Economic Commentary

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<a href="http://ndknotepad.blogspot.com/2009/01/us-cant-unilaterally-inflate.html">The US can't unilaterally inflate</a>



<blockquote>There are many countries that peg their currencies to the dollar in some form, but China is by far the biggest, most important, and most notorious. But even Japan has a ceiling beyond which they won't let the JPY rise. These pegs are not difficult to defend because their currencies are pegged too cheap, rather than too rich. In fact, China absorbs massive amounts of USD in their interventions to enforce that peg. Should they ever need to fight the other way, they can sell off USD and buy CNY until the crisis has passed, and the permanent, underlying current account surplus takes care of the problem.



Japan and China do not have any lasting inflation problem either, though both caught an inflationary wave during the commodity bubble. They have certainly both experienced deflation in the recent past. The economies survived, with a little discomfort. There is very strong structural deflation in both economies, with extraordinarily deep capital, and in China's case at least, virtually limitless labor. Deflation appears to be returning and it probably doesn't present a severe threat to either economy.



Deflation does pose a dire threat to the US economy. With immense debt outstanding to GDP, far higher than anything seen before, the US economy may have approached the Chandrasekhar limit of debt. Debt-deflationary spirals are not fun. Even worse, we have very large, persistent trade deficits and a poor NIIP.</blockquote>


You may not agree, but it's worth the read.
 
[quote author="no_vaseline" date=1258111841][quote author="Nude" date=1258109666] Once the banks started loaning out that money.....</blockquote>


I don't want to speak for Awgee, but I don't ever see us getting to that step. Every dollar printed is sucked into a black hole known as bad debt - the banks that are holding those reserves don't have the functional ability to loan anything.



</blockquote>


Let us introduce a scenario.

You get into debt.

You owe twice what you make in a year and can no longer make the interest payments on the debt.

Your uncle Joe pays off your debts for you. Problem solved right? No one the worse, right?





Or,





instead of uncle Joe paying your debts, you declare bankuptcy. Problem solved, right? Any one the worse?







Or,





instead of the above, Uncle Joe is a counterfeiter and prints up some Cs and gives them to you and you pay off your debt. Problem solved, right? No one the worse, right?
 
[quote author="awgee" date=1258150471][quote author="no_vaseline" date=1258111841][quote author="Nude" date=1258109666] Once the banks started loaning out that money.....</blockquote>


I don't want to speak for Awgee, but I don't ever see us getting to that step. Every dollar printed is sucked into a black hole known as bad debt - the banks that are holding those reserves don't have the functional ability to loan anything.



</blockquote>


Let us introduce a scenario.

You get into debt.

You owe twice what you make in a year and can no longer make the interest payments on the debt.

Your uncle Joe pays off your debts for you. Problem solved right? No one the worse, right?





Or,





instead of uncle Joe paying your debts, you declare bankuptcy. Problem solved, right? Any one the worse?







Or,





instead of the above, Uncle Joe is a counterfeiter and prints up some Cs and gives them to you and you pay off your debt. Problem solved, right? No one the worse, right?</blockquote>


And, if the Fed does what it says it's going to do and starts draining the pool in the first quarter and taxes start going up the way everyone says they will, no one is the worse, right?
 
did anyone else hear this article on marketplace yesterday? its also a NY times article... <a href="http://www.nytimes.com/2009/09/27/weekinreview/27healy.html">Men?s Underwear as an Economic Indicator </a>
 
<strong>FED CAN'T RAISE RATES UNTIL AFTER 2011</strong>

The reason ? there is a wave of mortgage refinancings coming in the housing market for one, and not only that, but in the commercial space, there are 2.7 trillion of debt coming due through 2011 and another 1.5 trillion of leveraged loans (see page 24 of Thursday?s FT). In other words, the default rate is going to rise even further and the Fed tightening policy would only aggravate that situation. In other words, the Fed is simply immobile for at least the next two years.



<strong>MA AND PA KETTLE STILL LEANING TOWARDS INCOME</strong>

Despite the fiscal help from Washington D.C., the state and local governments will still face a projected deficit of $142bln for 2011

It is becoming increasingly obvious that the household sector, burnt twice by two bubbles seven years apart, are simply not biting this time. Once again, equity funds suffered a $4.7 billion net outflow last week. At the same time, bond funds saw a $7.5 billion inflow (on top of $10.2 billion on the last week of October) and an additional $358 million went into hybrids.



<strong>State Budget Woes Continues</strong>

Fully nine states are in fiscal distress and only two have balanced budgets. States like Michigan are planning 20% budget cuts for the coming year. Indiana is planning a 10% spending cut in light of a 7.4% YoY revenue decline. How can the economy really be out of recession if government revenues are still deflating?
 
In the latest fiscal foray, the Administration is using taxpayer money to subsidize the homebuilders ? no other sector in the economy receives so much favorable treatment and yet the industry adds so little to productivity growth.



As part of the extension of Fiscal Stimulus 1 (they don?t dare call this Fiscal Stimulus 2 for fear of losing all the independent voters):



? Jobless benefits have been extended a further 20 weeks;



? The first-time home buyer tax credit has not only been extended to April but expanded to include repeat trade-up buyers;



? And, believe it or not, the homebuilders, the folks who helped get us into the mess we are in today through their irresponsible overproduction strategies, are going to receive a massive stimulus from the federal government in the form of carry forward provisions allowing the companies to offset losses incurred in 2008 and 2009 against profits booked as far back as ?get this ? 2004! This is despite the fact that, as Ivy Zelman points out, the homebuilders are sitting on a ton of cash.



This is truly a fiscal policy that is trying far too hard to pursue the old ways of over-consumption, over-borrowing and over-building and it is a policy that is doomed to failure. See Home Builders (You Heard That Right) Get a Gift by Gretchen Morgenson on the front page of the Sunday NYT biz section.



THE FRUGALITY STORY JUST WON?T GO AWAY



When champagne sales are going down and prices being cut, even in the midst of a 60%+ rally in the stock market, you know that we are into a secular theme of thrift even among the well-heeled among us. Have a look at Champagne Sales are Going Flat on page B1 of the Saturday NYT. And believe me, it?s not just the high-end that is hurting still ? according to the NPD Group, restaurant sales in the U.S.A. are down 3.0% since the summer, the steepest decline in decades (see What?s Eating McDonald?s on page 32 of BusinessWeek).
 
<em>WASHINGTON ? The Federal Reserve is striving for a strong dollar in an effort to ensure financial stability, chairman Ben Bernanke said Monday in the face of growing complaints about the sliding greenback.



Bernanke, in a New York speech, said the central bank was closely monitoring exchange rates with the dollar having lost its gains from safe haven flows during the height of the financial crisis.



"We are attentive to the implications of changes in the value of the dollar and will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability," the Federal Reserve chief told the Economic Club of New York.



"Our commitment to our dual objectives, together with the underlying strengths of the US economy, will help ensure that the dollar is strong and a source of global financial stability."

</em>









And the USD index ends down under 75 today on B-52's words.



Bwa-ha-ha-ha-ha-ha!
 
[quote author="awgee" date=1258437723]<em>WASHINGTON ? The Federal Reserve is striving for a strong dollar in an effort to ensure financial stability, chairman Ben Bernanke said Monday in the face of growing complaints about the sliding greenback.



Bernanke, in a New York speech, said the central bank was closely monitoring exchange rates with the dollar having lost its gains from safe haven flows during the height of the financial crisis.



"We are attentive to the implications of changes in the value of the dollar and will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability," the Federal Reserve chief told the Economic Club of New York.



"Our commitment to our dual objectives, together with the underlying strengths of the US economy, will help ensure that the dollar is strong and a source of global financial stability."

</em>



This is one of two funny things I found today, right after Bernanke tried to assure that Fed will keep an eye on sliding dollar, $ started cratering....



The weakest sector today was retailers. Because we had a "surprising" increase in retail sales in October. Oooooooookie........





And the USD index ends down under 75 today on B-52's words.



Bwa-ha-ha-ha-ha-ha!</blockquote>
 
[quote author="BondTrader" date=1258443737][quote author="awgee" date=1258437723]<em>WASHINGTON ? The Federal Reserve is striving for a strong dollar in an effort to ensure financial stability, chairman Ben Bernanke said Monday in the face of growing complaints about the sliding greenback.



Bernanke, in a New York speech, said the central bank was closely monitoring exchange rates with the dollar having lost its gains from safe haven flows during the height of the financial crisis.



"We are attentive to the implications of changes in the value of the dollar and will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability," the Federal Reserve chief told the Economic Club of New York.



"Our commitment to our dual objectives, together with the underlying strengths of the US economy, will help ensure that the dollar is strong and a source of global financial stability."

</em>



This is one of two funny things I found today, right after Bernanke tried to assure that Fed will keep an eye on sliding dollar, $ started cratering....



The weakest sector today was retailers. Because we had a "surprising" increase in retail sales in October. Oooooooookie........





And the USD index ends down under 75 today on B-52's words.



Bwa-ha-ha-ha-ha-ha!</blockquote></blockquote>


It would appear his credibility is zero. I was not watching at the time, but I heard that the USD index and oil responded to his words for about 10 seconds, and then went right back to where they were before he started jawboning. USD closed under 75 and is still moving slightly down after hours.
 
[quote author="awgee" date=1258150471][quote author="no_vaseline" date=1258111841][quote author="Nude" date=1258109666] Once the banks started loaning out that money.....</blockquote>


I don't want to speak for Awgee, but I don't ever see us getting to that step. Every dollar printed is sucked into a black hole known as bad debt - the banks that are holding those reserves don't have the functional ability to loan anything.



</blockquote>


Let us introduce a scenario.

You get into debt.

You owe twice what you make in a year and can no longer make the interest payments on the debt.

Your uncle Joe pays off your debts for you. Problem solved right? No one the worse, right?





Or,





instead of uncle Joe paying your debts, you declare bankuptcy. Problem solved, right? Any one the worse?







Or,





instead of the above, Uncle Joe is a counterfeiter and prints up some Cs and gives them to you and you pay off your debt. Problem solved, right? No one the worse, right?</blockquote>




You are right awgee, if they try to make it any more confusing it's for a reason.
 
[quote author="matt138" date=1258525234][quote author="awgee" date=1258150471][quote author="no_vaseline" date=1258111841][quote author="Nude" date=1258109666] Once the banks started loaning out that money.....</blockquote>


I don't want to speak for Awgee, but I don't ever see us getting to that step. Every dollar printed is sucked into a black hole known as bad debt - the banks that are holding those reserves don't have the functional ability to loan anything.



</blockquote>


Let us introduce a scenario.

You get into debt.

You owe twice what you make in a year and can no longer make the interest payments on the debt.

Your uncle Joe pays off your debts for you. Problem solved right? No one the worse, right?





Or,





instead of uncle Joe paying your debts, you declare bankuptcy. Problem solved, right? Any one the worse?







Or,





instead of the above, Uncle Joe is a counterfeiter and prints up some Cs and gives them to you and you pay off your debt. Problem solved, right? No one the worse, right?</blockquote>




You are right awgee, if they try to make it any more confusing it's for a reason.</blockquote>


My point was that the resolution that comes closest to a zero sum gain is the scenario where the uncle pays for the debt out of his savings. And even this is not a zero sum gain where paying for the debt has no economic consequences. The removal of capital to pay for the debt is a removal of capital from the investment community and a removal of capital from capital utilization.



The consequences of the other scenarios is dire. Printing money to pay for the debt is removing capital from all users of the currency as the currency is devalued.





It is a fallacy to think that the government can somehow make up for losses and debt incurred by subsidizing, bailing, tax crediting, monetizing, or any other ing. The printed money is not sucked into a black home known as debt. The debt can not paid by printed money. Debt must be paid in productivity, an activity of which the government is incapable. Some folks think deflation, (credit destruction), can be compensated for with a printing press. Those people do not understand what real money is. The debt will still exist and the consequences of devalued currency will be added to the consequences of deflation.
 
[quote author="awgee" date=1258535994] It is a fallacy to think that the government can somehow make up for losses and debt incurred by subsidizing, bailing, tax crediting, monetizing, or any other ing. </blockquote>


Absolutely, but this is the price all taxpayers will pay for the failure of the 30 year experiment in handcuffing the regulators! After all, that?s the first step while

moving to a smaller, less restricted, and more Libertarian government.



Maybe the Austrians are right. Show me somewhere it works.
 
[quote author="no_vaseline" date=1258540395][quote author="awgee" date=1258535994] It is a fallacy to think that the government can somehow make up for losses and debt incurred by subsidizing, bailing, tax crediting, monetizing, or any other ing. </blockquote>


Absolutely, but this is the price all taxpayers will pay for the failure of the 30 year experiment in handcuffing the regulators! After all, that?s the first step while

moving to a smaller, less restricted, and more Libertarian government.



Maybe the Austrians are right. Show me somewhere it works.</blockquote>


I'll show you somewhere keynesianism doesn't work - right here!



We successfully deregulated risky companies out of business but unfortunately they are still here because that was the "least worse option"



We have "least worse optioned" our way into this with successively larger booms to the point of being hopelessly dependent on "least worse options"



Booms and busts are shorter and lesser in magnitude when there is less manipulation, why? business people are smart, nimble, and don't like to lose money. Deregulation is the scapegoat when in reality, it is a cleansing tool. Regulation is a false sense of security. SEC checked madoff how many times? "Well boys everything looks good!"



Company defrauds people? out of business. Company loses on risky bets? out of business. Investors lose. It's that simple. The alternative is the "least worse option", which in reality is a big cop out, where future generations and an entire country loses in the long run.
 
No_vas,



A true self-interested politician would NEVER yield to the Austrian model. The Austrian model strips the government's ability to grow power.



They however, will masquerade under the guise of Austrian principles just to ensure the mob doesn't catch on.
 
While we're on it, somebody show me where Keynes showed where this was okay.



<a href="http://www.calculatedriskblog.com/2009/11/failure-of-regulatory-oversight.html">From Calculated Risk:</a>



<blockquote>At bank after bank, the examiners are discovering that state and federal regulators knew lenders were engaging in hazardous business practices but failed to act until it was too late. At Haven Trust, for instance, regulators raised alarms about lax lending standards, poor risk controls and a buildup of potentially dangerous loans to the boom-and-bust building industry. Despite the warnings ? made as far back as 2002 ? neither the bank?s management nor the regulators took action. Similar stories played out at small and midsize lenders from Maryland to California. </blockquote>


This isn't an Austrian vs Keynes problem! Regulation is big government! Big government is always the problem untill it's the solution.
 
[quote author="no_vaseline" date=1258633317]While we're on it, somebody show me where Keynes showed where this was okay.



<a href="http://www.calculatedriskblog.com/2009/11/failure-of-regulatory-oversight.html">From Calculated Risk:</a>



<blockquote>At bank after bank, the examiners are discovering that state and federal regulators knew lenders were engaging in hazardous business practices but failed to act until it was too late. At Haven Trust, for instance, regulators raised alarms about lax lending standards, poor risk controls and a buildup of potentially dangerous loans to the boom-and-bust building industry. Despite the warnings ? made as far back as 2002 ? neither the bank?s management nor the regulators took action. Similar stories played out at small and midsize lenders from Maryland to California. </blockquote>


This isn't an Austrian vs Keynes problem! Regulation is big government! Big government is always the problem untill it's the solution.</blockquote>


The solution is to let them fail, to hold the staff accountable, to sue them into the poor house and auction off every asset until the depositors are made whole... or as close as possible... and then let the FDIC make up the difference. No one is being held responsible for bad investments, bad loans, or bad policies so it's hard to blame a specific school of economics or political philosophy when neither one are completely implemented or completely in control.
 
The problem regulation is the bill Congress passed in 1913 initiating the Federal Reserve. The current mess is a failure of central planning and the socialists will not acknowledge this failure. Instead they will blame capitalism and insist that more regulation is needed. Socialists misidentify the cause of the problems they create. Remember "Animal Farm"?
 
[quote author="BondTrader" date=1258691551]<strong>In summry, we are breaking record on every single foreclosure measure%</strong></blockquote>
Yes, but the bottom is in and the economy is recovering.
 
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