Economy

[NatsAddict]

The Fed is answering to financial markets, and just cut the fed funds rate by a HUGE 75 basis points (3/4 of 1%).   The Fed has a dual mandate of stabilizing inflation and maximum employment.  Yet, with Paulson, our treasury secretary (and arguably the worst treasury secretary in history - the absolute worst of the long litany of moronic appointments by Bush) has been changing that mandate, tossing out any concerns about inflation and employment, and focusing solely on the equities markets.

It was idiotic for interest rates to get anywhere near where they were in the first place.  It's absolutely inexcusable that Greenspan (unquestionably the worst Fed Chairman, and possibly worst chair of any central bank, in history) started that round of 14 consecutive rate hikes when there was no economic reason for doing so, at least none other than to defend the $US as the world was getting saturated with $US thanks to Bush's lightning round of enormous deficits and expansion of the debt.  Greenspan never had any grasp of global economics, never learned from his mistakes (1999 equity bubble followed by the 2000's housing bubble, 3 recessions, and the highest average unemployment rate of any Fed Chair since the depression, plus several other "market corrections" due to other equity bubbles though none to the extent of the collapse in that of 2000 in which NASDAQ dwarfed the 1929 crash) - all in 18 years; plus much of the current situation is clearly on his shoulders) an had no problem with deficits as he thought he could raise rates enough to defend the $US from collapse, and never once considered that the world was becoming saturated with $US.  Instead, by giving Bush Carte Blanche with the deficits, he broke the back of the $US.  And why Clinton, in his last moments in office, stuck us with this blimin' idiot for another six years, can never be forgiven.

But, to use another analogy of another Bush disaster, when you make a huge mistake such as Iraq, the best way to screw things up worse is a knee-jerk reaction.  To just cut an run, withdrawing all the troops in one fell swoop, would make a bad situation even worse; this Fed cut is a knee jerk reaction.  Because of the mistakes already make, we have  high  inflation, and huge unemployment (even with Bush's number-manipulatoin that has the number of people wanting jobs today less than the number that held jobs under Clinton), this will instead increase inflation.  The volatility creates uncertainty which hurts employment.  The market fundamentals were never there to support it's levels at 14,198.  Nonetheless, thanks to Paulson and his talking heads, the Fed is now charged with defending stock prices that never had a reason to exist in the first place.  Heck, I won a bet today. With all the hoopla when the DJIA hit 14,198, I made what I considered, based upon the real fundamentals, a sucker bet with several brokers that it would go below 12,000 before it hit 15,000.

For our treasury secretary, his minions, Bernanke (the Ball-less Wonder Boy) and the talking heads on CNBC and the other financial networks not to have seen this years ago is unconscionable.  You can forgive the talking heads to some degree - they, like most brokers at the brokerage firms, have no economic or financial background (which makes them susceptible to sucker bets ).  What's really sad is that in his speeches and publications prior to taking over as Fed Chairman, Bernanke has shown that he knows better than to do what the Fed has done today.  But, he largely answers to a Treasury Secretary and Congress that (1) don't give two craps about what happens to this country, and (2) have absolutely no understanding of the duties which they are charged.

In 1929, the market fell 17% in the months prior to the big crash.  The DJIA has fallen 17% since October (NASDAQ down 21%).  Fortunately, there are not many other similarities between today and 1929, and we have a Fed Chairman that recognizes the numerous mistakes made then by the Fed and the Roosevelt administration.  In 1929, we were not a major economic power, the world economy was nowhere near today's global economy, and the world economy cared relatively little about the US.  More importantly, we are fortunate that in just under a year, Bernanke gets Paulson's foot off his throat.

At least Paulson is happy - the financials, such as his beloved Goldman Sachs, are the only beneficiaries of today's Fed action.  That's all Paulson cares about.  Still, since the window dressing which determined his buyout, GS is down 27%.

[tomterp]

Definitely hitting the panic button.

I'm thinking that I am going (very soon) to have a golden opportunity to refinance my mortgage, shortening up from the current 30 years (25 left) to 15, all the while lowering my APR.  In 15 I'll be 65 and ready to retire (if unable to do it sooner) and it would be nice to be done with the mortgage when my income drops.

[Ali the Baseball Cat]

I just checked this morning, and my 401K is cowering in the corner chewing its own hair...maybe I can burn stacks of stock certificates to keep warm when they shut off my gas.     

[2IPAs]

I don't even want to look.  But it can't be any worse than 2000, when I was suddenly in charge of my household's portfolio and had to start paying attention to this stuff. Every day in 2000 was pretty much bad news.

[kimnat]

I just checked this morning, and my 401K is cowering in the corner chewing its own hair...maybe I can burn stacks of stock certificates to keep warm when they shut off my gas.    

I can always count on an Ali comment to make me laugh.  You have quite a way with words.


Otherwise, so what all of us have seen coming down the pike is knocking at the door and the Fed and Wall Street are surprised???

[NatsAddict]

Definitely hitting the panic button.

I'm thinking that I am going (very soon) to have a golden opportunity to refinance my mortgage, shortening up from the current 30 years (25 left) to 15, all the while lowering my APR.  In 15 I'll be 65 and ready to retire (if unable to do it sooner) and it would be nice to be done with the mortgage when my income drops.

The 15-year is currently at 4.93%, down about 4/10 of a %.  I had told Sally last week that I was thinking mid/late February to refi,  but now may be the time to jump on it - the yield curve is pretty flat. Since the banks use short term instruments to finance long-term loans, their incentive to lend is drying up.   

[nospinzone1]

I just checked this morning, and my 401K is cowering in the corner chewing its own hair...maybe I can burn stacks of stock certificates to keep warm when they shut off my gas.    

DO NOT PANIC...YOU ARE STILL YOUNG. THE HISTORY OF THE MARKET IS THAT WHEN IT GOES DOWN IT COMES BACK TO A HIGHER HIGH. PATIENCE.

[nospinzone1]

The Fed is answering to financial markets, and just cut the fed funds rate by a HUGE 75 basis points (3/4 of 1%).   The Fed has a dual mandate of stabilizing inflation and maximum employment.  Yet, with Paulson, our treasury secretary (and arguably the worst treasury secretary in history - the absolute worst of the long litany of moronic appointments by Bush) has been changing that mandate, tossing out any concerns about inflation and employment, and focusing solely on the equities markets.

It was idiotic for interest rates to get anywhere near where they were in the first place.  It's absolutely inexcusable that Greenspan (unquestionably the worst Fed Chairman, and possibly worst chair of any central bank, in history) started that round of 14 consecutive rate hikes when there was no economic reason for doing so, at least none other than to defend the $US as the world was getting saturated with $US thanks to Bush's lightning round of enormous deficits and expansion of the debt.  Greenspan never had any grasp of global economics, never learned from his mistakes (1999 equity bubble followed by the 2000's housing bubble, 3 recessions, and the highest average unemployment rate of any Fed Chair since the depression, plus several other "market corrections" due to other equity bubbles though none to the extent of the collapse in that of 2000 in which NASDAQ dwarfed the 1929 crash) - all in 18 years; plus much of the current situation is clearly on his shoulders) an had no problem with deficits as he thought he could raise rates enough to defend the $US from collapse, and never once considered that the world was becoming saturated with $US.  Instead, by giving Bush Carte Blanche with the deficits, he broke the back of the $US.  And why Clinton, in his last moments in office, stuck us with this blimin' idiot for another six years, can never be forgiven.

But, to use another analogy of another Bush disaster, when you make a huge mistake such as Iraq, the best way to screw things up worse is a knee-jerk reaction.  To just cut an run, withdrawing all the troops in one fell swoop, would make a bad situation even worse; this Fed cut is a knee jerk reaction.  Because of the mistakes already make, we have  high  inflation, and huge unemployment (even with Bush's number-manipulatoin that has the number of people wanting jobs today less than the number that held jobs under Clinton), this will instead increase inflation.  The volatility creates uncertainty which hurts employment.  The market fundamentals were never there to support it's levels at 14,198.  Nonetheless, thanks to Paulson and his talking heads, the Fed is now charged with defending stock prices that never had a reason to exist in the first place.  Heck, I won a bet today. With all the hoopla when the DJIA hit 14,198, I made what I considered, based upon the real fundamentals, a sucker bet with several brokers that it would go below 12,000 before it hit 15,000.

For our treasury secretary, his minions, Bernanke (the Ball-less Wonder Boy) and the talking heads on CNBC and the other financial networks not to have seen this years ago is unconscionable.  You can forgive the talking heads to some degree - they, like most brokers at the brokerage firms, have no economic or financial background (which makes them susceptible to sucker bets ).  What's really sad is that in his speeches and publications prior to taking over as Fed Chairman, Bernanke has shown that he knows better than to do what the Fed has done today.  But, he largely answers to a Treasury Secretary and Congress that (1) don't give two craps about what happens to this country, and (2) have absolutely no understanding of the duties which they are charged.

In 1929, the market fell 17% in the months prior to the big crash.  The DJIA has fallen 17% since October (NASDAQ down 21%).  Fortunately, there are not many other similarities between today and 1929, and we have a Fed Chairman that recognizes the numerous mistakes made then by the Fed and the Roosevelt administration.  In 1929, we were not a major economic power, the world economy was nowhere near today's global economy, and the world economy cared relatively little about the US.  More importantly, we are fortunate that in just under a year, Bernanke gets Paulson's foot off his throat.

At least Paulson is happy - the financials, such as his beloved Goldman Sachs, are the only beneficiaries of today's Fed action.  That's all Paulson cares about.  Still, since the window dressing which determined his buyout, GS is down 27%.

THE FED SHOULD HAVE DONE IT A MONTH AGO.....
PAULSON AND BUSH BASHING....TYPICAL OF ULTRA LIB ERAL DEMOCRATS CONSUMED BY THEIR HATE OF BUSH.....
GREENSPAN AND PAULSON AND BUSH THE WORSE....JAJAJA.....REMEMJBER YOUR GUY JIMMY CARTER....23 PERCE3NT INTEREST?

IRAQ IS NOT A MISTAKE.....BUSH GOT THE BALLS THAT KLINTON DID NOT HAVE....HE IS FIGHTING A WAR AGAINST INTERNATIONAL TERRORISM AND IF WE DID NOT GO THERE, IRAN WOULD PROBABLY OWN THE WHOLE REGION. AND THEN WHAT WOULD YOU HAVE US DO, GENIUS?......

[NatsAddict]

THE FED SHOULD HAVE DONE IT A MONTH AGO.....
PAULSON AND BUSH BASHING....TYPICAL OF ULTRA LIB ERAL DEMOCRATS CONSUMED BY THEIR HATE OF BUSH.....
GREENSPAN AND PAULSON AND BUSH THE WORSE....JAJAJA.....REMEMJBER YOUR GUY JIMMY CARTER....23 PERCE3NT INTEREST?

IRAQ IS NOT A MISTAKE.....BUSH GOT THE BALLS THAT KLINTON DID NOT HAVE....HE IS FIGHTING A WAR AGAINST INTERNATIONAL TERRORISM AND IF WE DID NOT GO THERE, IRAN WOULD PROBABLY OWN THE WHOLE REGION. AND THEN WHAT WOULD YOU HAVE US DO, GENIUS?......

Sorry to disappoint you, NoSpin, but I'm a conservative economically.  The problem is that we've never in our history had a more liberal - economically liberal - in office.  Hell, I'm one of the idiots that voted for Bush.
 
As for Jimmy Carter, if you check history, what he experience was caused by Johnson not financing Vietnam, resulting in  our national bankruptcy and Nixon taking us off the gold standard and fighting inflations with wage and price freezes rather than economics.  Carter appointed Paul Volker as Fed Chair, in a move that saved teh economy.  Volker had to raise rates to break the back of inflation Nixon tossed at us.  Also, check history of the interest rates, they actually peaked under Reagan.  Why not foolishly blame him as you foolishly blamed Carter?  Carter was not a good president, but, economically, he inherited the worse mess since Hoover handed over the reigns to FDR.

The Iraq war is not a war againt terrorism.  In fact, Al Qaeda and the Taliban have regained potency due to the Iraq war.  If Bush had indeed fought a war against terrorism, and kept it focus as a war against terroism, that war would be much further along.  Instead, he went into an unnecessary war, weakening the war on terrorism, and by not watching the back door, has lost that war economically.  Al Qaeda never sought a military victory against us, and never sought to.  However, it has the capability to defeat us economically, and Bush ignored the back door that is giving them that capability.

Bush's deficits were the only remotely economic reason for Greenspan's rate hikes.  He was trying to defend the $US.  If not for the war and the related rate hikes, we would be a much stronger nation than we are today.  In short, if not for Bush, and his stupid Iraq war, we would have never had the high interest rates to begin with.

Rather than these massive moves, the largest since 1984 when we were recovering from the Johnson/Nixon disasters, a controlled steady delcine in rates would have been better than just popping the balloon.  However, due to the deficits, there is an enormous over-supply of $US in the world.  The supply alone is inflationary, the worst kind of inlationary pressure there is.  This is further compounded by Greenspan's breaking the back of the $US, heavily increasing the cost of imports.  With this inflationary pressure, the Fed should be holding rates as the lesser of the evils.  We have other means to control a recession, but inflation is much more difficult to control.  These moves are the equivalent to selling our soul to the economic devil.

Especially for the retirees on fixed incomes who think this is anything close to a good move, be careful what you wish for.  You won't be faced with choosing between food and meds, with these kind of moves you'll be coming closer to choosing between Fancy Feast or Kibbles and Bits for dinner.  There is nothing worse for you than $US supply inflation and import inflation.  This is especially true since in 2005 and 2006, and likely 2007, we were net importers of food and your cost of living adjustments don't cover those increases.  In fact, for 2008, the Feds will give you a whopping 2.3% COLA for your social security as it measures inflations without consideration of food and energy prices.

It also makes US treasuries less attractive, which will further devalue the $US.  Since we have to fund our deficits (or better yet, start running real surpluses, not the faux surpluses of the Clintion era, although I'd take any of his years over those of Bush), we have to sell bonds to cover them.  If we simply print money without backing, we'll go into hyper-inflation.  This is compounded by the baby boomers starting to retire.  Currently, there is still an annual surplus of social security taxes collected over social security benefits paid.  The same is true of medicare.  Medicare will be reversing into an annual deficit in about three years, and social security a few years laters.  Currently, we use those surpluses to pay for our general fund expenditures (44% of our deficit is currently funded by social security and medicare surpluses).  Once those dry up, or worse, turn into deficits, we will be borrowing even more to cover our annual deficits.  When those surpluses just even out, our borrowing from the public and international entities will approximately double.  As foreign government take over expanding levels of our currency, they also take over control our our country

Then, it will get much worse once we double our borrowing just to fund general expenditures, and then borrow even more to cover medicare and social security.  On the extremes, one of two things is going to happen: (1) either the dollar starts trading even with the peso or and we are facing hyper-inflation, or, (2) interest rates skyrocket into the 30% range.  Somewhere in between, with a growing economy would be preferrable.  But, Bush prefers an extreme option, option 1.

So, as for what I would have done:
First of all our money and banking should be used to control inflation and employment, not appease the whims of the treasury secretary and financial markets.  Further, if not for breaking the dollars backs and having created unprecedented inflationary pressures, cutting rates in order to achieve employment growth would have been a good idea, and then only if done with control.  Unfortunately, this isn't the case and today's action will hamper confidence and employment in the long run, is inflationary in the long and short runs, and was done only to appease the equity markets - the financial equities in particular.  And, what I would have done, having for a while been a member of Mensa, is told Paulson to f*ck off while I do what is right for the country and hold while going public with how the debt is killing us, and increase political pressure to truly stimulate the economy (Bush's,  and all other plans, suck) and turn the deficits into true surpluses. 

An example of inflation caused by the falling $US:
In March, 2006, the $US was trading at 1.17/euro.  Right now it is at 1.46/euro.  In a little under 2 years, the dollar has fallen 25%.  When the euro was introduced in 1999, it traded at .80 to the $US (you could trade a $US for 1.25 euros).  Today, you get .68 of a euro - a decline of 46%.  Now, take the current $89/bbl price of oil.  If not for Bush's deficits and the destruction of the $US, oil would be $48/bbl today.  In 1999, oil was at $32/bbl.  In short, since 1999, $41/bbl of our cost of oil, or 72% of its increase since 1999, is due to the weakened $US versus the euro. 

[GburgNatsFan]

Really? It never occurred to me that this would be a good time to refi. I'd actually love to get to something like a 20 year loan.

My current mortgage is with Countrywide. Sigh.

Definitely hitting the panic button.

I'm thinking that I am going (very soon) to have a golden opportunity to refinance my mortgage, shortening up from the current 30 years (25 left) to 15, all the while lowering my APR.  In 15 I'll be 65 and ready to retire (if unable to do it sooner) and it would be nice to be done with the mortgage when my income drops.

[kimnat]

My current mortgage is with Countrywide. Sigh.

Our's too!  Now it's w/ the horrible, evil Stank of America - Thieves En Masse!

[kimnat]

Hey, NatsAddict, do you have some sort of economics ph.d. or something?  This isn't a criticism.  You just seem to better understand and state this more than any I've seen.

[GburgNatsFan]

How could one interpret your asking if they have a doctorate as a criticism?

Hey, NatsAddict, do you have some sort of economics ph.d. or something?  This isn't a criticism.  You just seem to better understand and state this more than any I've seen.

[shoeshineboy]

DO NOT PANIC...YOU ARE STILL YOUNG. THE HISTORY OF THE MARKET IS THAT WHEN IT GOES DOWN IT COMES BACK TO A HIGHER HIGH. PATIENCE.

Yeah, I was going to say thing. Ali's awfully young to be following the ups and downs of a 401k that closely. It's all about the long term.

[NatsAddict]

Hey, NatsAddict, do you have some sort of economics ph.d. or something?  This isn't a criticism.  You just seem to better understand and state this more than any I've seen.

No, Sally's the PhD of this household. 

I do have a minor in econ, and an International MBA, and have a fair amount of experience with global economics (Saudi Arabia, Kuwait, Russia, Argentina, Turks and Caicos, and The Bahamas).  When I wound up with more time on my hands than what I could handle, I've taken several other courses over the years, including some in business finance and econ.  Plus, with the faculty at FAU, getting into friendly, though sometimes boisterous, debates and seeing how sociology, poli sci, business, finance and econ all affect one another provides a huge knowledgebase.  Also, being something of a research freak, I spend several hours every day reading more foreign press (the foreign press has more hard news and provides a better balance than any US-based media outlet) and international business/economic news sources.

[nospinzone1]

Our's too!  Now it's w/ the horrible, evil Stank of America - Thieves En Masse!

SORRY, MY DEAR....DID YOU GUYS UNDERSTAND WHAT YOU WERE SIGNING?

[GburgNatsFan]

Our mortgage with Countrywide do you mean? It was seven years ago. I doubt you could have predicted this seven years ago.

SORRY, MY DEAR....DID YOU GUYS UNDERSTAND WHAT YOU WERE SIGNING?

[NatsAddict]

Yeah, I was going to say thing. Ali's awfully young to be following the ups and downs of a 401k that closely. It's all about the long term.

That can be a big mistake.  Cutting losses is just as important as making gains.  If I ever execute a long-term trade (for me, that means anything I hold more than a day), I always place a sell order to prevent any even moderate losses.  In gold alone, which has gone up about 100% over two years, I've made several times that just playing the highs and lows and not accepting losses.  Since Thursday, I just sold out at 902, and bought back at 870, increasing my number of "shares" by about 3.7%.  Right now, its at 888, which provided me a net gain of 2% even though gold has dropped 1.5%.  Per ounce I had at 902, I now have 921 rather than taking a loss down to 888 waiting on the ride up from 870. In total, I'm up 3.7% over those who sit back and ride it out.  Those little percentages add up quick.  Just doing something like that 19 times in a lifetime will double a retirement fund.  In today's volatile market, it's pretty easy to do nearly 19 times in a single quarter. By simply paying attention now, and getting one more doubling of your retirement fund in your lifetime in now can potentially double the retirement benefit in the future.  The result could be the difference between retiring on $5,000 a month in today's dollars vs retiring on $10,000 a month in today's dollars.  Of course, if you are younger, you have may have only contributed what will turn out to be 25% of your retirement if you sit and wait.  But, even a doubling that contribution to make a huge difference.  For example, lets assume the wait it out retirement is $5,000/month.  One fourth of that is already in a retirement account (for somebody who works 40 years, this is usually contributed within the first 6 or 7 years).  That 1/4 would make up $1,250 per month of the $5,000 future retirement.  Double that portion just one extra time in a lifetime, and the $5,000 retirement just became $6,250.

Another example of how theses percentages add up is when I was doing day trading.  I set a goal of 1% per day, generally making it in increments of less than 25 cents/per share per trade.  My best year, I made 1,394%.  It sounds like a lot, but it really doesn't take much to get there.  Take 261 weekdays per year, and then knock off about 11 for non-trading days, and use a nice round number of 250 trading days.  Then take 1.01 (making 1% per day) to the 250th power.  Subtract the original 1.00 from the result, and you would have a yield of 1,103% - every dollar earned $11 more, and you ended the year with $12.  Making a measly 3/10 of one percent per day would more than double your money.

I think Ali is doing the right thing being concerned.  I don't know how old he is, but if he's paying this much attention now, he stands to be one of the guys who will more than double his retirement over the wait and ride it outers.

[NatsAddict]

Our mortgage with Countrywide do you mean? It was seven years ago. I doubt you could have predicted this seven years ago.

Seven years ago, Bush had only been in office 2 days.  Little did we know....  In fact, if somebody had then come back from the future and told me how bad Bush would screw things up, I don't think I'd have believed him.  A disaster of his scale needs to witnessed first hand in order to believe.

[NatsAddict]

Here is a very good piece, first published on Monday, before the Fed's idiocy du jour, and published in tomorrow's Asia Times, which is where I found it.

THE BEAR'S LAIR
The snare of stimulus
By Martin Hutchinson
Jan 23, 2008

President George W Bush, Fed chairman Ben Bernanke and the Democrats in both Congress and the presidential campaigns agree that a fiscal stimulus is essential. It now appears that such a stimulus, of around 1% of gross domestic product, US$145 billion, will be enacted, perhaps by means of a rebate of around $1,000 per taxpayer. This is a fairly small amount, so it may not do much harm. But does the theory underlying it make any economic sense at all - as distinct from political sense, clearly uppermost in a presidential election year?

It's good to know that the classics are still read, even at Yale in the 1960s and that the General Theory of Employment, Interest and Money was able to have such a formative influence on the mind of the young George W Bush. However he doesn't seem to have got beyond the Cliff Notes version. Keynesian economic stimulus, in the form of adding spending or providing a tax cut (something Keynes generally abhorred) to stimulate the economy, was intended to be used to stimulate a consumer demand that had become inadequate and had locked the economy into a suboptimal equilibrium with substantial unemployment.

Excessive savings was Keynes' bugbear; he believed that excessive saving had been the principal problem for Britain and the United States in the late 1920s, so that only a demand-side kick could re-stimulate the economy.

We now know that Keynes' remedy was basically wrong, even for the 1930s, although certainly the deflationary below-capacity 1930s was a decade in which it was both tempting and not very harmful. By the time Keynes wrote the General Theory, the British economy had recovered nicely entirely without the use of Keynesian stimulus. Indeed Neville Chamberlain, the Chancellor of the Exchequer who engineered the rapid recovery, had gone so far as to cut civil service salaries by 10% at the nadir of the Depression in 1931, thus reducing government spending, basically on the entirely correct grounds that the option value of civil servants' guaranteed job security was higher in an economic downturn.

The Great Depression was primarily caused not by the 1929 stock market crash but by the Smoot-Hawley tariff passed in 1930 (a failure that would have been recognized by Adam Smith in 1776), by the money supply contraction in 1931-33 (a failure that was not to be recognized until Milton Friedman and Anna Schwarz's magnum opus in 1963) and by a thumping income tax top marginal rate increase from 25% to 63% in 1932 (a failure that Keynes would have recognized, but which would appear much more salient to the supply-side economists of the 1980s.) It was overcome, in Britain though not in the United States, by a government of the utmost economic orthodoxy pursuing policies of which Calvin Coolidge and Andrew Mellon would have thoroughly approved.

However, even those who believe in Keynes can hardly suppose a Keynesian stimulus to be relevant now. Lack of consumer demand has not been the problem in the US economy since 1995, quite the opposite. Grossly excessive consumer demand, caused by an over-expansionary monetary policy over a period of 12 years, has produced record balance of payments deficits, a negative savings rate and the transfer to Asia and the Middle East of one of America’s most important comparative advantages: readily available capital at low cost.

At this point, the long-term need is for a radical upward re-orientation of interest rates, to a level that provides savers with at least a 3% real return over and above the current inflation rate of nominally 4%. That would reduce US consumer demand, close the payments deficit, increase US consumer saving and bring the US economy as a whole back into balance. It would also increase the worldwide cost of capital, making it less easy for emerging markets, most of which are still somewhat capital poor, to outsource US industries to their own lower-wage economies. It would also reduce the excessive US investment in housing and financial services, both of which sectors are in the early stages of a very unpleasant downsizing of their current bloated and carbuncular state.

A major rise in interest rates would also have the useful side effect of preventing a resurgence of inflation. Having remained quiescent over the past decade, in spite of excessive money creation in the US and worldwide, inflation is now making a comeback. Even by the heavily massaged numbers of the Bureau of Labor Statistics, US inflation is above 4% and likely to remain there. In China and India, two of the important sources of cheaper goods in recent years, which have kept prices down and US industries outsourcing, inflation is above 7% and shows no sign of returning to a more tolerable level. The Chinese and Indian governments are at their wits' end as to how to control it; not surprising because its origin is in the excessive money creation of the US and other Western economies.

However, a major rise in interest rates we are not going to get, quite the opposite. Instead the Fed, seeking as usual since 1995 to provide short-term palliatives to Wall Street at the expense of the long term health of the economy, clearly intends to cut the Federal Funds rate further at its meeting January 30th, probably by 0.50% to 3.75% (incidentally, it is interesting that while interest rates must be increased as slowly as possible, in increments of no more than 0.25%, cuts can apparently be as large as the Fed's whim dictates.)

That will have one effect which may appear unattractive, but which to the short-term thinkers of the Fed is beginning to have a strange allure: it will cause much higher inflation. Not the wimpy 4-5% inflation from which we are currently suffering, but a genuine take-no-prisoners 10-15% inflation.

This might seem an unpleasant result, for which ordinary folk might even marginally blame the sainted Bernanke (though no doubt the Bureau of Labor Statistics will help to keep the truth as far as possible from the populace) except for one thing: it would go a long way to solve the housing mess.

The housing problem results from the after-effect of the excessive run-up in house prices. House prices got too far ahead of incomes, so there is insufficient natural demand to sustain them. Once a house price decline began, speculative demand also disappeared.

To restore a properly functioning market, prices must fall to a level at which the overall ratio of house prices to earnings will cause them to be bought once again. Even at that level there would be houses that were too large or poorly built for the market, mortgages that had been made by charlatans to fools and folk who simply could not afford their houses, but in the long run the market would stabilize. The housing market would also benefit if stabilization could occur before too much pain had been felt by most homeowners, so that the "houses are always a good buy" mantra could be retained.

Inflation helps this. Since wages tend to rise with prices, 10% inflation will produce roughly a 10% annual rise in wages, which will cause incomes to rise rapidly towards steadily declining house prices. In real terms, housing will become cheaper and cheaper. Within at most a couple of years, incomes will have risen sufficiently for house prices to bottom out. Provided mortgage rates remain at the current 6% level, houses would once again be affordable and would be buoyed by the belief that prices would never drop too far, or for too long.

It's a clever solution, first practiced (largely accidentally) by Britain in the 1970s. There, a building boom in 1971-73 had cause prices of houses and real estate in general to rise above their equilibrium level. In 1974, interest rate rises and a recession caused a serious slump, which forced the bankruptcy of many homebuilders. In 1975, however, inflation ran at 25% and it remained well into double digits for the next five years. Consequently by 1977 the housing market was stabilized, and in the next couple of years it enjoyed another of the speculative booms, fueled by mortgage rates below the rate of inflation, that made housing so profitable an "investment" for the British middle class.

A Fed-fueled inflation that cushioned the housing decline would not be cost free, far from it. But the costs would be medium term and less intimately connected with the mistaken policies that had caused them. It would entrench inflation in the US economy, imposing huge long-term costs. It would enrich homeowners and heavy borrowers, and impoverish pensioners, savers and renters, thus intensifying the Latin Americanization of the US economy.

It would benefit the government at the expense of its debt-holders, while giving the banking system a serious problem in the erosion of its capital base in real terms. And of course, it would reduce the progress made in the 1980s and early 1990s toward conquering inflation and allowing bond yields to decline. Eventually the market would force bond yields into a savage increase, which would be hugely damaging to the economy.

All of those costs are serious but difficult to pin on one actor in the economy. In other words, highly tempting to the short-term thinkers of politics and apparently the Fed. The Fed is additionally protected by the lack of public understanding of monetary policy's importance; when Ron Paul has raised its misdeeds in Republican debates he has been met by yawns from the other candidates, the moderators and, unforgivably, from the media commentators.

The tax giveaway then fits neatly into the inflationary scenario. It has no beneficial long-term economic effect, since demand needs to be suppressed rather than stimulated and a one-time handout has no effect on the supply side.

However, it gives an additional kick to inflation for two reasons. First, it prevents a slowing in demand that might weaken wage pressures and prevent the acceleration of the wage-price spiral that is necessary for nominal incomes to rise to meet the housing market’s fall. Second, it increases the federal budget deficit, at a time when that would be widening anyway towards a level that will itself cause major concern - the excess demand in the public sector would thus cause inflation even if that in the private sector didn't.

The Federal budget moved from a surplus of $236 billion in 2000 to a deficit of $412 billion in 2004, a swing of $648 billion, in what can only be described as a Mickey-Mouse recession. This time, in a recession that is likely to be substantially deeper, the deficit is starting from $163 billion in 2007, so will surely rise beyond $800 billion, perhaps towards $1 trillion. If galloping inflation hasn't caused a sharp rise in interest rates, we can thus thankfully rely on the budget deficit to do so.

As an additional factor, much of state and local government finance depends on the rapid increases in property taxes that have been produced by the house price rises of 2001-06. Those have now gone into reverse and that reversal may be severe. Credit default swaps (which pay you money on a default) on the more profligate states, notably including California with its overblown real estate market and feckless state government, would thus seem excellent investments currently.

Thus the Fed and the administration are indeed working together on an economic policy. Unfortunately, they are working on an economic policy that will produce double digit inflation and trillion dollar federal deficits as far as the eye can see. However, that is not their worry. Bush leaves office next January and will have maximized the slim probability of electing a Republican successor. And the Fed will no doubt succeed, as it has so often in the past, in blaming somebody else for its mistaken policies.

Martin Hutchinson is the author of Great Conservatives (Academica Press, 2005) - details can be found at www.greatconservatives.com.

(Republished with permission from PrudentBear.com.

Asia Times

[Ali the Baseball Cat]

True, true, though we did just lean heavily on one of ours to renovate the basement, just in time for the unwanted spawn of the condo glut to issue forth like a huge blast of 2BR hardwood floor/granite counter diarrhea onto the D.C. rental market...sigh, well, chalk up yet another big reason why I'm praying for regime change (a big intake of new DC residents would be very helpful right about now).  But yes, you are absolutely right, what happens in the short term in the equity markets should not be a major concern w.r.t planning for old fartdom (and if I could, I would become an old fart tomorrow).

 

Yeah, I was going to say thing. Ali's awfully young to be following the ups and downs of a 401k that closely. It's all about the long term.

[Ali the Baseball Cat]

I tried playing around with ForEx and "emerging markets" stocks back in the mid-90s, but lacked the attention span (not to mention the cash) to stick with it...pity, because the South African Breweries (among other JoBurg SE) stocks I had been toying with would be major ka-ching right now. 

That can be a big mistake.  Cutting losses is just as important as making gains.  If I ever execute a long-term trade (for me, that means anything I hold more than a day), I always place a sell order to prevent any even moderate losses.  In gold alone, which has gone up about 100% over two years, I've made several times that just playing the highs and lows and not accepting losses.  Since Thursday, I just sold out at 902, and bought back at 870, increasing my number of "shares" by about 3.7%.  Right now, its at 888, which provided me a net gain of 2% even though gold has dropped 1.5%.  Per ounce I had at 902, I now have 921 rather than taking a loss down to 888 waiting on the ride up from 870. In total, I'm up 3.7% over those who sit back and ride it out.  Those little percentages add up quick.  Just doing something like that 19 times in a lifetime will double a retirement fund.  In today's volatile market, it's pretty easy to do nearly 19 times in a single quarter. By simply paying attention now, and getting one more doubling of your retirement fund in your lifetime in now can potentially double the retirement benefit in the future.  The result could be the difference between retiring on $5,000 a month in today's dollars vs retiring on $10,000 a month in today's dollars.  Of course, if you are younger, you have may have only contributed what will turn out to be 25% of your retirement if you sit and wait.  But, even a doubling that contribution to make a huge difference.  For example, lets assume the wait it out retirement is $5,000/month.  One fourth of that is already in a retirement account (for somebody who works 40 years, this is usually contributed within the first 6 or 7 years).  That 1/4 would make up $1,250 per month of the $5,000 future retirement.  Double that portion just one extra time in a lifetime, and the $5,000 retirement just became $6,250.

Another example of how theses percentages add up is when I was doing day trading.  I set a goal of 1% per day, generally making it in increments of less than 25 cents/per share per trade.  My best year, I made 1,394%.  It sounds like a lot, but it really doesn't take much to get there.  Take 261 weekdays per year, and then knock off about 11 for non-trading days, and use a nice round number of 250 trading days.  Then take 1.01 (making 1% per day) to the 250th power.  Subtract the original 1.00 from the result, and you would have a yield of 1,103% - every dollar earned $11 more, and you ended the year with $12.  Making a measly 3/10 of one percent per day would more than double your money.

I think Ali is doing the right thing being concerned.  I don't know how old he is, but if he's paying this much attention now, he stands to be one of the guys who will more than double his retirement over the wait and ride it outers.

[blue911]

It seems to me that President Bush is pushing for a tax rebate as the major part of his economic stimulus package. This would make the second time he has used a tax rebate to jump start the economy. What I don't understand is how this makes sense. If you base your economy on supply side economics, wouldn't you be better pumping the money into the hands of employers? Or is this an indictment that supply side economics isn't workable? The USA is over a trillion dollars in debt and hasn't had a balanced budget under the current administration,where is the $145 billion dollars coming from?

Basically I don't think we have an economic policy. But then again we don't have an energy policy or a foreign policy or an enviornmental policy or a domestic policy so why should the economy be different.

[tomterp]

You just don't get it, blue.  If deficits are too large, you cut taxes.   Cutting taxes stimulates business activity which generates more tax revenues.  This is an opportunity to spend even more on projects intended to preserve the constituency of elected members of congress.  Of course, deficits will once again swell, so resort to your one trick pony - cut taxes.

It just sounds so good.  Doesn't everyone wish they were paying less taxes?  Great!! 

Makes me want to refinance to a negative equity mortgage loan, where I pay less than the interest due, and just keep adding the overdue interest into principal.  That way I can buy more stuff.

[blue911]

Makes me want to refinance to a negative equity mortgage loan, where I pay less than the interest due, and just keep adding the overdue interest into principal.  That way I can buy more stuff.

Couldn't just put your mortgage on your Visa card?