 | | The Daily Reckoning | Thursday, November 18, 2010 |
- A no holds barred, sodium pentothal-inspired letter to the government,
- Inflation is here...but only if you eat, heat your house, drive a car, go to school, pay for health care...
- Plus, Bill Bonner on pushing Keynes' string, the idiocy of mandatory health insurance and plenty more...
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|  | | | Rationalizing the Fight Against Deflation | | And why Bernanke is supplying arms to the soldiers of inflation | |  | | Eric Fry |
Reporting from Laguna Beach, California...
"A cynic," Oscar Wilde famously remarked, "is one who knows the price of everything, but the value of nothing." A Federal Reserve Chairman is not so different.
Ben Bernanke seems to know the seasonally-adjusted, hedonically refined, government-calculated price of everything, but he seems incapable of determining the real-world value of a banana...or of a dollar bill for that matter.
Chairman Bernanke says the forces of deflation are encroaching upon the US economy. The government bean-counters tell him so. They tell him that the Consumer Price Index (CPI) increased only 1.2% during the past 12 months...and that the seasonally adjusted "core" CPI barely budged at all.
This disinflation/deflation stuff is a serious threat to economic recovery, Bernanke believes, and it must be quashed. If not, the bean- counters will walk into his office one of these days and tell him that seasonally-adjusted, hedonically refined prices are falling. And that would be a really bad thing.
Why? We are not really sure. But the rationale for Bernanke's deflation-fighting campaign seems to go something like this:
Ben Bernanke was a good student; Ben Bernanke studied the Great Depression at MIT; the good student learned that the Great Depression was really bad; therefore, things that happened in the Great Depression were also really bad; deflation happened during the Great Depression; therefore, deflation must be bad [along with jazz and temperance]; bad things should not happen; therefore, deflation should not happen...and neither should jazz or temperance.
Even though the cause-effect relationship between deflation and the Great Depression are highly debatable, Bernanke countenances no debate whatsoever. He simply proceeds doggedly under the assumption that deflation is a cause of bad stuff and that it must be vanquished so that inflation can work its therapeutic marvels.
Therefore, the Federal Reserve must continue printing dollars and funneling them into the US economy until the "threat" of deflation becomes so remote that the Bureau of Labor Statistics removes the minus signs from its computer keyboards.
Putting aside for a moment the wisdom or idiocy of printing money to combat deflation, let's examine merely the idiocy of combating an enemy that does not exist. Deflation is missing in action; it has already fled the battlefield. This fact seems obvious to everyone except the BLS, Ben Bernanke and the thinning ranks of 30-year T-bond buyers. Inflation is the real enemy, and Bernanke is inadvertently consorting with it.
What is a $600 billion quantitative easing operation if not a "supply line" to the forces of inflation?
But the chairman doesn't see it that way. He sees things like contracting credit, rising savings rates, sluggish economic activity and meager employment growth as sure-fire signs of a dangerous deflationary trend. He also sees the press releases from the BLS that tell him prices are, as he would put it, "failing to rise." But the truth of the matter is that the Consumer Price Index (CPI) is one big seasonally-adjusted, hedonically refined lie.
Officially, year-over-year CPI is up 1.17%. Officially, it is also up 8.51%. That's right; based on the official CPI-calculation methodology in use prior to 1982, the year-over-year inflation rate would be soaring north of 8%. (Deflation looks nothing like that). This fascinating insight emerges from the always-fascinating work of John Williams at Shadow Government Statistics.
If the Shadow Stats inflation data would fail to convince the Chairman that inflationary phenomena are at least as prevalent as deflationary ones, he could take a peek at commodity prices (up 11% yoy) or at health insurance costs (up 12.5% yoy). Easier still, he could examine his grocery bill.
"It's getting harder and harder for Americans to put food on the table," The Classic Liberalreports, "our basic food costs have increased by an incredible 48% over the last year (measured by wheat, corn, oats, and canola prices). From the price at the pump to heating your stove, energy costs are up 23% on average (heating oil, gasoline, natural gas). A little protein at dinner is now 39% higher (beef and pork), and your morning cup of coffee with a little sugar has risen by 36% since last October...
"You don't need a Harvard PhD in economics to understand what this means," The Classic Liberal concludes.
Very true, but you do need a Harvard PhD in economics to not understand what this means. "You can always tell a Harvard grad," the century-old saying goes, "you just can't tell him much."
Ben Bernanke did not merely graduate from Harvard, he graduated summa cum laude. The PhD came later, and not from Harvard. Be that as it may, we would never try to tell the Chairman anything about inflation or deflation. (He knows more about all of that stuff than we could ever hope to forget). We would simply tell him to look around...out in the real world where prices don't conceal themselves inside hedonic refinements.
He wouldn't have to look very far. Heck, he wouldn't even have to look outside of academia. The price of a four-year college education is soaring, even though the value of that education is going nowhere. For more than a decade, college tuition has been increasing at triple the rate of CPI. As a result, 100 colleges or universities are now charging more than $50,000 per year for tuition, fees, room, and board, according to theChronicle of Higher Education - that's up from 58 last year and only five colleges two years ago. As recently as 2004, no college or university charged more than $50,000 per year.
The rising price of a college education is not synonymous with inflation, but it's close. In the halls of academia, the only thing that's deflating is the value of a college degree. According to the National Association of Colleges and Employers, more than half of all 2007 college graduates who had applied for a job had received an offer by Graduation Day. In 2008, that percentage tumbled to 26%, and to less than 20% last year. Meanwhile, the unemployment rates for all college graduates - both recent and ancient - have doubled from 2% to 4% during the last year.
Ergo, college prices up; value down.
But don't try telling that to a college president. The number of college presidents receiving more than half a million dollars per year has been soaring at a 27% annualized rate during the last six years. The value of these presidents may or may not have soared commensurately. Either way, the aspiring youths who attend these universities are paying ever-higher prices to pursue their aspirations...and are assuming ever-larger quantities of student debt.
Earlier this year, for the first time ever, the total value of student loans outstanding exceeded the value of credit card debt outstanding. And this trend is accelerating. According the website Critical Mass, "The number of college students graduating with over $25,000 in student loan debt has tripled in the past decade alone. Today, 66% of students borrow to pay for college, taking on an average of $23,165 in debt. Twelve years ago, 58% borrowed to pay for college, taking on only $13,172 in debt."
Is this inflation? Maybe not, but it sure as shinola isn't deflation.
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| | The Daily Reckoning Presents | | Dear Uncle Sucker... | |  | | Barry Ritholtz |
[Ed. Note: This article originally appeared at "The Big Picture"]
For many years, I've been a fan of Warren Buffett's long term approach to value investing. Understanding the value of a company, regardless of its momentary stock price, is a great long term investing strategy.
But it pains me whenever I read commentary from Buffett that glosses over reality or is somehow self-serving. His OpEd in the NYT - Pretty Good for Government Work - paints an artificially rosy picture of the Bailout, ignores the negatives, and omits his own financial interest in government actions.
What might he have written if Sir Warren was dosed with some sodium pentothal before he sat down to pen that "Thank you" letter? It might have gone something like this:
DEAR Uncle Sam Sucker,
I was about to send you a thank you note for bailing out the economy...but then some nice men dressed in Ninja outfits came in and shot me full of truth serum. That led me to make one more set of edits to my letter thanking you for saving the economy.
It also helped me recall some things I seemed to have forgotten in my other public pronunciations about the bailouts.
I suddenly recalled who it was who allowed the banks to run wild in the first place: You. Your behavior before, during and after the crisis was the epitome of a corrupt and irresponsible government. You rewarded incompetency, created moral hazard, punished the prudent, and engaged in the single biggest transfer of wealth from the citizenry of the United States to the Wall Street insiders who created the mess in the first place.
Kudos.
Before I get to the bailouts, I have to remind you that in:
- 1999, you passed the Financial Services Modernization Act. This repealed Glass-Steagall, the law that had successfully kept main street banking safely separated from Wall Street for seven decades. Even the 1987 market crash had no impact on Main Street credit availability, thanks to Glass-Steagall.
- 1997-2010, you allowed the Credit Rating Agencies to change their business model, from Investor pays to Underwriter pays - a business structure known as Payola. This change effectively allowed banks to purchase their AAA ratings, and was ignored by the SEC and other regulators.
- 2000, you passed the Commodities Futures Modernization Act. It allowed the shadow banking industry to develop without any oversight by the Commodity Futures Trading Commission, the SEC, or the state insurance regulators. This led to rampant creation of credit-default swaps, CDOs, and other financial weapons of mass destruction - and the demise of AIG.
- 2001-04, the Fed, under Alan Greenspan, irresponsibly dropped fund rates to 1%. This set off an inflationary spiral in housing, commodities, and in most assets priced in dollars or credit.
- 1999-07, the Federal Reserve failed to use its supervisory and regulatory authority over banks, mortgage underwriters and other lenders, who abandoned such standards as employment history, income, down payments, credit rating, assets, property loan-to-value ratio and debt-servicing ability.
- 2004, the SEC waived its leverage rules, allowing the 5 biggest Wall Street firms to go from 12 to 1 to 20, 30 and even 40 to 1. Ironically, this rule was called the "Bear Stearns Exemption."
These actions and rule changes were requested by the banking industry. Rather than behave as adult supervision, you indulged the reckless kiddies, looking the other way as they acted out. You were the grand enabler of the finance sector's misbehavior. Hence, you helped create the mess by allowing the banking sector to run roughshod over decades of successful constraints. (Kudos again on that).
There were voices warning about the upcoming crisis, but you managed to turn a deaf ear to them: Warnings about subprime lending, problems with securitization, against the false claim that residential real estate never went down in value, or that the models forecasting VAR were wildly understating risk. An economy driven by growth dependent upon credit-fueled consumption was unsustainable, and yet you encouraged that reckless credit consumption. The compensation schemes for Wall Street were hilariously short term (ignored by you); the crony capitalism of Boards of Directors that undercut market discipline was similarly ignored. You encouraged the hollowing out of the US economy, allowing it to become increasingly "Financialized" at the expense of industry and manufacturing. What was once a small but important part of the economy became dominant, yet unproductive, with your blessing.
Bottom line: You were at a loss for understanding the many factors that led to the crisis in the first place.
When the crisis struck, you did not seem to understand the role you should play. Instead of stepping up to halt the financialization, to unwind it, you gave away the shop. You failed to extract concessions from firms on the verge of bankruptcy. Your negotiating skills were embarrassing. In the face of meltdown, you panicked.
You could have undone the decades of radical deregulation at that moment. You could have fired the incompetent management, wiped out the shareholders who invested in insolvent companies, given the creditors and bond holders a major haircut for their foolish lending. Instead, you rewarded them for their gross incompetence.
The solutions you ran with were ad hoc, poorly thought out, improvised. You crossed legal boundaries, putting the Fed in the position of violating its charter and exceeding its mandates. You created a Moral Hazard, the impact of which may not be felt until decades in the future.
Very few of your senior elected and appointed officials understood what was going on.
Rather than offer an intelligent response to the crisis, you delivered brute force: Trillions of dollars were thrown at the problem, papering over its symptoms but not its underlying causes.
Well, Uncle Sam, you delivered a motherload of cash. Considering the dollar sums involved, your actions were remarkably ineffective. What was left over afterwards was a wildly over-leveraged consumer whose credit limits had been reached; State and municipal budgets were heavily dependent upon that excess consumer spending, creating huge budget holes because of it. Net net: The resultant economy was in the worst recession since the Great Depression.
As a student of the Great Depression, Ben Bernanke should have had the best grasp - but his bailout of Bear Stearns revealed him to be just another banker, intent on saving the banks - banking system be damned. To give you a clue of exactly how lost Hank Paulson was, he spent his time praying, and creating documents that exempted himself personally for liability. He's from Goldman, so we know that "team first" ain't exactly his style. Tim Geithner, who did such a stupendous job overseeing the banks in the first place, was in way over his head. And while I never voted for George W. Bush, I give him great credit for hiding under the bed and pretty much staying out of everyone else's way. I would call him clueless, but that wouldn't be fair to the legions of clueless around the world.
Sheila Bair grasped the gravity of the situation earliest, and put numerous failed banks through the insolvency process. If we were smart, we would have allowed her to work her way through the entire finance sector, effecting a GM-like prepackaged bankruptcy for Citigroup, Bank of America, Merrill Lynch, Morgan Stanley, AIG, etc. It would have been painful as hell, but we would be much better off had we allowed her to tear the Band-Aid off quickly. Instead, we are suffering through a death of a 1000 cuts, Japanese style.
I would be remiss if I failed to mention my personal positions in this: I made a killing in Goldman Sachs and GE. My investments in Wells Fargo would have been a disaster if not for you. Don't even get me started with me being the largest shareholder in Moody's - that was some joyride. And considering all of the counter-parties that Berkshire Hathaway has, we risked being just another insolvent investment firm along with everyone else had nothing been done.
So I must say thanks to you, Uncle Sam, and your aides. In this extraordinary emergency, you came through for me - and my world looks far different than if you had not.
Your grateful but wide-eyed nephew,
Warren
Regards,
Barry Ritholtz,
for The Daily Reckoning
Joel's Note: Barry Ritholtz is the author of Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy. He blogs at The Big Picture. Contact him at TheBigPicture@Optonline.net
This article is reproduced with permission of author. Copyright Ginormous Content Limited. All rights reserved.
| | | | | | | Bill Bonner | | Printing Money Causes the Wrong Kind of Inflation | |  | | Bill Bonner |
Reckoning from Baltimore, Maryland...
The Great Correction...still in business...
The latest news suggests that we've been right all along. Housing starts are down a surprising 12% - with house prices still soft or falling in most areas.
Jobs? Forget it. Joblessness continues to be a major headache...with no significant relief in sight.
And both consumer and producer prices are flatter than expected. In fact, the core CPI reading is at a record low. For all the talk of "inflation" - there isn't any. Ben Bernanke is right, at least about "core" inflation. Prices for people who neither eat, nor travel, nor heat their houses are flat.
Yes, dear reader. We're in a great correction. We just don't know what it intends to correct. Not yet.
"US inflation moves close to zero," says the BBC.
And here's Bloomberg, with the details:
The cost of living in the US probably rose for a fourth month in October, led by higher gasoline and food prices that aren't filtering through to other goods and services, economists said before reports today.
The consumer-price index increased 0.3 percent after a 0.1 percent gain the prior month, according to the median forecast of economists surveyed by Bloomberg News before the Labor Department report. Excluding food and fuel, so-called core costs may have increased 0.7 percent from October 2009, matching a record low. Another report may show housing starts last month fell to the lowest level since July. We were watching the descent of consumer prices this past spring. It looked like the CPI would approach zero by the end of the summer...and then head into negative territory.
But then, with all the excitement around QE, we kind of lost track. The feds were printing money intentionally, right out-in-the-open and without even a "sorry" or an "excuse me."
Everyone knew it was "inflationary." And it was - to the extent that it inflated the monetary base. But it didn't inflate consumer prices. Why not?
"It's the economy, stupid."
When an economy is de-leveraging you get a phenomenon that John Maynard Keynes described as "pushing on a string." You can push money into the system. But the other end of the string...where you find consumer prices...doesn't move.
And now, it looks like Keynes was right. The Fed is pushing in $600 billion. Consumer price increases are still going down.
So we might be tempted to think that the feds can push on the string all they want; they'll never get consumer prices to rise.
But it's not that simple. It may be true that you can't increase consumer prices simply by putting money into the banking system. But the Fed is now going one step further. It's funding the US budget deficit - practically the whole thing. That frees all the money that would have gone into US Treasuries to go elsewhere. Where? Darned if we know.
But just look at cotton prices. And gold. And farmland in Iowa and Indiana. Farmland yields (not crop yields...financial yields, from renting out the land) are at an extreme low. Prices have been bid up - thanks to record low interest rates and record high agricultural output prices.
And look at prices of Indian stocks. They're selling near record levels too.
All over the world, prices are going up - especially in emerging markets, where economies are growing fast.
But in America, consumer prices - when you take out food and energy - are going nowhere.
Just what you'd expect in this strange correction.
And more thoughts...
As you know, the White House put together a bi-partisan commission to figure out how to get the deficit down. The group made what sounded like sensible proposals. Cut this...trim that. But even if the proposals were accepted in their entirety - which they won't be - only about a third of the deficit would be eliminated.
In a nutshell - which is where these things belong - the feds spend about one out of every four GDP dollars in the US. They collect, however, only about one in every five or six dollars worth of GDP. That is a pretty big gap - nearly 10% of total GDP.
If you're going to cut that kind of a deficit you're going to need more than a bi-partisan commission. You're going to need a catastrophe.
Heck, we could cut the budget in half an hour. We'd just get rid of everything that was not part of the original plan - that is, everything that was not necessary for the defense of the country or the maintenance of law and order. We'd have a huge surplus overnight...and lynch mob by daybreak.
Deficits are a big problem. They're not going away. We're not going to "grow our way out" of them. Left unchecked, the country will go broke. So you can expect a lot of pantywaist proposals and pussyfooting around on the subject in the years ahead. And then the country will go broke.
The big item is health care. It seems to grow uncontrollably. Americans don't want to give it up.
We went to the doctor today. We paid $220, in cash. That was the end of it.
"Come back next year," she said.
Seems controllable enough to us. If we don't have $220 we won't go back.
But Americans seem to like going to doctors and hospitals...especially if someone else pays for it.
*** Here's an example of what's ahead. Bloomberg reports:
Nov. 17 (Bloomberg) - Alice Rivlin, a member of President Barack Obama's deficit-reduction commission, is trying to stir a debate over imposing a national sales tax to reduce the deficit as part of a plan that includes steep Medicare cuts and a one-year payroll-tax holiday to spark economic growth.
Rivlin, as part of a separate 19-member group sponsored by the Bipartisan Policy Center in Washington, offered a plan for a 6.5 percent sales tax. Her recommendation comes as the president's panel prepares a Dec. 1 report on options for Congress to trim the national debt.
On Social Security, instead of raising the retirement age, as would the Bowles-Simpson plan, the Rivlin group proposes a gradual increase in the amount of wages subject to payroll taxes, currently $106,800, over the next 38 years to cover 90 percent of all wages. It would also trim the annual cost-of- living adjustments and reduce the growth in benefits for the top 25 percent of beneficiaries.
Targeting domestic discretionary spending cuts alone would require eliminating almost everything from law enforcement and border security to education and food and drug inspection, according to the policy center.
The nation also can't grow its way out of the deficit, the group's report says. Just to stabilize the debt at 60 percent of gross domestic product, the economy would have to grow at a sustained rate of more than 6 percent a year for at least the next 10 years, it says. The economy hasn't grown by more than 4.4 percent in any decade since World War II.
Finally, the problem also can't be solved simply by boosting taxes on wealthy Americans, the report says. Reducing deficits to manageable levels by the end of the decade would require raising rates on the top two income brackets to 86 percent and 91 percent, the report says. Regards,
Bill Bonner,
for The Daily Reckoning
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Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor atjoel@dailyreckoning.com
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| |  |  |  | Investments, Pensions and Government Guarantees
When governments become desperate for money, they take it wherever they can get it. It’s probably just a matter of time before they begin to eye the American retirement system. They’ve been living on “excess” Social Security contributions for many years. That is, people paid more into the system than they got out of it. Until this year. Now the system is in deficit.
Why True Prosperity Doesn’t Come from a Printing Press
“Good Yields” Guaranteed for Venezuelan Investors? | Buying Gold for Buoyancy as US the Credit Rating Sinks
I was not surprised that nothing was reported about the bad news contained in the new report from the Mogambo Investors Service (MIS) that “Ah-oogah! Ah-oogah! Dive! Dive! This is an emergency bulletin to buy gold, silver and oil, as much as you can, as often as you can! Stragglers will be eaten alive by inflation, or maybe by ravenous wolves, or sharks, but eaten by something, nonetheless, and maybe all three!”
Why Buying Bonds is a Bad Idea
Gold Investing: A Bet Against the Idiocy of Money Creation | Bernanke Clips the People’s Coin – From Bakersfield to Burma
“Ben Bernanke: The Chauncey Gardiner of Central Banking” examined the Federal Reserve’s November 3, 2010, decision to save the economy by inflating the asset markets. Chairman Bernanke shared his unpardonable rationale for QE2 in the Washington Post, on November 4, 2010. His deadly cruise missiles, QE1 and QE2, were described in “Chauncey Gardiner.”
Soros: China Uses Currency to Transfer Wealth to its Government
The Real Reason for QE2 | |
| | The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. |  | |
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