said David Rosenberg in one of his Breakfast with Dave musings: “The Fed has allowed its balance sheet to explode even further to obscene levels of $2.43 trillion or triple what it was before the financial crisis took hold. In the past three years, the Fed’s balance sheet has expanded by $1.5 trillion and nominal GDP has only managed to rise over $500 billion. Fascinating. And we had the U.S. public debt explode by $5 trillion over that same time frame — the country is 244 years old and over one-third of the national debt has been created in just the past three years. Incredible. The U.S. government now spends $1.60 in goods and services for every dollar it is taking in with respect to revenues which is unheard of — this ratio never got much above $1.20, not even during the previous severe economic setbacks in the early 1980s and early 1990s.”
This is one of those record numbers that probably wont make it to the Guinness Book, but certainly worth posting.
Since a long time it was my opinion that the US consumer price index has been designed to never show any meaningful inflation and that US GDP is systematically overstated.
In this excellent YouTube presentation Chris Martenson explains how THEY did it :
The history of the Weimar Republic teaches that real estate prices offered only limited protection against hyperinflation and only if one was living in his own home. Maintaining a house during periods of high inflation becomes very expensive due to constantly rising material cost. Of course a house usually survives a currency crisis whereas cash in a bank account does not.
In 1922 apartment rental prices were capped by the government and adjusted for inflation, rentals were only a fraction of what they had been before WWI. Consequently house prices were falling. However, rates and taxes on real estate sales were raised.
- Berlin raised the capital gains tax on real estate sales to 30%.
- In July 1924 home prices had dropped about 80% since 1918.
- From about 1935 to 1950 rental prices were “frozen”
- In 1952 “debt profiteers” had to pay a “mortgage gains tax”
RE offers wealth preservation in a currency crises, albeit one must be able to pay for maintenance and government levies and taxes. Moreover I assume that RE prices in a hyperinflation scenario are not increasing as much as gold and silver, if at all.
Lew Rockwell wrote an excellent essay in connection with World Bank*s Zoellick recent mumbling about a new gold standard : The Gold Standard Never Dies
In the essay he is also describing the immediate negative reaction of pundits like Nouriel Roubini :
The absence of the gold standard has made possible the paper world they all love, one ruled by the state and its managers, a world of huge debt and endless opportunities for mischief to be made from the top down.
“One of the funniest explosions came from Nouriel Roubini, who listed a series of merits of gold without recognizing them as such: gold limits the flexibility and range of actions of central banks (check!); under gold, a central bank can’t “stimulate growth and manage price stability” (check!); under gold, central banks can’t provide lender of last resort support (check!); under gold, banks go belly-up rather than get bailed out (check!).
His only truly negative point was that under gold, we get more business cycles, but here he is completely wrong, as a quick look at the data demonstrates. And how can anyone say such a thing in the immediate wake of one of history’s biggest bubbles and its explosion, which brought the world to the brink of calamity (and it still isn’t over)? Newsflash: it wasn’t the gold standard that gave us this disaster. (more…)
US Export Prices – M/M change 0.8 %, Import Prices – M/M change 0.9 %
Data Source: Haver Analytics
Weimar Ben says Not Enough Inflation …
Target long-term bond yields :
“So what then might the Fed do if its target interest rate, the overnight federal funds rate, fell to zero?”
“One relatively straightforward extension of current procedures would be to try to stimulate spending by lowering rates further out along the Treasury term structure–that is, rates on government bonds of longer maturities.”
A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt not only would yields on medium-term Treasury securities fall, but (because of links operating through expectations of future interest rates) yields on longer-term public and private debt (such as mortgages) would likely fall as well.”
“Of course, if operating in relatively short-dated Treasury debt proved insufficient, the Fed could also attempt to cap yields of Treasury securities at still longer maturities … The most striking episode of bond-price pegging occurred during the years before the Federal Reserve-Treasury Accord of 1951. Prior to that agreement, which freed the Fed from its responsibility to fix yields on government debt, the Fed maintained a ceiling of 2-1/2 percent on long-term Treasury bonds for nearly a decade.”
“To repeat, I suspect that operating on rates on longer-term Treasuries would provide sufficient leverage for the Fed to achieve its goals in most plausible scenarios. If lowering yields on longer-dated Treasury securities proved insufficient to restart spending, however, the Fed might next consider attempting to influence directly the yields on privately issued securities.”
Deflation … where the hell are you ? I am getting impatient …
IMO a brilliant analysis from Andy Xie :
American pundits, Nobel laureates included, are predicting Japan-style deflation for the U.S. and Europe. …On the other side of the world, consumer prices are surging. Emerging markets as a whole now have an inflation rate of more than 5 percent … Deflation prophets in the West are in for a rude awakening. Eastern fire will turn Western ice into a mess, and 2012 looks like it will be the year of melting. The fuel for the fire is coming from deflation-fighting stimulus programs, such as that of U.S. President Barack Obama.
Excerpts from When Unconventional Becomes Conventional
“The central bank has a profound duty to meld itself with the fiscal authority, until the fat risk of deflation is eliminated.
And as a practical matter, there is nothing magic about the zero line for inflation. Inflation that is too low implies similar pathologies as actual deflation, just not as severe: Incentivizing private sector deleveraging, even while making it more difficult to achieve, generating negative animal spirits and a chronic shortage of aggregate demand relative to aggregate supply potential.
In such circumstances, fiscal policy restraint is not a virtue but a deflationary vice. What is actually needed is yet greater leveraging of the fiscal and monetary authorities’ balance sheets.Thus, I believe the argument for the Fed to explicitly commit to print money to fund increased fiscal expansion is growing by the day.”
No matter how hard I look, so far there are no signs of deflation, quite to the contrary, living expenses for the average citizen are only going up. What I find particularly insidious in his article is his claim “Inflation that is too low ” is allegedly ” generating negative animal spirits .”
So, may I assume, since inflation was higher before the crisis, the infinite greed and hybris of Wall Street banksters who brought about this crisis, were actually positive spirits ?
May I also assume your funds would do better with a little more inflation Mr. McCulley ?