The hog is in the tunnel

[Andreuccio]

Re: The hog is in the tunnel

Could you remind me the meaning of the acronym PM, as in you are now holding PM's?

Excellent. This one I can answer. PM's are Precious Metals. I'm just glad you didn't ask about "currency depreciation based reflation efforts".

[BiscayneSunrise]

Re: The hog is in the tunnel

Excellent. This one I can answer. PM's are Precious Metals. I'm just glad you didn't ask about "currency depreciation based reflation efforts".

LOL!! That was my next question. I think it means throwing money from helicopters to prevent deflation.

Also Fred, I hope you don't mind if I am putting words in your mouth but I think you go on to say that the economy is much more prone to runaway inflation this time vs. 2000 if the Fed throws too much money at the problem.

[FRED]

Re: The hog is in the tunnel

Excellent. This one I can answer. PM's are Precious Metals. I'm just glad you didn't ask about "currency depreciation based reflation efforts".

Even before The Great Depression, it was understood that serious recessions and depressions are demand crises, characterized by a serious decline in purchases of goods and services in the economy by consumers and businesses. This tends to induce self-reinforcing processes: falling demand leads to falling production leads to falling employment leads to falling demand.

Following a financial crash that destroys money and renders financial institutions insolvent, such as in 1929 and 2000 in the US and 1990 in Japan, it is critical that the money destroyed be replaced before many financial institutions fail, because once they fail the machinery for getting money into the economy is broken. This is why the institution of the Fed's discount window exists, to extend short term loans to give banks time to either work with other parties on plans to recover or shut down in an orderly fashion. This is what is happening now.

The other condition which leads to a collapse in demand is a lack of access by consumers and businesses to loans, due to tightening credit standards as the pool of credit-worthy borrowers shrinks and banks lower risks to capital, and also due to disinflation, which drives the real rate of interest up. Another self-reinforcing dynamic can take hold: the hoarding of cash as price expectations shift from inflationary "buy it now before the price goes up" to deflationary "buy it later because it will be cheaper." This is occurring in the housing market today, and as it relates to financial assets is the definition of a bear market. Only after the money supply has been allowed to contract for several quarters does deflation begin to show up in the prices of goods and services.

There are several things governments can to stimulate demand and prevent these negative self-reinforcing dynamics. One critical policy move is to increasing the rate of money supply growth so that the rate of inflation does not turn negative. The Fed does this by lowering short term interest rates. The primary lesson of The Great Depression, and of the Japanese experience with deflation since 1990, learned by the Fed and is that rate cuts need to be deep and rapid enough to prevent the rate of inflation from falling below zero–as the Fed did this in 2001–because once inflation reaches zero or turns negative, the Fed is stuck with only unconventional policy options to stimulate money growth, such as targeting negative interest rates–literally paying consumers and businesses to borrow money. This has only been tried once or twice in history, and actually worked quite well.

Other policy moves to stimulate demand, that is, reflate the economy include currency depreciation, deficit spending, and tax cuts. All of these taken since 2001.

[c1ue]

Hog in Tunnel swallowed by Fed?

According to John Paul Koning at Mises, the Fed took payment of $38B+ in MBS, and could be gearing up to do this permanently:

http://www.mises.org/story/2676

Back to Friday's MBS purchases. Historically, the Fed's open market operations have been confined to US Treasuries. Clauses 3 to 6 of the Guidelines for the Conduct of System Operations in Federal Agency Issues ensured that Federal Reserve operations could not engage in temporary purchases of securities issued by federal agencies like Freddie Mac and Fannie Mae.[2]
In an August 1999 Fed meeting officials temporarily suspended clauses 3 to 6, giving themselves the authority to freely purchase Ginnie Mae–, Freddie Mac–, and Fannie Mae–issued MBS on a provisional basis without hindrance on size and timing. The reason given: it needed full reign to inject money into the banking system in preparation for the year 2000 crisis.[3] The period for which the temporary suspension was to extend was from October 1, 1999 through April 7, 2000.
The year 2000 crisis proved a dud. But rather than removing the temporary suspension on buying MBS, the Fed renewed the suspension in 2000 and 2001 before permanently striking off clauses 3 to 6 in 2002. In recent Fed documents, only clauses 1 and 2 are listed.

While the purchases are only temporary — the cash must be returned by Monday — one wonders how long before the Fed grants itself the power to buy MBS permanently.

[Andreuccio]

Re: The hog is in the tunnel

Fred:

What I really like about iTulip is the high level of discourse and honest evaluation of investing issues coupled with the willingness of yourself and others here to explain difficult economic concepts to those like me who don't have a background in the field. It is very much appreciated.

When I first started reading stuff here, I found myself referring to Wikipedia about three times per post to figure out what things meant. Now it's down to about once every fifth post. (I actually did have a pretty good idea, for example, what currency depreciation based reflation efforts were, though I joked that I didn't. I probably wouldn't try to explain them to anyone else, though. And I certainly couldn't bring the historical background to it that you did here.)

I'm currently looking for a basic econ primer. Anybody have any suggestions? Something along the lines of iTulip for Dummies, or Economics for Dummies, or some such. I figure the more I can educate myself, the fewer questions I'll have to ask, making it less likely I'll wear out my welcome.

Thanks again.

the Fed is stuck with only unconventional policy options to stimulate money growth, such as targeting negative interest rates–literally paying consumers and businesses to borrow money. This has only been tried once or twice in history, and actually worked quite well.

I'll be looking forward to this. Nothing like getting paid to borrow money. My favorite play up until now has been taking out high balance 0% interest loans on my credit cards and putting them into 5% MM accounts, although I fear this will be drying up soon, and the recent discussion here of MM funds and MM accounts has me a bit spooked. It plays havoc with my credit rating, but since I don't expect to be in the market for a house in the next few months, I can live with it.

[Jeff]

Re: The hog is in the tunnel

As the great man himself once said, "When the going gets wierd, the wierd turn pro." This should be an interesting ride.

[Guest]

Re: The hog is in the tunnel

Fred -

Can you expand on this comment ?

<< why we are holding PMs versus selling going into this Ka-Poom cycle is that the inflation environment is much less benign to currency depreciation based reflation efforts this time around >>

What I understood in layman's terminology was (perhaps) : " due to a much higher level of realized inflation today (higher CPI, Commodity prices, etc.), currency reflation efforts now will be much weaker in their effect (inflating already inflated cash pools) and also politically less acceptable, (opening door to runaway inflation) than in 2000 " ?

So if your statement observes that reflation efforts now will be much less effective to stimulate consumption or economic activity, and/or much less easily available to the Government politically as an option - can you expand on why this restricted set of options for the Fed adds up to a "continue to hold" for precious metals?

The conventional wisdom would seem to suggest that any diminishing of the Federal Reserve's reflation capability via further currency debasement today would spell a greater risk of deflation?

If this is correct, is your "continue to hold PM's" stance implying that you consider precious metals holdings to provide a two-way protection, against the Fed both succeeding or failing at it's reflation efforts? Or otherwise what am I misunderstanding as the reason for your recommendation?

If this is not your view, can you further clarify why holding rather than trading bullion is recommended when the "environment is much less benign to currency depreciation"?

And if you would also expand on iTulip's position on the following ? :

We read everywhere that global growth remains exceedingly strong due to an unusual confluence of many large countries entering the most robust stage of industrialization at this time. Historically such coordinated large area growth inflections don't cease abruptly, but most often complete their transitions across the span of a decade or even two. So industrialization of very large economic blocs might be an example of a very large trend in motion which must complete it's move prior to the assertion of any equally large counter trend.

Does iTulip view this very robust global growth, which is also exerting a strong inflationary impulse worldwide, to be a sigificant factor in how any deflationary developments may play out within the US economy should Fed reflationary effects prove weak in 2007, as described above?

China, for all the considerable imbalances in growth, is surpassing the US this year in it's contribution to global GDP growth - both at around 15% of the global net. At 12% annual GDP growth, another year or two of such growth coupled with comparable a sizable number of other developing nation's GDP growth may markedly diminish the likelihood of any deflating US GDP to exert the determining influence on global growth through the remainder of the decade?

To what extent does iTulip still view the US as the consumption motor which will deflate all the rest, as it deflates? Is this increasingly mitigated by rapid growth abroad? What about when US GDP shrinks to 10% of global GDP, and the BRIC countries et. al grow to 25% - this could be a reality within three or four more years.

Thank you!

[Guest]

Re: The hog is in the tunnel

I think Adrian Ash - over at Bullion Vault in the UK writes very crisp and enjoyable financial news articles. Interestingly, (perhaps he's selling his company just a wee bit, but always with his usual flair) in his most recent post, he's equating bullion as the 'senior cash' equivalent.

If this were so, it might clarify the holding of Bullion through either inflationary or deflationary events as being the most "liquid" and "cash-like" of assets.

What I've understood so far however is that Bullion = Cash has NOT been, and is not likely to be iTulip's view? This is something I imagine a lot of readers would appreciate understanding iTulip's position on?

His most recent article is on Safe Haven, here:

http://www.safehaven.com/article-8190.htm

[FRED]

Re: The hog is in the tunnel

Fred -

Can you expand on this comment ?

<< why we are holding PMs versus selling going into this Ka-Poom cycle is that the inflation environment is much less benign to currency depreciation based reflation efforts this time around >>

What I understood in layman's terminology was (perhaps) : " due to a much higher level of realized inflation today (higher CPI, Commodity prices, etc.), currency reflation efforts now will be much weaker in their effect (inflating already inflated cash pools) and also politically less acceptable, (opening door to runaway inflation) than in 2000 " ?

So if your statement observes that reflation efforts now will be much less effective to stimulate consumption or economic activity, and/or much less easily available to the Government politically as an option - can you expand on why this restricted set of options for the Fed adds up to a "continue to hold" for precious metals?

The conventional wisdom would seem to suggest that any diminishing of the Federal Reserve's reflation capability via further currency debasement today would spell a greater risk of deflation?

If this is correct, is your "continue to hold PM's" stance implying that you consider precious metals holdings to provide a two-way protection, against the Fed both succeeding or failing at it's reflation efforts? Or otherwise what am I misunderstanding as the reason for your recommendation?

If this is not your view, can you further clarify why holding rather than trading bullion is recommended when the "environment is much less benign to currency depreciation"?

And if you would also expand on iTulip's position on the following ? :

We read everywhere that global growth remains exceedingly strong due to an unusual confluence of many large countries entering the most robust stage of industrialization at this time. Historically such coordinated large area growth inflections don't cease abruptly, but most often complete their transitions across the span of a decade or even two. So industrialization of very large economic blocs might be an example of a very large trend in motion which must complete it's move prior to the assertion of any equally large counter trend.

Does iTulip view this very robust global growth, which is also exerting a strong inflationary impulse worldwide, to be a sigificant factor in how any deflationary developments may play out within the US economy should Fed reflationary effects prove weak in 2007, as described above?

China, for all the considerable imbalances in growth, is surpassing the US this year in it's contribution to global GDP growth - both at around 15% of the global net. At 12% annual GDP growth, another year or two of such growth coupled with comparable a sizable number of other developing nation's GDP growth may markedly diminish the likelihood of any deflating US GDP to exert the determining influence on global growth through the remainder of the decade?

To what extent does iTulip still view the US as the consumption motor which will deflate all the rest, as it deflates? Is this increasingly mitigated by rapid growth abroad? What about when US GDP shrinks to 10% of global GDP, and the BRIC countries et. al grow to 25% - this could be a reality within three or four more years.

Thank you!

We should probably bring Stagflation Godzilla back to tell the story.

There is very little that the Fed can do at this point. That's why Greenspan left. Everyone we talk to... Mayer, Hudson, Challenger, etc... across the political spectrum believe that we are in for a grinding stagflation, best case, as the dollar gradually loses its status as a reserve currency.

Selling crap MBS paper to EU funds was the last straw. Negative EU political opinion of the US because of the Iraq war pales beside their contempt for the corrupt ratings agencies that helped sell MBS paper the way Arthur Anderson helped sell tech stock crap in the 1990s. But it's worse than that. They've really had enough. The US-centric economic and financial system that took generations to build may be repudiated, along with the dollar.

You can thank Greenspan.

[Guest]

Re: The hog is in the tunnel

Fred -

Can you expand just a bit on iTulip's position regarding the gold = cash notion Adrian Ash mentions?

iTulip says these are not equivalent. A lot of people here hold precious metals as a general hedge, probably primarily because of it's being not directly correlated to the equity or bond markets. What's iTulip's general-purpose stance on the viability of precious metals to hedge the onslaught of Greenspan's crap from either deflation or inflation?

Is the question moot because what we are facing will be an inextricable mess of both?

This may be of great interest to many people here.

Thank you.

[FRED]

Re: The hog is in the tunnel

Fred -

Can you expand just a bit on iTulip's position regarding the gold = cash notion Adrian Ash mentions?

iTulip says these are not equivalent. A lot of people here hold precious metals as a general hedge, probably primarily because of it's being not directly correlated to the equity or bond markets. What's iTulip's general-purpose stance on the viability of precious metals to hedge the onslaught of Greenspan's crap from either deflation or inflation?

Is the question moot because what we are facing will be an inextricable mess of both?

This may be of great interest to many people here.

Thank you.

The question to ask is: which assets will retain purchasing power?

If you used current income to purchase gold in 2001, deferring purchases of gasoline, you can now guy gasoline with that gold and get the same quantity of gasoline as you could have purchased if you'd bought it back in 2001. But when you buy gasoline out of current income today, you purchase less than half the gasoline you could with the same income in 2001.

This is going to go on for a long time, except next cycle EU and Asian CBs will not buy tech stocks or MBS or any other crap to support the dollar. So it will be even worse.