Deflation,
Inflation, Politics and Insanity Stewed to Perfection.
Revised
and orginally published 1.15. 2010
Abstract: Half the
economists and most of the government leaders do not know what they are doing.
They tempt fate with higher and higher debt ratios to their GDPs. Most are
divided as to the answer to the essential question whether we are in deflation
or heading for inflation. Their analytical tools are either rusty or their
economic vision is blurred by politics. Whatever the theories or politics we
are clearly entering some new arena of massive world debt.
We
might presume, given the mountain of books and theories of economics, the queen of the social sciences[1],
that some general consensus of how to handle government spending, unemployment
and its concomitant debt and the effect on the value of currencies of the world
might be readily found and shown, when appropriate, to political leaders and
bankers in words of few syllables. We
might further presume that they would pay attention to the laws of economics,
if they are known with any certainty[2],
and adjust their policies accordingly. These presumptions are faulty at best.
Those who ‘study’ the grand science of economics and finance can agree on
little and much of this posturing appears to be based on the salient fact that
they are thinking backward from their political indoctrinations thus their
conclusions derived from objectively perusing the data and arriving at a sound
conclusion are phony if not fraudulent.
They
cannot decide if we are deflating or inflating at this point in the economic space-time
continuum. This appears to be as comical as the hypothetical case where some
new NFL team is created with pomp and circumstance, the stadium built and
adorned, the cheerleaders selected by acclaim for their many desirable
attributes and then the process is stalled for wondering why the ball is not
round.
The
quest for capital is essential to business and we may question the role of
government and the now hollow zombie banks in their ability or desire to ‘make
loans’ to business given the entanglements and interference from Congress.
Many,
like Mr. Evans-Pritchard’s of the Telegraph believe, and have demonstrated
quite convincingly, that we are in a downward debt-driven deflationary spiral.[3]
Others like David
Galland think we are heading for massive inflation and disagree.[4]
This is not possible simultaneously, but deflation could transition to
inflation very quickly.
At
the expense of being accused of seeking a reasonable and unexpectedly valid
source of information on this dilemma, we might look at the markets, relying on
such obtuse capitalism notions as the once-sufficient law of supply and demand,
for a quick view:
Surprisingly,
the junk bonds have done well raising some 163 billions and “Junk bonds returned 31 percentage points more than the
Standard & Poor’s 500 Index’s 26.5 percent in 2009.”[5]
So, junk
bonds of the CCC [high risk
rating] type are selling well and have good returns.
Paul
Krugman guessed wrong on this one[6] and predicted a bubble, but recall
that junk bonds have little or no government inference or oversight and thus offer
a degree of freedom beyond the clutches of the Marxists and their lackeys. Krugman
is a liberal political activist who only advocates taxation and bigger spending
by bigger and bigger government without exception.[7] Rogoff thinks this form of finance might
trigger an asset bubble due to the short terms on the bonds and the upward
pressure on the assets.[8] It is interesting that our government
is doing the same thing with its short term Treasury sales [30 day T-bills at
zero %] and frantic attempts to make up for the lost fraction of the GDP this recession has brought. Apparently, our government believes that if
wealth is lost, as in the housing bubble and the credit contraction aftermath,
with more to come, they can just print money and use that to subsidize lost home
equity with the intent of reproviding ‘affordable housing’ for the poor so we can all be ‘equal.’[9] Didn’t this result in a housing asset
bubble? Spending all of what we have and then borrowing from the future is the
preferred way in California
Getting
back to market thinking, Bill Gross of PIMCO now cautions us that the
government’s ‘sugar daddy’ performance in buying 1.25 trillions in mortgage
goodies must [or will] halt and thus a
vacuum may exist.[13] Maybe deadbeat homeowners can issue
their own junk bonds. The leftists cannot force themselves to cope with the
bond markets even after a few centuries of examination and fitful moaning.[14] Bonds are the major financing arm of
governments and have been for 5 centuries. Gold is soaring for what reason?[15] CCC
rated junk bonds return almost 9% now while AAA treasuries are still near zero
coupon. The corporations could borrow from banks that get federal funds at zero
% for 3-5 % or a smidgeon higher and are not doing so. Why is this? They must pay 8-12% on junk
issues. The reason is not clear, at least to me, as the banks may be hoarding
cash and lending only to AA rated borrowers and that leaves out many if not
most small businesses. If true, the smaller players in this game have no other
options for raising capital other than selling their own equities or bonds.
Markets usually open doors to the path of least resistance like water seeks the
lowest possible level and big banks with government chains wrapped tightly
around them may deliberately lock out the little guys. Tax breaks go to unions
and just about everybody else except small business and this is
probably by design. Government can
control and steer big business as they did with GM, Citi, BoA[16], AIG
and Chrysler employing their apparent Socialist-Neo-Fascist blend of governmental[17]mechanisms, but cannot do the same for
lesser business entities. Scarce capital may be the result of lending
institutions being forced to favor green projects otherwise known as EcoNazism.[18][19] California Spain
Thus, we
wonder if we have missed any outer barrier warning markers in this quest for
financial oblivion we are heading into based on debt. An article in the Irish Times peruses the
views and options of bonds, debt and gold and is highly authoritative and
soberly inquisitive in my view.[20] Some think we are entering into the
second phase of our second great depression.[21]
We need
to revisit the 1937 theories again and ponder some of this:
The Deflation fundamentals from Irving Fisher:
“Following the stock market crash of 1929 and
the ensuing Great Depression, Fisher developed a theory
called debt-deflation.
According to the debt deflation theory, a sequence of effects of the debt
bubble bursting occurs:”[22]
1.
Debt
liquidation and distress selling.
2.
Contraction
of the money supply as bank loans are paid off.
3.
A fall in
the level of asset prices.
4.
A still
greater fall in the net worth of businesses, precipitating bankruptcies.
5.
A fall in
profits.
6.
A reduction
in output, in trade and in employment.
7.
Pessimism
and loss of confidence.
8.
Hoarding of
money.
9. A fall in nominal interest rates and a rise in
deflation adjusted interest rates
How many
of these parameters do we now fulfill in the U.S.
So, instead of cutting jobs and spending
and trending toward austerity, the PIGS and others are going to borrow their
way out of debt like California
rycK
Comments
to: ryckki@gmail.com
[2] This
Time is Different: Eight Centuries of Financial Folly. By Reinhart and
Rogoff. Here is a link to a transcript of an interview. http://financialnewsexpress.blogspot.com/2009/11/rogoff-and-reinharts-research_03.html
Arrogance,
Ignorance Recurring in Economic History: Paul Solman speaks with economists
Carmen Reinhart and Ken Rogoff about the financial crisis and how it compares
to previous economic meltdowns http://www.pbs.org/newshour/bb/business/july-dec09/makingsense_11-02.html
[3] Protectionist dominoes
are beginning to tumble across the world The riots have begun. Civil protest is
breaking out in cities across Russia China
And
my comments:
Protectionism:
The World Economies Circle Their Wagons
[4] “While I very much share Mr. Evans-Pritchard’s view that the global
economy is far from out of the woods, our views diverge in that he sees
devastating deflation speeding our way down the tunnel. Casey Research readers
of any duration know that we see devastating inflation.
While we could both be
right, with deflation first and inflation later, I’m not so convinced.” What the Deflationists
Are Missing By David
Galland, 13 January 2010-- http://news.goldseek.com/GoldSeek/1263409566.php
[5] http://www.businessweek.com/news/2010-01-14/junk-bonds-defy-krugman-s-bubble-warning-as-loomis-sees-gains.html
[7] Krugman Exhausts His
Vocabulary by Monotonously Reciting the
Only Two Words He Understands In Economics: Tax And Spend. Let’s Tax the
Stock Markets!!
[8] Low rates may “for sure” create an asset bubble in the
junk-bond market, said Kenneth Rogoff, a Harvard University
“After losing 26.4 percent in 2008, junk
bonds had record returns last year, according to the Merrill Lynch U.S. High
Yield Master II index, as the Federal Reserve and government agencies lent,
spent or guaranteed $8.2 trillion to lift the economy from the worst recession
since the Great Depression.
Junk bonds returned 31
percentage points more than the Standard & Poor’s 500 Index’s 26.5 percent
in 2009. The gap exceeded the previous record of 20.2 percentage points in
2002, Merrill Lynch index data show.
Companies
raised a record $162.6 billion from U.S.
[9] The Futile Attempt of
Forcing Equality Among the Masses.
[10] The Road to Social
Success, Peace and Justice: California
[11] As Predicted: California
[12] Copulating
with Coprolites: The Unveiled Mechanism of Governance by Progressive Liberalism
in California
[14] Read Ascent
of Money
by Niall Ferguson.
[16] Bank of America
[17] Our Economy is
Collapsing. The Liberals will Now Institute Some Kind of Neo- Fascism or
Socialism or Some New Blend to Maintain Power.
[18] 300 Years of British
Inbreeding Brings us Flop Ears the EcoNazi
Prophet of Doom
[19] Reprinted from a
previous blog: The Dollar Sags in Full View of the World This Invites a Run on
the Dollar. Inflation Threatens US.
[20] The
Irish Times - Friday,
January 15, 2010 http://www.irishtimes.com/newspaper/finance/2010/0115/1224262375920.html
[21] Krugman Calls for More
Stimulus. What Else is New?? More Debt and Bigger Government and a Bigger
Depression!
No comments:
Post a Comment