Volker:Nervous About Inflation; China Chose to Hold Dollars

[Glenn Black]

Re: Volker:Nervous About Inflation; China Chose to Hold Dollars

Great curve. The discontinuity seems to start in 1952.

What change or policy shift occurred then? Is that not the birth of the changes and new systems that we have step-by-step taken to obscene levels today?

Wasn't 1952 the start of tract housing & sub-divisions (eg. Levittown, Pennsylvania)?

Was this not the start of the real estate housing boom that continued, more or less, until 2007?

[Guest]

Re: Volker:Nervous About Inflation; China Chose to Hold Dollars

GRG55 - Came across a quote from Bob Hoye - he's indirectly substantiating in some part your own thesis noting that FIRE type market manipulation has been robust and rampant well before the advent of the 1980's "official" start of the FIRE economy. He cites market interest rates willfully and programmatically distorted by the Treasury even in the 1960's - and this lends it's argument to your own assertion that the 1987 crash could just as well have been caused in part by a contamination of some of those (FIRE) distortions.

Regarding Bob Hoye - I take some of his opinions but discard others, although he's a quite decent historian / analyst. Case in point, notice the side mention at the end of the quote, wherein he flatly states that the famous (and now at first glance, presumedly shopworn) "China / India bid" underpinning commodities prices has been proven by this global commodities collapse to have been a complete canard. I respect Bob Hoye but this sort of throwaway comment is why I have learned to take his op-ed pieces with a pinch of salt, as he has a few pet theories which I find manifestly untenable.

(His debunks on global warming were another peremptory and not very compelling example.)

He's got a very strong "financialized origin of all phenomena" bias (we have apparently a lot of purist proponents of that here). According to this suspiciously tidy explanation of macro trends, the entire bid underpinning commodities is a "pure" credit cycle expression (what Bob Hoye thinks he's pointing out here). Quite apart from the fact that this is a superficial read of the commodities, it is a symptom of bias in how he reads an entire gamut of other issues.

The credit cycle rules everything apparently, for Bob Hoye, which is (IMO) a striking bit of shortsightedness for a chap who is otherwise an outstanding market historian. Regardless, I take his point clearly, on the open, blatant manipulation of interest rates well prior even to Volker. And this actually substantiates your own point here. In case you find my position ambiguous for bothering to mention why you might be right, and I wrong, I like to dig up good arguments for both sides of an issue. Bob Hoye is on your side in this question.

The immediately prior market crash comparable to 1987 in terms of magnitude was 1929. That marked the beginning of the end of FIRE economy v.1.

This does not weaken the argument at all Lukester.

However, at the end of the day it really does not matter. Dissecting the chicken entrails of market history is an exercise in seeing what we want to see, coloured by what we believe ["I'll see it when I believe it"]. What you see is different from what I see. So be it.

QUOTE:

This Year:

"Jim Rogers said that the Federal Reserve will probably start buying treasuries to keep borrowing costs down, postponing a disaster in U.S. Government bonds." - Bloomberg, March 9, 2009

This observation is so naïve as to be almost Zen-like. History provides many outstanding examples of unintended consequences, but one of the biggest involves simple arithmetic and government ambition.

At the secular low in interest rates for long-dated treasuries in the 1940s, the establishment got used to rates around 2.5 percent. Then as the yield rose to 3 % politicians and bureaucrats were quick to calculate that the overall cost of servicing government debt would increase.

Responsive to advice from economic charlatans, the treasury was persuaded that buying treasuries out of the market would lower long term interest rates. This went on and as the program was flooding currency markets with dollars - said dollar depreciated, forcing an inflation premium upon interest rates. The result was rising long interest rates and the 6 percent level had even greater arithmetic, and the federales redoubled their efforts to lower long rates.

The "new" buying program was propagandized as "Operation Twist", and a subsequent Fed paper noted: "From this episode [Operation Twist], many policymakers and analysts should have recognized that long-term interest rates cannot be substantially reduced by market gimmicks." Although it was abandoned in 1966, other misguided efforts to artificially lower interest rates conspired to drive long rates to 15 percent in 1981.

It is worth recalling the story that China and India were going to drive commodities for years:

"Chinese house prices fell by a record last month, paced by a 15 % plunge in Shenzhen."

- Bloomberg, March 10, 2009

Rather than accepting official schemes on their face value, market participants should contemplate the doctrine of unintended consequences.

[charliebrown]

Re: Volker:Nervous About Inflation; China Chose to Hold Dollars

Maybe I just had an epiphany?? You can service the 500% debt, IF if is long term, and if there is inflation. It's the debt holder that get screwed getting paid back in deflated dollars.

Is this why the fed is so afraid of deflation?? 500% cannot be serviced if dollars are becoming more valuable in time.

So is this the modus operendi? Externalize the debt, (push it onto foreigners), then turn up the inflation engine. It's only when the lender figures out the game that it ends.

If the U.S. could become economically independent (restore our manufactuing base and energy infrastrucure) then we could just walk away from the foreign debt (dollar devaluation/inflation) and they are left with a pile of meaningless paper.

[bpr]

Re: Volker:Nervous About Inflation; China Chose to Hold Dollars

Great curve. The discontinuity seems to start in 1952.

What change or policy shift occurred then? Is that not the birth of the changes and new systems that we have step-by-step taken to obscene levels today?

Wasn't 1952 the start of tract housing & sub-divisions (eg. Levittown, Pennsylvania)?

Was this not the start of the real estate housing boom that continued, more or less, until 2007?

[tinfoil]Isn't that also right around the time the goons started overthrowing popular elected governments and erecting democracies that strangely resembled colonies?[/tinfoil]

We're getting closer and closer to being disappeared here at iTulip.

[Supercilious]

Re: Volker:Nervous About Inflation; China Chose to Hold Dollars

Great curve. The discontinuity seems to start in 1952.

What change or policy shift occurred then? Is that not the birth of the changes and new systems that we have step-by-step taken to obscene levels today?

Wasn't 1952 the start of tract housing & sub-divisions (eg. Levittown, Pennsylvania)?

Was this not the start of the real estate housing boom that continued, more or less, until 2007?

Besides the RE game there were two other factors:
- USA had to start paying the bills for the Korean War
-Japan has started in '49-'50 it currency manipulation/mercantilist scam which allowed for the Japanese "economic miracle" with 9%+ GDP growth every year (sounds familiar ? a nonsensical war that not supposed to be won and a deficit with an asian "economic miracle" ?)

History repeats itself with fresh but small variations, so it won't be outright boring.

If Nixon left the rest of the world, in '71, holding the empty dollar bag, what do you thing The Chosen (by the CFR) One (TM) will do in similar conditions? Hmmm.... let me think hard ....;)

[Supercilious]

Re: Volker:Nervous About Inflation; China Chose to Hold Dollars

Maybe I just had an epiphany?? You can service the 500% debt, IF if is long term, and if there is inflation. It's the debt holder that get screwed getting paid back in deflated dollars.

Is this why the fed is so afraid of deflation?? 500% cannot be serviced if dollars are becoming more valuable in time.

So is this the modus operendi? Externalize the debt, (push it onto foreigners), then turn up the inflation engine. It's only when the lender figures out the game that it ends.

If the U.S. could become economically independent (restore our manufactuing base and energy infrastrucure) then we could just walk away from the foreign debt (dollar devaluation/inflation) and they are left with a pile of meaningless paper.

Yep you got it. Welcome to the Fed's Hammer Drill Theory, Add to that creating deflations and Ka-Pooms abroad so the ROW will start being starved for dollars (makes even printing a breeze).... and that is about it ....
http://blogs.cfr.org/setser/2009/03/...-market-funds/

China’s purchases of US Treasuries in 2008 (Setser/ Pandey estimate): $245 billion
US money market funds purchases of US Treasuries in 2008, from the flow of funds: just under $400 billion
China’s purchases of US Agencies in 2008 (Setser/ Pandey estimate): $38 billion. That reflects $85 billion in purchases through July, and $47 billion in sales since then …
US money market fund purchases of US Agency bonds: $542 billion
China’s purchases of Treasuries and Agencies in 2008: $283 billion
US money market funds’ purchase of Treasuries and Agencies in 2008: $942b
I am waiting for a round of stories pondering whether money market funds will continue to buy Treasuries and Agencies at their 2008 pace!
US money market funds holdings of Treasuries and Agencies rose by close to 350% in 2008, as their combined Treasury / Agency portfolio rose from from $392b to $1334b. That pace of growth of growth won’t be sustained. The large rise came from a low base.
But money market funds did hold more Treasuries and Agencies ($1357b) at the end of 2008 than China ($1233b) did.

, and:

http://blogs.cfr.org/setser/2009/03/...n-illustrated/

Here is one indication of the scale of the change: the US government was — according to the latest US balance of payments data – a large net lender to the world. Yes, a net lender, not a net borrower.

Of course deficits don't matter....