10-Dec-10 News -- Personal conflicts poison Europe

[John]

10-Dec-10 News -- Personal conflicts poison Europe as euro-crisis grows

Israel and Turkey hashing out final details of Israel's apology

** 10-Dec-10 News -- Personal conflicts poison Europe as euro-crisis grows
** http://www.generationaldynamics.com/cgi ... 10#e101210

Contents:
"Personal conflicts poison Europe as euro-crisis grows"
"European country by country comparisons"
"Deflationary spiral continues as home values fall"
"Additional links"
Israel and Turkey hashing out final details of Israel's apology
Hamas plans for new war with Israel in Gaza
Five myths exposed by Wikileaks.

[OLD1953]

Simple lists of US tax rates are grossly deceptive. The US allows for very generous deductions, exemptions and actual gifts to corporate entities. It is not uncommon for US corporations to have negative tax rates.

http://www.reclaimdemocracy.org/corpora ... lummet.php

As with most discussions of taxes, the reality is far too complex to be easily understood by anyone save an accountant with experience as a tax attorney. In all honesty, the best argument for a flat tax with a hefty personal deduction is that the tax code has become too complex to be understood. The flat tax support died away as the corporate entities realized any flat tax would mean a real tax increase for most of them - though much of that would be recouped by no longer needing an army of specialized accountants. Not surprisingly, the accountants are not in favor.

An interesting aside, the personal deduction in 1913, adjusted for inflation, would currently be 60,000$. Plus a bit.

The MidEast situation reminds me of a biased random walk that tends in a certain direction. There are improvements and changes and degradations over time, but the long term trend to major war is clear.

Given the number of inter Arab wars over the past half century, you have to wonder just who came up with this idea of "Muslim solidarity".

[vincecate]

Deflationary spiral continues as home values fall

2010 has been a big year for mortgage defaults and foreclosures, and Zillow Inc. has determined that U.S. home values have fallen by a total of $1.7 trillion dollars this year, according to Bloomberg.

If interest rates go up a little bit then bond prices go down lots. Given the amount and duration of bonds it is something crazy like 0.3% increase in interest rates drops $1 trillion on bond values (not sure of exact numbers).

In the 1970s the Fed was making new money, and inflation was going up. As it went up bond prices went down. If you count bonds as part of the money supply, then you could have said there was deflation in the 1970s, which is just silly. And then as prices got more steady in the 1980s and bond prices went up you would have said inflation was worse than before. Again, silly.

A similar thing can happen now. As the Fed announces another $600 billion in new money the bond market has lost much more than this. But prices on essentials (more important in hard times) are going up. You could say there was deflation when oil went from $140 to $35 but now that it has gone from $35 to about $90 this does not seem like deflation. We could soon have very clear price increases and the total value of the credit still going down. It will just sound silly to claim there is deflation because bond prices and house prices are going down when the reason they are going down is that interest rates are going up because inflation is going up.

I don't think you get reasonable answers if you count total house values and total credit values as part of "money". It does seem that when a bank loans against demand deposits the guy who borrowed the money has money and the guy with the demand deposit still thinks he can spend his money, so there is a "money creation" (which I think is fraud on the bank's part since they can not really pay off all the demand deposits on any given day unless a government or central bank is standing ready to bail them out). But I don't think bonds make money like that. And while real estate going up could be used to borrow from bank/central-bank and so help to make money, I don't think on its own that the price of real estate should count as money.

[Higgenbotham]

In the 1970s the Fed was making new money, and inflation was going up. As it went up bond prices went down. If you count bonds as part of the money supply, then you could have said there was deflation in the 1970s, which is just silly. And then as prices got more steady in the 1980s and bond prices went up you would have said inflation was worse than before. Again, silly.

A similar thing can happen now.

I agree with half of what you're saying, so far, at this point in time. It's like a teeter totter. There's a lot more debt now than in the 1970s so that side of the relationship is heavy.

In the 1970s wages and house prices went higher with the rest of the inflation.

I don't think it's enough to say stagnant or lower wages and stagnant or lower house prices now are deflation. The exchange traded items that are being pushed higher will need to fall to new lows in price for deflation to really be occurring. And the ratio of gold to silver, which has been falling, will need to rise, probably to new highs unless supply conditions dictate something else.

If the rising bond yields don't push the overall system into deflation, then nothing will. That's been my thesis for a year - when we start to see the bond yields spike, the speculative bubble in everything is over. Of course, I think the best bet is stocks should get hammered because that should happen independently of whether there is inflation or deflation. That is, unless yields are rising because the economy is really going to improve. In reading the news last night, that seems to be the consensus. Sounds like April 1930 all over again.

[vincecate]

In the 1970s wages and house prices went higher with the rest of the inflation.

Steady inflation raises stock or real estate prices. But increasing inflation rates drive interest rates higher. As interest rates are moving up it reduce what people can pay for real estate and higher interest rate bonds (lower price) compete with stocks to make them lower price as well. If inflation rates are going up fast enough this "second order effect" can dominate and reduce real estate and bond stock prices for awhile. Hyperinflation hits so suddenly that this "second order effect" becomes really important.

If the rising bond yields don't push the overall system into deflation, then nothing will. That's been my thesis for a year - when we start to see the bond yields spike, the speculative bubble in everything is over. Of course, I think the best bet is stocks should get hammered because that should happen independently of whether there is inflation or deflation.

My thesis is that rising bond prices will push the system to hyperinflation. But yes, as yields go up speculative bubbles based on credit should pop all over the place. Yes, stocks should get hammered either way. So it does seem like a very good bet at this time. As yet another confirmation that it will crash, Bernanke, who has a nearly perfect record for being wrong, thinks that QE2 will make the market go up.

I think some precious metals are good as well. Imagine that hyperinflation hits and the stock market crashes. Then imagine that they decide to close the stock market for a few days/weeks/months. By the time it opened again the hyperinflation could have increased prices so that your "short the market" is now losing money. The "second order effect" of rising rates can lose out to "steady inflation" while the market is closed. You might not be able to collect on your win while it was a win because the market was closed.

To me a "short the market" and "long precious metals" sort of hedge each other. And moving a bit of money back and forth gives some trading fun.

[Higgenbotham]

To me a "short the market" and "long precious metals" sort of hedge each other. And moving a bit of money back and forth gives some trading fun.

I hadn't read this before writing about the Dow/Gold ratio in the other thread. But from a practical standpoint, the Dow/Gold ratio is the real play that someone can make to be safe or safer.

http://www.sharelynx.com/chartstemp/DowGoldRatio.php

Yes, getting out of short positions in a timely manner is going to be critical. I don't want to wait for the bottom because either market closure or bankruptcy could evaporate all the gains.

http://kingworldnews.com/kingworldnews/ ... halen.html

[vincecate]

Yes, getting out of short positions in a timely manner is going to be critical. I don't want to wait for the bottom because either market closure or bankruptcy could evaporate all the gains.

I had been thinking flash crash and then market closure. But flash crash and market bankruptcy is a very real possibility. If the market drops a factor of 2 or more in a very short period then all kinds of margin calls would never be paid. Again, I worry that it might not be possible to get out in a timely manner.

In a related thought. Last year I was thinking that "shorting 30 year bonds is a no brainer" but then realized it is not so simple. If we get hyperinflation the bond value drops to near zero and a short "wins". However, the "win" is in hyperinflated dollars which may be worthless. Imagine the value of the dollar suddenly drops by a factor of 8. So you are putting at risk good dollars but might only win in worthless money. So in the end I decided that "long precious metals" is better than "short long term bonds". I even wonder if part of the reason bonds were so high was that others noticed this problem with shorting them, so we sort of don't have enough bond shorts.

[Higgenbotham]

I had been thinking flash crash and then market closure. But flash crash and market bankruptcy is a very real possibility. If the market drops a factor of 2 or more in a very short period then all kinds of margin calls would never be paid. Again, I worry that it might not be possible to get out in a timely manner.

Think how much money will evaporate in a situation like this. If the QE2 money is ending up in futures accounts for commodity speculation, which I think a lot of it is, it will go poof. People who are on the winning side of trades may not be able to get their original money out, to say nothing of their winnings. I noticed something unusual awhile back. The wires for my futures account were going into JP Morgan Bank. Now they go into a different bank. That money supposedly sits in segregated accounts set aside in the account holder's name/number. Some months back there was talk about commissions going higher. In the formal letter, overheads were the reason given. I gave a quick call to my broker. He said, well, there's no interest being paid on the deposits now. If there's a flash crash, the banks could go under and all that money could get wiped out. To get it out of there, it has to be settled in the afternoon settlement, wired out to your bank the next morning, and in your bank by afternoon. I guess what I'm saying is the whole banking system is tied into this.

Another problem I see is, since the futures markets trade around the clock, a crash that hits at night when the margin clerks are sleeping could be especially problematic. I think China may very well trigger a crash.

Then there's the problem with options. If things get crazy, the option sellers may end up bankrupt. A lot of traders do spreads on options where they might buy a put/call and sell a put/call at a slightly higher or lower level to capture a small gain. It they don't get paid, then they won't be able to pay.

As far as the inflation/deflation question, this reminds me of the oil debate in 2008. The debate was whether the oil price at $147 per barrel was real demand or speculative demand. Here, we have two pretty much separate money systems that interface less and less. There is no shortage of money in the financial system. At the same time, in the non financial system, there is a shortage of money. Within the financial system, there is definitely inflation of exchange traded assets and exchange traded real items. I think, as in 2008, the effect of inflation of exchange traded real items will be to reduce their demand. As an example of that, even as gas prices have come down, US miles driven have not recovered to the 2007 highs. That didn't even happen during the 1970s fuel price spikes when fuel comprised a much larger share of the household budget. In the 1970s, unemployment was high, interest rates were high, but wage increases were given and people drove off to the gas station and said fill 'er up with premium!

[vincecate]

I hadn't read this before writing about the Dow/Gold ratio in the other thread. But from a practical standpoint, the Dow/Gold ratio is the real play that someone can make to be safe or safer.

http://www.sharelynx.com/chartstemp/DowGoldRatio.php

That graph looks really different in the "pre-Fed" and "post-Fed" time periods. If you use the trend from pre-Fed it looks like gold may be on the pricey side relative to the Dow. But if you just look at the post-Fed period you could expect gold to go much higher relative to the Dow. Or you could decide that 1980 was just some fluke. I am not sure that from this graph alone I could decide what to do. But it is interesting.

[Higgenbotham]

That graph looks really different in the "pre-Fed" and "post-Fed" time periods. If you use the trend from pre-Fed it looks like gold may be on the pricey side relative to the Dow. But if you just look at the post-Fed period you could expect gold to go much higher relative to the Dow. Or you could decide that 1980 was just some fluke. I am not sure that from this graph alone I could decide what to do. But it is interesting.

I don't think you can from the graph alone. The slope of the uptrend line is 2.0% per year. My opinion is that represents an approximate real growth rate (plus the annual growth in above ground gold supply of approximately 1% per year). Along with the graph, it would be necessary to have an opinion on whether or not the growth rate can be maintained. If it can be maintained, then stocks and real estate should be the better buy. My guess is the real growth rate will (probably already has since 2007) flatten to zero. If so, stocks will undergo a tremendous repricing at some point. But if the economy can return to 3% long term real growth, then all bets are off. I think that's the really critical question right now. Until it's resolved, these huge 20% or even greater short term swings in stocks can probably continue. Bernanke wants to keep the stock market propped until they can get some growth. The propaganda machine is out in full force, maybe unconsciously, realizing how critical this is.