Posted on 04/20/2005 6:17:46 AM PDT by Alex Marko
So - what to invest in?
Am I the only one here that is aware that we do not have 20 inflation and 15 percent unemployment? Ok, maybe we agree that it's not quite that bad, but for me to believe that it will be that bad say, by 2:00pm today, is going to take more proof than simply taking Dan Rather, Jason Blair, and Economist's word for it.
Looks like the alarmists have come up for air.
We learned our lessons of the 70's and early 80's and have been very successful at controlling inflation since. GDP growth of 4.4% in 2004 and projected 3.3% growth in 2005, thanks to the 2003 tax cuts, make our current situation nothing like what occurred in the 1970's. Stagflation will require a lot more gloom to create than what we are now experiencing.
Our current problems are more about policy than economics. Government gridlock has stalled Social Security reform, energy policy and making Bush's tax cuts permanent. Sarbanes-Oxley has had an unintended negative impact on business activity and the threat of tariffs and a subsequent trade war with China is also weighing on the economy.
I think the EIU may be mistaking deceleration and decline.
The Bernanke Electric Mayhem Money Printing Machine and all its ramifications is the unseen hand behind the PPI. This is not anything that can be called transitory or irrelevant because of violent price movements such as oil. In a nutshell, it is the hidden hand of monetary liquidity that was introduced unconventionally into the marketplace and can not be recovered.
This brand of monetary liquidity was created out of thin air and seemingly fell like manna from the heavens. It poured into the world monetary system with the speed of bank wires from Japan to the New York Federal Reserve as the former intervened in the international currency markets. This is the electronic character of Bernanke’s money printing press.
The mechanics of this type of international monetary liquidity was produced by the purchase of US Treasury instruments all across the maturity spectrum by the New York Fed as soon as each bank wire was received from the Bank of Japan. This liquidity blast was mechanically produced by the management of the Japanese Float account, namely the New York Federal Reserve.
The New York Federal Reserve Bank then bought US Treasury instruments in a 24 hour operation as fast as dollars were produced by the Japanese intervention in the marketplace to maintain an artificial level of the Yen in international markets.
This non-traditional method of expanding international monetary liquidity CANNOT BE DRAINED from the system because you can buy huge amounts of US Treasuries which you can not sell without cremating the bond market. This is true because bonds are always being produced so the supply is theoretically unlimited but demand is not.
This colossal injection of the largest amount of international monetary liquidity that has ever occurred in the shortest period of time is the UNSEEN HAND that will drive inflation up as the US economy rolls over and moves sideways at a high level.
The reason the US economy will not crater is the fiscal stimulation caused by two wars and the monetary stimulation that was created by the above mentioned non-traditional methods.
Corporate profits will, however, crater because costs are going up, money costs more and productivity is headed lower, with consumers less optimistic due to the increased cost of everything including gas.
The decline in corporate and personal tax revenues, with no meaningful decline in expenses, will drive the US Federal budget much higher. The increased size of the US Federal Budget Deficit will cause the US Current Account to rise, making it larger as a percent of GDP. This is how it is factored into dollar valuation.
Sounds like everything is pretty good but the pessimistic disclaimer is for CYA purposes.
I agree that the government is measuring the wrong things and that those erroneous, perhaps partial is a better term, figures are often used for decision making purposes. Even if the smart investors don't follow those figures the figures still serve to affect consumer and investor confidence.
Your description of the unemployment numbers is especially important but I don't know how we could do it correctly. You could take an inventory of the want ads and employment services' available positions but that has considerable overlap and still doesn't cover those jobs and applicants who are listed in neither.
The government inflation figures are, as you say, near worthless because of what they exclude. That can be corrected. I don't know why it is not, unless they consider those prices to be too volatile. I suspect you do know. What is the reason?
The New York Federal Reserve Bank then bought US Treasury instruments in a 24 hour operation as fast as dollars were produced by the Japanese intervention in the marketplace to maintain an artificial level of the Yen in international markets.
This non-traditional method of expanding international monetary liquidity CANNOT BE DRAINED from the system because you can buy huge amounts of US Treasuries which you can not sell without cremating the bond market. This is true because bonds are always being produced so the supply is theoretically unlimited but demand is not.
This colossal injection of the largest amount of international monetary liquidity that has ever occurred in the shortest period of time is the UNSEEN HAND that will drive inflation up as the US economy rolls over and moves sideways at a high level.
Any factual reference source for these statements? And when did these events occur?
Really, all the IRS has to do is look at relative job numbers and change of income.
Look at the TIC reports for the last three years.
break the chinese currency peg, and many of these problems will be solved.
You can also go back and look at Bernanke's past statements. When he said three years ago they can use "non-traditional methods", what did you think he was talking about?
A great deal of present dollar strength was in the unwinding of down under carry trades and short covering. Both of these only impact the USD for short periods of time. Then there is the clear desire on the part of many central banks to hedge short the USD against their long US treasury instrument positions. What you can't sell, you can hedge.
Add to that a float of the Chinese currency and China is relieved of having to buy US dollars to prevent the upward movement of its currency. This is clearly dollar negative as well as disastrously TIC negative.
Under Carter there was inflation, no growth, high oil prices, tec. Bush has two tools that Carter didn't have though. Taxes and interest rates are low. Both could be raised to extend the down time.
we have this discussion on many threads - I always tell people who scream that if we do anything about china, prices of chinese goods will rise - they will, but how much of your monthly budget is spent on that stuff? if a shirt rises from $10 to $13, how many are you buying in any case? how many DVD players are you buying? in the meantime, most of my monthly budget goes to housing, taxes, energy, food, consumer non-durables, insurance, transportation, services (cell phone, cable TV), and entertainment (restaurants, etc).
if the chinese currency floats, they will have to do exactly what japan does today if they want to preserve their export ability. I am missing your point.
Comment by Paul Volcker,
On the present trajectory, the deficits and imbalances will increase. At some point, the sense of confidence in capital markets that today so benignly supports the flow of funds to the United States and the growing world economy could fade. Then some event, or combination of events, could come along to disturb markets, with damaging volatility in both exchange markets and interest rates. We had a taste of that in the stagflation of the 1970s -- a volatile and depressed dollar, inflationary pressures, a sudden increase in interest rates and a couple of big recessions.
http://www.washingtonpost.com/wp-dyn/articles/A38725-2005Apr8.html
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