Econ 2009

[Fusion_power]

I'm going to start out recommending reading the wiki on inflation at:
http://en.wikipedia.org/wiki/Inflation

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services; consequently, inflation is also an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.

Currently, the quantity theory of money is widely accepted as an accurate model of inflation in the long run. Consequently, there is now broad agreement among economists that in the long run, the inflation rate is essentially dependent on the growth rate of money supply. However, in the short and medium term inflation may be affected by supply and demand pressures in the economy, and influenced by the relative elasticity of wages, prices and interest rates.[25] The question of whether the short-term effects last long enough to be important is the central topic of debate between monetarist and Keynesian economists. In monetarism prices and wages adjust quickly enough to make other factors merely marginal behavior on a general trend-line. In the Keynesian view, prices and wages adjust at different rates, and these differences have enough effects on real output to be "long term" in the view of people in an economy.

Now lets talk about money supply. What has happened to the U.S. money supply over the last 2 years is an unbelievable growth via injections of money into the stream to support the various bailout programs. Most of that excess printing of money results in dollars going overseas. The increase in money supply directly causes a decline in the value of the dollar vs other world currencies. The end result is that imported goods rise significantly in price over time. The Euro for example has almost doubled against the dollar since the Euro first came into usage with formation of the EU and acceptance of the common currency. So why aren't we seeing an increase in domestic prices? Well, it is because domestic inflation is lagging behind the foreign markets. What happens when inflation finally catches up in the domestic market? Do you remember paying $4.50 for a gallon of gas? The result WILL BE felt but may take a few more months to filter into the economy.

How does a government control inflation? Money supply is the single most important means of controlling inflation. Print more money, inflation jumps. Retrieve money and take it out of the economy and inflation retreats. But in a large economy like the U.S. removing money from the economy is not feasible. So what to do? Well years ago, Paul Volcker figured out that if he manipulated the core interest rate an interesting effect would occur. Raise the interest rate and an artificial restriction is placed on internal money supply without actually reducing the amount of money in the economy and MUCH MORE IMPORTANT, the resulting high interest rates paid on deposits would trigger foreign currencies to invest in dollar based accounts which had a net effect of spreading U.S. currency around the world effectively reducing the amount of money in the U.S. and creating a much stronger inflation reducing effect. This allowed the U.S. to grow the supply of dollars over a 30 year period while curbing inflation using interest rates.

Now we get to a major problem. Over the last 2 years, dollars have been pumped into the economy in unprecedented volume. It is no longer a matter of slow growth in money supply, this is a bulk injection to the tune of about 4 trillion dollars or approximately 10% of the pre-2007 money supply. The fed's hands are tied because they have to keep the interest rate low to stave off the ongoing depression and they have to keep the money supply growing to pump up the economy and at the same time, they need to restrict the money supply to keep inflation under control. These conflicting goals translate into a 'so what' attitude toward inflation. It is NOT the most important problem at this time so it gets short shrift in the grand scheme of fiscal policy. But like Jack the Ripper, inflation is lurking just around the corner waiting to clobber the buying power of the average U.S. citizen and at the same time driving away foreign investors who are not about to lend us money at a negative effective rate of return.

You can sum it up by saying that everything is going to get a LOT more expensive over the next few years and imported goods will lead the way.

DarJones - who is thinking of moving to Canada because their currency is increasing against the dollar.

[ewmayer]

Originally Posted by Fusion_power

I'm going to start out recommending reading the wiki on inflation at:
http://en.wikipedia.org/wiki/Inflation

An interesting followup might be to contrast your (and/or the popular) definition(s) of inflation with Mish's credit-based one. A comment on the difference between the concepts of money *supply* and money *velocity* would also be useful.

DarJones - who is thinking of moving to Canada because their currency is increasing against the dollar.

But before you sink your remaining savings into that Vancouver condo, you may want to check out Mish on the Canada debt crisis and property bubble.

[Fusion_power]

Ewmayer, I can't move to Australia, those people hang on the world upside down!

While I agree with Mish's overall take on credit based inflation, I have to point out that the expansion of credit was primarily in the last 10 years up to 2007. the expansion that is taking place today is in the core money supply of U.S. dollars. The difference is like going from kerosene to hydrazine hydrate rocket fuel on the economy and inflation (measured as price rise of goods) in particular.

DarJones

[jasonp]

Originally Posted by ewmayer

Your 401k or IRA has near-absolute protection in a personal bankruptcy. As a qualified retirement plan it cannot be seized by creditors if you file a Chapter 7 or Chapter 13.

The amount of retirement funds you have that is protected from creditors varies a great deal by state. In Maryland I think it's only a few thousand dollars, in other states there's no limit.

Likewise, some states protect your house from creditors, others do not at all, and still others limit the amount of house value that is protected (I believe Maryland is in the last category).

Blanket statements like the above should not be taken without some due diligence.

Regarding inflation, remember that Japan has been injecting money for twenty years and has barely seen any inflation.

[ewmayer]

Originally Posted by jasonp

Regarding inflation, remember that Japan has been injecting money for twenty years and has barely seen any inflation.

...Except in their sovereign debt, which has mushroomed. I would say that assuming that rampant money-printing invariably leads to hyperinflation is too simplistic ... more generally it will lead to a currency crisis of one kind or another, with a time lag that depends greatly on how low the government can keep its borrowing costs. Japan was able to keep its borrowing costs near zero by drawing on the once-tremendous pool of domestic savings, but with debt-to-GDP currently rocketing past 200% and domestic savings rates close to zero the endgame for the Yen is nigh - I estimate sometime in the next 5 years the crisis will hit.

For the U.S. the equation is somewhat different - we've had to borrow much more from abroad, but the dollar's reserve currency status has allowed the government to keep borrowing rates relatively low, especially since in times of financial crisis the dollar has historically (and increasingly paradoxically) been seen as a safe haven. It's not clear to me whether we'll have a sudden sharp currency crisis or an ongoing bleed in the dollar, such as has been fueling the recent stock market "rally" and dollar carry trade - those are where the excess liquidity are going, and inflation (so far) has manifested itself - by way of dollar devaluation - in rising oil and commodity prices.

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

State and Local Tax Revenues Continue to Plunge

Via the Rockefeller Institute of Government, an independent research firm focusing on state and local governments, we get some nasty data and fugly charts.

The overview paints a picture of state and local governments in economic distress:

• State tax collections for the second quarter of 2009 showed a record drop of 16.6%, the second consecutive quarter in which revenues fell more sharply than during any previous time on record.

• Forty-nine states saw total tax revenue fall during the quarter,
with 36 states reporting double-digit declines. Both those numbers were up from the first quarter of this year.

• For the year ending in June 2009, the period corresponding to most states’ fiscal years, total state tax collections declined by $63 billion or 8.2% from the previous year. That loss is also a record, and is roughly twice the amount states gained during the year in fiscal relief from the federal stimulus package.

• Preliminary figures for July and August for 36 early-reporting states show continued deterioration, with overall tax collections dropping 8%. Early indications of September income tax payments provide further evidence of more troubling news for states during the third quarter of 2009.

• Local tax revenue declined by 2.8% in nominal terms and 4.2% in real terms, marking the first such decline since 2003.

My Comment: Check out the "state income tax" data in the first of the two accompanying charts in Barry`s blog posting - a truly truly appalling plunge going on there. Barry also has a followup showing changes in retail slaes and state tax revenues for the most-recent 5 U.S. recessions - it is clear from those charts that the current downturn is unprecedented among the ones in this 40-year sample. Interestingly the 1980 recession had roughly the same percentage decline in retail sales at its low point as the current one does at present, but took longer to reach this nadir, probably because consumers were far less overleveraged going in. (And the current one may yet go lower still, despite the pulled-forward demand from the government cash-for-clunkers and new-homebuyer subsidies). also interesting is that in the 2001 recession, consumer spending continued to increase, probably as as result of Greenspan`s massive credit easing and liquidity pump. This sowed the seeds for the current and much-nastier downturn.

But despite the very clear writing on the wall, many state legislatures are still dithering while their budgets burn.

[Fusion_power]

Lets examine some of the overwhelming issues facing us in today's economy.

1. U.S. debt has ballooned.
2. The majority of pension plans are underfunded.
3. Various fiscal policy effects are triggering inflation especially for imported goods.
4. Real estate values are still dropping - in spite of news to the contrary.
5. The consumer debt burden is at an unmanageable level.
6. The economy is still borderline on a depression.
7. The major U.S. automakers are still in dire straits - Ford's recent profit notwithstanding.
8. Consumer spending has not just slowed, it has withered on the vine.
9. Unemployment is at an adjusted 20% plus level.
10. Cheap energy supplies are in trouble on a slightly longer time horizon.

Now extrapolate the effects of the above. Government is not going to get smaller, but it will become more expensive. National debt levels will continue to rise. Inflation will creep in reducing effective buying power. Lack of jobs will crimp state and local budgets to the point of collapse of many local governing bodies. Saving money will become a pointless exercise since inflation will eat it up and besides, who will have any extra to save in the first place.

DarJones

[ewmayer]

Originally Posted by Fusion_power

Lets examine some of the overwhelming issues facing us in today's economy.

1. U.S. debt has ballooned.
2. The majority of pension plans are underfunded.
3. Various fiscal policy effects are triggering inflation especially for imported goods.
4. Real estate values are still dropping - in spite of news to the contrary.
5. The consumer debt burden is at an unmanageable level.
6. The economy is still borderline on a depression.
7. The major U.S. automakers are still in dire straits - Ford's recent profit notwithstanding.
8. Consumer spending has not just slowed, it has withered on the vine.
9. Unemployment is at an adjusted 20% plus level.
10. Cheap energy supplies are in trouble on a slightly longer time horizon.

Now extrapolate the effects of the above. Government is not going to get smaller, but it will become more expensive. National debt levels will continue to rise. Inflation will creep in reducing effective buying power. Lack of jobs will crimp state and local budgets to the point of collapse of many local governing bodies. Saving money will become a pointless exercise since inflation will eat it up and besides, who will have any extra to save in the first place.

DarJones

Damn, Fusion, you're just a bundle of economic optimism today. ;)

Mish notes today that the U.S. has plenty of company in its reckless deficit spending ... Japan's new ruling party has committed to increasing public spending even more (one of the comments in that snippet echoes my "fiscal crisis in the next 5 years" prediction), UK is following America's lead in terms of money-printing, most of the Eurozone is going to flagrantly violate the zone's rule of debt-no-more-than-3%-of-GDP this year. Even traditionally debt-averse Germany has succumbed. Sheer madness.

I saw a C-SPAN broadcast last night of a congressional committee hearing on the U.S. federal debt ... one of the numbers that got mentioned during that is that U.S. unfunded liabilities will increase by a whopping $4 Trillion this year, from $56T to $60T, which is over 4x GDP, even allowing the government's optimistic GDP figures, which include this year's current-account deficit (of around $1.5T) as part of the GDP. None of the committee members said so much, but I expect most deep down must have realized "this is simply unpayable". Massive currency debasement or sovereign default: pick your poison. Either will involve a significant hit to America's debt-sponsored artificially high standard of living, and quite possibly signal the end of U.s. global economic (and political) dominance. "The American Century" would appear to be over. The 16th-century Spanish, 17th-century French and 18th-century British probable all thought it equally unthinkable that their respect empires would someday come to an end, and that they would yet by dint of [Spanish | French | English] ingenuity and [Spanish | French | English] fortitude and [Spanish | French | English] love of country be able to fix things.

[garo]

Via Barry Ritholtz:

THE LLOYD’s Prayer

Our Chairman,
Who Art At Goldman,
Blankfein Be Thy Name.
The Rally’s Come. God’s Work Be Done
On Earth As There’s No Fear Of Correction.
Give Us This Day Our Daily Gains,
And Bankrupt Our Competitors
As You Taught Lehman and Bear Their Lessons.
And Bring Us Not Under Indictment.
For Thine Is The Treasury,
The House And The Senate
Forever and Ever.
Goldman.

[garo]

http://blogs.ft.com/maverecon/2009/1...ar-old-bubble/

Good article by Willem Buiter. Some lovely turns of phrase such as "in most of the overdeveloped world" and "So when fiscal incontinence threatens price stability"...

[ewmayer]

It appears that 3-month-long AIG CEO Robert "Jetaway Getaway" Benmosche is unhappy with the curbs being proposed for executive compensation at firms being propped up by the U.S. government, and may step down. Terrible as the loss of Mr. Benmosche would be for truth, justice and the American way - he knows *all* the best vacation villas along the Dalmatian coast - it appears AIG may find itself searching for a new head soon. In that vein, Mish quotes reader "Tin Hat"`s suggestion for a sample cover letter for would-be CEO candidates:

Dear AIG,

I am highly qualified for the position of AIG Chief Executive given that I possess all the skills necessary to lay waste of what's left of AIG.

I have no conscience, guilt or remorse. I am able to extort money from taxpayers and Congress by convincing them I do God's work. I am very skilled at making numbers fuzzier, covering up losses and generating bonuses so large even a blank check would blush. I have no concern for leverage, torch bearing mobs, Congress or President Obama.

I'm convinced that together, we can squeeze the middle class so successfully, they would be envious of the Haitian life style. I am looking forward to discussing this personally profitable opportunity with you soon.

Sincerely

AIG Candidate

[Mish] Clearly that is an extremely powerful cover letter. It is tailored specifically to AIG and lists all the skills required to run any large financial corporation these days.

The only thing lacking is a connection to Goldman Sachs or Tim Geithner. That could be a problem. Otherwise it is perfect. Also note how easy that sample cover letter would be to modify. A few simple changes and the cover letter would be entirely suitable for would be seekers of CEO or board member at Bank of America.

"Tin Hat" and I are both proud to do our part to help out in these trying times. Would be CEOs, all you need to do on your part is to get your cover letters in order.

Let's get America hiring again, the right talent for the right job. It all starts with an appropriate cover letter attached to your résumé.

My Comment: Besides name-dropping any connections you have with Goldman, it might not hurt to mention that by heading a TBTF financial firm, you will be doing God's work. (Yes, Goldman CEO Lloyd Blankfein really did say that recently).


A ZeroHedge reader comments on the New York Times` altogether-too-gushy treatment (another ZH reader describes the specific article in question as "textual fellatio") of their local patrons in Big Finance:

As I finish up Andrew Ross Sorkin's book, "Too Big To Fail", and read the article above linked....I can't help but wonder how much the commission offered to them to pen these fluffs was. A book about the largest scams in history that produces little in the way of an antagonist(s) and paints most as heroes doing Patriotic dealing to save us....yikes.

One of the most nauseating moments (of many) of Sorkin's book comes as TaxEvading Timmy [Geithner] was set to take a morning jog along the East River after a hellish weekend of commandeering taxpayers money to give to AIG. Young Timmy gazes out at the morning commuters wondering if he has done the right thing. Seeing us, the unwashed non-financial masses, he thinks "it is about them", "Never mind the staggering numbers. Never mind the ruthless complexity of structured finance and derivatives, nor the million-dollar bonuses of those who made bad bets. This is what saving the financial industry is really about...protecting ordinary people with ordinary jobs". page 409.

No need for Syrup of Ipecac after a dose of that.

China’s Liu Says U.S. Rates Cause Dollar Speculation: The decline of the dollar and decisions in the U.S. not to raise interest rates have caused “huge” speculation in foreign exchange trading and seriously affected global asset prices, said Liu Mingkang, chairman of the China Banking Regulatory Commission.

His view echoes that of Donald Tsang, the chief executive of Hong Kong, who said the Federal Reserve’s policy of keeping interest rates near zero is fueling a wave of speculative capital that may cause the next global crisis.

“I’m scared and leaders should look out,” Tsang said in Singapore Nov. 13. “America is doing exactly what Japan did last time,” he said, adding that Japan’s zero interest rate policy contributed to the 1997 Asian financial crisis and U.S. mortgage meltdown.

My Comment: There is no doubt the Chinese understand that what the U.S. is trying to do - address the consequences of the collapse of one debt-fueled bubble by blowing another - in in all likelihood doomed to fail; during Obama`s visit to Asia over the past week the Chinese had a lot of questions about things like the administration`s health care initiative - not about the legislative details, only about the likely effects on the U.S. federal debt. The problem for the Chinese (and other major holders of IOUSAs) is that they are in effect trapped - while they can shift some modest percentage of their holdings out of U.S. treasuries without devaluing the rest and causing bond yields to spike (which would crash the alleged economic recovery and hammer their own already-hurting export economies even more), they`re effectively stuck with most of them, which means watching their $2T holdings steadily bleed as the U.S. devalues the dollar, despite the lies folks like Geithner repeatedly tell about "being committed to a strong dollar". Of course the Chinese are busy blowing their own economic-bailout credit bubble, but aren't borrowing from abroad to do so.

[Fusion_power]

You only left out one detail Ernst. You forgot to mention the effect on the average person in America of devaluing the dollar. You get paid the same or less but everything costs more to buy and oh, by the way, we are going to turn any savings you have into so much worthless paper.

Inflation is here folks. China has reason to be concerned.

DarJones