PPI Whopper

[bart]

Re: PPI Whopper

It's worth noting here that this doesn't mean one definition is wrong and another right. Words often have more than one correct meaning. Take the word "saw", for instance. You could say "I saw your wife the other day.", or "I saw your wife in half." with equal validity. Depending on, of course, what you did with my wife ....

http://www.nowandfutures.com/grins/kinky.wav ;)

So we have some ambiguity when we talk about inflation or deflation. Often the context will make it clear what we mean, other times it won't. We just need to be aware of those multiple meanings and take care to be specific when our point relies on a particular one.

Very much so, Manly and Masterful Manor Maven.

We're both limited and enhanced by our use of words, even before walking into the land of Hayakawa or McLuhan... let alone walking into the valley of prancing eVangelics.

Clearly, when I say any increase in money supply is inflation, I'm using a particular meaning. And in this case, it's vital to not only consider whether there has been an increase in money supply, but who did the increasing or who got the increase. Consider the example I gave above where one guy was printing it up in his basement. This kind of inflation is normally considered a criminal act. His increased purchasing power comes at the expense of everyone else's, presumably without their knowledge or their permission.

In contrast, suppose for the sake of illustration that some neutral entity printed up the extra money, and distributed the increase to everyone in direct proportion to the money they already had. If, say, there were a total of $10,000,000 in town, and the increase was $1,000,000 (10%), then if Bart had $10,000 in his account, now he suddenly has $11,000. If WDC has $20,000 in his account, he now has $22,000 and if Lukester has $30,000, he now has $33,000. (Okay, not realistic since we know Bart has waaay more money than anyone else in town, but bear with me ...). In this case, there was inflation, all right, but there was no surreptitious, involuntary transfer of wealth from one party to another party. All else being equal, everybody is left right where they started. No one is better or worse off; each has 10% more dollars, and ultimately everything costs 10% more dollars.

Now let's add some food for thought. Which kind of inflation do you think is the kind we get? If money supply is increased, is that increase distributed evenly, or do certain favored parties ... uhmm ... stand in line of ahead of others?

No wonder you have so many more credits and kudos than that futures freak with the chart compulsion and heart of (fools) gold.

With few and very short term exceptions, that's been the story to varying degrees over recorded history too.

"If some lose their whole fortunes, they will drag many more down with them . . . believe me that the whole system of credit and finance which is carried on here at Rome in the Forum, is inextricably bound up with the revenues of the Asiatic province. If Those revenues are destroyed, our whole system of credit will come down with a crash."
-- Cicero, 66 B.C. (Translation by W.W. Fowler, 1909)

"Doctors have been caught using poisons, and those who falsely assume the name of philosopher have occasionally been detected in the gravest crimes. Let us give up eating, it often makes us ill; let us never go inside houses, for sometimes they collapse on their occupants; let never a sword be forged for a soldier, since it might be used by a robber."
-- Marcus Fabius Quintilian, Roman educator - Institutio Oratoria II, xvi

"Watch out for false prophets. They come to you in sheep's clothing, but inwardly they are ferocious wolves. By their fruit you will recognize them."
-- Matthew 7:15-23

“Oh what a tangled web we weave, when first we practice to deceive.”
--Sir Walter Scott

"Men who believe absurdities will commit atrocities."
-- Voltaire


“The things that will destroy us are: politics without principle; pleasure without conscience; wealth without work; knowledge without character; business without morality; science without humanity; and worship without sacrifice.”
-- Mahatma Gandhi

"Giving money and power to government is like giving whiskey and car keys to teenage boys."
-- P.J. O'Rourke

[bart]

Re: PPI Whopper

Bart -

Actually it was that FRED BOT character who gave me that name. They can call me 'Donkey's Rear End' and maybe that would be a better moniker (although unfortunately I'm hardly a poster child for the Democratic party who's mascot that appears to be). However a Donkey's wooden headed recalcitrance might be a good character fit for me.

Tempting.... oh so very tempting... ;)

As for the Finster - well it's great to see him back here posting! So I don't have to rely solely on the Bart to contribute all the pithy comments.

Ditto on Finster, one of the best white hats I know.

Here's your pith of the day:
M.B.A. = Money Before All

[Finster]

Re: PPI Whopper

...that futures freak with the chart compulsion and heart of (fools) gold.

And don't forget the hat of tin ...

;)

... on the other hand, we confess the more we see, the more we find ourselves donning similar milinary. We follow in your footsteps ...

...

...

... and appreciate your quotes, too. I especially like the one about the car keys and whiskey ...

[bart]

Re: PPI Whopper

And don't forget the hat of tin ...

... on the other hand, we confess the more we see, the more we find ourselves donning similar milinary. We follow in your footsteps ...

Would that I had decent certainty of where I'm going... ;)

By the way, another "whopper" that has gotten zero coverage - there was a huge leap in discount window borrowings last week. It's back above $3 billion again and even higher than it was in mid September.

... and appreciate your quotes, too. I especially like the one about the car keys and whiskey ...

O'Rourke is almost as good as Pat Paulsen:

“On the issue of inflation, I think I could solve it no matter how much money it took.”
-- Pat Paulson: 1968 Presidential Candidate & Comedian

[Finster]

Re: PPI Whopper

Would that I had decent certainty of where I'm going... ;)

By the way, another "whopper" that has gotten zero coverage - there was a huge leap in discount window borrowings last week. It's back above $3 billion again and even higher than it was in mid September...

That would then be on top of a big slug of the new "taffy" borrowings:

http://www.bloomberg.com/apps/news?p...d=aFplA_bwSyeU

Fed's Lends $20 Billion in Funds at Yield of 4.65%

(Update1)

By Liz Capo McCormick

Dec. 19 (Bloomberg) -- The Federal Reserve lent $20 billion in 28-day funds at a rate of 4.65 percent in the first of four auctions planned by the central bank to increase the amount of cash available in the banking system.

The rate was less than the 4.75 percent the central bank charges banks to borrow directly at its discount window, suggesting banks were more willing to access funds through the auction [that latter comment doesn't make sense ... if the banks preferred the taffy auction, they' be willing to pay more - not less - for it]. Financial institutions submitted $61.553 billion in bids, resulting in a bid-to-cover ratio of 3.08. There were 93 bidders, the central bank said in a statement today.

The Fed established the Term Auction Facility, dubbed TAF, last week to provide cash after interest-rate cuts failed to break banks' reluctance to lend amid concern about losses related to subprime mortgage securities. The program made funding from the Fed available beyond the 20 authorized primary dealers that trade directly with the central bank. The Fed will auction as much as $20 billion in funds tomorrow...

Let's see ... to paraphrase that (possibly apocryphal) Everett Dirksen quote ... $40,000,000,000 here, $500,000,000,000 there, $20,000,000,000 there ... pretty soon you're talking about real money ...

[bart]

Re: PPI Whopper

That would then be on top of a big slug of the new "taffy" borrowings:

http://www.bloomberg.com/apps/news?p...d=aFplA_bwSyeU

Fed's Lends $20 Billion in Funds at Yield of 4.65%

...

Let's see ... to paraphrase that (possibly apocryphal) Everett Dirksen quote ... $40,000,000,000 here, $500,000,000,000 there, $20,000,000,000 there ... pretty soon you're talking about real money ...

Are the Fed and other CBs having fun yet?

Are you considering replacing your cotton ruler with one made from taffy?

Will bart ever get back in his cage?


And on a more serious note, I did add the TAF auction data into my TOMO and TIO tracking daily charts or my daily page, and as you can imagine the total size of the money pool is approaching a record high.

[Finster]

Re: PPI Whopper

Are the Fed and other CBs having fun yet?

Are you considering replacing your cotton ruler with one made from taffy?

No … taffy is much too sturdy a substance to be compared with the US dollar…

Will bart ever get back in his cage?

And on a more serious note, I did add the TAF auction data into my TOMO and TIO tracking daily charts or my daily page, and as you can imagine the total size of the money pool is approaching a record high.

Holy helicopters, Bartman! One has to wonder again where all this money is going. It’s sure not into my pocket. And no sign it’s going into the pocket of the beleaguered subprime borrower, either.

Perhaps it is piling up in someone’s … ahem … Backyard Bank?

[jk]

Re: PPI Whopper

One has to wonder again where all this money is going.

inquiring minds DO want to know! your question really got me to thinking. where is the money going? are the banks just liquifying and holding cash? i'm especially interested in the ecb's sizable contribution. the conclusion i'm being drawn towards is that we're in a classic liquidity squeeze, with a dash to cash and velocity plummeting. and if velocity is plummeting, can assets be far behind? does this line of thinking sound right? [feedback appreciated]

[bart]

Re: PPI Whopper

Holy helicopters, Bartman! One has to wonder again where all this money is going. It’s sure not into my pocket. And no sign it’s going into the pocket of the beleaguered subprime borrower, either.

Perhaps it is piling up in someone’s … ahem … Backyard Bank?

There you go, piling it on again... are those beasties in the Manor Dungeon getting rambunctious with the holidaze spirits again?


The best analogy I can come up with on the money is Japan in the very early '90s. Their banks were so hugely overextended and many were technically insolvent, so anything the BoJ did simply had almost zero effect since most of the money never got out of the banks... and the BoJ wasn't as aggressive as the ECB, Fed, BoE, etc. are now too.

They're in massive support mode trying to get the interbank flows and trust going again somehow, and help keep the banks with the huge derivative losses liquid and solvent.

The unspoken primary purpose of CBs is as a lender of last resort... and stay tuned for more "thrilling" episodes. We're most likely far from hearing the fat lady sing... and there are many more billions to come.

[Finster]

Re: PPI Whopper

inquiring minds DO want to know! your question really got me to thinking. where is the money going? are the banks just liquifying and holding cash? i'm especially interested in the ecb's sizable contribution. the conclusion i'm being drawn towards is that we're in a classic liquidity squeeze, with a dash to cash and velocity plummeting. and if velocity is plummeting, can assets be far behind? does this line of thinking sound right? [feedback appreciated]

Ditto, JK. I don’t know. Maybe you and Bart and I and any other interested parties can put our heads together and sketch out some tentative answers.

Some observations.

Globally speaking, there is no shortage of USD (or other liquidity for that matter). In round terms, the Fed created a huge mass of them over the past few years. Much of it wound up in the hands of homeowners, who promptly sent it to BRIC and OPEC. Now even as we here in the US are short of cash, what little we have is competing with that overseas for scarce resources. It’s a very uneven inflation that’s left the West cash poor and the Rest cash rich. Hence the rock and hard place between which the Fed now finds itself.

What of asset prices? Guess that depends on which assets are in question. Those coveted by BRIC and OPEC would seem to be in good shape. Others, not so good. Equities overall look shaky. Consider the structure of the corporate balance sheet. Common stock sits at the very bottom … in effect it’s the limiting case of contingent credit. It’s hard to imagine how credit in general could be under such pressure for very long without its most speculative embodiment following suit.

As a matter of the most sketchily informed speculation, my guess would be that a lot of that fresh cash (to the extent your surmise about rollover pans out) pretty much sits static in the banking system for a little while. At some point, the political pressure for a wholesale mortgage bailout (maybe in an election year?) overcomes fiscal and inflationary concerns and the federal Treasury goes even deeper into hock. The banks buy the bonds and the Treasury gets the cash, which is used to monetize the debt via a system of grants and loans (perhaps tax "rebates" a la 2002).

At which point the helicopter drop is in full swing.

[jk]

Re: PPI Whopper

iirc, ej quoted some source to the effect that the commercial paper market recently shrunk by about a trillion dollars. pardon me while i think "out loud" -- look at citi's siv's, just digested back onto citi's balance sheet. the siv's had held cdo's financed by abcp. the abcp evaporated, as the prior buyers would not roll them over as they matured. so citi swallows the siv "assets" [the cdo's], but has nothing to finance them with, other than its own reserves, diminishing the quantity of reserves available for other loans. if citi can borrow from the fed at a low enough rate, putting up some less impaired asset it's carrying on its books, then it is liquid again. now, instead of citi, let's imagine this applies to, say, a big spanish bank with a lot of bad real estate loans and mortgages from its domestic market, as well as perhaps a slug of yankee cdo's. the spanish bank may well have been financing these "assets" with abcp, and now is gasping for liquidity as the abcp market disappears. the ecb said it would take as low as a+ paper.

conclusion: i'm not sure that the pumping is increasing liquidity enough to offset the diminution of the commercial paper market!

[Finster]

Re: PPI Whopper

iirc, ej quoted some source to the effect that the commercial paper market recently shrunk by about a trillion dollars. pardon me while i think "out loud" -- look at citi's siv's, just digested back onto citi's balance sheet. the siv's had held cdo's financed by abcp. the abcp evaporated, as the prior buyers would not roll them over as they matured. so citi swallows the siv "assets" [the cdo's], but has nothing to finance them with, other than its own reserves, diminishing the quantity of reserves available for other loans. if citi can borrow from the fed at a low enough rate, putting up some less impaired asset it's carrying on its books, then it is liquid again. now, instead of citi, let's imagine this applies to, say, a big spanish bank with a lot of bad real estate loans and mortgages from its domestic market, as well as perhaps a slug of yankee cdo's. the spanish bank may well have been financing these "assets" with abcp, and now is gasping for liquidity as the abcp market disappears. the ecb said it would take as low as a+ paper.

conclusion: i'm not sure that the pumping is increasing liquidity enough to offset the diminution of the commercial paper market!

Impossible to tell, at least based on the news reports we hear. They don't generally say exactly what passed from who to whom and what went the other way. For example, what exactly does it mean that the "commercial paper market recently shrunk by about a trillion dollars"? When Party A issues a million worth of commercial paper to Party B, that means that Party A gets a million dollars from Party B in exchange for an IOU for a million dollars. We say that the "size" of the commercial paper market is one million dollars. When Party A repays the million dollars to Party B, we say that the commercial paper market is now zero.

But what of it? The million bucks didn't disappear, right? It just made a round trip. So even if the "commercial paper market recently shrunk by about a trillion dollars", the net position of all parties hasn't changed. Something must be missing.

Yeah, questions like these may sound obtuse, but they serve to illustrate the peril of trying to handicap what is going on (and hence what is likely to happen next), based on the vague and ambiguous characterizations in most news stories.

...

[Finster]

Re: PPI Whopper

There you go, piling it on again...

We can think of no one more richly deserving than thou ...

The best analogy I can come up with on the money is Japan in the very early '90s. Their banks were so hugely overextended and many were technically insolvent, so anything the BoJ did simply had almost zero effect since most of the money never got out of the banks... and the BoJ wasn't as aggressive as the ECB, Fed, BoE, etc. are now too.

They're in massive support mode trying to get the interbank flows and trust going again somehow, and help keep the banks with the huge derivative losses liquid and solvent.

The unspoken primary purpose of CBs is as a lender of last resort... and stay tuned for more "thrilling" episodes. We're most likely far from hearing the fat lady sing... and there are many more billions to come.

One suspects in the pit of one's stomach that "billions to come" part will prove prophetic. Regardless, it's comforting to see you had anticipated my thoughts about most of that money not getting out of the banks. If that is the case, then what do you suppose the Fed is thinking? Wouldn't the money have to find its way out of the banks if credit is to begin flowing again? Or should we be asking what the Fed is smoking?

[jk]

Re: PPI Whopper

the shrinkage of the cp market in general, the evaporation of the abcp market, the size of the ted spread, and the ultra-low rates on t-bills all speak to mistrust and a reluctance to lend except to the sovereign.

in a fractional reserve system, the amplification of money runs in reverse when loans are paid off and not rolled over. this is what the cb's of the world are afraid of.

i've seen parts of this movie before- a steep yield curve and illiquid banks mean that the banks don't lend. instead they buy treasuries and earn the interest to gradually reliquify.

as we watch the various measures to inject liquidity, we also need to draw what inferences we can about what's happening to velocity.

[bart]

Re: PPI Whopper

We can think of no one more richly deserving than thou ...

Thank my lucky stars that Christmas doesn't result in me getting what I actually deserve...

One suspects in the pit of one's stomach that "billions to come" part will prove prophetic. Regardless, it's comforting to see you had anticipated my thoughts about most of that money not getting out of the banks. If that is the case, then what do you suppose the Fed is thinking? Wouldn't the money have to find its way out of the banks if credit is to begin flowing again? Or should we be asking what the Fed is smoking?

"Billions to come" is about the easiest prediction/opinion to have, it's just the timing that's tricky.

The Fed and other CBs are just playing and in the opening innings of "Save Our System".
First and foremost, they're conservative bankers and will virtually never over react to problems. Secondarily, they're literally being the lenders of last resort and trying to grease the wheels between banks and shore up liquidity... and those ephemeral things called trust and confidence.

I'm really glad that you brought up the issue of credit flowing again. The only real problems are between banks and also with the quality of their balance sheets due to derivatives issues.
Check this weekly chart of credit annual rates of change - the red line tells the actual story. Credit is continuing to expand at a pretty good clip - almost 10%.





Keep in mind that neither the Asian crisis or the LTCM mess in 1997-8 were resolved overnight. It's only been 4-5 months since the SHTF in June/July.

Also note that just because total credit is still expanding doesn't mean that it won't start dropping on a relative basis soon too. My basic point is simply that the actual total credit numbers look ok right now, even though real estate (and more recently consumer credit) are trending down hard.


And its always appropriate to ask what the Fed is smoking... ;)