I just read a very good article in Bloomberg about Bernanke's conundrum, i.e. rising long-term rates even as short rates are kept near zero. I particularly liked this comment by Mark MacQueen of Sage Advisory Services: “You can’t have it both ways. You can’t say I’m going to stimulate my way out of this problem with trillions of dollars in borrowing and keep rates low by buying through the other. I don’t think that is perceived by anyone as sound policy.”
Yield On 10-Year Treasurys (Chart: Bloomberg)Very simple and very common sense, indeed. But since the Fed and Treasury can't have it both ways, what's the way out?
I understand (but do not applaud) the current monetary bailout reaction, based as it is on America's deeply ingrained Great Depression phobia. Countless economists and Wall Streeters have spent their professional lifetimes studying and war-gaming the 1930's - Mr. Bernanke most of all. Nevertheless, they are completely and totally, knee-jerk wrong; throwing out more money (i.e. debt) will not resolve a problem that was created by too much debt, in the first place. As this blog's masthead proclaimed a while ago: "We hold this truth to be self-evident: You cannot solve a debt problem by issuing more debt".
Board of Governors Monetary Base (Chart: FRB St. Louis)Like other shortsighted generals in history, our monetary generals are fighting the previous war - furiously building static Maginot lines whilst Guderian is warming up his highly mobile panzers.
Therefore, I strongly recommend that instead of engineering a massive explosion of money supply through quantitative easing, the US should regulate it very tightly. I have proposed The Greenback, i.e. benchmarking money supply on the growth of renewable energy. This scheme will most likely lead to significantly higher short-term rates, at least initially. But, is this so bad? I think not.
For one, higher short rates will promote domestic savings, sorely needed in a period of massive budget deficits and the urgent requirement to invest huge sums in sustainable energy*. For another, such a policy will immediately restore confidence in the dollar and our commitment to service our debt. It is likely, thus, that long rates will drop.
Let's recap: our current expansionary monetary policy is completely at odds with present and future requirements in the real economy, which is challenged by a combination of too much debt, fewer and lower-paying jobs, resource depletion and environmental destruction.
The bond market, those ever-present bond vigilantes, is already warning us that we have got to bring monetary policy in line with reality soon, as opposed to sleep-walking in a rosy dream state.
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*Of course, I take it for granted that the borrow-consume-inflate assets Permagrowth economic model is completely and utterly defunct, de facto.
For one, higher short rates will promote domestic savings, sorely needed in a period of massive budget deficits and the urgent requirement to invest huge sums in sustainable energy*. For another, such a policy will immediately restore confidence in the dollar and our commitment to service our debt. It is likely, thus, that long rates will drop.
Let's recap: our current expansionary monetary policy is completely at odds with present and future requirements in the real economy, which is challenged by a combination of too much debt, fewer and lower-paying jobs, resource depletion and environmental destruction.
The bond market, those ever-present bond vigilantes, is already warning us that we have got to bring monetary policy in line with reality soon, as opposed to sleep-walking in a rosy dream state.
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*Of course, I take it for granted that the borrow-consume-inflate assets Permagrowth economic model is completely and utterly defunct, de facto.
With all this new money, you still don't see hyperinflation?
ReplyDeleteFirst, I hope that cooler heads shall eventually prevail.
ReplyDeleteBut, more importantly, hyperinflation in the Weimar model is almost impossible for the dollar for as long as it remains the de facto global currency. Putting it another way, hyperinflate the dollar against WHICH currency? The euro, the won, the yen? This is not possible, right now.
Now, if the US were to break up into 50 individual states...
Yeah, well, we can't have it both ways...
ReplyDeleteWhat is the government going to privilege ?
The financial markets, or the REAL economy ?
We really ARE down to one OR the other.
Playing Russian roulette, OR doing business ?
I know I sound like a broken record, but this is SO frustrating...
As far as the idea of the US breaking up into 50 individual states, for all intents and purposes it ALREADY HAS broken up into 50 individual states. Just as there is NOTHING federating the European Union, as the last elections show, there is NOTHING federating the united states.
The emperor has no clothes on.
Just waiting for some people to figure it out...
The raising cost of money will again depress the housing sector, and other economic sectors as well.
ReplyDelete30 years mortgages are again well over 5%. The next ARMs wave is at risk of resetting higher, sparking a second leg of mortgage defaults.
The FED can't announce a new T-bills purchase campaign without creating a commodity spike and inflation expectations.
They can't raise rates without having a spike in the T bills rates and mortgages definitely killing the housing sector.
They can only pretend economy is improving.
Yet another (probably silly) question.
ReplyDeleteDoes hyperinflation needs to be against other currencies? I am talking about goods.
I might only sell you a loaf of bread for 100 USD (irrespective of the value of other currencies), just because I don't trust (fiat) money that much anymore.
Re: Bread loaf and FX
ReplyDeleteTo answer your question..
Say that today,
1 loaf = $1 and
$1 = 1 euro
If,
1 loaf = $100
then what must happen to the dollar/euro rate?
Regards,
H.
This is not possible, right now.
ReplyDeleteIt's possible to hyper inflate USD relative to f.ex. Gold, Copper, Oil, Uranium - anything that people actually need. The other paper currencies will race the USD to the bottom - probably getting there in advance too, being smaller and lighter.
The FED just need to print that little bit harder still to convince even the stupidest (Asian, no doubt) "investors" that holding USD-assets is worse than spending those USD on "stuff we need" Today (before your neighbors get the same idea).
There is a tipping point: Once someone big eventually moves, all will have to as well because the last one out of the USD loses.
If all (western) blocks engage in the same policy of "printing money"? Which is probably a reasonable depiction of what the western world is doing now(in spite of Germany screaming against it), or not?
ReplyDeleteThis whole deflation/hyperinflation thingy is the thing that I have most difficulty in forecasting. And it is an important one, as deflation is bad but hyperinflation would be a complete catastrophe.
I would, originally, never expected deflation. I only believed it because you said so (and, during the last few years, I grow accustomed of you being correct)
Pick one.....
ReplyDeleteYou can save the oligarchs or you can save the country.
You don't have to be a rocket scientist to figure out where Larry Summers and Tim Geithner stand.
Best regards,
Econolicious
"...our current expansionary monetary policy is completely at odds with present and future requirements in the real economy..."
ReplyDeleteYou fail to understand that our monetary policy is not designed to meet the above mentioned requiremnts but rather the requirements of those who bestowed this little token of friendship on the US. See the masthead above for further clarification.
Their requirements are more debt and even more debt for war and ONLY war as debt for social programs would allow the grazing herd to pay down its own debts and that would be bad; very, very bad.
Econolicious seems to have a pretty good idea of the unstated priorities.
8 American jobs saved by GM!
ReplyDeleteWhy do we pay taxes to airlift these people to American hospitals? Let them sit on the side of the road and call the Mexican government to come get thier citizens?
SONOITA, Ariz. - Eight illegal immigrants "stacked like wood" in the back of a sports-utility vehicle were killed when the driver lost control on a remote southeastern Arizona highway, authorities said Sunday.
At least 27 men and women were in the vehicle traveling about 4 miles east of Sonoita when the vehicle rolled for an unknown reason shortly before midnight Saturday, said Officer Joy Craig of the Arizona Department of Public Safety.
"...as long as it remains the de facto global currency."
ReplyDeleteThe Gulf Cooperation Council just signed a unified currency agreement to begin in 2010; the UAE and Oman opted out for the time being but this is another brick out of the wall of "Global Reserve" currency.
It seems the overall sentiment from the comments is we are headed to hyper-inflation and I concur.
ReplyDeleteRemember, these trillions of dollars the FED has pledged is only illusory/hope that foreign investors will buy. They cannot stomach this amount of debt as most are already in dire straits.
At some point, the USD will be rejected by all only as a self-preservation mechanism by foreign governments.
Some event somewhere is going to happen and blow this whole mess out of the water. Then we go hyper and 3rd world.
Joe M.
Joe, this thread doesn't "concur" with your position. Please explain HOW the hyperinflation is going to occur.
ReplyDelete1) Hyperinflation of the U$D against what currency?
2) Inflation is a term which defines the TOTAL SUPPLY of a given currency. The overall conclusion of this site (and thread) is that DEflation is inevitable.
Please explain precisely what is offsetting the trillions (plural) of dollars that are being destroyed within the gaping maw of the deflationary monster. Not the Fed - we're barely over $1T so far, and MORE than that has already been lost.
Gratuitous rhetoric without fact might get you a job at the Fed, but not credibility on this site.
Hyperinflation only requires that the U.S. dollar is repudiated as a reserve currency. That process is well underway and will come to fruition. Having said that, all fiat currencies will be under pressure against non paper assets in due course.
ReplyDeleteThanks Edwardo, I thought I made myself clear but that was my point. Rejected by all means we lose reserve currency status.
ReplyDeleteHell made that point today in saying we must remain as reserve currency status to maintain the illusion.
Additionally, he raised his fear that he was hopeful cooler heads will prevail, they will not.
Joe M.
How?
ReplyDeleteThe dollar is a component of the currency basket being proposed by the IMF. Even IF the basket is approved, the US will still not hyperinflate.
What's the mechanism by which "loss of reserve status" leads to hyperinflation? Step by step, day by day, decision by decision.. let's see it!
Interesting article, just shows what a mess our current financial situation really is.
ReplyDeleteDiscussing hyperinflation here is refreshing. Having hell-as-ious as a host here, "sudden debt" should be a good place for discussions about hyperinflation.
ReplyDeleteI do not buy into the dollar destruction. But a significant dose of massive inflation is in the books IMHO. Bernanke will trigger what he wished for. And will regret it. And most of us even so.
There are some nasty factors. One is the complete absence of willingness to pay the owed money back via taxation and federal budget.
May I remind everyone that is exactly what triggered the Weimar debacle. The German people would not accept to pay the "Réparations" that they would not consider legimitate. The German authorities had no political alternative to monetization.
I feel that no American government will get anything like popular support to foot the current bill ("ordinary" deficits+war deficits+theWS nightmare) via taxation.
The output might bear some resemblance with Weimar. Will not break the dollar. However I expect a French Franc parity at best and a peseta at worse within 5/7 years. Until the situation is reverse.
This destruction will of create a lot of damage to other currencies.
It will break this insane financial globalization - nice, this madness made absolutely no sense. Just a nasty way to nurture wars. But it may as well seriously harm plain-vanilla globalization. Including some of its most valid aspects.
A high cost for civilization, accross the board IMHO
As I was saying.
ReplyDeletehttp://www.telegraph.co.uk/finance/financetopics/financialcrisis/5473491/Top-Chinese-banker-Guo-Shuqing-calls-for-wider-use-of-yuan.html
The handwriting is on the (Great) wall, in red and yellow colors.
As far as I understand, in order to have inflation you have to have people competing for material with more dollars. Who has more dollars? Certainly not the 10% (and growing) workers unemployed. Certainly not the workers being squeezed by corporations for less wages. Where then are these surplus dollars going to flow? The Chinese hold about one trillion in bonds, big deal, what's that 7% of our GDP?
ReplyDeleteUntil I see a new Ponzi scheme on the horizon, like the real estate bubble, I ain't worrying about inflation.
Now running low on oil, thats a different problem.
just as you cannot have low rates and issuing tons of debt, you cannot have high interest rates, economic growth and negligible inflation.
ReplyDeleteDear marcus
ReplyDeletein my opinion the surplus dollars that will push inflation up will come out from the trading desks of the US banks.
Oil is going up because of speculation, surely not for a booming demand.
The bailout dollars that were thrown at banks so liberally by the USA government will be leveraged 100 times and "invested".
The current stock market leg up is IMO of the same kind.
Nice posting. Thanks!
ReplyDeleteBig67-
ReplyDeleteCould you be a bit more specific how dollars that "...come out from the trading desks of the US banks." or dollars "...will be leveraged 100 times and "invested"...' come into the hands of consumers and competes for Chevys and flat screen TVs?
And "leveraged" against what asset?
Dear marcus
ReplyDeleteI was referring to fractional lending: the money provided by TARP funds and the like to the banks is power money indeed. Today much of this money is held at the FED as "reserves" to shore up balances. We are speaking of around $ 1 Trillion, compared with around $ 20 Billion before the crisis.
Please note that the balances are now blatantly rigged (suppression of mark to market accounting etc.).
If the economy bottoms out or starts improving that money can be freed and lent out by the banks using fractional lending, that is they can lend say 20 $ each 1 $ of reserve (keeping 5% reserve)... that's $ 20 trillion.
Now everybody's hope is that the money goes to fund new businesses, maybe green businesses etc.
I bet it will instead be lent out to the trading units of the same banks, pumping up commodities in the first place, creating a big last inflationary bubble and destroing the purchasing power of the middle class.
Big67-"Now everybody's hope is that the money goes to fund new businesses, maybe green businesses etc.
ReplyDeleteI bet it will instead be lent out to the trading units of the same banks, pumping up commodities in the first place, creating a big last inflationary bubble and destroing the purchasing power of the middle class."
What new businesses? Dollar store and more burger joints?
What viable green business model do you see where lenders will take a risk? Pump up commodities? For what market? The world economy is shrinking.
I realize the powers that be (Federal Government, TARP free banks, Wall Street Wise Guys) want inflation, want more financial innovations (AKA scams) but the game may truly be over.
ReplyDeleteWho are the greater fools out there willing to put their cash into another Ponzi scheme? The schemers and collaborators fouled the nest, killed the Golden Goose (American Middle Class) and now we're left with the bill.
Wait till the former Middle Class realizes the implications of this fact. Hell will be paid--and I don't mean homage for our host.
Wrong! "borrow-consume-inflate assets"
ReplyDeletebribe congress-offshore-bring in illegal slave mexicans-bribe the senate-force the middle class to borrow-steal 401K funds-inflate to protect the rich-repeat
If the Fed raises short term rates before 2011 then bank of America, wells, goldman, JPM are all bankrupt.
ReplyDeleteWorse Shelby, Frank, Clinton, McCain are all out of a job.