So, wheres the Crash?

[GRG55]

Re: So, wheres the Crash?

From the link:

... The housing bubble, [Greenspan] said, had far less to do with the Fed’s policy on interest rates than on a global surplus in savings that drove down interest rates and pushed up housing prices in countries around the world.

What BS. He postulates a "surplus in savings" as if it were some supernatural entity that came from nowhere. But these overseas savers came into a lot money from somewhere - and it was none other than the surplus of money created by the Greenspan Fed.

It went to homeowners all over the country, who - naturally - spent it. But when a country creates a lot of money without new production to go with it, the production has to come from somewhere else. The money just goes where the production comes from.

Then what are those foreigners going to do with it? The US can't consume more than it produces unless somebody else produces more than they consume.

In a word, they saved. Listen closely Mr Greenspan:

You inflated. We spent. They saved.

The question is: Why? Or at least: Why to such a high degree?

I am not completely unsympathetic to Greenspan's (and Bernanke's) "surplus savings" argument. No disagreement that expanding US money supply created the opportunity for developing countriies to accumulate large amounts of US dollars. However, the Fed was not alone. The BoJ, BoE, ECB and others are equally guilty of expanding money supply at rates well above economic growth through much of the Greenspan era.

During the years of ZIRP - Quantitative Easing Japan also created "a lot of money without new production to go with it". The Yen became so cheap and so plentiful that it gained, and retains, the dubious status of preferred funding currency for the global carry trade. Yet today we hear no reports of over-indebted Japanese consumers or Japanese politicians advocating mortgage relief programs. Clearly "indiscriminate" money printing by the national Central Bank is not, by itself, sufficient to have led the world to the current precarious situation.

I have heard many postulations about developing country high savings rate behaviour; none of them IMO truly satisfactory. These include lack of government "safety net" social programs, fear of a repeat of the '90's "Asian crisis", deep seated historical fear of consequences of deflation (Japan) or inflation (Germany), underdeveloped consumer product marketing, immature consumer credit options, and so forth.

I don't doubt these explanations carry some validity, but, in my mind, these fall short of explaining the vast gulf in observed consumption vs savings behaviour between Americans (plus the UK) and the rest of the world. The Fed and its counterparts may have created the opportunity, but blaming Greenspan alone for the present mess is analagous to blaming distillers for alcholism, or Vegas casino owners for compulsive gambling.

Absent a coherent explanation for why some societies choose to spend all their money and more, and others in similar circumstance do not, the "global surplus in savings" cannot be dismissed entirely.

[Sapiens]

Re: So, wheres the Crash?

The question is: Why? Or at least: Why to such a high degree?

Absent a coherent explanation for why some societies choose to spend all their money and more, and others in similar circumstance do not, the "global surplus in savings" cannot be dismissed entirely.

Not the easiest book to read, but it should answer your question.

http://ia350633.us.archive.org/2/ite...lonian_Woe.pdf

[Finster]

Re: So, wheres the Crash?

The question is: Why? Or at least: Why to such a high degree?

I am not completely unsympathetic to Greenspan's (and Bernanke's) "surplus savings" argument. No disagreement that expanding US money supply created the opportunity for developing countriies to accumulate large amounts of US dollars. However, the Fed was not alone. The BoJ, BoE, ECB and others are equally guilty of expanding money supply at rates well above economic growth through much of the Greenspan era.

During the years of ZIRP - Quantitative Easing Japan also created "a lot of money without new production to go with it". The Yen became so cheap and so plentiful that it gained, and retains, the dubious status of preferred funding currency for the global carry trade. Yet today we hear no reports of over-indebted Japanese consumers or Japanese politicians advocating mortgage relief programs. Clearly "indiscriminate" money printing by the national Central Bank is not, by itself, sufficient to have led the world to the current precarious situation.

I have heard many postulations about developing country high savings rate behaviour; none of them IMO truly satisfactory. These include lack of government "safety net" social programs, fear of a repeat of the '90's "Asian crisis", deep seated historical fear of consequences of deflation (Japan) or inflation (Germany), underdeveloped consumer product marketing, immature consumer credit options, and so forth.

I don't doubt these explanations carry some validity, but, in my mind, these fall short of explaining the vast gulf in observed consumption vs savings behaviour between Americans (plus the UK) and the rest of the world. The Fed and its counterparts may have created the opportunity, but blaming Greenspan alone for the present mess is analagous to blaming distillers for alcholism, or Vegas casino owners for compulsive gambling.

Absent a coherent explanation for why some societies choose to spend all their money and more, and others in similar circumstance do not, the "global surplus in savings" cannot be dismissed entirely.

Nevertheless, we do not control economic policy in other countries. We do control our own. We can either adjust our own behavior or find ourselves in the position of constantly hectoring other countries about theirs. It ought to be clear by now that the latter is not only ineffective but counterproductive as global resentment towards perceived US bullying grows.

Yet you are correct that it is not monetary policy alone that is at fault. Our tax policy is the other major driver. We tax production far more heavily than consumption. To take just one example, recent proposals to levy an import tax of some 27% on goods produced in China are termed "punitive"; ostensibly a punishment for the failure of the Chinese to float its currency or otherwise take action to reduce its huge trade surpluses with the US. For some reason, however, a tax of similar magnitude on the production of US workers - we call it the "income tax" - escapes criticism on the same grounds. If a 27% tax is "punishment" for China, then what exactly do we think we are doing to the US worker?

But none of this exculpates Greenspan and his bubble-blowing one jot. As I’ve said before, the Greenspan Fed held rates too low too long and was too slow and too predictable in normalizing them. Lest this appear to be mere 20-20 hindsight, let’s look at some statistics from 2002-2005, when this credit bubble was being inflated:

October 2002: Stock market bottoms. Unemployment rate is 5.7% Fed funds is at 1.75%.

July 2003: US Stock prices up 26.5% in nine months. Commodity prices up 9.5% in nine months. Unemployment rate is 6.2%. Fed funds are cut to 1%.

April 2004: Stock prices up an additional 16.5% in nine months. Commodity prices up 29.7% in nine months. Unemployment rate is 5.5% Nominal GDP is up 6.5% year over year. Fed funds are still at 1%.

July 2004: Nominal GDP is up 7.2% year over year. FOMC finally hikes Fed funds 25 bp, embarking on a program of "removal of accommodation … at a pace that is likely to be measured". As it establishes a predictable pattern of 25 bp hikes, it tells the markets that even though it is raising rates, it is also giving them visibility in the sense of putting an effective ceiling on the forward trajectory of Fed funds, inviting a speculative bonanza of credit expansion. In other words, even as it is tightening in an absolute sense, it continues to ease by reducing a key element of credit market risk.

July 2005: Stock prices up an additional 10.1% year over year. Commodity prices up an additional 16.0%. The economy is said to be booming. Housing and energy prices have been galloping upward, doubling to tripling in a scant three to four years. The Fed continues its baby step program with a 25 bp Fed funds hike to 3.25%, touting low "core inflation", citing statistics that do not include energy, food, or houses. Money supply has been soaring at double-digit annual rates. This is just over a year after Greenspan himself made a speech to the Credit Union National Association extolling the benefits of adjustable rate mortgages. And for at least as long there have already been voices in the financial media warning of a credit bubble such as Doug Noland of Prudent Bear, and of housing bubble, notably Eric Janszen here at iTulip.

October 2005: US house prices are soaring to new all time highs. Oil is $70 a barrel. Double digit money supply growth continues. Not just oil, but virtually every physical commodity, including industrial metals, and foods, is experiencing breathtaking price increases. Greenspan still insists inflation is moderate.

It is during this later time frame, from April 2004 to October 2005, that the credit crisis that is getting so much attention now started. Not in August of 2007. By early 2004, it was already clear that any danger of deflation had passed, the economy was gaining strength, GDP was growing solidly, unemployment falling smartly. Commodity prices were accelerating. Stock prices were accelerating. House prices were accelerating. Money supply was accelerating. Option ARMs, no-doc loans, and the now infamous subprime mortgages were being issued. Yet the Greenspan Fed resolutely maintained it 1% "emergency" Fed funds rate. Worse yet, when it did finally wake up at the switch, it substituted rate ease with risk ease by advertising limits to future policy moves under the guise of "transparency"; a mere euphemism for predictability.

Meanwhile, we also need to put in perspective why it was thought we needed the great inflation of 2002-2005 in the first place. It was the fallout from having blown a monster bubble in the stock market. In 1995, the Greenspan Fed effectively cut bank reserve requirements to zero. Rather than recount all the gory details here, I'll refer to Aaron Krowne's outstanding piece on the matter, What (Really) Happened in 1995?. Greenspan himself remarked to his fellow FOMC members on September 24, 1996 that "there is a stock market bubble problem at this point." (http://www.wsws.org/articles/2002/se...gpan-s18.shtml). It went on for five thousand more Dow points.

Greenspan has recently attempted to defend this abysmal record by citing the global nature of the housing and credit bubble. Like the misbehaving sixth-grader, it was okay because "everybody was doing it". Not to mention that central banks all over the world were taking their cues from the US Fed, driven at least in part by the fear of damaging their export industries by having their currencies appreciate too fast in relation to the US dollar. The maestro can hardly escape responsibility for the sonic disaster he leads.

[jk]

Re: So, wheres the Crash?

The question is: Why? Or at least: Why to such a high degree?

I am not completely unsympathetic to Greenspan's (and Bernanke's) "surplus savings" argument. No disagreement that expanding US money supply created the opportunity for developing countriies to accumulate large amounts of US dollars. However, the Fed was not alone. The BoJ, BoE, ECB and others are equally guilty of expanding money supply at rates well above economic growth through much of the Greenspan era.

During the years of ZIRP - Quantitative Easing Japan also created "a lot of money without new production to go with it". The Yen became so cheap and so plentiful that it gained, and retains, the dubious status of preferred funding currency for the global carry trade. Yet today we hear no reports of over-indebted Japanese consumers or Japanese politicians advocating mortgage relief programs. Clearly "indiscriminate" money printing by the national Central Bank is not, by itself, sufficient to have led the world to the current precarious situation.

I have heard many postulations about developing country high savings rate behaviour; none of them IMO truly satisfactory. These include lack of government "safety net" social programs, fear of a repeat of the '90's "Asian crisis", deep seated historical fear of consequences of deflation (Japan) or inflation (Germany), underdeveloped consumer product marketing, immature consumer credit options, and so forth.

I don't doubt these explanations carry some validity, but, in my mind, these fall short of explaining the vast gulf in observed consumption vs savings behaviour between Americans (plus the UK) and the rest of the world. The Fed and its counterparts may have created the opportunity, but blaming Greenspan alone for the present mess is analagous to blaming distillers for alcholism, or Vegas casino owners for compulsive gambling.

Absent a coherent explanation for why some societies choose to spend all their money and more, and others in similar circumstance do not, the "global surplus in savings" cannot be dismissed entirely.

great observation. there are obviously cultural/sociological contributors here. the tax structure/incentives cited by finster can be viewed as expressions of the same cultural values. part of it is rich and developed versus poor and less developed. but the japanese are rich and developed. of course there you have to account for the effects of deflation. low nominal interest rates can still be high real rates in the context of deflation. i also think demographic factors are important- the graying of japan, the one child policy in china.

nonetheless, whatever the explanations of the behaviors of others, greenspan poured the drinks instead of doing his job: taking away the punchbowl before things got out of hand.

[Jim Nickerson]

Re: So, wheres the Crash?

great observation. there are obviously cultural/sociological contributors here. the tax structure/incentives cited by finster can be viewed as expressions of the same cultural values. part of it is rich and developed versus poor and less developed. but the japanese are rich and developed. of course there you have to account for the effects of deflation. low nominal interest rates can still be high real rates in the context of deflation. i also think demographic factors are important- the graying of japan, the one child policy in china.

nonetheless, whatever the explanations of the behaviors of others, greenspan poured the drinks instead of doing his job: taking away the punchbowl before things got out of hand.

Why Americans spend and do not save might be explained on television advertising. If you watch American TV, you are constantly bombarded with "advice" or enticements to spend, spend, spend, spend, spend.

[c1ue]

Re: So, wheres the Crash?

Jim,

I think the advertisements are part of it, but I suspect they are a symptom as opposed to the disease.

Americans in general are more optimistic (naive?) and hopeful than people of other nations.

From the 2 countries outside of the US I have been most recently spending time in:

Japan: There are an astonishing amount of REALLY wealthy people in Japan. You might not know this, but in the past only the nobility could own land. I'm not sure how private property evolved; I'm still looking into this, but the result is that those descendants have in some cases literally billions of dollars of property. Thus while I lived in Japan inside the Yamanote circle train line in Tokyo, I had 3 ferraris and 2 lamborghinis parked outside of 600 sq. foot brick houses in my block.

I'm pretty sure these were paid for with cash.

Thus people due flaunt there wealth somewhat - the cars - but don't sell the ancestral home. Perhaps they have bought a McMansion, but I seriously doubt it - there is a major cultural taboo against too much flaunting of wealth. The newspaper does publish the top 10 taxpayers for each year though.

The corresponding equivalent in the US is the square mile of McMansions, each with their Mercedes in the yard, but paid for with credit.

Russia: Equally, there are an astonishing amount of people with money. Any car here costs 2x there due to taxes and what not. I've been proudly informed twice in the past month that the person's Isuzu or Honda 4x4 cost 60K or 80K.

So far in Russia, people are spending cash. Any major house fire in Moscow or St. Petersburg probably takes 50K or more in cash with it. This is changing as credit becomes more available, but in general people still have a very strong cash culture along with a (more than) American sense of flaunting their wealth.

[Finster]

Re: So, wheres the Crash?

Jim,

I think the advertisements are part of it, but I suspect they are a symptom as opposed to the disease...

Very much so. The Fed apologists write off American overconsumption as if it were some kind of congenital disease that one acquires upon moving here. Explanations as to why are notably absent. It's not so mysterious after all, though. It's exactly what you would expect after decades of inflation. People have been conditioned to unload their dollars fast as they can. And short them (i.e. borrow) against just about anything they can.

[Finster]

Stiglitz Indicts Greenspan

http://www.itulip.com/forums/showthr...litz#post20189

Greenspan `Mess' Risks U.S. Recession, Stiglitz Says
Nov. 16 (Reed V. Landberg and Paul George - Bloomberg)

Joseph Stiglitz, a Nobel-prize winning economist, said the U.S. economy risks tumbling into recession because of the ``mess'' left by former Federal Reserve Chairman Alan Greenspan...

[Finster]

Greenspan Indicts Greenspan

Alan Greenspan himself blamed the Great Depression on actions by the Federal Reserve in the 1920s strikingly similar to those undetaken by the Federal Reserve in the 1990s. Given that he wrote this essay some twenty years before he became Chairman himself, he had every reason to know better. Reproduced below are just a few passages most relevant here; interested readers will want to read the entire piece for full context.

http://www.321gold.com/fed/greenspan/1966.html

Gold and Economic Freedom

Alan Greenspan, 1966

...A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World Was I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.

But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline-argued economic interventionists-why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely-it was claimed-there need never be any slumps in business. And so the Federal Reserve System was organized in 1913. It consisted of twelve regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled, and supported. Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government. Technically, we remained on the gold standard; individuals were still free to own gold, and gold continued to be used as bank reserves. But now, in addition to gold, credit extended by the Federal Reserve banks ("paper reserves") could serve as legal tender to pay depositors.

When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates. The "Fed" succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market-triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930's....

[itpfan]

Re: So, wheres the Crash?

I know am a bit like the kid on the back seat of the car asking every 5 mins "Are we there yet".............but although i see trouble, i don't see the "Crash" i was proimsed.
Mega

Not just a kid but a kid with severe visual impairments

The credit market crisis are floating with dead bodies to the surface but a kid with severe visual impairments can't see.

December 10 – Bloomberg (Elena Logutenkova): "UBS AG will write down U.S. subprime mortgage investments by $10 billion, the biggest such loss by a European bank, and replenish capital by selling stakes to investors in Singapore and the Middle East. Europe’s largest bank by assets plans to raise 13 billion francs ($11.5 billion)…"

December 12 - Dow Jones (Aparajita Saha-Bubna): "Moody’s…said…that tranches of collateralized debt obligations receiving default notices has jumped to $45 billion as of Dec. 11. This is nearly nine times higher than the $5.6 billion of CDO pieces that Moody’s said were affected, as of the end of October, by these default notices. The increase in volume will likely trigger fresh concerns around forced liquidation of these complex securities by investors heading for the exits."

December 12 - Bloomberg (David Mildenberg and Hugh Son): "Bank of America Corp., Wachovia Corp. and PNC Financial Services Group said losses tied to bad debt will be worse than expected, providing fresh evidence that credit markets aren't returning to normal…Bank of America Chief Executive Officer Kenneth Lewis predicted disruptions will stretch into next year at his company… Wachovia…said it may set aside twice as much for loan losses than planned in this quarter and that writedowns already equal the third quarter's total. PNC, ranked 11th, said quarterly profit will be less than analysts estimated. Today’s announcements show bankers see no quick end to losses and writedowns… Lewis said loan losses will increase in 2008 at Bank of America and Wachovia Chief Executive Officer Kennedy Thompson said conditions are the ‘toughest’ in his 32-year career."

December 13 – Financial Times (Norma Cohen): "The world’s largest banks have around $212bn of assets at risk of default as a result of the severe contraction in lending on commercial property and the expected fall in real estate values, according to a new report from…Morgan Stanley. Sales of commercial real estate have ground to a halt in recent months, as lending markets have frozen and buyers disappeared. Property experts have said that the sharp rise in real estate values in recent years has been fuelled largely by access to cheap credit and its sudden withdrawal is expected to lead to declining property prices. Because the banks made loans against the property, a drop in values could leave them holding collateral worth less than borrowings. The biggest buyers of commercial mortgage-backed securities have included the specialised investment vehicles which are themselves facing a severe liquidity shortage… Morgan Stanley is forecasting a 73% drop in the issuance of new CMBS, an activity which has made a significant contribution to profits at some banks."

Ben Bernanke’s initial estimate of $50-100 billion on sub-prime home mortgage loan losses is far beyond accurate. Exactly number is yet to be determined but as now appears likely a figure much closer to $1 trillion, and if so then the subprime meldown is more than just a localized debacle. $1 trillion losses is about 7% of US GDP. How do you expect the market to absorb such sizeable losse without go through some major institutional bankruptcies or a lengthy recession?

[FRED]

Re: So, wheres the Crash?

Jim,

I think the advertisements are part of it, but I suspect they are a symptom as opposed to the disease.

Americans in general are more optimistic (naive?) and hopeful than people of other nations.

From the 2 countries outside of the US I have been most recently spending time in:

Japan: There are an astonishing amount of REALLY wealthy people in Japan. You might not know this, but in the past only the nobility could own land. I'm not sure how private property evolved; I'm still looking into this, but the result is that those descendants have in some cases literally billions of dollars of property. Thus while I lived in Japan inside the Yamanote circle train line in Tokyo, I had 3 ferraris and 2 lamborghinis parked outside of 600 sq. foot brick houses in my block.

I'm pretty sure these were paid for with cash.

Thus people due flaunt there wealth somewhat - the cars - but don't sell the ancestral home. Perhaps they have bought a McMansion, but I seriously doubt it - there is a major cultural taboo against too much flaunting of wealth. The newspaper does publish the top 10 taxpayers for each year though.

The corresponding equivalent in the US is the square mile of McMansions, each with their Mercedes in the yard, but paid for with credit.

Russia: Equally, there are an astonishing amount of people with money. Any car here costs 2x there due to taxes and what not. I've been proudly informed twice in the past month that the person's Isuzu or Honda 4x4 cost 60K or 80K.

So far in Russia, people are spending cash. Any major house fire in Moscow or St. Petersburg probably takes 50K or more in cash with it. This is changing as credit becomes more available, but in general people still have a very strong cash culture along with a (more than) American sense of flaunting their wealth.

You are bring up a favorite iTulip theme we've followed for nearly a decade. "Too much" inflation in Japan is "not too much" in the U.S., "not enough" saving in Japan is "a lot" in the U.S., and "too much" debt in the Japan is "just right" for U.S. households. These differences are cultural as well as the result of multi-generational government campaigns to encourage saving or dis-saving. See Mortgage Market Off the Rails, Economy to Follow.

[Finster]

The Savings Glut Myth

This savings glut myth is one of those vague and fuzzy concepts that begs to be deconstructed into concrete blocks. First, we need to consider whether exactly what we're talking about. Did the Chinese et al just pile money up in their mattresses? If it were simply "savings" at issue, wouldn't that be the case? And if it were, it couldn't very well be supporting US bond prices and holding down US interest rates, right?

No, the money was lent. So is there was any glut going on here, it was a "lending glut". Next, realize that the global economy is a closed system. No one here is conducting commerce with space aliens. If one party is lending, another party is borrowing. So if there is a lending glut somewhere, there must be a borrowing glut somewhere else. It was never possible for Asia to sua sponte engage in a lending spree on its own. One cannot simply decide one will be a creditor and carry it into effect without someone else willingly becoming a debtor.

[jk]

Re: The Savings Glut Myth

This savings glut myth is one of those vague and fuzzy concepts that begs to be deconstructed into concrete blocks. First, we need to consider whether exactly what we're talking about. Did the Chinese et al just pile money up in their mattresses? If it were simply "savings" at issue, wouldn't that be the case? And if it were, it couldn't very well be supporting US bond prices and holding down US interest rates, right?

No, the money was lent. So is there was any glut going on here, it was a "lending glut". Next, realize that the global economy is a closed system. No one here is conducting commerce with space aliens. If one party is lending, another party is borrowing. So if there is a lending glut somewhere, there must be a borrowing glut somewhere else. It was never possible for Asia to sua sponte engage in a lending spree on its own. One cannot simply decide one will be a creditor and carry it into effect without someone else willingly becoming a debtor.

if the chinese savings rate were markedly lower, and their consumption correspondingly higher, the global economy would look very different. there is information content in the statement that the chinese have a high savings rate.

[EJ]

Re: The Savings Glut Myth

if the chinese savings rate were markedly lower, and their consumption correspondingly higher, the global economy would look very different. there is information content in the statement that the chinese have a high savings rate.

Excellent discussion. We ask our contacts in China: "Why is the savings rate so high in China, 50% last we checked."

The response is that there are two primary factors. One is that the people do not trust their government or banks; the Chinese have seen their savings wiped out repeatedly over the centuries by bank failures and cancellations of currencies. The second is an ancient cultural emphasis on saving and against debt, likely at least party a result of distrust of government. These factors will diminish gradually over time, unless the Chinese government acts in a way that confirms its citizens' fears.

On the topic of "Where's the crash" asked on another thread, the credit markets have been crashing since July. The question is, when does the stock market follow? As I've said before, market participants remain confident that CB efforts to manage the credit crisis will effectively prevent bank failures, and that the Fed, Bank of England, and others will keep insolvent banks open and functioning just as the Bank of Japan did in Japan during their 1990s debt deflation. As long as the banks are lending, the financial system and economy will continue to function.

Central banks are substituting CB credit issuance for the credit issuance lost to the crash of the securitization market. Call this Plan A. Plan B is a far more comprehensive program of CB money printing and purchase of assets by CBs and arranged asset sales to foreign purchasers. The crash occurs when either 1) Plan A fails and before CBs move to Plan B, or 2) the inherently inflationary impact of Plan A begins to look both extended and volatile. Remember, not only inflation but more importantly volatility creates the worst problems for financial assets and tends to boost the price of gold. Gold has been rising not so much in response to rising inflation as to rising inflation volatility, inflation vol. The reason is that gradually rising inflation can be effectively hedged while inflation that rises and falls rapidly cannot.

After the stock market crashed and global CBs embarked on a policy of currency depreciation to reflate economies, we entered a period of high inflation vol, what I call Period X. Inflation vol died down for about a year between July 2006 and July 2007, during which time gold prices leveled off around $650. With the crash in the securitized debt market in August 2007 and the beginning of the execution of Plan A by CBs, inflation vol has picked up again, and gold prices with it.

Incidentally, in our Gold Update (our first since 2001) we go into each previous period of inflation vol A1, B1, etc. to find parallels and predict the future of inflation vol.

[Finster]

Re: The Savings Glut Myth

if the chinese savings rate were markedly lower, and their consumption correspondingly higher, the global economy would look very different. there is information content in the statement that the chinese have a high savings rate.

If the question had nothing to do with US policy, we could make such an observation and just leave it at that. But Greenspan has been trying to use that as a diversion from the fallout from his record at the Fed.

It remains that Chinese savings (lending) activity cannot exist in a vacuum. There must be a borrower somewhere. And why would Americans spontaneously - all together, now - get so enthusiastic about going deep into debt?

Something in the water?

Or ... just maybe ... ultra low interest rates?

Just as a little "thought experiment", let's ask what the rational response of people ought to be. Just suppose there exists a security X that depreciates at 6% a year. At the very least, you wouldn't want to hold much of it. That is, you wouldn't want to "save". Not only would want to get rid of all you had, but what if it could be borrowed at 3% a year? Looks like a pretty obvious short, huh? What if it's the US dollar?

Well the Greenspan Fed created zillions of these things in its last few years. Made them ultra-cheap to borrow, while they established a pattern of depreciating well into double-digit rates against, inter alia, residential real estate. It was only natural (and as we have seen, consciously anticipated by Mr. Greenspan) that they would make their way into the pockets of millions of Americans and ultimately be spent. Meanwhile, there was no new production in the United States commensurate with the new money. If, say, Americans have 20% more money to spend, but only produce 5% more, the difference has to be made up from somewhere else. That means loads of the new dollars go overseas. Once there, they begin to compete with the dollars remaining at home for resources (oil, copper, wheat, you-name-it), driving up prices.

This prompts the Bernanke Fed to tap on the monetary brakes, slowing the flow of new dollars into the US economy, at the same time the outflow amounts to hundreds of billions a year. Result: Americans wind up short of dollars while the rest of the world is swimming in them.

America, meanwhile, is still consuming more than it produces, so there isn't much for foreigners to buy from America with all these dollars.

Except perhaps for its IOUs ...