The American Bond Crisis

[EJ]

The American Bond Crisis

I was talking to the head of the fixed income desk of a major investment bank in London the day last week when agency debt spreads increased more than 90 basis points over US Treasuries. Agency bonds, namely mortgage bonds from GSEs, have an implicit US government guarantee so they usually trade close to treasuries with little spread.

Then all of a sudden they didn’t. The reason? Leverage – and lots of it. In fact, my friend told me, there is by his estimate $6 trillion in excessive leverage built up over the past ten years that has to be unwound. So the credit crisis that started June 2007 with obscure financially engineered debt products such as CDOs has not evolved to include bonds presumably backed by the US government. Guess what’s next after Agency debt? You guessed it!

Our road to the American Bond Crisis starts with another note from my pal Rick Ackerman today. He recently published Inflation's Last Gasp and attributes a number of comments on inflation to me.

As Ronald Reagan would say, “There he goes again!”

The first challenge of an argument with Rick is that he tends to invent a position for me then take the other side. If Rick and I were arguing about how to treat an illness versus the economy and I said, “Take an aspirin” he’d say in his rebuttal, “Eric says we should eat carrots when in fact we all know perfectly well that we should use leaches.” For example, “Eric and the inflationists implicitly believe not only that those fat raises for airline employees and autoworkers are coming, but that our homes are about to increase in value dramatically.”

Why say that I imply something when you can instead simply restate what I actually say? I’ve been warning of an eventual major correction in real estate since August 2002 and finally called a top in June 2005 after describing the crash process in Jan. 2005 that pretty much lays out what’s happened. More recently I said I expect a 38% correction nationally before the whole sorry episode is over. Well, 38% at least in real terms. Perhaps in nominal terms prices won’t fall so much.

Because we’re going to get so much inflation.

And here he goes again.

"Eric argues that commodity price-inflation is a leading indicator of wage inflation, and that wages are therefore all but ordained to play catch-up."

No, I say the Fed says that. I say wage inflation will certainly get inflation rising faster, but it is not politically expedient, in terms of economic policy, to do so. Which is not to say there is no wage inflation but you have to know where to look. In our not-so-fair, not-so-free-market system if you are in the top 99th percentile of wage earners your wages were up 7.6% between 2004 and 2005 and if you were among the tippy top 0.5% why your wages were up a very healthy 16% over that one year period.

But I doubt six or seven hundred thousand high paid folks are driving the inflation we've seen since 2004. But then what is? Why has wage inflation been unnecessary to create the present high rate of inflation? We’ve got $108 oil, $3.25 gas, groceries and food prices rising since 2004 and all the while nominal wages, except for the folks at the top as noted, have been flat and in fact falling in real terms, that is, adjusted for the inflation that you and others have said for years wouldn't happen.

Inflation adjustment of wages is necessary on account there has been so much inflation as shown here in commodity prices.

If the US economy didn’t need wage inflation to get all that price inflation we've experienced since 2004, why will we need wage inflation to have more in the future? Where is the logic in that?

The reason we have all of this inflation is because the dollar has been declining. Had it declined more we’d have even more inflation. Going forward, all that has to happen for inflation to continue to rise is for the dollar to continue to fall as it has and for energy and other import prices to increase as they have.

So forget wage inflation. The only inflation input that is necessary to keep building inflation expectations in the US economy is the rising price of everything priced in dollars, even as the recession deepens.

But wait, you say. In a recession demand falls and goods prices with it. Well, that was true back when producers weren’t good at anticipating a fall in demand and cutting back on production ahead of it. Welcome to the 2000s and computers and the Internet. In the 1930s producers didn’t have the tools or data to cut production ahead of falling demand. Now they do, and they will, and they have.

For example, since 2004 oil demand has been falling everywhere except where it is subsidized by government – China, India, oil producing countries – as prices rose 400% in dollars. But what happens to poor J6P if jobs are scarce and inflation is eating up his meager savings and he's out of new sources of credit all at the same time?

As I've said, this is not your average business cycle recession.

........

Okay, so we have all of this cost-push inflation from dollar priced imports, except the made-in-China stuff is still cheap, until it isn't either – that comes later as China allows the yuan to rise the way our genius Congress says it should.

Debt defaults are rising. Credit is tightening. Unemployment is rising. It’s getting ugly out there.

How about we throw a US Treasury bond crisis into the mix?

I was talking to the head of the fixed income desk of a major investment bank in London the day last week when agency debt spreads increased more than 90 basis points over treasuries. Agency debt has an implicit US government guarantee so they usually trade close to treasuries with little spread. Then all of a sudden they didn’t. The problem? Leverage. In fact, my friend told me, there is $6 trillion in leverage that has to be unwound.

Fed Needs to Buy Agency Mortgage Bonds, Pimco
March 10, 2008 (Bloomberg)

The Federal Reserve or another part of the U.S. government should start buying so-called agency mortgage-backed securities to stabilize the market, a Pacific Investment Management Co. executive said.

Concern that Freddie Mac and Fannie Mae, which plunged to the lowest since 1995 in New York Stock Exchange trading today, may fail have contributed to the rising spreads, David Land, a mortgage-bond portfolio manager at Advantus Capital Management in St. Paul, Minnesota, said in a telephone interview today.

No surprise to us. Years ago in Ka-Poom Theory is a Rhyme not a Repeat of History we could see that the Fed was likely to wind up buying mortgage paper. So guess what’s next? You guessed it!

Hedge funds reel from margin calls even on Treasuries
March 11, 2008 (TheStar)

LONDON: The hedge-fund industry is reeling from its worst crisis in a decade as banks are now demanding more money pledged to support outstanding loans even when the investment is backed by the full faith and credit of the United States.

What happens to inflation in an American Bond Crisis? Why hypothesize when there are recent real world examples to learn from?

Let’s take a look at what happened to Russia during their bond crisis in 1998. See money growth and inflation declining steadily from 1995 to 1998? Then... whammo! The Russian Bond Crisis hit.

Russian money growth and inflation 1995 to 2000

The year it hit in 1998 GDP growth was –4.9%, a serious recession. Must have had price deflation after that, right?

Nope. That year inflation averaged 84.4%.

Can that happen in the USA? Not to the extent of the Russian Bond Crisis because the Russians had way too much short term debt owed in foreign currencies. US foreign debts are largely long term and owed in US currency. A uniquely American version of the process is occurring.

But why am I arguing with you using examples? You tell me, "As you will have long since surmised, I prefer to argue the case for deflation more from instinct than in accordance with economic theory."

This is just the real world, not the colorful make-believe world based on imagination and intuition where leaches work as well as aspirin. In the real world the currencies of defaulting countries do not appreciate, they depreciate. Show me a country with a depreciating currency and all-goods price deflation and I will gladly slap on a leach or two next time I'm ill.

As the credit crisis continues to evolve, the dollar plumbs new lows, dollar priced commodities such as oil and precious metals rise, and inflation pressures intensify, I hope that we can soon put to rest worries about an appreciating dollar and price deflation. Deflation was the last crisis, in 2001 and 2002, but is not this crisis. I also hope that we have in the process of arguing this point finally come up with a name to replace the incorrect label "subprime crisis" that the mainstream press carelessly slapped on the box filled with stories about the symptoms of the process we laid out in Risk Pollution and the Housing Bubble and elsewhere on iTulip over the years.

This will go down in history as The American Bond Crisis.

See also:
The deflation case: caught, gutted, poached and eaten
Door Number Two: moderate inflation vs hyperinflation vs deflation

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[whitetower67]

Re: The American Bond Crisis

It seems to me that another difference between the Russian '98 crisis and the current US crisis is that the Russian annual budget deficit in '97 was 6.7%/GDP. In equivalent terms, a 6.7% deficit relative to US GDP today would yield nearly a trillion dollar annual deficit. This difference would, of course, reflect a combination of a much larger US economy and more constrained public spending (compared to the Russian government at any rate).

So, in theory, the US government can continue to issue debt (i.e., "stimulus plan," public spending) in its attempt to revive the economy and still avoid Russian-style "hyper-inflation."

Or am I off on this?

[Guest]

Re: The American Bond Crisis

There is America, already stagflationary ... And then there are the rest of the world's rampant inflationary signals.

Mr. Ackerman's position risks becoming increasingly confined and uncomfortable as these trends exacerbate. There is an increasing risk that Mr. Ackerman may come to be percieved as more devoted to buttressing his past arguments than he is to carefully re-examining the proliferation of new facts on the ground.

______________

An excerpt from the inimitable Gary Dorsch - reporting news from the Euromoney Bond Investors Conference in London.
______________

... the (ultra inflationist) Frederic Mishkin, defended the Fed's policy of ignoring food and energy prices when deciding on the correct level of interest rates.

"Stabilizing core inflation, which excludes food and energy, leads to better economic outcomes than stabilizing headline inflation. The shock of energy price rises is likely to have only a temporary impact on inflation, because inflation expectations are contained," Mishkin argued on Feb 25th.

"When inflation expectations are well anchored, the central bank does not need to raise interest rates aggressively to keep inflation under control following a supply shock. If central banks raise rates aggressively to counter inflation caused by a sudden rise in oil prices, unemployment will be markedly higher, than if policy-makers set borrowing costs in response to fluctuations in core prices."

"The Fed's credibility on inflation is rock solid," said deputy US Treasury secretary Phillip Swagel on Feb 26th. "Overall, inflationary expectations remain contained," he declared.

But in a show of hands, in a packed hall of delegates at the Euromoney Bond Investors Conference in London, listeners overwhelmingly disagreed with Swagel. Instead, the audience thought the Bernanke Fed had let the inflation genie out of the bottle.

Back to reality, Chicago Board of Trade wheat futures are up 160% from a year ago.

Spring wheat futures on the Minneapolis Grain Exchange staged a historic rally on Feb 25th, rising more than 25% in a single day after the exchange lifted daily trading limits on the front March contract.

March spring wheat settled at $24.00 per bushel, up $4.75, after reaching $25.00, the highest-ever price for any US wheat contract.

Soybean futures for July delivery rallied to a record $15 per bushel, up 90% from a year ago, fueled by aggressive Chinese demand for soybeans and soy-oil. China's soybean imports jumped 41.5% in January to 3.4 million metric tons from a year earlier, and demand is expected to rise ahead of the Beijing Olympics.

China bought up to 25 cargoes of soybeans and 300,000 tons of soy-oil last week alone. Rough rice is up 70% from a year ago, a big worry in Asia, where more than two billion people depend on rice as their main source of calories each day.

Platinum is up 90% to $2,145 per oz amid supply disruptions from South Africa; cocoa futures are up 65% at a 24-year high; coffee is up 60% to a 10-year high; sugar is up 35%; Gold and silver are up 50%, and crude oil is banging against $100 per barrel, up 80% from a year ago. Crude oil or "black gold" is not just an industrial commodity, but is utilized as an inflation-hedge and alternative to stocks.

Thus super-easy central bank money policies – plus rate cuts in Canada, Hong Kong, Saudi Arabia, the UK and the United States, combined with strong demand for industrial and agricultural commodities from emerging China, India, and the Arab oil kingdoms – are laying the groundwork for a new era of hyper-inflation worldwide

_________________


Commodity Bubble? "Super Cycle" sweeps into Japan

Japan is an industrial powerhouse, but it imports all of its oil, most of its raw materials, and almost two-thirds of its food consumption.

So it wasn't surprising to hear that Japan's annual wholesale inflation hit a 27-year high of 3% in January due to rising oil, raw material and food costs. Tokyo says its economy is still wrestling with deflation, but the truth is, Japan escaped the deflation trap four years ago.

Still the Bank of Japan pegs its overnight loan rate at only 0.50%, the lowest on the planet, and far below the 3% inflation rate. In other words, Japanese bank deposits and bond yields offer negative interest rates, whetting the speculative appetite of Tokyo gold traders, who are bidding up the yellow metal to stay ahead of global inflation, and the arrival of a new Bank of Japan policy chief.

Despite the surge in inflation to multi-decade highs and soaring commodity prices, BoJ chief Toshihiko Fukui said he won't react hastily to short-term developments.

"Companies won't be comfortable if we suddenly tighten or ease," Fukui said, adding that the BoJ was examining both downside risks to the economy, and long-term risks of inflation overheating, before deciding on adjusting interest rates.

Gold traders have known all along that Japan's inflation figures are phony and designed to give the BoJ the cover to keep its interest rates pegged at negative rates. Tokyo Gold Prices closed above the psychological ¥100,000 per ounce level in late Feb., up from ¥45,000 three years ago.

In Yen terms, crude oil is up 64%, and rice is up 60% from a year ago, yet Tokyo's propaganda machine, indicates that consumer prices are only 0.8% higher.

Gary Dorsch full article here:

http://www.commodityonline.com/news/...ls.php?id=6233

_________________


Those who would lead the rest of us purportedly to safety in these uncertain times have a special duty to continually reexamin their premises, in light of accumulating new facts on the ground.

There is some literary hyperbole in the quote below, and no intent of overt disrespect is intended here to Mr. Ackerman - but he might dwell on this cautionary quote, from the novelist James Baldwin - suitable as we are living in extraordinarily dangerous times.

“People who shut their eyes to reality simply invite their own destruction, and anyone who insists on remaining in a state of innocence long after that innocence is dead turns himself into a monster.”

--James Baldwin Biography - Fiction Writer, Essayist, Social Critic, 1924-1987

[Chief Tomahawk]

Re: The American Bond Crisis

I'm building an ark.

Am I the only one for whom the "Top Investors" section no longer functions?

[Jim Nickerson]

Re: The American Bond Crisis

I'm building an ark.

Am I the only one for whom the "Top Investors" section no longer functions?

Nope.......

Hey, FRED, are you awake in the control room. Oh, yoohoo, FREDie, the Top Investors Threadie isn't working.

[GRG55]

Re: The American Bond Crisis

The American Bond Crisis

I was talking to the head of the fixed income desk of a major investment bank in London the day last week when agency debt spreads increased more than 90 basis points over US Treasuries. Agency bonds, namely mortgage bonds from GSEs, have an implicit US government guarantee so they usually trade close to treasuries with little spread.

Then all of a sudden they didn’t. The reason? Leverage – and lot's of it. In fact, my friend told me, there is by his estimate $6 trillion in excessive leverage built up over the past ten years that has to be unwound. So the credit crisis that started June 2007 with obscure financially engineered debt products such as CDOs has not evolved to include bonds presumably backed by the US government. Guess what’s next after Agency debt? You guessed it!

Northern Rock, and Fannie Mae...separated at birth? :rolleyes:

"...Northern Rock, the first U.K. bank to suffer a run on deposits in 140 years, was nationalized this month..." http://www.bloomberg.com/apps/news?p...d=aFmTMKztD0_A

"...Agency mortgage securities are guaranteed by government- chartered Fannie Mae and Freddie Mac or federal agency Ginnie Mae. The almost $4.5 trillion market is about the same size as the U.S. Treasury market...

...Concern that Freddie Mac and Fannie Mae, which plunged to the lowest since 1995 in New York Stock Exchange trading today, may fail :eek: have contributed to the rising spreads, David Land, a mortgage-bond portfolio manager at Advantus Capital Management in St. Paul, Minnesota, said in a telephone interview today..." http://www.bloomberg.com/apps/news?p...d=aABd9Ci2k3O0

With the exception of those few brief years between the Tea Party, Lexington and Yorkton, sure seems like you Brits and Americans prefer to take turns leading the way to the same destinations (war, housing bubbles, nationalised mortgage mongers, what's next?)

[randallriggs]

Re: The American Bond Crisis

There is America, already stagflationary ... And then there are the rest of the world's rampant inflationary signals.

Mr. Ackerman's position risks becoming increasingly confined and uncomfortable as these trends exacerbate. There is an increasing risk that Mr. Ackerman may come to be percieved as more devoted to buttressing his past arguments than he is to carefully re-examining the proliferation of new facts on the ground.

______________

An excerpt from the inimitable Gary Dorsch - reporting news from the Euromoney Bond Investors Conference in London.
______________

... the (ultra inflationist) Frederic Mishkin, defended the Fed's policy of ignoring food and energy prices when deciding on the correct level of interest rates.

"Stabilizing core inflation, which excludes food and energy, leads to better economic outcomes than stabilizing headline inflation. The shock of energy price rises is likely to have only a temporary impact on inflation, because inflation expectations are contained," Mishkin argued on Feb 25th.

"When inflation expectations are well anchored, the central bank does not need to raise interest rates aggressively to keep inflation under control following a supply shock. If central banks raise rates aggressively to counter inflation caused by a sudden rise in oil prices, unemployment will be markedly higher, than if policy-makers set borrowing costs in response to fluctuations in core prices."

"The Fed's credibility on inflation is rock solid," said deputy US Treasury secretary Phillip Swagel on Feb 26th. "Overall, inflationary expectations remain contained," he declared.

But in a show of hands, in a packed hall of delegates at the Euromoney Bond Investors Conference in London, listeners overwhelmingly disagreed with Swagel. Instead, the audience thought the Bernanke Fed had let the inflation genie out of the bottle.

Back to reality, Chicago Board of Trade wheat futures are up 160% from a year ago.

Spring wheat futures on the Minneapolis Grain Exchange staged a historic rally on Feb 25th, rising more than 25% in a single day after the exchange lifted daily trading limits on the front March contract.

March spring wheat settled at $24.00 per bushel, up $4.75, after reaching $25.00, the highest-ever price for any US wheat contract.

Soybean futures for July delivery rallied to a record $15 per bushel, up 90% from a year ago, fueled by aggressive Chinese demand for soybeans and soy-oil. China's soybean imports jumped 41.5% in January to 3.4 million metric tons from a year earlier, and demand is expected to rise ahead of the Beijing Olympics.

China bought up to 25 cargoes of soybeans and 300,000 tons of soy-oil last week alone. Rough rice is up 70% from a year ago, a big worry in Asia, where more than two billion people depend on rice as their main source of calories each day.

Platinum is up 90% to $2,145 per oz amid supply disruptions from South Africa; cocoa futures are up 65% at a 24-year high; coffee is up 60% to a 10-year high; sugar is up 35%; Gold and silver are up 50%, and crude oil is banging against $100 per barrel, up 80% from a year ago. Crude oil or "black gold" is not just an industrial commodity, but is utilized as an inflation-hedge and alternative to stocks.

Thus super-easy central bank money policies – plus rate cuts in Canada, Hong Kong, Saudi Arabia, the UK and the United States, combined with strong demand for industrial and agricultural commodities from emerging China, India, and the Arab oil kingdoms – are laying the groundwork for a new era of hyper-inflation worldwide

_________________


Commodity Bubble? "Super Cycle" sweeps into Japan

Japan is an industrial powerhouse, but it imports all of its oil, most of its raw materials, and almost two-thirds of its food consumption.

So it wasn't surprising to hear that Japan's annual wholesale inflation hit a 27-year high of 3% in January due to rising oil, raw material and food costs. Tokyo says its economy is still wrestling with deflation, but the truth is, Japan escaped the deflation trap four years ago.

Still the Bank of Japan pegs its overnight loan rate at only 0.50%, the lowest on the planet, and far below the 3% inflation rate. In other words, Japanese bank deposits and bond yields offer negative interest rates, whetting the speculative appetite of Tokyo gold traders, who are bidding up the yellow metal to stay ahead of global inflation, and the arrival of a new Bank of Japan policy chief.

Despite the surge in inflation to multi-decade highs and soaring commodity prices, BoJ chief Toshihiko Fukui said he won't react hastily to short-term developments.

"Companies won't be comfortable if we suddenly tighten or ease," Fukui said, adding that the BoJ was examining both downside risks to the economy, and long-term risks of inflation overheating, before deciding on adjusting interest rates.

Gold traders have known all along that Japan's inflation figures are phony and designed to give the BoJ the cover to keep its interest rates pegged at negative rates. Tokyo Gold Prices closed above the psychological ¥100,000 per ounce level in late Feb., up from ¥45,000 three years ago.

In Yen terms, crude oil is up 64%, and rice is up 60% from a year ago, yet Tokyo's propaganda machine, indicates that consumer prices are only 0.8% higher.

Gary Dorsch full article here:

http://www.commodityonline.com/news/...ls.php?id=6233

_________________


Those who would lead the rest of us purportedly to safety in these uncertain times have a special duty to continually reexamin their premises, in light of accumulating new facts on the ground.

There is some literary hyperbole in the quote below, and no intent of overt disrespect is intended here to Mr. Ackerman - but he might dwell on this cautionary quote, from the novelist James Baldwin - suitable as we are living in extraordinarily dangerous times.

“People who shut their eyes to reality simply invite their own destruction, and anyone who insists on remaining in a state of innocence long after that innocence is dead turns himself into a monster.”

--James Baldwin Biography - Fiction Writer, Essayist, Social Critic, 1924-1987

ok, I get it....we're heading into a hyper inflationary period. How does the average small investor protect his assets in this environment? I can't put all assets in gold!!!!! should I spread to some agri ETFs? Oil? I little help please!!!!!!!!!!!! I'm 50% in gold now which has done nicely by the way, 10 FXE ans the rest in cash.

[magicvent]

Re: The American Bond Crisis

What will happen when other central banks start to cut rates?

[skidder]

Re: The American Bond Crisis

If this assessment of the FED's strategy is accurate, what is the likely impact going forward? (financialsense.com article)

We have conclusive proof that Fed is attempting to drain cash from the economy to support rates (and indirectly the $) whilst pumping funds directly into the balance sheets of the banks. Therefore the whole series of measures are not to deal with a liquidity issue but are to combat a breakdown in the capital reserves of the banks and a freezing/tightening/collapse of the credit markets.
US banks are being nationalized, temporarily, whilst they attempt to take cash away from all sectors of the economy, by either de-leveraging positions or calling in all debt owed to them on the flimsiest of excuses. Any non-performance in debt servicing by either Corporations or private citizens, for whatever reason, will result in immediate and swift foreclosure and an asset grab. I expect most credit lines to be withdrawn and limits imposed on the size of cash transfers and withdrawals in the very near future. All of these actions are to bolster bank reserves and the Fed itself believes this will take a minimum of 6 months. Some believe that is not enough. Kansas City Fed Pres. Hoenig called for the TAF to be made permanent

[FRED]

Re: The American Bond Crisis

Nope.......

Hey, FRED, are you awake in the control room. Oh, yoohoo, FREDie, the Top Investors Threadie isn't working.

Our IT services guys fixed the problem with the server going offline so often and in the process broke the Stock thingy. We're still trying to figure out how to fix it. We may have to re-install it in which case everyone will have to re-enter their positions. Bummer, I know.

[quigleydoor]

Re: The American Bond Crisis

If this assessment of the FED's strategy is accurate, what is the likely impact going forward? (financialsense.com article)

We have conclusive proof that Fed is attempting to drain cash from the economy to support rates (and indirectly the $) whilst pumping funds directly into the balance sheets of the banks. Therefore the whole series of measures are not to deal with a liquidity issue but are to combat a breakdown in the capital reserves of the banks and a freezing/tightening/collapse of the credit markets.

US banks are being nationalized, temporarily, whilst they attempt to take cash away from all sectors of the economy, by either de-leveraging positions or calling in all debt owed to them on the flimsiest of excuses. Any non-performance in debt servicing by either Corporations or private citizens, for whatever reason, will result in immediate and swift foreclosure and an asset grab. I expect most credit lines to be withdrawn and limits imposed on the size of cash transfers and withdrawals in the very near future. All of these actions are to bolster bank reserves and the Fed itself believes this will take a minimum of 6 months. Some believe that is not enough. Kansas City Fed Pres. Hoenig called for the TAF to be made permanent

Interesting. I'm not an expert on Japan's 1990s experience, but it sounds like Fed is consciously trying not to fall into the same trap, by aggressively cleaning up nonperforming loans (bad debts). Good for banks, maybe good for future growth—bad for the borrowers, be they victims or fools.

[GRG55]

Re: The American Bond Crisis

What will happen when other central banks start to cut rates?

This chart from bart will answer your question...
http://www.itulip.com/forums/showthr...29958#poststop

[dbarberic]

Re: The American Bond Crisis

I expect most credit lines to be withdrawn and limits imposed on the size of cash transfers and withdrawals in the very near future. All of these actions are to bolster bank reserves and the Fed itself believes this will take a minimum of 6 months.

Aka = Capital Controls. :eek:

This is a little scary. I have safe money to weather the downturn incase of an emergency (e.g. job loss). However, if they start implementing withdraw limits, etc, this could put a serious crimp in gaining access to emergency money or cashing out profits in positions designed to profit from this mess.

[FRED]

Re: The American Bond Crisis

Interesting. I'm not an expert on Japan's 1990s experience, but it sounds like Fed is consciously trying not to fall into the same trap, by aggressively cleaning up nonperforming loans (bad debts). Good for banks, maybe good for future growth—bad for the borrowers, be they victims or fools.

Not only is that what they are doing, that is exactly what they said they would do.

Ka-Poom is a Rhyme not a Repeat of History - Janszen - Sept. 2006

[kelton56]

Re: The American Bond Crisis

Inflation adjustment of wages is necessary on account there has been so much inflation as shown here in commodity prices.

From Rick Ackerman's "Inflation's Last Gasp" Commentary:
"Eric argues that commodity price-inflation is a leading indicator of wage inflation, and that wages are therefore all but ordained to play catch-up. Our response is that this commodity inflation is very different from all others before it simply because it has been fueled, not by physical demand, but by torrents of speculative capital fleeing rapidly deflating financial assets. If ever there were a trend that could not continue for long and which is likely to end in a crash, this is it."

My comment: It would appear that Rick Ackerman believes the chart above to be the sole result of speculative froth entering the commodities markets - only recently - hence the "but this time it's different" argument. Clearly the chart shows the most recent commodities surge to have begun in 2002 or so, which, of course, long predates "torrents of speculative capital fleeing rapidly deflating financial assets" as hysterical hedge fund managers belatedly realize Jim Rogers was right about commodities in 1999.
As the chart clearly illustrates, a long run-up in the 1970s was followed by 20 years of bull-bear appreciation/correction, but for the most part held a significantly higher plateau comapred with prior to 1973.

I do not disagree with Ackerman that there could be exciting swings above and below the current price levels of commodities given an ample amount of speculation in the past year, but more likely is the global-demand-based possibility of sustaining a new plateau at much higher price levels, which, eventually, always will result in wage inflation. Think of those who entered the workforce after college in the late 1970s, probably at about $10K a year, only to see that jump to $30K- $40K within 5 years or so as the rampant inflation of the era worked its way through the economy.

I also think that China, with all that potential for social unrest over food and fuel prices and shortages, and all those U.S. dollars it owns devaluing daily, will be more than happy to put the greenbacks to work buying some social stability.

Unless every American renounces consumerism and returns to three-generations living together in thousand-square-foot housing and no cars, I think we're gonna see inflation.