patrick.net

What about this CL job posting?

http://www.craigslist.org/about/best/ldn/783766933.html

Schiff was half right. He nailedwhat was going to happen, but his 'decoupling theory', the 'collapse of the dollar' and the 'stelar rise of gold' have all been so totally wrong that everyone invested with Schiff is down 50%.
He may be proven right over the next few years. . .
But I doubt it.
Decoupling is not correct. China is not the engine of the world economy and investing there will continue to b a losing strategy. Gold is suffering the same fate of any commoditiy. Until we hit the inflation side, which may not happen since we are getting a world-wide recession, gold will continue to underperform.
Everything else he says was well thought out and completely correct. As ever,it is 'what do I do given this insight' is where he falls down.

Significant decoupling is not realitic - but I expect that we will see some incremental move in that direction over time as more of the world becomes wealthier and consumes more.

We are still facing deflationary pressures from the both the globalization effect and the current financial panic. The bubblicious monetary policy of 2002 - 2005 offset the global deflationary effect, but the collapse since then exacerbates the deflationary pressures. Deflation is by definition a stronger currency, and will imply lower prices for nearly everything including gold.

The recent monetary policy and bailout policy will ultimately be very inflationary. But the macro tide is still heavily deflationary. So for now cash is king.

The recent monetary policy and bailout policy will ultimately be very inflationary.

But money supply is still not growing nearly as fast as debt/asset deflation, right?

Money supply is growing fast but velocity has slowed dramitaclly. The impact from deleveraging is very powerful.

The tide is going out.

Cash is king.

dramatically

The Great Money hole:

http://www.theonion.com/content/video/in_the_know_should_the_government

The time for action is now!

# Peter P Says:
But money supply is still not growing nearly as fast as debt/asset deflation, right?

True, but the debt/asset deflation will stop at some point. If monetary policy does not tighten immediately in response, you will see a spike in monetary inflation. Given the lack of discipline and caution at Central Banks, I am not too sanguine about their competence and ability to correctly time this to avoid inflation.

The CB's would have to overshoot on the tightening in order to mop up the excess liquidity they have p*ssed onto the "market". Again, not sure if they will have the sense, the guts and the ability to do this correctly.

Exactly _when_ we cross the event horizon from deflation to inflation, I don't know. What worries me is that so far, we seem to have net monetary deflation but real asset prices have been more or less propped up. Will "they" be able to keep this up long enough to enter the inflationary phase without snapping down first? I don't believe they can pull that off - but I don't know for sure.

What worries me is that so far, we seem to have net monetary deflation but real asset prices have been more or less propped up.

Because people are still in their jobs. Human beings are emotional and they do not make economic decisions as a group.

Soon enough, the job market will be affected more profoundly and we will see more corrections.

God help us.

"What worries me is that so far, we seem to have net monetary deflation but real asset prices have been more or less propped up."

I disagree.

Monetary policy is very inflationary now. Probably more so than ever before. The fed is pumping like crazy in an effort to stop the financial crisis. And asset prices have declined dramatically in the last year. Look at real estate and stocks - down about 40-50% in real terms.

Just look at a gollon of gas.

Yes. Credit is being destroyed far faster than the money supply is expanding. Hence delfation.
Ironically, a future part of monetary policy will be to spike up interest rates to soak up the liquidity now being deployed.
As we know here, when that happens, housing will have yet another leg down as home prices are very sensitive to interest rates.

It never occred to me after the current big correction in housing we are getting now, we will get a short reprieve, then another correction to the down-side becuase the Fed will simply have to raise rates.

Hmm, there has been mumblings that the Fed govt will start a new, new deal home mortgage branch. This would make sense as high future mortgage rates will cause much of we are already seeing in terms of the Big Recession. I wonder what rate the new agency will use. 5%?

gallon

Real rates will be high - they already are.

Housing will not recover until several factors change:
- excess inventory is absorbed
- real interest rates decline
- consumer confidence improves

We have a glut of homes as a result of overbuilding. This will take a while to work off. With deflation, or no inflation, real rates will remain high for a while. A return of inflation will lower real interest rates as rates will rise slower than inflation. Consumer confidence will not return until home prices stop falling. This will not happen until a slight shortage develops.

It will be a long slog from where we are now.

The fundamental cause of our current deflationary pressure is a glut of goods and assets for sale. It is exacerbated by the financial panic - but there is no shortage of money.

While I appreciate Schiff "carrying the flag" for so many years during the boom times, he did not anticipate that the European banks would be even more overleveraged than their American counterparts...
FWIW, terms on TAF are 28 and 84 days. The Fed can yank dollars out of the system rather quickly, but if they misjudge an 84 day term auction, that's $150B doing damage for 3 months. TSLF terms are 28 days.

Yes. Credit is being destroyed far faster than the money supply is expanding. Hence delfation.

Well, technically its debt that is being destroyed, but same difference.

I've said something for the last year that I just saw Mish echo in a recent post. What hurts your bottom line more, your house losing a few hundred K in equity or spending an extra few hundred a year on gas?

Its even worse now, as you are spending less on everything and your house is *still* losing value!

It is exacerbated by the financial panic - but there is no shortage of money.

Actually there is. People are fighting over whatever few dollars they can make just to service their debt.

There was too much credit and now we have too much debt. Debt can only be serviced or defaulted on, both of which destroy liquidity.

Too much credit is too much debt - by definition.

There is plenty of money in the system - but (as always) not everyone has enough. Too many people got used to easy borrowing to buy more than they could afford. Now too many are not repaying their debt. Banks are now afraid to lend, and are hoarding their cash. They are depositing with the federal reserve bank instead of lending. Loads of money in the system, but a huge reluctance to loan it out.

Yea - I jumped that whole thing pretty hard back in the day too.

As I recall I said, "When house prices in Mtn. View went from $500k to over $1m in less than 5 yeas, how many tanks of gas is that?"

It was something like 63 years wrth of gas to an average drver. And yea, we all went around on how gas affects the supply chain. Blah, blah, blah commoditities, blah blah blah, people rioting for food.

Look, fix the big budget items first, then sweat the other stuff.

We STILL have to fix the $60t of unfunded SS and Med. liabilities.

FAB,

that was really funny, LOL

Zephyr Says:
I disagree. Monetary policy is very inflationary now.

Actually, I would not disagree with that. Monetary _policy_ is pumping liquidity - what I am said was that the end result is not inflationary because at present time, the destruction of debt is larger than the liquidity being injected.

And asset prices have declined dramatically in the last year. Look at real estate and stocks - down about 40-50% in real terms.

RE and stocks have fallen relative to their highs, but they have not yet reverted to mean in most cases. My statement about "propped up" was poorly worded - what I meant was that they are still not back down to fundamentally sound valuation, IMO.

Schiff's decoupling is really completely off the base, I never believed him for a sec, he must not have worked overseas before to see how intertwined the world has become.

But I still believe in USD's demise, I think he will get that right very soon.

kewp Says:
Its even worse now, as you are spending less on everything and your house is *still* losing value!

My house has not lost value - it still provides exactly the same utility to my family as it did five years ago. What it has "lost" is a part of the speculative premium that was fueled by loose credit.

I realize this is an annoying way to twist what you said, but I am a somewhat peeved at all the hand-wringing in the media these days about "how much value houses have lost" - so I am trying to seed a meme of my own where I can. :-)

SP,

actually your house perhaps has "gained" value, because the difference between your house and your next target house may have narrowed in this asset deflation.

That is how I look at it. When the difference between my house and my next house (assuming I am trading up) is narrowing, that is how my house "gains value".

My house lost value in the last few years, because the difference between my house and my next house jumped significantly.

We STILL have to fix the $60t of unfunded SS and Med. liabilities.

Dig a big hole and tell all the boomers there is free Viagra at the bottom.

I already came up with a solution. we put them into something like a plow harness, expect its made to fit fat overweight homo sapiens, and we hook it into a power generating turbine.

Is it called the 'Boomtrix'?

Banks are now afraid to lend, and are hoarding their cash. They are depositing with the federal reserve bank instead of lending.
And the grim irony is that the Fed then lends this cash out through TAF. Sterilization, and risk free (for the banks, not the Fed)!

They are not doing it correctly, money wasted.

They should have mailed out more rebate check, at least it seems like Obama gets it right, he is going to stimulate us with at least $500B directly.

I like the recent proposal by the different CEOs on cutting tax permanently, giving out more rebate checks and investing in infrastructure as well as alternative energy.

Even if we go into trillions of debt, there may be some payback. If we just pump money through the monetary channel, it is a dead end, Fed and the bank are just doing a dead-end loop, waste of the money that Fed printed. If Fed prints, it should get it out through Treasury to reflate the market. Fiscal stimulus is the correct way to do it.

If the government spends the money on infrastructure we will at least have something to show for it.

Otherwise I think most of the money is just wasted for very little benefit. Just moving money from one pocket to another. No real gain for the economy. The bailout money and stimulus money does not come from nowhere. It comes from all of us in inflation or in taxes. So what the government spends the rest of us can not spend.

Infrastructure projects must be carefully chosen to have good value.

Repairing and strengthening levies in New Orleans or Sacramento River Delta would be good.

Tearing down and re-building bridges at random is not a good idea. Expanding airports given the future prospect of oil prices is not a good idea. Incremental improvements of railroads is a good idea.

It is crucially important that we build the right kind of infrastructure rather than just doing useless busywork, or worse, building entirely the wrong kind of infrastructure.

I pray that congress does not fall into the trap of thinking "the important thing is that we do something, and not so much what we get for the money". Nothing could be further from the truth.

Clearly some projects are more worthy than others.

Government spending is typically full of waste even when the project itself is totally worthwhile.

When the project is not worthwhile then it is just like pouring money into a hole (see my earlier link on the money hole).

Unfortunately congress has fallen into the trap of thinking they must do something even if it is a waste.

Normally in a free market the less efficient producers lose market to the more efficient. The least efficient go out of business.

In government there is no such effect.

With government intervention we can keep the inefficient in business.

Monopolies do not need to be efficient - and generally are not. Governments are monopolies.

yup. The worst kind of monopolies. They monopolize the money supply.

They have so much of a monopoly that they charge us a fee even when we just want to barter with someone else. And another fee for having our bartering turn out profitable.

But at least our fees are going to good use. Namely, blowing up brown people, and putting some helium under those golden parachutes.

Our fees are clearly NOT being used to regulate the very few things that should be regulated.

I would rather at this point pay a "leave me the fuck alone" fee of the same amount. But alas, that won't work. They are going to take my money, then fuck me even more.

Yes they will.

...and even more than you will ever know.

...because it is not just the direct fucking - you will never know what good is precluded by their failed good intentions.

Normally in a free market the less efficient producers lose market to the more efficient. The least efficient go out of business.

Replace 'efficient' with 'fraudulent' and you might be on to something!

One big reason our government is not working is that there is one political party that does NOT WANT it to work. They are known as the "republicans". Republicans are so hell-bent on proving that government does not work that they will do just about anything to prove it. With predictable results.

The Democrats are better. At least they want goevernment it to work, but they also run up against human frailty. Government must be strongly regulated (I know, I borrowed that last sentence from Peter. At least he is right about ONE thing :-)).

Saying that republicans do not want the government to work is just as silly as saying that democrats do not want business to work.

Both points are untrue. Yet we frequently hear that kind of political rhetoric.

Republicans want less government, and democrats want more government - but they both want it to work.

Of course, people have differing ideas on the priorities for what it should work on as well.

With economic policy I think the fundamental difference come to this: Republicans are more focussed on making the economy more efficient and the pie bigger, while democrats are more focussed on making the distribution of the pie more uniform. So republicans are not as concerned about those who get less of the pie, while democrats are not so concerned about incentives to make the pie bigger.

In a perfectly efficient free market world many would be oppressed and discarded by the brutality of the system. In a perfectly equal compassionate world everyone would share equally in the abject poverty. Both extremes suck, and somewhere in the middle is a good but imperfect compromise.