Deflation. The Fed owes people 12 trillion dollars, which is not a problem if the value of those dollars continues to go down. If you took out a loan for say 5,000 in 1930 paying it back 2009 dollars would be a breeze.....
This is exactly the Fed's game plan, they are going to pay you back all that they owe you..... just in future dollars (the cheaper brother of today dollars). The only thing that could go wrong with this BRILLIANT plan (who could possibly see this coming?) is if the future dollars were actually worth more than today dollars. That would suck....like alot. Unfortunately for the Fed a credit contraction is an incredibly deflationary event. Money is disappearing out of the economy: Home prices are down 25+%, IRA's/401 k's are down 30%, commodities are down 40%, consumer spending is down, consumer and business credit lines are down. This is called a liquidity trap, it means that no matter how much the Fed borrows it will not make it into the economy through traditional means. That is tantamount to saying no matter what you do you cannot stop inflation.
One doesn't have to look very hard to see the signs of deflation, they are actually all around us. I have faith though. If anyone can circumvent the liquidity trap and get cash into my sweaty hands it's Uncle Sam. He's like that crazy Uncle of yours, you know, the fun one. He'll mail you a check, build a bullet train from Anchorage to Miami, start a colonization on the Sun, Free Healthcare for everyone, or start a couple of new wars. It doesn't matter. I have faith that we can slay the Deflation Demon. The Hyperinflation Demon is the one I'm worried about.
Showing posts with label hyperinflation. Show all posts
Showing posts with label hyperinflation. Show all posts
Friday, August 14, 2009
Tuesday, August 11, 2009
Uh Oh....China is Buying Commodities
From the Wall Street Journal:
Crude oil imports jumped 18% from a month ago to 19.63 million metric tons last month, or about 4.8 million barrels a day, according to monthly data released by China's General Administration of Customs. Iron ore imports rose 5% to 58.08 million metric tons.
There is nothing sinister about this, China wants to build up it's strategic reserves. While not sinister it is problematic for the good old US of A. This is how the business cycle has run for the past decade or so: WalMart buys thousands of containers of cheap...errrr...inexpensive Chinese goods and sells them to you and I. They take there proceeds and pay them in dollars. It would seem that this would strengthen the Yuan and make their products less competitive relative to ours. This is how trade imbalances come into balance, one party buys too much and because of this their currency is devalued and they just can't afford to buy as much. The workaround for this problem was for China to take all their hard earned dollars and buy Treasury Bonds, this allowed the Yuan to remain undervalued relative to the dollar and for them to continue their industrial expansion unabated.
Funny thing is you can't trick basic economic principles forever. It is quickly dawning on China that they have lots and lots T-bills redeemable for US Dollars. If you are worried about the long term health of the dollar, which is a pretty valid concern, you would look to get rid of as many of them as you could, preferably on the down low. If you have warehouses of Dollars you have to spend Dollars, which is thankfully the world's reserve currency. You could be buy more T-bills, which they are doing in hopes that they can pull out slowly drawing out the collapse. You could buy American Companies, not as likely because of the high profile nature of this. Finally you could take your dollars and buy commodities, ditching their rapidly devaluing currency and picking up something they can use like copper, aluminum or oil.
As they continue to divest from T-bills into commodities we as US citizens are going to get hit by supply and demand on two fronts. First Gasoline (and Doritos for that matter) are going to get more expensive as more dollars are chasing fewer goods (more dollars because the Chinese aren't locking them up anymore in T-bills). Secondly, without Chinese and other sovereign wealth funds buying our treasuries (Demand) the interest rate will have to rise to lure dollars back into this market.
This is bad times. High commodity prices and high interest rates do not a recovery make. On the plus side we won't be able to afford anything imported so our trade deficit might actually turn into a surplus as we ship out all our raw materials to be turned into finished goods in other lands.
Crude oil imports jumped 18% from a month ago to 19.63 million metric tons last month, or about 4.8 million barrels a day, according to monthly data released by China's General Administration of Customs. Iron ore imports rose 5% to 58.08 million metric tons.
There is nothing sinister about this, China wants to build up it's strategic reserves. While not sinister it is problematic for the good old US of A. This is how the business cycle has run for the past decade or so: WalMart buys thousands of containers of cheap...errrr...inexpensive Chinese goods and sells them to you and I. They take there proceeds and pay them in dollars. It would seem that this would strengthen the Yuan and make their products less competitive relative to ours. This is how trade imbalances come into balance, one party buys too much and because of this their currency is devalued and they just can't afford to buy as much. The workaround for this problem was for China to take all their hard earned dollars and buy Treasury Bonds, this allowed the Yuan to remain undervalued relative to the dollar and for them to continue their industrial expansion unabated.
Funny thing is you can't trick basic economic principles forever. It is quickly dawning on China that they have lots and lots T-bills redeemable for US Dollars. If you are worried about the long term health of the dollar, which is a pretty valid concern, you would look to get rid of as many of them as you could, preferably on the down low. If you have warehouses of Dollars you have to spend Dollars, which is thankfully the world's reserve currency. You could be buy more T-bills, which they are doing in hopes that they can pull out slowly drawing out the collapse. You could buy American Companies, not as likely because of the high profile nature of this. Finally you could take your dollars and buy commodities, ditching their rapidly devaluing currency and picking up something they can use like copper, aluminum or oil.
As they continue to divest from T-bills into commodities we as US citizens are going to get hit by supply and demand on two fronts. First Gasoline (and Doritos for that matter) are going to get more expensive as more dollars are chasing fewer goods (more dollars because the Chinese aren't locking them up anymore in T-bills). Secondly, without Chinese and other sovereign wealth funds buying our treasuries (Demand) the interest rate will have to rise to lure dollars back into this market.
This is bad times. High commodity prices and high interest rates do not a recovery make. On the plus side we won't be able to afford anything imported so our trade deficit might actually turn into a surplus as we ship out all our raw materials to be turned into finished goods in other lands.
Thursday, August 6, 2009
Quanitative Easing Explained
The Federal Government needs a couple of two or three trillion dollars, they've got a certain lifestyle to maintain between Social Security, Medicaid, Fighting (2) wars, Debt repayments from previously borrowed money, and backstopping the biggest, worst businesses in America (maybe even the world). Taxes are a wee bit down due to 10% unemployment and they have a pretty big shortfall.
What to do, what to do..... issue IOU's of course!!!! Uncle Sam's version of " I will gladly pay you Tuesday for a hamburger today" is the T-bill. So they set up their T-bill stand and start counting noses.... They can count on institutions they bailed out to put some of that Tarp money to work and we shouldn't neglect other central banks who will trade their crappy paper for our crappy paper (sort of a currency circle jerk) but past that the pickings are slim. So we have a short fall.
No worries! We will collect the money from the large institutions who support us (also known as "marks" or "johns") and then we will fire up the printing presses. To make it as simple as possible we are selling IOU's to ourselves. I'm sure that this will work out really well, I can't see how anything could possibly go wrong, after all this guy is in charge.....
What to do, what to do..... issue IOU's of course!!!! Uncle Sam's version of " I will gladly pay you Tuesday for a hamburger today" is the T-bill. So they set up their T-bill stand and start counting noses.... They can count on institutions they bailed out to put some of that Tarp money to work and we shouldn't neglect other central banks who will trade their crappy paper for our crappy paper (sort of a currency circle jerk) but past that the pickings are slim. So we have a short fall.
No worries! We will collect the money from the large institutions who support us (also known as "marks" or "johns") and then we will fire up the printing presses. To make it as simple as possible we are selling IOU's to ourselves. I'm sure that this will work out really well, I can't see how anything could possibly go wrong, after all this guy is in charge.....
Don't Worry... We're Good for it
From marketwatch:
WASHINGTON (MarketWatch) -- The government's voracious appetite for capital was on display Wednesday as the Treasury Department announced plans to auction a record $75 billion in notes and bonds next week in its quarterly refunding auctions.
The department will auction $37 billion in 3-year notes, $23 billion in 10-year notes and $15 billion in 30-year bonds to refund $60.9 billion in maturing securities and raise $14.1 billion, the department said.
So let me see if I understand this. $60.9 billion of our debt is coming due, perhaps this was for an new aircraft carrier fleet, Part of the AIG bailout, or one of the multitude of stupid ways our government wastes money. Time to put this sad chapter of waste behind us right, clean living from now on right? Wrong!
Uncle Sam doing it's best Amy Winehouse impersonation it isn't paying back the payday cash advance, no it's borrowing more money. You see with all this unemployment the tax coffers are a bit thin and raising taxes now would be political suicide, right? I'm sure when this matures in the reasonably near future raising taxes will be the responsible thing to do, we wouldn't kick the can down the road again would we?
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