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Wednesday, December 08, 2010

Tumbling T-Bills, Batman!

Article (wondering what on earth could be doing this?) Hahaha. The ECB is buying bonzo junko sovereign bondso in Euros. The Fed is buying bonzo crumbo junko bondso in dollars.

So all that money heads back out in the investor market. And you know what? The investors no longer want the junko bondso, and higher quality debt is getting a bit thin on the ground due to the fact that it was A) run up earlier, and B) higher rates mean lower borrowing. (Like, ya know, mortgages - watch those refis plummet!)

So, C) all that money goes into commodities with some offset to stocks, which were basically priced for a good year (better than we're going to get) next year already.

So, D) inflation, which does not exactly make anyone want to buy junko sovereign bondso erupts like Godzilla from the bottom of the bay. Where is James Bond when you really need him?

Another way to look at this is that the central banks, and also China, are all trying to futz with prices. But the pricing system is intimately interconnected. It seeks stability for a maximum of salable goods at possible production prices, but when the thing was very tightly balanced anyway, and all of a sudden everyone starts to hurl money into the pot, the entire system becomes unstable.

PS: And the best one-sentence post ever on this topic, which I have duly snaffled in its entirety from Small Dead Animals:
When Pelley asked Bernanke what degree of confidence he had in his ability to control inflation, the Fed chairman responded, "one hundred percent."
It's the artless humility that so grabs you, doesn't it? Lenyrd Skynyrd's "Simple Man".

Higher borrowing costs mean higher taxes or less
government spending. My guess is both. Either way,
it means stagflation. Unless you are a polygamist and
have another wife to send into the workforce, you are
guaranteed to lose ground.

The arresting beauty of that novel proposal would perhaps strike a non-female person more vividly, Spork.

Nonetheless, it does seem more practically viable than most current proposals, so I will merely wander off in daze.
Finance is not my forte, so I have to ask: is it time to panic yet?
SW - No. We should have panicked in 2006, and if we didn't then it is too late to panic now.

It's just that it is hunker-down time. Mr. Market ain't having any more of the delusion dessert.

This represents an almost immediate funding crisis for the weaker localities and state governments. It is not going to help the federal balance sheet either.

The Bernank will be forced to back off the bond purchases next year, but not before doing a lot of damage.

Consumers will be, how shall I say, "encouraged" to keep deleveraging. We are in for a 50's economy for about 6 years more, followed by an economy determined by whatever populist consensus we can cobble up to make our spending fit our means.

Economically speaking, it means that both the Chicago School and the Keynesians of the delusional variety just got a pie in the face.

The formal divisions between economists don't really mean much any more. The real division is similar to the difference between psychiatrists who treat patients (not just prescribe, but provide therapy) and academic psychiatrists.

It also means that Obamacare is DOA, because half the states can't support the Medicaid end of it. Either they adopt extreme rationing or they don't participate.
The Bernanke "one hundred percent" comment is very scary. I would not put "one hundred percent" confidence on things that are a *lot* better defined and more certain than the Fed's understanding of the economy: for example, if asked how certain I was that a much-requested enhancement for a popular product would pay for its minimal engineering and marketing costs, I might say "pretty certain," or even "ninety-nine percent certain," but I would not say "one hundred percent certain."

What Bernanke's remark says to me is that he does not really comprehend how limited his understanding and control of the economy inherently must be.
David - I think Bernanke was trying to reassure everyone and calm inflation fears. He is not necessarily gifted at public relations.

It does come off as inane.
Bernanke's statement about inflation is not so far off the mark. Inflation can be controlled with higher interest rates - 100% of the time. The trick is when to apply the brakes. Too soon and you are back into deflation. Too late and you get a couple of years of bad inflation before it comes back down. The real problem is timing and Bernanke is probably no better at that than Greenspan.
I jut finished a book: "Ubiquity: Why Catastophes Happen". It starts of talking about sand piles and earthquakes to get to the concept of a "critical state".

When I read "...but when the thing was very tightly balanced anyway, and all of a sudden everyone starts to hurl money into the pot, the entire system becomes unstable..." in this post my first thought was critical state. It will be unavoidable this whole sand pile will get the grain of sand that starts the big avalanche. We won't know what grain that will be or how big the avalanche will be, but it is coming.

Joh Maulden calls it a "muddle through economy". You call it a "hunker down economy", but you are both in the same place. There will be major shocks and we all need to have plenty of breathing space to handle them. If, however, we get hyper inflation, even that bet is off.
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