Financial topics

[Higgenbotham]

Quite the contrary! BECAUSE the dollar is considered the "go to" currency in times of instability or panic, it makes it even EASIER for us to print money without immediate repercussions. This is exactly what we've been doing! This is how we can have $3 trillion in bailouts, deficits, and stimulus, all borrowed at extremely low rates and accompanied by a strong dollar. A plunging dollar (and rapidly rising treasury rates) would be necessary to END the massive printing of money.

As far as the last sentence, all that is necessary to end the stimulus effect is for the long end of the treasury curve (30 year bond for example) to rise as default risk increases due to increased borrowing. It is a time dependent phenomenon that will show up on the long end first and choke off the recovery. That's why we never get out of the slump with increased borrowing unless...productivity, appropriate cost reductions, jobs, earnings and all those other things I was talking about. The long end of the yield curve acts like a boa constrictor and will exert its discipline. It constricts the private sector and results in job losses, slower real estate markets, things like that.

Another piece of the asset side of the government "balance sheet" are all of those social security numbers that send federal tax revenues to the government. Job cuts, reductions in hours, and reductions in pay equate to loss of revenue. Japan didn't have that problem.

For the first 2 months of this fiscal year (October and November 2008), federal interest expenses on the debt are down 22% over last year.

Bottom line, no free lunch. No free energy either. Unless you like delta G, the Gibbs free energy.

[John]

Gordo - I moved your posting to the "high oil prices" thread, where it's
more appropriate.

John

[John]

Pop psychology question of the day:

Why am I finding so much enjoyment in a story about women whining
because their banker boyfriends can no longer afford them?

http://www.nytimes.com/2009/01/28/nyregion/28daba.html

John

[Higgenbotham]

Pop psychology question of the day:

Why am I finding so much enjoyment in a story about women whining
because their banker boyfriends can no longer afford them?

http://www.nytimes.com/2009/01/28/nyregion/28daba.html

John

You knew there was a bubble in bankers because they were in short supply and the demand for them was very high. Speculators were entering into contracts on bankers. Suddenly the speculators started dumping their contracts because there was a sudden change in social mood. The banker's bubbles burst.

[mannfm11]

That sounds like a tough time in NY for gold diggers and lucky gals. When the money runs out,they might find what kind of ass they have been dating or married. NYC isn't a very fun place once the money is gone from what I hear. Guess we can look forward to a lot of cuties from NYC coming to Texas looking for an oil man. I would like to be the divorce attorney for the next year, as she is going to get the scrape of all the cash that is still there. It will be gone in a year or so and they will be paying bankers like they used to, which is why I didn't get into banking.

[The Grey Badger]

Pop psychology question of the day:

Why am I finding so much enjoyment in a story about women whining
because their banker boyfriends can no longer afford them?

http://www.nytimes.com/2009/01/28/nyregion/28daba.html

John

Three reasons. Schaudenfreude; they definitely deserve it (though really, their profession should be more recession-proof than others, since concubines have been in demand since the ape days); and it's very gratifying to someone when their beliefs about an entire group are confirmed by news stories. Any others come to mind?

[freddyv]

Did anyone see Dick Morris on The O'Reilly Factor on Wednesday? He hit the nail on the head with his comments on our economic future. He suggested that the economy was headed down with deflation and then inflation after a few years. He's very specific. I am very disappointed in O'Reilly who seems to not wish to face the facts when it comes to our economic situation.

http://www.youtube.com/watch?v=-Z-NWK4dSVE

Don't get me wrong, my skin crawls at the sight of this sleazebag but he does have great insight when it comes to such things and he doesn't pull his punches.

--Fred

[Higgenbotham]

I may be reading too much into this.

First, we saw earlier this week that the Fed did indeed say they will buy treasuries. This means they will buy the long term US government bonds. This would have the effect of driving down long term interest rates. The Fed has been saying for a long time that this is one of their tools available to spur the economy after they take short term interest rates to zero, which happened a month or two ago. It is the equivalent of what some call printing money and it's been discussed here. Will they or won't they? We know they can but will they?

Next was Davos. Putin gave a speech which the press translated to mean we're all in the same boat with respect to the world economic situation. That, of course, can mean different things to different people.

Now comes this article that came out late this morning and, for example, Putin's comments might mean the following:

http://money.cnn.com/2009/01/29/news/in ... ney_latest

Russians to U.S.: Give us the Fed

On Thursday it was the turn of German Gref, a former Economics Minister who is now CEO of Russia's largest bank, state-owned Sberbank. His proposal during a panel discussion went even further than Putin's: In the absence of any serious competitors to the dollar, he advocated international control of U.S. monetary policy.

The biggest risk facing the world, he said, is that the U.S. dollar plays a global role but is managed narrowly "in the vested interests of only one country." In other words, he's pushing for the U.S. Federal Reserve to be governed more like an international institution than "merely" as the U.S. central bank.

I suspect this is not the whole story but now we come to the really interesting part.

http://www.bloomberg.com/apps/news?pid= ... IYOyeZ9UfQ

Yen, Dollar Strengthen as Fed Stops Short of Buying Treasuries

By Lukanyo Mnyanda and Stanley White

Jan. 29 (Bloomberg) -- The yen and the dollar rose after the Federal Reserve declined to provide more information about buying Treasuries to help boost the economy, fueling speculation investors will favor the currencies as a refuge.

I don't know if all of this is related, but I suspect it is, and I suspect there is more to the story. If so, this isn't good news for the stock market. It could explain some of why the market was up big yesterday and down big today.

Now let's say the US really is boxed in because "we're all in the same boat" as Putin says and now there is a decision to make about "printing money". What would this mean? Well, if it has come to the point where the Fed was saying earlier this week that they need to do it to keep deflation from getting out of control, it probably means just that.

So Obama may have a dilemma and the choice may come down to political expediency. Now we can take a trip back to John's blog entry tonight:

Ironically, what Obama has to "hope" for is some disaster. A disaster of some kind will unite the country behind him, and give him the flexibility to get things done.

From the point of view of Generational Dynamics, this is going to happen soon enough. The country is falling faster and deeper into a deflationary spiral. The "good" news for Obama is that this will cause a major crisis that will unify the country behind him. The bad news is there'll be nothing that he can do to keep the crisis from getting worse.

Amazing how that works. Time will tell.

[John]

Dear Higgie,

The statement, "In the absence of any serious competitors to the
dollar, he advocated international control of U.S. monetary policy,"
does not surprise me in the least, although it's interesting to see
it stated this way.

All major currencies (except the yen) are in a deflationary spiral,
but the dollar is unique in that it's the international reserve
currency, and because the hundreds of trillions of dollars of credit
derivatives were almost all written in dollars. This means that the
dollar CANNOT become hyperinflationary, and even if it could, it
would be politically impossible to allow it.

This is why the US Government CAN default on its bonds. It's clear
that those bonds will never be paid anyway, and it's quite possible
that China will forgive American debt, in the same way that America
forgave Germany's debt in 1932.

For the US dollar to become an international currency is actually the
most rational solution to this situation. It's probably a disaster
for the US, but it's quite possible that the rest of the world will
decide that it's best for the world. "Give the UN control of the
dollar, and we'll forgive all your debts."

There's no way to be sure that this scenario will unfold, of course,
but this is a scenario that makes a lot of sense.

Sincerely,

John

[Gordo]

The 2009 bull market will be among the most powerful short-term bull markets in the past century. So those who do “miss out”, especially those who sold in a panic in the fourth quarter of 2008, will rue their emotional behavior.

I realize that it is psychologically difficult to buy when you have been brainwashed by the media about mass layoffs, or contracting GDP growth, or some sad-sack person who appears on TV with his or her tale of woe, or other signs of a deepening recession. Always keep in mind that this news was already fully forecast by the stock-market plunge in the late summer and early autumn, and that it contains no surprises or implications whatsoever.