patrick.net

snmr says: I think US will soon be forced to work its ass off to produce goods and our standard of living will go down the toilet.

Work?!? Oh noes! :o

Come on, a little honest hard work would do this country a lot of good. Most of the protections by unions and anti-trade lobbies are to preserve laziness. Our standard of living is not going down the toilet, especially not at the present pace of technology. The Americal SoL might decline temporarily as we work off this debt and fall back to our rightful place in the global economy, but then we'll be off to the races again.

Honestly, Americans are so darn concerned about keeping things exactly the way they are, that they have become blind to the fact that we're a culture that rolls up its sleeves and gets on with it. Once circumstances force us to face that fear, I think we'll hit another truly productive era in U.S. history.

It all moves in cycles. After a wave of productivity gains, we get a wave of financial tinkering, followed by financial speculating. Then it all crashes and we have to focus on being productive again.

We have been through this cycle many times.

EBGuy,

I thought Maiden Lane is for Lehman, they have Maiden Lane III now? Are we practicing Islam at the Fed so that it can acquire 72 maidens at the gate of heaven?

It all moves in cycles. After a wave of productivity gains, we get a wave of financial tinkering, followed by financial speculating. Then it all crashes and we have to focus on being productive again.

Eternal wisdom.

RE: 72 maidens

Iron maiden?

Work?!? Oh noes! :o

I thought I could just a get a zero-down, no-doc neg-am mortgage, service it with home equity loans and count on 100% appreciation per year?

Whachoo be talkin' bout, Mr. B?

I was thinking maybe I could just buy a boat, an ATV and a plasma TV by continuously rolling my balance between 0% intro rate credit cards.

"It’s basically all just direct market manipulation to avoid the correct pricing of risk."

Brand,

Japan tried this very thing in the 90s and it had very little effect. Psychology has changed. It will take more than just a lower monthly payment to reignite the housing market. Expectation of appreciation will remain low for decades to come. While demand for purchases might increase slightly (not guaranteed given the worsening economy), decreasing rents will act as a counter force.

"wait till the Fed and Treasury are completely desperate and roll out their weapon of mass destruction - raw print in large scale, and in public."

OO,

You keep waiting. Meanwhile, oil is at $44 (going to $25 before midyear 2009), Gold is down to 750 from a high of over 1000 earlier this year and treasury yields are at historic lows.

AIG has always been a company of smoke and mirrors accounting. For decades AIG has used accounting tricks and off balance sheet companies to hide liabilities.

The collapse of the oil bubble is stunning. Even more stunning than the real estate bubble decline.

I never thought the prices above $60 were sustainable, but I am truly stunned by the speed of the oil price collapse. It usually take many years for the price to fall this far from the peak.

Frank said: "You keep waiting. Meanwhile, oil is at $44 (going to $25 before midyear 2009), Gold is down to 750 from a high of over 1000 earlier this year and treasury yields are at historic lows."

I agree. Short-term Cash continues to be the best investment option.

Frank,

I don't worry, because the Fed is behind me, I don't fight the Fed in a fiat system. They have unlimited power to print, and I endorse that :-)

frank says: ...and treasury yields are at historic lows.

You need to meander on over to Calculated Risk. Remember that bailout cash that the banks are supposed to be lending? They are (apparently) parking it in short-term Treasuries. The Fed pumps cash to the banks, the banks invest in T-bills instead of lending, and then we see yields drive almost to zero.

Liquidity is gridlocked. No matter how much cash the Fed tries to push out at near-ZIRP, they are pushing on a rope. The government is getting its own money loaned back to it, via a circuitous route (Teasury -> Fed -> banks -> T-bills). What a joke. And the banks make interest on their Fed collateral.

The Fed has already put in place the foundation for massive inflation. However, we must get through the deflationary tide before the inflation will be the dominant factor. My guess is about one year before it starts.

You can't push a string. Even with a zero cost of funds nobody wants to borrow to engage in a losing business or loan.

This is the trap of deflation. Interest rates cannot go below zero, but with deflation expected returns can. However, with deflation merely holding cash generates a tax free return equal to the rate of deflation. Why lend or invest?

Cash is King.

For more than a year the dollar has been appreciating in real terms.

Today the dollar buys more than it did a year ago:

It buys more real estate than a year ago.
It buys more stock than a year ago.
It buys more oil than a year ago.
It buys more lumber than a year ago.
It buys more copper than a year ago.
It buys more TVs than a year ago.
It buys more Car than a year ago.
It buys more gas than a year ago.

And now everything is on discount sale at the stores.

It is very easy to break the deflationary trap.

Give everyone $10K, $100K. Luckily that Obama sees the solution and his team is already acting on it. Once everyone of us gets $10K, $100K, it will be hard not to see inflation again.

I have a better solution for them. Instead of giving rebates, give cash coupons that expire in 3 months. It will take them a while, but they will get there.

OO, for a long time, I've thought your theory of extreme inflation was kind of silly. But I will admit, even amidst the inane actions of the last few months, the most recent announcements have shaken my faith in an equilibrium system. I retain my 2/3 cash position (including short term CDs), but I have averaged into the stock market, and I am seriously contemplating taking a physical position in PMs.

A year ago, I would have thought that was absolutely ridiculous. Now it seems like an intelligent hedge.

Wow.

Nonfarm payroll employment fell sharply (-533,000) in November, and
the unemployment rate rose from 6.5 to 6.7 percent, the Bureau of Labor
Statistics of the U.S. Department of Labor reported today. November's
drop in payroll employment followed declines of 403,000 in September and
320,000 in October, as revised. Job losses were large and widespread
across the major industry sectors in November.

Wow.

I have a better solution for them. Instead of giving rebates, give cash coupons that expire in 3 months. It will take them a while, but they will get there.

I also see that coming.

Or give everyone a debit card that 'expires' monthly. Use it or lose it. The Fed could credit it with 'stimulus' payments as needed.

Of course, I would just buy silver coins with it.

"It is very easy to break the deflationary trap.
Give everyone $10K, $100K."

The famous Bernanke helicopter cash drop.

“It is very easy to break the deflationary trap.
Give everyone $10K, $100K.”

If you gave everyone $100k, half the population would quit working. You would essential expand welfare entitlement to all.

A lesser amount, like the $10k, would be used mostly to pay off debt or buy Chinese imports. A few Zephyrs may invest. The handout would do very little to prime the pump and expand US jobs.

It seems that a better way is to allow the deflation to occur. Use that "stimulus" money to hire the unemployed with government programs to rebuild infrastructure, research technology, clean the environment, etc. The real problem with deflation is the lack of jobs, so a direct hire approach beats the print to prosperity method.

TOB :

Thanks for the video link in previous thread.

Oh, and I meant to post another kind of related link.

http://www.theatlantic.com/doc/200812/fallows-chinese-banker

Please go past the provoking title of the post. This man - Gao Xiqing, president of the China Investment Corporation - understands economy. Unlike our leaders who have no clue.

I was particularly touched by his comments about engineering jobs v/s finance jobs. But there are some great gems of thoughts as well.

Good article.

Is it not interesting how clear matters can be when explained by a person that is not beholden to US political machinery. Gao Xiqing just said it the way it is.

No person saying what he said could win a political office in the US.....not even Obama.

It was a god article. I like his notion of respect.
However, he is perfectly wrong.
The US is living on borrowed dollars because it is convenient to do so. They enable it. Take that away and wewill be just fine. We will switch to internal production. We still have the best capital markets in the world and we can shift to internal production faster than any nation on earth.
Who really needs who here? Do we need them to send cheap exports or do they need us to provide them cash so they can move 800million people from unproductive peasantry to a modern industrialized nation?

Can internal production meet our energy needs? Particularly oil?

Beyond that, I'm perfectly fine with the Chinese keeping their toxic food and crappy goods to themselves.

I'm perfectly happy to pay more for quality goods manufactured in America.

Answering "Who needs whom more ?" is only a partial - and I will argue - not so important from economics viewpoint. Yes, it's politically charged question and important for posturing and negotiating. But not the real story.

In last century, USA became a great nation on its own. A few hundred years ago China was a great nation on its own.

Question is how to sustain that greatness. I am more impressed with his views far more that those of our current leaders.

Today, the interdependence between countries is significantly high. Many country pairs are both competitors and customers of each other. So who needs whom more, the right answer is often closer to "both".

The grand moment of Fed's raw printing has started today, let's celebrate it.

A small step for the Fed, a big step for our economic system.

http://www.newyorkfed.org/markets/pomo/display/index.cfm

I am not saying giving out $100K will work long term, I am just thinking like the Fed and the bankers, putting myself in their shoes.

If I were to run this country, these WS crooks would have been shot multiple times till such a "profession" of pushing paper around is socially despised and disdained.

But, the Fed and our government is backed into a corner. Giving out $10K, $100K per household is their next logical step if you think like them.

Another example of smart governance in China, unlike here ....

NEW YORK (MarketWatch) -- China plans next month to raise tax on regular gasoline by five fold and diesel fuel tax by eight fold, in a move to take advantage of falling crude prices and encourage energy conservation, state-run media reported Friday.

Under the proposed measures, gasoline tax will go from 0.2 yuan a liter (3 U.S. cents) currently to 1 yuan, and diesel tax will rise from 0.1 yuan per liter to 0.8 yuan, effective Jan. 1, Xinhua news agency reported, citing a government statement.

The problem with physical gold is, you really need to be fast.

Unless you are able to buy 200, 300 ounces per transaction, retail physical gold is drying up very fast, and the premium is ridiculous these days. Do not expect to get your hands on physical gold at anything even remotely close to the "paper spot" anywhere.

Only wholesale gold can still transact physical gold at a price close to spot, but god knows how long that will last.

OO,

Good call. I wonder if POMO (Permanent Open Market Operations) always is equivalent to raw printing, or not?

(It's funny, in the link above I read .../pomo/display/... as /.../fed/po*no/display/...
I bet I was not the only one, but then this link really *is* Fed-po*n, and in more ways than one to some people :-)).

Our political leaders understand economy as well, do not think for a moment that they are stupid. The chance is, they are smarter than all of us on this blog.

But, their goal is slightly different from yours and mine. Their goal is to preserve their power base at whatever it costs the nation, our kids and our grandkids, as long as they get to keep their power one more day. That is how skewed the considerations are.

That's why you have to evaluate their next move from their angle, not from the perspective of what makes sense for all of us. We don't mean shit to these people. The most important thing for them, is to keep the current game going, because fractional reserve system requires ever growing credit, and ever growing asset value to survive. Once that stops, the fractional reserve system falls apart, and so will the key stakeholders behind the whole system.

And sure fractional reserve system will fall apart in the end, but holding the fiat means you go down together with it.

Yes, POMO is raw print, and they are very refrained from doing this, so it happened very rarely before. When Fed engages in loosening credit, it is always REPO, and there is collateral to account for it.

Well, you can argue that the Fed has taken in over a trillion rubbish in exchange for T, that is in essence printing, because it knowingly attached a higher value than the collateral is really worth.

The Fed has been printing in stealth mode or it couldn't have grown its balance sheet a trillion within 3 months. But this is big, because this is out in the open, and it is following what Ben said in his helicopter speech, setting a cap rate in MBS, GSE, and eventually T.

When Fed sets a cap rate at long-term T, USD collapses.

What's the deal with physical gold? A bullion bubble maybe?

Or is it just paranoid gold bugs?

Could it be something more sinister?

The government mints are shutting down supply to the small guys.

If gold is worthless, why is that Fed has not sold one ounce of its gold? Why is that you go to IMF, it has section reporting on gold reserve at each country's Treasury?

When countries transact gold with each other, they don't buy gold ETF. They take deliveries from each other. So paper gold is the bubble and it will become worthless at some point due to manipulation, physical is never a bubble.

Of course physical gold could be a bubble.

Anything can be a bubble. Tulips, tech stocks, houses, beanie babies... anything really.

Once everyone figures out the end is not nigh (yet) they will sell their hoarded gold and go chase after the next big thing.

Unless you are able to buy 200, 300 ounces per transaction, retail physical gold is drying up very fast, and the premium is ridiculous these days.

Isn't this saying that small guys (usually wrong) are buying while the professionals are not?

Of course physical gold could be a bubble.

Small denomination gold coins may be in a bubble.

Not investment advice.