The Best of the Exchange: Deflation, Fiscal Stimulus, and Central Banks
Highlights of Minyan commentary on a wild week!
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(Editor's Note: Some of the following posts have been modified slightly from their original form.)
Professor Depew's Five Things are always a hot topic on the Exchange, and this week was no different as he expounded on deflation and the growing evidence that the credit issues are spread across all demographics.
Spot on! Your 5 things articles are a great read. One thing to note, especially with Helicopter Ben's 'Bernanke' Put failing to staunch the flow: Is there a possible negative feedback loop starting?
The loop looks something like this: As credit contracts, we'll see more lay offs resulting in more defaults on credit (rinse, repeat). There are numerous other microeconomic loops as well like credit cards, 401k debit cards, auto loans which you and the other professors have brought up and yes, they all same to have the rinse, repeat wording so ... other than a complete shellacking of the capital markets ... where can the cycle be interrupted?
I fail to see how you think that monetary inflation by the Fed will have no effect going forward. Firstly, monetary growth has been negative so far - so increased liquidity hasn't even begun.
With so many countries tying their currencies to the dollar and the dollar being the reserve currency it is almost impossible to come to the conclusion that credit will continue to contract during a coordinated attempted at reflation (which again has not even really begun yet).
This is not Japan that had a savings rate and the yen was not the world's reserve currency nor had emerging markets tying their currency it.
This is not the Great Depression when monetary policy was tightened rather than the significant loosening we are all expecting going forward.
Inflation is already occurring globally today at a significant pace, as it was in the '70s. Emerging markets will not be able to handle further inflation and will need to de-peg but that is a dollar negative event, which in turn is a domestic inflation positive event.
Your dollar rally arguments are beginning to sound like, "the dollar must run up in the short term, simply because it has gone down so much."
Do not forget that today there are other vast sources of liquidity available as well. What I would really like to know is what would cause you to change your deflation outlook? What has to occur? Obviously the everyday price rises in your own life are not enough. Please tell us.
Don't get me wrong, I love the articles and discourse here. I am very interested in peoples' opinions that are opposite one to mine, because I can think of nothing more valuable to me as an investor than to constantly challenge my opinion, outlook and investment strategy.
The White House and Congress look like they finally agree on something: a fiscal stimulus package as needed. Professor Shedlock argues that the plan is doomed to fail.
That was one of the best reads on the 'Ville I have come across.
Thanks for the perspective and keep up the good work.
Is there any work done out there that outlines who the counterparties are to the MBIA and ABK CDS trades? I know MER is one and there are some international banks as well, but are they taking into account the fact that their hedges most likely wont get paid off?
Seems like an important bit of information.
Bernanke is right because the Plunge Protection Team will ensure that we technically don't have a recession. While consumer spending may be 70% of GDP, most of that spending is fairly stable given any economic environment. But deficit spending by the government adds to GDP. The Team is able to manipulate the measurement tool to be right. This administration will manipulate everything it can to ensure the numbers in the history books look as good as they force them to look regardless of the reality on Main Street.
Wow, day in and day out I read about how the U.S. economy got to this point with our banks on the ropes. Most people who should know better have it all wrong! The consensus seams to be that the fault should be placed on the previous Fed Chairman, Alan Greenspan.
The true culprits are the loan officers and loan brokers who gave or approved mortgages to customers that had no chance of making the payments. You can blame bank policies that overlook what these individuals did as long as the fees kept coming in, but you can't blame Greenspan. If I lend you money at 2% interest because of your good credit management skills and you lend it out to your friend at 10%, knowing full well the payments are more than his take home pay. Who's fault is it when you can't pay me back?
Is it my fault for believing that because of your credit history I could trust you with a 2% loan? How would the Fed to know that the insane quarter-to-quarter earnings increases demanded by bank shareholders would make banks and mortgage lenders start drop lending standards just to get the deals done?
Many traders were expecting an intra-rate cut by the Federal Reserve, but nothing materialized. Professor Udall questions the wisdom of the apparent lack of decisive action taken by Central Bankers.
The promissory note principle: "backed by the full faith and value."
What is value? It's the future potential of something.
The future potential of our economy depends on available resources in the hands of the majority. The recent run-up in oil prices and run-down in the value of individuals working with tools has taken the future value of the economy and tied it up in big, empty houses, yachts, aircraft carriers, SUV's that people can't afford to fuel, and debt-based pieces of paper that say we own a bunch of land that has been taken out of production in order to cover it with pesticide-laden grass and concrete.
Money is a tool that everyone has apparently forgotten how to use - especially banks and economists. It doesn't have any value in itself unless someone has the resources to promise some kind of future for the entity issuing the money. Our country owes trillions and trillions of dollars without the resources to expand and pay it back.
Is it really that befuddling as to why the Fed doesn't just drop the rates?
They're not at liberty to say so, but the U.S. debt is so large that the imperative is to keep interest rates high enough to keep U.S. debt instruments attractive to foreign investors. The Fed won't lower rates because they responsibly can't. They haven't got the wiggle room.
As for inflation, a quick glance at the CRB futures index shows that it's definitely a problem so that rationale has some legs, but it really is the debt they're looking at.
If the Fed lowers rates to soften the blow of housing and stock market losses, the usual flight to safety posed by U.S. Treasury instruments will be undermined and then we're looking at something worse, national insolvency. It's a classic case of pay now or pay later. I know it's popular to blame the banks but blame deficit spending instead. A trillion bucks down the hole with no end in sight is the real culprit.
We appreciate all the comments on The Exchange and look forward to the Best Of Next Week!
Have a great weekend Minyans!
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