File this under " No Shit item of the Day."

Get Ready for Inflation and Higher Interest Rates:



Normally I would quote liberally from Dr. Laffer's editorial as he is one of my favorite economists. However, what i want to discuss this morning is the inflation that we are currently seeing, especially with gas prices. Milton Friedman referred to inflation as "two many dollars chasing too few goods." I believe that we are seeing that in the rising oil prices.

As we can see from the chart above, the money supply has advanced at the fastest rate in the last fifty years. This was necessary according to Friedman. The money quote is at 1:38.

With the precipitous drop in housing prices being the central trigger in a deflationary spiral, Chairman Bernanke followed Friedman's advice and flooded the financial system with capital to maintain some level of price stability. This was a necessary step in halting a crisis that did have the possibility of throwing us into a Depression. However, what we are seeing now, with the Federal Reserve's monetizing of Treasury debt is something I believe will lead to a fairly ruinous situation.

In regards to oil prices, Since September, members of the Organization of the Petroleum Exporting Countries have pledged cuts totaling 4.2 million barrels a day, or nearly 12 percent of their capacity, a record in such a short time.

According to our own Energy Information Administration,

Oil prices rose for the third consecutive month in May, driven in part by expectations of a global economic recovery and future increases in oil consumption. In addition, a weaker dollar and increasing financial market activity are prompting higher prices for commodities, overshadowing weak oil supply and demand fundamentals. The weaker dollar may indicate that economic activity abroad, especially in Asia, is stronger than currently estimated, which would provide an upside risk to the oil price forecast. Downside risks, such as continuing weak demand as indicated by sluggish first quarter 2009 oil consumption data, high inventories, and increased surplus production capacity levels within the Organization of the Petroleum Exporting Countries (OPEC) could moderate the upward price pressure, especially if the global economic recovery is delayed and/or weaker than expected.

Interesting, why would we have a weak dollar. Possibly because
we have increased the monetary base over %100. Too many dollars chasing too few goods. It would seem to me that we have a large problem on our hands that we should get a handle on as soon as possible. An inflationary spike in commodity prices, oil specifically will ground to a halt a real recovery in the economy. It is time to stop the printing presses and suck some of that cash out of the system, it will be painful but a "real" recovery will not happen if we don't. To put a finer point on it , The Federal Reserve is caught between a rock and a hard place. To satisfy the demands of the White House, they need to keep the presses moving and printing dollars to fund the spending spree that the current administration is going on. The Chairman is in a tight spot, as this excellent piece from the American covers:

One has to pity Ben Bernanke as he tries to attain the Federal Reserve’s dual mandate of promoting economic growth while maintaining price stability. For the currency and bond markets are increasingly focusing on the long-run inflationary impact of the Obama administration’s budget, which according to the Congressional Budget Office will double the U.S. public debt-to-GDP ratio from 41 percent in 2008 to 82 percent by 2019. And the markets are also focusing on the Federal Reserve’s newly announced policy of “quantitative easing,” which they fear could be tantamount to monetizing the administration’s ballooning deficit.

Rising oil prices will severely affect economic growth and skew the budget deficit to an even higher percentage of GDP as tax receipts fall. Rough seas ahead my friends.

GM won't go into bankruptcy

From one of my favorite publications The Economist this afternoon Two passages of interest:

IN DECEMBER, when GM secured a large slice of government bail-out funds to keep it alive, the giant car company was jokingly dubbed Government Motors. The company’s latest—and most sweeping—restructuring plan, announced on Monday April 27th, could make the joke a grim reality. GM had until the end of May to present proposals to persuade America’s government to release billions more of taxpayers' dollars to keep it from the bankruptcy court. GM believes it has done the job already with a plan that gives the government a 50% stake in the firm. Now the important deadline is May 26th, by when the company’s creditors are supposed to agree to a deal which treats them far less generously.

This my friends is why Rick Wagoner had to go. No CEO worth his golden parachute would have devised a plan such as this; this makes GM a ward of the state and essentially launders taxpayer dollars to be paid out to the UAW through dividends and the continuing support of taxpayer dollars.

Despite protestations from the White House that the government had no desire to own or run a big car company, the politicians may have little choice but to get involved, if the deal goes through in its present form. The alternative might be to cede control to the UAW, the second-biggest shareholder, which is hardly blameless for GM’s current parlous state. Rumours also abound that a similar deal to avoid bankruptcy at Chrysler would see the UAW take a 55% stake in America’s third-largest homegrown car company. If so, it is unclear whether further concession from unions, if they are needed at the two carmakers, would be easier or harder to extract.

Standing in the way of restructuring outside of the bankruptcy courts are GM’s aggrieved bondholders. GM wants holders of just over $27 billion in unsecured debt to swap it for a mere 10% of shares in the company. If debts cannot be cut by 90% then GM will file for Chapter 11 bankruptcy protection. Bondholders smell an unsavoury deal cooked up between the UAW and Barack Obama, who had the union's support in last year’s election. Early signs suggest that the bondholders may conclude that they will do better to hope for a bigger pay-out in bankruptcy rather than agree to a deal on these terms.

It may be that by announcing the proposals early GM has left time for renegotiation with the bondholders. But the ferocity of their initial disapproval suggests that small sweeteners will not persuade creditors to change their minds. Bondholders face the prospect of a small stake in a clapped out car company run by a union-friendly government with a zeal for green cars that may not have much of a market. With that as an alternative, a gamble in a bankruptcy court may seem quite appealing.

If I were a bondholder in GM, I would hold off and allow them to go into bankruptcy court. Of course, with the way that we saw the FEDS handle the transaction of Merrill Lynch to BofA, the question becomes will the FEDS hold the bondholders feet to the fire in their quest for a "green" car company.

Read the article here.

I believe that this video covers it all.



Video H/T to Iowahawk