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  • Get Ready for a Fed Induced Period of Inflation
    "So the Fed... print[ed] money. It’s a great tactic short term to get things going…normally (but usually a bad mistake longer term for the economy)."

    But these are not normal times, and not because banks normally pass low rates along. These are not normal times because we have not seen a deflationary threat like this since the 1930s.

    "Just as the markets have gone through extreme swings, so have the banks in their lending habits. Since they perceive more risk now, they keep rates higher to compensate for that risk even though the Fed has reduced interest rates to a range of 0% to 0.25% (effectively zero)."

    No. Credit didn't stop flowing because of a perceived increase in risk. Credit stopped flowing because banks are faced with losses they are unable to quantify, and must increase their capitalization to cover their losses, but don't know by how much. This is clear from the halt of not just "risky" lending, but all lending. When ALL commercial paper comes to a screeching halt, it is not increased risk perception driving the train.

    "However, with the extreme amounts of money that they’ve had to pump into the country and with effectively zero interest rates, once the banks do start to loosen their grip on the money, it’s going to unleash an inflationary wave."

    Not necessarily. Consider the TARP innvestments. The government injects capital directly into the banks. The banks use that money to improve their capitalization, which will lead them to normal lending sooner. As they recover (and more importantly as the economy recovers), they will increasingly wish to be rid of the high dividend payments due on the government's preferred shares, and will repay them. The money injected today comes out as the economy improves; the anti-deflationary action of today does not become the cause of inflation tomorrow.

    I'm not Pollyanna-ish enough to think this will work precisely, but the mechanism is more thoughtful than most seem to understand.

    "When this happens, the “bond bubble” in Treasuries will pop, as money floods out of there back into stocks and commodities. So the cost of goods will go back up, stocks will finally recover and so will the economy."

    You have it backwards. While there will certainly not be inflation until the credit markets begin to heal, risk aversion will subside first. As investors realize the world's not ending and are willing to take on more risk, money will flow out of Treasuries and into everything else, which will cause yields to increase. But rising yields are not inflationary (they can be a symptom of inflation, however, as investors demand higher yields due to increased inflation risk).

    As Treasury yields increase, so will yields across the board, and banks will have a greater profit motive to drive lending. As credit markets normalize, that's when inflation becomes a potential problem, but not a certain one.

    "However, the excessive amounts of money pumped into the economy will produce the next “bubble type” environment."

    Upon what do you base your claim of "excessive"? Compared to what?

    "We do run the risk of [hyper-inflation] in light of the stimulus that the Fed has already put into play."

    Nonsense. Again, upon what do you base your assumption that the stimulus has been inappropriate, excessive, or medium-term inflationary?

    "If you remember, Alan Greenspan took interest rates to 1% and held them there for a while. Many economists blame the latest bubbles on that “super cheap money” type environment."

    Many more pundits than economists. Economists tend to understand that the Fed didn't force any bank to make any bad loan, didn't force any insurance company to write any CDS, and didn't allow the CDS market to remain unregulated. Rates of 2003 were comparable to rates in 1950 - why didn't we melt down then?

    "Well, if you thought 1% produced an eventual bubble, wait until you see the eventual effects of a 0% policy that we currently have. On top of that, consider the trillions of dollars being pumped into the economy

    "...and the Fed’s purchase of Treasuries that will only exasperate the Treasury bubble and thus further exaggerate the stock and commodity bubble to follow."

    Consider this. Suppose the Fed pumps money into the economy by purchasing lots of securities (Treasuries, agencies, even corporate and other debt) with an 12-month to 24-month maturity. Yields on these instruments fall, and hopefully interest rates across the board also fall, helping to lead the economy out of the current crisis. In one to two years, as these bonds mature, the cash is repaid to the Fed, which takes it out of circulation. The impact today is an increase in the money supply. The impact in two years is zero, as the money that would otherwise have entered the market when bonds matured is instead retained by the Fed.

    Basically, the Fed's action moves the growth in the money supply from the future (when we hopefully won't need it) to today - when we desperately need it. Does it mean no inflation? Nope, I don't think anybody can say with certainty that there will not be inflation. But I also don't think it's prudent to say with certainty that there will be.

    The Fed's not run by incompetents.
    Dec 28 14:58 pm |Rating: +5 -3 |Link to Comment |View article
  • My Portfolio Moves and Market Outlook
    "# I traded out of the Chesapeake Energy common (CHK) and into the preferred D shares [CHK-PD]... You can find specific details on CHK’s various convertible securities here but these preferreds are mandatory convertible after Sep 2010 when CHK sustains a share price over $44 and are yielding over 7% currently."

    Not exactly. The company has the option to convert these to common at a conversion price of $44.15 after 9/15/10 if the common's closing price exceeds 130% of the conversion price for 20 consecutive days.

    And CHK-D now yields 10.3%, as it's down 25% since this acticle was written.
    Dec 05 11:11 am |Rating: 0 0 |Link to Comment |View article
  • Panic in CDS Market to Cause Next Collapse in Equities
    Seems to me it's far more likely that the CDS market, which is much more thinly traded than either equities or bonds, is far more prone to pricing errors. Secondly, since fear (risk-aversion) is such a fundamental element of CDS, the heightened fear that permeates markets today is likely to have a more profound effect on CDS pricing. Thirdly, I believe it's a mistake to compare this market as it stands now to what it was like before September.

    First up, pricing errors and fear. The prime example was a couple of weeks ago the cost of insuring Berkshire Hathaway debt for five years exploded. Why? Apparently because of Berkshire's derivatives investments, wherein it sold puts on several market indexes, and under which BRK would have to pay if markets don't return to higher levels by the time these puts expire between 10 and 19 years from now. The potential cost to BRK, if all of the markets went to zero, is something like $37 billion.

    So what's the problem? The CDS widening that occurred on BRK's debt covered only the next five years - during which time none of these options come due. The CDS market was claiming that BRK's liabilities that come due in 10 years made it many times more likely that BRK would fail in the next 5 years. Where's the logic here?

    Now, risk aversion and a changed market. The fact is that the analysis of risk in debt markets has fundamentally changed in the last few months. Banks are reducing their leverage and raising capital in the face of losses many can't accurately quantify. Banks are unwilling to lend to each other at rates even close to what they were doing six months ago. We're seeing economic actors, across the entire debt market, circling the wagons. CDS is no different, and because fear is so central to it, the effect is greater than in the credit markets as a whole. This increased risk aversion should not be expected to return to pre-September levels soon, and indeed it may never return to that state. So comparing CDS prices today vs. three months ago almost certainly overstates the case the author makes.

    In short, I can't have a huge amount of confidence in CDS pricing as a market indicator.
    Dec 04 09:27 am |Rating: +1 0 |Link to Comment |View article
  • Service-Based Economy Is Progress? Show Me the Money
    "The Failure of credit market is a failure of government. Government intervention to put poor people in their own homes 'the American Dream.'"

    Hmmm...

    "The Bush administration backed off proposed crackdowns on no-money-down, interest-only mortgages years before the economy collapsed, buckling to pressure from some of the same banks that have now failed.

    "It ignored remarkably prescient warnings that foretold the financial meltdown, according to an Associated Press review of regulatory documents.

    "'Expect fallout, expect foreclosures, expect horror stories,'" California mortgage lender Paris Welch wrote to U.S. regulators in January 2006, about one year before the housing implosion cost her a job.

    "Bowing to aggressive lobbying—along with assurances from banks that the troubled mortgages were OK—regulators delayed action for nearly one year.

    "By the time new rules were released late in 2006, the toughest of the proposed provisions were gone and the meltdown was under way.

    "'These mortgages have been considered more safe and sound for portfolio lenders than many fixed rate mortgages,'" David Schneider, home loan president of Washington Mutual, told federal regulators in early 2006.

    "Two years later, WaMu became the largest bank failure in U.S. history.

    "The administration's blind eye to the impending crisis is emblematic of a philosophy that trusted market forces and discounted the need for government intervention in the economy.

    "Its belief ironically has ushered in the most massive government intervention since the 1930s.

    "'We're going to be feeling the effects of the regulators' failure to address these mortgages for the next several years,'" said Kevin Stein of the California Reinvestment Coalition, who warned regulators to tighten lending rules before it was too late.

    "Many of the banks that fought to undermine the proposals by some regulators are now either out of business or accepting billions in federal aid to recover from a mortgage crisis they insisted would never come.

    "Many executives remain in high-paying jobs, even after their assurances were proved false.

    "In 2005, faced with ominous signs the housing market was in jeopardy, bank regulators proposed new guidelines for banks writing risky loans.

    "Today, in the midst of the worst housing recession in a generation, the proposal reads like a list of what-ifs:

    "* Regulators told bankers exotic mortgages were often inappropriate for buyers with bad credit.
    "* Banks would have been required to increase efforts to verify that buyers actually had jobs and could afford houses.
    "* Regulators proposed a cap on risky mortgages so a string of defaults wouldn't be crippling.
    "* Banks that bundled and sold mortgages were told to be sure investors knew exactly what they were buying.
    "* Regulators urged banks to help buyers make responsible decisions and clearly advise them that interest rates might skyrocket and huge payments might be due sooner than expected.

    "Those proposals all were stripped from the final rules. None required congressional approval or the president's signature.

    "'In hindsight, it was spot on,'" said Jeffrey Brown, a former top official at the Office of Comptroller of the Currency, one of the first agencies to raise concerns about risky lending.

    "Federal regulators were especially concerned about mortgages known as 'option ARMs,' which allow borrowers to make payments so low that mortgage debt actually increases every month.

    "But banking executives accused the government of overreacting.

    "Bankers said such loans might be risky when approved with no money down or without ensuring buyers have jobs but such risk could be managed without government intervention.

    "'An open market will mean that different institutions will develop different methodologies for achieving this goal,'" Joseph Polizzotto, counsel to now-bankrupt Lehman Brothers, told U.S. regulators in a March 2006.

    "Countrywide Financial , at the time the nation's largest mortgage lender, agreed.

    "The proposal 'appears excessive and will inhibit future innovation in the marketplace,' said Mary Jane Seebach, managing director of public affairs.

    "One of the most contested rules said that before banks purchase mortgages from brokers, they should verify the process to ensure buyers could afford their homes.

    "Some bankers now blame much of the housing crisis on brokers who wrote fraudulent, predatory loans.

    "But in 2006, banks said they shouldn't have to double-check the brokers.

    "'It is not our role to be the regulator for the third-party lenders,'" wrote Ruthann Melbourne, chief risk officer of IndyMac Bank.

    "California-based IndyMac also criticized regulators for not recognizing the track record of interest-only loans and option ARMs, which accounted for 70 percent of IndyMac's 2005 mortgage portfolio.

    "This summer, the government seized IndyMac and will pay an estimated $9 billion to ensure customers don't lose their deposits.

    "Last week, Downey Savings joined the growing list of failed banks.

    "The problem: About 52 percent of its mortgage portfolio was tied up in risky option ARMs, which in 2006 Downey insisted were safe—maybe even safer than traditional 30-year mortgages.

    "'To conclude that 'nontraditional' equates to higher risk does not appropriately balance risk and compensating factors of these products,'" said Lillian Gavin, the bank's chief credit officer.

    "At least some regulators didn't buy it. The comptroller of the currency, John C. Dugan, was among the first to sound the alarm in mid-2005.

    "Speaking to a consumer advocacy group, Dugan painted a troublesome picture of option-ARM lending.

    "Many buyers, particularly those with bad credit, would soon be unable to afford their payments, he said. And if housing prices declined, homeowners wouldn't even be able to sell their way out of the mess.

    "It sounded simple, but 'people kind of looked at us regulators as old-fashioned,' said Brown, the agency's former deputy comptroller.

    "Diane Casey-Landry, of the American Bankers Association, said the industry feared a two-tiered system in which banks had to follow rules that mortgage brokers did not. She said opposition was based on the banks' best information.

    "'You're looking at a decline in real estate values that was never contemplated,'" she said.

    "Some saw problems coming.

    "Community groups and even some in the mortgage business, like Welch, warned regulators not to ease their rules.

    "'We expect to see a huge increase in defaults, delinquencies and foreclosures as a result of the over selling of these products,'" Stein, the associate director of the California Reinvestment Coalition, wrote to regulators in 2006.

    "The group advocates on housing and banking issues for low-income and minority residents.

    "The government's banking agencies spent nearly a year debating the rules, which required unanimous agreement among the OCC, Federal Deposit Insurance Corp., Federal Reserve, and the Office of Thrift Supervision—agencies that sometimes don't agree.

    "The Fed, for instance, was reluctant under Alan Greenspan to heavily regulate lending.

    "Similarly, the Office of Thrift Supervision, an arm of the Treasury Department that regulated many in the subprime mortgage market, worried that restricting certain mortgages would hurt banks and consumers.

    "Grovetta Gardineer, OTS managing director for corporate and international activities, said the 2005 proposal 'attempted to send an alarm bell that these products are bad.' After hearing from banks, she said, regulators were persuaded that the loans themselves were not problematic as long as banks managed the risk.

    "She disputes the notion that the rules were weakened.

    "In the past year, with Congress scrambling to stanch the bleeding in the financial industry, regulators have tightened rules on risky mortgages.

    "Congress is considering further tightening, including some of the same proposals abandoned years ago."

    www.cnbc.com/id/279980...
    Dec 01 18:29 pm |Rating: +1 0 |Link to Comment |View article
  • Service-Based Economy Is Progress? Show Me the Money

    Your belief that BRK was appropriately valued at all times during a 5-day period that saw it dip and regain 20% pretty much says it all. The fact is that the free market is constantly making valuation errors; the difficulty (some say impossibility) lies in understanding and capitalizing on them.

    "The risk-adjusted return is highest [in China and India] because their markets have suddenly been allowed the freedom to self adjust and correct."

    Um, no. Returns are higher there because those economies are growing at a faster rate. You have demonstrated no knowledge of the burdens and limits placed on foreign capital; you simply assume that the growth is due to new-found freedom.

    "Unemployment is very safe."

    Thank you for destroying your own argument. If we had "government encouraged labor cartels(UAW, AFL-CIO etc.)" we would inevitably have higher unemployment, like Europe, right?

    "From Wikipedia - 'A cartel...'"

    Try Random House: "1. an international syndicate, combine, or trust formed esp. to regulate prices and output in some field of business."

    Try American Heritage: "1. A combination of independent business organizations formed to regulate production, pricing, and marketing of goods by the members."

    "(firms here being Labor Unions)"

    Stretch.

    "(here the product is labor. They especially are Labor cartels.)

    Streeeeeeeetch.

    Unions are by definition not cartels.


    "'> And yet our taxes are lower than...'
    "In the 80's maybe.

    No, as I said, the tax burden of the United States is NOW lower than every OECD nation except Iceland and Ireland.

    "During the campaign it was stated that corporate taxes are the 3rd highest in the world."

    First off, is that your best effort at substance? "During the campaign it was stated that..."? Secondly, you were broadly talking about taxation, not specifically about corporate taxes. Thirdly, the marginal tax rate is not the same as the effective tax rate. The effective tax rate is 27%, and the corporate tax burden as a percentage of GDP, compared to the OECD states, is lower. (www.smartmoney.com/inv.../)

    "We constantly tell ourselves how low are taxes are."

    Compared to most of the world, our taxes are low. Please do some research if you'd like to refute the statement.

    "'> We do [tax what we don't want]. But this could quite obviously not be the source of a meaningful amount of revenue.
    "Meaningful to who, bureaucrats."

    Sigh. Please state specifically what you think should be taxed, at what level, to produce what revenue. Oh, I'm sorry, I forgot that you anti-tax types can't produce any real numbers.

    "Tax revenue double (sic) under Reagan."

    This isn't any more true than the last time you wrote it. Even without adjusting for high inflation, even with the economy recovering from a deep recession, this doesn't hold true. Individual and corporate income tax revenue: 1981 - $347M; 1989 - $549M. [It's almost true for Social Security taxes, which Reagan RAISED enormously: 1981: $183M; 1989 - $359M.] Factor in inflation, and the increase in revenue diminishes substantially: nominally during Reagan's two terms, income tax revenue increased 58%; in real terms it was 16%. (source: EROP tables B-80 and B-60)

    "During his term Democrats complained loudly about cuts to future spending."

    Really? Examples, please.

    "Those deficits clearly belonged to Democrats."

    Don't know why you think Reagan should get credit for tax cuts, but not take blame for deficits. They're all part of the same budgeting process. And, by the way, Reagan's original budgets were LARGER than those passed by Congress.

    "Are you say (sic) the more one pays in taxes the more civilized one is?"

    I guess you'll need to look up "civilized" and "civilization.&qu...

    "Socialism is not Civilization and thats what our liberal friends arguing for when the quote Holmes, socialism."

    Here, let me help you, since you clearly don't know what socialism is, either: "a theory or system of social organization that advocates the vesting of the ownership and control of the means of production and distribution, of capital, land, etc., in the community as a whole." (Random House)

    There are two American policies that have been the closest to socialism: semi-nationalization of banks under George W. Bush, and wage and price controls under Nixon. No Democrat's policies or positions even comes close to these.

    "The Failure of credit market is a failure of government. Government intervention to put poor people in their own homes 'the American Dream.'"

    Again, such a weak understanding. Without the completely unregulated credit default swap market and the terrible handling of mortgage backed securities, the damage from sub-prime and other failed mortgages would not have spread into the financial system as a whole. There is plenty of blame to go around on this one.

    "The predominant economic theory in practice today is Keynesianism."

    Really? What does that mean, "in practice"? Do you think the Bush White House is full of Keynesians?

    "Through Keynes the argument is made for government to grow and spend us out of trouble."

    You're missing half the story. Keynes argued that government action should be counter-cyclical, using deficit spending to boost a sagging economy but doing the opposite during expansions. We lost the discipline the second half of the equation requires during the 1980s, appeared to get it back in the 1990s, and blew it out of the water in the 2000s.

    "Isn't that exactly what Obama is planning now?"

    If you mean massive deficit spending, yes. The real question is how.

    "We need to tax cut our way out of this. And not by cutting taxes of those who don't pay them now, but those who pay the bulk of them."

    Keynes would argue that lowering taxes on those who create jobs won't help end this crisis quickly, as these economic actors are not likely to increase investment until they see consumer markets improving. If the economy is in as bad shape as it appears, Keynes would argue that government spending to boost aggregate demand would be better, as it would improve market conditions more quickly, which would lead to the supply side of the economy ramping up again more quickly.

    Another argument made by Keynes is that government spending is not necessarily wasteful. For example, the vast majority of infrastructure projects are necessary and proper, and running deficits to fund them during this downturn would fit well with Keynesianism. I believe this is the kind of spending Obama's been talking about.
    Dec 01 09:05 am |Rating: +1 0 |Link to Comment |View article
  • Service-Based Economy Is Progress? Show Me the Money
    "The free market is always right."

    Hardly. Ask Ben Graham (well, okay, he's dead) or Warren Buffett (well, okay, you couldn't possibly). At any time, the markets are full of inefficiencies, improper valuations, and opportunities. When was the market right: when it valued Berkshire Hathaway shares at $95,000 on 11/18 and 11/25, or when it valued it at $75,000 on 11/20?

    "Capital and investment flow to where the market is the most free. Oddly, that is China and India(at least more than us). "

    Nonsense. You clearly have no idea of the conditions the Chinese typically place on non-Chinese companies. Capital flows not to where the market is "most free," but to where the risk-adjusted return is highest. Basic, basic capitalism.

    "We have government encouraged labor cartels(UAW, AFL-CIO etc.),"

    Which have created work conditions which are not as favorable to labor as exist in much of Europe. By the way, I think you need to look up the word "cartel."

    "We tax consumption and labor and savings and investment."

    And yet our taxes are lower than Germany, France, Canada, Austria, Belgium, Denmark, Finland, Greece, Hungary, Switzerland, Turkey, the UK, Portugal, the Czech Republic, Norway, Spain, Italy, Australia, New Zealand, Korea, Luxembourg, Poland, and of course Sweden. Of the OECD countries, only Ireland and Iceland have a lower tax burden.

    "We should be taxing what we don't want."

    We do. But this could quite obviously not be the source of a meaningful amount of revenue.

    "Our nations economist have not spoken with a unified voice to say 'taxes bad' ,'government spending bad', 'market intervention bad'."

    Funny that you didn't say "deficit spending bad"; how very Reaganesque of you. By the way, there's been no unified statement like you want because NOBODY BELIEVES IT. Economists tend to agree with Holmes' statement that taxes are the price we pay for civilization. And clearly, not all government spending is bad, and not all market interventions are bad.

    "I think we need this calamity, so that to remember Milton Friedman, and oust the Keynesian's. The strength of Keynesianism was it attempt to explain the success of the Soviet Unions command economy."

    You demonstrate once again that you don't know anything about Keynes' theories. Please, go ahead and make some connection between Keynesianism and the failure of the credit markets. I need something more to discredit.
    Nov 26 15:44 pm |Rating: +1 0 |Link to Comment |View article
  • The Downfall of Keynesian Economics and the U.S. (Part 3 of 3)
    "Tax revenue doubled under Reagan tax cuts. The Spending belonged to the Dems in congress."

    First, you can't have the tax cuts and disown the spending. They are all part of the same bill. If you want to give credit for tax cuts, you have to take ownership of deficits. In any case, if you look at Reagan's original budgets, there was actually MORE spending than the Congress eventually passed.

    Now, as for tax revenue doubling under Reagan's tax cuts - hogwash. Even without adjusting for inflation, even with the economy recovering from a deep recession, this doesn't hold true. Individual and corporate income tax revenue: 1981 - $347M; 1989 - $549M. [It's almost true for Social Security taxes, which Reagan RAISED enormously: 1981: $183M; 1989 - $359M.] Factor in inflation, and the increase in revenue diminishes substantially: nominally during Reagan's two terms, income tax revenue increased 58%; in real terms it was 16%. (source: EROP tables B-80 and B-60)

    "Don't confuse the politics by saying Reagan used Keynesian theory."

    I'm not confused in the least. The massive increase in deficit spending under Reagan (twice as much, in real terms, as during the previous 8 years) was quite obviously stimulative, as Keynes predicts. Unfortunately, this is when we lost fiscal discipline; during expansions (such as the post-1984) the government should run a surplus so that during recessions it can run a deficit.

    "...would we have to throw Keynesian theory in the garbage if Reagan tax cut effectively cured the economy in the 80's."

    Except that it didn't. Paul Volcker's monetary policy, which tamed inflation and sent the country into a deep recession, set the stage for the lengthy recovery during the 1980s. Also, the Keynesian implications of record deficit spending can't be ignored.
    Nov 24 08:03 am |Rating: 0 0 |Link to Comment |View article
  • The Downfall of Keynesian Economics and the U.S. (Part 3 of 3)
    "In the meantime, crowding out is the name of the game, as government indulges itself in one final act of self-preservation. If you're a real, producing company that wants to borrow money, tough luck."

    What's happening is not crowding out; if this were the case, yields between Treasuries and other debt would be narrowing, not widening, which is what has occurred. Yields on some Treasuries are at all-time lows. This doesn't happen because of increased government borrowing - the cause of crowding out.

    Because of the massive amount of uncertainty in the markets right now, buyers of debt are fleeing anything but the safest vehicles around. As things settle down, investors will be more willing to take on more risk. But for now, the fear keeps them where they feel safe - in Treasuries.

    As for real, producing companies unable to borrow money - look to the banks, who are still trying to firm up their capital. If you're a bank worried about surviving losses you've been unable to quantify, you're not trying to lend out the capital you have.
    Nov 21 15:52 pm |Rating: 0 0 |Link to Comment |View article
  • The Downfall of Keynesian Economics and the U.S. (Part 3 of 3)
    "How "safe" do you think your Treasuries will be when the government needs to fund untold trillions of dollars over the next few years and none of the regular foreign buyers show up because they are too busy funding the needs in their own troubled economies?? The last remaining bubbles of American finance - Treasuries and the US Dollar - will burst and like all burst bubbles,it will be a mess. Or do you arrogantly assume that foreigners will let their own people starve just to save arrogant Americans like you??"

    You make several questionable assumptions:

    1. "the government needs to fund untold trillions of dollars over the next few years" How many is "untold"? One? Two? Three maybe? In an economy of 14 trillion dollars (well, maybe 13 trillion now), this is hardly unprecedented.

    2. "none of the regular foreign buyers show up because they are too busy funding the needs in their own troubled economies" If the world's economy is in such bad shape, US treasuries will continue to be the safest place to keep money. And, believe it or not, there will still be money.

    3. "The last remaining bubbles of American finance - Treasuries and the US Dollar - will burst and like all burst bubbles,it will be a mess." The dollar's value has increased during this crisis from historically low levels. The dollar is less valuable now than it was in more valuable now, in terms of foreign currencies, than it was between 1996 and 2006. Where's the bubble? And as for Treasuries - you think speculation is driving the price of Treasuries up? Seriously? Do you know what a bubble is?

    4. "Or do you arrogantly assume that foreigners will let their own people starve just to save arrogant Americans like you??" You assume that I'm arrogant, likely because I pointed out (correctly) that US Treasuries are currently viewed worldwide as the safest place to keep money. Evidence: 30 year treasuries traded at all-time low yields yesterday. 30 YEAR Treasuries. Chew on that for a while. Now, I may be arrogant, but describing US debt that way is no indication of it.

    Oh, you also assume for some reason that one question mark isn't sufficient.
    Nov 21 13:33 pm |Rating: 0 0 |Link to Comment |View article
  • The Downfall of Keynesian Economics and the U.S. (Part 3 of 3)
    Once again, the author fails in his stated attempt to lay blame for our ills at the feet of John Maynard Keynes. The discussions here have very little to do with Keynesian theory at all.

    Now, specific problems:

    1. If the banker is aware that there is only $300 in the monetary base, and he has it all, he won't be a banker. Why would he lend out money if there isn't any money to repay as interest?

    2. "The answer is hyperinflation, and that is most likely the course that the Federal Reserve will take." Most likely based on what?

    3. You show the scary monetary base chart, which takes off higher in the end. What you don't show is the actions of banks in the last year, while they have been deleveraging like mad to raise their capital levels. This IS a decrease in the overall money supply (which we used to measure - M3), and the fed's recent actions are meant to counteract this hugely deflationary action by the banking industry.

    4. "Those signs come in the form of negative net sales of U.S. treasuries by foreigners..." Really? Why then is the dollar appreciating against all currencies except the Yen and why then are treasuries currently trading at historically low yields?

    5. "...credit crunch making new loans more and more unavailable..." Which is because the banks have had to deleverage in response to much greater potential losses than previously expected.

    6. "...and the deflation seen in financial markets." And commodity markets. And all other markets EXCEPT for US Treasury securities, which are seen by the market as SAFER THAN ANYTHING ELSE.

    7. "The U.S. government and Federal Reserve will fight this with every tool they have, resulting in an end game of hyperinflation." Hogwash. The preferred share investments by the TARP aer structured such that as the banks regain their footing, take their losses, and start to function normally again, they will have a strong incentive to pay off the loans (reducing the monetary base) as they increase to normal levels their leverage (increasing the monetary base). The Fed and Treasury are well aware that in normal times their actions would be highly inflationary. These are not normal times.

    8. More worthless, unsupported attacks on Keynesianism. And then: "We had a near implosion as a result of these theories in the early 1980’s." Without even a mention of the oil shocks of the early 1970s, which sent inflation rippling through the economy, or of the institution and repeal of wage and price controls, which, like a coiled spring, sent prices much higher. These had nothing to do with Keynes, and had much more impact on prices in the late 1970s than anything related to theory specific to Keynes'.

    9. Let us not forget that Ronald Reagan's huge deficit spending (well, at least at first, during the recessions) fell nicely into line with Keynesian theory.
    Nov 21 08:58 am |Rating: +3 -1 |Link to Comment |View article
  • The Downfall of Keynesian Economics and the U.S. (Part 2 of 3)
    Again, there's nothing here to indict Keynesian economic theory.
    Nov 21 08:37 am |Rating: 0 0 |Link to Comment |View article
  • The Downfall of Keynesian Economics and the U.S. (Part 1 of 3)
    There is nothing here indicting Keynesian economics in the least.
    Nov 21 08:34 am |Rating: 0 0 |Link to Comment |View article
  • Inflation Is Bad for Stocks...
    Deflation is obviously bad. As for inflation, I'd like to see a comparison based on the rate of change rather than the rate itself. Investors hate uncertainty; in our history, highly inflationary times have been highly uncertain times.
    Nov 20 08:18 am |Rating: +1 0 |Link to Comment |View article
  • The Reykjavik Scenario (or How Interest Rates Can't Control Monetary Inflation)
    You're pulling my leg, right? You're torturing yourself to continue your charade.

    "When interest rates rise, lenders are encouraged to lend, and thereby the cash supply is increased and inflation is increased and so the real rates are brought low."

    Except, of course, there are fewer borrowers at higher interest rates. Once again you ignore the demand side of the equation. But that's a minor matter, since you're ignoring the market pricing mechanism as well. Lending rates are determined through competition. And of course lenders also factor expected inflation into their interest rates.

    And of course, what we're talking about are not rates between banks and borrowers, but rates between the banks and the Fed. This is in a very real sense the cost of money to the banks. Lower the cost of money and the banks have a greater incentive to lend, because the profits are larger. Given time, profits will be squeezed out and new equilibriums will be reached across the lending markets at lower interest rates.

    Seriously, this isn't rocket science.

    "The exchange rate is not a good indicator of the inflation rate at all."

    Who said anything about exchange rates? Do you not know what the Nikkei is?

    "The money supply was contracting, was it not?"

    Strictly speaking, no, M1 was not contracting at all. Was M2 or M3 contracting? Of course it was. Was it because of interest rate changes? Not at all.

    "Yet the interest rates were falling, making Japan less desirable to foreign investors, and so the exchange rates fell off even though the cash contraction was diving into deflation."

    Shift your arguments all you want. The highest central bank interest rates persisted more than halfway through the market collapse.

    "Where are you getting that info?"

    So you really have no clue at all, then. Nikkei is from Yahoo finance, the rates of the BOJ are easy to find.

    "I remember when the Nikkei crash was THE big news story, it was also stated that interest rates were already virtually zero and couldn't be lowered anymore."

    So your beliefs are based on your obviously fuzzy recollections of something that happened more than 15 years ago. Now I understand completely. Good bye.
    Nov 17 14:58 pm |Rating: 0 0 |Link to Comment |View article
  • The Reykjavik Scenario (or How Interest Rates Can't Control Monetary Inflation)
    "It isn't claimed, but it is clearly displayed."

    No, actually, it's not. What's shown is deflation. Once again, with feeling, since the real interest rate equals the nominal interest rate plus inflation, how exactly would the real interest rate and the nominal interest rate be inversely correlated?

    "The [Japanese] rates went down to virtual zero WHILE the [Japanese] markets were collapsing."

    Naturally, of course, unsurprisingly, you're wrong yet again. Please look at the data. The Nikkei fell more than 60 percent—from a high of 40,000 at the end of 1989 to under 15,000 by 1992. Japan raised the discount rate from 2.5% in the beginning of 1989 to 6% at the end of 1990. Starting in mid 1991, when the market had already lost 40% from its peak, the discount rate was lowered several times over the next 5 years. When the market reached its 8/92 bottom, more than 60% off the peak, the discount rate was still 3.25%. The rate continued to be cut, to 0.5% in 1995 and eventually to 0.1% in 2001 - not at all WHILE the markets were collapsing. Most of the collapse occurred before the discount rate was cut ONCE.

    Of course, it's necessary to consider the nature of the savings patterns of the Japanese people vs. the American people, but that's beyond my patience to explain.
    Nov 17 08:30 am |Rating: 0 0 |Link to Comment |View article

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