. This thing is a moving target. Some of it is getting made up by Central Banks the FED & Gov'ts as time goes on.

The fed does fear credit destruction and that is why I fear inflation. IMO, the only solutions to the very real deflationary forces are excessively loose monetary policies AND fiscal stimulus.

That $150B stimulus IS a helicopter drop.

As far as the FFR is concerned, the banks act as a cartel. That's why the prime rate follows the fed funds rate so perfectly.

As for asset price deflation, national wealth dropped significantly after the tech bust, yet we still had inflation by any definition (CPI, money supply, credit expansion).

In the 1970s, the fed tried to force growth. They ended up with inflation. Now that's pushing on a rope.
Angry Saver | 05.07.08 - 2:09 pm | #

Anonymous writes:
you can show all the "temporary market ops" all you want.....still does'nt address the issue of creation on the back of crap valuations....

That is where the money is "printed"

but keep thinking those values are real...the Fed has you and several others convinced that those were fairly valued.

If they were/are then sell them in an open market.

That has not been done so I call BS on it's valuations.....as well as these arrangements where the money is loaned to the buyer. How that is even considered a fairly valued transaction is ridiculous.

But the Fed has a lock on farces these days.

Ciao
MS
Anonymous | 05.07.08 - 2:09 pm | #

ipodius writes:
Yes AS, this is good. And, btw i agree about the "stimulus" package. Just tossing money out in the streets, and not enough of it to really make a difference, I might add.

My point about the FFR is that you get the rate by manipulating the money supply though open market operations...including draining ones that have the effect of tightening the money supply, thereby hiking the rate. The problem here is that, the destruction is happening on the fractional side, so the Fed has lowered the rate (put more money into circulation) and it isn't having the desired effect because in the external system credit and money are being destroyed faster than the Fed is tossing it out there.

Again, watch what happens the first time the Fed hikes unexpectedly. And that's why it is unlikely to do so for quite some time. They need the lenders to lend, offsetting the current level of destruction.
ipodius | 05.07.08 - 2:15 pm | #

Emma Anne writes:
dilbert dogbert writes:
I think the Fed only worries about wage inflation. There is not going to be any wage inflation.
Inflation in everything else is self correcting.

Now that is a very insightful comment.
Emma Anne | 05.07.08 - 2:19 pm | #

Angry Saver writes:
Ipodius,

There's plenty of money in the system. I would argue we have excess money in the system. MZM grew at 3.5% above nominal GDP since 1995. However, the people that control the money are a much smaller group than at any time since 1929. This small group includes hedge funds & SWFs. Bernanke is lowering rates because banks are impaired and he believes he is helping the majority of consumers. It's not working so far.

If the wealthy won't spend the money, the fed & gov't will dilute them. Hence the race into commodities.

We need more output, not just more money.
Angry Saver | 05.07.08 - 2:32 pm | #

HARM writes:
Angry Saver said: "I don't buy your volatility argument either."

Why does price "volatility" only matter to the BLS (or Fed) when it occurs in one direction: UP ?

Two things you will never see:

1) BLS hedonically modifying the CPI, because they feel it is UNDER-reporting inflation, and..

2) Fed actually doing something (besides lip service) to help ordinary non-Richistani taxpayers, suffering from the twin whammys of energy/food inflation and declining real wages (mainly due to the Fed's own policies).
HARM | Homepage | 05.07.08 - 2:37 pm | #

Angry Saver writes:
HARM,

All I see is pain for the middle & lower income groups.

I knew we were in trouble when unaffordability (aka house & stock appreciation) was touted as a solution.

Ludicrous.
Angry Saver | 05.07.08 - 2:40 pm | #

Diane writes:
I like Mish, and I agree with him on many things, but not this one.

I don't need to read statistics, fancy reports, etc. or listen to talking heads on the MSM. I can see with my own eyes. Food, energy, tuition, health care, services, etc are up while companies are going BK, homeowners are going FC and wealth is evaporating.

The Fed is trying to fight the strong forces of deflation with inflation. It will never work, because the Fed is only good at doing one thing - creating inflation.

We are headed into a modern day Weimar experience. The waters are unchartered, but that is the direction we are going.

It is one thing to have knowledge about this train wreck and quite another to do something about it.

I have taken steps to protect myself by eliminating all debt (I live within my means so that was easy), removing my money from financial institutions I don't trust, buying a stash of gold and silver and continuing to buy on the dips, and keeping cash reserves in a place I trust where it is readily available in the event of job loss or expenses due to a sick kid, etc.

I am generally a positive person but do not feel positive about the U.S.'s economic outlook. Note to administration: The consumption on credit model is not working. I believe the next president will be the bagholder by design. He/she is a one termer as we enter into darker times. God Bless us all. It will be humbling.
Diane | 05.07.08 - 2:41 pm | #

Angry Saver writes:
Diane,

Well said.
Angry Saver | 05.07.08 - 2:43 pm | #

kis writes:
I think the Fed only worries about wage inflation. There is not going to be any wage inflation. Inflation in everything else is self correcting.

What they missed was that HELOCs were essentially a form of wage inflation - people supplementing their income with house-credit extraction. And that was enabled by the low housing interest rates and subsequent asset bubbles. So the (under-reported)inflation we've already realized is a direct result of past low rates and HELOCs.

With the asset bubble popping and HELOCs getting shut off, is that not a huge deflationary force on 'wages'???
kis | 05.07.08 - 2:45 pm | #

John Stark writes:
I'm a student here, not a teacher, so here are my questions:

1. If people borrow to buy or build McMansions, and those McMansions decline in value below the purchase price, hasn't money (wealth) been destroyed? And if the market changes, and those properties go back up in value, doesn't that wealth magically reappear? Isn't the same thing true for shares of stock or mortgage-backed securities?

2. If inflation raises the price of the stuff we need, but our wages stay the same (or don't rise as fast), isn't that simply a mechanism for a downward revision in our standard of living? Isn't that what's happening right now? Doesn't history suggest that standards of living in given nations rise and fall over time? (I remember reading that Venice once had the world's highest per capital income...)
John Stark | 05.07.08 - 2:48 pm | #

Angry Saver writes:
John Stark,

Asset values such as houses & stocks are fickle. That's why they are not included as savings in NIPA.

Over time, aggregate asset values should increase as should national wealth. At least in theory anyway. Basically, we've screwed up housing so badly we're now in Great Depression territory.

As for declining real wages, that is a bib, big problem imo. I just don't see how we can expect prosperity if inflation continually exceeds income growth for the majority. Eventually, the majority become insolvent.

The asset inflation model has concentrated the wealth.
Angry Saver | 05.07.08 - 3:12 pm | #

ipodius writes:
Diane, I'm confused. In one paragraph you state that the strong forces of deflation are a problem. Then you state that the fed is trying to fight that with inflation. Then you mention Wiemar, which is an example of, literally, printing money to pay bills (in that case punitive war reparations). the fed is not printing money, we've covered that. So how do these two things line up logically? How would lower interest rates bring on Wiemar inflationary forces?
ipodius | 05.07.08 - 4:13 pm | #

Kicker writes:
I have taken steps to protect myself by eliminating all debt (I live within my means so that was easy)

That's too bad if you really believe in higher inflation....

The only way to protect yourself in a high inflation environment is using debt to leverage real assets. The real value of the debt decreases while the real value of the asset remains at par.

Owning gold or other real assets without leverage will leave you wounded, but still standing. The government will end up with a good portion of your real net worth when you eventually convert it back into cash.

By paying down debt, removing money from the banks, and buying gold and silver you are trying to cover all your bases but you'll never come out at par.

But sometimes that's all you can do.
Kicker | 05.07.08 - 4:14 pm | #

Angry Saver writes:
Ipodius,

I think Diane is saying what many are feeling these days. Their assets (stocks, houses) are deflating while their expenses (food, gas, insurance, tuition) are inflating faster than their incomes.

It's the best of the 1930s combined with the best of the 1970s. This is the horror of a negative savings rate and the asset inflation model. Asset values are worth far less in times of need.

I see it.
Angry Saver | 05.07.08 - 4:34 pm | #

boob writes:
ipodius writes:
What is the equilibrium the fed is trying to protect? Therin lies the real question
boob | 05.07.08 - 4:51 pm | #

boob writes:
ipodius writes:
Show me when the money supply has EVER contracted since we left the glod standard.

The glod standard has nothing to do with it. AS, when the Fed wishes to decrease or increase the money supply (set the FFR), it performs open market operations. It contracts all that time.

yesterday you told us that rates are set by the market - I assume you ahve changed your view
boob | 05.07.08 - 4:52 pm | #

Diane writes:
Ipodius - "printing money" in the technical sense of the word not yet, but it will come as the Fed gets more desperate. The losses are too large. The Fed has unchecked power and no oversight and IMO believes it can conquer this beast. Also, the government's obligations are increasing as the revenues are dwindling. The Fed will be used to make up that difference. I think we are at the beginning stages...

Kicker, If today's inflation showed up in wages, I would agree with you Re: carry debt, but my wages have not gone up, only my living expenses, so I am staying away from debt.

I am no economist, although my intuition is pretty darn good. I am just going by what I see in life and in my checking account. I could be wrong. I hope I am.

Good luck to all of you.
Diane | 05.07.08 - 4:53 pm | #

zirpy the pinhead writes:
supporting a strong dollar; lean on credibility needless to say ho-hum......
zirpy the pinhead | 05.07.08 - 4:57 pm | #

zirpy the pinhead writes:
u know times are tough when PFE is added to a taxable account to squeeze an additional 100+ b.p.'s out of an average yield overweighted in C.D.'s :)
zirpy the pinhead | 05.07.08 - 4:59 pm | #

ipodius writes:
yesterday you told us that rates are set by the market - I assume you ahve changed your view

boob, in my statement the market DID set the rate. didn't it? the fed cannot *set* the rate. it sets a *target*.
ipodius | 05.07.08 - 5:31 pm | #

EBGuy writes:
ipodius and AS,
Great stuff! ipodius, how fearful are you that the Fed will run out of ammunition and be forced to "print money"? Sure, they are sterilizing now, but the increase in TAF by 50%, at least in my book, means one fewer bullet in the chamber (about 10% of the Treasuries the Fed holds). I haven't tried backing out off balance sheet items like the TSLF, but things start looking grim, in my book. As to where money goes when it dies (disappears), I am betting it shows up on H3 in the form of negative non-borrowed reserves. Who knows, perhaps this is extremely naive. Then again, I agree with AS that Mish's definition of deflation/inflation is screwed up -- but first I will try to get a handle on monetary vs. price inflation so as not to get taken to task by ipodius. Seriously, though, folks, this is a fractional reserve banking system; there is an inherent bias towards growth. Oh crap, the poles just switched and I started worrying about deflation again... Sigh, can anybody vouch for the monetary base figures in the H3 reports?
EBGuy | 05.07.08 - 9:39 pm | #

bond guy writes:
"EBGuy writes:
ipodius and AS,
Great stuff! ipodius, how fearful are you that the Fed will run out of ammunition and be forced to "print money"? Sure, they are sterilizing now, but the increase in TAF by 50%, at least in my book, means one fewer bullet in the chamber (about 10% of the Treasuries the Fed holds). I haven't tried backing out off balance sheet items like the TSLF, but things start looking grim, in my book."

The latest TAF (?) results were actually pretty good, and brought in LIBOR.

The only "bullets" the Fed will run out of if their Treasuries ran out would be their ability to get LIBOR/T-Bill spreads tighter. They still have no problem getting funds to hit the target rate. [They would have to keep some Treasuries, so that they could do the open market operations to manage the fed funds rate. But they probably wouldn't need much to do that.] But the Fed does not target LIBOR (supposedly), so there's no reason for that to be the end of the world.

The Fed only runs out of ammunition when they have driven fed fund to 0%. Then they are forced to go the quantitative easing route. It's hard to see things getting that bad, at least on any reasonable forecast horizon.
bond guy | 05.07.08 - 9:50 pm | #

sterlingerl writes:
Thanks, Sebastian.
sterlingerl | 05.08.08 - 12:45 am | #

Elvis writes:
Laster.
Elvis | 05.08.08 - 1:20 am | #