The Coming Global Stag-Deflation (Stagnation/Recession plus Deflation)
Last January – at a time when the consensus was starting to worry about rising global inflation – I wrote a piece titled Will the U.S. Recession be Associated with Deflation or Inflation (i.e. Stagflation)? On the Risks of “Stag-deflation” rather than “Stagflation” where I argued that the US and other economies would soon have to worry about price deflation rather than price inflation.
As I put it at that time last January:
the S-word (stagflation that implies growth recession cum high and rising inflation) has recently returned in the markets and analysts’ debate as inflation has been rising in many advanced and emerging markets economies. This rise in inflation together with the now unavoidable US recession, the risk of a recession in a number of other economies (especially in Europe) and the likelihood of a sharp global economic slowdown has lead to concerns that the risks of stagflation may be rising.
Should we thus worry about US and global stagflation? This note will argue that such worries are not warranted as a US hard landing followed by a global economic slowdown represents a negative global demand shock that will lead to lower global growth and lower global inflation. To get stagflation one needs a large negative global supply-side shock that, as argued below, is not likely to occur in the near future. Thus the coming US recession and global economic slowdown will be accompanied by a reduction – rather than an increase – in inflationary pressures. As in 2001-2003 inflation may become the last of the worries of the Fed and one may actually start hearing again concerns about global deflation rather than inflation.
Let me elaborate next why…
…unlike a true negative supply side shock – that reduces growth while increasing inflation – a US recession followed by a global economic slowdown is a negative demand shock that has the effect of reducing US and global growth while at the same time reducing US and global inflationary pressures. Specifically such a negative demand shock will reduce inflation and across the world because of a variety of channels.
First, a US hard landing will lead to a reduction in aggregate demand relative to the aggregate supply as a glut of housing, consumer durables, autos and, soon enough, other goods and service takes places. Such reduction in aggregate demand tends to reduce inflationary pressures as firms lose pricing power and then to cut prices to stave off the fall in demand and the rising stock of inventories of unsold goods. These deflationary pressures are already clear in housing where prices as falling and in the auto sector where the glut of automobiles is leading to price discounts and other price incentives. Obviously, inflation tends to fall in recession led by a fall in aggregate demand.
Second, during US recessions you observe a significant slack in labor markets: job losses and the rise in the unemployment rate lead to a slowdown in nominal wage growth that reduces labor costs and unit labor cost, thus reducing wage and price inflationary pressured in the economy.
Third, the same slack of aggregate demand and slack in labor markets will occur around the world as long as the negative US demand shock is transmitted – through trade, financial, exchange rate and confidence channels – to other countries leading to a slowdown in growth in other countries (the recoupling rather than decoupling phenomenon). The reduction in global aggregate demand – relative to the global supply of goods and service – will lead to a reduction in inflationary pressures.
Fourth, during any US hard landing and global economic slowdown driven by a negative demand shock the US and global demand for oil, gas, energy and other commodities tends to fall leading to a sharp fall in the price of all commodities. A US hard landing followed by a European, Chinese and Asian slowdown will lead to a much lower demand for commodities pushing down their price. The fall in prices tends to be sharp because – in the short run – the supply of commodities tends to be inelastic; thus any fall in demand leads to a greater fall in price – given an inelastic supply curve – to clear the commodity prices. And indeed in recent weeks the rising probability of a US hard landing has already lead to a fall in such prices: for example oil prices that had flirted with a $100 a barrel level are now down to a price closer to $90; or the Baltic Dry Freight index – that measures the cost of shipping dry commodities across the globe and that had spike for most of 2007 given the high demand and the limited supply of such ships – is now sharply down by over 20% relative to its peak in the fall of 2007. Similar downward pressure in prices is now starting to show up in other commodities.
Note that a cyclical drop in commodity prices – led by a US hard landing and global economic slowdown – does not mean that commodity prices will remained depressed over the middle term once this global growth slowdown is past. If in the medium term the supply response to high prices is modest while the medium-long term demand for commodities remains high once the US and global economy return to their potential growth rates commodity prices could indeed resume their upward trend. But in a cyclical horizon of 12 to 18 months a US hard landing and global economic slowdown would lead to a sharp fall in commodity prices. Note that even in the case of oil that is the commodity with the weakest supply response to prices – as the investments in new production in a bunch of unstable petro-states (Nigeria, Venezuela, Iran, Iraq and even Russia) are limited – a cyclical global slowdown could lead to a very sharp fall in oil prices. Indeed while oil today is closer to the $90-100 range in the last 12 months oil prices drifted downward at some point close to a $50-60 range even before a US hard landing and global slowdown had occurred. Thus, one cannot rule out that in such a hard landing scenario oil prices could drift to a price close to $60.
The four factors discussed above suggest that – conditional on the negative global demand shock (US hard landing and global economic slowdown) materializing even the risks of stagflation-lite are exaggerated; rather US and global inflationary force would sharply diminish in this scenario and, if anything, concerns about deflation may reemerge again.
This is not a far fetched scenario as one looks back at what happened in the 2000-2003 cycle. Until 2000 the Fed was worried about the economy overheating and rising inflation risk. But once the economy spinned into a recession in 2001 US and global inflationary pressures diminished and by 2002 the great scare became one of US and global deflation rather than inflation. Indeed the Fed aggressively cut the Fed Funds rate all the way to 1% and Ben Bernanke – then only a Fed governor – wrote speeches about using heterodox policy instruments to fight the risk of deflation once and if the Fed Funds rate were to reach its nominal floor of zero percent.
Today, following a US hard landing and a global economic slowdown, the risks of outright deflation would be lower than in the 2001-2003 episode because of various factors: US inflation starts higher than in 2001; the Fed needs to worry about a disorderly fall of the US dollar that may increase inflationary pressures; the rise and persistence of growth rates in Chindia and other emerging market economies implies that – even if such economies likely recouple to the US hard landing – a global growth slowdown will not turn into an outright global recession that would be truly deflationary. Still, while the scenario outlined here – US recession and global slowdown – may not lead to outright deflationary pressures it would certainly lead to a slowdown of US and global inflation.
The fact that the most likely scenario in the global economy in 2008 is one of a negative global demand shock is the one that is priced by bond markets: if investors were really worried about a rise in US and global inflation – or about true stagflationary shocks – the yield on long term government bonds would have not fallen as sharply as it has since last summer. With US 10 year Treasury yield now well below 4% and sharply falling in the last few weeks it is hard to see a bond market that is worried about global inflation or global stagflation. And while until recently commodity prices pointed to the other directions, recent weakness in oil prices, the cost of shipping commodities and the price of some other commodities also signals that commodity markets are now pricing the risk of a US recession and the risk that – with a lag – a US recession will lead to a broader global economic slowdown.
So in conclusion “stag-deflation” (i.e. low growth or recession with falling inflation rates and possible deflationary pressures) is more likely than “stagflation” (low growth or recession with rising inflation rates) if a US hard landing materializes and leads – as likely – to a slowdown in global demand and growth.
So last January I argued that four major forces would lead to a risk of deflation (or stag-deflation where a recession would be associated with deflationary forces) rather than the inflation risk that at that time – and for most of 2008 – mainstream analysts worried about: slack in goods markets, re-coupling of the rest of the world with the US recession, slack in labor markets, and a sharp fall in commodity price following such US and global contraction would reduce inflationary forces and lead to deflationary forces in the global economy.
How have such predictions fared over time? And will the US and global economy soon face sharp deflationary pressures? The answer deflation and stag-deflation will in six months become the main concern of policy authorities. Let me now explain in more detail why…
First, what has happened in the last few months? The US has entered a severe recession that is already leading to deflationary forces in sectors where supply vastly exceeds demand (housing, consumer durables, motor vehicles, etc.) while now aggregate demand is sharply falling below aggregate supply; the unemployment rate is sharply up while employment has been falling for 10 months in a row; and commodity prices are sharply down – about 30% from their July peak – in the last three months and likely to fall much more in the next few months as the advanced economies recession is becoming global. So both in the US and in other advanced economies we are clearly headed towards a collapse of headline and core inflation.
Is there any doubt about this ongoing inflation capitulation and the beginning of sharp deflationary forces? Take the current views of the economic research group at JP Morgan; this group was in 2007-2008 the leading voice arguing about the risks of rising global inflation, about the associated risks of a global growth reflation and arguing that policy rates would be sharply increased in 2008-2009.
This week instead this JP Morgan research group published its latest global economic outlook arguing that we are headed towards a global recession, negative global inflation and sharply lower policy rates in the US and advanced economies (a 180 degree turn from its previous position). As written in the most recent JP Morgan Global Data Watch:
“A bad week in hell
Increasingly, the signs point to a deep and synchronized global recession. Today’s reported slide in UK 3Q08 GDP is expected to be followed by contractions in the United States (next week), the Euro area, and Japan—confirming that the global downturn began last quarter. More troubling is the additional loss of momentum at quarter end, combined with collapsing October survey readings. These developments appear to be part of a negative loop in which economic and financial weakness are feeding on each other, making the prospects for growth in the coming months decidedly grim. Once again we have taken an axe to near-term growth forecasts for the developed world and will likely follow up with additional downward revisions for emerging market economies in the coming weeks. Already, our forecasts suggest that global GDP will contract at a near 1% annual rate in 4Q08 and 1Q09.
It is still too early to accurately gauge the depth of the downturn, as the outlook depends on how well policy actions contain the financial crisis. From a US perspective, our current forecasts place the contraction in GDP somewhere between the last two mild recessions and the deep contractions of 1973-75 and 1981-82. This picture masks the degree to which the pain of the current downturn is falling on households. From the perspective of wealth losses and declines in real consumption, the current recession is likely to prove more severe than any of the previous ten in the post World War II era (see Special report: How deep is the ocean? Gauging US recession contours). For Western Europe, the current downturn is currently projected to look similar to the one in the early 1990s—the last episode in which regional GDP contracted…
Inflation and real policy rates to go negative
With part of this year’s slide in global growth linked to an inflation shock, the recent collapse in global commodity prices should be seen as an important factor cushioning the downturn. In the six months through August 2008, global consumer prices rose at a 5.6% annual rate, prompting stagnation in real consumption across the globe. Based on recent moves in the price of oil and other commodities, it is likely that the coming six months will see headline inflation dip below zero. While this swing will be a plus for consumers across the globe, it is also a development that will promote a significant growth rotation towards the G3 and Emerging Asian economies that were hurt most severely by this negative shock. In the developed world, this backdrop of contracting GDP, collapsing inflation, and financial market stress opens the door to a powerful monetary policy response.
So the leading supporters of the view that the global economy risked rising inflation, rising growth reflation and sharply higher policy rates to fight this inflation are now predicting a global recession, global deflation and sharply falling policy rates. What a difference a year makes!
Any further doubt that we are headed towards a global deflation or – better – a global stag-deflation? Aggregate demand is now collapsing in the US and advanced economies and sharply decelerating in emerging markets; there is a huge excess capacity for the production of manufactured goods in the global economy as the massive and excessive capex spending in China and Asia (Chinese real investment is now close to 50% of GDP) has created an excess supply of goods that will remain unsold as global aggregate demand falls; commodity prices are in free fall with oil prices alone down over 50% from their July peak (and the Baltic Freight Index – the best measure of international shipping costs – is 90% from its peak in May); while labor market slack is sharply growing in the US and rising in Europe and other advanced economies.
And what are financial markets telling us about the risks of stag-deflation?
First, yields on 10 year Treasury bonds fell by about 50bps since October 14th getting close to their previous 2008 lows; also two-year Treasury yield have fallen by about l50bps in the last month. Second, gold prices – a typical hedge against rising global inflation – are now sharply falling. Finally, and more importantly, yields on TIPS (Treasury Inflation-Protected Securities) due in five years or less have now become higher than yields on conventional Treasuries of similar maturity. The difference between yields on five-year Treasuries and five-year TIPS, known as the breakeven rate, fell to minus 0.43 percentage points; this is a record. Since the difference between the conventional Treasuries and TIPS is a proxy for expected inflation the TIPS market is now signaling that investors expect inflation to be negative over the next five years as a severe recession is ahead of us.
So goods markets, labor markets, commodity markets, financial markets and bond markets are all sending the same message: stagnation/recession and deflation (or stag-deflation) is ahead of us in the US and global economy.
So, don’t be surprised if six months from now the Fed and other central banks in advanced economies will start to worry – as they did in 2002-03 after the 2001 recession – about deflation rather than inflation. In those years where the US experienced a deflation scare Bernanke wrote several pieces explaining how the US could resort to very unorthodox policy actions to prevent a deflation and a liquidity trap like the one experienced by Japan in the 1990s. Those writings may have to be soon carefully read and studied again as the US and global economy faces its worst recession in decades and as deflationary forces envelop the US and other advanced economies.
Finally, while in the short run a global recession will be associated with deflationary forces shouldn’t we worry about rising inflation in the middle run? This argument that the financial crisis will eventually lead to inflation is based on the view that governments will be tempted to monetize the fiscal costs of bailing out the financial system and that this sharp growth in the monetary base will eventually cause high inflation. In a variant of the same argument some argue that – as the US and other economies face debt deflation – it would make sense to reduce the debt burden of borrowers (households and now governments taking on their balance sheet the losses of the private sector) by wiping out the real value of such nominal debt with inflation.
So should we worry that this financial crisis and its fiscal costs will eventually lead to higher inflation? The answer to this complex question is: likely not.
First of all, the massive injection of liquidity in the financial system – literally trillions of dollars in the last few months – is not inflationary as it accommodating the demand for liquidity that the current financial crisis and investors’ panic has triggered. Thus, once the panic recede and this excess demand for liquidity shrink central banks can and will mop up all this excess liquidity that was created in the short run to satisfy the demand for liquidity and prevent a spike in interest rates.
Second, the fiscal costs of bailing out financial institutions would eventually lead to inflation if the increased budget deficits associated with this bailout were to be monetized as opposed to being financed with a larger stock of public debt. As long as such deficits are financed with debt – rather than by running the printing presses – such fiscal costs will not be inflationary as taxes will have to be increased over the next few decades and/or government spending reduced to service this large increase in the stock of public debt.
Third, wouldn’t central banks be tempted to monetize these fiscal costs – rather than allow a mushrooming of public debt – and thus wipe out with inflation these fiscal costs of bailing out lenders/investors and borrowers? Not likely in my view: even a relatively dovish Bernanke Fed cannot afford to let the inflation expectations genie out of the bottle via a monetization of the fiscal bailout costs; it cannot afford/be tempted to do that because if the inflation genie gets out of the bottle (with inflation rising from the low single digits to the high single digits or even into the double digits) the rise in inflation expectations will eventually force a nasty and severely recessionary Volcker-style monetary policy tightening to bring back the inflation expectation genie into the bottle. And such Volcker-style disinflation would cause an ugly recession. Indeed, central banks have spent the last 20 years trying to establish and maintain their low inflation credibility; thus destroying such credibility as a way to reduce the direct costs of the fiscal bailout would be highly corrosive and destructive of the inflation credibility that they have worked so hard to achieve and maintain.
Fourth, inflation can reduce the real value of debts as long as it is unexpected and as long as debt is in the form of long-term nominal fixed rate liabilities. The trouble is that an attempt to increase inflation would not be unexpected and thus investors would write debt contracts to hedge themselves against such a risk if monetization of the fiscal deficits does occur. Also, in the US economy a lot of debts – of the government, of the banks, of the households – are not long term nominal fixed rate liabilities. They are rather shorter term, variable rates debts. Thus, a rise in inflation in an attempt to wipe out debt liabilities would lead to a rapid re-pricing of such shorter term, variable rate debt. And thus expected inflation would not succeed in reducing the part of the debts that are now of the long term nominal fixed rate form. I.e. you can fool all of the people some of the time (unexpected inflation) and some of the people all of the time (those with long term nominal fixed rate claims) but you cannot fool all of the people all of the time. Thus, trying to inflict a capital levy on creditors and trying to provide a debt relief to debtors may not work as a lot of short term or variable rate debt will rapidly reprice to reflect the higher expected inflation.
In conclusion, a sharp slack in goods, labor and commodity markets will lead to global deflationary trends over the next year. And the fiscal costs of bailing out borrowers and/or lenders/investors will not be inflationary as central banks will not be willing to incur the high costs of very high inflation as a way to reduce the real value of debt burdens of governments and distressed borrowers. The costs of rising expected and actual inflation will be much higher than the benefits of using the inflation/seignorage tax to pay for the fiscal costs of cleaning up the mess that this most severe financial crisis has created. As long – as likely – as these fiscal costs are financed with public debt rather than with a monetization of these deficits inflation will not be a problem either in the short run or over the medium run.
568 Responses to “The Coming Global Stag-Deflation (Stagnation/Recession plus Deflation)”
Guest • October 25th, 2008 at 2:55 pm
1st & way ahead of the pack
Guest • October 25th, 2008 at 3:02 pm
You have done a stupendous job of predicting and analyzing these developments. We need you as Secretary of the Treasury, pronto.If the DEMS sweep this election, I think they should begin a campaign for ChenyBush to leave office early, or agree to replace their appointees immediately; or else start investigations upon arriving in power as to laws one or both of the ChenyBush gang leaders broke while in office.
AfA • October 25th, 2008 at 3:07 pm
Are you talking about Guest above who is self proclaimed “1st & way ahead of the pack”? If so, I agree.Can I apply for a vice secretary, being 3rd?
jeremyr • October 25th, 2008 at 3:17 pm
Dear Nouriel,Thank you for sharing your great insights, as an Economics Grad from LSE, and now an active trader, i never thought economic macro insights could be as accurate as yours are, and unusualy for an economist you can predict the market reaction equally well too.
AfA • October 25th, 2008 at 3:19 pm
Dear Professor,I would rather disagree with you on one aspect and it is that Bernanke, judging from his actions not words, seemed to be worried about deflation long time ago (at least 6 months ago, wow, only 6 months? that feels light years away, anyway), more than inflation. None of his endeavors, except jawboning, was destined to fight inflation (expectations). Somehow the Fed was trying to pump up the deflating bubble without recourse to outright inflationary measures, which, I suspect is due to less to a fear of future inflation and more to, what you rightly describe as “The trouble is that an attempt to increase inflation would not be unexpected and thus investors would write debt contracts to hedge themselves against such a risk if monetization of the fiscal deficits does occur.”
Guest • October 25th, 2008 at 3:19 pm
Not sure that I agree with the prediction for oil prices. The difference between supply and demand is quite small. Some slackening of demand does create a more favorable pricing. But I believe thast current oil prices are depressed by hedge fund speculation. We’ve gone from excessive LONG positions putting oil at $150/BL to excessive SHORT positions putting oil at $60-70/BL. Keep in mind that good oil supplies continue to dwindle (e.g. Cantarell), and that OPEC & Russia/Iran/Venezuela can certainly boost prices by making more serious cuts.Bottom line … did everyone in China and India stop driving their new cars just because we have a global recession? I don’t think so. Even most Americans are still driving their normal mileage (in single-occupancy vehicles!), they’ve just cut back on vacations and holiday trips.Finally, and not to bring up a sore point again, but the whole Israel/Iran issue is far from settled. The fact that this issue has died in the media coverage does not mean that it’s really dead. This could be the lull before the storm.PeteCA
Lloyd Gillespie • October 25th, 2008 at 3:25 pm
Great post NR. Just one point that should be made. Though this be extremely un-orhthadox, it may need to be in the economic lexicon. I do agree deflation is upon us already, and if severe deflation sets in, as it certainly will with such slow administration action, monetization of deficits(actual crude printing), as long as all nations syncronize such monetization during severe deflation, will not, and can not lead to inflation during such dire and extreme deflationary periods, but only if used during such severe conditions. Others can chop my head off, if they wish, but Keynes’ Bancor system, never enacted, was just such a finance system for such future dire situations, but only to supplement and liquidate national payments imbalances, or extreme deflationary incurred debts. Paul Davidson has also offered alternative systems for reducing balance of payments deficits. My suggestion is offered as I see us entering such a dire situation. It just may be needed, although such suggestion would ultimately be required to be protected by future inflation regulations___but such regulations are possible, either through external exchange clearing international mechanisms, or through drastically reworked internal exchange clearing autonomous mechanisms…Paul’s ideas can be accessed here: http://econ.bus.utk.edu/davidson.htmlMine are here: http://theawakeningoftheamericamind.blogspot.com/
Guest • October 25th, 2008 at 3:30 pm
will the freezing interest rate idea make a comeback?
Octavio Richetta • October 25th, 2008 at 3:39 pm
Professor,Great analysis. A lot of “stuff” to digest here. You are putting out a tremendous amount of material so it is understandable that your analysis will have points in which your arguments are not as convincing as in others. IMHO, the weaker part of your analysis is in the material that follows:”So should we worry that this financial crisis and its fiscal costs will eventually lead to higher inflation? The answer to this complex question is: likely not.”You conclude with:”In conclusion, a sharp slack in goods, labor and commodity markets will lead to global deflationary trends over the next year. And the fiscal costs of bailing out borrowers and/or lenders/investors will not be inflationary as central banks will not be willing to incur the high costs of very high inflation as a way to reduce the real value of debt burdens of governments and distressed borrowers. The costs of rising expected and actual inflation will be much higher than the benefits of using the inflation/seignorage tax to pay for the fiscal costs of cleaning up the mess that this most severe financial crisis has created. As long – as likely – as these fiscal costs are financed with public debt rather than with a monetization of these deficits inflation will not be a problem either in the short run or over the medium.”I understand the argument supporting the first sentence in your conclusion and agree with it. But I am still far away from understanding/buying you argument in support of the rest of your conclusion paragraph, which deals with rising inflation due to the bailout and why it will not happen.Did inflation follow the government actions that followed the depression? If inflation did not follow then; can this be used as an example/argument of why inflation will not follow this time around either?BTW, what do you think about my observation in the previous thread that ECRI’s WLI is falling at an accelerating rate (i.e., negative second derivative). IMO, this may indicate we are heading to a bigger hole than most people think.
AfA • October 25th, 2008 at 3:54 pm
PeteCA,In my turn, I am not sure I would agree with you, and what you described may be a good illustration of when price movements drive news. Remember during the spring when even the mention of a strike in some unknown oil field drove prices $10 up? When even Saudi Arabia threats to increase production did not shake the seemingly unstoppable surge in oil prices?The same story is repeating itself now. Even Ike and OPEC threatening to cut production didn’t stop prices from diving.My analysis/2cents: the same way that the rise in prices was justified by increased emerging markets consumption had some fallacious grounds, too is the justification of collapsing prices by global recession/decreased consumption. I am not saying these 2 forces have no effect or are not fundamental, what I am saying is that they are long term forces and are unable to impact prices the way they are behaving recently (it is unimaginable to me that the world shifted from a global economic boom to a global economic depression in less than 1 year time). As you rightly point out “did everyone in China and India stop driving their new cars just because we have a global recession? I don’t think so. Even most Americans are still driving their normal mileage (in single-occupancy vehicles!), they’ve just cut back on vacations and holiday trips.” The same story however should have been told last spring “did just everyone in China and India just suddenly started driving new cars just because we had a global bubble?” The Israel/Iran issue is yet another illustration.Rather, the short/medium term price movement are greatly impacted by what happens elsewhere in other markets to which commodity markets are plugged through speculative/hedging/arbitrage trades. Such other markets are FX, equities and bond markets. The same thing is true for the FX market. Once those trades reverse, for any reason, they give way to a new trend which, thru similar trading patterns, become self-fulfilling.Again, the reason why I don’t think oil would stay at a bubble price is that it has not the profile of a bubble asset (consumption vs. cash generating asset). The possibility of peak oil is clealy not priced in since the supply curve is difficult to depict. However, we would have to notice a clear shift in the demand curve (very radical changes in energy consumption behaviors) to know that prices have shifted to peak level, where high prices can be sustained (until a new source of energy is found or new technology is developed).
Octavio Richetta • October 25th, 2008 at 3:56 pm
BTW, even though the “reply to this comment” format appears to make the blog easier to read, it actually makes the blog harder to read for people who, like me now, like to read all posts.IMO, a linear structure along the time line in which, as before, people quote a bit of the comment they found interesting enough to add to it much more efficient. This way I can start reading where I left and be sure not to miss any comments.With the current format, one quickly gives up with trying to read all comments. I suggest that if you believe you have something important to say to post it at the bottom (i.e., along the time line) as I for one will not go back to read old comments to see if I can fish some additional information of value. Every-time I login to read the blog, I will start reading where I left on the time line. I will not go back and read older posts.it would be nice to read what others think about this.
lperd • October 25th, 2008 at 4:07 pm
OctavioYOU ARE RIGHTthis change should be adopted asapit’s much easier to read comments and replies
Alessandro - http://castellidicarte.blogspot.com/ • October 25th, 2008 at 4:10 pm
LOL! I’d certainly trust you better than the guy they’ll appoint anyway!
NRGroupie • October 25th, 2008 at 4:15 pm
Professor, is there a risk that, as the US’s debt burden continues to build (due to numerous factors) it might become suddenly more difficult than it is now for the US to find willing financiers for that debt (i.e., due to a partial flight FROM the dollar) – which in turn will force an increase in interest rates similarly to what happens in developing economies with a currency crisis?
Lord Sidcup • October 25th, 2008 at 4:21 pm
Yes,it’s nice to be able to see what’s new without having to scan the whole page again.
KJ Foehr • October 25th, 2008 at 4:22 pm
Great work professor,But beware; as your reputation and visibility grows in this crisis, you may cease to be a predictor of markets and become a driver of them. Then the PTB and the MSM will begin to blame you in earnest for further declines in markets, e.g., the current selloff could become known as The Roubini Rout.This would be a very dangerous situation as eventually, the markets do humble us all and your creditability would inevitably be damaged at some point.Just food for thought.Thank you and keep up the outstanding work.
Ed Lane • October 25th, 2008 at 4:28 pm
I have not read (I may have missed) hearing a rationale supporting supressed inflation that takes into account the expenditures the US faces with health care, Social Security, infrastructure, alternative energy, environmental controls and education, to name a few. I think it’s likely these expenditures will be made –not only are they needed in their own right, they will also increase jobs, a necessary component for increaased consumer spending.Can inflation be far behind?
Lord Sidcup • October 25th, 2008 at 4:34 pm
Also – as we must login – usernames identities should be fixed: not guest/anonymous etc.Generally the people who have ‘identities’ and are engagable with over time elevate the level of debate- off the top of my head; dof/Octavio/MA/PeterCA/London Banker/AfA and many others. Plus Ryskamp and StocksGoingGreen.( then again I’m quite totalitarian and a major fan of police-state activities etc. )
Guest • October 25th, 2008 at 4:43 pm
I am not familiar with what was here in the past. My initial reaction to this format was one of frustration but with some minor improvements e.g. a navigational aid that would highlight new comments, I think it is superior to the linear format.Linear formats such as Seekingalpha.com can also be cumbersome to navigate if there are numerous posts and repsonses. I find that a great deal of time is spent scrolling up and down. The worst linear format is the kind that limits the number of comments per page thereby creating mulitple pages of comments.
Anonymous • October 25th, 2008 at 4:44 pm
agreed that user names should be fixed
Dave P • October 25th, 2008 at 4:49 pm
Roubini fails to consider what happens with the coming dollar rejection and devaluation. Plus the repatriation of trillion of foreign investment dollars. What happens to all this money?
Guest • October 25th, 2008 at 4:53 pm
low inflation – code word for lots of people without jobs?
PeterJB • October 25th, 2008 at 5:06 pm
Beware of applying rational logic to accelerating irrational moments. The present moments dictate the end of any type of accurate predictive analysis for the short and long term future. We are now entering full-blown chaos.Ho hum
artichoke • October 25th, 2008 at 5:08 pm
The Vinod Khosla article does not convince me.For example he’s pushing ethanol. That is now a rather damaged idea for several reasons:1. It takes more energy to distill ethanol out of grain (corn at least) than the energy produced by burning that ethanol. That doesn’t make it useless, because the energy in ethanol is usable by automobiles and other vehicles, but it’s still not a good thing.2. Food distilled into ethanol is not available for human consumption. Within the past year we have had famines due in part to the diversion of food to use as fuel.3. Ethanol is hard to transport. It must be protected from moisture, as “wet” ethanol is ruined or requires recycling through expensive drying processes.Rich, your economics has been spot-on. I’m not sure you have as much knowledge of the pros and cons regarding energy, though you could be formidable once that knowledge is in place. I am trained as an engineer and have worked in energy trading for years as a quant, so I have some background.
AfA • October 25th, 2008 at 5:15 pm
Hey KJF, good to see you’re back!I would only agree with your first assertion; that talking heads and delusional pundits would want to blame any possible blow up on anything or anyone else except the real reason/responsible.The idea that someone’s opinions set market behavior (beyond some short moments) is just fallacious. More generally, from an economic theory/thinking point of view, I find the idea that “expectations” lead to realization is much far stretched in the classic school.How much impact did the greatest of all Warren Buffett have had on stocks after saying it was the golden occasion to get in? How much impact did all government, treasury & fed interventions had on markets? It is just absurd. If he (Roubini) is/was right, then the fact that markets do what he described is an indicator of his acute forecasting and analysis skills, no more no less. Otherwise, he will be proven wrong, in both cases; if he had any impact on markets, then his models will be flawed, unless he integrates the fact that what he says is what becomes, which is impossible, ridiculous and makes no sense; why then say anything of substance or do any analysis, just say whatever he wants/ what comes to his mind, and as he does so, he would be saying things completely ridiculous that markets cannot follow and will prove him wrong.
Alessandro - http://castellidicarte.blogspot.com/ • October 25th, 2008 at 5:16 pm
Nouriel: “Fourth, inflation can reduce the real value of debts as long as it is unexpected and as long as debt is in the form of long-term nominal fixed rate liabilities….Also, in the US economy a lot of debts – of the government, of the banks, of the households – are not long term nominal fixed rate liabilities. They are rather shorter term, variable rates debts….I.e. you can fool all of the people some of the time (unexpected inflation) and some of the people all of the time (those with long term nominal fixed rate claims) but you cannot fool all of the people all of the time. Thus, trying to inflict a capital levy on creditors and trying to provide a debt relief to debtors may not work as a lot of short term or variable rate debt will rapidly reprice to reflect the higher expected inflation.”WOW! This is the first time I read Nouriel debunking the “we will inflate our way out of this mess” argument and he uses exactly the reasons I wrote several times in the comments of this site (sorry not enough ego to look up precise references a la Miss America).Nouriel, I’ll consider that a hat tip 
koen • October 25th, 2008 at 5:17 pm
He’s wrong: greenspan and bernanke have repeatedly said that they will monetise long term debt, if necessary. He will do it, there’s no doubt about it, whatsoever. But I’m not sure that it will lead to high inflation. Japan also practised quantitative easing, a couple of years ago. It didn’t have a noticeable impact. But I think that bernanke will go much further than the boj.www.gold-eagle.com/editorials_02/milhouse120802.html
Anonymous • October 25th, 2008 at 5:27 pm
NR suggests that the Fed will not monetize the bailout as a Volker style surge in interest rates to bring inflation back into line would be too costly and lead to a severe recession. Surely the increased public debt through bond issuance etc will lead to much higher interest rates anyway, and the Fed would know this. NR himself has said that we cannot rely on the kindness of strangers to finance our debt going forward, so according to simple economic theory, increased supply of bonds and less demand to finance it by foreigners should mean a big surge in rates once the safety flows are taken out. So monetizing the bailout or not will not make much difference to the end result – much higher rates. Does anyone agree or disagree for some reason?
Anonymous • October 25th, 2008 at 5:27 pm
As several people have indicated in these comments, this article does not address the potential impact that a selloff in the dollar (predicted over and over by you during the past few years) will have on inflation rates. Is it your belief that such a selloff will not occur in the near term, or rather, do you believe that it will not trigger inflation?
NRGroupie • October 25th, 2008 at 5:31 pm
The point you make is really bugging me also. I hope that, because so many of us are making this point that someone on this site will address it.
Gloomy • October 25th, 2008 at 5:42 pm
Nouriel,It is time to call a spade a spade. Stag-deflation is but a euphemism for depression.
Gloomy • October 25th, 2008 at 5:44 pm
Your analysis is spot on.
gael • October 25th, 2008 at 5:47 pm
Am I getting this right? deflation for the short or medium run and then….? And how long is the short or medium run….6 months? A year?
Guest • October 25th, 2008 at 5:51 pm
I just posted a list of questions but there was a glitch and they didn’t post – I will repost later but I think that the ultimate quesiton I was asking but couldn’t articulate is the statement above. You nailed it Gloomy…nice name.Nouriel, It is time to call a spade a spade. Stag-deflation is but a euphemism for depression. If that is so what are the implications? e.g. currency good or bad? which currency? USD, Swiss, Euro, Yen, Sterling, Canadian, Euro? More questions later.
Gloomy • October 25th, 2008 at 5:52 pm
Black swans in large flocks are blanketing the earth.
Guest • October 25th, 2008 at 5:59 pm
If NR gets a gov job that means he will probably have to give up his blog. I have learned way too much here in a short period of time to want that. I never knew Economics could be so interesting. The classes I took were always dry and boring, whereas NR gives Economics the voltage of a trading floor.
Alessandro - http://castellidicarte.blogspot.com/ • October 25th, 2008 at 6:00 pm
No supply is not a problem right now. Follow the money.Take short term commercial paper as an example. Anybody in his right mind wants out of CP right now, so at maturity of his $1m of CP an investor do not roll the money over into the new issue but move straight into newly issued T-bills. Hank get a new $1m and buys the new issue of the CP, that was not taken by the investor.Much ado about nothing.Treasury supply will not be a problem as long as new issuance on a day is same size as other non-treasury debt maturing that day and Hank gets the duration right (shorter than the maturing one).This is an extremely unstable game, but it can go on for a long time.OTOH, what you are see is real time nationalization of the US financial system.
PeterJB • October 25th, 2008 at 6:00 pm
A sample of the future is “secretly” being attempted by Australia’s communist er, labour, government:The “…Australian government is about to degrade the internet with a filtering system that will not offer any effective protections – that if a way can be found to erect the Great Firewall of Australia”.(Joining the exclusive China, Burma and North Korea Club)Imagine this censorship program run by a group of moralist pure illiterate morons vying to stay in power throughout the coming age of the “Wests’ Fall” – on a Internet infrastructure run at dial-up speeds and charged for at double Premium by the fascist lobbyists (American) empowered and appointed by, yes you guessed right, government. Sounds like TV.Now, if that doesn’t create deflation, then nothing will.Where do all these cockroaches keep come from?Ho hum
PeterJB • October 25th, 2008 at 6:03 pm
You all should note that there are certain countries now meeting that are discussing the de-fanging of the USA. About time too.Nobody trusts the USA anymore and neither they should.Ho hum
koen • October 25th, 2008 at 6:05 pm
Interest rates in Japan (long term) fell between 1990-1998, even though the government issued enormous amounts of bonds. In the US, people will save much more and finance the deficit themselves.http://www.federalreserve.gov/pubs/ifdp/2002/729/ifdp729.pdf (p. 54).Quantitative easing didn’t lead to inflation:http://www.federalreserve.gov/pubs/ifdp/2002/729/ifdp729.pdf
AfA • October 25th, 2008 at 6:08 pm
Good question. I too asked myself similar question while thinking this through. How could monetizing debt make any difference? All it can do is trying to “dissolve” it across a wide base of assets and products; the subsequent inflation would make all USD-denominated assets and products more expensive = less affordable. The only problem is the size of the bad debt. It is as if trying to dissolve one kilogram of sugar in a cup of water; boiling water makes it absorbs a little bit more sugar, but at some point, all added sugar will just deposit and sink at the bottom of the cup.Let’s think this through. Monetizing debt would make dollars worth much less, penalizing, through inflation, products that were not subject to such debt, by increasing their prices relative to wages and assets. Higher inflation would ultimately be embodied into interest rates, however, we should ask, whose interest rates. The answer to that question follows the answer to the question “whose debt would be monetized by the Fed?” I would believe that the Fed would buy long maturity US Bonds since they are the less liquid I would believe that this path will make the short end rates go up faster (as they adjust quickly to new risk sources) and relieve some pressure from the long end; long enough to kill banks and before reversing course due to investors switching course.Imbalances in the US Bond market would also result in increasing rates, but this time, it will be the long end which will suffer more, as the flight to security will be so great that investors would only buy short term on the run treasuries.The short answers:Monetization: Flatter yield curveQuasi-default: Steeper yield curveoff?
NRGroupie • October 25th, 2008 at 6:09 pm
I dunno … what if a bit of fear about the US Dollar hits that investor owning the commercial paper (as well as investors in US govies)? In that scenario, your hypothetical commercial paper holder (as well as the US govie holder) might buy foreign treasuries instead of treasuries – which will push the dollar down further, and so on…
PeterJB • October 25th, 2008 at 6:22 pm
Let’s hope that it really is a “black swan” moment and not a repeat of that which has gone before such as Stalin’s loyalty purges and Hitler’s fellowship management programs.
Lord Sidcup • October 25th, 2008 at 6:29 pm
This is an interesting point.When I first heard of NR he was using the word ‘depression’ a lot.Now his star has risen and as well as being in the media more, it seems he is advising goverments/international bodies etc.So now he avoids using the word depression, and talks about it having seemingly been averted.Is this connected with having been brought inside the system, and having to palatablise his arguments to a greater/lesser extent?T. Williams wrote about “the catastrophe of success?”
Anonymous • October 25th, 2008 at 6:45 pm
I agree with some of Nouri’s observations, but I do not agree with a fair number of his conclusions. Much of it I think really comes down to a Keynes vs. Von Mises argument, with Nouri clearly in the Keynes camp on what will really happen from here on out. The writing seems to be on the wall in what the rest of the world is going to do with our dollars, and the dollar’s future as the world’s reserve currency, I do not think this is heavily factored into his equations. He was most correct with the liquidity vs. insolvency argument, however now we seem to be moving into the distrust/Ponzi scheme combined with just how deep the rabit hole goes outlook moving forward. Nouri’s argument holds merit if the world kept holding dollars, but there seems to be a real distrust of wallstreet going on around the globe,..fool me once,.. The world has been coupled, this is undeniable as Nouri has pointed out in the past, but I wonder now if there is a consorted effort to decouple from the US moving forward.
Lord Sidcup • October 25th, 2008 at 6:47 pm
Yes. We will of course be vulnerable to crazy bastards who want to blame everything on say, red-heads, and have them exterminated.Maybe I’m utopian, but I think there’s an opportunity looming to create new social systems that go beyond the redundant left vs. right ideological arguments. Something that is fair and sustainable with freedoms built-in.It’s like Victor Frankl said ; America needs a statue of responsibility as well as a statue of liberty.Debt capitalism has become crazily unfair. We in the west have willingly accepted this unfairness so long as it ‘worked’. Now it is being revealed to have been largely smoke and mirrors, I hope a change can happen (like the alcoholic hitting bottom).If the positive changes do not happen, I, among many, welcome our new EastAsian overlords.
PhilT • October 25th, 2008 at 6:48 pm
@ ArtichokeI also bothered to read the Khosla paper cited by MA and came to a similar conclusion. In fairness, the article was published in 2006 but my view would likely have been the same then as now.I think the case can easily be made for a comprehensive Energy strategy blueprint to be derived and developed by an expert panel with no conflicting interests; the same is true for Transportation.This strategic framework of basically defining where we are now, where we want to be in let’s say 10-15 years from now, and how to get there are absolutely pre-requisite to any “one-off plans” being considered.Best …
Guest • October 25th, 2008 at 6:53 pm
the social security time bomb – it was referened in the Greenspan hearings by one of the inquisitors who quoted from this US Government document:Fiscal Year 2007 Financial Report of the United States Government“While attention has been recently focused on addressing emerging challenges in today’s economy, the last 3 years show economic growth and improvement. Revenue went up, deficits went down, and cost stayed fairly constant. But as you can see in chart 1, the government faces a huge fiscal challenge in the years ahead. This year, 2008, is the year in which the first of the approximately 80 million babyboomers—those born between 1946 and 1964—become eligible to draw Social Security benefits. Scheduled Social Security and Medicare benefits together with other federal programs’ projected long-term cost are much greater than the resources (revenue and borrowings) available to pay for them. Unless action is taken to bring program cost in line with available resources, the coming surgeof entitlement spending will end in a fiscal train wreck that will have an adverse effect on the U.S. economy and on virtually every American.“
PeterJB • October 25th, 2008 at 6:53 pm
Yes, we must learn our lessons first and foremost and,Yes, great opportunity is coming.Ho hum
Stonejaw • October 25th, 2008 at 6:54 pm
Dr. Roubini,Thanks for your insightful commentary over the past few years!I keep having a reoccuring thought. Who is going to buy all this new debt being created? With trillions of new debt being created by central banks across the world and asset losses approaching $10 trillion – what is to prevent a spike in interest rates even in T-notes and bonds?Best,
painter • October 25th, 2008 at 6:56 pm
it seems we are in the dark, pitch black, and no one knows what will happen next. Just walking blind with our hands in front of us and when we touch something we begin the guessing on what it is and how to get around it.
Mark • October 25th, 2008 at 7:01 pm
@gael on 2008-10-25 17:47:16Am I getting this right? deflation for the short or medium run and then….? And how long is the short or medium run….6 months? A year?Take a look at Figure 1 from here http://www.dieoff.org/page125.htmThat'll tell you the duration.
devils advocate • October 25th, 2008 at 7:17 pm
OctavioI really appreciate your thoughful questions-perhaps, the New Deal did not print enough money to create inflation?afterall, unemployment stayed between 14-25% throughout the New Deal————–NOURIEL/OCTAVIOyou may have underestimated the political pressure on the politicians in USA/Europe- but especially the USA – “to do something” in the “first hundred days” – such as:Gov Schwartznegger already has proposed one and a half trillion dollar infrastructure programwhich both Dems and Repubs love; and Pres-to-be Obama adds Public Works to this a la FDR———this would mean millions of jobs to the people/economyand especially to Joe the Plumber, Joe the Carpenter, etc.plus, redoing the mortgages + moratorium on foreclosures to put a floor under housingplus, expanding the Health Coverage to 50 millionswhich will mean more jobs in Health Care——————-yes, all of it will raise US Debtbut, if you hire many millions with good construction wages and long-term jobs,and lots more in Health Care, Nursing Homes…these many millions will start to buy homes and spend…leading to more jobs…and a recoveryfirst in the USA and then the World…recovery = inflation much sooner,I believe, than you anticipatemy question is how will the world buy more and more USA debt?
Guest • October 25th, 2008 at 7:18 pm
Is world demand for commodities just going to collapse indefinately? When we hit rock bottom will government be able to avoid the temptation to pump money into the real economy for job creation? This view of deflation for ever seems improbable, maybe like a year or two and then watch out.
Guest • October 25th, 2008 at 7:25 pm
Afa: Look at it this way. Suppose the dollar drops to 50% of its current value over the next 2 years. That immediately puts oil back up to $120-$140/BL, when priced in US dollars (relative increase in terms of other currencies may be less). Any Middle East crisis could easily drive it to $200/BL. So from my point of view I’m not sure I see how the current level is anything more than a temporary low. But others may disagree with me … we’ll find out soon. I’m not suggesting that anyone should speculate based on these ideas – just putting out a few thoughts. Personally, I believe that key commodities such as gold and oil are mispriced by the market right now due to severe turbulence.PeteCA
JohnRyskamp • October 25th, 2008 at 7:35 pm
I sense an unwillingness to embrace catastrophe. Perhaps you ought to look at the Austrian situation at the end of the First World War. In short, you should look at cases of economic DISRUPTION. It is not enough to say that consumers stop spending or that unemployment rises–or even that the financial structure falls apart. Ask, what is going on with the supply chain? The main goal of price supports is not to keep suppliers in business–the main reason is to prevent interruption of supply.In short, what is the level of commitment to supply? Is supply qua supply, weak or strong. Start looking at that. However you characterize the distribution mechanism, don’t underestimate the potential for its disruption to suddenly confront you with inflation, not deflation.And that is what we should be examining now: where are supply chains beginning to break down? Where is distribution being interrupted?Again, having recourse constantly to technocracy only means that policy makers are unwilling to confront facts, and people are unwilling to force them to confront facts.
KJ Foehr • October 25th, 2008 at 7:41 pm
Thanks Afa.It is very rare, but it does occur. Joseph Granville in 1981 is a good example:“…Early this year that service flashed a bit of advice that is now part of Wall Street legend. Late on Jan. 6, just three days after Granville’s newsletter had urged aggressive buying because the market was headed “straight up,” his hot line offered contradictory counsel. Thirty staffers at Granville’s headquarters in the Daytona Beach suburb of Holly Hill worked until 3 a.m. to deliver a brief, urgent message: This is a Granville Early Warning. Sell everything. Market top has been reached. Go short on stocks having sharpest advances since April. Click.A selling stampede triggered by the warning hit the stock market as soon as it opened a few hours later. By day’s end the Dow Jones average of 30 blue-chip industrial stocks had plunged from a four-year peak of 1,004 to 980. Nearly 93 million shares were traded, making Jan. 7 the busiest day in the Big Board’s 188-year history.…”http://www.people.com/people/archive/article/0,,20078981,00.htmlGranville was / is a clown, and it is sacrilege to compare Roubini with him. But it does show that individuals can sometimes grow in popularity to the point that they move markets, temporarily, in the short-term. And that is exactly my point, that it is not possible to get short-term calls right over the long-term. So I fear that by moving more into the realm of stock market predictions NR is setting himself up for a fall. Especially now when, as in all times of crisis, many people are looking for both a savior to guide them through the darkness and scapegoats to blame.The world is fickle and his well deserved recent fame, that is certainly growing by the week, can quickly turn into infamy if people begin to see him as a cause of further losses instead of as just the messenger, or he can suddenly find himself in disrepute after a few bad calls on the market. Either way, it seems he is entering more dangerous waters as his dire warnings about the economy gain more prominence in the media and as he makes more stock market predictions.Perhaps he won’t get into trouble, but I think the possibility is something he should be aware of.
JohnRyskamp • October 25th, 2008 at 7:44 pm
And the fiscal costs of bailing out borrowers and/or lenders/investors will not be inflationary as central banks will not be willing to incur the high costs of very high inflation as a way to reduce the real value of debt burdens of governments and distressed borrowers. The costs of rising expected and actual inflation will be much higher than the benefits of using the inflation/seignorage tax to pay for the fiscal costs of cleaning up the mess that this most severe financial crisis has created. As long – as likely – as these fiscal costs are financed with public debt rather than with a monetization of these deficits inflation will not be a problem either in the short run or over the medium run.This underestimates the cost of what government will be asked to undertake, and above all, it stretches out the timeline too far. Events are rushing much more quickly, and will find government a wall instead of a path. Even now the Federal Government is crunching the numbers to see what level of unemployment public opinion will accept. Since it won’t accept an official level even of 12%, this is a signal to set up a wall, not clear a path.
K in TX • October 25th, 2008 at 7:48 pm
Caught an interview of James Galbraith tonight. He comes out strongly in favor of U.S. Government intervention a la the New Deal. I don’t know about the U.S. having excellent credit, but he does have a point re:the deficit – the deficit will grow due to increased government spending, OR if the economy collapses/can’t be re-started then the deficit will grow due to the destruction of the tax base. Damned if you do…Here is a bit of the transcript as the video isn’t up yet:BILL MOYERS: What’s the worst-case scenario you think about late at night?JAMES GALBRAITH: Right now the thing that troubles me most is not the United States. The thing that troubles me most is that the same ideas of deregulation, of free markets, were applied in the construction of modern Europe. And the Europeans don’t have the institutions of the New Deal, a central bank that can lend as necessary.BILL MOYERS: Right.JAMES GALBRAITH: Government that can borrow as necessary; that can take the initiative. They have expanded themselves into Eastern Europe in a way in which Communism was replaced by nothing. And a financial collapse is going on there now is, in many ways, more profound than the one we are experiencing here.BILL MOYERS: But, you know, you and everybody else have been reading or talking to or calling for more spending, more spending because that’s the only way you say to get capital into the system. But where’s that money going to come from, Jamie?JAMES GALBRAITH: The government has no problem with money. What we’re learning, first of all, is that the dollar remains the anchor currency of the world. The euro is the one, is the currency that’s collapsing right now, not the dollar.Uncle Sam’s credit is excellent. Uncle Sam can borrow short term for practically nothing these days. Everybody wants to have Treasury Bills and bonds because they’re safe. Uncle Sam can borrow for 20 years at 4.3%. That’s the same rate that the United States could borrow at for 20 years in the last month of the Eisenhower administration. So from our point of view, we’re actually well placed, I mean, as the government of the United States is well placed to take the lead in pulling the country and the world out of this crisis.BILL MOYERS: But even Barack Obama’s website calls the deficit America’s “Domestic Enemy.” Even he’s aware of the fact that the deficit’s beyond sight.JAMES GALBRAITH: Well, the deficit isn’t beyond sight. The deficits in the Bush administration in relation to the size of the economy were never all that large. They were certainly larger than they were under Clinton, but that was in part necessary because of the changed economic situation, the collapse of the dot-com bubble in 2000.The United States government’s credit is good. The deficit is a financial number that people are going to have to get used to because there is no way in these circumstances of avoiding an increase in the deficit. One of two things can happen. The government can take action and help stabilize the economy in which case we will have more spending but also more employment.Or the government cannot take action and let the economy collapse in which case we will have much less tax revenue. The deficit is going to be larger either way. There is no way of avoiding that. The only question is do you work to have a good economy or do you accept a terrible economy?http://www.pbs.org/moyers/journal/10242008/transcript4.html
K in TX • October 25th, 2008 at 8:22 pm
As I posted down thread this kind of massive intervention is what Galbraith is calling for. He believes that other countries will support the U.S. as he see the dollar as the only game in town.Alternately, it may take a bit of make believe, the snake swallowing its own tail, as the government would purchase its own treasuries. As it is in the ROW’s interest that the dollars/dollar debt they hold retain value perhaps they would let this game play out.
PeterJB • October 25th, 2008 at 8:33 pm
@ Mark,I knew Fred Hoyle personally and besides being a close family friend, I did a few drinking binges with him (it was my 16 to 18 years old period; above all, he was a great guy, a human being and a lover of fun. And he was a great source of all types of knowledge.I have no doubts that a global disaster cum Dark Age is upon us but brought about by “leadership” and its innate “incompetence and stupidity”; but it is a systemic problem or if you like, our adopted system can’t work any other way which means that this system is destroyed and we re-build new structure i.e. after learning our lessons and thereupon rebuild new organizations upon that structure.Our beloved financial, economic and monetary system is a sham which has evolved to a ‘ex nihilo’ system of consensual fraud and it certainly is in rapid decline; here there be no value at all as it is in itself a destructive force, a priori.As I have said before, the USA Constitutionally had a system that had the ability to achieve sustainability but it has been self-eroded by the armies of presidential morons etc., plying their own accords of corruptive exercise, ignorantly and egotistically; however, it is spent and the US is going down big-time with or without the help of others… but all will be affected.Hoyle didn’t have the knowledge of irrationality or perceptive irrationality; he was definitely a rationalist when it came to theories and here he was brilliant.In the life cycles there are shifts called “crossings” and I believe we are at one of these points in the evolution of life; we are shifting from intelligence to intellect.This could be argued as the point in time when our technological advances ( developed from ‘intelligence’)have reached a point of infinite growth (for the period) and we have thus become in ‘intellectual’ need for growth in order to safely handle and utilize such knowledge and developments. IOW our technologies are beyond or basic intelligence so nature cuts in and in a differential shift, switches us to intellectual mode; this has occurred before in circa 1300 BCE and thereabouts.IOW, it is time to move onwards from that which Blake termed “Newtonian Sleep” and there is evidence that this is happening and will eventually reach critical mass – aided and abetted by a global socio-economic collapse unfortunately. But belief systems needed to be re-booted, the hard way it seems.The lesson we need to learn is to be adaptive. And this fact is defined in the ‘attentional span’ of the Bell Curve; Lose the focus and you slide off the the crown; Keep the focus to keep the game alive. Sentience!I also posit that the ancient zodiac – now dated as ~75,000 years old by a US University – denoted the changes in dominant consciousness du jour and the attributes associated therewith. Or, the cycles of conscious life modes.
Guest • October 25th, 2008 at 8:35 pm
there was a book on that called 1984 and by the way the middle were in charge
Guest • October 25th, 2008 at 9:09 pm
In the most recent interview with Bloomberg, DrR addressed his view of the US Dollar and how the rest of the world would react. He said that long term, it would lose its status as a reserve currency, but that it would occur gradually. I think it is safe to say that this most recent post is designed with that pretense in mind.IMHO, if the change were rapid, then all bets are off. I think DrR (and Bernanke) are counting on the US $ being “too big to fail” from the point of view of the rest of the world. But surely, TROTW is ready for and looking for how to invoke this change.PKB
Yves • October 25th, 2008 at 9:16 pm
I’m no Professor, but I think that a worst-case scenario would mean a 20% increase of public debt relative to GDP over 2 or 3 years; which would be easily manageable, especially if in the end of the process the US savings rate has improved,i.e, the US is not as dependent on foreigners as it is today for the financing of the deficit.
Yves • October 25th, 2008 at 9:33 pm
As for a brand new Statue of Responssibility, no problem: Mr Sarkozy will be delighted to oblige, with a little fiscal stimulus for France 
PeterJB • October 25th, 2008 at 9:37 pm
“Taiwan’s financial regulators reportedly have ordered that nation’s insurance companies to pare their holdings of the debt and mortgage-backed securities of Fannie Mae (ticker: FNM), Freddie Mac (FRE) and Ginnie Mae securities, according to a report on the Internet site of Asian Investor magazine.”@ BarronsHo hum
Guest • October 25th, 2008 at 9:43 pm
@Artichoke and PhilT,Please allow me to provide a counterbalancing perspective. To be fair, the Khosla article, IMHO addressed the concerns that you have posed above. I’ll try to clarify that salient points here:1. In the early years, when ethanol plants were less efficient, they did in fact require more BTUs to produce then BTUs derived from a unit of ethanol. That is no longer true with modern production processes. Furthermore, using closed loop systems, such as that build by E3, where production heat is generated by poop from cattle, and cattle are fed from the byproduct of the squeezed corn, there is a huge net positive carbon benefit. There is lots more, but I’ll spare you the lecture…no offense intended.2. The food argument is a myth that is perpetuated by the big oil lobby and is simply not supported by the agricultural statistics. Khosla addressed this in great detail, but you were obviously not convinced by the facts presented. In short, emerging cellulosics do not compete with food, even if your concerns were true.3. “Ethanol is hard to transport and very suceptible to moisture contamination.” YES, this is a great point that is not addressed in the article, and I fully agree with you. I’m a researcher in the energy sector and currently working on this very issue. The solution is the “next generation” biofuel, Butanol, which is only tassetly discussed by Khosla. Butanol is highly compatible with gasoline and can be successfully mix in any proportion to traditional gasoline. It is also highly resistant to moisture (even more so than gasoline) and can be pipelined using the same gasoline infrastructure. This is the greatest benefit (with regard to net carbons emitted) along with the fact that it has a much higher energy density. So, the solution is coming, but is not available yet because there are still production issues that we reseachers are dealing with. So, to be fair to Khosla, he does suggest an incremental evolutionary process as the solution with ethanol being the first step.4. “We need a comprehensive energy plan” I agree and there is one. I have a copy of the latest such plan in brief presentation form that was delivered to Congress in May of 2008. I’d be happy to send it along if I had your contact info. Perhaps this could be arranged.Obviously, I’m in the biofuels camp because the info that I’m privy to. Hopefully, I’ve moved you at least a little bit in this direction.PKB
Yves • October 25th, 2008 at 9:47 pm
Bernanke was nicknamed Helicopter Ben for a good reason: if need be, and we’ll know that in the next few months, the printing press will be turned on and working flat-out.No doubt about that ‘quantitative easing’ happening if necessary. The Fed will have no scrupules like the BoJ, they won’t wait for ten years to resort to it…
Jason B • October 25th, 2008 at 9:51 pm
I agree. Nouriel’s important “IF”:Second, the fiscal costs of bailing out financial institutions would eventually lead to inflation if the increased budget deficits associated with this bailout were to be monetized as opposed to being financed with a larger stock of public debt. As long as such deficits are financed with debt – rather than by running the printing presses – such fiscal costs will not be inflationary as taxes will have to be increased over the next few decades and/or government spending reduced to service this large increase in the stock of public debt.What if there is no demand for this debt? Then printing dollars becomes the only option.
Yves • October 25th, 2008 at 9:52 pm
“Printing press: in case of severe deflationary threat, remove the seal carefuly, break the glass andpush the ‘power’ button as log as needed…
Octavio Richetta • October 25th, 2008 at 9:53 pm
This is as qualified an opinion on the bailout juggernaut as one can possibly get:Tearing Into the Fed and Treasury PlansBy JACK WILLOUGHBYPre-eminent economist Anna Schwartz thinks the shortcomings of the U.S. bailout plan will only lead to further problems in the credit market.ANNA SCHWARTZ, CO-AUTHOR WITH Nobel Laureate Milton Friedman of the seminal A Monetary History of the United States, has worked with the National Bureau of Economic Research since 1941, and remains an adjunct professor emeritus at the Graduate Center of the City University of New York. About to turn 93, she has spent most of her professional life studying how the changes in money supply interact with inflation — both within the United States and abroad.”The chief problem is that the Treasury can responsibly provide capital only to solvent institutions, but should not recapitalize insolvent institutions. The current program offers no way of determining who is solvent and who is insolvent,” says monetary authority Anna Schwartz.When it comes to the unprecedented lending by the Federal Reserve Bank under Chairman Ben Bernanke and new and untested programs from the Treasury and its head, Henry Paulson, she doesn’t like what she sees.Her prescription: Stop managing by press release. The federal government needs to turn off the liquidity spigot and quarantine bad assets. Ad hoc program announcements have only undermined faith in the U.S. financial system, in her view, and, if continued, could raise fears that ultimately threaten the U.S. financial system. Here are more of her provocative thoughts on the current crisis….http://online.barrons.com/article/SB122489726575668975.html?mod=9_0031_b_this_weeks_magazine_main
Yves • October 25th, 2008 at 9:57 pm
“DANGER: this is a printing press. Use only in case of severe deflationary threat.1- Remove the seal carefully.2- break the glass, and 3- just push the ‘power’ button as long as needed to reflate economy”.
Paco • October 25th, 2008 at 10:03 pm
If he is part of the government he will stop having an INDEPENDANT voice.Compare to all the nonsense I have read in books with lavish praise, NR is stunningly different and fiercely independant.
kilgores • October 25th, 2008 at 10:04 pm
What countries? De-fanging the U.S. how?SWK
kilgores • October 25th, 2008 at 10:08 pm
Interesting points.SWK
g Anton • October 25th, 2008 at 10:08 pm
I have a simplistic mind, and so my view on the current subject is probably overly simplistic.If there is a financial depression and the national government responds with expensive interventions into the economy (and “prints” much more money to do so), you’ll get inflation and very likely a currency collapse.If the national government response to depression is fiscally responsable, the situation is a little more complex. For example, in Mexico today, many investors (both nationals and foreigners) are removing their investments from the country, and to do this they are converting their paper to pesos, and then their pesos to dollars (with which to buy US government bonds or whatever). Thus, even though the Mexican government has been fiscally responsible, there is currently a heavy demand for dollars, and consequently the peso/dollar exchange rate has gone from ~10 to 1 to ~14 to 1, and there is considerable inflation of prices of imported goods (the WalMart stores in Mexico are very busy raising the prices of imported shelf goods a flat twenty percent!). So even though the Mexican government has been acting responsibly and using its dollar reserves to buy pesos to support the peso, the inflation situation is not prime. But it would be a hell of a lot worse if the government were printing money like it was in the early 1990s
kilgores • October 25th, 2008 at 10:21 pm
If substantial, prolonged, and widespread disruptions in supply chains for necessities such as food were to occur, inflation would be the very least of our worries.SWK
Imelda Blahnik • October 25th, 2008 at 10:26 pm
“trying to inflict a capital levy on creditors and trying to provide a debt relief to debtors may not work as a lot of short term or variable rate debt will rapidly reprice to reflect the higher expected inflation.”Thank you, Professor (and Alessandro). I found this argument eye-opening and extremely valuable. I’ve been trying to make sense of the deflation v. inflation arguments, including the first-deflation-then-inflation one, and this part of your post succinctly explained a great deal.
Imelda Blahnik • October 25th, 2008 at 10:33 pm
“OTOH, what you are see is real time nationalization of the US financial system.”Hmmm, is that why Paulson is tacitly encouraging big banks to use Treasury’s capital injections to acquire other banks? The Great Agglomeration? Where does it end…JP Morgan Chase and Goldman Sachs locked in each other’s orbit like two giant stars, eventually collapsing into one black hole….
Imelda Blahnik • October 25th, 2008 at 10:36 pm
I would think the current meltdown in the European currency markets makes this unlikely in the near future.
Mark • October 25th, 2008 at 10:36 pm
Ryskamp, great posts!Regarding supply chains, our current, incredibly efficient chains have been brought to us by way of cheap, plentiful fossil fuels. As the availability of these fuels decrease their prices (affordability) increase, creating a downward spiral of decreasing transported goods.From the dieoff.org link above:Indeed, the ability to control energy, whether it be making wood fires or building power plants, is a prerequisite for civilization.– Isaac Asimov, 1991″K in TX,” Galbraith is saying that we can just print money and that that will make things right?Money is supposed to represent work done. Failure to understand the true meaning of work is also the failure to understand the true meaning of energy.Face it, we all here are asking ourselves whether this system, which is clearly in decay/on the ropes, is worth saving. The conversation with Galbraith has the same tone to it as did the “give us the $700 billion or you’ll die” threat. Sure, things will be in chaos, but out of the ashes we will have found ourselves to be cleansed and ready to meet reality- a truly sustainable future, one predicated on low energy use (more focused on real-time energy- i.e. solar/wind).Galbraith and other “leaders” are from the very system that has failed. They are so far intertwined that they cannot see anything outside of this system. They’ll go down swinging trying to save the un-savable! And in the process they’ll interfere with the rest of humanity’s ability to move past this system (read “save itself”).
Anonymous • October 25th, 2008 at 10:38 pm
Has anyone noticed how the number of flat-panel TVs for sale on Craigslist is rising?
Guest • October 25th, 2008 at 10:50 pm
“Money is supposed to represent work done.”Labor Theory of Value?
Guest • October 25th, 2008 at 11:04 pm
NR, It escapes me why Paulson hasnt strongly clarified that there is indeed an explicit government guarantee of GSE DEBT to close the wide gap between treasuries and agencies. If he did so along with some contractual language, it would seem that it would quickly and substantially lower government interest costs and provide a decent assist to the mortgage and housing market that is being stifled by rising mortgage rates. Buying back some MBS paper from month to month seems much less effectual than putting to rest any lingering question of explicit backing..What am I missing?
Guest • October 25th, 2008 at 11:05 pm
Requires four AA-batteries. Not recommended for children over 8 years old.PeteCA
Anonymous • October 25th, 2008 at 11:09 pm
PeterJB I love ya! Here’s big hugs XXX! But you are still a curmudgeon. It’s not a bad thing. Curmudgeons help society keep perspective regardless of how abrasive they may be and it’s not a bad crowd to bundled into: http://en.wikipedia.org/wiki/Curmudgeon and http://en.wiktionary.org/wiki/curmudgeon
Guest • October 25th, 2008 at 11:09 pm
China is holding a lot of GSE debt. It’s sepeculated that they threatened to dump US Treasuries (or at least stop buying them) if the US did not guarantee the GSE’s.PeteCA
JLC • October 25th, 2008 at 11:11 pm
Perhaps a “Recent Comments” bar could be added on the left or right of the page, maybe one that shows links to the new comments added in the past six to twelve hours.Personally, I like the current format as it was easier to follow a single thread of conversation without having to search up and down for related comments.There must be some way to implement a more user-friendly approach for those who are pressed for time.
Mark • October 25th, 2008 at 11:14 pm
A friend of mine who is in Mexico says that she has to pay to deposit money in the banks there! I don’t know whether this applies only to non-citizens (she’s there working for a short time), or for everyone, but this is pretty lame.
Guest • October 25th, 2008 at 11:24 pm
No way govt couldnt guarantee agencies imho.Foreigners would flee from all govt paper. All the more reason to formalize the explicit guarantee imho. No reason that the spread on bullet paper should exist as it is just a wasted interest expense . If Paulson formalizes the guarantee , spreads should collapse in bullets with callables also declining which should cause a further drop in long term treasury rates given the need to take off duration hedges. Just seems so obvious a move.
Shawn • October 26th, 2008 at 12:23 am
“As long – as likely – as these fiscal costs are financed with public debt rather than with a monetization of these deficits inflation will not be a problem either in the short run or over the medium run.”Public Debt… another way to pass on the problem to the future. Can anyone tell me where I can dollar cost average purchases of gold on the black market so the government can’t come and confiscate it 30 years from now? Kiss your 401(k) good bye… by the time you cash it out, it will be raped by government to help pay for your neighbor’s retirement, in addition to his cost-adjusted mortgage. Meanwhile, the wealthy elite will remain unscathed in percentage terms to their real income… after all, they decide who is elected… and believe me, they are more than happy to have the productive class (the working/small business class) paying the tab for socialism… either to bailout banks and insurance companies, or the entitlement class. The middleclass has no representation in politics.
Ali • October 26th, 2008 at 12:51 am
Dr. Roubini,I would like to thank you for sharing your precious predictions for free. I also think you should be the next Secretary of the Treasury (the sooner the better for the US and world economy).
AfA • October 26th, 2008 at 1:08 am
4-fill the ink container. 5-select the desired paper format. 6-choose the number of copies. 7-select two-sided (duplex) or one-sided printing.WARNING: May cause serious injuries to finger joints and wrists. Please read ‘Safety and Comfort Guide’ for more information.
AfA • October 26th, 2008 at 1:18 am
Thanks for doing the job, instead of us all and of me, I couldn’t have been able to sleep otherwise:)So, just a thumbs UP.
Guest • October 26th, 2008 at 1:32 am
I read the above article slowly and carefully…trying to understand each sentence although I don’t have a degree in economics….I finally got it…I was really concerned that raising money for the bank bailouts would put pressure on money supply by printing it.Thank you very much for being honest and kind for sharing your insights and saving our lives.All the readers here are deeply indebted to you.
hero • October 26th, 2008 at 1:39 am
One more note:Thank you professor for making this site free. It saved my life.hero
Roger • October 26th, 2008 at 1:40 am
Since Prof. Roubini thinks we’ll need to review Bernanke’s viewpoints on deflation, here’s a link to one of Bernanke’s key speeches on the topic:Deflation: Making Sure “It” Doesn’t Happen Here http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htmI also noticed that Mr. Roubini is saying that one of the main causes of today’s problems was Greenspan’s keeping rates too low for too long after the dotcom bust. I take that at face value. Yet Bernanke did write,
Despite the adverse shocks of the past year, our banking system remains healthy and well-regulated, and firm and household balance sheets are for the most part in good shape. Also helpful is that inflation has recently been not only low but quite stable, with one result being that inflation expectations seem well anchored….Fed should try to preserve a buffer zone for the inflation rate, that is, during normal times it should not try to push inflation down all the way to zero. Most central banks seem to understand the need for a buffer zone. For example, central banks with explicit inflation targets almost invariably set their target for inflation above zero, generally between 1 and 3 percent per year.
What I find interesting is that during Greenspan’s tenure the inflation rate was actually kept exactly within that target range. And that was despite the recent dotcom bust, 9-11, an election, and a war in Iraq. I also remember everyone constantly praising Greenspan for acting so decisively and quickly after the bust while hoping he would not raise rates with such low inflation, which most feared would cause a recession.Any opinions on this? Is Greenspan being unfairly blamed by politicians with short memories? Wasn’t Greenspan’s tenure among the most, if not the most, stable period of growth for the U.S. economy? Check out the chart link to see a comparison.http://trinifar.files.wordpress.com/2008/03/chart.png
AfA • October 26th, 2008 at 1:40 am
Not only. Any descent theory would explain that as a basic assumption. From Adam Smith (and earlier) to today’s theories would all agree that value is both intrinsic (utility) and extrinsic (need) to the product/asset. The problem comes when trying to quantify that “value” with a unstable measure (fiat money): it is like trying to guess what time is it during one’s sleep. It seems that we did put price tags on few things but forgot to what those prices do really refer. We dropped out what is measured; the subjects, the items, the x’s and y’s and only left the measures; the naked and absolute numbers, the objects:We transformed 2x+4y into 2+4 and our flawed math gave us 6.
IT MANAGER • October 26th, 2008 at 1:43 am
Dear “Blogsters”, Mr Roubini,Hi again. This is Shipyard IT Manager form Turkey.Regarding the paragraph below:Second, the fiscal costs of bailing out financial institutions would eventually lead to inflation if the increased budget deficits associated with this bailout were to be monetized as opposed to being financed with a larger stock of public debt. As long as such deficits are financed with debt – rather than by running the printing presses – such fiscal costs will not be inflationary as taxes will have to be increased over the next few decades and/or government spending reduced to service this large increase in the stock of public debt.As the bad debt transfers to the governments all around the world (this is mostly bad us debt, mortgages, commercial papers, LBOs etc), I beleive, eventually there will come the time for the final assessment. That will show that, no tax increase (in fact how the us government will be able to increase taxes in a hard recession is another question) will line up the us balance sheet.So, I still beleive the US will have to monetize the debt soon, just as described at europe2020.org…Just another note for those of you who think that gold is the best investment or store of value for the coming times:I see that gold bullions are sold at %50-%100 premium on ebay. Here in Istanbul, I am able to buy as much gold as I want (in forms of 24k bullions of 1,5,20,50,100 grams) for a small premiums like 20%-30%.If any of the fellow bloggers want to buy physical gold, I can buy and send over to them.Contact me at gold @ adafon.net, and we can discuss the mechanics, if you want.Regards to all…
GSM • October 26th, 2008 at 3:35 am
Whether it is “right” or not , Obama and the Dem Congress will most definately open up the expenditure spigots in order to spend their weay out of this recession. There is absolutley no doubt about this. And as unemplyment dramatically rises, look for Obama to find ways to severely ramp up Federal and Fed sponsored spending in the US. Above all things, Obama wants ONE thing- a 2nd term. So, spending and spending BIG will be front and centre on the agenda.Inflation/Stagflation/Deflation/Stagdeflation- do NOT sweat this.The USD will decide apon which path the price environment will take. Right now its panic driving liquidations and therefore the USD as transactions default to the USD prior to being distributed/repatriated etc. But, this will exhaust itself. USD fundamentals will re assert themselves.And those fundamentals are hopeless.Commodities have been hammered. But I expect that with the huge capital expenditure projects of the Obama presidency, commodity demand will return in the US.
zebla • October 26th, 2008 at 3:43 am
Who will buy the Tbonds in a few months?petro-monarchies certainly not: oil too cheap and huge local investments programs will drastically reduce their surpluschina also will be confronted with falling exports as european and american consumers have to reduce their consumptionhow to avoid increase of interest rates?
hero • October 26th, 2008 at 3:46 am
How high will the USD index go? Any ideas?I can’t stop scratching my head….90? 100? 110?hero
Capone • October 26th, 2008 at 3:46 am
AGREE 100%. i am old school prefer reading from top to bottom and not go back…
Guest • October 26th, 2008 at 4:14 am
The snakes name is Oroborous
Roga • October 26th, 2008 at 4:19 am
how about a button at the top that lets you switch between the two views? Time order or Comment Reply order and association?
jomos • October 26th, 2008 at 4:19 am
I wouldn’t chase the dollar higher.
Guest • October 26th, 2008 at 4:26 am
“Fourth, inflation can reduce the real value of debts as long as it is unexpected and as long as debt is in the form of long-term nominal fixed rate liabilities”Then how will you ever get out of this mess?It is very unlikely that the current debtmountain in the advanced economies is going to be paid back by taxes or by people paying back loans. real debt bankrupcy or inflation are the only options as I see it.As for me I think we will have a world wide currencycrisis that will bring inflation and interestrates to high and intolerable levels
Guest • October 26th, 2008 at 4:58 am
There is only one thing that Russia, Iran and Venezuela could do to change the course of history: peg oil to gold. Say they collectively demand their oil exports be paid in gold, about one tenth ounce gold for one barrel of oil, they will soon enough to turn this game around. Those oil importing countries will be forced to dump their dollar reserve and buy gold thereby raising both gold and oil prices in terms of US dollar. This is a currency war launched by the US, and only gold can help its rivals win. In doing so, these three countries and other oil exporting countries will be winners, and the US and its dollar will be the biggest loser, along with those who have their most reserve in the worthless paper – US dollar.
Guest • October 26th, 2008 at 5:02 am
this is also the only way to stop the US from exploiting the world by holding the printing rights of a de facto world currency. be gone with it is the American empire.Dear professor, i have enjoyed your analysis in the last two years; and this gold-oil peg could be the blind spot ignored by many, including Russia, Venezuela and Iran themselves.
K. Ackermann • October 26th, 2008 at 5:08 am
I think we will see the rate of decrease fall for oil, but it will still deflate with the economy.If it doesn’t… if we saw oil prices intentionally rise because of supply, then the only response allowed would be a sharp military response. They all know this; you can’t mess with a country in a recession. You will not get any more money from them, and you will only cause undue hardship.They will try and stabilize prices, and then let it drift down as our economy does.Nouriel is being kind by not saying it, but the forces at work indicate a multi-year recession, with an ‘L’ at the end so far.
Octavio Richetta • October 26th, 2008 at 5:29 am
The party goes on…Companies start competing for bailout money- APThe bailout is now the hottest lobbying game in town. Insurers, automakers and American subsidiaries of foreign banks all want the Treasury Department to cut them a piece of the largest government rescue in U.S. history.http://biz.yahoo.com/ap/081026/bailout_bonanza.htmlThis is what happens when you do things cowboy style. Read the Anna Shwartz article in this weeks Barrons. Link Above. The lack of clarity/strategy apparently make the Treasury/Fed actions increase uncertainty instead of lowering it.Could it be that crazy Hank and Benny are actually making it worse than the “do nothing” alternative?
Guest • October 26th, 2008 at 6:57 am
Thanks very much for posting the link to the Bernanke deflation comments from 2002 –In the final paragraph of Roubini’s argument he concludes that:”
…central banks will not be willing to incur the high costs of very high inflation as a way to reduce the real value of debt burdens…The costs of rising expected and actual inflation will be much higher than the benefits of using the inflation/seignorage tax to pay for the fiscal costs of cleaning up the mess that…
“Is one to infer that deflation is therefore the lesser of two evils?If so then what do we then make of Bernanke’s concluding comments?”
Sustained deflation can be highly destructive to a modern economy and should be strongly resisted. Fortunately, for the foreseeable future, the chances of a serious deflation in the United States appear remote indeed, in large part because of our economy’s underlying strengths but also because of the determination of the Federal Reserve and other U.S. policymakers to act preemptively against deflationary pressures.
“
Guest • October 26th, 2008 at 7:10 am
Exactly right. Policy will be formed only with a view to the 2012 election – now whether or not they get it right, that’s a different question. Will Krugman emerge as a key figure in the administration? Will Corzine replace Paulson?
Guest • October 26th, 2008 at 7:34 am
No. Low inflation is preferable to high inflation, which is preferable (at all costs) to deflation.
Guest • October 26th, 2008 at 7:40 am
And I recalled reading this gem from non other than Bill Gross back in 2002 where he argued (in a different yet similar set of circumstances) that defaltion would be defeated.
After all, think of the obvious – how does a government ease its way out of a debt crisis? By eroding the real value of debt with a bit of unanticipated inflation; by cheapening its currency; by bolstering nominal corporate profits; by levering up the public sector (federal deficits) and in so doing delevering the relative debt of the private sector. Bingo.The fact is that every G3 central bank – and there are only three – has seen the specter of Japanese 1990’s style deflation, and will make all efforts to avoid a replay. The invigorated monetary ease of the Japanese over the past year or so is evidence of that; as is the stabilization of their property market deflation in Tokyo as shown in the following chart.
Bill Gross on Deflation circa 2002At that time China was the driver of defaltion according to Gross and the ramp up to Iraq among other things the reflationary counterbalance.
Guest • October 26th, 2008 at 7:44 am
Correct me if I am wrong but Roubini’s argument seems to rest on a decision by “central banks” to avoid “very high inflation” at all costs even the cost of defaltion. That’s what I am having difficulty reconciling.
Guest • October 26th, 2008 at 7:47 am
Whether the government forgives debt in the form of mortgage relief or not doesn’t matter because it will happen through jingle mail and bankruptcies anyway. Then the liquidity provided by gov. to save the banks will start being loaned out because have we forgotten that bankers make thier living loaning out money, either they loan or die. Deflation will not last, and you think Barak Obama’s going to set up walls?
Guest • October 26th, 2008 at 8:07 am
Watch how quickly WW3 is started by central bankers if countries try to undermine the Wests fiat currencies.
the economic fractalist • October 26th, 2008 at 8:30 am
The Science of Nonstochastic Saturation MacroeconomicsAs of 26 October 08, for the Nikkei, FTSE, DAX, and Wlshire: an exact replica of the daily decay fractal sequence that occurred in 1929 is now occurring; the sequence starts in the final lower high saturation area for all indices after an initiating fractal sequence of three days vice four days in 1929: 11/26/11 of 27 days as of 26 October 08. For the third 27 day decay fractal in 1929 a 40 percent valuation drop occurred for the DJIA. The 2008 devaluation representing multiple synchronized second fractal endings including the 150 year second fractal nonlinear decay area will likely much more severe.
Guest • October 26th, 2008 at 8:39 am
Also, in the book ‘animal farm’ it wasn’t the bulls or bears in charge, but the pigs!!!
eugene fisk • October 26th, 2008 at 8:47 am
At the macro level, whatever happens sure will be interesting. In the US, massive government deficits, job loss, etc. Across the rural midwest, many people are already stretched to the breaking point, living on borrowed money. Heaven help the midwest if this one’s worse than 1979-1982, that was a killer.At a micro level, just 10 cars in the parking lot of a Home Depot at 11 AM on a Saturday morning tells me all I need to know. “This suckers going down”.
Guest • October 26th, 2008 at 8:56 am
If Russia, Venezuela and Iran don’t do anything, they will be pretty much weakened or even overthrown by the ongoing currency war anyway, so at least they have a chance if they peg oil trade to gold.Plus Russia is not a smaller nuclear power than the US, the balance of terror for guaranteed mutual destruction is still there. nothing to fear!
Guest • October 26th, 2008 at 9:07 am
I appreciate anecdotal evidence, as Krugman says “the plural of anecdote is data”. I would think that the building supply retailers such as home depot would be on the leading edge of a decline in consumer activity.From my own observations it would appear that since Ben and Hank came on stage a few weeks ago to warn of the “end times” that the consumer has become paralysed. I suspect the data for October will be well below the so called analysts expectations -
Guest • October 26th, 2008 at 9:09 am
translated to mean that sometime in the next 5 days the equity markets will … ?
Guest • October 26th, 2008 at 9:14 am
The inventory in process for the energy(petroleum) supply chain in the US is about 3-5 days…high disruption potential.PKB
Anonymous • October 26th, 2008 at 9:20 am
Three problems remain. 1. What madman will sell insurance for long term nominal fixed rate liabilities? 2. What will happen to the shorter term borrowers after their debt is suddenly repriced in view of the coming hyperinflation? 3. Who will buy the U.S. fiscal deficit in the form of debt?
Guest • October 26th, 2008 at 9:26 am
Or atleast the U.S. would invade Iran or Venezuela, Russia by itself would not succeed.
Guest • October 26th, 2008 at 9:30 am
Buy physical gold from a local dealer and pay in cash. There is no paper trail.
Anonymous • October 26th, 2008 at 9:34 am
Please bear with my thought experiment! If I were to try to create propietary trading program models, I would program them with a survival bias. The world market trading system is digital and the large players have dark pool programs for trading. If I am one of these large players, I would program trading assumptions that favor neoliberal market solutions and that punish any others. That means that if all large players had corrolated assumptions of country risk and political risk that favored neoliberal solutions, this would be tantamount to a digital override of the market. If you rig the market through internal tradingassumptions, you would create trading that would favorthe dollar, since Treasury would always take the mostmarket driven solutions to problems and no other currency has a signoirage privilege.We are always wondering why the dollar holds up! Thedollar hegemony in conjunction with rigged trading based on computer model assumptions that punish non-neoliberal solutions would do the trick!I am intuitively convinced that the trading system islike HAL, and there is a de facto trading world controlthrough securities trade. The chinese market began totank way before any other! Why? The emerging markets are tanking through seemingly correlated capital flight? Why.Maybe this is the reason the Professor is not worried about inflation and its logical effect on the dollar!Something aberrant is happening here! Whenever I see that! I follow the software assumptions and the neoliberal bias! A good programmer would always havea survival bias!
Guest • October 26th, 2008 at 9:35 am
A interesting article posted by Yves Smith (Nakedcapitalism.com) Oct. 26Currency crisis is gathering storm
“…Now the meltdown may resume Monday, but another scenario may play out. Recall 40 nations (EU and Asian) met in Beijing over the weekend, endorsing Nicolas Sarkozy’s call for a revamping of international banking regulations and more coordinated, tougher supervision. None of this directly addresses the looming currency crisis, but the markets sold off badly Friday, and if there is any stabilization or reversion on Monday, the backing away from the abyss plus the hope that the next phase of meetings, scheduled for November 15 in Washington DC, might ameliorate the situation, may put the currency crisis in abeyance for a couple of weeks…”
Jimbojim • October 26th, 2008 at 9:37 am
You are quite correct. Listening to http://www.financialsense.com Sat’s radio broadcast I learned that the Commercials have taken a huge short position on the US$-and these guys are not often wrong.
Guest • October 26th, 2008 at 9:41 am
The question is how much deflation? It’s one thing to have stocks plummet 50% and homes plummet and also commodities but that can easily be traced too failing hedge funds too much leverage speculation but for jobs to deleverage that much would be way too much for the gov. to stand idle. Plus the leverage was all aimed at asset appreciation not job and wage inflation therefore I suspect jobs and wages have way less to fall than investors building up assets. I don’t think food prices will drop that much and employment won’t be allowed to drop 20% or more. Real demand will not go down as much as people think and inflation will roar back except next time backed by real demand and wage inflation. People who think inflation is not comming tend to believe the economy works entirely off of credit. Credit deflation happens almost instantly as we have all wittnessed but real deflation I doubt is going to happen nearly to the degree and as quickly, real deflation as in jobs/food cost/home heating/cable bill etc. Can you guys really see the cable company cutting your bill 50% haha!
Guest • October 26th, 2008 at 9:47 am
Professor,you conclude your writing: “As long – as likely – as these fiscal costs are financed with public debt rather than with a monetization of these deficits inflation will not be a problem either in the short run or over the medium run.”Who is going to buy the huge amounts of public debt that will be issued by the U.S.? I don’t see too many volunteers right now.
Alessandro - http://castellidicarte.blogspot.com/ • October 26th, 2008 at 9:56 am
But… which foreign currency/economy/government will investors find more reassuring?Europe? China? Japan?This has been tried in late 2007, beginning 2008 and didn’t work out too well. I guess it will not be tried again for some time.
Guest • October 26th, 2008 at 10:01 am
Poor, blind Humanity dinned even understunned the quiztunes.What is the only currency anyone living in a human body really has to spend?First player to answer correctly gets a cookie…
Guest • October 26th, 2008 at 10:18 am
that makes sense -
kilgores • October 26th, 2008 at 10:27 am
You read my mind.SWK
Guest • October 26th, 2008 at 10:36 am
Some of the gold dealers still have gold. Silver is very hard to get. Check orders from the Perth Mint in Australia. If you go local in the USA, you can get bullion if you’re prepared to bid well above the current gold price on http://www.kitco.com
Guest • October 26th, 2008 at 10:38 am
Yeah, Russia will sit there and do nothing when Venezuela or Iran is invaded by its primary strategic rival, the US. Does Putin look like that kind of nice guy? I guess the nuclear bombers and cruisers go to Venezuela for nothing but a fashion show.
Guest • October 26th, 2008 at 10:43 am
Last comment was very good advice. US Dollar has been going through a parabolic rise. Not a good sign.PeteCA
Guest • October 26th, 2008 at 10:44 am
America starting another war with Russia, Ven, Iran? With what army? We are doing so well in Iraq and Afghanistan. Our military is decimated, and we are broke! Besides, China would cut us off at the knees. The professor assumes the Bernacke doctrine of avoiding deflation at all costs is dead. I wonder. Also, anyone know what’s happening with M3 lately? Lower oil prices and decreasing US imports mean fewer dollars sloshing around to buy treasuries. Does this not mean higher yields,in the not too distant future?
Mark • October 26th, 2008 at 10:44 am
And George Bush said before he was elected in 2000 that he wasn’t into nation building; also said that he was FOR smaller government, yet here were are!Bernanke et al cannot tip their hand, as doing so will defeat any attempts to (try to) correct things: leaving aside the idiotic things he’s done so far.Think of it this way: the boat is listing heavily. By pointing out that people need to move to the other side you’ll get a stampede which just sends the boat listing to the other side! What’s wanted is to slowly (orderly) get people easing on over to the other side; the problem, of course, in our economic case, is that these early migrants are the ones who will reap the biggest reward (this is where the “everyone’s on the same ship analogy breaks down).
Guest • October 26th, 2008 at 10:45 am
Even the US starts a war against Iran or Venezuela, guess where oil or gold prices will go? the US dollar will lose either way. the Russians don’t have to declare war but provide weapons to the invaded. Americans have not finished Iraq or Afganistan yet, a double nightmare!
Guest • October 26th, 2008 at 10:47 am
How hard is it for the Iranians to provoke a new incident in the Persian Gulf? That’s what they usually do when they want to drive the price of oil higher.PeteCA
Anonymous • October 26th, 2008 at 10:51 am
I’m starting to see some local stores in LA close up shop now. So far it’s mostly the folks that are doing specialty retail. But the Mervyns chain went bankrupt just a week or tow ago. One good thing you’ve got about the midWest – you’ve still got fresh food out there.PeteCA
Guest • October 26th, 2008 at 10:56 am
It’s interesting that the countries who are looking for a solution to the global economic problems are meeting in Beijing these days. George Bush is having his own emergency meeting in Washington on Nov 15′th. I wonder how many countries will attend that?PeteCA
Guest • October 26th, 2008 at 10:57 am
Iran like any other oil exporter have every right to demand payment in gold instead of dollar, euro or yen, and it can actually raise oil prices in terms of these fiat money without militarily provoking any state. If it starts some incident in the gulf, it will look like a bad boy and get blocked from exporting oil, which is not in its best interest. If the US invades Iran on basis of its demand for gold payment, well, Iran will not be the bad boy at all but the Americans will.
WiseGuy • October 26th, 2008 at 11:01 am
Sounds complicated! I guess it must be right! Seriously, though, is that model based on something other than matching the pattern of past index movements? I could probably make a bunch of spurious correlations myself without actually producing a reliable forecast model for the future.
andrew hart • October 26th, 2008 at 11:03 am
Hi,can you predict eur/jpy , eur/dollar and sterling/jpy and gold movement over the next week month and year and will deflation affect them or will they follow previous patterns. If so should there be a pattern from previous recessions that i should follow to give me guidance? My concern is that this is a depression and not a recession and feel there will be more extremities on this four areas.
Mark • October 26th, 2008 at 11:10 am
I’m hungry- “goodwill?”
Guest • October 26th, 2008 at 11:22 am
I agree. Investors take a best guess, but the reality is the world is so uncertain that you cannot place too much emphasis on anyone’s arguments. Time and again, so called experts have been proven horribly wrong. Now more than ever, with events moving at such a rapid pace, it is time to step aside and let things work themselves out without betting the farm on any one outcome. When things slow down again, it might be time to dip the toes in. “Fooled by Randomness” is the perfect book that shows how people can be made to look good by getting their investments right for a short period of time before they have their heads handed to them thanks to the randomness of the markets.
Guest • October 26th, 2008 at 11:24 am
U get half a cookie for very nice try, but, alas, no, that is not the correct answer. Try again? The question goes to the very heart/core of economics…
Guest • October 26th, 2008 at 11:26 am
Do you think Krugman has been affected by his recent award?October 26, 2008, 10:37 amThe mother of all currency crisesI invented currency crises. No, really — not the thing itself, of course, but I did publish the first paper in the modern academic literature on the subject, back in 1979. And as I like to say, business has been good ever since.But I never anticipated anything like what’s happening now….http://krugman.blogs.nytimes.com/
JohnRyskamp • October 26th, 2008 at 11:37 am
It doesn’t sound like anyone is reading anyone’s mind, because it doesn’t appear anyone HAS a a mind. Business bankruptcies always implicate distribution because deliveries can’t be made, and new contracts can’t be given out, until the business is taken over.Don’t forget the reason financial institutions are being bailed out: so the money keeps coming through the ATMs. The Federal Government controls these institutions anyway. Its only interest is in making sure life goes on for people.Until it loses control, that is, or decides that it has done all it can do given its own need to survive.In which case, it doesn’t survive or does, depending on the level of unemployment.What I am saying is that, in a destabilized situation, watch out. That is an inherently unpredictable situation, and therefore necessarily implicates supply, the essence of which is predictability.I think the government/power structure commitment to facts on the ground is loosening every hour. All these guys at the top ever think of is, “Will I be overthrown?” They’re all looking over their shoulders.But that’s a very good way of getting overthrown. No one is concentrating on all the facts on the ground, no one is concentrating on the on-the-ground economy. So look for the supply chain to begin deteriorating.Remember how the Bolsheviks obtained power: they picked it up out of the gutter, where it had been thrown.
Guest • October 26th, 2008 at 11:39 am
No-one, as far as I can figure. It would require countries to start buying two or three times the amount of UST’s that they were buying by historical measures. The data don’t support that. Total purchases of UST’s leveled off (more or less) a year or two ago. Purchases are not following the same old trend (upwards). Even if interest rates go appreciably higher, it’s not clear that rates of UST sales will respond quickly.That’s what the meeting in Beijing is all about. A new system for intl currencies. The same old game of the US financing its borrowing habits through sales of bonds could be over soon.PeteCA
JohnRyskamp • October 26th, 2008 at 11:56 am
You may be seeing the Federal Government’s endgame in connection with Citadel. If you put yourself as the government in the middle of what Citadel is experiencing, you cannot escape the conclusion that the only possible intervention is to take control of all the facts. There isn’t any political mandate for that. Suburbia hasn’t been primed for that in any way whatsoever. So either way the implications for the facts on the ground are horrendous. I think they will back away. Look at what various interventions are doing to the percentage of intervention vs. GDP. You are looking at an increase in percentage so huge, and in such a brief period of time, that you reach the BINGO point: this government is not sustainable. With all the concern over debt, I don’t understand why people don’t talk more about the point at which the Federal Government will cease to be sustainable, the point at which its “writ will cease to run.” All the figures at the top have turned into cardboard.What further information does anyone out there have on Citadel?Fed questions counterparties about Citadel: reportSun Oct 26, 2008 12:18pm EDT Email | Print | Share| Reprints | Single Page | Recommend (0) [-] Text [+]1 of 1Full SizeMarket NewsUgly October can’t end soon enoughFed to cut as markets implodeCrisis hammers stocks, roils currencies | VideoMore Business & Investing News… Featured Broker sponsored linkTrading will never be the same.CHICAGO (Reuters) – Examiners with the Federal Reserve have questioned Wall Street counterparties about their exposure to debt and other holdings of Citadel Investment Group, The Wall Street Journal said on Saturday.Citing people familiar with the matter, the Journal said the Fed questioned the counterparties in at least two instances in recent days.Katie Spring, a spokeswoman for Citadel, said Citadel continues to have more than 30 percent of its investment capital in cash.The Journal’s report came a day after Citadel, one of the world’s largest hedge funds, said it had more than $10 billion in available credit. The Chicago-based fund company, which manages $18 billion, held a conference call to quell rumors it was facing liquidity issues.The fund firm, founded by Kenneth Griffin 18 years ago, denied on Friday market talk that it had approached the U.S. Treasury for a cash injection and that the Federal Reserve was coming to inspect its accounts.The rumors had surfaced in the wake of news that Citadel’s two main funds had lost 35 percent since January, traders and hedge fund investors said on Friday.The Fed has been speaking with dozens of prominent hedge funds and their counterparties in the past weeks to monitor trading and liquidity issues as the financial crisis deepened, industry sources have said.The average hedge fund has lost roughly 19 percent since January, the $1.7 trillion industry’s worst-ever performance, according to data from Hedge Fund Research.(Reporting by Kyle Peterson and Svea Herbst-Bayliss; Editing by Peter Cooney and Philip Barbara)
kilgores • October 26th, 2008 at 12:01 pm
“The ‘first generation’ of models of currency crises starts with the paper of Krugman (1979).”See, Paul Krugman (1979), ‘A model of balance-of-payments crises’. Journal of Money, Credit, and Banking 11, pp. 311-25.-http://en.wikipedia.org/wiki/Currency_crisisSWK
kilgores • October 26th, 2008 at 12:02 pm
Please see my comment erroneously entered two posts below.SWK
Ahkeem • October 26th, 2008 at 12:03 pm
For those interested a different, perhaps even contrary anaylsis, is provided by Krassimir Petrov at the following URL.http://www.financialsense.com/editorials/petrov/2008/1024.html.Dr Petrov argues that a traditional stagflationary recession is coming. Though he cedes current movements in oil, USD and gold prices run counter to his hypothesis – he suggests that these represent intermediate corrections and that such short term trend changes need to be viewed with caution.
Guest • October 26th, 2008 at 12:12 pm
No one on a blog about economics can answer most basic question in economics? Very strange. Very revealing of what is wrong in world. I thought question would be too easy for all here to answer…thought answer too obvious!
subgenius • October 26th, 2008 at 12:40 pm
Life = time
JLC • October 26th, 2008 at 12:50 pm
Any bets on when we reach the zero bound?
Guest • October 26th, 2008 at 12:51 pm
Only one comment, but the one that is fatal to Roubini’s deflation argument. The sheer size of the public debt makes it impossible to pay it off with printing presses shut down.
JLC • October 26th, 2008 at 12:53 pm
Ditto
Guest • October 26th, 2008 at 12:55 pm
Yes I hate to say it but I do not trust Wall Street candidate Barack Obama.
Guest • October 26th, 2008 at 12:59 pm
I don’t mind the government levering up. What I do resent are their attempts to stop consumers from delevering.
Guest • October 26th, 2008 at 1:00 pm
TIME! Correct! Cookie for you, subgenius – TIME is the only currency any human really has to spend.Next fundamental/essential economics question:Since all have limited time to spend, why don’t humans spend all their time doing things that are not work, are better fun than work? (Like making love to lovers or pushing child in swing to hear them laugh?)Why do anything but have leisure and pleasure time while in human body?
AfA • October 26th, 2008 at 1:05 pm
Delete any occurrence of the word “fractal” and all will be much clearer.
Guest • October 26th, 2008 at 1:11 pm
Also this e-book of Krugman’s 2000 publication Currency Crises (free access)
Guest • October 26th, 2008 at 1:14 pm
Now a question for you: What is the definition of time?
Alessandro - http://castellidicarte.blogspot.com/ • October 26th, 2008 at 1:15 pm
The US would still be able to pay its debt via asset sales (fire-sales at the moment). There’s a post by Nouriel about that being one of the options.For political reasons a straight debt default could be considered more appropriate, and I’d bet it’s one of the more probable outcome.Due to the short term duration/rate-adjustment of most of the US debt, monetization translates into hyper-inflation that in turns translate into nuking the financial system to ashes. I’d not consider that a zero probability outcome only due to demonstrated terminal idiocy of most politicos and bankers.
aleister perdurabo • October 26th, 2008 at 1:18 pm
What can’t be paid back, won’t be paid back.
the economic fractalist • October 26th, 2008 at 1:18 pm
The Science of Nonstochastic Saturation Macroeconomics*This ongoing nonlinear equity phase transition was predicted in 2005Google: blog of gary lammert*The exact interday high: 11 October 2007 for the world proxy composite equity index: the formerly valued 15 trillion dollar Wilshire, was exactly predicted* The rise in the US dollar Index was predicted* The fall of commodities was predicted* The fall of US dollar denominated gold was predicted* An attempt is now being made to predict the exact day for the composite equity primary low and identify the decay fractal sequenceThis is a validation attempt of new quantitative macroeconomic science.As of 26 October 08, for the Nikkei, FTSE, DAX, and Wlshire: an exact replica of the daily decay fractal sequence that occurred in 1929 is now occurring; the sequence starts in the final lower high saturation area for all indices after an initiating fractal sequence of three days vice four days in 1929: 11/26/11 of 27 days as of 26 October 08. For the third 27 day decay fractal in 1929 a 40 percent valuation drop occurred for the DJIA. The 2008 devaluation representing multiple synchronized second fractal endings including the 150 year second fractal nonlinear decay area will likely much more severe.
AfA • October 26th, 2008 at 1:22 pm
A not-so-fatal detail in your argument is that the objective is not to pay off debt but to sell it. But I think you are right. That is what I tried to mean when I said “The only problem is the size of the debt. It is as if trying to dissolve one kilogram of sugar in a cup of water; boiling water makes it absorbs a little bit more sugar, but at some point, all added sugar will just deposit and sink at the bottom of the cup.”
Guest • October 26th, 2008 at 1:26 pm
The medium is the message here: Chair’s Statementof the Seventh Asia-Europe MeetingBeijing, 24-25 October 2008
“1. The Seventh Asia-Europe Meeting (ASEM 7) was held in Beijing on 24 and 25 October 2008. The Summit was attended by the Heads of State and Government ofsixteen Asian and twenty-seven European nations, the President of the EuropeanCommission and the Secretary-General of ASEAN Secretariat. The President of thePeople’s Republic of China, H.E. Hu Jintao addressed the opening ceremony. ThePremier of the People’s Republic of China, H.E. Wen Jiabao chaired the meeting…”
Guest • October 26th, 2008 at 1:28 pm
the ASEM7 websitehttp://www.asem7.cn/
Jason B • October 26th, 2008 at 1:34 pm
to meet the needs of life – working for food, shelter. Also to work to find a mate, align oneself with others for security and utility.
Madame Guillotine • October 26th, 2008 at 1:35 pm
Time is finite and, therefore, a precious commodity. The joys you illustrate—making love, playing with your children—are gifts which are afforded and protected by an equal opposite of labor. That’s the deal. We either take it or leave it.
AfA • October 26th, 2008 at 1:36 pm
Time alone would not be sufficient as to be taken as the only currency. It’s quality changes from one person to another.”Why do anything but have leisure and pleasure time while in human body?”Because the more you do it, the less you have it or the less you enjoy it. As I said time is necessary but not sufficient condition as a currency, it is true also for leisure. Pleasure requires other things than just spare time. And many of these things are affordable through work (less leisure). So if you want to have more fun, you have to work more/harder. Since both leisure and work are based on the same finite variable (time) this becomes an optimization problem/function.OTOH, leisure, just like any other utility function is governed by the law of diminishing marginal utility; beyond some point, the more pleasure you have, the less you enjoy it (you get bored).You can see that in both cases, leisure can be plotted as a bell-shaped graph: / ; where x=time for leisure and y=quality of leisure.That’s all I can come up with in 5 minutes.
subgenius • October 26th, 2008 at 1:47 pm
That is a fundamental question in physics, and there is no current consensus – it depends on if you go with Mandelbrot, Einstein, Newton/Lagrange, Leibniz/Kant, or many others.If you follow the reasoning of Gödel, any self-consistent recursive axiomatic system has to contain a priori assertions that cannot be proved/understood within the system in question. Gödel himself applied this reasoning primarily to mathematics, but others have expanded it’s application throughout physics. Basically the upshot is that our intellect, embodied in our bodies, embodied in our universe prevents us from ever being able to fundamentally understand any of these systems.
Skarface • October 26th, 2008 at 1:51 pm
In this country, you gotta make the money first. Then when you get the money, you get the power. Then when you get the power, then you get the women.
AfA • October 26th, 2008 at 1:55 pm
Today’s buzz word “Please, bail me out!”It has replaced supply/demand and lend/invest. How feasible would it be to have a “Bail Out Exchange” where bailout programs are auctioned and trade? We can even have a primary and secondary market; Investment banks .. err Bailout banks would underwrite bailout plans and sell shares in the secondary market where institutional and individual vestors (contrary of investors) would auction for the bailouts; the auctions would go to the one who sheds more tears; performs the best strip-tease (of assets) … or anything along these lines.Today’s hot programs are the Treasury’s TARP and the IMF’s bailout program; Ukraine has just been approved a $16.5B line, after Iceland has been bailed out. Next are Hungary and Pakistan.Ok, that was not a word. Please-bail-me-out is a word.
subgenius • October 26th, 2008 at 1:56 pm
I should add: this is where mysticism comes in – there is potentially a way to connect to the universe at a more subtle level, and while it doesn’t bring what is generally understood as understanding in the scientific sense it does appear to bring a wisdom unavailable to scientific endeavour.The relationship to time of masters of Taoism, Buddhism and other such philosophies/practices appears to be markedly different to that experienced by the rest of us.
Guest • October 26th, 2008 at 2:01 pm
Most of the deflation happening is a result of asset appreciation that is excessive credit directly aimed at asset appreciation, or a bunch of billionaires bidding up the price of some painting an calling that an economy. Wage and job deflation has been happening for the past 20 years how much more deflation can the real economy sustain? The next credit bubble will be in wage inflation the central banks will resort to that out of desperation to revamp a broken finance system ie. “The new deal/Barak Obama”. The new inflation that will soon be here at our doorsteps will be of the real variety socialistic job creation etc. which is already upon us. Most people who are doing well financially and have stable jobs either work for the gov. directly or indirectly ie. Medicare. You’re either subsidized by the government right now or you struggle and this will be the new inflation unless teachers/professors policeman judges, nurses, gov contract workers all give up thier jobs voluntarily. Socialism is the only answer going forward as Marx predicted and through that inflation will roar. Your government paycheck will afford you less and less in the future.
Guest • October 26th, 2008 at 2:03 pm
Even without a failing economy socialism is enevitable because of technology replacing workers. All these people deliriously hanging on to capitalism do so in futility.
Guest • October 26th, 2008 at 2:09 pm
It’s astonishing how much companies like Google and Microsoft profit vs. the payrolls and amount of employees needed. Farmers nolonger need workers, factories barely need them so where will all these people work?
Guest • October 26th, 2008 at 2:11 pm
4 legs good. 2 legs baaaaadd.
devils advocate • October 26th, 2008 at 2:14 pm
Nouriel is “bearish” on the dollar -so I have to ask why?the dollar/T-bill has become the safe haven!USA is blamed for causing havoc with the world economy/financial system(forget that plenty of willing victims were like the no-income people buying homes/they knew)MORE US DEBT/MORE US DOLLARS WORLDWIDE = MORE SUPPLY = lower interest ratesYES! WE ARE INVINCIBLEas the Mets used to say: “ya gotta buh-lieve!”but still…I believe it’s only a matter of years before the dollar slides way downdue to lack fresh factories in USA and too much US debteven if Obama perks up the green industry, it won’t be enough
Guest • October 26th, 2008 at 2:19 pm
Pete–We’ve got plenty of fresh food out here. Just just check out your local farmers market (where I just stopped by and picked up fresh strawberries, tomatos, peppers, broccholi, lettuce, artichokes, avocados, sapotes etc.) or your own or neighbor’s backyard. And what’s more we get it fresh year round!Califoria Gardener
Guest • October 26th, 2008 at 2:21 pm
Secretary of BailoutNearly every country need one.
Anthony D'Amato • October 26th, 2008 at 2:23 pm
Scrolling up and down can be avoided by having a link to the comment you’re responding to.We do need a return to the linear format as it reflects the most important factor, namely, the arrow of time.
Guest • October 26th, 2008 at 2:26 pm
They are needless.Maybe another flu pandemie can solve the problem.
Guest • October 26th, 2008 at 2:28 pm
Unemployment become a profession.Maybe with a degree.
Guest • October 26th, 2008 at 2:29 pm
So you got a few numbers right, in hindsight. How many predictions were wrong?Now that you told us what has happened, tell us what will happen and exactly when at what levels.Then, I’ll be impressed.
Guest • October 26th, 2008 at 2:32 pm
But then you could be an unemployd unemployed.
Guest-o-Rama • October 26th, 2008 at 2:45 pm
Apparently the good professor has only had 4 hours sleep a night during this crisis. Maybe the feedback could be sent to the webmaster for RGE instead of Dr. R. He doesn’t need more things to do at this time!
Anonymous • October 26th, 2008 at 2:52 pm
>It doesn’t sound like anyone is reading anyone’s mind, because it doesn’t appear anyone HAS a a mind.What’s your point, Mr. Ryskamp? That you’re the only one here bright enough to understand what you have to say?You seem to waste a lot of verbiage spewing high-falootin’ pseudo-wisdom, the only point of which seems to be to bring attention to yourself and your wacky views. Didn’t you get enough suckling when you were a baby?
Roger • October 26th, 2008 at 2:56 pm
Just what I feared most is happening. Can it get any worse?Financial crisis: Beer sales in decline
Guest • October 26th, 2008 at 2:58 pm
Jason B gets cookie! Human must sacrifice pleasure-time to time doing work, because human have stomach requires to be fed or else human body dies. Plus human body need shelter from elements or body dies. Also body dies without sleep, without clean water, without treatment for disease if catch disease. Africa’s childrens die most from have no clean cup of water and bad or no sanitation.So we see that insertion of money between work and eat/survive does not change the fundamental situation, yes?Madame G also right when saying we have no choice but to do work, since we have stomachs and etcetera needs (including we need birthright land to live and work on because human body cannot float in air), but she suggest rewards are equal to work done. This not so in our economics. Each year 50 million working people are work long, long hours but continued to suffer death from not get enough pay to buy necessaries to live, so rewards cannot be being gived in proportion to time sacrificed to working being done. All people are working to feed their stomach (and their offspring’ stomachs). All the work done by people sacrifice of time equals all wealth created. The wealth is all the goods and services brought forth by mankind sacrifice time to work. So we see rewards earned are being stolen from some bodies in order to give to others who did no more work. All humans have same 24 hours in a day, yes?Why does humans take life from Peter, to give Paul yachts and Rolexes? Why do people say humans are greedy when billions working people give up their earned pay to ones who already have everything and more? Humans do not love having their own money enough so they give it away to someone who did the same sacrifice of time? Even so they die from this generosity?Hi Subgenius, you watch movie named Mindwalk? You like? I like very much!Everything and everybody connected, so cookies for everybody! yay! All be happy!
Anonymous • October 26th, 2008 at 2:59 pm
Agree with the above 2 comments: nobody, not even the economists, never mind our gov’t has the guts to call this new system they are creating what it really is: Socialism! And if anyone thinks adding several more trillion into the economy and unto the debt is not inflationary, better go back to economics 101!
Guest • October 26th, 2008 at 3:00 pm
The Russians seem to using the strategy of being the merchants selling the picks and shovels during the gold rush. Except this time, the picks and shovels are weapons.
Guest • October 26th, 2008 at 3:08 pm
More Endtimes Lore “there will be wars and rumours of wars” or was that “bailouts and rumours of bailouts”Bloomberg Oct 24 – I have never seen a market as full of panic as I’ve seen in the last seven or eight weeks,” Kenneth Griffin, founder of Citadel Investment Group LLC, a Chicago-based hedge-fund firm, said yesterday”…Griffin, 40, who started Citadel in 1990 (age 22), has posted the biggest losses of his career in 2008 after increasing wagers on loans and bonds before the markets plunged.New York Times Oct 24 – Citadel Chief Denies Rumors of Trouble As the stock market tumbled again Friday morning, the Citadel Investment Group, which rarely discusses its business affairs publicly, took the unusual step of issuing a statement to deflect rumors that it might be in trouble. The talk, Citadel said, was “categorically false.”October 26 CHICAGO (Reuters) – Examiners with the Federal Reserve have questioned Wall Street counterparties about their exposure to debt and other holdings of Citadel Investment Group…
Guest • October 26th, 2008 at 3:13 pm
I say we price beer in gold!!!
Guest • October 26th, 2008 at 3:14 pm
You must be an Aussi.
Guest • October 26th, 2008 at 3:17 pm
@ Nouriel: “Second, the fiscal costs of bailing out financial institutions would eventually lead to inflation if the increased budget deficits associated with this bailout were to be monetized as opposed to being financed with a larger stock of public debt. As long as such deficits are financed with debt – rather than by running the printing presses – such fiscal costs will not be inflationary as taxes will have to be increased over the next few decades and/or government spending reduced to service this large increase in the stock of public debt.”As Mae West so aptly put it: You can pay me now or you can pay me later.And pay we will for NR’s proposed “large increase in the stock of public debt” to bail out financial institutions—both through taxation and inflation. As he admits, “taxes will have to be increased“ (only people on another planet believe we’re headed toward reduced government spending). Dr. Roubini knows the government has nothing to give without first taking it away from somebody else – whether it indebts the people to bail out Wall Street corruption directly or indirectly by funding make-work public projects. Either immediately or ultimately every dollar of government spending must be raised through a dollar of taxation, including the taxation of inflation. There are no “miracles” of government spending.And what is government debt but monetary intervention, i.e. debt abasement of the currency – i.e. inflation.Dr. Roubini freely admits that this additional public debt to create more billions for the bankers will be charged to the bulk of the population – i.e. debt for the people and billions for the bankers.As economist Ludwig von Mises said in his treatise on economics, “Human Action”: [L]arge-scale additions to the amount of public expenditures cannot be financed by ‘soaking the rich,’ but the burden must be carried by the masses.“Men must choose between the market economy,” said Mises, “and socialism.”Dr. Roubini, in my opinion, has chosen socialism.There will be no abatement of this swindle of the people to preserve a corrupt banking syndicate and a Federal Reserve System that chronically depreciates its paper currency. The outlook for America is dark, indeed.
Lord Sidcup • October 26th, 2008 at 3:18 pm
My guess is that you know very little about socialism except that the Tv sez it’s BAD.Socialism has ideas of equality/fairness connected to it (worked better in theory in than practice). No-one with any connection to reality could suggest that’s what is happening here. Nouriel himself described our present situation well ===>Socialising corporate losses, alongside privatization of profits.
Lord Sidcup • October 26th, 2008 at 3:21 pm
Yeah like he’s sittin up all night clicking clicking refresh refresh refresh wanting to absorb whatever wisdom me and guest and anonymous have to offer so he can pass it on to the IMF.
Anonymous • October 26th, 2008 at 3:24 pm
As is being pointed out in a discussion above, work is the first, essential, most fundamental condition of life/survival, so society has no right to with-hold jobs from anyone. What’s wrong with our technological advances making us all able to work fewer hours? That’s what was always supposed to happen, right? The problem is the eggregiously unjustifiable practice of letting the wealth increase that has come from gains in productivity be funneled and concentrated instead of being rightfully spread.
Anonymous • October 26th, 2008 at 3:29 pm
Yes that other non wall street candidate is definitely more trustable.
Guest • October 26th, 2008 at 3:32 pm
A strategy they stole straight out of the American’s playbook.
Guest • October 26th, 2008 at 3:46 pm
Where Inflation Came FromBy Paul Craig RobertsAnyone who has been alive very long is aware that the US government has failed on the inflation front. Soft drink machines that once delivered a bottled drink for a nickel now charge a dollar, a twenty- fold increase in price.Until the Reagan administration indexed the income tax, inflation was a boon to government, because by pushing up wages and salaries inflation pushed taxpayers into higher brackets. This allowed the real tax burden on labor to rise without politicians having to raise the tax rates. Inflation also destroyed the value of depreciation allowances, thus raising the tax rate on capital as well.It is not easy to make the young aware of the long-term rise in prices. The inflation indices are periodically re-based, resulting in measures over time with different years as the base. The Clinton administration further destroyed comparability by substituting a variable basket of goods for the fixed assortment that had previously prevailed. With the Boskin Commission “reform” adopted by the Clinton administration, the Consumer Price Index (CPI) no longer compares apples to apples. If the price of apples rises, the CPI assumes that consumers switch to a cheaper substitute. The “substitution effect” tthus underestimates the rate of inflation and destroys the comparability of the inflation rate from one period to the next.Inflation is inherent in a fractional reserve banking system based on fiat money. Fiat money is not subject to limits on its supply, and fractional reserve banking permits the banking system to create money by expanding loans…For example, in 1973 when I left Stanford University I had an opportunity to purchase a 1967 Ferrari 330 GTS. It was a low mileage car in new condition. The asking price was $10,000 and could have been negotiated down. Unfortunately, the Scottish part of my ancestry prevailed, and I did not purchase the Ferrari. Recently at the Monterey auction a 330 GTS sold for $671,000, 67 times its 1973 used car price.As an assistant professor of economics in 1967, I cut a road test out of Road & Track magazine and filed it. The test was one of a 1967 Ferrari 275 GTB/4. The new price was $14,500. I intended to find one in a few years at a substantially depreciated price. At a recent Monetary auction, a 1967 GTB/4 sold for $1,925,000.What has happened to money that causes a 41-year-old used car to sell for 133 times its new car price?…http://www.vdare.com/roberts/081019_inflation.htm
Roger • October 26th, 2008 at 3:51 pm
There will be no abatement of this swindle of the people to preserve a corrupt banking syndicate and a Federal Reserve System that chronically depreciates its paper currency. The outlook for America is dark, indeed.
But since the U.S. under 19 years of Greenspan had one of the most stable, and lowest inflation rates in the world ( see graph), what are you basing this conclusion on? Are you aware that much of the world’s investment cash is flowing back to the safest and strongest currencies – mainly the U.S.?
JUAN PABLO • October 26th, 2008 at 4:01 pm
NOURIEL:1) ISN´T IT RISKY FOR THE US GOVERNMENT, FACING A 12-24 MONTHS UGLY RECESSION, TO RAISE TAXES IN ORDER TO FINANCE A HUGE FISCAL DEFICIT?2) WILL FOREIGNERS BE WILLING TO FINANCE THE FISCAL DEFICIT KNOWING THIS UGLY SCENARIO?¿MIGHT THE DEPRECIATION OF THE DOLLAR, SURGING EXPORTS, DIMINISHING IMPORTS BE THE WAY OUT FOR EEUU AND GLOBAL IMBALANCES?MY WIFE IS MAD AT ME BECAUSE I READ YOUR BLOG EVERY NIGHT…BUT I CAN´T HELP IT!!!!JUAN PABLO.
Anonymous • October 26th, 2008 at 4:06 pm
That’s an insult to women, Skarface. Women are sick to death (literally, often) of the murderous, oppressive powerpatriarchy.Yes, there are exceptions. Ann Coulter comes to mind, but she lost touch with her humanity long ago.
Guest • October 26th, 2008 at 4:18 pm
I’m completly connected to reality and I say that’s exactly what’s happening, the facist moves to socialize corporate losses is an initial last ditch effort to support a failing capitalistic system and already is failing as the gov. under political pressure caved to equity stakes in banks instead of buying up bad assets at artificially high prices. Also Freddie and Fannie loans are now owned by the government. The past 20 years besides a few tech jobs most new jobs created have been government jobs, so it is you who is not connected to reality.The facist moves to Socialze corporate losses will eventually lead up to more and more nationalization and morph into pure socialism. Can you have an economy where only the owners of robots can afford to live? Is that a sustainable system? As the worker loses value so to does the capitalistic system.
Guest • October 26th, 2008 at 4:20 pm
Only a few still depend on the inflation propaganda charts such as the one provided by the same government that uses hidden inflation for its own purposes. Are you not aware of the steep decline in purchasing power of your money over the past two decades, including the years of service by “mistakes-were-made” Greenspan. Your “chart” shows inflation from 2000 to 2008 ranging between 2% and 4% during those 8 years. Any Social Security recipient, or a man whose raises have been “indexed” to the government’s official inflation “rate,” can tell you this, sadly, is untrue. Talk to those who during that same period can no longer buy medical drugs, who cannot heat their homes, who walk instead of driving, who can’t even afford a Big Mac, whose education “fund” will no longer “fund” an education, who can no longer exist on even two incomes… And tell them they’re reduced standard of living is just an illusion, that the charts say their pension still buys what it did in 2000.The world is rapidly losing faith in the dollar as it’s reserve currency. Should the dollar lose that status, foreigners will no longer service our debt: many have already cut back. I, personally, have not felt my dollars to be safe for a long, long time. I am putting as many of them as possible into hard assets as I can. But, good luck to you–with your “stable” dollars.
Guest • October 26th, 2008 at 4:20 pm
Scareface is a movie, the guy saying that is TonyPS Options – the ability to choose – is real power
Guest • October 26th, 2008 at 4:23 pm
Comment was supposed to be the reply to earlier comment, sorry. Already late in Moscow
Roger • October 26th, 2008 at 4:27 pm
I find the example of inflation that Roberts uses to be bordering on the ridiculous.First off, any college grad (even one from rich-kid Stanford) that considers buying a rare and exotic car for themself, does not gain my confidence as someone who knows what’s best for Americans.Second, no economist should use the value of a hand-made, collectible, rare, and expensive auto like a Ferrari to show how inflation works. The average person, even back then, could not afford to even get it tuned up, much less driven around to pick up girls and show off in. This is a stupid example, IMO.A reasonable description would tell how in the 1960′s it would have taken a year’s average salary to pay for the average car, verses today’s 6-months. That’s not inflation, but deflation. Here’s a more relevant example:Around 1985 I considered buying a newly-released 100K hard disk for my computer, at a retail price of $10,000. Even after inflation since 1985, that same amount of disk space now costs less than $.01 – a penny!
Detlef Guertler • October 26th, 2008 at 4:30 pm
Dont make your wife angry. Friends & Family will become even more important in the ugly times ahead.So stop reading this blog every night – read it every day!
Guest • October 26th, 2008 at 4:31 pm
My girlfriend is mad at me. My sister said ignorance is bliss. Seeking real answers to life’s questions can be difficult, especially in today’s climate.hlowe
Syndrum • October 26th, 2008 at 5:07 pm
for those that haven’t seen this documentary, its a must see:www.zeitgeistmovie.comThe Addendum (the 2nd part) is a spot-on analysis of our current monetary order. However it not only criticizes our current system but also proposes an alternative. A resource based economy over a monetary one. It would be interesting to hear anyone’s ideas as to how feasible you think it could be…
subgenius • October 26th, 2008 at 5:18 pm
I have never heard of mindwalk, I will look it up….
James • October 26th, 2008 at 5:21 pm
One thing I don’t hear discussed enough is new essential costs facing us all. For example, 30 years or so ago, there was no such thing as cell phones. Now cell phone bills cost nearly $100 a month. Plus, TV used to be free. Now it costs another $100 a month for cable. Computers and online services cost money too. None of these existed when I was a kid. These services are not optional in this day and age, with the possible exception of cable TV. And their pricings are way out of line with actual costs, especially for cell phone text minutes. I’ve read that it costs less to send data to and from the Hubble Space Telescope than it costs for regular cell phone text messages. When the electric and telephone grids were set up, it was designed so that everyone could afford these things. With our current usurious hyper-capitalistic system, these companies are maximizing their costs at our expense and killing our economy in the process.
AfA • October 26th, 2008 at 5:24 pm
Thanks Roger for addressing that issue. I was shocked to see how a supposedly well-educated person such as Paul Craig Roberts would make such fallacious examples to make his point.I hope for him he was drunk or something when he wrote that article.
ze100 • October 26th, 2008 at 5:35 pm
But what happens if the US is unable to find sufficient buyers for it’s debt? I don’t suppose China will do this forever.
Guest • October 26th, 2008 at 5:36 pm
communication and entertainment (t.v.)costs are 150.00 a month where i sit of course i could unplug and go back to reading books. “The World Without us” by Alan Weisman. Gave me a new appreciation for the word “maintenance”.
Guest • October 26th, 2008 at 5:44 pm
Perhaps Robert’s April take on “The Fading American Economy: Government is the largest employer,” would suit you better.According to the Bureau of Labor Statistics, the US economy lost 98,000 private sector jobs in March, half of which were in manufacturing. Today 13,643,000 Americans are employed in manufacturing, of which 9,849,000 are production workers.Government employs 22,387,000 Americans, 8,744,000 more than manufacturing. Even the category leisure and hospitality employs 13,682,000 Americans, slightly more than manufacturing.There are as many waitresses and bartenders as production workers.Wholesale and retail trade employ 21,467,000 Americans. Professional and business services employ 18,036,000 Americans of which 8,368,000 are in administrative and waste services. Education and health services employ 18,699,000 Americans.Financial activities employ 8,228,000 Americans. The information sector employs 3,010,000. Transportation and warehousing employ 4,532,000. Construction employs 7,338,000, and natural resources, mining and logging employ 751,000. Other services such as repair, laundry, and membership associations employ 5,516,000 Americans.This is the portrait of the US economy according to the Bureau of Labor Statistics. It is an economy in which government is the largest employer. Manufacturing employment comprises just under 10% of total employment and about 12% of private sector employment. Everything else is services, and not particularly high level services.Is this a portrait of a super economy?To help answer the question, consider that US imports in 2007 were 17% of US GDP, according to the National Income and Product Account tables provided by the Bureau of Economic Affairs. In contrast, the BEA industry tables show that in 2006 (2007 data not yet available) US manufacturing comprised only 11.7% of US GDP.If US imports actually exceed total US manufacturing output by 5% of GDP, it does not seem possible that the US can close its massive trade deficit. Even if every item manufactured in the US was exported, the US would still have a large trade deficit.The NIPA and industry tables from which the percentages come are not calculated identically, and I do not know to what extent differences might exaggerate the differences between the percentages. However, it seems unlikely that mere calculation differences would account for US imports exceeding US manufacturing output.If the US cannot close its trade deficit, it is unlikely that the US dollar can remain the world reserve currency. If the dollar were to lose the reserve currency role, the US government would not be able to finance its annual red ink budget by borrowing from foreigners, as the US saving rate is about zero, and the US would not be able to pay its import bill in its own currency. The rest of the world continues to hold depreciating US currency, because the dollar is the world reserve currency. The dollar is certainly not a good investment having declined dramatically against other traded currencies.From March 2007 to March 2008 the US economy created 1.5 million new jobs (in services). Legal and illegal immigration and work visas for foreigners exceed US job creation.During the current school year, 3.3 million high school students are expected to graduate. If we assume that half will go on to college, that leaves 1.6 million entering the work force. College enrollment in 2007 totaled 18 million. If we assume 20% graduate, that makes another 3.6 million job seekers for a total of 5.2 million. Clearly, immigration, work visas, and high school and college graduates exceed the 1.5 million jobs created by the economy. Unless retirements opened up enough jobs for graduates, the unemployment rate has to rise.The US unemployment rate is creeping up, and according to John Williams, the official unemployment rate greatly understates the real rate of unemployment. Williams has followed the changes that government has made to the official indices over the years in order to spin a more politically palatable picture. Williams uses the original methodology prior to the decades of spin. The original way of measuring unemployment indicates the current rate of unemployment in the US to be 13%, much higher than the 5.1% official number.Williams also calculates the CPI according to the same way it was officially calculated prior to the recent decades of spin. Williams estimates the current CPI at 12%, three times higher than the official 4% figure.Williams reports that upward growth biases built into GDP modeling since the early 1980s “have rendered this important series nearly worthless as an indicator of economic activity.”Williams estimates that US GDP growth has been in negative territory during almost all of the 21st century. The notion that the US is just now entering a recession is nonsense if we have in fact been in recession for most of the 21st century.America’s post-World War II economic dominance was based on the destruction of other economies by war and socialism. It is a different world now, and Americans have given little thought to the economic challenges of the 21st century.Paul Craig Roberts was Assistant Secretary of the Treasury during President Reagan’s first term. He was Associate Editor of the Wall Street Journal. He has held numerous academic appointments, including the William E. Simon Chair, Center for Strategic and International Studies, Georgetown University, and Senior Research Fellow, Hoover Institution, Stanford University. He was awarded the Legion of Honor by French President Francois Mitterrand.http://www.vdare.com/roberts/080408_economy.htm
devils advocate • October 26th, 2008 at 5:44 pm
Nourielalthough I disagree with your expectations-I am counting on a Obama a la FDR affect and effect on the country (i.e. at least the 1/2not cursing socialism and welfare) another “first hundred days”…huge infrastructure/public works jobs jobs jobs+ mortgage modificationto revive the economy/housingyour honest thinking is thought-through even down to the details unfolding before our eyesYou deserve the appelation “hero”!
devils advocate • October 26th, 2008 at 5:55 pm
well, well, well that’s an original thoughtUSA prints $$$ to buy its own DEBT notto spend but invest!!!and owes itself the principal + interest from its Investment in USAlike Savings Bonds, USA Bonds- the govt buys these bonds not the citizensthe Bonds are backed by the economyas the GDP rises each % up means the USA Bonds rise up in value and pay off interestto the taxpayersnot bad, huh?ha, ha, ha, ha
Devils advocate • October 26th, 2008 at 5:59 pm
I stopped laughing…this actually will be implementedUSA Bonds invests is Infrastructure, hospitals, schools, roads and bridgesall throwing off income from tolls, rents to pay off the USA Bonds
kilgores • October 26th, 2008 at 6:24 pm
Julian Barbour has suggested that there is no need for time in the Theory of Relativity or elsewhere, and that it does not exist.SWK
Anonymous • October 26th, 2008 at 6:28 pm
Glad it was Tony saying it, and not you. Thanks for setting the record straight. Rest easy and well, Dearie in Moscow, from women everywhere.
AfA • October 26th, 2008 at 6:47 pm
What does not exist? Relativity or Julian Barbour? Why stop at time? Everything else, through the same concept, is illusion.BTW, this is not a critique to you SWK. Happy to see such an elevated and varied intellectual debate on this board. I also enjoyed, and agree more with subgenius’s comment.
Gad Romann • October 26th, 2008 at 6:51 pm
Nouriel, I am in the business of coming up with ideas. That’s how I make my living.So here goesSince a large part of our economic woes have to do with CDS, why don’t we put a moratorium on paying them off.No one will get poor for not have been paid on their bet of buying CDS.The government could decide to pay only off the initial price was of the CDS and defer the “winnings” as it were, to a later date.If the government is considering putting a moratorium on foreclosures it additionally should consider putting a moratorium on paying off CDS.Halting foreclosures will prevent turning people out on the street. Halting payment on CDS won’t.
subgenius • October 26th, 2008 at 7:10 pm
Ahh the sweet, sweet smell of escalation is in the air:http://news.bbc.co.uk/2/hi/middle_east/7692153.stm'US troops’ strike inside SyriaUS helicopter-borne troops have carried out a raid inside Syria along the Iraqi border, killing eight people including four children, Syrian officials say.
Guest • October 26th, 2008 at 7:19 pm
Your first mistake is believing the winner of this presidential race will be more than a politician thus corruption is a given. The winner of this presidential race is not a win for you and I. It’s sad that we settle for corruption every time. Why would any honest person want the job. In a open and honest system we would have to interview thousands of accomplished people across the country and once we decided who was the most qualified then we would have to force them to serve or face jail time.
WiseGuy • October 26th, 2008 at 7:23 pm
Thanks AfA! That actually did make it a bit clearer — at least the English.After 15 years of financial modeling and given the current turbulent times, I’m more than a little skeptical of any model that claims to have a reliable forecast of market timing.The interaction of people in the world economy is a bit like the interaction of air particles in the weather. Both are chaotic systems. Just as the long-term accuracy of weather forecast models is limited by the density and frequency of weather stations to supply each model run’s initial conditions, so is the long-term accuracy of any economic model dependent upon the density and frequency of measurements of human activity.Weather forecasts are only accurate out to about 1 week and drop off in accuracy considerably after that. Climate forecasts give longer term forecasts but at the expense of precision at finer levels of detail.Nouriel Roubini’s forecasts have been more akin to climate forecasts. At various times, he has indicated general future trends in the economy without nailing down exact timing, location, or severity.My point (and yes I have one) is that our time would be better spent in preparing for a changing (ecomomic) climate rather than worrying about each rain storm that will be coming our way.
JLC • October 26th, 2008 at 7:35 pm
Professor I think the following passage needs clarification:”As long as such deficits are financed with debt – rather than by running the printing presses – such fiscal costs will not be inflationary as taxes will have to be increased over the next few decades and/or government spending reduced to service this large increase in the stock of public debt.”So because taxes will be increased or spending reduced in the future, the deficits from the bailouts will not be inflationary? I’m no economist, but I don’t see how that is so. Furthermore there are many issues to consider in determining whether the bailouts will eventually be inflationary.In the past 20 years, the US has ballooned both its budget deficit and consumer debt. This money found its way into the system, but it went into assets that aren’t properly accounted for in inflation statistics – such as stocks and housing. Past deficit spending has been inflationary – it has increased the aggregate level of money and credit. It just hasn’t shown up in consumer prices.I concur with the deflationary scenario, but I submit that the Fed will go out on a limb to try to introduce inflation into the system. Since the deflationary hurricane is massive and spreading like a virus they will not be able to succeed for the time being – the net result will still be deflation in consumer prices and negative GDP. The deflationary forces may be powerful enough to overwhelm whatever inflation the Fed can introduce into the system in the short term.But Bernanke’s Fed has already shown a willingness to embark on radical and unorthodox policy responses to the current crisis. As a student of the depression, Bernanke has spoken favorably of the effects of a downward revaluation in the US dollar.The Fed will walk a fine line while attempting to reflate the system – they will risk letting the inflationary genie out of the bottle in an attempt to stave off an outright collapse. “We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.” (2002). I believe that the Fed will monetize to a certain extent, and indeed they have dramatically expanded the monetary base in the past month.Every Fed and Treasury action thus far has produced unintended consequences, and many would submit that the Fed has already lost control. The history of the Federal Reserve of the past 20 years, and especially in this current crisis, shows that they do not have the data or the foresight to accurately predict where the economy is headed. All of their economic metrics are largely backward looking. So when the time is right to mop up the excess liquidity and clean up the inflationary effect of their reflationary efforts, the Fed could miss it until it is too late. At that point the inflationary beast will rise with a vengeance.
Guest • October 26th, 2008 at 7:44 pm
Sounds like pay-back time:
The Iraqi government has in the past accused Damascus of harboring Iraqis who are aiding the insurgency. And Syria makes no secret of its sympathy for the insurgents.”Syria looks to the resistance as freedom fighters, like George Washington fighting the British,” said Mahdi Dahlala, a former Syrian minister of information. Herald Tribune
Anyone else in favor of sending a shipload of George Washington costumes to Syria for Halloween?
Guest • October 26th, 2008 at 7:46 pm
This was posted by ptm a few threads back, but it echoes your idea.It takes a Casino (with apologies to Hillary): A Metaphor for CDS and Bailouts(This is a long post, but I think you will enjoy this one. In response to one of my posting on another list, Charles Brown (real name) offered the following metaphor which I have edited with his permission. Any mis-understandings are my fault.)A con man by the name of Wally came to USAville and talked to the mayor about opening a casino in town and sharing proceeds with the village. Being short on revenue, the mayor thinks this is a fantastic idea for the town. But first, Wally lays down couple of preconditions, he wants the casino to have special tax breaks for the players and no regulation or interference whatsoever in what goes on inside the Casino.”Fair enough” says the mayor, who thinks to himself “whatever happens in the Casino is Wally’s problem.” Then the mayor tells his friends and all of the sudden the mayor and a lot of local business people decide to play in the Casino, but to keep the appearance of objectivity, they play through representatives (hedge funds). And since the mayor’s friends and business associates are going to make a killing on the Casino coming to town, they want him to run for Governor next term.What the mayor does not know is how Wally’s Casino is different from traditional casinos. There is no “House” to cover the bets in Wally’s Casino. Rather, the role of the traditional casino “House” is taken up by the other players that bet at any table (transaction) in the Casino. The “House” (Wall Street) is providing the facility and the playing field for the players, who are mostly well known to each other and the House anyway.The new rules are that the amount of good bets must match the amount of bad bets at the crap table. Thus for a given round, all bets are covered (balanced) by the sum of the players at the crap table, not the House. The volume of action (bets) in the House is limited by the number of player IOUs that other players are willing to accept. After a roll of the dice, the bad bets (IOUs) are payable in US dollars to the other players that placed good bets. (e.g., George Soros, and James Simons made a total of 9.4 billion in 2007 betting the sub-prime CDOs would not pay. Goldman Sachs also made 11.6 billion in 2007 doing similar bets.)The players adore this game so much that they asked Wally to manage their IOUs and hand out casino chips which created its own form of private money. A player could walk into the casino with $100 and buy $5,000 worth of chips (IOUs), “nominally” issued by the House, but only as a custodian for the players much like a private clearing house. The chips represent the IOUs (CDS contracts) while a player is involved in a round at the game table. Winners and losers are made every minute by the action at the various tables, which differ only in the type of game such as cards, dice, roulette, slot machine, etc. (MBS, ABS, Autoloans, credit card debt, student loans, etc.), but not the substance of chips (IOUs) exchanging hands for the right to play.Then one day, a small player looses too many chips and calls-in his IOUs from one of the “high-rollers” at the Casino and whoa! The high-roller doesn’t have the money to cover his IOUs! In fact, it turns out that the high-roller also has big losses in the game! So the high-roller starts trying to cash-in chips (IOUs) he holds and discovers that some of the chips are not worth the plastic they are made from. The high-roller was having so much fun playing the game and making so much money for himself and his staff in terms of fees and reporting profits to his friends and shareholders, that that there was no need to think about the credit worthiness of the chips! Why should the high-roller worry, the casino had everything going for it, political cover, it’s own bank creating money, albeit phantom money, private exchange, and a host of brilliant, credible players with deep pockets.Now the problem begins to cascade onto Wally. Players are lined-up outside his office wanting to cash-in their chips and collect on some of their IOUs. But Wally doesn’t have the money, “I’m just the Casino facilities operator” he tells them. “I’m just the clearing house taking a cut. You knew what you were doing when you came in the door and bought those chips (IOUs),” he restates in vain. But they shout back, “You have the power (Wall Street) and wherewithal (political connections) to cover us!” Some of us have more IOUs going the wrong way and didn’t balance our IOU portfolios, and unpaid IOUs will only make the problem worse! Your reputation is on the line and we are all in this together Wally,” they plead.Wally then goes to the mayor of USAville and suggests that USAville’s citizens need to cover the bets made by the players at the Casino. After all, they benefited from casino jobs, new schools, and new roads, Wally argues. Wally also brought in lots of side-money to USAville’s town council and other politicians. Funds flowed to USAville and its environs and Wally also put a lot of money into the mayor’s upcoming run for Governor.The mayor doesn’t like it because he knows it is going to be hard to spin this turkey to the citizens of USAville, but the alternatives as explained to him, are bleak. Wally’s tells the mayor everyone on main street will be hurt, there will probably be riots in the streets, martial law may have to be imposed if you can not help us. “What else can I do?” the mayor mumbles to himself constantly. The village’s economy has become dependent on Wally’s Casino. And Wally is right, the economy could collapse since some of the local commercial banks are carrying high-roller IOUs. The political pressure is enormous from Wally and his influential friends. The mayor finally decides to go along. “What else can I do? File a law suit? Against whom? For what?”, he tells his staff and neighbors.But then one day a lowly aide in the mayor’s office exclaims, “Wait a minute! Why can’t the Casino patrons get together and cross-eliminate all bad bets with good bets? Net them out, gains against losses? It’s all IOUs anyway. It doesn’t matter how many times removed any particular bet (IOU) is from one another. They are all holding IOUs transacted at the Casino! They put them all together into a big pot and compress them down to the nub by eliminating all of the debits and credits. The last players holding IOU(s) in excess of someone’s else ability to pay take the netted-out loss. That way the high-rollers in the game take their losses. How do we know they don’t also have astronomical profits from the casino? And even if they don’t, what can the high-rollers do, sue us to cover their losses? We didn’t know anything about their gains and losses. If anyone is going to be sued they will sue each other over not paying their respective IOUs after compressing them to the nub. Why should the village citizens and our children vouch for the actions at the Casino?”Another lowly aide said, “Even Wally had friends who weren’t patrons of the casino, but most of his friends were regulars.” Another of the mayor’s aides said, “I get it. They created a type of currency with these casino chips that were convertible into USAville dollars.” And another jumped in saying, “Now if only the City Council could understand, but they will not listen to us; they are only listening to Wally and his friends.”Narrative:The substance of this metaphor accurately reflects the details of CDS contracts. When the “brilliant” people on Wall Street tell us we are too stupid to understand what they have “created,” it’s just Wall Street spin. When Wall Street lawyers hold up 500-page CDS contracts and say “You do not understand the sophistication of these instruments,” it’s just obfuscation. Remember Wall Street lawyers made a fortune in this market creating a huge conflict of interest. The verbosity coming from likes of Secty. Paulson, the progeny of numerous university business school professors, the main-stream press, et al, is just so much drivel and more Wall Street spin, or as David Reed would say, “failed physicists.”The remaining investment banks and other players want you and I to cover their IOUs and keep the casino in business. If that isn’t brazen enough, we don’t even get a tax subsidy like they did on their profits, and still are getting!The correct response of the mayor of USAville is simple, if someone could inform him and if he had any integrity. Let the casino players un-sort (“net out”, or “compress”) the pool of IOUs and sue each other over non-payment of their 500-page CDS contracts. Their shareholders, hedge fund participants and other investors would take the compressed losses, however much it might turn out to be. $1 trillion? $2 trillion? $5 trillion?Shareholders and investors of the regulated and non-regulated financial institutions around the world can absorb those numbers without burdening the already harassed citizens of USAville hanging on to what’s left of their economy. If the citizens of USAville understood that, maybe the mayor would change his mind since he is running for Governor next year. Maybe he would find the strength to do the right thing, to do his duty by his fellow citizens. The USAville banks that participated at the casino have to be compressed as well, and some will fail. That’s unpopular in some circles of USAville. Perhaps many will fail, so what? Won’t they likely fail anyway? Wasn’t the value proposition that Wally came to USAville with in the first place exactly that, i.e., the IOUs were an elegant, fool-proof way of “spreading the risk” on losses and of collecting on the IOUs? Yes, that’s exactly what the physicists, mathematicians and high-rollers that came with Wally to pitch the mayor had said. And they said it over and over again as the Casino was operating 24×7.On the contrary, Wally, the mayor, and all of their friends in the media frightened the citizens of USAville into believing that they had to incur further indebtedness and pledge what remains of their vanishing wealth to cover the outstanding IOUs at the Casino. No compression is necessary as long as a few of the high-rollers avoid scrutiny and prop-up the IOU market (Goldman Sachs, Morgan Stanley, certain purchased entities of other bankrupt high-rollers), because Wally and the mayor now have everyone convinced that the high-rollers bets need to be made whole, or they will suffer too, even worse. They have been heard to say, “We are all in this together.” Yes, but only those who played at the casino, not those who did not.And that is why this bailout and the management thereof is politically and commercially criminal.Moral of the story:We, the citizens of this Republic need to understand the fraud on Wall Street. In fact, it is the duty of those of us who do understand it to explain it to other citizens.
AfA • October 26th, 2008 at 7:51 pm
In the club of “Please, bail me out”, “say welcome to Hungary. Hungary, please take a seat between Ukraine and Iceland, no, not that one, it is reserved for Pakistan, don’t fight, you will have plenty of company” …Meanwhile, in the other room, “insurers, meet banks and brokerages, banks, insurers. All, you will soon have the company of car manufacturers and pension plans”
WiseGuy • October 26th, 2008 at 7:51 pm
So, in plain English, what are you predicting? What/when are your predicted minima of the Dow, S&P, Nikkei, FTSE, DAX, etc.
Guest • October 26th, 2008 at 7:53 pm
CDS contracts were used to sell a lot of bad debt to al kinds of buyers. People beleived the crap was equivalent to AAA because it was covered by CDS (or at least – that was the Wall St spin). If CDS contracts are dropped, there will be all kinds of fallout in debt instruments as credit ratings sink and interest rates soar. Think about the interest rates for bonds offered by GM and Ford if all the CDS contracts are invalidated for these companies. Effectively, the auto industry would be unable to raise any money, except for bailouts from Uncle Sam.I’m not sure there are any easy outs here.PeteCA
ignatius • October 26th, 2008 at 8:09 pm
Check out http://www.shadowstats.com/alternate_data. Official US inflation figures has been increasingly rigged by a variety of methods since the 80s.
Lord Sidcup • October 26th, 2008 at 8:14 pm
If i was a country I’d go bust now, and get the bail-out, because the IMF will be skint in a week or two. You’ve got to be at the front of the queue.
Lord Sidcup • October 26th, 2008 at 8:20 pm
Its a line from the film Scarface.Its actually funny in the context of what’s above, not an expression of misogyny. Made me laugh. Guess ye have to see the film.
Guest • October 26th, 2008 at 8:21 pm
labor.
Anonymous • October 26th, 2008 at 8:23 pm
“In the developed world, this backdrop of contracting GDP, collapsing inflation, and financial market stress opens the door to a powerful monetary policy response.”What is this powerful monetary policy response that Roubini speaks of? (Can someone help me understand?)
Anonymous • October 26th, 2008 at 8:44 pm
4. Monetary InflationThe current environment is certainly stagflationary from a monetary perspective. The economy is slowing, yet monetary indicators are rapidly expanding and pricing pressures increasing.The strong inflationary environment preceding the real estate bust prompted the Fed to raise the fed funds rate in baby steps over 15 times. At every point, the Fed was “behind the curve”.While raising interest rates, it allowed money and credit to expand faster and faster. The best indicator for that is the Total Credit Market Debt Outstanding, reported by the Fed and provided in the chart below by Prudent Bear. In essence, during the “tightening-lite” cycle, the Fed actually implemented loose monetary policy that resulted in steadily rising outstanding debt.Since the beginning of the real estate bust—and especially since the beginning of the Credit Crunch—the Fed has been especially accommodative. Bernanke rapidly slashed interest rates from 5.25% down to 2% in about half a year. The Fed has introduced a plethora of channels and mechanisms to inject extra liquidity into the banking system, such as the Term Auction Facility (the TAF). It is estimated that since August 2008 the Fed has injected over a half a trillion dollars cumulatively into the system. The most extraordinary development is that over the last two months the Fed has ballooned it balance sheet by about 80%. This is an extraordinary monetary inflation, unprecedented in the history of the Fed, which is likely to surface in coming months and years as deteriorating price inflation. It also appears to be only the first installment in the ongoing battle against the forces of deflation.Probably the best testament to the accelerating monetary inflation over the last couple of years is John Williams’ reconstruction of the discontinued M3 money supply series. In the middle of 2006, money supply was growing in the 5-7% range, but since the beginning of the credit crunch growth has reached the 15-17% range. This increase in money supply represents an extraordinary accumulation of a “built-in” monetary inflation, which will eventually burst into consumer price inflation.5. The Deflation ScareEverything on the monetary side points to more inflation in the future. Nevertheless, over the last half a year—especially since the “Credit Crunch” has gained strong momentum—deflationists have been emboldened to proclaim yet again that the economy will spin into a dreadful deflation, dragging everything in sight with it. I can understand the deflationist warnings, as I was once a deflationist, schooled by Robert Prechter, the Dean of the Deflationist School. His book Conquer the Crash is the ultimate reference book on deflations, The Deflationist Bible. Whether one believes in a coming deflationary depression or not, one must nevertheless read the book and understand its arguments.Prechter provides (in Chapter 13, p. 130) three limits to credit expansion that we can actually observe. With these, we can determine whether monetary inflation can continue or not. His first limit on credit expansion is the rising price of gold; the second is the falling dollar, and the third is rising interest rates (due to rising inflationary expectations) and corresponding falling bond prices, which in itself is strongly deflationary. In Prechter’s terms, the three countervailing forces to inflation come from the gold market, the bond market, and the currency market.Over the last six years, I have found these criteria to be extremely helpful, especially in determining whether the environment would turn deflationary any time soon. It is easy to analyze each and see if any currently represents a genuine limit to credit expansion.
Roger • October 26th, 2008 at 8:45 pm
It’s mostly outlined in his plan consisting of: 12 steps
Anonymous • October 26th, 2008 at 8:48 pm
1. Price of Gold: The price of gold has been steadily rising for the last seven years and it has not yet deterred the Fed from inflating. Clearly, whether gold rises to $1,000 or $2,000 or more, the Fed will remain unmoved by its rise. Also, just because the price of gold has been correcting for the last 3-4 months does not mean that deflation is here. An intermediate correction does not make a secular trend!2. Dollar. Moving to the second limitation, apparently the Fed pays only lip service to the government’s Strong Dollar Policy. In reality, the Fed seems to like the idea of a falling dollar, as long as the fall is orderly. The Fed would most likely be pleased to see the dollar a lot weaker in the future, provided again that the devaluation is “orderly”.3. Interest Rates. This third limitation is no limitation at all to an Inflationist Fed hell-bent on preventing deflation. The Fed has devised a number of ingenious approaches to support the long bond and has even stated in public that, if necessary, it will monetize the long end of the curve to support high bond prices and respectively low bond yields.The deflationist arguments resting on gold, the dollar, and the long-bond yield apparently present no problems for the Fed at all. In reality, the Fed can inflate at will, and this is exactly what it’s doing!
Roger • October 26th, 2008 at 8:55 pm
The link above covers the causes, but here’s the article which explains his recommended solutions.
Guest • October 26th, 2008 at 8:57 pm
Other deflationists have raised a very powerful argument in their favor. Typically during an asset deflation, where the prices of stocks and real estate fall, there are no willing lenders and no willing borrowers, no matter how low the Fed lowers interest rates. This is dreaded condition is known as “pushing on a string”. The classic example is Japan since 1990.The counterargument is straightforward: in modern fiat monetary systems: the Central Bank is always a willing lender of last resort and the Government is always a willing borrower of last resort. In order to prevent contraction of credit, the government can always borrow and the Fed can always monetize – credit contraction and deflation do not have to occur when the Fed and the government do not allow it to happen.So far, it is more than obvious that the Credit Crisis has not prevented the Fed from its inflationary course, despite the rhetoric to the contrary. In reality, the Credit Crunch combined with a contrived deflation scare and a rising dollar has provided a cover for the U.S. government to increase its budget deficits and an excuse for the Fed to inflate further. All monetary indicators confirm that the Fed has been successful in this regard.The second obvious driver of price inflation is a steadily weakening dollar against all other currencies, despite the dollar bear market rally during the last 3-4 months driven most likely by Wall Street deleveraging. Since the beginning of the Credit Crunch, the dollar has fallen between 10 and 20% against a wide basket of currencies, suggesting steadily rising prices of imports, while the recent relief rally will most like prove to be an intermediate correction. More importantly, many exporting countries, like China and India, are reporting accelerating inflationary pressures in their economies, indicating rising prices in their own currencies, which in turn will translates into even higher prices in U.S. dollars.The third driver is the rising price of energy on international markets. Rising crude and gas prices will filter eventually through consumer prices as production costs rise. In a sense, the “Third Oil Crisis” is unfolding in slow motion as the price of crude has doubled during the last year. Such a 12-month increase in the price of crude has always resulted in a recession coupled with rising price inflation, even though the price of oil eased after the price spike. In other words, spiking oil prices are highly stagflationary. While it is true that the oil has corrected almost 50% in few short months, the price of oil will resume its upward move; we have seen similar corrections many times before, most notably in January of 2007.The fourth driver is the evolving “Food Crisis”. In my opinion, there is no food crisis and there is no shortage of food. There has been a small decrease of output in highly inelastic agricultural goods coupled with steadily rising demand that has resulted in food prices almost doubling in a very short period of time. This is a classic textbook example of basic Econ 101 that we typically teach freshmen in their third week of the semester.It seems to me that the journalists’ quest for sensationalism naively associates rising food prices with “Food Shortages” or with a “Food Crisis”. They show us images of emaciated children in poor countries caused by the Food Crisis, while the simple truth is that these poor are starving because their parents have low incomes and cannot afford the rising price of food. The root of the problem is not the lack of food, but the lack of income.In reality, what has happened is that after so many years, food prices are finally beginning to catch up with other prices in the economy – with real estate prices and with stock market indexes, for example. Essentially, the whole commodity complex is making up for lost time during the 1980s and 1990s. Commodities still have a lot to rise in order to realign their values to stocks, bonds, and real estate; or alternatively, stocks, bonds and real estate prices must collapse relative to commodity prices.
Guest • October 26th, 2008 at 9:01 pm
Here, I prefer a monetary argument: given that the Fed has been flooding the markets with liquidity over the last 9-12 months, it is unlikely that stocks, bonds, and real estate will adjust significantly downward, but much more likely that commodities will adjust upward, which spells even more consumer price inflation down the line. Rising commodity prices, just like rising oil prices, spell stagflation. Do not be fooled by the recent fall in commodity prices.The sixth driver is the government’s stimulus packages. This summer the consumer benefited from a few hundred billion dollar stimulus package and Ben Bernanke testified again in front of Congress in October 2008 that yet another fiscal stimulus is necessary. The consumer has plenty of options, like paying down debt and investing the money in stocks and bonds, but the most likely outcome is that the majority of money will be spent of food and energy, thus further driving their prices higher and further exacerbating an already acute inflationary problem.The above is sufficiently important to warrant a detailed explanation. In essence, the current price inflation has squeezed the consumer to the point where a much larger portion of his income goes to food and energy. Demand for these two critical items is very inelastic, so most extra income will be directed towards them. The key to understanding the outcome is the fact that food and energy supply is also very inelastic – consumers can willingly pay higher prices, yet businesses cannot respond with increased supply of food and energy. The nature of providing (supplying/producing) food and energy is such that it entails significant lags in time, often three, five, seven or more years. Thus, increased demand for food and energy driven by the Bush stimulus package(s) will likely result in significant price inflation and little economic growth. As a counter-example, consider that if consumers were to decide to spend their stimulus package cash on massages and fitness trainers, it would result in booming massage and fitness industries hiring more massage therapists and fitness trainers to expand their services; with food and energy this won’t happen—it won’t translate into jobs or growth.
Guest • October 26th, 2008 at 9:05 pm
Roubini has arrived in American Pop Culture – featured on DrudgeReport
ECONOMICS GURU: WORST IS YET TO COME; MARKETS WILL CLOSE FOR UP TO WEEK FROM PANIC…
Roubini in DrugeReporthere is the article link From The Sunday Times October 26, 2008 Nouriel Roubini: I fear the worst is yet to come
Anonymous • October 26th, 2008 at 9:10 pm
Can someone comment on when the dollar appreciation may start to reverse course and what currencies/investments will be profitable to get into at that point?
Guest • October 26th, 2008 at 9:10 pm
It’s just W feeling like a lame duck. Had to get one last shot for the Gipper…bottoms up boys!
AfA • October 26th, 2008 at 9:25 pm
Guest, you are presenting some good ideas, however, many of them are debatable. Unfortunately, I am too tired and sleepy to put something convincing. Hoping that someone else will pick it up (probably Alessandro) I would just quote one phrase of yours.”The counterargument is straightforward: in modern fiat monetary systems: the Central Bank is always a willing lender of last resort and the Government is always a willing borrower of last resort.”When both happen on a big scale, what is the purpose of having an economy, private economy and endeavor that is?Also, you are assuming that the Fed has been successful so far to reinflate. I am curious to see one evidence, besides “statistical” inflation. Note that I am not officially in any camp.
redleg • October 26th, 2008 at 9:28 pm
The US is more than capable of severely curtailing trade to/from these nations, army or not. Based on my experience, I would say that the US military is ideally suited to engage in these mission tomorrow. Much more so than it is to carry out occupation duties that it is currently engaged in.
AfA • October 26th, 2008 at 9:29 pm
If it indeed works on a first come first serve basis, then it is a sure thing.
Jubilee • October 26th, 2008 at 9:46 pm
@James,I don’t say this to be argumentative (the Internet is a hard medium to communicate on, don’t you think?) but I thought you and others might find it interesting that I have:a) no cell phoneb) no TVc) no cable (obviously)d) no Internet – until two months ago, when my wife requested we get it for business reasons.what I do have is lots of free time to spend with my wife and daughter doing the things we love.It seems odd to most of us, because we live in an age of affluence (at least here in the States), but almost everything we consider necessary is anything but. Everything you listed above is optional, and if or when those things are taken from us, we’ll laugh at the idea that we ever thought they were essential.Just a thought…
Guest • October 26th, 2008 at 10:13 pm
Would revising Christmas gift-giving be better than becoming a socialist country? Your mission: find the flaws in this argument.The scenario (based on real facts rounded off):The U.S. retail industry is $6 trillion;Half of that comes during December as Christmas sales – $3 trillion;Average quarterly sales for 1st 3 quarters is $1 trillion;Estimated sales due to Christmas gift purchases is therefore $2 trillion;Estimated percent of gift items that are imported is 90%, or about $1.8 trillion;Therefore, the American consumer sends $1.8 trillion overseas each year for Christmas gift items;Most gifts received are non-necessities, such as toys, videos, electronic gizmos, jewelry, appliances, tools, etc;Theoretical conclusion: If all consumers either make or buy U.S. made items only, or else just give a card, wouldn’t the U.S. be saving this $1.8 trillion in import costs during this one-day holiday?Where are the flaws? (please avoid the multitude of minor flaws – go for the big ones.
Guest • October 26th, 2008 at 10:19 pm
Item 2: Not only does the Fed accept the idea of a falling dollar, it’s a key part of Bernanke’s strategy to work through this economic transition. It’s a deliberate policy over the long term – if they can make it work.PeteCA
2cents • October 26th, 2008 at 10:19 pm
@ ORI jummped up and down 10 minutes after they implemented it! I complained for 3-4 days, but as you see it’s still with us. Evidently some folks like it.Anyhow, I suggested a user selectable format (threaded or timeline). All the timeline data is still there, all they need to do is coookie your chosen option and present the page in the format you prefer. Likewise, if you choose timeline, you could still click on the replies link to associate it in the threaded group.Wadda Ya Think?
2cents • October 26th, 2008 at 10:21 pm
@ OR (Posted again here for OR’s sake)I jummped up and down 10 minutes after they implemented it (threaded comments)! I complained for 3-4 days, but as you see it’s still with us. Evidently some folks like it.Anyhow, I suggested a user selectable format (threaded or timeline). All the timeline data is still there, all they need to do is coookie your chosen option and present the page in the format you prefer. Likewise, if you choose timeline, you could still click on the replies link to associate it in the threaded group.Wadda Ya Think?
Ashu • October 26th, 2008 at 10:39 pm
Its all mark to market accounting standards……..if they are not corrected, the markets & commodities will continue to fall.
Ashu • October 26th, 2008 at 10:45 pm
I think the governments will have to rather loosen regulations in the short run (to facilitate a smooth market sailing) and prepare a solid foundation of stricter regulation for the longer run.
Guest • October 26th, 2008 at 11:28 pm
Thank you for that magnificent summary. The economy appears to be nearing that point in the crack-up boom when maladjustments from the Fed’s inflationary credit expansion, the squandering of production and over-consumption, massive financial corruption within the derivatives time bomb and the consequences of off-shoring will produce impoverishment in America and a breakdown of the whole monetary system.Unfortunately, the Fed’s history brings into question the loyalty of men such as Greenspan and Bernanke and Rubin and Paulson who have all enjoyed the best a nation can offer, yet have conspired to plunder their fellow citizens. International money managers may be citizens of a particular country, but most consider themselves to be citizens of the world first. And their highest loyalty appears to be themselves.In 1910, consumer credit in the United States accounted for only 10% of retail sales. By 1929 just before the Crash, credit transactions were responsible for half of the $60 billion retail market. In his book, “Money and Man,” Elgin Groseclose says: “By 1920 the United States was overwhelmed by a flood of credit. It had covered the land. It was pouring into every nook and cranny of the national economy.”Says G. Griffin, “The impact of expanding credit was compounded artificially by low interest rates…the money supply in America began to expand. From 1921 through June of 1929, the quantity of dollars increased by 61.8%, substantially more than the increase in national product. During that same time, the amount of currency in circulation remained virtually unchanged…“Between 1921 and 1929, while commercial bank loans remained constant, total bank loans increased from $24,121 million to $35,711 million. Loans on securities and real estate rose nearly $8 billion. Thus, about 70% of the increase during this period was in speculative investments. And that money was created by banks.”At the same time another time bomb was at work. Paul Warburg, a partner with Kuhn, Loeb and Co. who was THE acceptance market in America, along with other monetary scientists who created the Fed were making a fortune from these instruments, including the Warburgs in Germany and the Rothschilds in England, says Larry Schweikart, editor of “The Encyclopedia of American History and Biography (1990). Banker’s acceptances are contracts promising payment for commercial goods scheduled for late delivery, and are negotiable and can be traded on the securities market. Before the Federal Reserve Act was passed, national banks had been prohibited from purchasing them.Just how large and free-flowing was this river of acceptance money? In 1929, it was 1.7 trillion-dollars wide. Throughout the 1920s, it was over “half” of all the money created by the Federal Reserve—greater than all the other purchases on the open market plus all the loans to all the banks standing in line at the discount window, according to economist Murray N. Rothbard in “America’s Great Depression.”The consequence of this self-serving mechanism was the massive expansion of the money supply that made the Great Depression inevitable. A distinct sense of déjà vu prevails in today’s unfolding economic scene.
Mark • October 26th, 2008 at 11:34 pm
Biofuels = death!First rule of discussion when it comes to ANYTHING: Know your priorities! FOOD, SHELTER, WATER! Notice that transportation isn’t one of these? And notice neither is biofuels?From someone who has spent LOTS of time understanding energy I can tell you that the externalized costs (read “damage”) that biofuels can inflict could possibly be the absolute worst thing that mankind has EVER pushed!I also spend a lot of time understanding soil and soil biology. And it’s here where the greatest threat comes from. As the availability of fossil fuels declines we will be hard pressed to get our soils to produce food! When you take biomass off of the farm, be it for food or for fuel, you leave that farm’s soil with less minerals. Sooner or later (in the case of the US’s large scale mono-cropping food systems “sooner”) the soils have been so heavily mined that they produce less and less output: poorer soils also mean less disease and pest resistant crops, which further equates to diminished output/production.NO BIOMASS IS WASTE. Mother Nature doesn’t waste. Those leaves that fall, those trees that shed limbs or die and fall, all regenerates soil with which to grow healthy vegetation.Most of the world’s past civilizations have doomed themselves because they have screwed up their soils! (mined/depleted them!)Another interesting fact: today’s soybeans are so tweaked that they don’t play well with natural soil microbes (esp mycorrhizae), instead relying on synthetic fertilizers.Our attempts to sidestep/beat Mother Nature are only going to end in a lot of pain: so much for the Green Revolution!
Guest • October 26th, 2008 at 11:34 pm
Connections| Saturday, October 25, 2008What do the following charts (see link) have in common?· A chart of collapsing bulk carrier shipping rates, showing an over-the-cliff plunge of over 90% for the largest Capesize vessels. Bulk Carrier Rates (Chart from: Dryships)· A chart of the Reuters CRB Index that tracks a wide range of commodity prices. Looks similar, doesn’t it?Here’s the simple explanation.A commodity bubble was fueled by massive amounts of liquidity (aka debt) that was available (aka issued) during the past few years.While the speculative frenzy was going full blast, traders were tempted to keep large and growing stockpiles of everything from coal and iron ore to wheat and soybeans in order to make large capital gains. This produced increased pressure on transport demand, particularly for the largest vessels possible (Capesize). Incremental boat supply being particularly slow to materialize – unlike, say, CDOs – charter rates went through the roof.But when the credit bubble popped, everything else followed, too: the dominoes fall with great speed in our globalized world. So, don’t look for charter rates to recover materially until stockpiles are worked down and fundamental physical demand (i.e. consumption) comes into line with commodity production rates.http://suddendebt.blogspot.com/2008/10/connections.html
Mark • October 26th, 2008 at 11:43 pm
Here’s something that I’ve been waiting to see (which validates what I’ve been saying, as well as what John is saying): `Biggest Bubble of Them All’ Is Globalization: Chart of the Day
Mark • October 27th, 2008 at 12:00 am
But who can afford to buy US debt/assets? China? I suppose to some degree, but what if they don’t see the value in it? Which would they prefer more of, worthless USD or worthless US mortgages? At least with USD the maintenance overhead wouldn’t be a killer (no real taxes to pay either!).It’s like the plane is in a nose dive and we’re wanting to see how far it can go before we an pull up and avoid the impact. Drive prices down further and further to get a better deal; unfortunately as this happens the USD is likely to be driven down as well (no?). The threat then becomes that nothing has any value left and the entire system implodes. But, I guess don’t see it ending any other way if we all try and prop up bad currencies and bad debt…
Mark • October 27th, 2008 at 12:15 am
We here in Internet land tend to be pretty myopic. There are two things that can be used to predict the future:1) The past;2) The current.I know that this sounds like an over-simplification, but bear with me…With both the past and the current you have to look at the averages.Currently 2/3rds of the world’s population lives on $3/day or less. Most live close to subsistence levels.For the past, most of mankind has labored under an agricultural environment/culture (well, for much of the past 8,000 years or so; prior to that, which represents an even greater period of time, mankind lived in an hunter-gatherer environment/culture).We are the exception. And this has only been due to the presence of a lot of stored energy (fossil fuels). As this windfall inheritance winds down we will find (as I believe we are not discovering) that we’re going to be forced back to actual labor: working the land for food.Whether the land can sustain 6.5+ billion people I don’t know, but there IS some number that it can sustain and we will ultimately discover it.
Roger • October 27th, 2008 at 12:46 am
Since RN has been discussing the probability of a market shutdown, I thought this paragraph might be useful. It’s from Manias, Panics, and Crashes, by Charles Kindleberger (1996) (pg. 132)
One way to stop the panic is to close the market. This was done to the New York Stock Exchange in 1873 and in London and many other cities at the outbreak of war in 1914. On the whole, it is not recommended, since shutdown may drive the panic underground and worsen it. Moreover, short-run and long-run goals are in conflict. Closing the stock market in this panic exacerbates the next, as people dump stocks or pull out call money sooner to avoid getting locked in. The New York Stock Exchange was closed for the first and last time in a panic in September 1873, but a financial editor suggested that fear of closing of the exchanges in October 1929 was a factor in the withdrawals of call money by out-of-town banks and “others.”
Roger • October 27th, 2008 at 12:47 am
I meant NR, not RN. Hey, it’s late.
Roger • October 27th, 2008 at 1:05 am
More food for thought this Sunday night before another worrisome week ahead. This quote, from the same Kindleberger book (p. 127) was stated by president Hoover sometime after the crash: (Kindleberger writes that this statement was made without actually approving the view of Mellon)
The “leave-it-alone liquidationists” headed by Secretary of the Treasury Mellon … felt that government must keep its hands off and let the slump liquidate itself. Mr. Mellon had only one formula: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” He insisted that, when the people get an inflationary brainstorm, the only way to get it out of their blood is to let it collapse. He held that even panic was not altogether a bad thing. He said: “It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.
Roger • October 27th, 2008 at 1:21 am
OK, this might be my last quote from the same book (p. 97). This one is a clear explanation of how crashes and panics work and I think it’s worth adding:
A crash is a collapse of the prices of assets, or perhaps the failure of an important firm or bank. A panic, “sudden fright without cause,” from the god Pan, may occur in asset markets or involve a rush from less to more liquid assets….The system is one of positive feedback. A fall in prices reduces the value of collateral and induces banks to call loans or refuse new ones, causing mercantile houses to sell commodities, households to sell securities, industry to postpone borrowing, and prices to fall still further. Further decline in collateral leads to more liquidation. If firms fail, bank loans go bad, and then banks fail. As banks fail, depositors withdraw their money (this was particularly true in the days before deposit insurance). Deposit withdrawals require more loans to be called, more securities to be sold. Merchant houses, industrial firms, investors, banks in need of ready cash – all sell off their worst securities if they can, their best if they have to. … households, firms, and banks are “very similar to a row of bricks, the fall of one endangering the stability of the rest… At the height of the panic, money is said to be unavailable.
vsssarma • October 27th, 2008 at 1:27 am
Dear Professor,My maiden post.How long will the Dollar appreciate against almost all currencies ? What is driving it ? What is the outlook of immediate and distant future of US Dollar ?
Mike • October 27th, 2008 at 1:58 am
Dear Professor,Please 3 questions to answer.What is your prediction for 2009,2010 on1.Gold price2.Oil price3.Commodities pricesThank you in advance
I am not the professor • October 27th, 2008 at 2:47 am
Down with a “D” as “Deflation”
pb_2_au • October 27th, 2008 at 2:55 am
What we really need is “mark this comment as read enabled checkbox which de-emphasizes (gray) what has been read. This in combo with the nested reply format would be best. The problem would be that the database would require a table dedicated to this so it would persist between page loads and it would slow page loads some.
Guest • October 27th, 2008 at 3:22 am
Asian markets tank again….
Guest • October 27th, 2008 at 3:40 am
European markets down, but not as much as Asian markets.Only exception: Volkswagen, up 70% (no joke)!
Guest • October 27th, 2008 at 4:52 am
The USD seems to be in a final shooting star upwards, before a massive swooning fall to happen sometime soon…
RayT • October 27th, 2008 at 4:55 am
Same here.Finally a voice we can trust.
Guest • October 27th, 2008 at 4:59 am
Well, it sure isn’t working right now, and ya know Bennyboy is losing sleep at night because of it. It won’t last forever, so consider it a gift to move out of the US dollar. When the heard turns, you don’t want to be in thier path.
painter • October 27th, 2008 at 4:59 am
So the dollar gets stronger and oil goes down. Is that the reason oil is getting lower ?How can policies be made when everything is so unstable ? make a decision today thinking this is the reason then tomorrow finding that it was wrong because of something new.Something is very wrong
Guest • October 27th, 2008 at 5:01 am
Little correction: Volkswagen temporarily up 95%
Jason B • October 27th, 2008 at 5:07 am
In this environement of deflation, make believe assets are now show to be worth little or nothing. Money is being destroyed. There is no way to protect you money, no matter where it goes, it has to be destroyed. If money goes into gold, the value of gold has to be destroyed. If money goes into dollars and is hidden in mattresses, the value of the dollar has to be destroyed. No matter what you do,
Alfred Moldovan,MD • October 27th, 2008 at 5:12 am
I have been waiting for someone to finally connect the dots. To awaken the American public to the mad ravings of Ayn Rand and her “Objectivist” cult, and the Economic program of Alan Greenspan. No one, including myself, paid any attention to the luntic ravings of Ayn Rand which were the cornerstone of Greenspan’s economic programs. Why were we all so blind? Unfetered,unrestricted, unregulated, laisez-faire capitalism became the cornerstone of Republican government, and no-one caught it, not even Clinton. This mad philosophy of unregulated Capitalism is directly responsible for the current Financial meltdown and the severe economic recession that will follow. Greenspan’s admission the he “found a flaw” and that he was “partially wrong” in advocating for decades that his deregulation policy was correct. Will he made to pay for leading us into the quagmire of the coming years of financial chaos and economic depression.? Will he be called to account for misleading and destroying the greatness that was once ours? We all drank the Cool-Aide of Jonestown, at lest Jim Jones paid with his own life
Phalanges • October 27th, 2008 at 5:26 am
ASEC 7 (Asian and European COnference) has just finished in Bejing. High point comment: Trade should be conducted in local currencies (Yuan, Yen, Euro, Pound) in the near term, dropping the USD.
Guest • October 27th, 2008 at 5:48 am
Somehow I cannot picture NR as Treasury Secretary. Just try to picture him assuring everone that “The financial system is basicly sound” in this crisis. Nope, his role is to beDoctor Doom.
Octavio Richetta • October 27th, 2008 at 5:53 am
Well, I am breaking my own promise. I came back and checked the comments on the issue of blog formatting. After much thought; I believe the best alternative is to do away with the “reply to this comment” format and just have people who want to reply to a comment copy and paste a small fragment of the comment in question (including the time stamp). This is exactly the way we used to do this before.IMO, there are many advantages to going back to the older format:1. SIMPLICITY! A linear format along the time line makes the posts easier to read. Also, it does away with indentation of the reply to comments, which makes comments harder to read AND automatically makes the reply comment less important than the original comment for two reasons: The indentation and the fact that the reply is posted possibly far above the current time stamp.2. Very few comments are truly worthy of a reply; Having to do the referencing manually improves the comment selection process improving the quality of the blog. And, once again, if the reply is a good one, it deserves full comment status (i.e., no indentation) and be posted as the last one in the thread.
Guest • October 27th, 2008 at 5:53 am
why not put SHORTs on most assets?
Octavio Richetta • October 27th, 2008 at 5:58 am
Octavio Richetta on 2008-10-25 15:56:27 wrote: “BTW, even though the “reply to this comment” format appears to make the blog easier to read, it actually makes the blog harder to read for people who, like me now, like to read all posts.”Well, I broke my own promise. I went back and checked the comments on the issue of blog formatting. After much thought; I believe the best alternative is to do away with the “reply to this comment” format and just have people who want to reply to a comment copy and paste a small fragment of the comment in question, including the time stamp (just as I just did above). This is exactly the way we used to reply to comments before.IMO, there are many advantages to going back to the older format:1. SIMPLICITY! A linear format along the time line makes the posts easier to read. Also, it does away with indentation of the reply to comments, which makes comments harder to read AND automatically makes the reply comment less important than the original comment for two reasons: The indentation, and the fact that the reply is posted possibly far above the current time stamp.2. Very few comments are truly worthy of a reply; Having to do the referencing manually improves the comment selection process improving the quality of the blog. And, once again, if the reply is a good one, it deserves full comment status (i.e., no indentation) and, thus, be posted as the last one (i.e., most current) in the thread.I am sure that if the Professor still reads the posts (I doubt he has the time), he would agree with this.
jomos • October 27th, 2008 at 6:10 am
Money, fame and power promised will shut most mouths.
jomos • October 27th, 2008 at 6:13 am
shorting will be outlawed shortly.
Guest • October 27th, 2008 at 6:14 am
No, Greenspan is immune: he is a board member of the BIS which has complete international immunity from prosecution. As does Mervyn King in the UK. Check out the boardmembers of the Bank of International Settlements in Basle. For those that are interested, the single global currency already exists – SRS, based on a weighted basket of currencies. There may be some revaluation of the traded weight going on at the moment…
Guest • October 27th, 2008 at 6:14 am
??? the way the above reads: Octavio Richetta on 2008-10-27 05:58:49 is responding to Octavio Richetta on 2008-10-25 15:56:27 now that’s confusing – Is a change being made on the blog structure or does the lobbying continue?
Guest • October 27th, 2008 at 6:18 am
ok but until then you are allowed to short
Octavio Richetta • October 27th, 2008 at 6:42 am
Watz the problem? it is myslef, replying manually to one of my earlier comments. The time stamp for the original comment allows you to search for it using find on this page under the Edit command.
Octavio Richetta • October 27th, 2008 at 6:45 am
From the very day Paulson and Co. started talking about tampering with stock shorting I knew the bottom was nowhere near. Bans on shorting are possibly the most reliable indicator that markets will continue nosediving.
Guest • October 27th, 2008 at 6:57 am
But the moment it gets outlawed you are screwed.
Anonymous • October 27th, 2008 at 6:58 am
Forgive my ignorance. I did not go to Harvard and did poorly in economics, which qualifies me to comment.First, why is deflation bad? If you have savings in the bank, e.g. you’ve lived within your means and saved what you could as your grandparents taught you, falling prices are your reward. To the extent you think it’s government’s business to monkey around with the economy, shouldn’t it be encouraging savings? And deflation is just part of the process of reaching equilibrium. Businesses miscalculated and produced more goods than were wanted. To get rid of them, they have to reduce the price. Until they’ve gotten rid of that inventory and then adjusted their input costs to produce a product that will be purchased, fiddling around with inflation/deflation mechanisms will just screw the process up. . . But then again, that’s really the point of all this isn’t it?Second, inflation is not just a function of the supply of goods and the demand for those goods. It’s also a function of the amount of money in circulation. If, for example, you double the amount of money in circulation, prices will rise once that new money works its way into the system regardless of demand for goods. (Incidentally, the banks who receive those injections of money first, get the benefit of the deflation. They’re buying at deflated prices using inflated dollars before the economy realizes the dollars have been inflated. Score another one for the big banks, who will be eating your grandchildren.)Third, what difference does monetization of the debt (printing more money) versus issance of more government debt (bonds) really make for purposes of inflation? The bonds will be put on the market. If they’re purchased (an increasingly dubious proposition) the money will come from outside the country (because everyone here is broke). That money will go into the banks. The banks using those deposits will create more money (i.e. loans) limited only by the reserve requirements which are effectively non-existent. Those loan proceeds will in turn be deposited in other banks that will also create money based on those deposits etc. etc. ad infinitum.You get the idea. I think it’s incredibly naive to think the government doesn’t want inflation and so will avoid it. The debts of the government are astronomical. It has only 3 choices: (1) hugely confiscatory taxes (everyone paying 90% of their income), (2)defaulting on the debt and starting over, or (3) inflate away and pay off the debts with devalued dollars. Which do you think the govenrment is chosing? And since the big banks own the government, who do you think is going to get the inflated dollars first? Reminds me of something. The bailout? Yes. That money ain’t going to you. You’re the sucker who gets it last, when it’s lost all its juice.
Guest • October 27th, 2008 at 7:10 am
The way it read I thought that a change was being implemented -but then I realized it was the same person commenting (you) thus my confusion. It would be nice if they would just say the current format lives or it goes back to linear.
Anonymous • October 27th, 2008 at 7:31 am
Dare to Hope (in government)Prepare to be disappointed.The track record in US politics should be apparent. We spend 6 months putting a person in office, then spend the next 4 years tearing him down.Smaller government is the solution.
James • October 27th, 2008 at 7:45 am
Just wanted to say that I didn’t find it argumentative at all. There is a lot to be admired about this way of looking at things. I appreciate your comments and those of Guest above.
Guest • October 27th, 2008 at 8:01 am
yes agree – it could get outlawed but then again between now and then it is ok to do…once outlawed other opportunities likely…what is more worrisome if you are an Americanis the distinct possibility that the US Govt may nationalize the 401K plans just like Argentina did last week – means your 401K would then be owned by the US Govt and not you…for Canadians, this could also happen with the RSP plans…
ntell411 • October 27th, 2008 at 8:21 am
you use alot of impressive mathematical terms but where is your prediction. My mathematical model says DOW bottom at 6000+/-5%!
JimmyTheBanker • October 27th, 2008 at 8:25 am
LOLOL-Looks like Paulson didn’t sleep at all last night!! He was too busy using my tax dollars to buy back the futures!!!! We went from a 6% down open to NOTHING! JUST LIKE THAT! This has to be a coordinated event, has to be! RIGGED RIGGED!!
Guest • October 27th, 2008 at 8:28 am
Yup, looks like the “market” has been trying to engineer a wash-out event and the powers that be just won’t let it happen
jomos • October 27th, 2008 at 8:31 am
Think of it as corrals.The moneychangers want to maintain their monopoly of the herd.So,they create incentives to lure individual cattle from the wild ranges.They put free salt licks(401k,TIF’s,inflation protected bonds…to get you use to coming to their troughs.All the while they are really trying to control your movement from free to branded cattle.All the time they are building fences around you that they alone have the key to the gate.Most of the herd are unaware of the dangers of licking the public salt licks.Once corralled,they determine the when,where, what and how of your new life.It is true that for most of us,there are not free handouts!
Hubbs • October 27th, 2008 at 8:41 am
Juan,I feel your pain. My wife gets mad at me for spending so much time reading this blog…but she doesn’t realize that by reading this blog, I managed to sell all my US equities back in Oct 2007–the amount I have saved on paper has more than paid for the 25 acres of farmland, Beach Resort and custom built new house in Cebu Philippines, money for her niece’s operation, chemotherapy for her nephew, remittances to her mother etc.
StocksGoinGreen • October 27th, 2008 at 8:42 am
GOIN GREEN BABY!!!!!!!!BOOOM!!!!
Anonymous • October 27th, 2008 at 8:44 am
thankyou for proving my point: “socialism has ideas of equality/fairness connected to it (WORKED BETTER IN THEORY THAN PRACTICE)!!Who in the heck do you think is going to pay for this government bailout: the capitalists or the American public?!
Guest • October 27th, 2008 at 8:47 am
what happened friday?
Guest • October 27th, 2008 at 8:50 am
We’re approaching a US election. You don’t get your party re-elected with high gas prices.PeteCA
Guest • October 27th, 2008 at 8:54 am
A headline for ya:Carnage in World MarketsJapan’s stock index closes at lowest level in more than a quarter century, while Hong Kong plunges over 12 percentThey all need the daily no plunge rules we have here in the USSAR! We are down less than 1%
Hubbs • October 27th, 2008 at 8:58 am
Now that is a concise, well thought out summation based on sound principles and logic…in a language I can understand. The kicker which I, also a non-Harvard type, failed to take into account is the fractional banking system which allows money to be created out of thin air each time a deposit is made at a bank and then allowing the bank to suddenly lend out 10 times the amount it has just received as a deposit. PS: Hellasious, now I get the reasoning behind your blog title Sudden Debt or Hell as I Owe Yous.
Flanders • October 27th, 2008 at 9:00 am
QUESTION:What was the percentage drop in profits during 1929-1933?Any numbers?
Guest • October 27th, 2008 at 9:01 am
RALLY MATERIAL!!!!10:00 a.m.U.S. Sept. median home price down 9.1% in past year10:00 a.m. U.S. new-home sales down 33% in past year
Guest • October 27th, 2008 at 9:01 am
10:00 a.m. U.S. Sept. new-home sales rise 2.7% to 464,000 annual rate10:00 a.m. U.S. Sept. new-home inventory falls record 7.3%10:00 a.m. U.S. Sept. new-home sales close to 460,000 expected10:00 a.m. U.S. Sept. new-home sales boosted by 23% gain in West
StocksGoinGreen • October 27th, 2008 at 9:02 am
GREEN BABY!!
Guest • October 27th, 2008 at 9:05 am
So how long before all of the artificial manipulation stops working and we go over the edge?
Guest • October 27th, 2008 at 9:06 am
am colorblind??
Guest • October 27th, 2008 at 9:09 am
how long these fuckers gonna play this game
Guest • October 27th, 2008 at 9:11 am
You see all these economists get to play alchemists with a fractional reserve economic system, with out it they could never prove how smart they are. It creates a degree of complexity so we can all marvel at their genius.
Guest • October 27th, 2008 at 9:14 am
Robert A. Lutz, GM’s vice chairman, announces that bankruptcy is NOT an option and has not been discussed at the board.Suggestion: this might be a good week to get any warranty work done on your new Caddy.
Guest • October 27th, 2008 at 9:14 am
they simply DO NOT care anymore the effect or consequences on their actions”i dont give a #### how you feel or think”im pushing this baby greentheyre like pyschotic serial killers!!
Guest • October 27th, 2008 at 9:15 am
RED baby!!!…mrskeptical
Guest • October 27th, 2008 at 9:19 am
when the reaper comes to get mecan i say Hey joe, death is not an optionIdiot
Guest • October 27th, 2008 at 9:23 am
Bill Gross who in 2002 called for Dow 5000 called earlier today for Libor to come down by tomorrow from 3.51 to less than 2.88 due to the CPFF rates set by the Fed this morning. (note Pimco will run the CPFF on the Feds behalf)He was wrong on in his 2002 prediction let’s see how this one does – Libor has been stuck at teh 3.5 level since the middle of last week.In all my years watching CNBC I have never seen them try to talk up the market as in the last couple of days – makes you want to heave – and the worst is that there are viewers who buy into what they are saying — Oh and guess who the first customer of the CPFF will be — General Electric (parent of CNBC)
Anonymous • October 27th, 2008 at 9:25 am
Chrysler really needs to file bankruptcy – reduce output – would improve outlook for both GM and Ford. It’s ridiculous for GM to absorb Chrysler — to take on Chrysler’s extremely highly paid union and executive work force and retirees.The govt should just say no on that one.
Guest • October 27th, 2008 at 9:26 am
Here in lies the big problem and why the government chooses to bail out creditors instead of debtors, it’s because society draws a line between “capitalists and American public”. This is why the era of free market greed is coming to a close because it is the American public that supports the capitalists through their productivity not the other way around . The way the elite see the world revolving around them and ownership as a entitled state of being to be passed down to their children is the reason for the collapse and fascist tendencies were seeing.
Anonymous • October 27th, 2008 at 9:29 am
Art Cashin is trying to talke DOWN the market – last week mentioned Elliott wave, wants the bottom at 7200 as he calls the “washout” level. So he’s not talking up the market.
Anonymous • October 27th, 2008 at 9:30 am
US equity market has totally decoupled from rest of the world until the elections by an executive order.
Guest • October 27th, 2008 at 9:31 am
there are alway exceptions – Cashin, Santelli and a couple of others are honest – the rest are shills
Anonymous • October 27th, 2008 at 9:31 am
is anyone recommending FXY buy at $106?
Guest • October 27th, 2008 at 9:33 am
agreed but how connected is Cerberus to Washington?
Guest • October 27th, 2008 at 9:38 am
last year manipulation was really bad, ask caponebut this is absurd..and Sarkozy want to preserve this kind of capitalismwhat bullshit
Anonymous • October 27th, 2008 at 9:43 am
Remeber Taiwanese had high hope for their new elected president, yet they are disappointed. Obama is no GOD, he can not fight the mother nature of market force. Debt must be cleansed during the Kondratief winter phase in preparation for the next boom-bust phase.
Roark Calling • October 27th, 2008 at 9:45 am
Dear Professor: please post your thoughts on the currency situation brewing worldwide, and the crisis that is starting to spread in the eastern bloc.
Guest • October 27th, 2008 at 9:49 am
it just shows the problem with humans making decisions. It is the same problem with fixing the current financial system. “Hey, that sounds like a great idea” may be what is first thought about some “solution”. Later on the decision maker may feel like it was REALLY not the best decision…but at that point it may be difficult to change it.
Guest • October 27th, 2008 at 9:52 am
Energy is in infinite supply it’s just finding away to tap into it that is cost effective and safe for the enviroment. This will happen and the crisis you refer to may be the instigator or big push needed to develop this technology. Almost everything electronically or mechanical is vastly more efficient than 50 years ago and there is no reason to believe this trend won’t continue.Also as meat eaters the planet cannot sustain the populations food needs but as vegetarian especially raw vegetarians the planet could easily sustain double or triple the populations food requirements. Live stock require huge amounts of land for growing grains for their feed which is extremely inefficient use of land. Also a raw foodist can get a lot more energy and good health from the same weight ratio of vegetable food vs. meat.
Steven • October 27th, 2008 at 9:56 am
AMBROSE EVANS-PRITCHARD:“The system is paralysed, and it is starting to look like Black Wednesday in 1992. I’m afraid this is going to have a very deflationary effect on the economy of Western Europe. It is almost guaranteed that euroland money supply is about to implode,” he said.HOW WILL THIS IMPACT THE VALUE OF THE EURO?
Capone • October 27th, 2008 at 9:58 am
Professor Roubini, thanks for this extensive review of this topic. Still no answer how in US dollars commodities can decline while dollar declines? What infuence has supply and demand actually had to do with price in commodities over the past year or so compared to liquidity flow and currency value? The dollar tanks and the commodity price rises no?I am perplexed by references to headline inflation and core inflation as if those figures ever reflected reality at all. They never have and perhaps never will. Your predictions of recession as defined by the establishment have never been confirmed due to the blatantly false inflation adjustment to GDP over the past few years. They lied and erroneously refuted your calls on “”"recession.”"”REPOST and this a potential tradeable bottom or even scaling in opportunity… IMHO,certainly the medium term upside must be approaching a point where it is worth the near term downside risk……if this “event” were to continue to unfold perhaps ending with an exclamation point ? ! ? this week…, 50-55-60 should be in play for oil… limit orders down below, scaling in, discipline and patience.i took a look at dollar’s rise from lows compared to corresponding oil, silver and gold declines.dollar 20% ish risehttp://tfc-charts.w2d.com/chart/US/C8silver 50% declinehttp://stockcharts.com/charts/gallery.html?slvoil 50% declinehttp://stockcharts.com/charts/gallery.html?usogold 30% declinehttp://stockcharts.com/charts/gallery.html?gldto reiterate my point above and Professors US dollar warning ! – see 90 as potential resistance for dollar? … (this chart does not show the latest 87.5 price)http://tfc-charts.w2d.com/chart/US/MThere is so much information here and great view points and commentary. I wish it were my job to study this stuff. There just is not enough time in the day.
Guest • October 27th, 2008 at 9:58 am
If I am not mistaken the ex-boyfriend of my cousin’s coworker’s mother is recommending exactly this.
StocksGoinGreenWhether ULikeItOrNot • October 27th, 2008 at 9:59 am
Heeerrrssss Johhny! GREEN IS THE COLOR OF THE DAY!
Guest • October 27th, 2008 at 10:05 am
Most people on this forum are well aware of the cloaked arrogance and greed called “Objectivism” you refer to as it’s been talked about at great length here without much debate. But sadly it gets to be a bit over the heads of most Americans and even if they’re capable of comprehending most don’t want to take the time, they would much rather let Sean Hannity or Rush Limbaugh/Glen Beck do their thinking for them.
Payam • October 27th, 2008 at 10:06 am
No, fool. The depression has been averted through direct equity stakes in the remaining banks, not only here but throughout Europe as well. This is why he is no longer calling it a depression.
Payam • October 27th, 2008 at 10:10 am
Lol I like the trolls keep em coming
Payam Sharifi • October 27th, 2008 at 10:12 am
Speaking about the concept of fluid capital with regard to “energy” is conceptually incorrect.
Anonymous • October 27th, 2008 at 10:13 am
I agree. Ayn Rand was a nutjob and her books are unreadable.
Sasch • October 27th, 2008 at 10:14 am
I agree, the old format was much better.Markets are confusing enough. Please admin, reinstall the old formatting
Guest • October 27th, 2008 at 10:14 am
8 days.Right after the election – if the GOP doesn’t win.PeteCA
jomos • October 27th, 2008 at 10:14 am
There was not one drop.There was an initial drop and a pretty good counter trend rally over 40% and another drop taking the DOW from approx. 410 to 40,if my memory serves me correctly. 90% drops in stocks,bonds,real estate and business’,40% drops in gold and cash was the best asset with the least amount of loss.
Payam • October 27th, 2008 at 10:14 am
Excellent historical post, really applicable to the current situation.
Guest • October 27th, 2008 at 10:25 am
lady in RED.. is dancing with jonny.. cheek to cheek..mrskeptical
Horace • October 27th, 2008 at 10:25 am
IMO you are 100% right.
Guest • October 27th, 2008 at 10:32 am
Anyone playing these markets is a sucker.
Justice Prosperity and Peace • October 27th, 2008 at 10:37 am
The bubble in the glorification of MILITARISM is eating your chance to have a future, America. (Remember The Don rumsfeld announcing on September 10, 2001 (day before a quite nasty event cancelled interest in the fact) that the Pentagon couldn’t account for trillions of dollars it plucked off you??????)Pentagon Tag Sale TimeThe Trillion Dollar Tag SaleHow the Pentagon Could Help Bail Out AmericaBy Nick TurseWars, bases, and money. The three are inextricably tied together.[snips provided here, read the whole article at the link, please.]Since bin Laden’s supreme act of economic judo in 2001, the U.S. military has spent multi-billions of tax dollars on a string of bases in Iraq and Afghanistan, failed wars in both countries, and a failed effort to make good on George W. Bush’s promise to bring in bin Laden “dead or alive.”Despite this record, the Pentagon still has a success option in its back pocket that might help bail out the American people in this perilous economic moment. It could immediately begin to auction off its overseas empire posthaste. To head down this road, however, U.S. military leaders would first have to take a brutally honest look at the real costs, and the real utility, of their massively expensive weapons systems and, above all, those bases.Today, the Pentagon acknowledges 761 active military “sites” in foreign countries — and that’s without bases in Iraq, Afghanistan, and certain other countries even being counted.An extremely conservative estimate of their cost by the Congressional Research Service — $1 trillion (in 2008 dollars) — tops the present economic bailout. Add in brief cut-and-run flops like Lebanon in 1983 and Somalia, from 1992-1995, as well as now-forgotten hollow victories in places like the island of Grenada and Panama, and you tack on billions more with little to show for it.Since 2001, the Bush administration’s Global War on Terror (including the wars in Afghanistan and Iraq) has cost taxpayers more than the recent bailout — more than $800 billion and still climbing by at least $3.5 billion each week. And the full bill has yet to come due. According to Noble Prize-winning economist Joseph Stiglitz and Harvard University professor Linda Bilmes, the total costs of those two wars could top out between $3 trillion and $7 trillion.While squandering money, the Global War on Terror has also acted as a production line for the creation of yet more military bases in the oil heartlands of the planet. Just how many is unknown — the Pentagon keeps exact figures under wraps — but, in 2005, according to the Washington Post, there were 106 American bases, from macro to micro, in Iraq alone.If you were to begin the process of disentangling Americans from this world of war and the war economy that goes with it, those bases would be a good place to start. There is no way to estimate the true costs of our empire of bases, but it’s worth considering what an imperial tag sale could mean for America’s financial well-being. One thing is clear: in getting rid of those bases, the United States would be able to recoup, or save, hundreds of billions of dollars, despite the costs associated with shutting them down.Tag Sales and SavingsIf the Pentagon sold off just the buildings and structures on its officially acknowledged overseas bases at their current estimated replacement value, the country would stand to gain more than $119 billion. Think of this as but a down payment on a full-scale Pentagon bailout package.In addition, while it leases the property on which most of its bases abroad are built, the Pentagon does own some lucrative lands that could be sold off. For instance, it is the proud owner of more than 11,000 acres in Abu Dhabi, “the richest and most powerful of the seven kingdoms of the United Arab Emirates.” With land values there averaging $1,100 per square meter last year, this property alone is worth an estimated $48.9 million. Add in the structures there and you’re talking almost $80 million. The Pentagon also owns several thousand acres spread across Oman, Japan, South Korea, Germany, and Belgium. Selling off these lands as well would net a sizeable sum.Without those bases, billions of dollars in other Pentagon expenses would immediately disappear.Once no longer garrisoning the globe, the Pentagon would also be able to cease paying out the $1 billion or so that goes into the routine construction of housing and other base facilities each year, not to mention the multi-billions that have gone into the construction, and continual upgrading, of bases in Iraq and Afghanistan.And that’s not the end of it either. Back in the 1990s, the Pentagon estimated that it was spending $30 billion each year on “base support activities” — though the exact meaning of this phrase remains vague. Just take, for example, five bases being handed back to Germany: Buedingen, Gelnhausen, Darmstadt, Hanau and Turley Barracks in Mannheim. The annual cost of “operating” them is approximately $176 million. Imagine, then, what it has cost to run those 750+ bases during the Global War on Terror years.Men and MaterielWith most or all of those 761 foreign bases off the books, and a much reduced global military “footprint,” the U.S. could downsize its armed forces. As Andrew Bacevich notes in his book The Limits of Power, it already costs the Pentagon a bailout-sized $700 billion a year to “train, equip, and sustain the current active-duty force and to defray the costs of on-going operations.” Even if current U.S. forces were simply brought home, there would still be significant savings (including, of course, the $10 billion a month going into the Iraq and Afghan wars).The very opposite, however, is happening. Facing manpower demands on an overstretched military, the Pentagon is planning to ramp up the size of the armed forces by 92,000 over the next several years. That expansion comes with a sure-to-rise price tag of $108 billion. This step has the support of large majorities in Congress and both presidential candidates. John McCain has denounced the notion of “roll[ing] back our overseas commitments” and instead proposes “to increase the size of the Army and Marine Corps.” Barack Obama agrees, but has been more specific. He has long touted plans, echoing the Pentagon’s desires, to “increase the size of the Army by 65,000 troops and the Marines by 27,000 troops.”Just attracting this many recruits would cost a small fortune. And this is to say nothing of how much it costs to train, equip, feed, and pay these future troops.Capping, if not decreasing, the size of the military and bringing troops home would be the foundation for a new foreign policy based on non-aggression and fiscal responsibility.This year, for example, the Air Force is spending nearly $65 billion on new weapons systems. By shutting current and future weapons programs not meant for actual defense of the United States, Americans would be looking at hundreds of billions of dollars in savings in the near term. If the Pentagon demilitarized and sold off existing equipment as well, including, for instance, some of its 120,000 Humvees, at least 280 ships, and 14,000 aircraft, you’re talking about another significant infusion of cash.Bases Gone BustIf history suggests anything, it’s that one way or another, on a long enough timeline, all imperial garrisons fall.While it would be difficult to total up just how many firebases, camps, airbases, port facilities, and base camps the U.S. had in Indochina during the Vietnam War, or what it cost to build and upgrade them, the numbers would surely be staggering. What we do know is instructive. For instance, the U.S. Army-Vietnam headquarters complex at Long Binh, about 16 miles from Saigon, had a value of more than $100 million in 1972 — the year the U.S. gave it away to its South Vietnamese allies. They, in turn, lost it when the Saigon regime collapsed in 1975. Today, it’s an industrial park. Similarly, the U.S. poured huge sums into its naval base at Cam Ranh Bay. By 1979, the Soviet Navy was using it and, after abandoning it earlier this decade, may do so again.The Pentagon stands to lose billions more when it finally withdraws from Iraq and Afghanistan. The cost of manning, maintaining, and regularly upgrading the mega-bases in Iraq, in particular, is already a significant financial burden on American taxpayers, but it would be dwarfed by the losses incurred if they had to be abandoned. As such, getting out, even in today’s depressed real-estate market, would be the financially prudent thing to do.The Pentagon Comes HomeWhile we may never know if it was bin Laden’s knowledge of America’s “expeditionary” history that drove him to plan out the 9/11 attacks, he certainly goaded the Bush administration into a Soviet-style military spending spree, complete with a Soviet-style ruinous war in Afghanistan. With some caves for bases, he managed to sink Americans into a multi-trillion dollar financial quagmire.If the United States had never wasted the better part of a trillion dollars fighting a war in Vietnam and, following defeat there, embarked on a scheme to saddle the Soviets with a similarly ignominious loss — which has now led to wars with a multi-trillion dollar price tag — the United States might not be in such dire financial straits today. And yet, despite the worst economic downturn since the Great Depression, the U.S. continues to sink money into costly wars fought from expensive bases overseas with no end in sight. The result is sheer waste in every sense of the word.When Americans want to get serious about a long-term bailout strategy that brings genuine financial and national security, they’ll look to real cost-cutting options like stopping America’s string of costly wars and getting rid of the Pentagon’s vast network of overseas bases. Until then, they are simply helping Ronald Reagan’s freedom fighter, Osama bin Laden, be a better Reagan than Reagan ever was.Nick Turse is the associate editor and research director of Tomdispatch.com. His work has appeared in many publications, including the Los Angeles Times, Le Monde Diplomatique (German edition), Adbusters, the Nation, and regularly at Tomdispatch.com. His first book, The Complex: How the Military Invades Our Everyday Lives, an exploration of the new military-corporate complex in America, was recently published by Metropolitan Books. His website is Nick Turse.com.Copyright 2008 Nick TurseHope what I snipped out to save space does not make the read confusing, and I hope it’s obvious to all here that this has everything to do with economics and is no way “off topic”.
Guest • October 27th, 2008 at 10:49 am
A sucker is born every day So there is at least 365 people playing this market.
JimmyTheBanker • October 27th, 2008 at 10:51 am
Just and FYI, I have a very reliable stock model that says the likely S&P bottom is around 756. If I am correct, this model has only produced 3 other buying opportunities like this in the past since 1966 (Data for the model):Aug 21, 1970Jan 3, 1975Nove 8, 2002If you are young and have a long 401K future, you must have the guts to step in. That level is roughly another 13% lower from where we stand now.
Guest • October 27th, 2008 at 10:54 am
I’m enjoying the show.
smith • October 27th, 2008 at 10:55 am
I need some help. I’m need some help responding to a e mail that lays the blame for the financial meltdown on the democrats. I think there is plenty of blame to go around but stating its all the democrats fault is crazy.They site Fannie and freddie as the root of this mess and the backbone of the argument is Senate democrats killing S.190 in the senate banking committee in 2005. I say its much more complacated than that and much damage had been done by 2005. I need help with why the senate democrats killed s 190. Also, their argument fails to mention the policy of self regulation, credit default swap mess, low interest rates and to much easy credit. Any help would be great.
Guest • October 27th, 2008 at 10:59 am
Intraday trinagle is our of room…we either bust higher or bust lower…
Guest • October 27th, 2008 at 11:01 am
Campaign adds making it on RGE, ?
JimmyTheBanker • October 27th, 2008 at 11:04 am
MONEY!! 19 of the top 25 contribution recipients of Phony & Fraudy money (lots of it) were Democrats! They were bought and paid for and American politics will NEVER work properly until lobbyists are outlawed from the process, NEVER. It is that simple.
Guest • October 27th, 2008 at 11:04 am
When is everyone going to understand that what is going on is decades of average American consumers (that number over 280 million now)saying enough. We don’t belive the press, TV, politicians and tose who are the few (greedy, corrupt, etc) are all running scared now. They are trying to devise schemes to make us feel better and people are not falling for it.Dow going to 4000, companies that took advantge are going under and the 280 million average Americans are now going to reset/level everything on our terms. Start cleaning your own bathrooms now….hahaGame over for the rich and corrupt
Guest • October 27th, 2008 at 11:10 am
You said: “[S}ince the big banks own the government, who do you think is going to get the inflated dollars first? … That money ain’t going to you. You’re the sucker who gets it last, when it’s lost all its juice.”Your definition of the immorality of the fiat monetary system really cuts to the chase! I’ve never read better of how a fiat money system allows power and influence to fall into the hands of those who control the creation of new money, and to those who get to use the money or credit early in its circulation. It belongs on Wikipedia definitions.As Ron Paul put it years ago,” this system of legalized plunder allows one group to benefit at the expense of another. And actual transfer of wealth goes from the poor and the middle class to those in privileged financial positions.”As every dollar created dilutes the value of existing dollars in circulation, “those individuals who worked hard, paid their taxes, and saved some money for a rainy day are hit the hardest, with their dollars being depreciated in value while earning interest that is kept artificially low by the Federal Reserve easy-credit policy.”Printing money, which is literally inflation, is nothing more than a sinister and evil form of hidden taxation.”
crgordon • October 27th, 2008 at 11:10 am
You are asking to for reason and logic to address an emotional issue. For the great unwashed, blaming either party as the sole culprit is an emotional response – much faster than study and research. Whatever logic you may use to defend either extreme is a wasted keystroke – it would require and open mind to consider and open minds are in somewhat limited supply. You seem to have the open mind and a willingness to research. Good luck – you will find the answer.
smith • October 27th, 2008 at 11:15 am
Post not meant as a campaign ad in any way. Just hopping for non bias facts.
Guest • October 27th, 2008 at 11:15 am
White House: Treasury Rescue Plan (TARP) could apply to automaker financing arms.…and perhaps the no money down no payments till 2011 deal on my flat panel television too…
Guest • October 27th, 2008 at 11:17 am
smith, if you ask your same question at a place called ConceptualGuerilla.com, you’ll find help from a pack of info warriors who use Republicans for chew-toys.
Guest • October 27th, 2008 at 11:17 am
and to add to the above: why not just buy every American a house with a car in the driveway … and throw in a gift card with a few grand on it to take care of incidentals.Economics 101
StocksGoinGreen • October 27th, 2008 at 11:22 am
DUDE, IF DOW GOES TO 4000, IT IS OVER FOR EVERYONE!!!!
Guest • October 27th, 2008 at 11:23 am
The ultimate shortsqueeze: VW +150%.15% Stocks where lent to shorties now are only 6% left.Porsche got it.
Guest • October 27th, 2008 at 11:24 am
Now 176% up.
tesla • October 27th, 2008 at 11:26 am
Let’s see. If I had bought on your reliable signal in 1970 I would have lost a cool 18% in 1975 where—voila!—another reliable buy signal comes up? Stop the CNBC bottom calling. People have had enough, already. Oh, and by the way, what was the macro scene like in ’75?
Guest • October 27th, 2008 at 11:29 am
Does that model take into account the baby boomers retiring and pulling out all their money? Could it be that the days of easy money are gone for a long time? If I were an investor I’d be looking to buy only in China or companies with heavy exposure to China investing in the U.S. not good idea.
Guest • October 27th, 2008 at 11:31 am
Now that’s reality! Point well made!
Guest • October 27th, 2008 at 11:33 am
The Freddie Fannie thing is a drowning republican party grasping for any thing that floats. The rebuttal to that argument is vast.
Guest • October 27th, 2008 at 11:37 am
This is hilarious. Of course unless you went short on Volkswagen on Friday.
StocksGoinGreen • October 27th, 2008 at 11:42 am
OFF TO THE RACES!!!!
Guest • October 27th, 2008 at 11:43 am
12:43 p.m.[BBT] BB&T to get $3.1 bln from Treasury’s program
Guest • October 27th, 2008 at 11:46 am
suddenly 700bil does not seem like alot of money..mrskeptical
Guest • October 27th, 2008 at 11:48 am
DUDE- you actually beleive there 25 million people left in the stock market game… it’s all paper money- look at the price of gold… people cant buy food and other day to day things with nuggets of gold…. 4000 isn’t so bad…. it’s till a lot more than the millions of people will have and esepcially those who will be out of work…THE BIG RESET IS IN PROGRESS….
JLC • October 27th, 2008 at 11:50 am
Republicans = Democrats.
Guest • October 27th, 2008 at 11:51 am
Roughly 200% up at the peak. Absolutely incredible.
Guest • October 27th, 2008 at 11:52 am
GREEEEEEEEEEEEEEEEEEEEEEEEEEEEEN!!!!!!!!
will this happen in usa? • October 27th, 2008 at 11:55 am
um, so now a bailed-out bank can take your home if you can’t make a couple of credit-card payments??timesonlineuk
vote Nader or McKinney • October 27th, 2008 at 11:58 am
Yup, and bipartisanship = I’ll hug your elephant if you’ll kiss my ass.
Guest • October 27th, 2008 at 12:04 pm
Democrats=Republicans=Lobbyists
JohnRyskamp • October 27th, 2008 at 12:05 pm
Is this also “systemic risk?” “Systemic risk”–what a bogus concept! Another way to avoid the facts and impose corporatist fascism. Where is the inimitable Dr. Schacht with his MEFO bills? Ha ha!aid: White HouseMon Oct 27, 2008 12:32pm EDT Email | Print | Share| Reprints | Single Page | Recommend (0) [-] Text [+] Market NewsU.S. dollar, yen uptrend intact as risky assets shunned | VideoOil below $64, down on economic gloomTelecoms lift Dow; S&P 500, Nasdaq lower | VideoMore Business & Investing News… Featured Broker sponsored link¥ € $ – Learn. Practice. Trade.WASHINGTON (Reuters) – The finance arms of U.S. automakers such as General Motors Corp and Chrysler could apply aid from the financial rescue package approved by Congress earlier this month, the White House said on Monday.”The automakers do have financing arms, many of them do,” said White House spokeswoman Dana Perino. “And it’s possible that some of those financing arms could be a part of the rescue package, the TARP, as they call it, at the Treasury Department.”(Reporting by Jeremy Pelofsky, editing
Guest • October 27th, 2008 at 12:06 pm
I did the same thing the other day and was pounced upon – best to leave anything that can be misconstrued as partisanship unpublished for the next week or so. IMO
Guest • October 27th, 2008 at 12:08 pm
Black Swan? I saw one today!http://img208.imageshack.us/img208/8818/blackswanchartael4.png
Guest • October 27th, 2008 at 12:12 pm
that’s similar to what you said Friday. Is it different this time?
StocksGoinGreen • October 27th, 2008 at 12:13 pm
FINISHIN UP 325 TODAY!!!
Guest • October 27th, 2008 at 12:14 pm
Just stop paying your debts and let these bastards crumble.
Anonymous • October 27th, 2008 at 12:16 pm
I MUST HUMBLY DISAGREE WITH NR:While your logic makes sense theoretically, I believe in our current situation, as demand for goods and services decreases and more and more capital is injected into the global system, this will lead to a strong RECESSION with moderate INFLATION because the EFFICIENCY of the cost of producing goods and services will decrease because unlike the stock market, there is a considerable lag time for businesses to readjust to changing conditions (Inefficiency) thereby leading to an increase in those costs.
Anonymous • October 27th, 2008 at 12:18 pm
http://finance.yahoo.com/Is this chart true or is there somwthing wrong with it? What’s up with the linear increase in the afternoon session? This is true also for French and German indices? What’s going on? If true, this is absurd!
Guest • October 27th, 2008 at 12:19 pm
S&P and Dow way out of sync
Guest • October 27th, 2008 at 12:23 pm
The seem to have problems getting data, in which case they simply connect the gap with a line. Today this happened with data from the European stocks.
Guest • October 27th, 2008 at 12:24 pm
What’s ironic is they’re trying to save the system you favor, without these interventions capitalism is a goner with the intervention it’s also a goner. Capitalism is being sacraficed so people won’t have to starve to death. It’s a bit awkward but that is what’s happening. Soon you will be a worker to the state and ironically it’s the very system you romance about that collapsed under its own weight.
Guest • October 27th, 2008 at 12:29 pm
The diametric ideals that seperate capitalism from socialism that seem so cut and dry upon closer examination turn out to both be illusionary ideals in times of panic.
Guest • October 27th, 2008 at 12:38 pm
Capitalism will never die, in the long run, because “we are all capitalist, even those of us who don’t know it”"Capitalism” is defined along economic terms on Dictionary.com as “an economic system in which the means of production and distribution are privately or corporately owned and development is proportionate to the accumulation and reinvestment of profits gained in a free market.”“In order to have an economic system in which ‘production and distribution are privately or corporately owned,’ you must have individual rights and specifically property rights,” says Capitalism.org.Fortunately, there are still remnants of capitalism left in the current Monopoly system regulated for the benefit of the privileged few.In today’s Barron’s editorial commentary, “The Crash Must Come,” Thomas G. Donlan writes: “History provides few examples to support those who believe that politicians can use government power to regulate and improve individuals’ impulses. That doesn’t stop them from trying to end the business cycle.”Says Dolan:“The French president, Nicolas Sarkozy, has announced, with neither a trace of an accent nor a trace of sarcasm, that “Laissez-faire is finished.”"The U.S. will lose its status as the superpower of the world financial system,” chortled the German finance minister, Peer Steinbruck. “This world will become multipolar.”…In one of the more lucid passages of “Das Kapital,” Karl Marx said, “In every stockjobbing swindle everyone knows that some time or other the crash must come, but every one hopes that it may fall on the head of his neighbor, after he himself has caught the shower of gold and placed it in safety. ‘Après moi le déluge!’ is the watchword of every capitalist and of every capitalist nation.”He had a good point, quite applicable to the current situation. But we ought to realize that Marxists and others who would hail the end of capitalism must be hailing the end of human nature — just as Marx himself aspired to do.Capitalism — investment for profit — is universal. Neither politics nor revolution can kill it. Markets even existed in the old Soviet Union, even in periods when the penalty for profiteering was death, because, for society to function, goods and services must be exchanged at a mutual profit…In a wiser moment, Sarkozy said recently that “what happened was a treason of the values of capitalism. The market economy itself is not called into question.”We hope it’s this Sarkozy who attends the world economic summit in Washington after the U.S. election. Perhaps he can lead the world to understand that capitalism is the application of money to practical ends, not a political system for the rich to rule the poor…Another possibility is that Sarkozy, a true French director, will demand that the Washington meeting produce hot air about a new world financial order… Either possibility could be the meaning of Sarkozy’s repeated calls for a new Bretton Woods agreement…A more solemn irony is that the Bretton Woods agreement was no model of multipolarity or world concord. It was dictated by the United States. It reflected the astounding dominance of America in the world economy right after World War II. The U.S. accounted for 40% of global economic output and had at least 80% of the gold reserves. Only the dollar was credible enough to be pegged to gold; other currencies could be pegged to the dollar. Thus, the U.S. became the world’s creator and judge of money.The U.S. eventually abused its power to create the world’s money, flooding the globe with unwanted dollars in such profusion that it couldn’t redeem them for gold. In 1971, it admitted that, went off the gold standard and left the world and itself with no restraints on the creation of money and credit.This isn’t the Bretton Woods that anyone admits wishing to recreate. But it’s the likely result. History can repeat itself, both as tragedy and as farce.http://tickerforum.org/cgi-ticker/akcs-www?post=68776
Guest • October 27th, 2008 at 12:47 pm
make sure someone updates the PPT memo to ensure consistent treatment to all indices, thanks
Hubbs • October 27th, 2008 at 12:49 pm
No. I am not through yet! The government, via the taxpayers, both present and future, has handed over hundreds of billions of dollars in bailouts to these banks and other free loaders off the middle class, to do what? Not make loans and be satisfied to reap profits on a 10 fold increase of loan to reserve! Instead, it appears some are looking to buy up more banks, so that the loan ratios,and thus money in circulation, and finally the dilutitive effects of the original currency, go exponential! These powerful banks want to get their cut at all levels of the banking system. As guest above has so eloquently put, the Banksters get the crisp new dollars, and the rest of us get, after the inflation sets in, a piece of old wrinkled paper that some fat cat has used to wipe his butt!
Guest • October 27th, 2008 at 12:52 pm
WALL STREET REFUGEES SET OFF ON STEINBECK-STYLE MIGRATIONOctober 27, 2008 –ALBANY – Bankers and brokers looking to escape the financial meltdown are scrambling to relocate their families, possessions and rarified talent far from Wall Street to places such as Florida, Chicago, Milwaukee, Virginia and Asia.Travis Lacey left investment bank Jeffries & Co. and Wall Street behind in September to work in Chicago for Robert W. Baird, a Milwaukee-based middle-market firm. He also left behind the nagging sense of worry that had plagued him since his company had started announcing layoffs earlier in the year.”Anyone in that environment, you never know what’s going to happen,” Lacey said. “There are a lot of good bankers that unfortunately are at the wrong place at the wrong time, especially in New York.”New York State Comptroller Thomas DiNapoli expects 40,000 Wall Street jobs could be lost by the end of the year. So far he said 13,200 people have lost jobs in New York’s financial sector since a year ago.http://www.nypost.com/seven/10272008/business/wall_street_refugees_set_off_on_steinbec_135464.htm
crgordon • October 27th, 2008 at 1:11 pm
“The U.S. will lose its status as the superpower of the world financial system,” chortled the German finance minister, Peer Steinbruck. “This world will become multipolar.”…So, only the Germans are chortling? I would think the chortle is more widespread.
Detlef Guertler • October 27th, 2008 at 1:20 pm
Ever thought of braindrain-style emigration? If people can’t follow the money (because no money is left) they might return to their family. How many millions of “US Americans”have their family outside the USA?
Guest • October 27th, 2008 at 1:29 pm
How is it the bastards crumble if I stop paying my debts? Don’t you need a majority of people all simultaneously not paying their debts for that strategy to work? If it’s just a few not paying, those few suffer and the bastards don’t even blink, eh? Got any idea what percentage not paying would work, if it isn’t a true majority needed?
2cents • October 27th, 2008 at 1:30 pm
I would like to congratulate Nouriel for his broad and insightful post. However, I would like to comment about the following portion.
Finally, while in the short run a global recession will be associated with deflationary forces shouldn’t we worry about rising inflation in the middle run? This argument that the financial crisis will eventually lead to inflation is based on the view that governments will be tempted to monetize the fiscal costs of bailing out the financial system and that this sharp growth in the monetary base will eventually cause high inflation. In a variant of the same argument some argue that – as the US and other economies face debt deflation – it would make sense to reduce the debt burden of borrowers (households and now governments taking on their balance sheet the losses of the private sector) by wiping out the real value of such nominal debt with inflation.So should we worry that this financial crisis and its fiscal costs will eventually lead to higher inflation? The answer to this complex question is: likely not.First of all, the massive injection of liquidity in the financial system – literally trillions of dollars in the last few months – is not inflationary as it accommodating the demand for liquidity that the current financial crisis and investors’ panic has triggered. Thus, once the panic recede and this excess demand for liquidity shrink central banks can and will mop up all this excess liquidity that was created in the short run to satisfy the demand for liquidity and prevent a spike in interest rates.Second, the fiscal costs of bailing out financial institutions would eventually lead to inflation if the increased budget deficits associated with this bailout were to be monetized as opposed to being financed with a larger stock of public debt. As long as such deficits are financed with debt – rather than by running the printing presses – such fiscal costs will not be inflationary as taxes will have to be increased over the next few decades and/or government spending reduced to service this large increase in the stock of public debt.Third, wouldn’t central banks be tempted to monetize these fiscal costs – rather than allow a mushrooming of public debt – and thus wipe out with inflation these fiscal costs of bailing out lenders/investors and borrowers? Not likely in my view: even a relatively dovish Bernanke Fed cannot afford to let the inflation expectations genie out of the bottle via a monetization of the fiscal bailout costs; it cannot afford/be tempted to do that because if the inflation genie gets out of the bottle (with inflation rising from the low single digits to the high single digits or even into the double digits) the rise in inflation expectations will eventually force a nasty and severely recessionary Volcker-style monetary policy tightening to bring back the inflation expectation genie into the bottle. And such Volcker-style disinflation would cause an ugly recession. Indeed, central banks have spent the last 20 years trying to establish and maintain their low inflation credibility; thus destroying such credibility as a way to reduce the direct costs of the fiscal bailout would be highly corrosive and destructive of the inflation credibility that they have worked so hard to achieve and maintain.Fourth, inflation can reduce the real value of debts as long as it is unexpected and as long as debt is in the form of long-term nominal fixed rate liabilities. The trouble is that an attempt to increase inflation would not be unexpected and thus investors would write debt contracts to hedge themselves against such a risk if monetization of the fiscal deficits does occur. Also, in the US economy a lot of debts – of the government, of the banks, of the households – are not long term nominal fixed rate liabilities. They are rather shorter term, variable rates debts. Thus, a rise in inflation in an attempt to wipe out debt liabilities would lead to a rapid re-pricing of such shorter term, variable rate debt. And thus expected inflation would not succeed in reducing the part of the debts that are now of the long term nominal fixed rate form. I.e. you can fool all of the people some of the time (unexpected inflation) and some of the people all of the time (those with long term nominal fixed rate claims) but you cannot fool all of the people all of the time. Thus, trying to inflict a capital levy on creditors and trying to provide a debt relief to debtors may not work as a lot of short term or variable rate debt will rapidly reprice to reflect the higher expected inflation.
First, I generally agree with your points (Second – Fourth) as to why the bailout funds shouldn’t be monetized. This brings me to your first point. If they are in fact able to stave off collapse, then the very fact that you believe that they will then “mop” up the excess liquidity leads me to conclude that we are indeed headed for a “L” shaped recession. Whereby the time and characteristics of horizontal portion will in fact be determined by the “mopping” actions. Essentially, you are effectively announcing that liquidity will remain rather tight for a long, long time.While I don’t generally disagree with your points based on your assumptions, I do disagree that the results are going to be what you expect. If the bailout (all programs incl.) funds are not monetized then they have to be funded over some given timeframe. On a gross global scale, such funding actually has to by definition be a deflationary catalyst. This is because available monies will now be “tied up” in government bonds and thus will be unavailable for capital investments elsewhere, or through cascade effects, unavailable for consumer spending. Furthermore, there is an additional deflationary multiplier built in due to the fact that the taxpayer must not only pay interest on this debt but eventually pay the debt down. This in turn leaves again less money available for capital investments or consumer spending.One could certainly argue that if the funds are basically imported then the localized effect could be considered short term inflationary, but eventually the interest and debt pay down by the taxpayer will again drag the overall effect back into a deflationary catalyst albeit with a delay.Either way your argument boils down to a stance that we will not see inflation because the burden now and in the future placed upon the taxpayer is so huge that it can’t possibly develop. Even more succinctly, we’re so doomed it doesn’t matter!Unfortunately, as I’ve stated, the very fact that the debt was and is being piled up is and of itself the major deflationary trigger. Pilling on more debt will only … lead to greater and deeper deflation.
The Russian • October 27th, 2008 at 1:37 pm
If you know someone leavin US pl. give me his contacts. I am planning to leave Europe for the US asap, maybe we can swap. EU socialism sucks, and now is a good time, W is (almost) gone.Call it contracyclical..PS Are you German? Have fun with crazy EU president Berlusconi next year
Guest • October 27th, 2008 at 1:38 pm
I know I’ve been chortling.chortle, chortle, chortle…
JohnRyskamp • October 27th, 2008 at 1:45 pm
Why doesn’t Nouriel confess that all these “systemic risk” interventions are nothing more than bubble extenders. And now comes the ultimate leap out of the shadows: currency interventions.And next? Currency restrictions?And what is the reason for all of this? What is the reason for the collapse?The United States refuses to raise the level of scrutiny for housing, even one small level, from minimum to direct scrutiny. You’ll find what I want on page 15 of my book, The Eminent Domain Revolt. Ha ha! Idiots. The survival of the country depends on this slight change. And they still won’t do it.Find out about the absolute, implacable resistance inside the political establishment to allowing even the slightest iota of an increase in the level of scrutiny for housing.No no, they know better than housing. Just you wait…..Heads will roll because of this stubbornness.
Dan the First • October 27th, 2008 at 1:53 pm
If this is correct it seems that Europe is facing almost eminent and inescapable financial crash. Please read this and give me your understanding of the article.http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/3260052/Europe-on-the-brink-of-currency-c…%20sis-meltdown.html
Guest • October 27th, 2008 at 1:59 pm
Where can I download your book The Eminent Domain Revolt: Changing Perceptions in a New Constitutional Epoch?
Anonymous • October 27th, 2008 at 2:01 pm
here’s your link made clickable, DanDan’s link
Guest • October 27th, 2008 at 2:12 pm
Why does the United States refuse to raise the scrutiny?
JohnRyskamp • October 27th, 2008 at 2:14 pm
Just go to Amazon. You can read most new books online now at Amazon.
Berlin taxi driver • October 27th, 2008 at 2:16 pm
Basic facts are largely correct IMO, but the Telegraph and A. Evans-P. are famous for frequent EU and German bashing. He does it every week, that makes it so boringPS Good discussion about the article with Yves on NC
JohnRyskamp • October 27th, 2008 at 2:17 pm
1. The political system will lose the power over money.2. The political system will lose the power over the facts.If you don’t think the scrutiny regime and its enforcement are uppermost in the minds of the political system, just check out the creepy Nancy Pelosi’s response when the Supreme Court upheld the regime in Kelo. Every lawyer who knew about that case, knew that if the Court had decided otherwise (the decision was 5-4), it would have signalled a Constitutional revolution. In any event, a case which, according to precedent, should have come out 9-0, came out instead 5-4. Big surprise. Bad sign.
Mark • October 27th, 2008 at 2:17 pm
Regarding the comment below…1) Energy isn’t infinite. Only that which reaches the earth (primarily from the sun) is the ONLY energy available long-term.2) If you think that being more efficient is going to get us out of this mess I suggest that you read about Jevons Paradox.3) Tell the Eskimos that they have to become vegan. We’re omnivores for a reason. THE issue is one of excess: shipping goods and food out of an area.
PeteCA • October 27th, 2008 at 2:20 pm
Don’t worry about it. BOTH parties share blame in the mismanagement of Fannie and Freddie. Of course we expect to see blatant mudslinging in the last week before the election. But it won’t stick. After all, it wasn’t that long ago that Congress voted to increase the limits of borrowing allowed to Fannie and Freddie. That occurred under a Republican president. And the whole housing bubble occurred under a Republican administration. So long as the Wall St. banks were fat and happy, not a single person in the upper echelons of the Bush admin even bothered to raise a finger regarding the lack of regulatory practices.PeteCA
JohnRyskamp • October 27th, 2008 at 2:20 pm
I am skeptical of these bottom calls, based on several articles I have read that this is the most intelligent, “sneaky” bear market there has ever been, not corresponding in any way to historical bear markets. The suggestion is that it will drain every cent out of the market by the time it is through. I passed by noting the citations, because at the time it seemed the declines would be more rapid and close to the historical norm. Not this one, apparently.Cet ours est tres perspicace.
Lord Sidcup • October 27th, 2008 at 2:22 pm
Okay Payam. Assuming you are being serious, let us let continue this conversation in say, three months, which should establish who is or is not foolish.
JimmyTheBanker • October 27th, 2008 at 2:24 pm
not ecouraging for a quick economic recover…3:22 p.m.[WMT] Wal-Mart U.S. to cut FY 2010 capital spending from FY20083:15 p.m.[WMT] Wal-Mart U.S. to trim supercenter growth, add remodels
PeteCA • October 27th, 2008 at 2:35 pm
I keep seeing projections for unemployment that estimate an 8% future max. rate (based on official figures). I am having a very hard time believing this. Projections based on trends (recessions) from 1980 and the 1970′s forget the significant fact that the US has transitioned to a largely service-based economy. Manufacturing is only something like 15% of total economic activity now. Therefore, it is much more difficult for our current society to re-structure itself into new industries and new types of productive jobs. It seems to me that double-digit unemployment is a much more realistic expectation – with all of the pain and suffering that will go along with that. As I’ve said before – the US economy is at serious risk of implosion … a credit implosion and a major loss in jobs. I suspect that economists in Washington DC are well aware of this, and they’re keeping the facts under wraps from the American people.PeteCA
PeteCa • October 27th, 2008 at 2:54 pm
Taking a look at John Hussman’s weekly commentary today (www.hussmanfunds.com), I appreciate as always Prof Hussman’s commitment to professional attitudes about trading. He’s a very good role model for mental attitude. Although I do get a clear sense that he’s struggling against the massive tide of the “short-term trading mindset” that has flowed into the marketplace over the last decade.Putting all that aside, I do NOT get a warm and comfy feeling when I look at the data in Prof. Hussman’s first chart in the current weekly post. The current market behavior looks – to me – like something that could be quite different than any other recessions since 1929-1930. I am not making a call here (now) for a new Great Depression. It could be, or maybe not. But it is worth looking at that comparison chart and asking yourself if we are repeating similar trends that go with prior recessions.PeteCA
Guest • October 27th, 2008 at 2:55 pm
SGG are you out there? looks like we’ll get triple digits…
stocks closing red • October 27th, 2008 at 2:59 pm
stocks closing red
stock closing red • October 27th, 2008 at 3:02 pm
gee, maybe if the DAX, Hang Seng and Nikkei close at zero overnight the Dow will be down 250 points. ooohhh scary 215…
Guest • October 27th, 2008 at 3:02 pm
teeheehee, the bankster bosses will sue for their bonuses – and win! (just one little tidbit published in this week’s TooMuch online email update)toomuchonlineAmong investment bankers, a sense of entitlement appears to have the upper hand. Despite the financial crisis, say survey results released last week, two-thirds of the financial pros at six top global banks are still expecting bonuses this year. And over half these power-suits are expecting this year’s bonuses to run at least as high as last year’s. Many of those who don’t get the bonuses they expect, says attorney Julie Morris of the London-based Russell Jones & Walker, will probably be suing. Their hero: James Keen, a manager at Commerzbank who lost his job three years ago when the bank shut down his trading desk. Keen had pocketed bonuses of $3.85 million in 2003 and 2004 and claimed he was owed a similar bonus for 2005. He won his case.
PeterJB • October 27th, 2008 at 3:06 pm
“and they’re keeping the facts under wraps from the American people.”And this alone also guarantees things will get far worse… its a human behaviour thingy (obviously designed to maintain the peoples misplaced faith in their appointed “leadership”).People are inherently pioneers and react well, very well to adverse challenges once identified – allow this to remain unidentified and you do not allow the enemy to be confronted and fought.AS I have always said, politics is about keeping a dynamic system in a state of stasis. Wrong.Ho hum
sanjeev • October 27th, 2008 at 3:07 pm
Several flaws in the argument against inflation1. “First … central banks can and will mop up all this excess liquidity that was created in the short run to satisfy the demand for liquidity and prevent a spike in interest rates”.Yes they can … but will they. Taking away the punch bowl is not easy politically.2. “Second, … As long as such deficits are financed with debt – rather than by running the printing presses – such fiscal costs will not be inflationary as taxes will have to be increased over the next few decades and/or government spending reduced to service this large increase in the stock of public debt”.Aha you hedge. The more likely scenario is that printing presses run overtime. In a democracy, the people will throw out the bums who impose significantly higher taxes.3. “Third, wouldn’t central banks be tempted to monetize these fiscal costs – rather than allow a mushrooming of public debt – and thus wipe out with inflation these fiscal costs of bailing out lenders/investors and borrowers? Not likely in my view: even a relatively dovish Bernanke Fed cannot afford to let the inflation expectations genie out of the bottle via a monetization of the fiscal bailout costs; it cannot afford/be tempted to do that because if the inflation genie gets out of the bottle..”Here you rely on the central bank doing the right thing. Please. The genie will be allowed to get out of the bottle to soothe the pain to the public.4. “Fourth, inflation can reduce the real value of debts as long as it is unexpected and as long as debt is in the form of long-term nominal fixed rate liabilities. .. Thus, trying to inflict a capital levy on creditors and trying to provide a debt relief to debtors may not work as a lot of short term or variable rate debt will rapidly reprice to reflect the higher expected inflation”Are the creditors economic buyers of debt?
PeterJB • October 27th, 2008 at 3:12 pm
Yes, “leadership” is in total defensive mode now and their very existence depends on all efforts and all monies to be placed in their defense and sustainability.This is one phenomenon (unnatural) that is and endangered species and near done; and good riddance.Ho hum
Guest (Not JohnRyskamp) • October 27th, 2008 at 3:18 pm
Get the feeling JohnRyskamp is carrying on a conversation with himself as “Guest”? Hmmmmm.
PeterJB • October 27th, 2008 at 3:21 pm
Regretfully, it is so; a sad day but a day that had to come; in the short term it will be difficult for the many, but the future is brighter for the coming moments.We must never forget these days and we must never allow these parasites and feral to take the stage, ever, again.Learn the lessons.Ho hum
Stocks Going No Bid • October 27th, 2008 at 3:26 pm
final trades in DOW stocks i watch printed nicely below low of the day… golly gee whiz batman, lookee the paper equities! the ones you are supposed to buy and hold or should we say buy and hope for the best ? they look like commodities-Boy Wondermeesa thinks they look more like commodities than stocks too.–Jar Jar Binxwhich ones will respond the most favorably after the s _ _ t storm passes?well, historically stocks and commodities move inversely yet now they move together for years… anomalywarning warning (sirens!) historical anomaly returning to historical mean in the near futuree – allocate accordingly$.02 worth from the twisted, bent, shaken, stirred spaghetti brain of Capone
Anonymous • October 27th, 2008 at 3:32 pm
Ditto Ditto!
Guest • October 27th, 2008 at 3:34 pm
4:32 p.m. GE sells commercial paper to Fed as liquidity program starts
Guest • October 27th, 2008 at 3:35 pm
BULLETIN ALASKA’S SEN. TED STEVENS IS CONVICTED IN FEDERAL CORRUPTION CASEWOW! Imagine that, a politician being corrupt!!
Guest • October 27th, 2008 at 3:36 pm
4:34 p.m.Moody’s knocks GM’s debt down another pegThis should just about do GM in…Oh thats right, the government will take some more of my money and give it to them!
JimmyTheBanker • October 27th, 2008 at 3:42 pm
Breaking News >> ATF Says Skinhead Plot to Assassinate Obama, Kill 102 Black People DisruptedWhat a sad friggin world we live in.
Alessandro - http://castellidicarte.blogspot.com/ • October 27th, 2008 at 3:45 pm
Close call.
kilgores • October 27th, 2008 at 3:45 pm
I’ll believe it when I see it.SWK
Wild Bill • October 27th, 2008 at 3:51 pm
Here’s my problem. Maybe you can help me with it. A few years ago, I fell hopelessly in love with Maria Bartiromo. How could I not. Those pouty lips, her perky disposition, her unfaltering optimism. Even when I was losing my entire portfolio, a few optimistic words from her and I didn’t care anymore. I would hang on her every word as she peppered her guests with hard hitting questions. Everything was going along great and then, along came Erin Burnett. I found myself unable to resist her as well. I raged as she kept being interrupted by Cramer. My heart broke as she languidly stretched her lithe body across the desk and reported on the current market condidtions. Her impish grin, dimples and all, were irrestistable.The problem is, I’m infatuated with both of them. When I watch one of them, I feel guilty and unfaithful to the other. I feel so wretched. I even keep two separate portfolios to cherish the losing stocks they individually promote. I shall treasure those turkeys forever.
kilgores • October 27th, 2008 at 4:16 pm
Afa:Funny you mention that. I actually corresponded with Dr. Barbour a few years ago and suggested to him that if time were an illusion, perhaps space was as well. After all, I pointed out, we do not see in three dimensions: our brain takes what our eyes see and transforms it into a three-dimensional experience, like a holograph. Perhaps our senses act in concert with our brain to create a three-dimensional experience that has no independent reality.He responded by refering to Samuel Johnson’s encounter with Bishop Berkley, who had suggested that matter did not really exist and that his assertion could not be refuted. Johnson reportedly responded by kicking a large stone and saying, “I refute it thus.” Seems to me Johnson could have spent a little more time reading the pre-Socratics.I’m a panentheist (which is sometimes difficult to reconcile with being an Episcopalian). While I accept the reality of this relative world, I believe that it is ultimately Maya, an illusion of self and other.I, too, enjoyed the points about Gödel made by subgenious. Systems that depend on postulates are of limited usefulness in arriving at ultimate truths, which (in my view) are ineffable (although I am always fascinated by the fact that mystics from Plato to Shankara to St. John of the Cross inevitably feel compelled to try to express their experience of the Godhead in rational terms).BTW, Mindwalk is an excellent film. Great summary of Fritjof Capra’s essential thoughts. Plus, I’ve always loved Liv Ullman (I have a thing for beautiful Norwegians).SWK
Guest • October 27th, 2008 at 4:17 pm
In “How to Bankrupt a Nation” Michael S. Rozeff, a retired professor of finance, says: “The U.S. government is not near bankruptcy. However, in all three departments, spending, borrowing, and running down its assets, it is doing an excellent job of heading for that target.”Says Rozeff, The federal government has an official debt of around 10,000 billion ($10 trillion) dollars. The liabilities of programs such as Social Security and Medicare add another 60,000 billion dollars. They will add to the debt in years to come. This debt will never be repaid. Think of it as a perpetual mortgage on which you and all your heirs must always pay interest forever…There has been a slow-motion slide toward bankruptcy as the cash flows coming in fail to match the cash flows going out. Spending keeps exceeding the income, which is not rising fast enough to prevent more and more borrowing in order to stay afloat. At present, Uncle Sam is taking in 2,700 billions and spending 3,100 billions. The difference is borrowed, which makes for another 400 billions of debt.The slide is accelerating with the financial crisis. Income growth is slowing and government spending and debt are soaring as it plows money into bad loans and banks. The federal debt will soon rise by 1,000 billions in one year alone…The lobby for more debt is unstoppable. Not too far down the road, the result is going to be higher interest rates (lower bond prices). It will be the only way to induce savers to supply the additional funds that will be needed to pay for the consumption inherent in the social programs like Medicare.The real rate of interest will rise. The risk premium on government debt will rise because the debt is growing relative to national income. The inflation premium will rise because there is more of a threat of inflation when there is more debt. Productive investments will face higher costs of capital, and this will crimp the stock market and economic growth. It’s not a pretty picture.http://www.lewrockwell.com/rozeff/rozeff234.html
Roger • October 27th, 2008 at 4:17 pm
The battle has begun. If you read today’s opinion in the WSJ, you’ll see what amounts to a direct confrontation and contradiction of the current bail-outs. I hope NR can reply to this opinion which is a summary of a new book. It seems like an almost black and white opposition and both positions have strong merits along with heavy risks if we choose wrong.Read today’s WSJ opinion: The Age of Prosperity Is Over by Arthur LafferI can post it if requested.
David in Seattle • October 27th, 2008 at 4:19 pm
Stock market wisdom (very funny!) Once upon a time in a village, a man appeared and announced to thevillagers that he would buy monkeys for $10 each.The villagers seeing that there were many monkeys around, went out tothe forest, and started catching them. The man bought thousands at $10and as supply started to diminish, the villagers stopped their effort.He further announced that he would now buy at $20. This renewed theefforts of the villagers and they started catching monkeys again.Soon the supply diminished even further and people started going backto their farms. The offer increased to $25 each and the supply ofmonkeys became so little that it was an effort to even see a monkey,let alone catch it!The man now announced that he would buy monkeys at $50! However, sincehe had to go to the city on some business, his assistant would now buyon behalf of him.In the absence of the man, the assistant told the villagers. “Look atall these monkeys in the big cage that the man has collected. I willsell them to you at $35 and when the man returns from the city, you cansell them to him for $50 each.”The villagers rounded up with all their savings and bought all themonkeys. Then they never saw the man nor his assistant again, onlymonkeys everywhere!
kilgores • October 27th, 2008 at 4:38 pm
Thank God for the so-called “jack-booted thugs” of the ATF! Sad, indeed, that such acute hatred exists in our society, but we should count ourselves fortunate to live in a country in which the government does all it can to prevent people of that ilk from disrupting through violence the democratic will of the people. Makes you damn proud and thankful to be an American.SWK
Guest • October 27th, 2008 at 5:05 pm
Guest • October 27th, 2008 at 5:05 pm
I request! Thanks.
Guest • October 27th, 2008 at 5:07 pm
This link actually worksNew Roubini interview on Bloomberg
Guest • October 27th, 2008 at 5:07 pm
request
Guest (not JR either) • October 27th, 2008 at 5:08 pm
Actually no …
Imelda Blahnik • October 27th, 2008 at 5:10 pm
A huge problem with the CDS market is its opacity. The practice of reassigning contracts, and the fact that the value of contracts exceeds assets many times over makes it incredibly difficult to know who is holding what, who owes whom, etc. One step that’s been suggested is the creation of a centralized exchanged (like a stock exchange I think), a clearinghouse for CDS issues and sales. Obviously reform of the ratings firms is essential.
Guest • October 27th, 2008 at 5:13 pm
“The Fed and Financial Madness: Crossing the Rubicon (Again)” by William L. AndersonOctober 27, 2008 — Today, I write about [a]Rubicon that has been crossed, that dealing with the financial system that seems now to be in permanent meltdown.It began with the government’s intervention in the Bear Stearns meltdown last spring, and the Fannie and Freddie bailouts. It then went to the infamous $700+ billion “bailouts” of financial institutions, the Federal Reserve System’s purchase of AIG stock, and the recent promise by the Fed to purchase commercial paper of mutual funds. With the U.S. Department of the Treasury looking to take equity positions in banks and the willingness of Congress and the executive branch to further expand the government’s actions, it seems that there is no stopping this state-run juggernaut…Thus, we hear from people like recent Nobel Laureate Paul Krugman, who has declared that the government intervention and increased financial regulation to follow (which means that the government will increase the various financial “safety nets” that got the markets into trouble in the first place) is what is currently needed, along with huge doses of new government spending:”While the manic-depressive stock market is dominating the headlines, the more important story is the grim news coming in about the real economy. It’s now clear that rescuing the banks is just the beginning: the nonfinancial economy is also in desperate need of help.”And to provide that help, we’re going to have to put some prejudices aside. It’s politically fashionable to rant against government spending and demand fiscal responsibility. But right now, increased government spending is just what the doctor ordered, and concerns about the budget deficit should be put on hold.”It gets even better:”…there’s not much Ben Bernanke can do for the economy. He can and should cut interest rates even more – but nobody expects this to do more than provide a slight economic boost.”On the other hand, there’s a lot the federal government can do for the economy. It can provide extended benefits to the unemployed, which will both help distressed families cope and put money in the hands of people likely to spend it. It can provide emergency aid to state and local governments, so that they aren’t forced into steep spending cuts that both degrade public services and destroy jobs. It can buy up mortgages (but not at face value, as John McCain has proposed) and restructure the terms to help families stay in their homes.”And this is also a good time to engage in some serious infrastructure spending, which the country badly needs in any case. The usual argument against public works as economic stimulus is that they take too long: by the time you get around to repairing that bridge and upgrading that rail line, the slump is over and the stimulus isn’t needed. Well, that argument has no force now, since the chances that this slump will be over anytime soon are virtually nil. So let’s get those projects rolling.”For those who might recognize the Keynesian language, Krugman is describing the so-called liquidity trap (which Murray Rothbard demolishes in America’s Great Depression), and the only way to bust out of this “trap” is for government to spend (and spend, and spend). If you don’t believe me, read on:”Will the next administration do what’s needed to deal with the economic slump? Not if Mr. McCain pulls off an upset. What we need right now is more government spending – but when Mr. McCain was asked in one of the debates how he would deal with the economic crisis, he answered: ‘Well, the first thing we have to do is get spending under control.’”If Barack Obama becomes president, he won’t have the same knee-jerk opposition to spending. But he will face a chorus of inside-the-Beltway types telling him that he has to be responsible, that the big deficits the government will run next year if it does the right thing are unacceptable.”He should ignore that chorus. The responsible thing, right now, is to give the economy the help it needs. Now is not the time to worry about the deficit…”First, and most important, the government is not “injecting capital” into troubled banks and financial firms; it is diverting capital from productive uses to non-productive uses. The determination on who is to be bailed out and who is permitted to fail is done with a political calculus. Furthermore, the only means by which this can be done is for the Fed ultimately to “monetize” the bonds issued by the U.S. Department of the Treasury, something that people other than central bankers, Princeton University economists, and New York Times editorialists call inflation.The government’s actions are not re-establishing faulty credit markets; they are trying to cover for the huge malinvestments made by these financial institutions…Second, we need to do away with the notion that government brings gravitas and stability to the markets. The last time I checked, government was a political institution…What has been missing from the equation during the latest financial meltdown is the role of losses in providing valuable information to the markets. In a true private enterprise economy, those who experience losses either will change the direction of their activities or go out of business…Lest people believe that a government running $500 billion budget deficits can inject new capital into the markets, rejuvenate them, and act responsibly, a reality check is needed. These latest interventions are not the end; they are just the beginning. By crossing the financial Rubicon armed with the idea that Fed-created “liquidity” can solve any financial problem, the government has unleashed something that certainly is not going to be contained by the present administration and Congress and absolutely not by the one-party government that voters are preparing to give this country on November 4…Keep in mind that the government is not “rescuing” the financial system and certainly not capitalism; it has punished firms that made good investment choices and has rewarded people who made the errors. However, no one in a decision-making capacity is listening, anymore…The Rubicon has been crossed and New Deal II is underway. To paraphrase Sir Edward Grey, the lamps are going out all over the United States, and I only can hope they are again lit in my lifetime.http://www.lewrockwell.com/anderson/anderson231.html
Guest • October 27th, 2008 at 5:23 pm
YAH, RIGHT, SOCIAL SECURITY AND MEDICARE ARE THE PROBLEM.COULDN’T BE THE FUCKING PENTAGON TOTAL FUCKING WASTE.BITE ME, LEW ROCKWELLers.
Anonymous • October 27th, 2008 at 5:30 pm
ATF prolly cooked up the plot themselves. You’re fooled to be proud of them goons, but don’t take that as anything like wanting harm to come to anyone black or white or red, yellow, brown, whatever.
Ryan Darwish • October 27th, 2008 at 5:57 pm
Nouriel,While you make many good points in your as usual astute analysis, I have not seen consideration of the impact of repudiation of the US $, or at least a fall in US $ demand. Yes, it is true that the US $ has strengthened of late. I have also heard you, in one of your interviews, express concern about the fate of the US dollar. When considering the issuance of additional US debt and US deficit funding issues, it is not a far reach to the position of deteriorating strength in the US $.In real terms, there appears to me to be a relationship between the strength of the US $, and those things it can purchase, oil being a prime example. This suggests to me that the benign inflation, or even deflation hypothesis, needs more work in flushing out the probability of and the implications of a US $ decline.Thank you for all your good work.Ryan Darwishwww.investmentmegatrends.com
Guest • October 27th, 2008 at 6:06 pm
sort of like the action in the 30′s. many brilliant speculators met their match in that, i’m sure.
Anonymous • October 27th, 2008 at 6:08 pm
I really don’t know how our large numbers of former realtors and mortgage brokers will retrain for the new economy. Seriously. They could start over in ninth grade I suppose …
Guest • October 27th, 2008 at 6:20 pm
lol
JLC • October 27th, 2008 at 6:26 pm
Nice analysis, especially the last few sentences. I hadn’t thought of it that way.
JLC • October 27th, 2008 at 6:30 pm
Good point. Transparency and facing the facts are what it will take to get through this. Once a challenge is identified it can be met, but if it is continually obfuscated then people’s reactions to it will be perpetually distorted.
Guest • October 27th, 2008 at 6:30 pm
Barney Frank is calling for a 25% cut in military spending:”In a meeting with the editorial board of The Standard-Times, Rep. Frank, D-Mass., also called for a 25 percent cut in military spending, saying the Pentagon has to start choosing from its many weapons programs, and that upper-income taxpayers are going to see an increase in what they are asked to pay.”- http://www.southcoasttoday.com/apps/pbcs.dll/article?AID=/20081024/NEWS/810240332/-1/NEWS10
JLC • October 27th, 2008 at 6:32 pm
Yes, when was the last time the Fed “did the right thing” and “took away the punch bowl”? The early ’80s?
Guest • October 27th, 2008 at 6:33 pm
Peter Schiff believes we are heading for a depression:FP: How bad is the economic downturn going to get?PS: As of right now, we are headed for a depression, meaning a protracted period of economic contraction with elevated levels of bankruptcies and unemployment. It’s not going to be a recession the way we’ve come to know them. Whatever we call it, we’re still going to be in it at the end of [U.S. presidential contender Barack] Obama’s term. He’s going to be known as a depression-era president. Unfortunately, [things he's proposing to do] could make it worse and drag it out. The economy will be the issue when he goes for reelection…We have to restructure the economy in a different way. That’s going to involve a lot of pain. We haven’t seen the full extent of the doom and gloom in real economy. It’s showing up on Wall Street first because they funded all of the extravagance…But the bigger picture is the party is over. We’re going to have to get used to a different lifestyle. We’re going to have to start saving money again.- http://www.financialpost.com/story.html?id=911549
JLC • October 27th, 2008 at 6:34 pm
Ummm . . . huh?
JLC • October 27th, 2008 at 6:35 pm
If I ran my business the way the government runs theirs, I would have been locked up long ago. Unless I could afford lobbyists.
kilgores • October 27th, 2008 at 6:41 pm
The Laffer-Curve hypothesis — the notion that by lowering marginal tax rates, net tax revenues will increase — has long since been discredited among respectable economists. It is hard for me to take seriously anything Arthur Laffer says.SWK
Guest • October 27th, 2008 at 6:47 pm
Laffer is Reagan/Thatcher’s original supply-side moron, isn’t he? Ew…
bcdogs • October 27th, 2008 at 6:55 pm
The link works, unfortunately bloomberg’s version of win media player sucks…I can’t download the player they want me to to run it (it is 10 and I have 11)…I will try to find it on utube or if someone else has a link and is kind enough to post it, would appreciate it much. If I find a utube link I will post it, is this a link from the interview he did in Madrid? I still haven’t found a utube of that, quite a few people in the comments section on that couldn’t view it.If any one is around who can answer some questions for a newbie who is trying to deal with their 88 year old mom’s finances…I have googled and cannot find an answer to these questions. I have also called the customer service # and they could not answer them either!?Is Morgan Stanley, now (10/27/08) a national bank? They don’t have a website and my understanding is they were converting their Utah affiliated bank to a national FDIC insured bank. When I search for info on the Utah bank (google is my friend), it simply takes me back to the investment page of MS.Her MS broker is offering her a 5 year cd at 5%?!! or so interest. I’m wondering if this is a third party CD of some sort (beware no?). She needs something more liquid than five year CD right now anyhow, age and health. I’m wondering why they are offering an interest rate higher than what others are offering for the same product also. I am also wondering why I can’t find anything by googling Morgan Stanley CD rates.If they are now a bank taking deposits it seems to me they would have a website somewhere indicating that. How do you open a checking account with Morgan Stanley Bank, go to a brokerage office (I think not)?. Broker made the offer because I want her money in FDIC insured accounts, not SIPC accounts and in the same city. The broker is not even in the same city. Even though I have a durable power of attorney that gives me standing to do her banking business for her, the customer service rep at MS, said that they couldn’t use that, will talk to the broker tomorrow! Pretty close to calling the lawyer who did the trust/poa for advice.I do not want her to have any of her money with MS. I want her to park it in a cash account or CD FDIC insured account at a good regional bank here, that is NOT taking bailout money.Would a regional bank take bailout money if they didn’t need it?What is to now prevent any bank that is taking bailout money to aggressively go after those sound regional banks and do a hostile takeover? The incompetents are rewarded and swallow up the competent?I have tried to google and answer my questions, but am coming up short with answers.For those that need a good laugh, MS on their web page still brags about getting the Credit Derivatives House of the Year award from Risk magazine, I think if I were Morgan Stanley, I’d do some web work on that site ASAP, maybe someone there just has a real sense of irony?
kilgores • October 27th, 2008 at 6:57 pm
Look, the ATF is not above reproach by any means. I’m a lawyer representing a small business owner in a case against the ATF right now. That being said, I think it is irresponsible to suggest that the ATF “cooked up” a plot by racist skinheads to assassinate Mr. Obama and kill scores of innocent black students at a predominantly black high school in Tennessee.SWK
kilgores • October 27th, 2008 at 6:58 pm
Well, those aren’t exactly the words I would have used, but yes, he was the “genius” behind supply-side economics (or, as George H.W. Bush referred to it before being offered the vice-presidency, “Voodoo Economics”).SWK
bcdogs • October 27th, 2008 at 7:06 pm
I found a link to what I think might be the above posted bloomberg link that doesn’t work…at any rate this person seems to have Prof. Roubini’s latest videos up.video Prof RoubiniIn case I messed up my html:http://www.youtube.com/watch?v=oMJMJ-hn3c0I am bookmarking his videos since bloomberg’s media player stinks…
Guest • October 27th, 2008 at 7:11 pm
The nation’s largest public pension fund, known as Calpers, is unloading stocks in a falling market to make sure it has enough cash to meet its obligations.The pressures come as the California Public Employees’ Retirement System has had to raise cash to fulfill commitments to private-equity firms and real-estate partners. The giant fund’s predicament is another sign of how the market selloff is tightening the screws on pension funds nationwide. Many other pension funds have similar partnerships and could also confront liquidity strains.Members of the board investment committee at Calpers held a closed-door session on Monday and discussed ways to raise more cash, according to people familiar with the matter. The issue was brought to the attention of the committee after members of the investment staff expressed concern, a person with knowledge of the matter said.Typically, Calpers keeps less than 2% of its assets in cash, but the recent demands have forced it to raise that level.”Calpers receives more than enough cash from employers and members to cover its monthly benefit obligations” to retirees and other beneficiaries, a Calpers spokeswoman said Friday.Under normal conditions, pension funds count on some private-equity partners to distribute investment gains, while pensions owe some partners more capital. During the recent market selloff, however, distributions have dried up while capital calls continue. That’s created a mismatch and a cash strain.Since the credit markets have tightened up and real estate and alternative investments aren’t very liquid, Calpers has been compelled to sell off stocks to raise large sums quickly. Those sales are turning paper losses into realized losses.Calpers said it had $188.8 billion under management as of Wednesday, down 21% from the end of June. The fund, which said it had about 63% of its assets in global stocks at the end of August, has been punished severely by the stock-market selloff.Critics say that some of Calpers’s troubles are of its own making. The pension fund is the main investor in a partnership that is expected to lose much of its nearly $1 billion investment in LandSource, a venture that owns thousands of acres of undeveloped residential land north of downtown Los Angeles and that filed for bankruptcy protection in June.The pension fund also has been without two of its top leaders, the chief executive officer and chief investment officer, since they resigned at midyear. The fund has been operating with interim people in those key positions.Calpers initially tried to fill the CIO spot first, but without any luck. A former fund official said that candidates were reluctant to take the job while the permanent CEO position remained vacant. Calpers is now focusing on landing a CEO first, recently hired a search firm and hopes to have its new leader in place by December, people familiar with the matter say. The fund intends to have a CIO by no later than February.Anne Stausboll, a politically well-connected attorney and the former California chief deputy treasurer, is serving as interim CIO. She appears to be the only top Calpers official vying for the CEO job, according to people familiar with the situation. She doesn’t have the investment experience that is common for a CIO of a large fund, which critics say puts Calpers at a further disadvantage during this particularly severe market crisis.”Calpers’s investment office is being capably managed by our interim CIO and her team of seasoned investment professionals,” the spokeswoman said.Calpers counts 1.6 million former and current public employees as members whose benefits are contractually guaranteed. If the fund suffers large investment losses, it has little choice but to hit up employers — such as cities and counties — to increase their contributions. Calpers recently indicated plans to raise the contribution level starting in 2010 and 2011, unless the recent investment losses can be reversed. The fund estimates that employers would have to pay an additional 2% to 4% of their payroll to Calpers if the June fiscal year ends with returns of negative 20%, which the fund recently hit.http://online.wsj.com/article/SB122488856222368463.html?mod=googlenews_wsj
and I'm no white supremacist! • October 27th, 2008 at 7:25 pm
ATF cold blooded Mother and Son murderersTHE SIEGE AT RUBY RIDGEBATF’s entrapment of Randy Weaver, an outrageous precursor to the Waco inferno, led to the violent deaths of three people. Says his defense attorney, Gerry Spence: “What happened to Randy Weaver can happen to anybody in this country.”BY JIM OLIVERSeeing his dog, Striker, shot to death by masked intruders clad in camouflage, Sammy Weaver, 14, fired back in fear for his life. The 4 ft. 11″ tall youngster was hit in the arm, then shot in the back as he turned to run for home. He died instantly, killed by an agent of the federal government.Cradling her 10-month-old daughter in her arms, Vicki Weaver stood in the doorway of her home, mourning her slain son, unaware that she herself had only seconds to live. In an instant a bullet tore into Vicki Weaver’s face, blew through her jaw and severed her carotidartery. The bullet was fired from 200 yds. away by an agent of the federal government.Go read the rest of the article and then tell me I can trust the ATF! GAWD!
Guest • October 27th, 2008 at 7:30 pm
There’s your proof they do indeed cook up plots. I fight against racism and white supremacists all the time, but the ATF sure as HELL don’t make me proud to be an American.
kilgores • October 27th, 2008 at 7:36 pm
I agree, the Ruby Ridge incident was indefensible. From time to time, members of law enforcement agencies engage in despicable behavior, but that doesn’t mean we should do away with law enforcement. We do, however, need to hold people accountable for their actions, including members of the law enforcement community when they violate the Constitution and the law.SWK
Guest • October 27th, 2008 at 8:00 pm
Without questions, this week is shaping up to be a critical turning point in the global financial crisis. With CALPERS finally announcing they are in trouble, I believe things will quickly unravel. CALPERS is the world’s largest pension fund, and I would have thought they would have kept things under wraps for a year or two.Obviously, the pension funds are in far worse trouble than anyone anticipated. This is the last straw. This is total destruction of the global financial system, as this is the top of the Ponzi Scheme designed by men like King Henry when he ran Goldman Sachs with accomplices like Kashkari, Rubin, Corzine and other outright frauds that raped the global financial system.The only way out of this is to go after the crooks like Paulson and his buddies that made trillions of dollars at the expense of the masses. That will never happen, so we slide into chaos . . . just as I began writing about four years ago.http://realestateandhousing2.blogspot.com/
kilgores • October 27th, 2008 at 8:01 pm
I’m glad you fight against racists and white supremacists all the time.Ruby Ridge, however, was not a plot. It was the product of poorly crafted rules of engagement prepared by the FBI and extremely poor judgment on the part of the participating officers. See, e.g., DEPARTMENT OF JUSTICE REPORT REGARDING INTERNAL INVESTIGATION OF SHOOTINGS AT RUBY RIDGE, IDAHO DURING ARREST OF RANDY WEAVER at http://www.byington.org/Carl/ruby/ruby1.htm.The conspiracy of these skinheads to assassinate Mr. Obama and kill scores of innocent high school children was certainly a plot by any definition, and it was thwarted by the ATF, which deserves credit for that success, however egregious its negligence may have been in 1992 at Ruby Ridge.SWK
Guest • October 27th, 2008 at 8:05 pm
You can save your strawman argument. I never said anything like we should get rid of law enforcement.And don’t expect me to withhold the plain damn truth when someone posts that the ATF makes them thankful and proud to be american and puts jack-booted thugs in quotation marks.
Guest • October 27th, 2008 at 8:06 pm
entrapment ain’t a plot?Americans deserve the TRUTH.
Guest • October 27th, 2008 at 8:07 pm
there will be bloodim sure of it.. WW3 dead aheadpigmen bankster will not like thispaper money is now “unofficially” worthlessdidnt The Third Reich bartered with its trading partners? pls correct me if im wrong..http://www.ft.com/cms/s/0/c47190fe-a452-11dd-8104-000077b07658.htmlThais to barter rice for oil with IranBy Javier Blas in London and Tim Johnston in BangkokPublished: October 27 2008 18:22 | Last updated: October 27 2008 18:41Thailand on Monday said it planned to barter rice for oil with Iran in the clearest example to date of how the triple financial, fuel and food crisis is reshaping global trade as countries struggle with high commodity prices and a lack of credit.The United Nations’ Food and Agriculture Organisation said such government-to-government bartering – a system of trade not used for decades – was likely to become more common as the private sector was finding it hard to access credit for food imports.“Government-to-government deals will increase in number,” said Concepción Calpe, a senior economist at the FAO in Rome. “The lack of credit for trade could lead also to a resurgence of barter deals between countries,” she added.———————————————————————-US has plundered the world’s wealthhttp://www.reuters.com/article/email/idUSTRE49N1XX20081024BEIJING (Reuters) – The United States has plundered global wealth by exploiting the dollar’s dominance, and the world urgently needs other currencies to take its place, a leading Chinese state newspaper said on Friday.The front-page commentary in the overseas edition of the People’s Daily said that Asian and European countries should banish the U.S. dollar from their direct trade relations for a start, relying only on their own currencies.A meeting between Asian and European leaders, starting on Friday in Beijing, presented the perfect opportunity to begin building a new international financial order, the newspaper said.The People’s Daily is the official newspaper of China’s ruling Communist Party. The Chinese-language overseas edition is a small circulation offshoot of the main paper.Its pronouncements do not necessarily directly voice leadership views. But the commentary, as well as recent comments, amount to a growing chorus of Chinese disdain for Washington’s economic policies and global financial dominance in the wake of the credit crisis.”The grim reality has led people, amidst the panic, to realize that the United States has used the U.S. dollar’s hegemony to plunder the world’s wealth,” said the commentator, Shi Jianxun, a professor at Shanghai’s Tongji University.
Guest • October 27th, 2008 at 8:12 pm
TEN WAYS TO CUT COSTS IN THE HOME ALA WW1i like no 6.,http://timesonline.typepad.com/timesarchive/2008/10/ten-ways-to-cut.htmlIn August 1914, a Times correspondent sat down with his lady wife to work out some household economies that would help them, and the country, survive the war.This is the list they came up with (warning – you may find some of their cost-cutting efforts more useful than others):War Programme1. The servants must take 25 per cent less wages.2. We must have no guests to stay in the house.3. No casual entertaining; no theatres; no outings for pleasure costing over 2s 6d each; no taxis; only third-class travelling.4. No wines, spirits, or cigars.5. Neither of us must have one single new article of dress for at least a year.6. No newspapers except The Times and one feminine weekly.7. If any golf, no caddies; and only on the home course.8. No Christmas, birthday, or wedding presents.9. Rigid economy in food; no soups, entrees, sweets (ie, crystallized fruits, etc), or fruit, beyond what is thought necessary for the boy’s health, except from our own garden; only joints, plain puddings, and simplest food.10. Strict economy in coal, gas, and electric light.And how did they get on? Click on this link to read their report back, two years into the programme: A Lesson from Life, from The Times, February 3, 1916
MNmom • October 27th, 2008 at 8:12 pm
LOLOLOLOL Oh man, I have to remember that one!!! That was good!
kilgores • October 27th, 2008 at 8:22 pm
The “plain damn truth” is that the ATF foiled an extremist plot to kill a presidential candidate and innocent children. Do you want to get rid of the ATF when they do good, too?I put “jack-booted thugs” in quotations because this is how ATF agents are commonly characterized by some. That term might have been understandable in describing the actions of the ATF at Ruby Ridge, but not what the ATF did today in thwarting mass murder.Now you are putting words in MY mouth. I am proud when our government “does all it can to prevent people of that ilk from disrupting through violence the democratic will of the people.” I don’t care if it’s the ATF, the FBI, the Secret Service, the DEA, or any other law enforcement agency doing that important work.SWK
kilgores • October 27th, 2008 at 8:24 pm
Sure, legal entrapment can be a plot. I don’t imagine you’re talking about legal entrapment, though.SWK
kilgores • October 27th, 2008 at 8:30 pm
Oh, leave it to the Chinese. Surely THEY won’t be plundering the world’s wealth through their coming economic hegemony later in this century.This blog just gets nuttier and nuttier…SWK
Guest • October 27th, 2008 at 8:33 pm
Pete,Thanks for pointing us readers to the data. I too see that chart as ominous and it clealy shows that this bear market is unlike any other. Furthermore, it appears to be setting up for a washout waterfall down.PKB
AfA • October 27th, 2008 at 8:47 pm
I gave an assignment to Bernanke last week hoping he would profit from a “relatively” light weekend to finish it up this week. We will see what announcements will be made.
Guest • October 27th, 2008 at 8:48 pm
Yes.
Healthy Skeptic • October 27th, 2008 at 8:56 pm
Somebody just proved the ATF fomented a plot and lied about it before, so how do you know they didn’t just do the same thing again? Why would the records on these punks be unsealed just this week? It all sounds pretty fishy to me.Remember, the first lie the government tells you is that they don’t lie, kilgores.
Mark • October 27th, 2008 at 8:58 pm
I’ve always wondered why those on the political “left” are targets more often than those on the “right.”How odd it is that those who support authoritarianism tend to violate the very authoritarian system.
Guest • October 27th, 2008 at 9:02 pm
thanks for posting this – here’s an other article from Canada – perhaps that’s a currency to buy Heed the advice of The Smartest Man
Guest • October 27th, 2008 at 9:04 pm
and this is the correct link Heed the advice of The Smartest Man
AfA • October 27th, 2008 at 9:07 pm
Breaking News:Live images of the amazing massacres caused by the flight off/to safety as the herds continue falling in the usual traps (or should I say TARPs)Look at how one hedge fund was cut in half.The closing statement is even more telling.
Guest • October 27th, 2008 at 9:08 pm
Alcohol, Tobacco and Firearms should be the name of a convenience store, not a government department.
Pecos Banker • October 27th, 2008 at 9:10 pm
I recently heard that Caesar invaded Gaul to get the gold of the celtic tribes. What I can’t understand is what we are doing? When armies invade other countries, it is usually to make off with the wealth of those countries and to exact tribute. Yet we invade countries and set up bases to spread democracy and the American way of life. Is this another example of American exceptionalism? Why aren’t we out there plundering and enslaving populations? I thought that’s what invasions and armies are for. We could sure use the money!
Guest • October 27th, 2008 at 9:14 pm
The markets in Asia are really not looking very healthy – not a huge sell off, though one does need to get used to a 70 point move on the Nikkei equal to 1% – but as I was saying things just are just not looking healthy – we are in some real serious trouble I think -
kilgores • October 27th, 2008 at 9:23 pm
@ Healthy SkepticThe first lie a LYING government tells you is that they don’t lie. I’m not prepared to believe that everything the government tells me is a lie, or that government is my enemy. The government is me, you, and all of us. If there is lying going on, there are legal and political means of redressing those problems. We need to stop blaming OUR government for OUR problems, and begin acting like adult citizens with the responsibility to see that public affairs are handled responsibly.As I said, I’m a lawyer, and I very much appreciate your healthy skepticism, especially when it comes to government. Wish we had all been a little more skeptical about WMDs in Iraq, too.I remember in the second film of the “Why We Fight” series produced by Frank Capra, “The Nazis Strike,” a cartoon of a radio tower broadcastings “Lies–Lies–Lies” and the narrator remarking how if you repeat something often enough to the people, they’ll begin to believe it. That’s image is certainly pregnant with meaning.All this being said, if one takes skepticism too far, it becomes irrational paranoia. Plots and conspiracies do take place, but when one starts seeing them under every rock, it’s time to take a break and catch a few innings of the World Series.SWK
Pecos Banker • October 27th, 2008 at 9:23 pm
I’ve been scrutinizing housing in my neighborhood, and I have to tell you that there are a lot of for sale signs. Nobody can say that I haven’t done my part in scrutinizing. Indeed, it probably works better to leave it to private individuals rather than having government officials going around counting for sale signs. That’s just more government expense and more burden on taxpayers.
Guest • October 27th, 2008 at 9:27 pm
I agree, agree and agree.
Guest • October 27th, 2008 at 9:28 pm
Bloomberg’s Editor’s Video Pick tonight is “Roubini Says U.S. Needs $400 Billion Stimulus Package.”The earth does not revolve backwards and money, no matter how much you wish you it did, does not grow on trees. It only comes from productivity, nowhere else. It’s bad enough to have politicians flimflamming their way through the American treasury, but the last thing we need are economists who forget that every single time the piper plays, the piper must be paid…or he doesn’t play.For people who are working, and for taxpayers, a stimulus package means it costs more than you get because of government waste in accounting time and making nationwide mailings and distributing lots of your money to people who don’t pay taxes. It’s a horrendous unworkable gimmick. It’s like a company dipping into employee funds without giving the employees a raise, but giving them a turkey. “What a wonderful guy.” With tears of gratitude streaming down our cheeks, we walk all the way to the Poor House with our turkeys.But I’ll say one thing for Dr. Roubini, when he gets with the program he goes all the way: In for a penny, in for a pound.
Guest • October 27th, 2008 at 9:31 pm
youre extrapolating meaning;it could happen OR it could not happen (my grammar sucks)OTOH, US historical records shows the gubment did used the currency exchange/reserve status to their advantangenuttier? well, trillions of dollars was wiped out from the world stock mkts, increase in nuttiness does not surprise me
We Need A Payroll tax Holiday • October 27th, 2008 at 9:42 pm
Dr. Roubini:Is It Time for a FICA Holiday?Traditional thinking has produced an economic disaster, which the same traditional thinking cannot solve. New thinking is needed. As the U.S. and world economies slip into recession, we must remember this ultimately is a bookkeeping crisis. The housing “market” was destroyed, but not the actual houses. They still exist. Nothing real has been destroyed. Instead, we are starved for money.This problem should be easier to remedy than a food shortage, water shortage, wartime destruction, or an epidemic, because a money shortage can be cured by the simple expedient of adding money – something the federal government is uniquely empowered to do.To add money,we propose a FICA payroll tax “holiday,” whereby the US Treasury will make our Social Security and Medicare payments for us. This immediately will add about $10 billion per week to our take-home pay, and another $10 billion per week to business income, both of which urgently are needed. When we eliminate this partly double, severely regressive tax, we instantly will give consumers the income they need to make their mortgage payments, to pay their bills, and to do the shopping American business craves. The FICA holiday instantly will help business by providing money for jobs and investment.In direct contrast, the “top down” approach (saving Fannie Mae et al, buying toxic mortgages), while helpful and perhaps even necessary, does not directly address consumer/business money needs, and therefore has had only modest effect.Common knowledge holds that Social Security and Medicare will face bankruptcy even with FICA. So proposed fixes invariably include benefit cuts that would reduce consumer incomes, or tax increases that would cut consumer and business spending power – exactly the opposite of what our economy requires.Many people fear federal deficit spending when it supports Social Security and Medicare, but not when it supports the military or economic bailouts. Social Security spending for 2008 is approximately $600 billion, about equal to the defense budget. Ironically, both candidates for President believe Social Security will run out of money and the military will not. The $1 trillion in “stimulus” spending was authorized without increased taxes. Both candidates advocate tax cuts.Does anyone believe this deficit spending will cause federal government checks to bounce? No, even during the darkest days of the Great Depression, the federal government never ran out of money. Massive government spending, before and during World War II, helped lift us from the Depression.In 1971 President Nixon eliminated any risk of federal government insolvency by ending the last vestiges of the gold standard. At the stroke of a pen, he assured that neither the federal government, nor any of its agencies, ever could run short of money. Social Security and Medicare, being two of those 400+ federal agencies, are immune from bankruptcy..If Congress authorizes the Treasury to make our Social Security and Medicare payments for us, thus allowing our take-home pay to rise, the economy immediately will turn around. With this simple bit of accounting, we can afford to live in our houses that already exist, buy food and clothing, and continue to provide each other with every kind of service. The elimination of FICA deductions would provide consumers and business with more than a trillion additional dollars annually, guaranteeing recovery to a healthy economy.Won’t this increase the federal deficit? Yes, but President Nixon’s signature guaranteed the government never will run short of money to service its debts. This removed taxation as a source of federal money, and together with federal spending, it became a mere tool to create optimal output and employment. Whatever deficit accomplishes that goal is the right size.Doesn’t a large deficit cause higher interest rates? No, interest rates are set by the Federal Reserve. The government can, and has, set rates at any level it wishes.Doesn’t a large federal debt create a shortage of lending funds? On the contrary, the more money the government pumps into the economy, the more lending funds are created.Won’t our children and grandchildren have to pay for the increased deficit? No, the government owes the debt and easily services a debt of any size. Our children and grandchildren are not the debtors. (In many cases, they even are the creditors.) Because the “right” size debt will continue to grow forever as our economy grows, it never should be reduced or paid back.Meanwhile, each year the increased debt will help keep output high and unemployment low, benefiting our children and grandchildren with additional income, goods and services.Won’t increasing the deficit by eliminating FICA, cause inflation? President Carter had modest deficits and high inflation. President Reagan had the highest deficits in American history and modest inflation. Contrary to popular wisdom, America has not experienced an historical relationship between federal debt and inflations, recessions, high interest rates or any other negative economic effects. Large deficits have been associated with economic growth.In summary, we offer new thinking – an accounting fix to an accounting problem: Eliminate FICA and pay for Medicare and Social Security the same way we pay for Congress, the military, the Supreme Court and every other federal agency, by folding these two federal agencies into the general fund. The economic crisis has presented us with the rare opportunity to accomplish two important goals: Permanently fix the seemingly intractable Social Security and Medicare problems, and energize our entire economy
Guest • October 27th, 2008 at 9:47 pm
Awesome visual of the carnage!
kilgores • October 27th, 2008 at 9:48 pm
As Mel Brooks said in History of the World – Part I, “It’s good to be the king!”No doubt the U.S. has taken advantage of its status as the source of the world’s reserve currency. My point is, that is to be expected.At least some foreign nationals that complain about the U.S. taking advantage of them are not facing facts. For example, the U.S. has borne the lion’s share of defense costs for Western Europe for the last 63 years or so, allowing the EU to develop and prosper because its member states did not have to concern themselves with paying for guns and butter at the same time. The U.S. can be rightly criticized in many respects regarding its projection of military force around the world, but many other countries have benefitted enormously for decades under the aegis of U.S. military protection. Both good and bad have come out of the Pax Americana, as was the case with the Pax Romana,You’re right, too, that there’s nothing nuttier than trillions being wiped from the world markets in the span of months. Amazing.SWK
kilgores • October 27th, 2008 at 9:51 pm
The ATF Convenience Store! What a great idea! ;-DSWK
Casey • October 27th, 2008 at 9:58 pm
Not True, Bush’s Treasury Secretary, and his chief of Economic advisors warned of mismanagement at Fannie Mae. Demacrats blocked any chance for increasing regulatory oversight. These people include Barney Frank, and Christopher Dodd (Mr discounted loan from nowdefunct Countrywide). They also, received large contributions from Fannie Mae. Such as Barack Obama’s $800K political contribution from Fannie Mae. I don’t mean to be political about it, but these are just the facts.Making loans to people who could not afford the home loans, led to the housing crisis. Demacrats pushed for reduced loan standards, such as no down payment mortgages, to make housing available to the poor. This eventually led to increasing default rates, increasing foreclosures, and then falling home prices. Then financial banking crisis, now stock crisis. Housing Market must be allowed to clear before recovery will come..
Roger • October 27th, 2008 at 10:09 pm
This is an opinion piece in today’s Wall Street Journal. I said I would post it if requested from an earlier post, so here it is. I think it’s important since it gives an opposing argument to the current bailout plans.The Age of Prosperity Is OverThis administration and Congress will be remembered like Herbert Hoover.By ARTHUR B. LAFFERAbout a year ago Stephen Moore, Peter Tanous and I set about writing a book about our vision for the future entitled “The End of Prosperity.” Little did we know then how appropriate its release would be earlier this month.Financial panics, if left alone, rarely cause much damage to the real economy, output, employment or production. Asset values fall sharply and wipe out those who borrowed and lent too much, thereby redistributing wealth from the foolish to the prudent. This process is the topic of Nassim Nicholas Taleb’s book “Fooled by Randomness.”David GothardWhen markets are free, asset values are supposed to go up and down, and competition opens up opportunities for profits and losses. Profits and stock appreciation are not rights, but rewards for insight mixed with a willingness to take risk. People who buy homes and the banks who give them mortgages are no different, in principle, than investors in the stock market, commodity speculators or shop owners. Good decisions should be rewarded and bad decisions should be punished. The market does just that with its profits and losses.No one likes to see people lose their homes when housing prices fall and they can’t afford to pay their mortgages; nor does any one of us enjoy watching banks go belly-up for making subprime loans without enough equity. But the taxpayers had nothing to do with either side of the mortgage transaction. If the house’s value had appreciated, believe you me the overleveraged homeowner and the overly aggressive bank would never have shared their gain with taxpayers. Housing price declines and their consequences are signals to the market to stop building so many houses, pure and simple.But here’s the rub. Now enter the government and the prospects of a kinder and gentler economy. To alleviate the obvious hardships to both homeowners and banks, the government commits to buy mortgages and inject capital into banks, which on the face of it seems like a very nice thing to do. But unfortunately in this world there is no tooth fairy. And the government doesn’t create anything; it just redistributes.Whenever the government bails someone out of trouble, they always put someone into trouble, plus of course a toll for the troll. Every $100 billion in bailout requires at least $130 billion in taxes, where the $30 billion extra is the cost of getting government involved.If you don’t believe me, just watch how Congress and Barney Frank run the banks. If you thought they did a bad job running the post office, Amtrak, Fannie Mae, Freddie Mac and the military, just wait till you see what they’ll do with Wall Street.Some 14 months ago, the projected deficit for the 2008 fiscal year was about 0.6% of GDP. With the $170 billion stimulus package last March, the add-ons to housing and agriculture bills, and the slowdown in tax receipts, the deficit for 2008 actually came in at 3.2% of GDP, with the 2009 deficit projected at 3.8% of GDP. And this is just the beginning.The net national debt in 2001 was at a 20-year low of about 35% of GDP, and today it stands at 50% of GDP. But this 50% number makes no allowance for anything resulting from the over $5.2 trillion guarantee of Fannie Mae and Freddie Mac assets, or the $700 billion Troubled Assets Relief Program (TARP). Nor does the 50% number include any of the asset swaps done by the Federal Reserve when they bailed out Bear Stearns, AIG and others.But the government isn’t finished. House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid — and yes, even Fed Chairman Ben Bernanke — are preparing for a new $300 billion stimulus package in the next Congress. Each of these actions separately increases the tax burden on the economy and does nothing to encourage economic growth. Giving more money to people when they fail and taking more money away from people when they work doesn’t increase work. And the stock market knows it.The stock market is forward looking, reflecting the current value of future expected after-tax profits. An improving economy carries with it the prospects of enhanced profitability as well as higher employment, higher wages, more productivity and more output. Just look at the era beginning with President Reagan’s tax cuts, Paul Volcker’s sound money, and all the other pro-growth, supply-side policies.Bill Clinton and Alan Greenspan added their efforts to strengthen what had begun under President Reagan. President Clinton signed into law welfare reform, so people actually have to look for a job before being eligible for welfare. He ended the “retirement test” for Social Security benefits (a huge tax cut for elderly workers), pushed the North American Free Trade Agreement through Congress against his union supporters and many of his own party members, signed the largest capital gains tax cut ever (which exempted owner-occupied homes from capital gains taxes), and finally reduced government spending as a share of GDP by an amazing three percentage points (more than the next four best presidents combined). The stock market loved Mr. Clinton as it had loved Reagan, and for good reasons.The stock market is obviously no fan of second-term George W. Bush, Nancy Pelosi, Harry Reid, Ben Bernanke, Barack Obama or John McCain, and again for good reasons.These issues aren’t Republican or Democrat, left or right, liberal or conservative. They are simply economics, and wish as you might, bad economics will sink any economy no matter how much they believe this time things are different. They aren’t.I was on the White House staff as George Shultz’s economist in the Office of Management and Budget when Richard Nixon imposed wage and price controls, the dollar was taken off gold, import surcharges were implemented, and other similar measures were enacted from a panicked decision made in August of 1971 at Camp David.I witnessed, like everyone else, the consequences of another panicked decision to cover up the Watergate break-in. I saw up close and personal Presidents Gerald Ford and George H.W. Bush succumb to panicked decisions to raise taxes, as well as Jimmy Carter’s emergency energy plan, which included wellhead price controls, excess profits taxes on oil companies, and gasoline price controls at the pump.The consequences of these actions were disastrous. Just look at the stock market from the post-Kennedy high in early 1966 to the pre-Reagan low in August of 1982. The average annual real return for U.S. assets compounded annually was -6% per year for 16 years. That, ladies and gentlemen, is a bear market. And it is something that you may well experience again. Yikes!Then we have this administration’s panicked Sarbanes-Oxley legislation, and of course the deer-in-the-headlights Mr. Bernanke in his bungling of monetary policy.There are many more examples, but none hold a candle to what’s happening right now. Twenty-five years down the line, what this administration and Congress have done will be viewed in much the same light as what Herbert Hoover did in the years 1929 through 1932. Whenever people make decisions when they are panicked, the consequences are rarely pretty. We are now witnessing the end of prosperity.Mr. Laffer is chairman of Laffer Associates and co-author of “The End of Prosperity: How Higher Taxes Will Doom the Economy — If We Let it Happen,” just out by Threshold.
Jason B • October 27th, 2008 at 10:11 pm
Here are the CIRCUIT BREAKERS FOR THE DJIA after the market opens:Level 1 Halt: a 1,100-point drop in the DJIA before 2 p.m. will halt trading for one hour; for 30 minutes if between 2 p.m. and 2:30 p.m.; and have no effect if at 2:30 p.m. or later unless there is a level 2 halt.Level 2 Halt: a 2,200-point drop in the DJIA before 1:00 p.m. will halt trading for two hours; for one hour if between 1:00 p.m. and 2:00 p.m.; and for the remainder of the day if at 2:00 p.m. or later.Level 3 Halt: a 3,350-point drop will halt trading for the remainder of the day regardless of when the decline occurs.
Roger • October 27th, 2008 at 10:13 pm
I just posted it about 14 post-boxes below. You can also find it by doing a search for “Laffer” – (press ^F)
Guest • October 27th, 2008 at 10:34 pm
i predict a boring mundane tuesday, just like “Boring Monday”
Guest • October 27th, 2008 at 11:08 pm
A good Lesson from Life from the good life. Perhaps not so good if one must begin at the opposite end of the social strata – but, still, most of us can easily cut back if we must — for a the right cause.However, I must say these folks do not represent my great-grandparents: maybe Henry Paulson’s. Servants, theatres, taxis, first-class travel, wines, spirits, cigars, The Times, a feminine weekly, country clubs, caddies, crystallized fruits…? In 1914? On a Times’ correspondent’s salary?Let’s see, for the boy, Hank, an austerity programme today might include cut backs in, say, mansions, jets, yachts, world travel, classic cars, Renoirs and Van Goghs, 30 carat diamonds and emeralds, $138,870-a-year butlers who iron creases out of newspapers, Botax, swimming estates, vacation islands, and congressmen. A sign of the times, n’est-ce pas?
JLC • October 27th, 2008 at 11:11 pm
So now the Fed is bailing out the Koreans???http://www.bloomberg.com/apps/news?pid=20601087&sid=aH.7.EElweAU&refer=home
AfA • October 27th, 2008 at 11:14 pm
Yes, and I find it surprising that they are expressing the drops in terms of points and not percentages. The more the DJIA falls the more difficult will it be to reach those levels.Next question that comes to my mind; why there are no circuit breakers for rallies? Even in China they have a 10% maximum movement either way.
JLC • October 27th, 2008 at 11:19 pm
only joints, plain puddings, and simplest food.Roll ‘em up. Somthings got to take the place of the wines, spirits and cigars.The joints will make the plain and simple foods more appetizing
JLC • October 27th, 2008 at 11:23 pm
Remember the people that complained about Roubini using the phrase “dead cat bounce” earlier this year? They’re not going to like this video.
Guest • October 27th, 2008 at 11:26 pm
Capital One, Key Among 19 Banks Getting $35 Billion (Update5)Oct. 27 (Bloomberg) — At least 19 regional U.S. banks, including SunTrust Banks Inc. and Capital One Financial Corp., accepted $35 billion in government cash as the Treasury rolled out the second half of its $250 billion package to shore up lenders and thaw frozen credit markets.Treasury Secretary Henry Paulson is doling out cash to recapitalize struggling lenders and jump-start takeovers in an industry suffering from the worst housing crisis since the Great Depression. SunTrust, Capital One, KeyCorp and PNC Financial Services Group Inc. are among regional lenders that have agreed to take cash so far by selling preferred shares to the U.S.“This is just unprecedented,” said BMO Capital Markets analyst Peter Winter. “What the government has said is that you can’t let the financial system fail, and if this doesn’t work they’ll come up with another plan.”The capital infusions come as governments worldwide do all they can to ensure the stability of banks. Kuwait’s central bank said it will guarantee deposits at Gulf Bank KSC, which remains solvent after clients defaulted on currency derivatives contracts, the state-run Kuwait News Agency reported. Paulson already gave $125 billion to nine of the biggest U.S. lenders.Some banks are raising money on their own. Mitsubishi UFJ Financial Group Inc., the Japanese bank investing $9 billion in Morgan Stanley, said it will sell as much as 990 million yen ($10.7 billion) of stock to replenish its capital. Japan’s biggest bank may sell as much as 600 billion yen of common shares in the 12 months starting Nov. 4.Niagara Falls, Beverly HillsThe latest U.S. banks to benefit from the government’s Troubled Asset Relief Program, or TARP, spanned the nation, ranging from City National Corp., in Beverly Hills, California, to First Niagara Financial Group Inc., based in upstate New York near Niagara Falls. The banks may be joined by life insurance companies, some of which are now in talks with the government about potential Treasury investments, said Jack Dolan, spokesman for the American Council of Life Insurers in Washington.Dolan declined to say which companies are involved in the talks. Spokesmen for MetLife Inc. the biggest U.S. life insurer, and No. 2 Prudential Financial Inc. declined to comment today. Most U.S. property and casualty insurers won’t participate, according to a statement today from Evan Greenberg, chief executive officer of Ace Ltd. and chairman of the American Insurance Association.State Street, Northern TrustOther financial firms participating in the program included State Street Corp., the world’s largest money manager for institutions, which is selling a $2 billion stake. Northern Trust Corp., a custody bank that oversees $3.53 trillion, plans to sell the government a $1.5 billion stake.“We’re happy to do our part to support the financial and economic stability of the U.S.,” Capital One spokeswoman Tatiana Stead said in an e-mailed statement. The McLean, Virginia-based bank is raising $3.6 billion.News of the infusions helped spur gains in U.S. financial stocks. Huntington Bancshares Inc. advanced 15 percent to $9.17 as of 4:10 p.m. in New York Stock Exchange composite trading. Regions Financial Corp., which is selling a $3.5 billion stake, added 11.3 percent. Fifth Third Bancorp, which expects $3.4 billion from the Treasury, rose 5 percent after earlier surging as much as 20 percent.BB&T Corp., the best-performing stock in the KBW Index this year, said today it will sell $3.1 billion in preferred shares and warrants to the Treasury. BB&T is based in Winston-Salem, North Carolina.Tennessee, ClevelandFirst Horizon National Corp., Tennessee’s largest bank, said Friday it received preliminary approval to receive about $866 million from the U.S. Treasury. PNC on Oct. 24 announced it was buying National City Corp. for $5.2 billion in stock after receiving $7.7 billion from the Treasury. Washington Federal Inc. and Valley National Bancorp said over the weekend they would receive a total of $560 million from the government. City National said it would sell $395 million in preferred stock and warrants.Cleveland-based KeyCorp plans to sell $2.5 billion in equity. Huntington, of Columbus, Ohio, announced its application for $1.4 billion in a statement today.The funds will help KeyCorp “gain flexibility in managing our balance sheet” and “enhance our ability to lend to our relationship clients,” Chief Executive Officer Henry L. Meyer said in a separate statement today.Dallas, San FranciscoThe bank said that had the $2.5 billion capital increase been in place on Sept. 30, KeyCorp’s Tier 1 ratio, measuring the ability to absorb losses, would have been about 10.76 percent, rather than 8.48 percent. A ratio above 6 percent puts banks into a “well-capitalized” category.Another bank accepting funds was Comerica Inc. The Dallas- based bank, which also does business in Canada and Mexico, said today that it plans to sell $2.25 billion in preferred stock and warrants to the Treasury, boosting its Tier 1 ratio to 10.35 percent.Also included among banks getting funds were UCBH Holdings, the San Francisco-based company that owns United Commercial Bank, which said it expects $298 million from the Treasury. Bank of Commerce Holdings, which owns Redding Bank of California, expects as much as $17 million.Baltimore-based Provident Bankshares Corp. said today it got preliminary approval to participate in the U.S. program and didn’t disclose how much it will get. Old National Bancorp, based in Evansville, Indiana, said today that it has preliminary approval to raise $150 million from the government, and hasn’t decided whether to participate.HF Financial Corp., based in Sioux Falls, South Dakota, said today that it also received preliminary approval to sell a $25 million stake to the government. HF Financial is the parent company for financial firms including Home Federal Bank and Mid America Capital Services Inc.Following are banks that have announced participation in theTreasury program. Some company names have been shortened forspace:FIRST ROUNDCitgroup $25 billionWells Fargo $25 billionJPMorgan Chase $25 billionBank of America $15 billionMerrill Lynch $10 billionGoldman Sachs $10 billionMorgan Stanley $10 billionBank of New York $3.0 billionState Street $2.0 billionTOTAL $125 billionSECOND ROUNDPNC $7.7 billionCapital One $3.6 billionSunTrust $3.5 billionRegions Financial $3.5 billionFifth Third $3.4 billionBB&T $3.1 billionKeyCorp $2.5 billionComerica $2.25 billionNorthern Trust $1.5 billionHuntington $1.4 billionFirst Horizon $866 millionCity National $395 millionValley National $330 millionWashington Federal $230 millionUCBH Holdings $298 millionFirst Niagara $186 millionOld National $150 million*HF Financial $25 millionRedding Bank $17 millionProvident –**TOTAL $34.93 billion (35.18)*Old National hasn’t decided whether to participate.**Provident didn’t say how much it expects.http://www.bloomberg.com/apps/news?pid=20601170&refer=home&sid=aSbq7pnoWhZg
AfA • October 27th, 2008 at 11:37 pm
Want to see food stamps Wall Street version?
AfA • October 27th, 2008 at 11:45 pm
That’s the least the Fed can do in exchange of what KDB did for Lehman; talk it up until the last weeks.BTW, I still have some internal Lehman documents (internal audit, deontology, Chinese Wall … don’t laugh … and some other documents signed by Fuld himself). If anyone is interested in acquiring rare collection of a dinosaur corporation from a dinosaur industry, I can organize an online auction.
AfA • October 27th, 2008 at 11:53 pm
Ok, then, it must be rated:Caution: This is an R-rated motion picture. The program may contain violent material, strong language or adult themes. Viewer discretion is advised.
RBG • October 28th, 2008 at 12:10 am
I understand why US might not want to run the printing press. BUt, isn’t the case more that they might “be forced to” as less and less foreigners will want to own US treasury?
Anonymous • October 28th, 2008 at 12:30 am
Citadel is a very strange hedge fund. It is the only one to have a direct settlement account with DTCC and refuses to use any prime broker, dealing direct in markets. It is very secretive about its investors. It is so well connected that it was the go-to buyer for Sentinel’s assets in Chicago last summer, the Florida teachers’ money market Jeb Bush bankrupted at Christmas, and deep discount purchase of other very desirable distress assets. I’ve always assumed that if we could see Citadel’s investors, there would be a lot of Washington/Virginia names on the list.
Guest • October 28th, 2008 at 12:36 am
see, Asia is now rallyingwhy? i just dont know..but its green, DJI gonna go green today..why? i just dont know
Alessandro - http://castellidicarte.blogspot.com/ • October 28th, 2008 at 5:10 am
LOL! this will among my classics!
Alessandro - http://castellidicarte.blogspot.com/ • October 28th, 2008 at 5:49 am
No, Friday was a juke, today is the day, VW touched €1000 per share, 100% on top of yesterday 100%.And we are not talking a low volume, exotic firm. Just plain insane.
Alessandro - http://castellidicarte.blogspot.com/ • October 28th, 2008 at 5:52 am
Volkwagen story is nut. Friday +100% was a juke, today is the day, VW touched €1000 per share, 100% on top of yesterday 100%.And we are not talking a low volume, exotic firm. Just plain insane.DAX30 at some point was up 10% with all other shares down. Unreal.
Octavio Richetta • October 28th, 2008 at 6:29 am
Broken Securities Industry Still Has $20 Billion to Pay Bonuseshttp://www.bloomberg.com/apps/news?pid=20601109&sid=aVann0.cv9Tw&refer=exclusive
kilgores • October 28th, 2008 at 6:30 am
Gotta give credit where credit is due.According to the Wall Street Journal, the suspects were initially taken into custody by the Crockett County Sheriff’s Office as they drove around in a vehicle covered with racially offensive words and symbols. The ATF investigated and filed the federal complaint against them. The Secret Service apparently then was called in after the suspects repeated statements about their plans to the ATF agents.Thank God for the Crockett County Sheriff’s Office of Crockett County, Tennessee!SWK
Guest • October 28th, 2008 at 6:33 am
Crop yields has consistently increased year over year. Get a clue!
Guest • October 28th, 2008 at 6:56 am
3 month LIBOR according to Bill Gross of Pimco and the CPFF was to fall today (Tuesday) to 2.88 due to the Commercial Paper Fed Facility that began Monday.LIBOR has been at 3.51 been for almost one week, having leveled off after declining from the 4.5 range earlier in October. A healthy LIBOR rate would be in the 1.6 range.This morning 3 Month LIBOR was set at 3.46.
jomos • October 28th, 2008 at 6:57 am
This is revisionist history,he did nothing but pump the”Greatest story never told” with Larry Kudlow.
Guest • October 28th, 2008 at 7:12 am
Americans just don’t grok sarcasm this subtle, Pecos. You need to make it more obvious.
Guest • October 28th, 2008 at 7:37 am
Haven’t kept up on all the details, but last I read it was also the amount of water needed to produce ethanol that made it a net loss/loser idea.
Guest • October 28th, 2008 at 7:38 am
How do we know that the printing presses aren’t already rolling out the dough?
Guest • October 28th, 2008 at 7:50 am
An interesting interview that SGG may appreciate:Marc Faber on CNBC Europe
Guest • October 28th, 2008 at 7:51 am
100% strongly disagree with Mark that overpopulation is any cause to worry, but do agree/confirm the soil producing those increased yields is DEAD now without the fertilizers. And runoff from those fertilizers is poisoning our fresh water. Huge monocropping farms are 30 times less efficient than small, diversified farms.
Guest • October 28th, 2008 at 7:56 am
Yes! Yes! Yes Yes Yes Yes YES!!!!!!!!!!Give this person a Nobel Prize and elect them President!
Guest • October 28th, 2008 at 7:58 am
Is anyone purchasing RSW? I worry about whether Rydex might become victim to any serious market problems… are these concerns unfounded?Would appreciate feedback from this intelligent community…
Guest • October 28th, 2008 at 8:12 am
If you ask me, this Laffer idjit oughta be charged with crimes against humanity since his economic lies cost so many people their lives. Trickle down economics is a deadly weapon of mass destruction.
Icke • October 28th, 2008 at 8:27 am
That was really something to see. Yesterday afternoon the stock was up roughly 200%. Ever seen anything like that? About two weeks ago some newspaper wrote that the Volkswagen market capitalization was more than the market capitalizations of BMW, Daimler, Renault, Peugeot, Fiat, GM, Ford, Mitsubishi and Hyundai combined.Meanwhile the Volkswagen stock price has doubled and the others did not do very well…
Alessandro - http://castellidicarte.blogspot.com/ • October 28th, 2008 at 8:33 am
The US government has several alternatives to the printing presses:* spend less (much less)* tax more (much more)* sell assets (Anyone wants Alaska for $1tn?)Nouriel thinks they will go with the asset sales.
Guest • October 28th, 2008 at 8:41 am
New thread/post.
Guest • October 28th, 2008 at 10:51 am
Where is the new thread?
Guest • October 28th, 2008 at 11:28 am
If you didn’t find it yet, scroll back up to nearly the very top of this page, and on the right-hand side look for the list of Nouriel’s most recent posts, then click on the very first one listed.
Roger • October 28th, 2008 at 1:27 pm
Because Laffer’s opinions are based on facts and since he is one of the few voices contradicting the bailouts now in progress around the world, it would be helpful to everyone to show where his opinions are wrong – if they are wrong. It does nothing to just throw general words around like “revisionist” or “crimes against humanity.”Unless some of us can say exactly where he is missing the boat, we should assume he may be right.
Vincent • October 29th, 2008 at 5:39 am
“With US 10 year Treasury yield now well below 4% and sharply falling in the last few weeks it is hard to see a bond market that is worried about global inflation or global stagflation.”The bond market, with respect to bond prices alone, is not a leading indicator and therefore not useful in assessing probablities for any future economic scenario. Refer back to the early 80′s when long treasuries were yielding 15%, suggesting that inflation was deeply entrenched and would go in only one direction: up. The bond market was only “worried” about inflation and gave absolutely no forward indication that a 20 year period of disinflation was about to ensue. Historically, the yield curve has provided the only consistent leading outlook on the economy. At least since WWII, a strongly positive yield curve, which we have now, has reliably projected an accelerating economy nine – twelve months hence. This current recession was accurately led by the flattening of the yield curve into early 2007. If anything, bond prices, per se, have been at best a coincident indicator.
Peter Cooper • October 29th, 2008 at 6:37 am
Here is a quote from Anna Schwartz, the 92 year old co-author with Milton Friedman of ‘A Monetary History of the United States’, who has worked with the National Bureau of Economic Research for 67 years and retains her emeritus professorship at the Graduate Center of the City University of New York:“Since mid-summer, Fed credit appears to have ballooned greatly, and that’s behind the upward pressure in the consumer price index. The Fed pooh-poohs inflation because of a perceived slowdown in oil and gas prices. But theoretically any increase in the monetary base must be met with a tightening if inflation is to be avoided. Right now the Fed is pursuing a pro-inflation strategy by lowering interest rates and showering the banking system with liquidity. They’re not even considering inflation.”
Guest • October 29th, 2008 at 9:02 am
I could not agree more. If Israel strikes Iran, all predictions are off. Oil will go through the roof again and stocks will collapse.
Guest • October 29th, 2008 at 9:09 am
Anyone have thoughts on the international summit and November 15th meeting that world leaders have demanded President Bush attend? There are many rumors that suggest global leaders will move to remove the dollar from its global reserve status, or at least combine it with other currencies.This would have a profound affect on the U.S. economy and set the stage for a dollar collapse in the near future.
Mark P • October 29th, 2008 at 10:20 am
Here is an article in the Wall Street Journal comparing and contrasting the November 15th meeting to the original Bretton Woods conference of July 1944.http://online.wsj.com/article/SB122489333798168777.html
Guest • October 29th, 2008 at 11:07 am
Good and insightful article, but my gut feeling suggest that something is brewing to create a multi-basket currency trade system. Whether that is to be back by gold remains to be seen. The recent strengthing of the dollar suggest that the world wants $ to pay their accumulated debt, which was originally purchased in $. Why would any country pursue such a desperate course of action unless something was on the horizon.China can afford to play devils advocate because of their abundant GDP and $ reserves. The rest of the world, with maybe the exception of your oil exporting countries, are in trouble and must liquidate positions to either pay debt or throw money at their rapidly expanding financial problems.
Chris Hagelstein • October 31st, 2008 at 6:34 am
I wonder why this arguement wasn’t factored into NR’s observations
Basle • November 1st, 2008 at 7:03 am
Right! But, the increase in taxes or the reduction in expenses, mentioned in point 2 above, will generate a sluggish economy for decades. So, what is best? A tough but short recession, or a slow, lethargic recovery, lasting several decades? Additionnally, won’t the neoconservatives as well as some democrats take this opportunity to cut badly needed social programs? Pictures from Steinbeck’s “Grapes of Wrath” come to mind. I doubt very much that the USA (and the rest of the world) can avoid a major recession. Government officials have faired so badly in the past, why should they do better in the future? This crisis is so complex, so gigantic and so global, that I doubt anybody understands it fully – including Professor Roubini, whom I respect for his acumen and courage.What does this mean? Do nothing? No. But,we should be extra careful not to make matters worse. The next president should help home morgagees keep their houses, repeal Bush’s senseless tax cuts, reduce defense spending (get out of Iraq where the USA has no business anyway) and offer every American a decent health plan. This would go a long way to rectify the situation we are in now.China should should also do its bit by allowing the yuan to appreciate.
Guest • November 7th, 2008 at 9:42 am
You may be right! Should prosecute Bush, Cheney,Wolfowitz, Douglas Feith, Donald Rumsfeld, Membersof the American Enterprise Institute, Richard Perle,for Treason, High Crimes, Abuse of power, …this old Nixon crowd attempted a coup of the US government and its power! It was Israel’s big attempt to get a lock on US government, and globalpower it can wield!!…end result, millions ofpeople now have to pay the price
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