Full Astern Ahead
June 27, 2008 5:16 AM   Subscribe

The US Federal Reserve has allowed ... its credibility fall "below zero". Barclays Capital said in its closely-watched Global Outlook that US headline inflation would hit 5.5pc by August and the Fed will have to raise interest rates six times by the end of next year to prevent a wage-spiral. "This is the first test for central banks in 30 years and they have fluffed it. They have zero credibility, and the Fed is negative if that's possible. It has lost all credibility."

Central bank credibility plays a pivotal role in much of the modern literature on monetary policy, yet it is difficult to measure or even assess objectively. In essence, monetary credibility helps the central bank do its job, by inducing private sector participants also to take actions that help achieve the central bank's low inflation objective.

Barclay's chief equity strategist, Tim Bond, cautioned ""There is an inflation shock underway. This is going to be very negative for financial assets. We are going into tortoise mood and are retreating into our shell. Investors will do well if they can preserve their wealth."

On Wednesday, the tortise the decided to keep its target for the federal funds rate at 2 percent.
posted by three blind mice (56 comments total) 6 users marked this as a favorite
 
...the Fed will have to raise interest rates six times by the end of next year to prevent a wage-spiral.

Is this something they are interested in? Or is it only a crisis if a CEO has to thin out his yacht collection?
posted by DU at 5:34 AM on June 27, 2008


Of course, Barclay's Capital has absolutely no vested interest in this drama. No, their comments are purely independent statements of absolute fact.
posted by Nelson at 6:10 AM on June 27, 2008 [1 favorite]




The Fed is between a rock and a hard place. There's really nothing they can do now. If they print money they fuel inflation. If they raise rates they send the economy into a recession. All they can do is jawbone. There will probably be a couple more bear rallies but the markets are on a hair trigger right now and people are looking for any reason to sell.

There are still many shoes to drop. Consumer credit is probably next.
posted by unSane at 6:30 AM on June 27, 2008


Ummm...can someone translate this for the fiscally-challenged MeFites like me? How screwed are we? Should I head for the survival camp yet?
posted by zardoz at 6:44 AM on June 27, 2008


can someone translate this for the fiscally-challenged MeFites like me?

Vizzini takes charge of the Fed
posted by sfenders at 6:52 AM on June 27, 2008 [34 favorites]


can someone translate this

My approximation of a translation would be: the Fed has done lots of stupid things, and now that the US is several months into what looks like an inflationary spike (fuel up, food up) combined with a soft economy, their options are quite limited and so they can't do much to prevent bad things from happening.
posted by zippy at 6:54 AM on June 27, 2008


sfenders, that is a fantastic link.
posted by zippy at 6:59 AM on June 27, 2008


The Fed won't raise interest rates before the US Presidential election.
posted by notyou at 6:59 AM on June 27, 2008


Many people think inflation is a good thing for borrowers, perhaps the US government.
posted by Brian B. at 7:07 AM on June 27, 2008


Zardoz,

We seem to be in for a rough patch, but whether we're in for 'just' a recession, or something worse is debatable. In the article cited, you can also see there's no consensus on whether it's commodity-fueled inflation, or real-estate-collapse-driven deflation that is to be most feared

That's because in financial forecasting a kind of Conservation Principal applies: for every well reasoned argument from a highly credentialed, experienced and knowledgeable observer, there's an equal and opposite opinion from someone with similar stature. One will be right. You will know which about 18 months after the fact.

So it's far from clear whether the Fed is acting prudently or not.. But that's where this buck stops, and they had to act.

On a personal level, all one can do is keep debt to appreciating assets like education, have a rainy day fund sufficient to cover six month's expenses, and be an essential contributor to your work. The usual good advice, whatever the forecast.
posted by mojohand at 7:08 AM on June 27, 2008 [2 favorites]


Principle, dammit! Sigh.
posted by mojohand at 7:09 AM on June 27, 2008


people are looking for any reason to sell

Which means soon it will be a very good time to buy if you can afford a long horizon.
posted by spicynuts at 7:26 AM on June 27, 2008


In very short form: the Fed has been printing too much money for a very long time. They've been entirely behind the ball, and fueled the expansion and popping of multiple bubbles; the stock market in Y2K, and the twin monsters of debt and real estate up to 2007 or so.

House prices should not go up 25% a year. They just shouldn't. Neither should stocks, with certain rare exceptions. These are both forms of inflation, caused by too much money being available. The problem is that these are forms of inflation that people love and want more of, all they can get. But the drawbacks are ferocious, as we're finding.

These huge prices increases have been caused both by the Fed increasing the rate of money supply expansion dramatically in about 1995, and also by short-term injections of capital anytime we hit a rough spot. This aided and abetted a whole new class of speculative player, a whole new type of entity. These guys take on massive positions through the use of derivatives, a form of meta-casino that sits on top of the regular market. It allowed them to take on vast positions, far in excess of their true capital, and reap the rewards of having all that money floating around. The system responded as though these massive positions were 'real' money, and drove speculative markets to insane heights. (regular money is fake too, waved into existence at a political whim, but this stuff is extra fake, supersize fake, and not controlled by any one entity.)

The problem, of course, is that this has disconnected the financial system from any kind of on-the-ground reality. Stock and house prices have gone far into ridiculous territory, driven there by a combination of stupidly low interest rates and a massive oversupply of what looked like available capital. It also has caused an enormous, gigantic, unbelievable trade imbalance and debt position on the part of the consumer.

This whole setup looked fantastic, with everyone involved making legendary profits, but it was a speculative fervor on paper. The economy for the last ten years or so has been about swapping ever-larger IOUs: first stock certificates, and then real estate loans. But the ability of the economy underneath to service these IOUs hasn't grown nearly enough to support them. The higher the tower got built, the more precarious it got. Eventually, economic reality started to catch up with this market from one tiny change: Fannie Mae tightened lending standards to subprime borrowers.

That's it. That's ALL. That's the entire change that has started this massive landslide of slow-motion failure. The Fed is doing everything in its power to prop up the speculators and keep them from blowing up, and they're doing it by prescribing more of what made us sick in the first place, too much money.

The Fed realizes that the derivative market has become so enormous and so profoundly destabilizing that if any one major player fails, the whole system could go with it. That's why they've has invoked emergency powers that were invented for it during the Depression, but never used before; they are actively bailing out individual players, and they won't tell anyone how much money they're injecting. They're desperately trying to turn the supersize-fake money into the ordinary fake money we think we're using.

The problem is that their monetary gymnastics are FINALLY overwhelming the powerful deflationary force on labor that is globalization. They've been able to get away with their inflationary games for just about fifteen years, because of the huge undertow of deflation coming in from China. I have no doubt that they saw that deflation and were trying to stop it, but I'm not convinced they really understood the cause, and I'm quite certain they didn't understand the consequences.

We're on a mine cart, plunging toward an abyss. If we fall off the cart, it will hurt terribly; a lot of us will probably die. The economy does not match the financial system anymore; it can't service the debts we've taken on. The Fed, by trying to keep the cart on the rails, is just ensuring that we continue to plunge toward the abyss, faster and faster. They're greasing the wheels and throwing their weight back and forth in a desperate attempt to keep us on the rails, but we're on the wrong track, and until we crash and go back to a saner economic system, the cart will just pick up speed and hurt more and more of us as it accelerates.

There is no good outcome here. None. We've backed ourselves into a corner from a series of incredibly bad decisions. If the Fed screws up, or if it miraculously realizes that we're doomed if it doesn't, we will have a massive deflationary crash, the Second Great Depression. As the debt we've taken on goes bad, it will cause deflation, the deflation that has been hidden from us by the monetary games. This is the best possible outcome.

If, as I expect, we stay on the path we're on, we're going to eventually go into Zimbabwe-style hyperinflation. Why? Because the speculators, having been bailed out by the Fed this time, will start another round of derivative injection; this is a good chunk of why gas prices have gone up so high. When that starts to blow up, the Fed will bail them out again, and they'll start inflating something else instead. Meanwhile, all us normal schmucks will be getting destroyed, because we have to compete with just our labor and basic work products against these enormous fictional supplies of supersize-fake money. We're going to be eating sawdust for breakfast and biking to work, while the government insists that there's no inflation and that everything is just fine. The only people that will do well in this situation are the parasites that caused most of the problem in the first place; the international speculative community. Guys like Mutant are going to be just fine. Folks that actually work for their living, instead of manipulating the outputs of others, are going to be utterly screwed.
posted by Malor at 7:55 AM on June 27, 2008 [47 favorites]


But aside from that, Mrs Lincoln, how do you like the economy?
posted by zippy at 8:08 AM on June 27, 2008 [2 favorites]


Is it revolution time yet? Please let it be revolution time.
posted by Mach5 at 8:16 AM on June 27, 2008


I hope at least a lesson is learned from all the havoc Malor and many others predict.
posted by CautionToTheWind at 8:17 AM on June 27, 2008


What are they going to revolt against?? The american dream of getting filthy rich?
posted by CautionToTheWind at 8:18 AM on June 27, 2008


the lesson being move to europe?
posted by fuzzypantalones at 8:20 AM on June 27, 2008


The sky is falling! The sky is falling!
posted by Nelson at 8:20 AM on June 27, 2008


I blame the B52s.
posted by Afroblanco at 8:35 AM on June 27, 2008


Anyone working in a real job over the past 10+ years has seen inklings of this situation coming. Steadily stagnating incomes...steadily increasing costs...a financial system increasingly geared to the interests of the wealthy to the detriment of the middle class...and a real inability to do anything concrete to forestall the looming inevitability. Even if a middle class family were able to, somehow, put-away a good chunk of "rainy-day" funds to weather the coming storm, they've seen those funds nickle-and-dimed away by the simple costs of trying to keep your family fed, schooled, healthy, and sheltered.

In some ways it's an extremely bitter comedy to witness the "experts" to be waking-up to what has been happening. All they ever really needed to do over the past decade was do a few door-to-door walks through most any working-class or middle-class neighborhood to discover what was happening on the ground, in reality. In some ways, the guys who supposedly have their fingers on the pulse of the economy have been far behind the curve. Sad.

Even sadder is, as Malor points out, the very cretins who have built this disaster will make-out like kings. Further, once the shit settles-out, they will go right back their old games, knowing that they will continue to profit, no matter what.
posted by Thorzdad at 8:36 AM on June 27, 2008 [3 favorites]


I hope at least a lesson is learned from all the havoc Malor and many others predict

Clearly you have not learned the lesson of human history, viz, lessons are not learned.

This is going to suck hard for Canada; "When the USA sneezes, Canada gets a cold."
posted by dirtynumbangelboy at 8:47 AM on June 27, 2008 [3 favorites]


Well, if everything Malor says pans out, at least all the hipster douchebags who pine for the old New York City of the 70s will be happy again. Man, I can't wait for the Bronx to burn again! It will be just like old times and we can love NYC for being authentic again! Bring it!
posted by spicynuts at 8:52 AM on June 27, 2008


Is this the same Barclay's bank that's funding Mugabe's hyper-inflation?
posted by jenkinsEar at 9:00 AM on June 27, 2008


gaw. so is there anything I can do to protect the value in my 401(k)? I mean if I had a crystal ball and knew that Malor was right, would I do best by moving all my 401(k) into a bond mutual fund or a money market? Is Malor predicting a 25% stock market drop? 50%? Or is the real issue that inflation will crush any meager gains we might still expect out of the market?
posted by joecacti at 9:10 AM on June 27, 2008


In some ways it's an extremely bitter comedy to witness the "experts" to be waking-up to what has been happening. All they ever really needed to do over the past decade was do a few door-to-door walks through most any working-class or middle-class neighborhood to discover what was happening on the ground, in reality.

And if you ask them today, they'll still deny that anything bad is happening. "Sure, most formerly middle-class people can't afford medical care and are up to their eyeballs in debt, but listen, they got iPods now! Fucking iPods, man! We're the greatest country on Earth!"

I believe there was a comment here on Metafilter a few years ago wherein a foreigner said that he had recently visited the USA after a long absence, and discovered that "everyone I knew had gotten poorer in the meantime".

Thats what this is really all about. Debt is growing, prices are rising, wages are stagnant, the middle-class is shrinking, the lower classes are growing -- but our only defense is to cook up some creative accounting to try and deny this fact for as long as possible.
posted by Avenger at 9:11 AM on June 27, 2008


This is going to suck hard for Canada; "When the USA sneezes, Canada gets a cold."

While I'm sure it won't make for happy times for Canada, I don't think it'll be that catastrophic for them.

They have a few things they didn't have before- a stronger (and more stable) dollar than us, strong international ties, less infrastructure to support, enough oil supplies to export, and pretty soon, a nice new Northern Passage to ship stuff around the Northern Hemisphere.

They might be in the storm, but at least they have an umbrella and a raincoat...
posted by yeloson at 9:16 AM on June 27, 2008 [2 favorites]


Even sadder is, as Malor points out, the very cretins who have built this disaster will make-out like kings. Further, once the shit settles-out, they will go right back their old games, knowing that they will continue to profit, no matter what.

It's really sad to watch your friends get seduced by this lifestyle. It takes all I can do not to ask them if they realize that they're getting paid for pretending to have a return on their investment and then getting the government to step in and make it real.
posted by oaf at 9:31 AM on June 27, 2008


It takes all I can do not to ask them if they realize that they're getting paid for pretending to have a return on their investment and then getting the government to step in and make it real.

Free market! Yay! Too big to fail! Yay! Another market we can go rape! Yay!

Rinse, repeat.
posted by ryoshu at 9:39 AM on June 27, 2008


Anyone working in a real job over the past 10+ years has seen inklings of this situation coming. Steadily stagnating incomes...steadily increasing costs...a financial system increasingly geared to the interests of the wealthy to the detriment of the middle class...and a real inability to do anything concrete to forestall the looming inevitability.

Without globalization, I don't think you'd see nearly as many problems for the US middle-class worker in contrast to the upper class, regardless of other economic policy. It's just as easy today for a large corporation to hire workers of any skill level in developing countries, where labor is cheap, which means that American workers do not have as much of an advantage over similar workers in other countries.

The largest corporations in the world are still mostly owned by Americans, so the rich are continuing to get richer (nobody outsources the CEO to China). Those companies are still selling to the US consumer, which is the world's biggest cash cow, but the no longer employ as many middle class workers in the US. There's nothing the Fed or anyone else can do to really fix that. The big problem for everyone is that if things get bad enough for the US middle class, they will stop buying things, which will knock the legs out from under the global economy. Americans in general seem to not be able to slow down their consuming though, which leads to things like massive consumer debt.
posted by burnmp3s at 9:59 AM on June 27, 2008


The largest corporations in the world are still mostly owned by Americans.

The falling value of the dollar is making it easier for this to change though.
posted by drezdn at 10:07 AM on June 27, 2008


About about five years ago I saw an editorial from the guy who wanted to be able to invest his share of social security in something super high yield so he could retire to Barbados, and by investing social security monies so conservatively (old definition) the government was, essentially, robbing him of his birthright. He, of course, ignored the fact that super high yield flew in tight formation with super high risk, and that the likely scenario was that I was going to end up paying to keep him from dying in the street.

We've had thirty years of people singing lullabies to these clowns, telling them that they are the chosen ones because they're clever and work hard and that poor people are lazy, stupid and deserve to be poor. It been the story of the ant and the grasshopper, written by someone who had something to sell to the grasshopper. And they bought it.
posted by Kid Charlemagne at 10:09 AM on June 27, 2008 [2 favorites]


If, as I expect, we stay on the path we're on, we're going to eventually go into Zimbabwe-style hyperinflation.

Do you even know what this means? Because I don't think you do.

It's one thing to look at the situation and think we're facing down the worst economic crisis since the 1970s and the worst financial crisis since the 1930s. It's another to suggest that the USD is going to inflate at a rate of over 1,000,000% a month.

It's hyperbole like this that really makes your arguments specious.
posted by dw at 10:15 AM on June 27, 2008 [4 favorites]


really makes your arguments LOOK specious.

Forgot a word there.
posted by dw at 10:16 AM on June 27, 2008


I want a Mutant -vs- Malor steel cage match! Two men enter, one man leaves!
posted by Justinian at 10:40 AM on June 27, 2008 [1 favorite]


me: people are looking for any reason to sell

spicynuts: Which means soon it will be a very good time to buy if you can afford a long horizon.


It's already a great time to buy in some sectors. Junior gold companies are at historic lows and are highly leveraged to the price of gold. So if you think gold is going up, they are potentially the buy of a lifetime. Many of them are trading below asset value despite sitting on discoveries. But only if you buy the right ones, obviously.
posted by unSane at 11:08 AM on June 27, 2008


Two men enter, one man leaves!

Two men enter, one man shorts hedge derivitives, wraps the collateral debt and sub-prime paper in some CSCs and EBSs, utilizing the cash flow to get an early ownership position in flying car company, steals the only working prototype and flies out through the roof, in that split second making $27 mil as he shorted his own company and sold the other founder's position for pennies on the dollar to a Russian front company selling Uncle Sam statues made of lead in Sri Lanka.

Or something.
posted by jalexei at 11:10 AM on June 27, 2008 [10 favorites]


Watching Malor and Mutant fight/post is fascinating to me the way football might be if I were into sports: I cannot tell what the rules are, I have no idea who to root for ... I don't even know who is winning. And more importantly, it's completely academic to me because I know I will never have the resources to play on that level.
posted by adipocere at 11:36 AM on June 27, 2008 [5 favorites]




From the Credit Bubble Bulletin for the 20th:
Good Inflation?:

“And the essential fact right now is that the American economy needs an inflation rate above the Fed’s comfort zone.” Paul McCulley, “A Kind Word for Inflation”, June 16, 2008

I have elevated the status of my old “analytical nemesis” to that of the most dangerous monetary analyst in the country. He has been preaching inflationism for years now, and the more obvious the flaws in his framework the more creative he becomes in crafting his sermons. And he’s become so adept at this game that many might actually buy into his flawed yet seductive logic.

Essentially, if I am reading McCulley correctly, he is arguing that because of an unusual “trade shock” from rapidly escalating energy costs, the Fed must employ negative real interest rates to avoid a “modern day depression.” I will continue to espouse the view that today’s ridiculously low interest rates are part of the problem rather than the solution.

Back in 2001/2002, the Inflationists were keen to monetize the wreckage from the technology bust through the inflation of mortgage Credit. Not uncharacteristically from a historical perspective, this inflation ran out of control and amuck. Now, with much greater and generalized financial and economic post-Bubble wreckage, the unbowed Inflationists are subscribing more generalized consumer price inflation as part of the medicine to ensure asset prices and the real economy avoid sinking into a deflationary spiral.

A book could be written explaining why the Inflationists are so wrong. This evening I’m limited to the briefest synopsis.

Today’s inflationary forces have been developing over a period of many years. Importantly, the key dynamic is one of a highly unusual strain of acute global inflation. The impetus for this inflationary backdrop has been the massive inflation of dollar financial claims, in particular a Bubble in Wall Street asset-based lending that spawned unprecedented distortions to both the U.S. Credit system and underlying “Bubble economy” (and, increasingly, the global economy). This massive dollar Credit inflation (“currency” debasement) opened Pandora’s Box for similar unfettered expansions in domestic Credit systems across the globe.

Oil is inarguably the most important commodity in the world. The massive ongoing inflation in energy prices is and will continue to have momentous economic, financial, and geopolitical consequences. Comparisons to the seventies and seventies-style inflation, however, miss key aspects of today’s inflationary dilemma.

There are three interrelated dynamics that are driving current inflationary forces. First, there is the massive flow of dollar liquidity inundating the world. Despite huge dollar devaluation, a major Credit crisis, and economic downturn, our system is on track for yet another year of $700bn plus Current Account Deficits (and this doesn’t include the massive speculative outflows to participate in the global inflation). Global economies, especially booming Asia, are awash in dollar liquidity to use to bid up the prices of oil and other strategic resources. Second, today’s massive dollar flows have increasingly gravitating to speculative endeavors (hedge funds, sovereign wealth funds, commodities speculation, etc.) – each year ballooning the “global pool of speculative finance” that by its very nature chases rising prices (“liquidity loves inflation”). Third, the confluence of the flood of global liquidity and unfettered domestic Credit systems has exerted its greatest stimulatory effect upon the highly populated countries of China, India, and Asia generally. This, then, has created a historic inflationary bias throughout the energy, food and commodities complexes.

McCulley and others prefer to “monetize” the current oil price “shock” through ongoing artificially low interest rates, arguing that recent price effects are a temporary phenomenon. This short-term jump in inflation is said to be, in the words of Mr. McCulley, “Good Inflation.” Supposedly, it will help buttress the general prices level and generally help support asset prices, while tepid wage growth ensures that a 70’s-style wage price inflationary spiral will be avoided. Yet such analysis seems oblivious to the nature of the underlying risks associated with the current inflation.

As should be obvious by now, the current hyper-inflation in energy and food prices risks global chaos. There is today such a robust inflationary bias in globally priced necessities that spectacular (NASDAQ1999) price moves have become the norm rather than the exception. As such, U.S. monetary policy that accommodates $700bn Current Account Deficits and massive speculative outflows to the world is courting Monetary Disorder Disaster. To be sure, the current trajectory of U.S. financial outflows ensures an acute inflation problem for key things everyone wants and needs. Or written differently, efforts to “monetize” mortgage losses and energy inflation here at home will be invalidated by a global push to exchange excess dollar (and other currencies) liquidity for real things of necessity and tangible value.

A major flaw in the “Good Inflation” argument is that surging fuel, food and other costs in reality are administering a further crippling blow to the over-indebted U.S. consumer. Grossly inappropriate short-term U.S. interest-rates are today directly stoking serious price inflation, in the process reducing consumer discretionary incomes and the capacity to service enormous debt loads. The collapse in SUV and truck prices (see Bursting Bubble Economy Watch) – and the resulting huge “negative equity” in auto loans - is the most obvious example of household sector creditworthiness taking a direct inflationary hit. This has created a major additional burden for millions that bought the big new home out in suburbia. And because of the worsening Credit backdrop, mortgage and consumer debt borrowing costs are rising in spite of Fed rate cuts. Moreover, households are suffering further from the sharp reduction in returns on their savings, not to mention the inflation-related decline in many stock prices.

The seventies inflation saw consumer prices rise, incomes rise, home and asset prices rise, and wage-based inflation spiral higher. The current inflation dynamic is a different beast. Sinking home prices and surging energy and food prices are causing bloody havoc on general creditworthiness, a huge dilemma for the faltering financial sector and the finance/consumption-driven Bubble economy. The bust in Wall Street finance is driving a major shift in economy-wide spending patterns, putting downward pressure on wages, incomes and profits in some sectors, while other sectors enjoy huge inflationary boosts. The breakdown in Wall Street “alchemy” has ensured that this round of Fed-orchestrated reflation bypasses home prices as it hastens problematic inflation elsewhere. A very strong case can be made that the nature of the Wall Street finance and asset-based lending boom nurtured a degree of financial and economic imbalance and vulnerability unlike the wage-based inflation of the seventies.

And while headline inflation numbers today may not be approaching the 70’s double-digits rates, I would argue that an even more problematic economic adjustment is in the offing. I simply see no way around the necessity of sharply reducing the amount of new Credit and imports required to sustain the U.S. economy. I see no alternative than a long and wrenching adjustment period while the household balance sheet is repaired, financial sector stability is restored, and some semblance of economic balance is achieved. Students of the sordid history of massive inflations are familiar with the inevitable pleas for just a little bit more inflation and a little more and a then lot more… McCulley wants us to believe the Fed is doing the right thing by providing us some “Good Inflation.” This really upsets me. I’ve repeated over a number of years a lesson learned repeatedly throughout history: Inflationism is a “Road to Ruin.” This road has become all too visible.
posted by Malor at 12:12 PM on June 27, 2008


Oh, and far as hyperinflation/Zimbabwe goes: we're headed that way. If the Fed can keep us on the tracks, that's inevitably where we're going to end up. We have too much debt, and to try to hide that fact, the Fed is causing more and more debt to be issued.

That kind of collapse is going to take a good while yet, probably a decade or more, but it's as inevitable as the sunset. The US government is doing the same thing Zimbabwe is doing; trying to extract more value out of the economy than the economy can support. We're already over fifty trillion dollars in debt, in today's dollars. That means we need to have fifty trillion in the bank, right now, earning interest, to be sure we can pay off our debts. Instead, we have a balance of negative nine trillion. We can't pay those debts. We can't pay off our personal debts. And we can't service the enormous position that other countries have in our currency, which is another, hidden form of debt. We need to be making stuff and shipping it overseas to repatriate those dollars, but instead, we continue to import goods, shipping only dollars overseas to 'pay' for them, to the tune of two billion a day. Foreign central banks alone hold more than four trillion dollars, and that's just in reserves; god only knows how many dollars are circulating in private hands overseas.

It's a house of cards. It has to collapse. Which way it will collapse, I don't know, but it has to go into either deflation or hyperinflation. The path of apparent stability gets narrower with each passing month, as the mine cart hurtles ever further down the ever-steepening track, and as the world's central banks resort to ever stranger and more intense efforts to keep us from falling off the rails. Falling off, as soon and as thoroughly as possible, would be the best possible outcome, but with our modern short attention span, that would be politically unacceptable.

So, if our policy makers get their way, we'll eventually, after quite a few years, end up as Zimbabwe. If they don't, we'll have a depression. There aren't any good outcomes here. We've been partying long and hard, and we're due for one HELL of a hangover.
posted by Malor at 3:48 PM on June 27, 2008 [1 favorite]


We've been partying long and hard, and we're due for one HELL of a hangover.

Some of us just hit legal drinking age, but will have to deal with the hangover anyway.
posted by oaf at 4:07 PM on June 27, 2008 [1 favorite]


While I'm sure it won't make for happy times for Canada, I don't think it'll be that catastrophic for them.

Right, because if there's one thing the history of the US has taught us, from the birth of Manifest Destiny to the invasion of Iraq, it's that if the US goes dustbowl-shaped as a result of global warming, that if the oil and water start running out, that if people start getting broke, while Canada sits on oil and newly-warmed fields of food, and good water supplies, the reaction of the US will be to say, "well, sucks to be us and having to support the most powerful millitary machine in the world."
posted by rodgerd at 5:36 PM on June 27, 2008 [4 favorites]


"Guys like Mutant are going to be just fine. Folks that actually work for their living, instead of manipulating the outputs of others, are going to be utterly screwed" -- Let's take this to MeTa please.
posted by Mutant at 7:44 PM on June 27, 2008


I'm waiting for someone to say that the solution is to return to the gold standard.
posted by Class Goat at 8:02 PM on June 27, 2008


I'm waiting for someone to say that the solution is to return to the gold standard.

Shhh. You'll rouse Malor.
posted by oaf at 8:29 PM on June 27, 2008


We're going to be eating sawdust for breakfast and biking to work

Please, God, No!
posted by Anything at 9:59 PM on June 27, 2008


I just heard Richard Fisher president and CEO of the Federal Reserve Bank of Dallas, expanding on his years in government and discuss his concerns about the U.S. economy. Fisher currently serves as a member of the Federal Reserve Open Market Committee, the Federal Reserve's principle monetary policymaking group.

This is well worth listening to, as Fisher clearly lays down the gauntlet by saying - among other things - that teh Fed will never let itself be seen as a shill for helping the country out of structural problems of its own citizens' and policy maker's making.

Listen to this lecture and get informed in plain language just how critically bad our unfunded mandate responsibilities are. Scary, in a good way.
posted by MetaMan at 12:44 AM on June 28, 2008


Malor - good summary, but I fall into the Austrian camp who sees us headed into a deflationary cycle that will ultimately trump inflation as credit and demand dry up, moderating inflation.
posted by tgrundke at 6:29 AM on June 28, 2008


sees us headed into a deflationary cycle that will ultimately trump inflation as credit and demand dry up, moderating inflation

Living in Japan 1992-2000 was very educational for me; I've seen this movie before.

Without wage inflation, there can be no actual monetary inflation (the wage-price spiral), just economic restructuring. Wages didn't go up during the boomtimes 2003-2006, there sure as hell not going up now.

If & when energy goes up 50%, food goes up 30%, healthcare goes up 40%, taxes go up 10% [oh yes, I went there], there happens to be one fungible economic sector that can & will price itself down to adjust -- rents and the capitalized rents we call home prices.
posted by yort at 12:35 PM on June 28, 2008 [1 favorite]


A public service announcement for those who read this thread: if you're inclined to take what Malor says at face value, do a site search for 'Malor' before doing so. You will find that Malor's history is a staggering work of short selling hyperbole, short on analysis, and interlaced with outright attempts at deception.
posted by felix at 7:35 AM on June 30, 2008


classy, felix, classy

The market is in the process of figuring out who is swimming naked, and from what I've seen so far it isn't Malor (not that I buy into his gloom-and-doom end-game scenario).

The S&P 500 is, of now, back to late 90s valuations. The cliff dive we saw in 2001-2003 was only reversed by intentionally blowing a TEN TRILLION DOLLAR asset bubble increase in real estate valuations, from which 10-20% -- ONE OR TWO trillion dollars -- is going to prove to be dead-loss to the end bagholders.

Fleckenstein has been proved right. Hell, even CNBC and Cramer is scaring everyone with their beat-market talk now.

In 2001 Americans had around $11T of household debt. Today, it's nearing twice that.[1]

Corporations skimmed off a lot of this $10T net debt issue into its healthy profit margins of 2003-2006. Profits are under pressure now, from nearly all angles.

My sense of things tells me the S&P 500 will come out of the present tailspin around 1050 -- its 1998 valuation, though a return to the depths of earlier this decade is a distinct possibility, depending on how the dollar moves.
posted by yort at 10:18 AM on June 30, 2008


oh, yeah, the national debt proper was $3.3T on 10/1/2001. Now on track to close the fiscal year at $5.3T. Two trillion dollars of deficit spending over seven years to produce the robust economy we're seeing now. Heckuva job, everyone.
posted by yort at 10:28 AM on June 30, 2008


yort -- "My sense of things tells me the S&P 500 will come out of the present tailspin around 1050 -- its 1998 valuation, though a return to the depths of earlier this decade is a distinct possibility, depending on how the dollar moves"

Wow I just gotta ask (and I'm not trying to start an argument, I'm genuinely curious) - how did you arrive at this number? And do you have a time frame in mind for this low?

Curious - the S&P 500 opened January 1998 at 970.43, so your projected base for this down trend (which I'm not denying is happening mind you) is about 8% above that. It actually was trading around 1,050 in February or March of that year. Even so, seems like you're calling for about an 18% decline from current (already battered) levels.

So is this intuition / feeling (it's ok if it is btw), TA or based on some type of fundamental analysis?

I'm very active in the markets, don't have a feeling for where the broad market is going as I have to stay pretty focused on the sectors where I've got exposure. But I do tend to make money pretty consistently. I'm a cash flow investor, so for folks like me it seems the difficult market is ending. I've been taking advantage of the more recent carnage to pick up some assets offering higher yields - you can easily see current yield approaching 20% for some with nice discounts in NAV. I think that is probably a good time to be taking on sensible exposures, as long as the underlying business is strong, balance sheet healthy and you know exactly what it is you're purchasing (a pet peeve of mine is it seems like most folks don't care much for looking at prospectus' these days).

You mention MSNBC and Cramer; I love it when they start scaring the shit out of retail. I moved some cash into the markets last August/September, first time in years actually, and those positions have performed very nicely (about 16% increase in share price while paying about a 17% dividend).

Of course we knew this 2008 was gonna be crappy for the overall market but that yield curve (I believe in the predictive power of the yield curve) is looking pretty healthy these days, so this is a rather curious time.

So you taking a view on that number and direction? Looking at deep out of the money puts seems like one could do pretty damn good if they took a position, even a speculative one.
posted by Mutant at 11:57 AM on June 30, 2008


how did you arrive at this number?

TA, more or less. Looking at the "base" of this curve, ie. lopping off the speculative blow-offs and imaging what a appropriately-deep MA line would look like.

IMO, the twin peaks in that graph were driven by the dotcom speculative mania (whose buyers got burned bigtime) and the P/E effects of the unsustainable debt-driven consumer (and government) spending orgy 2003-2006. They're not fundamental facts of the financial landscape.

Clearly there has been substantial asset transfer overseas if not monetary inflation this decade.

The S&P will reflect that, and for USD-holding funds the S&P will certainly look like a bargain if & when the dollar begins a snapback move towards historical exchange rates (Y120, .90 CDN, ~1.20 Euro).

My bear-reading has made me overly negative, but I just don't see an economic engine to pull US corporate profits back up to the 2005-2006 good-times. Plus our financial house was a lot more in order in 2002 compared to now.

And do you have a time frame in mind for this low?

~6 months to move from 1280 to 1050, from looking at how the 2002 graph turned down.
posted by yort at 1:44 PM on June 30, 2008


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