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Monday, December 17, 2007

Will We Ever Escape The BS Zone?

I must admit that I am becoming increasingly uncomfortable with the actions of the central banks. Take the proposal referenced in the last post. Yes, it enhances liquidity, but if the problem is distrust leading to bankers' unwillingness to lend to each other, the proposal won't do much. The rhetoric of the central banks worries me.

The reality is that we have inflation for basic commodities, and the central banks can only control that inflation by inducing a major global recession. But they can't do that, because the combination of a major global recession combined with all this bad credit would create a global depression. So what they are really trying to do is allow a mild recession to prevent commodity inflation from diffusing throughout the global economy.

Whether this is possible or not remains to be seen. The only way to prevent the diffusion of higher costs is to suppress wages, thus suppressing consumer demand, which will inevitably suppress commercial demand. Naturally enough, suppressing wages is going to cause commercial and consumer credit to go blooey in higher amounts, which will create the risk of an even more severe credit contraction, which will accentuate a mild recession. To prevent a severe credit contraction, the central banks are throwing money into the financial system in a desperate manner. Auctioning money to the highest bidder is just as likely to feed further bad lending as it is to feed responsible investments, and this is what we cannot afford.

It probably would be more efficient to provide some government guarantees underpinning bank lending, because the other side of this story is that the central banks also desperately need the global financial system to slowly back away from the insane credit it has been offering. If there were some penalty for bad lending, but a limited amount of penalty, it would enhance the rewards for due diligence and controlling risk.

All of this talk about possible inflation and possible credit contractions ignores the reality that this is already happening. Take, for example, these two Bloomberg articles. The first discusses the situation in Italy:
Dressed in his best Sunday suit, Fausto Cepponi took his wife and seven-year-old son out for dinner -- at a soup kitchen.
...
With salaries on hold, prices for staples such as pasta and bread rising and mortgages soaring, efforts to keep up appearances -- ``fare la bella figura'' in Italian -- can no longer disguise that thousands of job-holding Italians are failing to make ends meet. They've been labeled ``The New Poor,'' the title of a book published this year.

Prime Minister Romano Prodi attempted to address the issue in September by issuing a decree that 12.5 million of the poorest Italians, 21 percent of the population, will receive 150 euros ($220) next December, the single biggest expense in the 2008 budget. Bank of Italy Governor Mario Draghi on Oct. 10 dismissed the payment as ``a short-term fix,'' and said the spread of poverty was holding back Italy's economy.
In other words, the socialist economies of Europe are facing exactly the same problems that the US economy is facing. Greenspan's addled talk about "virtuous cycles" has led to this - worldwide, workers are in trouble. Kuwaiti foreign workers, Chinese shoemakers, Indonesian petty bureaucrats, Indian farmers and US mechanics all have the same problem. They can't make ends meet.

In a large part, both the growth and collapse of consumer credit is related to this problem. This article discusses the stagflation risks, noting:
China and other emerging markets are trying to slow their economies to keep inflation in check by tightening monetary policy. They've had limited success, in part because some of them have tied their currencies -- directly or indirectly -- to the dollar or the euro.

That restricts their ability to raise interest rates to slow growth because it would probably also lead to an unwanted appreciation of their currencies.

``Global inflation pressures emanate mainly in the emerging countries, where growth is strong and monetary policy is relatively expansionary,'' Fels of Morgan Stanley says.

The same emerging-market nations have also helped stoke inflation by sheltering their consumers and companies from rising oil prices through subsidies. That's kept energy demand in China, India and other countries high because domestic prices are still low.
Yes, it has. What has happened is that as the US cuts (or the UK - the pound is keeping pace with the dollar now), these countries experience our inflation. They can either choose to keep a strong currency, control inflation and undercut their exports, or choose a weak currency and experience high inflation.

Now that inflation is accelerating rapidly, the emerging market countries will be the worst affected. If they give their workers raises, they lose the ability to compete, and if they don't, they create serious political instability. These countries are dependent on consumption in other countries to keep their expansions going, so the money is going to leave these markets and roll back to the developed countries such as the US. It's already beginning, and it will continue because many of these countries are unstable politically, and in an environment such as this, big money flies to places in which the owners stand the best chance of retrieving it.

Another problem for these countries is that their internal lending to consumers is breaking down. How anyone could write a long article entitled The Ugly Side of Microlending and omit to mention that rising costs for food and fuel are destroying the ability of consumers in countries like Indonesia and Mexico to repay these loans is completely beyond me. But BusinessWeek managed it, and as I read the story and the comments I realized that very few are confronting the fundamental problem. We are still living in the BS zone that constitutes my real concern about Greenspan's policies.

An economic cycle that consistently cuts the effective wages of the majority of workers in developed countries is anything but virtuous. Inevitably it becomes a problem for the workers in the developing countries, and inevitably it shows up in the world financial system, and shortly thereafter, it induces political instability across the globe. It was not a virtuous cycle. It began as one, and then continued to become a vicious cycle. Paybacks are a bitch.

Ninety percent of what we must face is unavoidable, because we must unwind the imbalances in the world economy. This is the major issue for foreign policy, the major issue for energy policy, and the major issue for economic policy.

The first and most fundamental need is to drop the Kyoto/anti-nuclear nonsense and have the developed countries push hard into nuclear power and whatever else they can use. Coal is fine too. The key to controlling inflation is to control energy costs, and you can only control energy costs by making more energy available. If we don't control energy costs, the debt problem is going to be unmanageable, the pain felt by the bulk of the populations in the emerging countries will be unbearable, and WWIII will erupt.

It's painful to watch the Democratic presidential nomination race and realize how out of touch the primary candidates are. If we get a populist who has a clue, it's going to have to come from the Republican side. Since the top Republican candidates are also in lala land, 2008 is going to be a wild political roll of the dice. The people of the US know what the problem is, but our political structures don't.

Comments:
The people of the US know what the problem is, but our political structures don't.

That sums it up. I cant even stand to watch, not even for a minute, this election cycle. The whole system seems more out to lunch than ever before, and that includes the run up to the Iraq war!
 
MoM,

"An economic cycle that consistently cuts the effective wages of the majority of workers in developed countries is anything but virtuous." but isn't this a market produced labor pricing ? The fact is in 90s we saw up to 2bln people enter global labor force and when supply increases and demand can't catch up, price falls. Market is doing labor cost arbitrage as it supposed to.
 
We need to kill the never-to-be-sufficiently-damned corn ethanol subsidies, drop the sugar/ethanol tarriffs, and pursue nuclear power vigorously. That will lower food and energy prices (and not incidentally, put money in the pockets of Latin American sugar farmers as ethanol produced from sugar replaces ethanol from corn, and as sugar replaces corn sweetener). We're doing Stupid Things in the name of subsidizing Iowa farmers and Archer Daniel Midlands. But you won't see any of these presidential candidates dare say it!
 
Napolean - I can't either.

Perp - remember, I said it started as a virtuous cycle. Everything has its limits. Tomorrow I'll try to explain.

Who Struck John - yup. We are shooting ourselves in the foot, and shooting people in poorer countries in the chest.
 
There is not a Central Banker on the planet wasting a brain cell worrying about inflation. All are living in mortal terror of a deflation that sucks the World economy down the drain.

Central Bankers know that the consequences of an economic collapse driven by parched liquidity far outweighs the risks of inflation in their current mindset.
 
Anon - that's simply untrue. India, for example, is paying a great deal of attention to inflation. Trichet is too.

They ought to be worried about deflation, but I don't think most of them are currently.

The collapse of farm incomes in the 1920s caused a lot of what followed. Those who are genuinely worried about deflation don't foster bubbles.
 
Sad to say, I think looking to politicians (and the Fed is one branch of them) or the economic elite (ditto) to recognize or describe the problems in useful terms is hopeless.

The nature of most human organizations is that people who are on the leading edge and recognize/describe problems early are almost inevitably punished (called Cassandras, shooting the messenger, etc).

Ultimately, the political and economic elite are therefore *responsive* organizations, meaning that they will usually respond ONLY when the public demand means that they can't avoid it without looking worse than they will for acknowledging the problems.

So a lot more public pain and then public notice and outcry will be needed for any genuinely focused attention from those crowds.

On the other hand, I tend to believe that the "fixes" of politicians and those in the economic elite generally tend to make things worse so I don't see this as all bad. The more effective everyone is in delaying the "need to act", the less dramatically bad the attempted solutions will be.

See, BS is your friend!
 
And a lot of blogs are creaming their pants with glee over it. Apocalyptic buzz-phrases like "Weimar Republic Hyperinflation", "Just run the printing presses 24/7", "Wheelbarrows of Government Fiat Paper"; I'm expecting the flakier Survivalists of the Eighties to surface with how-tos about "human flesh as your most plentiful food source". And the rubbing-hands/smacking-lips GLEE! of it all.

I'm even seeing occasional Christianese buzz-phrases like "Coming One World Currency/Economic System/Government (TM)", which from experience is just this side of "SIX-SIXTY-SIX! DON'T TAKE THE MARK!"

I really would like to NOT live in a never-ending South Park episode...
 
I spent Friday reading the county newspaper from 1948. It's interesting stuff. Lots of talk about inflation and an interesting editorial on how we need to have manufacturing jobs. Anyway, I copied down some of the prices. Keep in mind that these are likely sale prices:
Coffee--$ .43 a pound
Hams--$ .58
Bacon--$ .69 a pound
100 pounds of sugar--$8.86
Flour--$ .89 for 10 pounds
Butter--$ .82 a pound

Some items were still price in half cents. I also found out that an area I drive past every day used to be orchards and dairy farms. Somehow, it seems like the higher cost of commodities just might be related to things like turning those farms into a "national scenic area" where all economic activities are restricted. I do not see a resolution to this, until we restrict development of farm land the same way that we restrict development of pretty scenery.
 
Wow. Coffee. My original sin. Someone get me a time machine.

Europe has restricted the development of farm land. Bacon and hams are relatively cheap now.

Europe has restricted the development of farm land.

Headless, the urge for Armageddon is somehow rooted in restless souls. I don't understand the attraction myself, but it is a constant.
 
I've also heard that meat is cheap right now because they are culling out the herds. Hay and grain are not cheap and pigs especially take a lot to raise (which is why you don't see much organic pork.)I did pay $.99 for fresh picnics this week, but it cost $16.57 for 25 pounds of pinto beans.
 
Somehow, it seems like the higher cost of commodities just might be related to things like turning those farms into a "national scenic area" where all economic activities are restricted. I do not see a resolution to this, until we restrict development of farm land the same way that we restrict development of pretty scenery. -- Teri

Wasn't there something similar in France before the French Revolution? Where Les Aristos evicted all their tenants to starve in the slums of Paris so Les Aristos could Return to Nature and Enjoy the Picturesque Natural Views from their Chateaus?

I've also heard that meat is cheap right now because they are culling out the herds. -- Teri

Which is why you keep a large freezer handy and stock up when it's cheap.
 
Headless, the urge for Armageddon is somehow rooted in restless souls. I don't understand the attraction myself, but it is a constant.

I have a long and dubious relationship with "Grinning Apocalyptism" -- my introduction to Christ was through The Gospel According to Hal Lindsay, when the Bible had only 3 1/2 books (Daniel, Revelation, the Nuclear War Chapter of Ezekiel, and Late Great Planet Earth.

Amazing how that will mess up your head for years. I'm a regular commenter on the blog where Slacktivist is deconstructing Left Behind: the Neverending Series.

And I see a lot of "Left Behind for non-Christians" around today. Like Global Warming Guilt Trips and Total Global Economic Collapse, HA! HA!

It's like they can't wait for everything to be destroyed (including themselves), just so they can laugh "SEE? SEE? I WAS RIGHT! I WAS RIGHT! I WAS RIGHT!" like Roberta Gregory's Third Little Pig.
 
Teri - yes, the feed costs are so high that a lot of animals are being slaughtered. This means that next year meat prices should rise again.

The stupidity of the new energy bill is making me nauseous.
 
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