Thursday, November 7, 2013

SAR #13311

Before 9/11, if there was a torture scene in a TV show or movie, it was always an American being tortured by the Bad Guys. After 9/11, it was an American (often named Jack) who was torturing the bad guys. Now Americans get to play both parts.

An Article of Faith: Ron Paul and the Tea Party Puppets have been going on and on about the inflationary damage that the Fed's continuous dumping of billions and billions of dollars into the economy every month is doing. Or will do soon. Or maybe a bit later. But this money-pumping has been going on for five years now, with no noticeable inflation in the economy (in some assets, yeah, but we're talking about the real economy where the folks who work at WalMart live) and with expectations by several Wall Street Too Big To Care banks that low or no inflation is to be expected for another decade or so. However, the fact that Mr. Paul ranks right up there with Chicken Little does not dim his position in the hearts of those who are impervious to evidence based reality.

A Nobel Question: Do people have rational expectations? Not always, no. Actually, not often. Really, hardly ever, especially if it interferes with their role as hero in their private dreams. Economists who base their theories on rational expectations are irrational.

First Things First: Kerry is running around Europe telling them they shouldn't let a little NSA spying jeopardize profitable trade agreements.

Traveler's Warning: Avoid Deming, New Mexico. Avoid all of Hidalgo County, NM. Avoid all of Southern New Mexico. Cops in Deming stopped a guy for rolling thru a stop sign, ordered him out of the car, didn't like his posture so they took him to the Gila Regional Medical Center in Silver City (also an place to avoid) where he was x-rayed, had two separate digital rectal 'exams', was given three enemas in front of officers, was X-rayed again, and then underwent a complete colonoscopy. All in a search for narcotics the arresting officers thought he had hidden in his rectum, based on his posture. Hell, just to be safe, go to Oregon.

Second Time 'Round: Fitch rating agency is warning that house prices have made an "unsustainable" jump and are currently 17% overvalued. Okay, so there's a bubble. But 17%? Exactly?

Kryptonite: In England, communications security officials are requiring top government officials to put their cell phones, tablets, iPads, etc. in specially designed lead lined boxes when discussing sensitive matters, to prevent hostile governments - like China, Russia, Iran, Pakistan, and the United States - from turning them into transmitters even when they are turned off. Takes one to know one.

Selfishness: Nobody's getting rich off Social Secuiry. Most of our elderly more or less manage to get by, barely. In a nation with the largest GDP there is no reason not to raise Social Security benefits – it is money that will immediately be spent into the economy, creating jobs. A third of our seniors rely on Social Security for virtually their entire income. More than half of our retirees depend on Social Security for significantly more than half their income. Cutting benefits is morally unacceptable. And don't talk to me about 401ks. They have been a disaster for everyone except the guys on Wall Street.

A Pause: Mortgage applications decreased 7.0 % w/w and refinance applications dropped 8% w/w, while the seasonally adjusted Purchase Index decreased 5% w/w to reach its lowest level this year. The housing boom is obviously gathering strength to surge to even higher highs, etc. etc.

Shut Up And Deal: The Trans-Pacific Partnership (TPP) being negotiated in secret by Wall Street and large multinational corporations is designed to further the upward redistribution of income. The agreement – like the other putative 'trade agreements' currently being crafted - is not about trade or tariffs or quotas, it is about dismantling regulations aimed at protecting things like the environment, local economies, or the health of the populace that that are might reduce the profitability of large companies.

Continental Divide: Euro zone retail sales fell 0.6% m/m in September. The EU's 12.2% unemployment (go, austerity!) may have had a negative effect, they said. May have.

Once Upon A Time: The Fed's QE has created an asset bubble bigger than the 2008 housing debacle and its eventual bursting will bring on a mammoth recession. The Fed is not likely to back off from QE any time soon, as market fears that it might is enough to slow the economy enough to insure that QE continues. But when (the sky is falling, the sky is falling) the US financial system “is emboldened to lend like before the 2008 crisis, inflation will surge... and stay high for a long time.” Or so it says here.

Gaming the System: UnitedHealth says it will chose not to participate in the first round of the ACA health insurance exchanges, letting others step in and write policies on all those sickos who needed but couldn't afford insurance before. Once these claims-intense customers are signed up, then UnitedHealth will enter the fray, signing up the healthy – which is good business and poor public policy.

The Parting Shot:


notsofastfriend said...

Ron Paul and his Tea Party Puppets:

Federal Reserve policy, namely QEs, has not had an inflationary effect in the US, you are right. It has had, however, a tremendous inflationary effect on Emerging Market (think India, China, Brazil). The fact that we have not experienced such a faith at home is true indication of the deflationary (deleveraging) forces at work. Most QE does not actually reach the "Real" economy. Rather, it is held as excess reserves in the vaults of our nation's Primary Dealers (CITI, JPM...).

These primary dealers are not lending this "Created Credit" into the "Real Economy" for a number of reasons. One, there is a lack of credit worthy demand - Two they receive 25 basis points of interest from the Fed and Three they are Capital poor (Remember the FASB decision not to mark to market bank assets).

If, ever this tidal wave of credit were to hit main street Ron Paul and his sidekicks would be proven right but in the here and now, they are dead wrong.

I know you have a fundamental dislike for Ron Paul but he does support many issues you are also arguing for. Overseas Military Operations (Empire building), reigning in the "Big Brother" spy machine, getting money out of politics (lobbyist takeover of Congress) and many other positions that appeal to the more "Progressive" among us.

Perhaps, it is time to seek out common ground instead of antagonizing those who have "Some" opposing views. I think most of us can agree that this once great country has been taken over by a Crony Capitalistic establishment that benefit neither you, me or dare I say the 99% of puppets out there. I appreciate your blog and the insight you share.

Charles Kingsley Michaelson, III said...

I agree with nearly all of your comments, notsofastfriend, except I'd have to take on faith that the Fed's QE has "had a tremendous inflationary effect on Emerging Market (think India, China, Brazil)."

Which may be true, but I don't understand the mechanics of how that was achieved. If you can point me to some resources that explain that, I'd be appreciative. I am sure that the current stock market levels are propped up by QU funding, but that's not "the real economy", and in that Wall Street has already gobbled up most of our 401ks through fees and market losses a fall in the Dow would be a spectator sport for most of us.

I certainly agree that if (or if and when) the QE funds are passed into the real economy the results would be... important?

But inflation (as I understand the term and phenomenon) requires significant participation on the wage side - rising prices without anyone being able to pay those rising prices are essentially deflationary on the overall economy as more money goes to some things and leaves less money to chase prices elsewhere - and I don't see wages increasing. They continue to decrease in real terms and we are in a deflationary period (but hush, we're not supposed to notice).

Quite how, and how successfully, the Fed can climb off the tiger remains to be seen - obviously the financial economy is very fearful of even the attempt.

As for Ron Paul, he's right at times and hideously wrong at times and I neither like nor dislike him, but regard him as inconsequential - a niche I'd like to see Rand reduced to soon.

notsofastfriend said...


When "We the People" bailed out Wall Street back in 2009 we should have had a right to the assets of those institutions. Rather, we guaranteed the debt created and still being created (QE and huge Gov deficits) without the benefits (income) produced from these same assets (social loss/private gain).

The economic truth today is that without the backing of the taxpayer (current and future) via huge government deficits our system implodes. With this in mind, should not the citizenry be entitled to the "spoils" of not only our labor but of the profits from our investments (all public corporation!)?

For those of us who understand the machinations of our financial system it is not difficult to appreciate its "Ponzi-esque-ness" and the illusion of wealth projected by it. If we are to live in such a "Fiat Money" world then why should it benefit only those controlling its levers?

The Swiss seem to understand this and have put forth a very interesting idea of a "Citizen Dividend" to the tune of $2,800/month. I would take this idea of a Dividend even further and restructure the tax code by suggesting we no longer tax "earned income" (the income from our labor) but rather we tax "Surplus" income.

What is surplus income? It is the surplus created by our economic activity not immediately absorbed by our economy (spent). Examples of which would be profits, capital gains, dividends, interest and rental income.

Naturally, the nascent nature of these ideas need refinement... But if one understand its equitability and potential for a true paradigm shift in our social thinking and structure. One cannot help but be a little curious I would hope.

This Citizen Dividend could be equal to the poverty line and provide basic necessities (food, clothing, shelter). No more need for welfare checks, snap programs, social security, disability, anyhow you get gist...

notsofastfriend said...

Reply to CKM- The Puppets

The mechanics of outsourcing inflation: More recently the article by Satyajit Das in the EconoMonitor struck me as very well written...

I also consider Michael Pettis, a professor at Peking University an authority on Macro Economic policy and its effects... Namely, Inflow/Outflow of Capital to the Emerging Markets and the role played by the Federal Reserve in its amplitude. Why did the Indian Rupee crash at the mere mention of "Taper"?

It would stand to reason that being the Reserve Currency of the world would impact the said world. Domestic monetary policy has its unintended consequences!

You are so right about stagnant wages and the deflationary effect there of. We are and will see, a loss of purchasing power and the inevitable downward spiral in our living standards if our current course continues.

We should allow deflation to take its course but unlike Europe and its Austerity (we will make economic slaves of all of you) we should get out of the way and allow debt to default. Of course, this would entail a bank holiday (sent packing to the Gulags of Siberia!) and price discovery. I understand that no one wants to see the price of their home and asset drop by 50% but our system is broke. And when I say broke I mean broken...

We need to stop collectively placing our hope and trust in the institutions that got us here and start thinking of a better way... I'm willing to listen!

Charles Kingsley Michaelson, III said...

I'll try to achieve coherency later on, but for some reason while reading " no one wants to see the price of their home and asset drop by 50%..." I kept hearing the theme from M*A*S*H

Anonymous said...

First Things First: Kerry is running around Europe telling them they shouldn't let a little NSA spying jeopardize profitable trade agreements.

This one as old as the Hills:
"Hey, guys, let's play poker while I get to see YOUR cards!"

notsofastfriend said...

I kept hearing the theme from M*A*S*H...

Ah! Ah! Where is hot lips when you need her...

Leverage (Debt) and the exponential use of it, is largely responsible for the price of that said asset. If you believe, such as I do, that there is an excess amount of debt (leverage) in our financial system than asset prices correlated to that debt are also excessive. The helicopter at the beginning of M.A.S.H. episodes (theme and all)! How apropos...

50% is a number pulled out of my Wizard's hat. Prices of homes should fall enough to allow a median priced house to correlate with the purchasing power of a median priced income. Which I believe is $27,519/yr (your number). Using the long gone "Rule of Thumb" of buying a house priced no greater than three times income would, considering a median price of ~$225K for said house, necessitate a drop of 64%. I was too generous in my calculation!

What our wonderful financial system has done since the "Great Robbery" is turned the average worker into a working slave. And we call ourselves evolved...

Thanks for letting me spend a few hours here...

TulsaTime said...

QE may not have kicked off classic inflation as the government defines it, but it has sure twisted the traditional market relationships all to hell. The endless speculation in anything has been jet fueled by QE and ZIRP, and oil speculation in particular is vampiric for the economy. The hedge fund guys don't have interest rate spreads to grow free money, so they have been into all the areas that should be left alone, like housing. To me, QE is like trying to run the economy on defib paddles after the heart wore out from the pacemaker. Not a viable long term alternative.

OkieLawyer said...

On another note:

What is the blue on the road and ditch?

Locally, there has been a lot of color here in Saint Louis, Missouri and environs: vibrant reds, rich oranges and bright yellows.

Charles Kingsley Michaelson, III said...

The blue is a reflection off a wet freshly oiled macadam road (the curve on the left) and on the right is a rock-filled (erosion prevention) ditch. The blue cast of the shadows was somehow enhanced in the posting, because while present in my original, it is not nearly so pronounced. A ghost in the machine...