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"First you argue correlation doesn't matter, then you argue that it does. Not sure what you mean."
Now you are being purposefully stupid. I did not say correlation DOES NOT MATTER. I have said, and the overwhelming majority of economists say, that the run up in commodities prices has far more to do with supply/demand expectations than with dollar valuation. And the dollar index is far less correlated with commodity index price changes than any sort of measure of economic growth or expected growth - be it the yield curves, stock market, whatever.
You really are unnecessarily nasty, jason. You have an opinion; I do not share it.
However, just looking at a chart:
your trader's opinion doesn't hold water. From January 2007 to July 2008 - 18 months or so - went from 113 to 215. That is, it nearly DOUBLED in 18 months.
Are you telling me that the demand for commodities DOUBLED in 18 months, and that there was no speculation involved in this pre-crash run-up?
Because if you are, you would be alone in that. And we are seeing the exact same run-up now, and since we have not even recovered to the prior GDP levels, it seems not likely to be due to "supply and demand."
It is a bubble, and it is crashing.
If you extend that view to 20 years, you will see a clear bubble pattern, not unlike the bubble in housing:
It simply is what it is.
>You really are unnecessarily nasty,
Steve you must be new here.
"Are you telling me that the demand for commodities DOUBLED in 18 months, and that there was no speculation involved in this pre-crash run-up?"
Boy, did you ever even take Econ 1? High school econ? Because demand on the slope of the supply-demand curves, and the elasticity of demand, you can have demand go up 5% for prices to double or double for prices to go up by 5%.
I mean literally I learned this in HIGH SCHOOL.
....and you know from the real estate market that it does not take TWICE as many people looking for rental apartments in Chelsea for prices to double.
You must have learned it in high school, jason: what you say is possible, but not probable. It is highly unlikely for prices to double if demand goes up 5%.
And yes, I do have a degree in economics, so no need to resort to the wikipedia.
"it does not take TWICE as many people looking for rental apartments in Chelsea for prices to double."
No. It takes a doubling of incomes for rental and property prices to double. Hence the housing crash - it was all fake.
And it would take a doubling of GDP - or thereabouts - for prices of commodities as a whole to double. Especially since, historically since the Egyptians, commodity prices fall over time in real terms; they do not rise.
There is simply no economic justification for those spikes in prices, other than speculation.
You clearly learned very little. I majored in Econ at Cal myself, and took it again at NYU when I got my MBA. My point is however that prices are determined by the marginal product, and by the slope of the supply/demand curve. You don't need GDP to double for prices to double. Seriously, how can you be that stupid and claim to be an econ major?
We know perfectly well that OPEC was able to cut the supply of oil by only lets say 20-30% to triple the price of oil in the 70s. Similarly, the Iran crises raised prices by a much higher percent than Iranaian production halts lowered the supply. This is basic, basic stuff here. really high school level.
If you have very inalstic demand for a product - and in the short term, you clearly do for almost all industrial inputs - then something as little as a 10% rise in Chinese GDP can yes increase the prices of rare Earths or copper or palladium by far more than 10%.
I mean seriously - call up ANY of your old econ professors if you don't believe me. Forget commidities. lets just pretend I concede and say its 100% the dollar causing the spikes. I really want you to understand this basic concept you failed to grasp in all your years of econ study. Seriously, so you don't embarrass yourself at parties, call and ask ANY econ professor about the GENERAL CONCEPT of the curvature of the supply-demand curve and the elasticity of demand (think also of marginal utility curves) can for markets - ANY MARKETS for ANY good or service, result in prices dropping or rising by far more than the percentage increase or decrease in supply or demand.
This really is embarrassing for you.
"This really is embarrassing for you."
Not really, and in fact, not at all
"its 100% the dollar causing the spikes"
Did I EVER say that? No, not ever. In fact, I'm not very much of a believer in the price of the dollar affecting commodities the way that's bandied about on CNBC. It has some impact, but not a lot, and not enough to cause the spike in commodity prices that we have seen recently.
I know all of the theory, and I stand by what I said: you've presented nice theoretical arguments as to how the explosion of commodity prices MIGHT be due to the supply and demand curves. Indeed, some of it MIGHT be. Some of it might also be due to the fall in the price of the dollar. But there is no empirical evidence that the demand for corn, or oil, or anything else, for that matter, rose to precipitous heights in the last year, or that the supply was seriously impeded. In fact, the supply and demand for oil were relatively unchanged in that time, but oil prices rose 50%. Such a rise in such a short time cannot be attributed to supply constraints or demand increases.
The only thing that rose significantly during that period - along with the prices - was margin borrowing. It is speculation pure and simple, and as it unravels - and it is unraveling - the markets suffer extreme volatility, as they are today.
The same arguments you are making - this time it's different - have been made in every bubble ever in the history of the world. In the medium- to long-term, however, prices always revert to their mean. You should call up your own dead econ professors and ask them about that: it will do you good.
ps: you should also review the history of the OPEC oil embargo during the 70s: I lived through it, remember it well. It was not a cut in production; it was an out-and-out embargo.
And you know what happened? Same thing that always happens in situations like that: it fell apart in the medium-term, because the incentives to cheat were too high, and the cost of oil was too high with respect to incomes. It caused a severe recession.
...but my point is it does not matter if I JUST took HS econ. This is basic.
Here is a simple interactive explanation of at least the elasticity of demand concept:
I'm very familiar with elasticity of supply and demand, jason - no need to look it up. Arrogance isn't getting you very far.
What would be useful is if you would provide something to back up your claims that the inexorable rise in commodity prices since the onset of QEII is, in fact, due to an increase in demand or a decrease in supply.
In fact, for crude oil here is the chart through 2009:
In fact, oil consumption FELL in 2008, the very year that prices skyrocketed. Plug that into your elasticity of demand model and tell me what you get.
So you know, I did a quick correlation of international oil consumption to the average nominal and inflation-adjusted price of oil from 1980 through 2009, inclusive. And the results are:
The correlation between crude oil consumption and nominal prices in that period was: .533512.
The correlation between crude oil consumption and inflation-adjusted prices in that period was: -0.07704.
There is, then, ZERO correlation between oil consumption and oil prices.
If you just take from 2000 through 2009, the correlation is much higher: .86.
With one outlier:
That outlier was 2008 - the year of the leverage, the year of the crash.
Case - essentially - closed.
Forgot to mention: there is not a significant increase in oil consumption in that time period: it averages 1.2% per year.
It is a nonrenewable resource so some increase in price over time would be expected, but that is, in fact, NOT the case: the inflation-adjusted price of oil reached its peak in 1980, and did not come close to it again until 2008.
The median price of oil in that period was $34.50; the average was $45.46; but the standard deviation was 22.815.
It is simply NOT the case that the price of oil spiked in 2008 because of supply or demand. It was pure speculation.
"inexorable rise in commodity prices since the onset of QEII"
??? Crude going from $75 to $82 is an "inexorable rise" ??? Huh?
"No. It takes a doubling of incomes for rental and property prices to double. Hence the housing crash - it was all fake."
"And it would take a doubling of GDP - or thereabouts - for prices of commodities as a whole to double"
"Crude going from $75 to $82 is an "inexorable rise" ??? Huh?"
Read again. It went from $75 to $115, then fell back as QEII ended. And it's not the only commodity - take a look at corn, gold, silver....
"It takes a doubling of incomes for rental and property prices to double."
Yes it does, for rents. To purchase, the only thing that could affect prices beyond incomes would be - again - LEVERAGE. Incomes drive property prices - if you have a different theory (there isn't one) I'm all ears. It's the fundamental law of supply and demand: you cannot demand more than your income can afford.
Actually, the truth is, until around 2000, over the history of the world, commodity prices have FALLEN in real terms. There is no fundamental reason for the price of wheat, for instance, to increase significantly over the medium-term: there is just so much wheat that can be consumed, after which you can't consume anymore. And if the price goes up too high, you can eat rice instead.
Really, Bsex, unworried as you are about how your 3 stocks are doing, if you don't know that rents and property prices are 100% correlated to incomes, you should not be opining on things economic. Jason is correct insofar as, in the short-term, there can be reasons for commodity prices and even housing prices to rise or fall suddenly, but in the medium- to longer-term, they ALWAYS revert to the mean.
And the reversion to mean can be very violent.
I said said EXPECTED demand, not actual consumption. Oil prices move up and down based on EXPECTED supply and demand. So silly. They are based on futures market, not past or present consumption.
And its the value of the dollar versus OTHER CURRENCIES, not inflation - jesus Christ! - that determines rather the dollar "debasement" or appreciation is causing oil to go up or down.
But others have ran correlations of the dollar index and oil going back decades and found it enitrely uncorrelatied...BUT...of COURSE INFLATION is going to be highly correlated with oil prices! Jesus Christ!
And I gave you a basket of commidities, not just oil, BTW.
Back to the futures market and oil - if the market thinks economic growth will happen, or supply will disrupted in the middle east, THIS is what determined the price!
Just like any S&P Company blowing past analysts estimates, but guiding lower. The stock will go DOWN because its FUTURE expectations.
And seriously...come on...INFLATION IS CORRELATED WITH OIL PRICES FOR OBVIOUS REASONS.
Do the dollar index versus other currencies to oil. Which has been done to death.
See for example http://www.econbrowser.com/archives/2007/10/does_dollar_wea_1.html
You have it backwards - the correlation between the dollar index and oil is strong in the short term and weak in the long term.
"Oil prices move up and down based on EXPECTED supply and demand."
If that is true - which it's not - then expectations are wildly off, because there is no correlation between prices and actual demand.
"THIS is what determined the price!"
Time to give up that theory. There was no EXPECTED supply and demand change in 2008, to drive oil prices up to $145 a barrel. All there was was speculation.
"But others have ran correlations of the dollar index and oil going back decades and found it enitrely uncorrelatied"
I don't remember having said anything about the dollar index.
"And its the value of the dollar versus OTHER CURRENCIES, not inflation - jesus Christ! - that determines rather the dollar "debasement" or appreciation is causing oil to go up or down."
Who said otherwise? Did I? I don't think I did.
"INFLATION IS CORRELATED WITH OIL PRICES FOR OBVIOUS REASONS."
But it's not. Dig deeper, read again: "The correlation between crude oil consumption and inflation-adjusted prices in that period was: -0.07704."
"The correlation between crude oil consumption and NOMINAL prices in that period was: .533512."
Even nominally - there was no correlation between inflation and oil prices, though a lot depends on the definition you use for inflation.
"...BUT...of COURSE INFLATION is going to be highly correlated with oil prices!"
Yet it's not.
Really Jason, you're reverting to the LICC method of trying to win an argument, by claiming that I said things that I didn't, and by claiming that magical forces - what the market "thinks" - is what drives prices. If that were so, then the inflation-adjusted peak price for oil COULD NOT HAVE BEEN 1980 - which it was - because we were mired in one of the deepest recessions ever.
Give it up.
Really, the more I think about it, the funnier it gets.
So, according to Jason, because the price of oil is highly correlated to inflation, there must have been 50% inflation between 2007 and 2008, because that's how much the average price of oil rose.
Really. I'm far more patient than I ought to be.
Elasticity of intelligence.
"Goldman predicts new boom for commodities..
...Goldman Sachs forecast that slumping commodity prices would rebound strongly in the next year as growth in demand from prospering emerging markets far outweighed the impact of the crisis in Western economies...
...Industrial metal prices are down nearly 24 per cent this year, as optimism about a strengthening economy gave way to concerns about the the debt crisis in the West..."
"...“Barring a global financial crisis, we view the European turmoil as a headwind to global growth, which we expect will only take away some of the upside to commodity prices, not reverse it,”Currie, London-based head of commodities research, wrote in the commodities report.
With emerging market growth expectations still “relatively solid,” the bank anticipates “demand growth in 2012 will be sufficient to tighten major commodity markets,” according to the report. “Accordingly, we are now near-term neutral but maintain our overweight recommendation on a 12-month horizon,” Currie wrote...."
Not a WORD about the dollar impacting the price. Its entirely supply-demand. I suspect he may know more than Steve or Riversider about commodity prices.
"...Chinese demand had ended a century of steadily falling raw-material costs for rich-world consumers..
...There is a more straightforward explanation for the scarcity: the surge in commodity prices is simply the result of exploding demand and sluggish supply. The demand side has been boosted by industrial development unprecedented in its size, speed and breadth, led by China but not confined to it. Growth in emerging markets is both rapid and resource-intensive. The IMF estimates that in a middle-income country a 1% rise in GDP increases demand for energy by the same percentage. Rich economies are far less energy-hungry: the oil intensity of OECD countries has steadily fallen in recent years...."
Not a word about the dollar.
I suspect the writers at the economist know about what they speak also.
In fact, if you read any research report from any Wall Street firm - be it on Alcoa from CLSA, or on ICE's energy trading business from Credit Suisse, the only thing they talk about is SUPPLY AND DEMAND.
Every time Golden Slacks predicts something, the exact opposite happens. They were predicting a huge surge in stocks right before the collapsed, and in 2008 were predicting $200 a barrel oil right before it dropped to $33.
American economists, central bankers and fiscal policy makers have reinterpreted British economist John Maynard Keynes's clever idea that government spending is the best way to counteract a serious economic downturn -- and have turned it into a permanent prescription. In their version of the Keynesian theory, declining growth or tumbling stock prices should prompt central banks to lower interest rates and governments to come to the rescue with economic stimulus programs. US economists call this "kick-starting" the economy.
Cheap money created the fertilizer for the excesses of the US financial industry. Low interest rates seduced mortgage providers into talking even the homeless into taking out mortgages. And the same low rates made it easier for investment banks and hedge funds, using increasingly risky loan structures, to transform the once-leisurely insurance and bond markets into casinos.
Now the bubble has burst. This has not, however, prompted the US government to conclude that its prescriptions could have been wrong. On the contrary, now it wants to increase the dose. Obama plans to follow the largely unsuccessful 2008 economic stimulus program with a new program this year. Meanwhile, Federal Reserve Chairman Ben Bernanke says that he intends to flood the economy with cheap liquidity -- for years, if necessary.
The real problem, though, is a different one. The US economy doesn't lack money. Rather, it lacks products that can compete in the global marketplace. The country has a deep trade deficit, yet the Obama administration is borrowing money at the same rate as near-bankrupt Greece.
>Every time Golden Slacks predicts something, the exact opposite happens.
Yet somehow the protesters haven't managed to find Goldman's headquarters.
Uhm, RS, that is really a shallow article. First, the "permanent prescription" was an invention of St. Ronald, built upon by George II, under the guise that if you cut taxes you'll have to cut spending along with it. Second, "Low interest rates seduced mortgage providers into talking even the homeless into taking out mortgages" is just dumb: Low interest rates were part of the problem; securitization was part of the problem; bad ratings was part of the problem. The "homeless" were not part of the problem.
The US is extremely competitive in terms of goods: Apple, for instance, Boeing, etc. The issue is that they design the products here, but manufacture them elsehwere. There are many reasons for that, not insignificant among them are labor costs and currency manipulations. Which, yes, it does exist.
Balancing the budget now would be the Stupidest Thing Ever. Sort of like bleeding a TB patient to evacuate the "humours." Lots of good that does.
"American economists, central bankers and fiscal policy makers have reinterpreted British economist John Maynard Keynes's clever idea that government spending is the best way to counteract a serious economic downturn -- and have turned it into a permanent prescription. "
Which economists? Not Krugman, Stieglitz, Deanra-Tyson or Reich. None of the Wall Street economists I read. They in THIS circumstance, like in the 1930s, government spending can help. Not in EVERY. In fact, they all agree that Milton Friedman is correct in OTHER circumstances. This silly broad-brush critisim is a tires straw man argument.
Friedman's theories on low taxation work in environments of extremely high taxation, not in an environment like today's. The theory that inflation is a purely monetary phenomenon has been pretty much debunked. The Efficient Market theory has also been debunked, as has the "crowding out" theory.
Government action should be countercyclical: when times are good, the government should be parsimonious. When times are bad the government should be splendid. That, however, is a hard lesson to learn.
What Steve said (only about Friedman.)
"...Commodity prices have fallen sharply this year. They’re still above their levels at the bottom of the global slump, but that’s hardly surprising. What may be surprising is that they’re just about where they were in 2007, before the big 2007-2008 runup. Over a 4-year period, then, it turns out that the Bernanke Fed has just about stabilized commodity prices — not that this is a good goal, but it is what has happened.
So will people like Ryan admit that the dollar has not in fact been debased? Will they look at the recent plunge and conclude that maybe we need more expansion, not tightening? Will they admit that their favorite “experts”, who saw the commodity bulge last year as a harbinger of hyperinflation, don’t know anything? Is the Pope Jewish?..."
It burns Steve. It burns.
What burns, Jason? I never said the dollar had been debased, and I never attributed a significant portion of the rise in commodity prices to the dollar.
I said it was due to margin, and if you look, the CME has raised margin requirements on contracts and, BEHOLD, the prices fell.
As soon as the Fed stopped pumping QEII money into the economy, things started to collapse. Exactly as they did after QEI.
Wow, reading a ton of confused statements. What a kerfuffle of thought.
Bernanke with his QE@ did debase the currency and raise commodity prices. We saw the dollar go down and liquidity go into speculative assets instead of lending & new credit. What we're seeing now is that QE2 ultimately didn't work, with investors learning once again that the Fed can't keep stock prices up forever. Europe meltdown and continued deleveraging at all levels both in the U.S. and elsewhere has taken money out of risk assets and money is flowing out of commodities in general(add to that a weakening global economy reduces the need for copper, oil, etc . The rise in the dollar of late is because as Bill Gross calls it, we're the least dirty shirt in the hamper.
RS - contrary to CNBC, the price of the dollar has very little impact on the price of commodities. It's not the Fed's responsibility to "keep stock prices up forever."
"Bernanke with his QE@ did debase the currency and raise commodity prices."
No he did not. I just showed you graphical proof that commodity prices are exactly where they were 4 years ago. They want up then came back down, despite a tripling of the monetary base. Here it is again, idiot. Click on the 5-year chart:
Here is the chart if you can't figure it out. Again, 5 years: http://www.bloomberg.com/quote/CRY:IND/chart
Here is CPI charted against commidty prices and monetary base over the past three years:
RS, the definition of "debase" is: "lower the value of (coinage) by reducing the content of precious metal."
Thankfully, there is no precious metal in our coins; most are made out of stainless steel. The Big Stuff is made of paper and linen. Most exchange rates float, and their parities in the medium- to long-term are based on interest rates. So if US interest rates are lower than European interest rates, the US dollar falls to equalize them.
I know you're a True Believer in the Fiat Currency Larry Kudlow Ron Paul Gold Standard Myth. Unfortunately, the gold standard never worked, and it was constantly dropped (Civil War, Great Depression, for instance) because it is inflexible. It led to massive economic swings from boom times to bust. It was finally dropped in the '70s because Charles DeGaulle called the US's bluff and was about to take all of France's dollar reserves and ask for gold in return. Of course the US didn't have that much gold, and the whole thing fell apart, as did Bretton Woods.
Gold is NOT a hedge against inflation; it is NOT an alternative currency; it does NOT pay interest; it CANNOT be invested; it is NOT an industrial metal; it has very few uses except for false teeth and jewelry because it's inert (which is also why it's not an industrial metal - can't be combined with much of anything). It's been - like all commodities - on an 11-year bull run (see below). However, it still hasn't recovered in price from the initial gold run of the 70's, not even on an inflation-adjusted basis. It's just a myth.
Regarding it and other commodities, commodity prices fell 80% in real terms from 1840 through 2002. Some adhere to the myth that this is due to increased demand, but there has also been an increase in supply. A lot of this bull run is due to the ease with which people can buy commodities and not have to take delivery on them, aka speculation, aka on margin. What QEII did was increase risk appetite, which increased margin astronomically because of low interest rates and the belief that the government would support asset prices. When QEII ended, and Twist didn't add any new money into the system, that belief was put to the lie, and reality set in; the QEII Bubble is necessarily bursting, just like the whole thing burst after Lehman Brothers.
ob Ivry, Hugh Son and Christine Harper have written an article that needs to be read by everyone interested in the financial crisis. The article (available here) is entitled: BofA Said to Split Regulators Over Moving Merrill Derivatives to Bank Unit. The thrust of their story is that Bank of America’s holding company, BAC, has directed the transfer of a large number of troubled financial derivatives from its Merrill Lynch subsidiary to the federally insured bank Bank of America (BofA). The story reports that the Federal Reserve supported the transfer and the Federal Deposit Insurance Corporation (FDIC) opposed it. Yves Smith of Naked Capitalism has written an appropriately blistering attack on this outrageous action, which puts the public at substantially increased risk of loss.
BAC’s request to transfer the problem derivatives to B of A was a no brainer – unfortunately, it was apparently addressed to officials at the Fed who meet that description. Any competent regulator would have said: “No, Hell NO!” Indeed, any competent regulator would have developed two related, acute concerns immediately upon receiving the request. First, the holding company’s controlling managers are a severe problem because they are seeking to exploit the insured institution. Second, the senior managers of B of A acceded to the transfer, apparently without protest, even though the transfer poses a severe threat to B of A’s survival. Their failure to act to prevent the transfer contravenes both their fiduciary duties of loyalty and care and should lead to their resignations.
Now here’s the really bad news. First, this transfer is a superb “natural experiment” that tests one of the most important questions central to the health of our financial system. Does the Fed represent and vigorously protect the interests of the people or the systemically dangerous institutions (SDIs) – the largest 20 banks? We have run a real world test. The sad fact is that very few Americans will be surprised that the Fed represented the interests of the SDIs even though they were directly contrary to the interests of the nation. The Fed’s constant demands for (and celebration of) “independence” from democratic government, combined with slavish dependence on and service to the CEOs of the SDIs has gone beyond scandal to the point of farce. I suggest organized “laugh ins” whenever Fed spokespersons prate about their “independence.”
Bring back Glass-Steagall!
To know what is wrong with the Federal Reserve, one must first understand the nature of money. Money is like any other good in our economy that emerges from the market to satisfy the needs and wants of consumers. Its particular usefulness is that it helps facilitate indirect exchange, making it easier for us to buy and sell goods because there is a common way of measuring their value. Money is not a government phenomenon, and it need not and should not be managed by government. When central banks like the Fed manage money they are engaging in price fixing, which leads not to prosperity but to disaster.
The Federal Reserve has caused every single boom and bust that has occurred in this country since the bank's creation in 1913. It pumps new money into the financial system to lower interest rates and spur the economy. Adding new money increases the supply of money, making the price of money over time—the interest rate—lower than the market would make it. These lower interest rates affect the allocation of resources, causing capital to be malinvested throughout the economy. So certain projects and ventures that appear profitable when funded at artificially low interest rates are not in fact the best use of those resources.
The Fed fails to grasp that an interest rate is a price—the price of time—and that attempting to manipulate that price is as destructive as any other government price control. It fails to see that the price of housing was artificially inflated through the Fed's monetary pumping during the early 2000s, and that the only way to restore soundness to the housing sector is to allow prices to return to sustainable market levels. Instead, the Fed's actions have had one aim—to keep prices elevated at bubble levels—thus ensuring that bad debt remains on the books and failing firms remain in business, albatrosses around the market's neck.
The Fed's quantitative easing programs increased the national debt by trillions of dollars. The debt is now so large that if the central bank begins to move away from its zero interest-rate policy, the rise in interest rates will result in the U.S. government having to pay hundreds of billions of dollars in additional interest on the national debt each year. Thus there is significant political pressure being placed on the Fed to keep interest rates low. The Fed has painted itself so far into a corner now that even if it wanted to raise interest rates, as a practical matter it might not be able to do so. But it will do something, we know, because the pressure to "just do something" often outweighs all other considerations.
The protesters on Wall Street shouldn’t be patronized. Though they may not be financial sophisticates and they don’t know how to articulate a coherent message, they are absolutely – unquestionably – intuitively correct in directing their protest against the banking system.
We are not all in this together because our monetary system is grossly inequitable. Credit is created from thin air if a borrower can be found. Governments are always willing takers of credit because it allows them to fund legislative priorities. Consumers have also been willing debt assumers because they have been able to use it to improve their near-term standard of living. Meanwhile, private sector debt = bank system assets (two sides of the same coin). Banks have incentive to grow. Therefore, banks have incentive to continually extend credit regardless of borrower creditworthiness. When a bank makes a loan there is no incentive for it to ever be repaid, by creditor or debtor.
A wage earner – whether he or she self-identifies as progressive or conservative – can no longer save his or her wage and hope to keep his or her purchasing power. Why? Because more money has to be created simply to service already outstanding debt. As the Fed has created more money since 2008, (and given the vast majority of it to creditor banks, not debtors), the purchasing power of a wage-earner’s dollar has diminished in terms of food, energy and other goods and services that do not require credit for consumption (i.e. nominal prices are rising at the supermarket and gas pump but home prices are falling). This is perfectly logical.
The real economy is now naturally compelled to de-lever. There are only two ways to de-lever: 1) let credit naturally deteriorate, or 2) print money. The numerator (debt) and denominator (base money) must be reduced. Money creation is far more socially and politically expedient because debt deterioration would mean rising unemployment and bankruptcies, not to mention bank asset deterioration. Money printing, on the other hand, promises to ease the burden of repaying private sector debt loads ONLY IF the new money reaches private sector debtors. So far the new money has only gone to the banking system.
There is a far more fundamental aspect to the workings of our monetary system that is also clearly inequitable. Our markets and economy are no longer producing capital (sustainable wealth and resources). Leverage has marginalized real growth. Further asset price increases can only be catalyzed by further credit or money growth – enough to turn de-leveraging into re-leveraging. A growing percentage of people in Europe and the US are discovering that the economy in which they are ostensibly participating has been serving at the pleasure of a very small class of professional leveragers. What protesters seem to intuit is that the banking system has all the power and that it is taking care of its own.
For those of you who self-identify as progressives, you should re-think your defense of the current system. Money printing is a terribly regressive tax on the working and middle classes. Those with higher incomes and access to credit remain able to maintain their demand for inelastic goods and services, as well as maintain their ability to service debts, while lower wage earners, those with less access to credit, and those losing jobs as the real economy shrinks, are suffering. For those of you who self-identify as “free-market conservatives”, you should also re-think your support of the current system. “Free markets” are compelled to de-leverage presently, not to re-leverage. A more laissez faire regulatory environment and lower taxes do not address the fundamental problem, which is an abundance of credit that re-distributes wealth from the factors of production to the leveragers.
The White House said Obama tapped former Kansas City Federal Reserve Bank President Thomas Hoenig to be vice chairman of the board of directors of the Federal Deposit Insurance Corporation, a regulator that insures individual bank accounts up to $250,000.
Hoenig has been a critic of large banks, arguing they still pose a threat to the financial system and that the 2010 Dodd-Frank financial oversight law did not do enough to address the issue.
"We must make sure that large financial organizations are not in position to hold the U.S. economy hostage," Hoenig told a meeting of the Women in Housing and Finance in February. "We must break up the largest banks."
Hoenig served as head of the Kansas City Fed from 1991 until October 1, 2011.
"The Federal Reserve has caused every single boom and bust that has occurred in this country since the bank's creation in 1913"
Then what caused them before the Federal Reserve? Because they were much more prevalent then.
"A growing percentage of people in Europe and the US are discovering that the economy in which they are ostensibly participating has been serving at the pleasure of a very small class of professional leveragers."
That's what I've been saying for a long time now.
"For those of you who self-identify as progressives, you should re-think your defense of the current system. Money printing is a terribly regressive tax on the working and middle classes."
Precisely why it's NOT the progressives who are doing it. Bernakers, Anal Greenspan, George II, St. Ronald.
To fix a broken financial system and to oversee its proper functioning in the future you need experts. Finance is complex, and the people in charge need to know what they are doing. One common problem, manifest in the United States today, is that many leading experts still believe in some version of business as usual.
At the height of the Great Depression, Marriner S. Eccles was summoned to Washington from Utah, where he was a regional banker. He helped remodel the Federal Reserve through the Banking Act of 1935 and then became its first independent chairman; the Fed board had previously been headed by the Treasury secretary.
Mr. Eccles was not a fan of big Wall Street firms and their speculative stock market operations; rather, he understood and identified with smaller banks that lent to real businesses. Mr. Eccles was the right kind of expert for the moment. Who has the expertise to play this kind of role in our immediate future?
Thomas Hoenig, the former president of the Federal Reserve Bank of Kansas City, has long been a strong voice for financial sector reform along sensible lines. Within the official sector, he has spoken loudest and clearest on the most important defining issue: “Too big to fail” is simply too big. And last week he took a major step toward a more prominent role, when he was nominated by President Obama to be vice chairman of the Federal Deposit Insurance Corporation.
The F.D.I.C. is not as powerful as the Fed, but in our current financial arrangements, it does play a critical role. The Dodd-Frank legislation has its weaknesses, but it gives the F.D.I.C. two important powers.
First, with regard to big banks, the F.D.I.C. can help force the creation of credible “living wills” — explaining how the bank can be wound down if necessary. If such wills are not plausible then, in principle, the F.D.I.C. could force simplification or divestiture of some activities. Second, the F.D.I.C. is now in charge of “resolution” for mega-banks, i.e., actually closing them down and apportioning losses in the event of failure.
One important concern is whether the F.D.I.C. has enough clarity of thought and — most critically — enough political support to take the pre-emptive actions needed to make our biggest banks smaller and safer. (For more specific suggestions – and some disagreement – on what exactly is required to strengthen financial stability, you can watch two speeches made on Oct. 21 at a George Washington University law school symposium: Sheila Bair, the former F.D.I.C. chairwoman, spoke first and I spoke immediately after; my remarks start around the 49-minute mark.)
The F.D.I.C. senior team is already strong, with a great deal of experience handling the problems of small and midsize banks. The current acting chairman, Martin J. Gruenberg, was vice chairman under Ms. Bair. These are not people who are easily intimidated by big banks. And Mr. Gruenberg is highly regarded on Capitol Hill, where he worked for the Senate Banking Committee for nearly two decades. (Disclosure: I’m on the F.D.I.C.’s Systemic Resolution Advisory Committee, which meets in public; I’m not involved in any personnel or policy decisions.)
I have been a strong supporter of Mr. Hoenig in recent years, endorsing his views and arguing in the past that he should be named Treasury secretary.
In the current mix of Washington-based policy makers, Mr. Hoenig would be a great addition. He spoke out early and often against “too big to fail” banks. In early 2009, his paper “Too Big Has Failed” became an instant classic. It is worth reading again because it contains a number of forward-looking statements that remain important. Perhaps the most relevant for his F.D.I.C. role:
Some are now claiming that public authorities do not have the expertise and capacity to take over and run a “too big to fail” institution. They contend that such takeovers would destroy a firm’s inherent value, give talented employees a reason to leave, cause further financial panic and require many years for the restructuring process. We should ask, though, why would anyone assume we are better off leaving an institution under the control of failing managers, dealing with the large volume of “toxic” assets they created and coping with a raft of politically imposed controls that would be placed on their operations?
This sounds very much like the basis for a sensible strategy of thinking about Bank of America, which is in serious trouble — and where the F.D.I.C. should consider a more proactive intervention.
The European debt situation is also threatening to spiral out of control, with potentially serious consequences for our financial sector. If you have not yet reviewed the details of Bill Marsh’s graphic from The New York Times on Oct. 23, I strongly recommend it — but you’ll need a big computer screen or the ability to print out on a very large piece of paper. (The picture is literally big, 18 by 21 inches; there is also a nice interactive version that lets you look at various scenarios.)
We do not know how these or other shocks will hit our financial system. Nor do we know exactly who will fall into what kind of trouble.
We need experts at the helm with sensible judgment and the right priorities – and with a good understanding of what kind of financial system we really need. We also need policy makers who have strong support from across the political spectrum, including on Capitol Hill.
Mr. Hoenig is exactly the right person for the moment.
Until his retirement last month, Thomas Hoenig was a consistent thorn in Ben Bernanke's side, voting against the Federal Reserve chairman's easy-money policies at each of the central bank's eight policy-making meetings in 2010.
Now, Mr. Hoenig, the former Kansas City Fed president, is likely to become a thorn for the nation's biggest banks.
n a rare display of bipartisanship, the Senate appears likely to easily confirm Mr. Hoenig to a six-year term as the vice chairman of the Federal Deposit Insurance Corp., an agency that gained significant powers over the nation's biggest banks under last year's Dodd-Frank financial overhaul. Mr. Hoenig breezed through his confirmation hearing Thursday, lauded by senators from both parties.
The choice has rattled Wall Street executives. Mr. Hoenig believes some banks are so big that they are a risk to the financial system, and that taxpayers might need to bail them out in the future, just as they rescued big financial firms in the 2008 crisis.
Mr. Hoenig believes there is only one way to end this phenomenon of "too big to fail." "We must break up the largest banks," he said in a February speech, arguing that regulators could do so by restricting the activities of government-backed banks "and significantly narrowing the scope of institutions that are now more powerful and more of a threat to our capitalistic system than prior to the crisis."
Dec. 13 (Bloomberg) -- The Senate Banking Committee unanimously approved the nomination of Thomas Hoenig, the former president of the Federal Reserve Bank of Kansas City, to be the vice-chairman of the Federal Deposit Insurance Corp.
Hoening better watch himself or else the banks will pull a DSK on him and pay off some hotel maid to say he raped her. Oh yes, there is a lot to the DSK case that nobody knows about...
For the purpose of analyzing economic policy, a student would be better equipped with the quantity theory of money (together with the expectations-augmented Phillips curve) than the Keynesian Cross. In the United States today fiscal policymakers have completely abdicated responsibility for economic stabilization. Their inability to cope with persistently large government deficits has left them unable to even imagine trying to reach consensus on countercyclical fiscal policy in a timely fashion. All attempts at stabilization are left to monetary policy. When a recession ensues, as it did recently in the United States, fiscal policymakers merely begin discussions of what the Federal Reserve did wrong.
On the issue of whether ZIRP increases aggregate demand raised earlier in this thread, here is an interesting take I read recently on nakedcapitalism:
"He then goes on to make the point that we’d have to see borrowers spending more than savers to see any real stimulative effect on the real economy. But alas, such is probably not the case.
""The only way a rate cut could add to aggregate demand would be if, in aggregate, the propensities to consume of borrowers was higher than savers. But fed studies have shown the propensities are about the same, and, again, so does the actual empirical evidence of the last several years. And further detail on this interest income channel shows that while income for savers dropped by nearly the full amount of the rate cuts, costs for borrowers haven’t fallen that much, with the difference going to net interest margins of lenders. And with lenders having a near zero propensity to consume from interest income, versus savers who have a much higher propensity to consume, this particular aspect of the institutional structure HAS CAUSED RATE REDUCTIONS TO BE A CONTRACTIONARY AND DEFLATIONARY BIAS."" (emphasis by Lecker)
you can read the whole spiel over at www.nakedcapitalism.com - the Philip Pilkington 1/26/2012 piece
I should also link the orignal piece by Warren Mosler (Philip Pilkington references this piece)
Here's an example of how ZIRP is increasing risk in the system
The use of lower-rated debt in a key US funding market has returned to pre-crisis levels, fuelling fears that the so-called shadow banking system is becoming riskier.
In 2009 and so on, banks couldn't help but make money on the arbitrages involved from zero interest rates and their lending rates, at the expense of the people who would usually invest and use the income. If you could go back and pay pensioners the extra 3% interest, they would have spent all that in the economy.
Who benefits from the banking profits and the banking bonuses? Was there a great capital-spending surge? No. You took money away from people who would have spent it instantly, and gave it to people who have tended to sit on it.
“The discretionary interventions of the Federal Reserve have been ratcheted up in such unprecedented ways in recent years that they raise fundamental questions about the future of monetary policy,” Taylor said in his testimony.
“The fact that the Fed can, if it chooses, intervene without limit into any credit market -- not only mortgage backed securities but also securities backed by automobile loans, or even student loans -- raises more uncertainty, and of course raises questions about why an independent agency of government should have such power,” Taylor said in prepared testimony. The Stanford economist was a U.S. Treasury undersecretary for international affairs from 2001 to 2005, and in prior years served on the President’s Council of Economic Advisers.
he president of Estonia chewed out Paul Krugman on Wednesday, using Twitter to call the Nobel Prize-winning economist "smug, overbearing & patronizing," in response to a short post on Estonia's economic recovery.
Krugman's 67-word entry, entitled "Estonian Rhapsody," questioned the merits of using Estonia as a "poster child for austerity defenders." He included a chart that, in his words, showed "significant but still incomplete recovery" after a deep economic slump.
Estonia, which in 2011 became the latest country to join the eurozone, has been heralded by some as an austerity success story. That year, it clocked a faster economic growth pace than any other country in the European Union, at 7.6 percent. Estonia is also the only EU member with a budget surplus, and had the lowest public debt in 2011 -- 6 percent of GDP. Fitch affirmed its A+ credit rating last week.
Ilves, a strong austerity advocate, told Bloomberg News in May that the EU should implement austerity in order to boost economic expansion. “You can achieve growth through austerity. Estonia has done that,” he said during the interview. “Growth policy -- that doesn’t make sense to me.”
Once upon a time (today), in a land not so far away (USA), there lived a trio of economic wizards (economists), whose names shall remain anonymous (Paul Krugman, Greg Mankiw, Ben Bernanke).
A fourth wizard, Murry Rothbard, is no longer among the living but resides in the netherworld.
The above wizards seldom agree with each other because they come from competing schools of wizardry.
this would have been nice
Moral of the Story
The average non-wizard non-union employee has long ago figured out the moral of this story. Those in ivory towers in "Academic Wonderland" have not, so I need to spell it out.
It is indeed possible to have a genuine economic debt-free recovery, along with austerity, as long as other sound economic measures are incorporated at the same time.
Yes, there will be some short-term pain. However, any attempt to avoid pain via heaps of fiscal and monetary stimulus is nothing but voodoo economics and can-kicking witchcr
Two very short posts by Krugman demolish the Estonian President's comments.
In short, Estonia has seen 6% (!!!!) of its labor force out-migrate to other parts of the EU since 2008 (or drop out of the labour force), hence there lower unemployment rate. 2 - Estonia had a gigantic plunge of 25% from 2007 peak GDP, and now being only 15% below peak is not some grand endorsement of austerity - especially considering all the much-better-than-that examples from contemporary Europe and the 1930s depression Krugman and others have shown - counter examples that do NOT follow the German ideals.
Krugman is very guilty of cherry-picking data. If you look at the chart that accompanies his post, Estonia’s economic performance isn’t very impressive, but that’s because he’s only showing us the data from 2007-present.
The numbers are accurate, but they’re designed to mislead rather than inform (sort of as if I did a chart showing 2009-present).
But before exposing that bit of trickery, there’s another mistake worth noting. Krugman presumably wants us to think that the downturn coincided with spending cuts. But his own chart shows that the economy hit the skids in 2008 – a year in which government spending in Estonia soared by nearly 18 percent according to EU fiscal data!
It wasn’t until 2009 that Estonian lawmakers began to reduce the burden of spending. So I guess Professor Krugman wants us to believe that the economy tanked in 2008 because of expectations of 2009 austerity. Or something like that.
Returning now to my complaint about cherry picking data, Krugman makes Estonia seem stagnant by looking only at data starting in 2007. But as you can see from this second chart, Estonia’s long-run economic performance is quite exemplary. It has doubled its economic output in just 15 years according to the International Monetary Fund. Over that entire period – including the recent downturn, it has enjoyed one of the fastest growth rates in Europe
What makes Krugman’s rant especially amusing is that he wrote it just as the rest of the world is beginning to notice that Estonia is a role model. Here’s some of what CNBC just posted.
Sixteen months after it joined the struggling currency bloc, Estonia is booming. The economy grew 7.6 percent last year, five times the euro-zone average. Estonia is the only euro-zone country with a budget surplus. National debt is just 6 percent of GDP, compared to 81 percent in virtuous Germany, or 165 percent in Greece. Shoppers throng Nordic design shops and cool new restaurants in Tallinn, the medieval capital, and cutting-edge tech firms complain they can’t find people to fill their job vacancies. It all seems a long way from the gloom elsewhere in Europe. Estonia’s achievement is all the more remarkable when you consider that it was one of the countries hardest hit by the global financial crisis. …How did they bounce back? “I can answer in one word: austerity. Austerity, austerity, austerity,” says Peeter Koppel, investment strategist at the SEB Bank. …that’s not exactly the message that Europeans further south want to hear. …Estonia has also paid close attention to the fundamentals of establishing a favorable business environment: reducing and simplifying taxes, and making it easy and cheap to build companies.
"As Republicans Hail Hayek, Their Plans Advance Friedman...
...As he undertook an American lecture tour in 1944, Hayek expressed frustration that many of his most ardent acolytes seemed not to have read the book. Although “The Road to Serfdom” expressed deep anxieties about central planning, it was also explicit about the positive role that government could play. “Probably nothing has done so much harm to the liberal cause,” Hayek wrote, as a “wooden insistence” on “laissez-faire..."
"Several Federal Reserve officials rallied around Chairman Ben Bernanke’s plan to press ahead with the central bank’s $85-billion-a-month bond-buying effort in public comments Wednesday"
Of course, the news sources RS reads only like to quote the inflation Hawks.