From NRO:
Right now, with oil trading through $71 a barrel, Treasury bonds closing in on 4 percent, and commodity indexes up 25 percent year-to-date, inflation fears are circulating through the markets.
There’s a way to nip this in the bud: First, the Treasury and Fed should work together to protect the value of the dollar. Here’s how they do it. At the Fed’s June meeting in two weeks, Ben Bernanke should put in the FOMC minutes a clear reference to an exit strategy that will curb the massive money creation that Art Laffer wrote about in today’s Wall Street Journal. Next, at its September meeting, the Fed should raise its target rate — which is now 0.0 to 0.25 percent — pulling it up to 25 basis points, the upper end of the current range. That’s a small, even tiny, move that would represent about a 12 basis-point hike. But the move would at least send a signal that the Fed has an exit strategy from excess money that it intends to implement. Just that tiny move would go a long way towards protecting the dollar and knocking down inflation fears.
Its good to see that he is on the same page with me.
Showing posts with label inflation. Show all posts
Showing posts with label inflation. Show all posts
Wednesday, June 10, 2009
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.
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.
Tuesday, June 9, 2009
Told you so...
China airs fears on U.S. Debt
Senior Chinese leaders have privately voiced fear over the soaring US budget deficit and are increasingly looking to diversify from the dollar, a Republican congressman said.
"We heard across the board -- in private -- substantial, continuing and rising concern," Representative Mark Kirk said after a trip to China that included talks with government officials and central bank chief Zhou Xiaochuan.
This is what happens when you borrow more than you can afford. We have taken out a giant subprime mortgage and it appears that the bank is already contemplating cutting off our equity. Like it or not, China is a larger holder of Treasury debt and is our largest trading partner. We don't want to make them think we are going to inflate our way out of this problem.(Although that is what will happen whether or not the FED does it on purpose.)
Kirk's assessment differed with that of Treasury Secretary Timothy Geithner, who said last week on a separate visit that Chinese leaders had expressed "justifiable confidence" on the future of the recession-hit US economy.
Kirk traveled with Representative Rick Larsen, a member of President Barack Obama's Democratic Party, who also painted a less gloomy picture of Chinese officials' views.
China is the largest creditor to the United States with some 700 billion dollars invested in Treasury bonds. Zhou earlier this year floated the idea of replacing the dollar with a basket of currencies as the benchmark global unit.
Instead of a basket of currencies how about we make the global benchmark Kathie Lee Gifford blouses and copies of Mao's Little Red Book. What we always say, at least me to my friends, is that the Chinese would never call in the debt that we owe them as it would kill their economy which is heavily reliant on exports of cheap plastic shit to sell at Wal-Mart. What we have seen in the past several years since Bush starting running up his deficits is a rise in the Chinese Middle Class, as well as a global middle class which will be competing for ever more scarce resources. Per the Wharton School of business.
China is expected to become the world's third-largest consumer market by 2025 as an expected transition from an investment-led economy to a more consumer-focused model brings about continued growth. The McKinsey Global Institute projects China's middle class will increase from 43% of the population today to 76% by 2025. "The shift from investment to increasing consumption overall -- and as a share of GDP -- is very important to sustainable growth in the long-term. China has maxed out on the input model," says Diana Farrell, the Institute's director. India has been more open to consumption, but like China it has a very high savings rate that Farrell says should be converted to consumer spending to strengthen the overall economy.
So, let's look at this. We have a huge consumer base which has been saving money and being dutiful in a way that the American consumer has forgotten. The global currency which will be in vogue, so long as we don't cave on some kind of supra currency, is the dollar. What is the one thing that runaway inflation kills more than anything else... savings my friends. My hypothesis is that the Chinese will continue purchasing T-Bills, but they are going to want a higher RoR. This will push interest rates up for the average consumer.
Of course, this is just a guess, but then again we never thought that the ChiComs would prattle on about wanting to diversify their portfolio. Time to bring back King Dollar. What I believe that Ben Bernanke will begin to do after the repayment of some of the TARP monies to the FED is gradually raise the FED interbank rates, we need to begin to suck up some of the excess capital that is floating around and get it into circulation. Hopefully, this will satisfy the Chinese as well as bring a little order back to incentives to save money. Investment will come later.
Senior Chinese leaders have privately voiced fear over the soaring US budget deficit and are increasingly looking to diversify from the dollar, a Republican congressman said.
"We heard across the board -- in private -- substantial, continuing and rising concern," Representative Mark Kirk said after a trip to China that included talks with government officials and central bank chief Zhou Xiaochuan.
This is what happens when you borrow more than you can afford. We have taken out a giant subprime mortgage and it appears that the bank is already contemplating cutting off our equity. Like it or not, China is a larger holder of Treasury debt and is our largest trading partner. We don't want to make them think we are going to inflate our way out of this problem.(Although that is what will happen whether or not the FED does it on purpose.)
Kirk's assessment differed with that of Treasury Secretary Timothy Geithner, who said last week on a separate visit that Chinese leaders had expressed "justifiable confidence" on the future of the recession-hit US economy.
Kirk traveled with Representative Rick Larsen, a member of President Barack Obama's Democratic Party, who also painted a less gloomy picture of Chinese officials' views.
China is the largest creditor to the United States with some 700 billion dollars invested in Treasury bonds. Zhou earlier this year floated the idea of replacing the dollar with a basket of currencies as the benchmark global unit.
Instead of a basket of currencies how about we make the global benchmark Kathie Lee Gifford blouses and copies of Mao's Little Red Book. What we always say, at least me to my friends, is that the Chinese would never call in the debt that we owe them as it would kill their economy which is heavily reliant on exports of cheap plastic shit to sell at Wal-Mart. What we have seen in the past several years since Bush starting running up his deficits is a rise in the Chinese Middle Class, as well as a global middle class which will be competing for ever more scarce resources. Per the Wharton School of business.
China is expected to become the world's third-largest consumer market by 2025 as an expected transition from an investment-led economy to a more consumer-focused model brings about continued growth. The McKinsey Global Institute projects China's middle class will increase from 43% of the population today to 76% by 2025. "The shift from investment to increasing consumption overall -- and as a share of GDP -- is very important to sustainable growth in the long-term. China has maxed out on the input model," says Diana Farrell, the Institute's director. India has been more open to consumption, but like China it has a very high savings rate that Farrell says should be converted to consumer spending to strengthen the overall economy.
So, let's look at this. We have a huge consumer base which has been saving money and being dutiful in a way that the American consumer has forgotten. The global currency which will be in vogue, so long as we don't cave on some kind of supra currency, is the dollar. What is the one thing that runaway inflation kills more than anything else... savings my friends. My hypothesis is that the Chinese will continue purchasing T-Bills, but they are going to want a higher RoR. This will push interest rates up for the average consumer.
Of course, this is just a guess, but then again we never thought that the ChiComs would prattle on about wanting to diversify their portfolio. Time to bring back King Dollar. What I believe that Ben Bernanke will begin to do after the repayment of some of the TARP monies to the FED is gradually raise the FED interbank rates, we need to begin to suck up some of the excess capital that is floating around and get it into circulation. Hopefully, this will satisfy the Chinese as well as bring a little order back to incentives to save money. Investment will come later.
Subscribe to:
Posts (Atom)
Posts
