01/10/11 Paris, France – Now, here’s some bad news. As far as we could tell, the Obama team only had one good man on it…former Fed chief and DR hero Paul Volcker. But word came last week that Volcker is out as head of the president’s economic advisory committee.
Dear Readers are reminded that Volcker saved the day back in 1979. He pledged to cut inflation. He kept his word. It wasn’t easy. He put interest rates up over 15%…at a time when the CPI was running at 13%. And Ronald Reagan backed him up.
If you’re going to get control of inflation you can’t trail the CPI. You have to get ahead of it. Which is why Bernanke’s pledge is such nonsense. He says that as inflation rates go up, he’ll put up the key Fed lending rate to 2%. He’s already increased the monetary base to 3 times what it was under Volcker. He’s committed to raising it another 33% by the end of June, bringing it to 4 times its 1980s level. When all that latent inflation becomes real inflation we’ll see prices rise more than just 2% per year. We’ll see them fly.
What we won’t see is Ben Bernanke getting ahead of them by putting rates up even more than inflation. It won’t happen. Because it goes completely against the grain of Ben Bernanke’s theories.
The US is in a Great Correction. He thinks it needs stimulus, not austerity. When inflation rates finally begin to go up, he’ll dither. He won’t want to put up interest rates at all. At first, he’ll hope that it is just a fluke. He’ll delay. He’ll hesitate. He’ll stall. At first, the rise of inflation will be confused with a growing economy. Prices will move up. Consumers will spend money just to get rid of it. Businessmen will think they have more demand on their hands. They may even hire more workers. Stocks may go up.
Bernanke won’t want to nip this “recovery” in the bud. “Growth” – even with inflation – is better than no growth, he will reason.
Then, when CPI is really getting up some real speed…and the inflation rate is headed towards 10%…he’ll realize that it is too late. The only way to get ahead of it would be to “pull a Volcker”…and bring the whole economy down around him – like Volcker did.
But Volcker was still dealing with an essentially healthy economy. It could survive the fall. Today, the economy is much heavier…and more fragile. Debt levels are three times what they were back then. Stocks are high, with a long way to fall too. And unemployment – as we saw above – is already about 12%, with mortgage rates still near 50-year lows. Imagine what would happen with the prime rate above 10%. Who would hire anyone? How could the US finance its deficits? What would it do to the US economy?
We don’t know…but we’ll guess that Sherman did less damage to Atlanta.
Inflation will run wild…
Bill Bonner
for The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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Re. Bonner’s “trade of the decade” and JGBs – here is a must see story from the BBC –
Japanese shoplifters getting older
http://www.bbc.co.uk/news/world-asia-pacific-12157786
It would be useful to review how the Money supply is counted.
When banks make a new loans and the loan is deposted back into that or another bank, deposits and therefore money supply is increased. But debt of the borrower is up and so net wealth in unchanged.
Why do we count money as we do and why don’t we instead count all wealth? or net wealth after deducting debt?
In earlier 2000′s increased house prices led to wealth effect, as all homeowners felt wealthier. But did that add to money supply? I think not except as loans were made against it and deposited into a bank that may have. What about stocks going up, why not count that as money?
I doubt there are more than a very few people in the world who really understand how we should count money.
Maybe Bill can enlighten us. If not i will have to read up on it and get back to you all.
America is financially bankrupt, the natural outcome of decades of moral bankruptcy. Bubbles Ben knows the only way out is to make each and every American a millionaire.
QE is practised in almost all countries, not just in a region. It is the trend.
It is a known fact. If you pull a hair on the head, the whole body dithers. If one
add in more economic activities, the more raw material, natural resource will be spiked. So, commodities spiral up dramatically. Conversely, if austerity is insisted, unemployment spreads like wild fire. All debt will be settled by default. And, we can’t expect the president reporting his duty by public commuter. And, we can’t see a big carrier in the Pacific running out of fuel and awaiting trawlers to tow it to the harbour. No regime would stand up to unruly mob for a lengthen period. Either way, it is doom!
As we already know even before the introduction of QE the economic food chain has already been contaminated.
Persistence in applying sinful economic measure like allowing prostitution to flourish or enlisting casino economic in the frontline would only dampen the entirety and ushering of catastrophe. In all eventuality, humandkind are victims of their own circumstances.
Whatever it is, electorates have thier words and a direction to be paved. A dot here, a drip there, when all these moleculary distilled water converge, the bountiful Amazon waterway is thusly constituted.
Bill. I think your last paragraph gives a perfect explanation as to why Volker has left. His theories will no longer work. It is too late. Team Obama knows it. I’m sure having Paul Volker around them just reminds them of how screwed the US is. He is nothing more than an irritation to their collective mind-set.
That “great sucking sound” of jobs leaving for Mexico enunciated by Ross Perot around 20-years ago is now the sound of the US economy being drawn down the toilet.
Meanwhile the posturing and one-upmanship continues. Anthem of the doomed.
TIF
I’ll save you the research time:
The reason houses aren’t counted in the money supply is because houses aren’t money. Neither are sofas or school buses.
Ask any chartered accountant.
To my Groupie and number 1 fan:
But which is more important Money or Wealth?
Stocks are not money but can be converted instantly to Money. So what is the value of counting this Money, when so many other things can be converted to money?
“Stocks are not money but can be converted instantly to Money. So what is the value of counting this Money, when so many other things can be converted to money?”
When someone “converts wealth to money” no change in the amount of money takes place. All that happens is who has the “wealth asset” and who has the money are swapped.
I have 100 shares of IBM. It is selling for $100/share. You have $10,000. You buy my shares. Overall, nothing has changed. Between us, we started off with $10,000 and 100 shares of IBM. After the transaction the same numbers still apply. The only thing that has changed is who has which asset.
Those who are constantly pointing to “money on the sidelines” as potential fuel for stock purchases are employing similar incorrect reasoning. The money will always be “on the sidelines” because all it does it change hands when a stock transaction takes place. Additionally, much of what is thought of as money, such as MMFs, is not truly money. MMFs invest in debt instruments (that’s how they earn interest to pay dividends) and only keep enough cash on hand to handle redemptions. If everyone in the MMF tried to obtain their “money” at the same time the MMF would be forced to sell the debt instruments (possibly at a loss) and could only do so if someone else agreed to buy them. This is the same thing as what happens with a stock transaction. The MMF obtains money that someone else gives up in exchange for the debt instrument.
“Why do we count money as we do and why don’t we instead count all wealth? or net wealth after deducting debt?
Because wealth is not money. Furthermore, a great deal of “wealth” is in the mind. Something is only worth what someone else will pay for it. Market cap and total housing stock value do not measure wealth. Thinking that it does presumes that it could all be liquidated instantaneously without impacting price. Obviously it can’t as there would be no one, or at least insufficient numbers, to take the other side of the transaction.
Final final ‘last’. Health is one’s greatest wealth. Do not be confused by the volatile figures flickering stock exchange LCD scoreboard. Neither, should you loiter in the mist of worldwide QE monetary long march in promotion of their flimsy inflammable paper product. Naturally, confucian was neither born to be confused. No more no less. Wealth just thrives within youself, ie. health.
Sorry, once again in demostration of one-upmanship.