Daily Digest

Daily Digest 10/26 - Inflation Bonds Sold With Negative Yields, Betting On Inflation, Bernanke Leaps Into The Liquidity Trap

Tuesday, October 26, 2010, 10:44 AM
  • Inflation Bonds Are Sold With Negative Yield for First Time 
  • Short Sales Resisted as Foreclosures Are Revived
  • In Bond Frenzy, Investors Bet on Inflation
  • Goldman: The Fed Needs To Print $4 Trillion In New Money
  • Bernanke Leaps into a Liquidity Trap
  • Monetary Meltdown Monday
  • Bill Murphy's address to the 2010 Silver Summit
  • William K. Black: Fire Holder, Geithner, Bernanke
  • BP Chief Says Rivals Fanned Public Fears Over Gulf Spill

Crash Course DVDOwn the Crash Course Special Edition Set with Presenter’s Pack (NTSC or PAL)

Economy

Inflation Bonds Are Sold With Negative Yield for First Time (jdargis)

The $10 billion auction of the five-year bonds sold at a negative yield of 0.550 percent, according to the Treasury Department. The results of the auction of the securities, known as TIPS, came as indexes on Wall Street edged higher, buoyed by recent strong corporate earnings and a rise in housing sales. The previous lowest yield for the TIPS was in the auction on April 26, when the yield was 0.550 percent.

Short Sales Resisted as Foreclosures Are Revived (jdargis)

The halt in most foreclosures the last few weeks gave a hint of hope to homeowners like Ms. Sweetland, who found breathing room to pursue alternatives. Consumer advocates took the view that this might pressure banks to offer mortgage modifications on better terms and perhaps drive interest in short sales, which are rising sharply in many corners of the nation.

In Bond Frenzy, Investors Bet on Inflation (jdargis)

The reason is that these types of bonds offer a guaranteed protection against inflation. So, if inflation soars — as some economists worry might happen, with the government seeking to give the economy a boost by flooding it with money — the value of the bonds would go up accordingly.

The investors who took part in the $10 billion auction are betting that inflation, now at about 1 percent annually, will rise to a level that more than compensates for the premium they paid.

Goldman: The Fed Needs To Print $4 Trillion In New Money (pinecarr)

Turns out, even we were optimistic. A brand new analysis by Jan Hatzius, which performs a top down look at how much monetary stimulus is needed to fill the estimated 300 bps hole between the -7% Taylor Implied Funds Rate (of which, Hatzius believes, various other Federal interventions have already filled roughly 400 bps of differential) and the existing 0.2% FF rate. Using some back of the envelope math, the Goldman strategist concludes that every $1 trillion in new LSAP (large scale asset purchases) is the equivalent of a 75 bps rate cut (much less than comparable estimates by Dudley, 100-150bps, and Rudebusch, 130bps).

In other words: the Fed will need to print $4 trillion in new money to close the Taylor gap. And here we were thinking the economy is in shambles. Incidentally, $4 trillion in crisp new dollar bills (stored in bank excess reserve vaults) will create just a tad of buying interest in commodities such as gold and oil...

Bernanke Leaps into a Liquidity Trap (TomA)

"There is the possibility... that after the rate of interest has fallen to a certain level, liquidity preference is virtually absolute in the sense that almost everyone prefers cash to holding a debt at so low a rate of interest. In this event, the monetary authority would have lost effective control."

John Maynard Keynes, The General Theory

John Hussman says that Bernanke has taken a tall leap...

Monetary Meltdown Monday (Ilene)

So good morning, America, how are ya? I’ll tell you how you are, you are 1% poorer than you were on Friday as the Yen rises to 80 to the Dollar and the Euro rises to $1.41 and the Pound hits $1.58. That drive oil back over $82.50 and gold back to $1,350 and copper hit $3.89, up from $3.75 on Friday - that’s 3.5% inflation of a basic material OVER THE WEEKEND!

Bill Murphy's address to the 2010 Silver Summit (TomA)

William K. Black: Fire Holder, Geithner, Bernanke (TomA)

BP Chief Says Rivals Fanned Public Fears Over Gulf Spill (jdargis)

The comments by the chief executive, Bob Dudley, represented the latest volley in BP’s battle to rebuild its battered reputation by taking a harder line with those who had attributed the disaster to a safety culture at BP that, they said, put cost-saving before safety.

In an address to the annual conference of a British business lobbying group, the CBI, Mr. Dudley said there had been “a great rush to judgment by a fair number of observers before the full facts could possibly be known, even from some in our industry.

Article suggestions for the Daily Digest can be sent to [email protected]. All suggestions are filtered by the Daily Digest team and preference is given to those that are in alignment with the message of the Crash Course and the "3 Es."

30 Comments

saxplayer00o1's picture
saxplayer00o1
Status: Diamond Member (Offline)
Joined: Jul 30 2009
Posts: 4149
Re: Daily Digest 10/26 - Inflation Bonds Sold With Negative ...
  • Just headlines:

"Currency war" may lead to a second round of crisis: Thai economist

Pimco's El-Erian Says Fed Easing to Spur Inflation

Greece Likely to Default Within Three Years, El-Erian Says

US Declines in Corruption Ranking as Crisis Hits Confidence

Japan approves extra budget for stimulus

Bernanke Asset Purchases Risk Unleashing 1970s Inflation Genie

Shrinking Bank Revenue Signals Dawn of 'Worst' Decade of Growth

Dudley Says Fed Members `Owe' Action to Millions of Unemployed Americans

Report: Treasury's AIG bailout loss estimate is too optimistic and Treasury Hid AIG Loss, Report Says and Watchdog: Funny math used on AIG bailout

States Face Budget Holes If US Capital-Gains Tax Doesn't Rise

Moody's to End Hungary Rating Review Next Month, May Downgrade

Hungary Passes Bill To Withhold Private Pension Fund Payments

New York's MTA Would Pay $606 Million to Unwind Swaps

Anglo Irish Debt Offer May Trigger Payouts on $420 Million Swaps, BNP Says

Federal Reserve leader warns of future downturn

Schools face funding riddle with new state budget (California)

Study: 4 Bay Area counties in pension predicament (California... news video)

37 Kids Per Class, Bells That Don't Ring: Illinois Students Experience Budget Problems Up Close

Madison School Board OKs budget with $170 tax hike for average home

U.S. home prices drop 0.2% in August

Consumers Issue a Cautious Christmas Spending Forecast (Gallup poll)

Retirement Benefits for Public School and State Employees Significantly Above Those in Michigan’s Private Sector, According to New Mackinac Center Study

crash_watcher's picture
crash_watcher
Status: Silver Member (Offline)
Joined: Aug 12 2008
Posts: 146
Guns and Butter interview of Percy Schmeiser

http://www.kpfa.org/archive/show/34

(or http://www.kpfa.org/archive/id/64647 and http://www.kpfa.org/archive/id/64806 )

Percy Schmeiser was the Saskatchewan farmer and seed developer who fought Monsanto—and lost. 

Schmeiser's case resulted in the Canadian Supreme Court ruling which essentially said that Monsanto's patent allows Monsanto to own and control higher life forms, such as Canola.  And, regardless of how it got into your field, Monsanto now owns your "contaminated" crops. 

In this excellent interview,  Schmeiser, now 77 years old, recounts the history of his case, and discusses the wider implications of GMO contamination of the food chain.  Schmeiser apparently was visiting Sonoma County California to consult with a local group who wanted to block allowing GMOs into the county.

JAG's picture
JAG
Status: Diamond Member (Offline)
Joined: Oct 26 2008
Posts: 2492
oops

ignore this post...

Full Moon's picture
Full Moon
Status: Diamond Member (Offline)
Joined: Oct 14 2008
Posts: 1258
Re: Daily Digest 10/26 - Inflation Bonds Sold With Negative ...

CW , thank you so much for the guns and butter  / Monsanto's  links .   Makes me screamYell then cry Cry.  This is so hard to get into people heads around our farming community .  Corn and soybeans ....  

  I sent this on to the  County extension officeand a few farming neighbors  but I am sure Monsanto's owns the local Ag .colleges .   This is going to be  one Huge battle.

 

 FM

Full Moon's picture
Full Moon
Status: Diamond Member (Offline)
Joined: Oct 14 2008
Posts: 1258
Re: Daily Digest 10/26 - Inflation Bonds Sold With Negative ...

this is the e-mail I recieved

 

Community Leaders and 4-H Families:

Last May, we let you know about program sponsored and funded by Monsanto called
America's Farmers Grow Communities Project. This project provides grants to local non-
profit organizations. The grants are worth $2,500 and there will be an award made in each
county. Only farmers can nominate a local organization.

A few weeks ago, we learned that Work-To-Win 4-H Club will be the recipient of the
America's Farmers Grow Communities Project grant. So, congratulations to Work-To-Win.

We received information that from Monsanto that they are doing this program again and
Monsanto will donate $1 for each farmer that applies to the program to be donated to local
United Way, help local food banks, food pantries, Meals On Wheels and other charitable
organizations that are helping to fight hunger in that farmer's county.
 
The Monsanto Fund will award grants to local non-profit organizations such as 4-H Clubs. So
far, this fund has awarded $205,000 to local 4-H Clubs

The grants are worth $2,500--just think of the good that your 4-H Club could do with $2,500.
Maybe your club could use that money to something for your community, for the County Fair,
the 4-H and Youth Fund, or 4-H Council.

Your 4-H Club will need to have farmers nominate your 4-H Club. The farmers who
nominate (vote) for your 4-H Club will need to be over the age of 21 and meet acreage
criteria and complete a very simple on-line form at
http://www.monsantofund.org/growcommunities/apply/ or they can call at 1.877.267.3332.
I could not believe how simple the nomination form was on-line. The due date is
December 31, 2010 

Winners will be drawn from a pool of nominated local organizations. The more
votes the better the chances of being drawn as a winner.

Below are some details:

Who's an eligible farmer? Farmers, age 21 and over, who are actively involved in
producing a minimum of 250 acres of corn, soybeans and/or cotton, 40 acres of open field
vegetables or at least 10 acres of vegetables grown in protected culture, are eligible. The
application period runs August 1 through December 31, 2010. There is no purchase
requirement.

Additional information can be found at www.growcommunities.com , including an introductory
video, state flyer, promotional poster, frequently asked questions and the official rules. I
encourage you to visit the website to obtain more information or perhaps find answers to your
questions. Serving as the Monsanto Coordinator for the project is Gayla Daugherty and she
can be contacted at: [email protected] or 314-694-6229. 

So what does this mean for your 4-H program?
* The more votes for a 4-H club, the greater the chances of being drawn as the winner of
$2,500!

* Share this information with 4-H club leaders and members, encouraging them to take a
copy of the flyer and make contact with the eligible farmers, encouraging them to vote for a
4-H club (here's a superb opportunity for the 4-H member to let key individuals in their
community know about their 4-H club!).

* Share this information through your networks and partnerships in the ag community,
encouraging them to be involved and to vote for their favorite non-profit organization.

Marshall County is one of 105 counties eligible to participate and there will be a
winner from Marshall County again. So, why not your 4-H Club? 

I would love to have every 4-H Club have local farmers nominate their 4-H Club.

We will put flyers about America's Farmers Grow Communities Project in each 4-H Club's
mailbox.

Please let me know if you have any questions.

 

  FM  .

JAG's picture
JAG
Status: Diamond Member (Offline)
Joined: Oct 26 2008
Posts: 2492
A Century of Challenges by Nicole Foss

LogansRun's picture
LogansRun
Status: Diamond Member (Offline)
Joined: Mar 18 2009
Posts: 1444
Re: A Century of Challenges by Nicole Foss

I watched the presentation and agree with much, but she still doesn't take into account the actual drivers of the problem....ie:  tptb

 

JAG wrote:

plato1965's picture
plato1965
Status: Platinum Member (Offline)
Joined: Feb 18 2009
Posts: 615
crash_watcher's picture
crash_watcher
Status: Silver Member (Offline)
Joined: Aug 12 2008
Posts: 146
Re: Daily Digest 10/26 - Inflation Bonds Sold With Negative ...

FM, you are most welcome.

What Mr. Schmeiser was put through was truly outrageous, and I can't believe that anyone in Canada (except maybe Monsanto's local lawyers) would be happy with the outcome of the case.  However, as best as I can tell, the Federal and Provincial governments did nothing in response to the Court's ruling to help protect the farmers.

Monsanto does not need a patent to own and control the politicians, it seems.

As Schmeiser's case shows, all you need is one neighbor to sign an agreement to use Monsanto's GMO seeds and the contamination of all of the surrounding fields with the GMO seeds become inevitable within just a few years.  Then you become a patent infringer, and Monsanto goes after you for damages.  Most farmers settle out of court because the cost of defending themselves is just too high.  That's what made Schmeiser exceptional, and a hero, in my opinion. 

Maybe fighting the introduction of GMOs at the county level is the last hope—but still this would probably just delay the inevitable contamination GMOs from surrounding counties.

Loren's picture
Loren
Status: Member (Offline)
Joined: May 20 2010
Posts: 9
Re: A Century of Challenges by Nicole Foss

Nicole Foss seems convinced we'll have a deflationary depression rather than hyperinflation.  In another interview, she says something to the effect that the Fed can't print money and loan it to banks fast enough to compensate for the debt defaults that are coming.  Therefore, we'll still have deflation.  See her web site for more details:

http://theautomaticearth.blogspot.com/

Most Chris Martenson subscribers seem to think hyperinflation is more likely.  If so, what is the flaw in her reasoning?

joelandsonia's picture
joelandsonia
Status: Bronze Member (Offline)
Joined: Mar 25 2010
Posts: 30
Re: A Century of Challenges by Nicole Foss

It's basically a game of chicken between the bond market and the Fed.

Nicole believes if the Fed continues to print, the bond market will call it to account, forcing interest rates to rise, which will crash more companies/individuals and lead to another debt-deflation event.   Possible, but the reserve currency status of the dollar makes me wonder about this.    Also, there is no solid challenger to the dollar.   The Euro has proven weaknesses and the Yuan I think has very dangerous cracks and no track record.

I think the one thing Nicole has discounted is that hyperinflation is usually a political/social event -- a loss of confidence in the currency.   Afterall, dollars are simply a promise -- there is no guaranteed exchange for gold as in the old days.

I think it is very possible to have  fiat currency crises followed by a reversion to the gold standard or more likely a commodity basket.

alcatwize's picture
alcatwize
Status: Bronze Member (Offline)
Joined: Dec 24 2008
Posts: 78
Deflation?

I know there is a raging battle between deflation and inflation camps, but so far have we had any deflation?  I mean what has gone down in price (except housing).  Remember, prices will rise and fall based on supply and demand and housing was definitely a case of too much supply and it needs to find a balance. This doesn't mean deflation.  Other than housing, I have seen an increase in the costs of fuel and food.  Personally, I don't fear the deflation aspect at all.

Farmer Brown's picture
Farmer Brown
Status: Martenson Brigade Member (Offline)
Joined: Nov 23 2008
Posts: 1503
Deflation

Rising or falling prices are symptoms, not causes, of inflation or deflation, and both can occur for short periods in either scenario, so prices are not a very good thing to look at in the short term .  

Stoneleigh's reasoning for deflation revolves around the premise that we are in a credit-induced collapse, which we are.  In a credit-based economy, which the entire western world has, deflation occurs because lending comes to a stop.  The lack of lending in a credit-based economy, where the actual base money is a small fraction of the credit-based money, has a gigantic impact on gross money levels (credit+base money) in the economy.  When you remove money from any system, the economy pretty much comes to a halt, which is what happened in the 1930's.  Prices collapse due to demand collapse.  But that doesn't mean things will be cheaper because your wages and benefits will also be cut.  

As for the Fed's money printing, all it's doing is winding up in bank reserves held at the Fed.  See Mish's interview in Straight Talk and read the articles he links to in that interview for an overview.

It's not that the Fed can't print its way out of this, it's that our system requires not only money from the Fed, but also lending by banks, and they are in no more of a mood to lend than people are in a mood to borrow.  Result:  gross (credit + base money) money levels collapse, which is the very definition of deflation.  Price collapses will follow.  Our friends in Detroit are way ahead of the rest of us.  You can buy a house there for less than a used car.  Inflation?  I think not.

 

 

Poet's picture
Poet
Status: Diamond Member (Offline)
Joined: Jan 21 2009
Posts: 1891
Re: Deflation? Inflation? Biflation?
alcatwize wrote:

I know there is a raging battle between deflation and inflation camps, but so far have we had any deflation?  I mean what has gone down in price (except housing).  Remember, prices will rise and fall based on supply and demand and housing was definitely a case of too much supply and it needs to find a balance. This doesn't mean deflation.  Other than housing, I have seen an increase in the costs of fuel and food.  Personally, I don't fear the deflation aspect at all.

I think we're in different times, with terms that won't quite apply correctly nor define the situations as they shift. And shift they will. We could very well see currency collapse, or multiple currency collapses, or hyperinflation, or just plain old deflation. I think certain costs will rise while others drop. Likely the cost of labor will drop while the cost of special services and goods will rise.

I think that's why Dr. Martenson is hedging both ways with his 30% / 70% allocation and making suggestions for preparation. Our current economic system is precariously intertwined and intricately balanced.

Poet

alcatwize's picture
alcatwize
Status: Bronze Member (Offline)
Joined: Dec 24 2008
Posts: 78
Re: Deflation

Yes, all good comments.  I would like to add another comment on the comparison of the 1930s and now.   I agree with the model of deflation caused by credit and base money reduction and that certainly happened in the 1930s, but today we are finding new ways to inject fresh money into the system.  The biggest example is FDIC.  In 1930 if u had 50k in a bank that failed u were simply up the creek.  Can u image?????  Talk about money destruction, from 50k to zero.  The pain felt by the innocent, crazy. Today, we don't have this.  Failed banks don't destroy the savors and the money that should contract the base supply gets supplemented from fresh printing (because the FDIC is broke without a printing press).   Yes?

 

 

Farmer Brown's picture
Farmer Brown
Status: Martenson Brigade Member (Offline)
Joined: Nov 23 2008
Posts: 1503
Re: Deflation
alcatwize wrote:

Yes, all good comments.  I would like to add another comment on the comparison of the 1930s and now.   I agree with the model of deflation caused by credit and base money reduction and that certainly happened in the 1930s, but today we are finding new ways to inject fresh money into the system.  The biggest example is FDIC.  In 1930 if u had 50k in a bank that failed u were simply up the creek.  Can u image?????  Talk about money destruction, from 50k to zero.  The pain felt by the innocent, crazy. Today, we don't have this.  Failed banks don't destroy the savors and the money that should contract the base supply gets supplemented from fresh printing (because the FDIC is broke without a printing press).   Yes?

The FDIC is broke.  It's reserves for bailing out anyone are near zippo.  Evidence of this is, as Machinehead recently put it, can be seen in how instead of bailing out banks, they are frog-marching them into the arms of still-solvent banks, but that's just kicking the can down the road.

I agree the current crop of charlatans have more tricks up their sleeves than what they had in the 1930's.  Heck, GD-1 inspired the creation of most of the tricks they use today.  But those tricks will only get us so far.  Eventually, we will come around that turn in the river and realize that gentle rumbling we've been hearing for the last 10 miles is the heart-stopping thunder of Benagara Falls, dead ahead. 

 

Poet's picture
Poet
Status: Diamond Member (Offline)
Joined: Jan 21 2009
Posts: 1891
Re: Deflation? Inflation? Biflation?

 

I wonder if the Fed will end up stepping in to guarantee the vast majority of bank loans to businesses small and large - just as they and Fannie, Freddie, FHA, etc. are currently owners of (or guarantors) of the vast majority of all residential home mortgages now.

This would mean even more fees for banks that do the processing  (like they currently do with mortgages purchased by government entities). If so, does that mean there will be more credit and/or currency debasement?

I am not an economist or very math-oriented, so would love to hear some comments.

Poet

chaster's picture
chaster
Status: Member (Offline)
Joined: Aug 27 2008
Posts: 6
Re: Daily Digest 10/26 - Inflation Bonds Sold With Negative ...

Contrary to common understanding, Hyper-inflation is not "inflation on steroids". 

Inflation occurs when you have too many dollars chasing too few goods. The price rises - but relatively slowly.

Hyper-inflation occurs for a very different reason: people lose faith in the currency, and therefore try to get rid of it by buying anything and everything of material value - rapidly driving up the price of those goods in a very short amount of time.

Hyper-inflation is caused people trying to get rid of the currency they hold in exchange for something of real value.  And because of its' nature, it can be triggered by many different things that are not under the control of the government printing the currency.  It's like a classic Bank Run except instead of people trying to pull their money out of the bank, they are trying to pull their value out of the currency.

 

rjs's picture
rjs
Status: Gold Member (Offline)
Joined: Aug 8 2009
Posts: 445
Re: Deflation? Inflation?

just my two cents:

what the Fed will be doing with QE is creating another asset bubble; it could all very well go into the market and commodities, without affecting inflation at the street level...ie, the "too much money" wont be chasing "too few goods" on the street...

cmartenson's picture
cmartenson
Status: Diamond Member (Online)
Joined: Jun 7 2007
Posts: 5733
Re: Deflation
Farmer Brown wrote:

Stoneleigh's reasoning for deflation revolves around the premise that we are in a credit-induced collapse, which we are.  

In a credit-based economy, which the entire western world has, deflation occurs because lending comes to a stop.  The lack of lending in a credit-based economy, where the actual base money is a small fraction of the credit-based money, has a gigantic impact on gross money levels (credit+base money) in the economy.  

That's a good theory, and I find it intuitively compelling as it seems like that's what should be happening, but the problem is that it is not backed up by the most recent Fed data on credit markets and money, nor recent price action in assets.  

FB - when you make this statement of fact, "we are in a credit induced collapse, which we are" what exactly are you referring to?  Credit, money, or asset prices?  I cannot find evidence to back up any of those positions and I am quite eager to engage in a substantive discussion on the topic but have been unable to round up the necessary facts to support the idea that we are in the grips of deflation.

Total non-financial credit market debt stands at $35.5 trillion (as of 2Q10) which is - drum roll please - an all time high for the series besting its 2008 peak by nearly $2 trillion and up a handy $1 trillion over the past year (check table D.3 of the Z.1 report for confirmation).  I don't know what data Stoneleigh is using if her position has been accurately portrayed, but it's not the same data I have access to.  

Next, M2 is not deflating and is advancing at what appears to be an unbroken pace.  

Together, credit and money are two sides of the same coin and they are both telling the same story and the plot involves increases, not decreases.  

To these observations we might add the commodity index making new  highs since the 2008 peak, bonds at a higher price than they've been in generations, and stocks well up off the lows.  So we now have assets, credit and money all indicating that the direction is "up" not "down."  What am I missing here?

I think we're all better off if we can keep our conversations here centered on data and facts as much as possible.  What are the facts that support the idea that "we are in a credit induced deflation?"

I've been on this subject for a while over in the enrolled area and there is a lot of data nearly all of it pointing towards inflation, not deflation.  We'll keep chewing on it, and I'm going to let the data tell the story, but I think its time for the believers of deflation to lay out their macro story using hard data.  

saxplayer00o1's picture
saxplayer00o1
Status: Diamond Member (Offline)
Joined: Jul 30 2009
Posts: 4149
China should significantly boost gold in reserves -media

"BEIJING Oct 27 (Reuters) - China should significantly boost the amount of gold XAU= held in state reserves, a newspaper run by China's Ministry of Commerce said on Wednesday, citing a local researcher.

Meng Qingfa, a researcher with China Chamber of International Commerce, was quoted by the International Business Daily as saying that China should eventually boost its gold reserves to a level equal to that held by the United States.

U.S. reserves stood at 8,133 tonnes as of the end of June, significantly higher than China's current level of 1,054 tonnes.

"Doubtlessly, if the yuan is set to become an international currency like the dollar or the euro, China has to get a huge gold reserve to support it, and a reserve of 1,054 tonnes is far from being enough," Meng said.

He added that China can keep buying gold at a price of about $1,300 per ounce, and China could build up a gold reserve as large as the United States' current one by using only 10 percent of its $2.65 trillion stockpile of foreign exchange reserves.

Meng's view does not represent China's official stance. But the domestic appeals for China's foreign exchange reserve regulator to buy bullion has been intensifying in recent years as the dollar has fallen and the gold price has moved higher.

Yi Gang, head of the State Administration of Foreign Exchange, said earlier this year that China will be prudent in adding gold to its official reserves, wary that any move to buy the precious metal would only serve to drive its price higher. [ID:nTOE62802N]

China vies with India to be the world's top consumer of gold. China is already the top producer, with output of 313.98 tonnes last year, up by almost 50 percent in five years.

According to the World Gold Council, China's share of global gold demand has doubled from 5 percent in 2002 to 11 percent in 2009, and China's domestic gold mines could be exhausted within six years. (Reporting by Zhou Xin and Ken Wills) "

junkyard71's picture
junkyard71
Status: Member (Offline)
Joined: Sep 7 2009
Posts: 22
Re: Daily Digest 10/26 - Inflation Bonds Sold With Negative ...

is what we're seeing regarding inflation/deflation explainable if one views our world as bifurcated.  and for now, at least, data points to inflation while reality is deflation.  

when did corporates (best) interest diverge from consumers best interest.  i do believe they were once aligned.  i'm guessing early/mid 70's?   when did corporate lobbyists take over our gov't?  early/mid 80's? 

i believe that in 08 we witnessed the breakdown of each of these branches on virtually every front. 

can anyone name just one "system" that isn't careening over the edge?  if you can think of one please let me know i've been wracking my poor brain for many months trying to find one.

i believe that what we're seeing is each system, main street and corporate breaking down in their splendid isolation from the other.  since they have become so detached over the decades they don't react to events symbiotically.

people are being forced into ccard debt the same way they were forced into bread lines in the 30's at the same time they are being forced into defaulting on mortgages.  many are still unaware and spending more or less as usual while paying minimum due where once they paid more.

corporations are raising "cash" as fast as they can, while they can.  and everybodys' cash seems to be chasing real wealth and bonds/treasuries.

the fed is trying to replace corporate  losses just before  they are required to book them.

i don't know if it's possible to figure out how this will unfold but i don't think the data will be helpful in deciding except maybe somewhat inversly or maybe hold it upside down in a mirror?

gm will give you a truck for 50 days and a loaf of bread is up .50 or more.  go figure...

idoctor's picture
idoctor
Status: Diamond Member (Offline)
Joined: Oct 4 2008
Posts: 1731
Re: Daily Digest 10/26 - Inflation Bonds Sold With Negative ...

LogansRun's picture
LogansRun
Status: Diamond Member (Offline)
Joined: Mar 18 2009
Posts: 1444
Re: Guns and Butter interview of Percy Schmeiser

Haven't had a chance to listen to this, but this article looks like it's in the same genre.

http://saladin-avoiceinthewilderness.blogspot.com/2010/10/leaked-trade-agreements-and-hidden.html

Under provisions in CETA [Comprehensive Economic and Trade Agreement], using saved seed could result in a farmer's land, equipment, and crops being seized for alleged infringement of intellectual property rights attached to plant varieties owned by corporations such as Monsanto, Dow, Syngenta, and Bayer.
"It includes the freezing of bank accounts too, so you couldn't even defend yourself in court. And this is for alleged infringement," says NFU [National Farmers Union] president Terry Boehm. ...
"These are the most draconian measures possible and they would literally create a culture of fear in the farm population where, I think, that ultimately farmers would end up buying seeds every year for every acre just to avoid prosecution or the threat of prosecution."

 

 

crash_watcher wrote:

http://www.kpfa.org/archive/show/34

(or http://www.kpfa.org/archive/id/64647 and http://www.kpfa.org/archive/id/64806 )

Percy Schmeiser was the Saskatchewan farmer and seed developer who fought Monsanto—and lost. 

Schmeiser's case resulted in the Canadian Supreme Court ruling which essentially said that Monsanto's patent allows Monsanto to own and control higher life forms, such as Canola.  And, regardless of how it got into your field, Monsanto now owns your "contaminated" crops. 

In this excellent interview,  Schmeiser, now 77 years old, recounts the history of his case, and discusses the wider implications of GMO contamination of the food chain.  Schmeiser apparently was visiting Sonoma County California to consult with a local group who wanted to block allowing GMOs into the county.

rjs's picture
rjs
Status: Gold Member (Offline)
Joined: Aug 8 2009
Posts: 445
Re: Daily Digest 10/26 - Inflation Bonds Sold With Negative ...

one of the best takes on it ive seen so far:

What do the Fed's policy and poker have in common? - Chevelle

Farmer Brown's picture
Farmer Brown
Status: Martenson Brigade Member (Offline)
Joined: Nov 23 2008
Posts: 1503
Re: Deflation

 

 

cmartenson wrote:
Farmer Brown wrote:

Stoneleigh's reasoning for deflation revolves around the premise that we are in a credit-induced collapse, which we are.  

In a credit-based economy, which the entire western world has, deflation occurs because lending comes to a stop.  The lack of lending in a credit-based economy, where the actual base money is a small fraction of the credit-based money, has a gigantic impact on gross money levels (credit+base money) in the economy.  

That's a good theory, and I find it intuitively compelling as it seems like that's what should be happening, but the problem is that it is not backed up by the most recent Fed data on credit markets and money, nor recent price action in assets.  

FB - when you make this statement of fact, "we are in a credit induced collapse, which we are" what exactly are you referring to?  Credit, money, or asset prices?  I cannot find evidence to back up any of those positions and I am quite eager to engage in a substantive discussion on the topic but have been unable to round up the necessary facts to support the idea that we are in the grips of deflation.

What I mean by a "credit-induced collapse" is that debt was taken on (credit extended) beyond levels that the economy can sustain.  When credit was cheap and plentiful, we had a run-up in all sorts of asset prices, all fueled by cheap and wonderful, and as it is now becoming increasingly apparent, also fraudulently-created credit.  When the credit orgy came to an end in 2008, it came to an end because of defaults - first in sub-prime and later in prime debt,  mostly household debt as we all know, but followed later by credit card debt, and non-revolving debt.  

My use of the term "credit-induced collapse" refers to the fact, and I believe it is a fact, that debt beyond the capacity of the system to service was taken on, and once it became apparent that all those IOU's were not worth the 100 cents on the dollar that they were valued at, major write-downs in the value of those IOU holders were swift and painful.  This resulted, lest we forget, in the death of three of the five largest banks in the US, one of which (Lehman)  alone was valued as high as the entire economy (GDP) of Mexico.  

It is a “collapse” because asset prices suddenly fall, and credit dries up.  It is credit-induced because it was an overdose of credit that led to asset appreciation in the first place, and whose unservice-ability (defaults) in the end led to a reversal of the asset run-up originally induced by easy credit.

If there is another name for it, I don’t know what it is, but the name I use attempts to reflect the cause of the problem.

As for data that points to a collapse in assets and a withdrawal of credit, except for the run-up that has occurred between March 2009 and today, which even still does not bring us back to pre-crisis levels, everything has gone down except for gold and bonds:  housing, stocks, commodities. 

Furthermore, just because we’ve had a rally between March 2008 and today does not mean we’re out of the woods, by any measure.  There was a stupendous suckers rally between 1930-1931 – you know, before anybody was even using the term “depression” yet.  Equity markets are extremely overpriced right now, priced beyond perfection in that not only are they priced for perfection today, they are also priced for the perfect, anticipated, QE2 announcement due next week.  And, this isn’t me talking, it’s the valued analysis of many a market watcher from Mish, to Prechter, to Hussman, Albert Edwards, and more than I can mention.

As for credit, I don’t know why M2 shows record debt because quite frankly I don’t know what is included in M2 or in what you term, “total non-financial credit market debt”. 

I suspect it includes government debt, since private-sector debt has been falling in a way not seen since the 1930’s, as recently observed by Steve Keen in Deleveraging with a Twist:

The latest Flow of Funds release by the US Federal Reserve shows that the private sector is continuing to delever. However there are nuances in this process that to some extent explain why a recovery appeared feasible for a while.

The aggregate data is unambiguous: the US economy is delevering in a way that it hasn’t done since the Great Depression, from debt levels that are the highest in its history. The aggregate private debt to GDP ratio is now 267%,  versus the peak level of 298% achieved back in February 2009–an absolute fall of 31 points and a percentage fall of 10.3% from the peak.

http://cdn.debtdeflation.com/blogs/wp-content/uploads/2010/09/092010_012...

 

This dwarfs any previous post-WWII experience–even the steep recession of the mid-1970s.

US Debt Downturns

Now

1990s

1970s

Duration in years

1.3

2.3

1.3

Peak Debt

298

169

114

Debt Trough

268

163

106

Fall in Debt

31

7

8

Percent Decline

10.3%

4.2%

6.7%

Rate of Decline p.a.

7.9%

1.8%

5.1%

The aggregate level of private debt now towers over the economy, putting into sharp relief the obsession that politicians of all persuasions have had with the public debt. Rather like Nero fiddling as Rome burnt, politicians have focused on the lesser problem while the major one grew out of control. Now they are obsessing about a rise in the public debt, when in a very large measure that is occurring in response to the private sector’s deleveraging.

If they had paid attention to the level of private debt in the first place, then we wouldn’t be facing exploding public debt today.

 

There is much more in the article, but basically, the only place where debt is increasing is in the government sector:

Drilling down into the debt data, it’s apparent that the sector that caused the crisis—the finance sector—is the one that has delevered the most is also the one whose rate of delevering is slowing most rapidly.

This is not a good thing, nor is it likely to last. The finance sector exists to create debt, and the only way it can do that is by encouraging the rest of the economy to take it on. If they were funding productive investments with this money, there wouldn’t be a crisis in the first place—and debt levels would be much lower, compared to GDP, than they are today. Instead they have enticed us into debt to speculate on rising asset prices, and the only way they can expand debt again is to re-ignite bubbles in the share and property markets once more.

 

 

Here’s where the level of debt (when compared to income) matters, as opposed to its rate of change: reigniting these bubbles is easy when debt to GDP levels are low. But reigniting them when debt to income levels are astronomical is next to impossible. Speculators have to be encouraged to take on a level of debt whose servicing consumes a dangerously high proportion of their income, in the belief that rising asset prices will let them repay that debt with a profit in the near future.

With the debt to GDP levels for all non-government sectors of the American economy at unprecedented levels, the prospect that any sector can be enticed to take on yet more debt is remote. Deleveraging is America’s future.

 

 

More importantly, despite the massive injections of stimulus and corresponding increase in government debt, GDP (if you take the government’s numbers at their word, which is a leap of faith) has stayed mostly flat, indicating that the only response to stimulus is for velocity to go down, with GDP staying flat despite an increase in the total money supply, and that we are in a Liquidity Trap as recently described by John Hussman:

Bernanke Leaps into a Liquidity Trap John P. Hussman, Ph.D.
All rights reserved and actively enforced. Reprint Policy

"There is the possibility... that after the rate of interest has fallen to a certain level, liquidity preference is virtually absolute in the sense that almost everyone prefers cash to holding a debt at so low a rate of interest. In this event, the monetary authority would have lost effective control."

John Maynard Keynes, The General Theory

One of the many controversies regarding Keynesian economic theory centers around the idea of a "liquidity trap." Apart from suggesting the potential risk, Keynes himself did not focus much of his analysis on the idea, so much of what passes for debate is based on the ideas of economists other than Keynes, particularly Keynes' contemporary John Hicks. In the Hicksian interpretation of the liquidity trap, monetary policy transmits its effect on the real economy by way of interest rates. In that view, the loss of monetary control occurs because at some point, a further reduction of interest rates fails to stimulate additional demand for capital investment.

Alternatively, monetary policy might transmit its effect on the real economy by directly altering the quantity of funds available to lend. In that view, a liquidity trap would be characterized by the failure of real investment and output to expand in response to increases in the monetary base (currency and reserves).

In either case, the hallmark of a liquidity trap is that holdings of money become "infinitely elastic." As the monetary base is increased, banks, corporations and individuals simply choose to hold onto those additional money balances, with no effect on the real economy. The typical Econ 101 chart of this is drawn in terms of "liquidity preference," that is, desired cash holdings, plotted against interest rates. When interest rates are high, people choose to hold less cash because cash doesn't earn interest. As interest rates decline toward zero (and especially if the Fed chooses to pay banks interest on cash reserves, which is presently the case), there is no effective difference between holding riskless debt securities (say, Treasury bills) and riskless cash balances, so additional cash balances are simply kept idle.

Velocity

A related way to think about a liquidity trap is in terms of monetary velocity: nominal GDP divided by the monetary base. (The identity, which is true by definition, is M * V = P * Y. The monetary base times velocity is equal to the price level times real output).

Velocity is just the dollar value of GDP that the economy produces per dollar of monetary base. You can also think of velocity as the number of times that one dollar "turns over" each year to purchase goods and services in the economy. Rising velocity implies that money is "turning over" more rapidly, so that nominal GDP is increasing faster than the stock of money. If velocity rises, holding the quantity of money constant, you'll observe either growth in real output or inflation. Falling velocity implies that a given stock of money is being hoarded, so that nominal GDP is growing slower than the stock of money. If velocity falls, holding the quantity of money constant, you'll observe either a decline in real GDP or deflation.

The belief that an increase in the money supply will result in an increase in GDP relies on the assumption that velocity will not decline in proportion to the increase in money. Unfortunately for the proponents of "quantitative easing," this assumption fails spectacularly in the data - both in the U.S. and internationally - particularly at zero interest rates.

How to spot a liquidity trap

The chart below plots the velocity of the U.S. monetary base against interest rates since 1947. Since high money holdings correspond to low velocity, the graph is simply the mirror image of the theoretical chart above.

Few theoretical relationships in economics hold quite this well. Recall that a Keynesian liquidity trap occurs at the point when interest rates become so low that cash balances are passively held regardless of their size. The relationship between interest rates and velocity therefore goes flat at low interest rates, since increases in the money stock simply produce a proportional decline in velocity, without requiring any further decline in yields. Notice the cluster of observations where interest rates are zero? Those are the most recent data points.

One might argue that while short-term interest rates are essentially zero, long-term interest rates are not, which might leave some room for a "Hicksian" effect from QE - that is, a boost to investment and economic activity in response to a further decline in long-term interest rates. The problem here is that longer-term interest rates, in an expectations sense, are already essentially at zero. The remaining yield on longer-term bonds is a risk premium that is commensurate with U.S. interest rate volatility (Japanese risk premiums are lower, but they also have nearly zero interest rate variability). So QE at this point represents little but an effort to drive risk premiums to levels that are inadequate to compensate investors for risk. This is unlikely to go well. Moreover, as noted below, the precise level of long-term interest rates is not the main constraint on borrowing here. The key issues are the rational desire to reduce debt loads, and the inadequacy of profitable investment opportunities in an economy flooded with excess capacity.

One of the most fascinating aspects of the current debate about monetary policy is the belief that changes in the money stock are tightly related either to GDP growth or inflation at all. Look at the historical data, and you will find no evidence of it. Over the years, I've repeatedly emphasized that inflation is primarily a reflection of fiscal policy - specifically, growth in the outstanding quantity of government liabilities, regardless of their form, in order to finance unproductive spending. Look at the experience of the 1970's (which followed large expansions in transfer payments), as well as every historical hyperinflation, and you'll find massive increases in government spending that were made without regard to productivity (Germany's hyperinflation, for instance, was provoked by continuous wage payments to striking workers).

Likewise, real economic growth has no observable correlation with growth in the monetary base (the correlation is actually slightly negative but insignificant). Rather, economic growth is the result of hundreds of millions of individual decision-makers, each acting in their best interests to shift their consumption plans, saving, and investment in response to desirable opportunities that they face. Their behavior cannot simply be induced by changes in the money supply or in interest rates, absent those desirable opportunities.

You can see why monetary base manipulations have so little effect on GDP by examining U.S. data since 1947. Expand the quantity of base money, and it turns out that velocity falls in nearly direct proportion. The cluster of points at the bottom right reflect the most recent data.

[Geek's Note: The slope of the relationship plotted above is approximately -1, while the Y intercept is just over 6%, which makes sense, and reflects the long-term growth of nominal GDP, virtually independent of variations in the monetary base. For example, 6% growth in nominal GDP is consistent with 0% M and 6% V, 5% M and 1% V, 10% M and -4% V, etc. There is somewhat more scatter in 3-year, 2-year and 1-year charts, but it is random scatter. If expansions in base money were correlated with predictably higher GDP growth, and contractions in base money were correlated with predictably lower GDP growth, the slope of the line would be flatter and the fit would still be reasonably good. We don't observe this.]

Just to drive the point home, the chart below presents the same historical relationship in Japanese data over the past two decades. One wonders why anyone expects quantitative easing in the U.S. to be any less futile than it was in Japan.

Simply put, monetary policy is far less effective in affecting real (or even nominal) economic activity than investors seem to believe. The main effect of a change in the monetary base is to change monetary velocity and short term interest rates. Once short term interest rates drop to zero, further expansions in base money simply induce a proportional collapse in velocity.

 

There is much more evidence that we are in deflation brought on by excess credit, and that "stimulus" is doing nothing but exacerbating the problem and guaranteeing us much more deleveraging than would otherwise be necessary.  I apologize for not bringing forth the data in my original post (and other posts previously), but quite frankly, since I do not write economic  bogs or books for a living, and because I do not have a machine-head (I am jealous, MH!), I often try to get my points across without the pertinent data, which while I have seen and read, I simply do not archive as I would have to in order to pull up any chart I wished on a moment's notice in response to X article.  

I hope the points made in the above articles and data help you and others understand the deflationist view.

crash_watcher's picture
crash_watcher
Status: Silver Member (Offline)
Joined: Aug 12 2008
Posts: 146
Re: Guns and Butter interview of Percy Schmeiser

Haven't had a chance to listen to this, but this article looks like it's in the same genre.

http://saladin-avoiceinthewilderness.blogspot.com/2010/10/leaked-trade-agreements-and-hidden.html

 

LR, thanks for this link! 

Yes I believe that Schmeiser referred to CETA and S 510 in passing in the second part of the interview, but the above link gives much more detail.  Schmeiser's contention is that laws like these will turn farmers into serfs, with no freedom to plant what they choose. 

Full Moon's picture
Full Moon
Status: Diamond Member (Offline)
Joined: Oct 14 2008
Posts: 1258
Re: Guns and Butter interview of Percy Schmeiser

 OH my, Many are already sucked in .  Only a hand full of farmers I have talked to have been staying organic and those few said MonSATANos is getting harder tp resist .

FM

LogansRun's picture
LogansRun
Status: Diamond Member (Offline)
Joined: Mar 18 2009
Posts: 1444
Re: Guns and Butter interview of Percy Schmeiser

I suggest (and I'm doing it myself), that everyone start to collect their organic seeds now and keep them safe.  Larger farms are in trouble, but everyone should be able to keep their own little gardens GMO free if they start keeping seeds now.  I know cross pollination is obviously possible, but there are ways to protect against that if need be.  Also, get yourself some of those gardens in a can and throw them in the freezer.  They'll grow an acre of vegi's (which most families won't need) and they save for years!  I have 6 cans now, and I figure I could use about 1/3 of the seeds a year.  That's 18 years of seeds without collecting my own.  Just some thoughts.

Full Moon wrote:

 OH my, Many are already sucked in .  Only a hand full of farmers I have talked to have been staying organic and those few said MonSATANos is getting harder tp resist .

FM

crash_watcher's picture
crash_watcher
Status: Silver Member (Offline)
Joined: Aug 12 2008
Posts: 146
Re: Deflation

FB, that was a great response to Chris—thank you for taking the time to put that together.

As for credit, I don’t know why M2 shows record debt because quite frankly I don’t know what is included in M2 or in what you term, “total non-financial credit market debt”. 

I too am puzzled by the focus on M2 when M3, the broadest measure of money supply,  still tracked by John Williams at shadowstats.com, has been contracting since about December 2009, and as of Oct 17, 2010, is estimated by Williams to still be contracting at -4%.  

 

 

from: http://www.shadowstats.com/alternate_data/money-supply-charts

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments