Nurse!

WEDNESDAY, NOVEMBER 03, 2010

Nurse!

American pie - now worse even than the clothes in Don's vid

[Warning - contains scenes of US monetary growth that some viewers may find distressing]

On the day of the US election results and the latest round of Fed dollar printing, Tyler was intending to do another of his "just like the 70s" retro-posts. You know - an incompetent discredited President wildly out of his depth in a busted economy, a central bank deliberately debasing the currency, and a frightened demoralised populace looking for scapegoats. Kind of idea.

But once he sat down to start typing, Tyler realised it's actually worse than the 70s.

Let's consider US monetary policy. Back in the 70s the US Federal Reserve Board was far too lax in the face of rising inflation, an inflation that spilled over to the rest of the world and brought huge increases in the world price of oil and other commodities. Following the de-linking of the dollar from gold in 1971, the US currency was soggy throughout, falling by about 20% overall (in trade-weighted terms).

Eventually of course there was a day of reckoning. Inflation was threatening to get seriously out of control - like it always does after such monetary laxity - and the legendary Paul Volcker was appointed as Fed Chairman to sort it out. Which he did, but only at the cost of sky high interest rates and two recessions in three years.

Now here's the thing - the Very Scary Thing. Compared to today's Fed, the high inflation, weak dollar, pre-Volcker 70s Fed was an absolute model of monetary rectitude.

We need to look at the so called monetary base. No, don't skip forward to the end - the monetary base is really quite simple (at least in theory). It comprises the money issued directly by a country's central bank - the Fed in this case. That's all the notes and coin in circulation, plus the moneycommercial banks hold on deposit with the central bank.

And what's the significance of this monetary base?

Well, most of what you and I think of as money comprises not the notes and coins we have in our wallets, but what we have sitting in our own bank accounts. The bank is where we keep our money, and we spend it by writing cheques or flashing a plastic card. In other words most of our money is merely an entry in our bank's accounting ledger - it is not a direct obligation of the central bank.

What that means of course is that most of our money depends not on the central bank, but on the commercial banks being able to honour our cheques and plastic (which can sometimes get a little scary, as we recently rediscovered on the pavement outside Northern Rock).

However, modern banks are not allowed to create this accounting entry money willy nilly ad infinitum. Against every extra bit of money they create, they have to hold a fraction of its value as reserves with the central bank - those central bank deposits we already mentioned as part of the monetary base (this is called the fractional reserve system).

That places an upper limit on how much money the commercial banks can create relative to how much money the central bank has issued in the form of the monetary base. And it means that the size of the monetary base is crucial in determining how much money can get created in the economy overall.

That's why the monetary base is sometimes called "high powered money". It is very high octane, and it needs to be handled with great care.

Still with this?

Good.

Because over the last two years the Federal Reserve has increased the supply of this high octane monetary base by an astonishing amount. It's Quantitative Easing programme has more than doubled the monetary base. In two years they have printed more high powered money than had been printed in the whole of previous US history:

Take a good hard look at that chart. Scary or what? It makes the high inflation 70s Fed look like a bunch of puritan tight wads. It is a monstrous historic act of monetary irreponsibility.

And even worse - even worse - the Fed are reportedly about to do even more. Even more!

Now of course, what they say is that they are having to do this to stave off depression, or at least, the dreaded double-dip. That although they've stoked up the supply of high powered money, the overall money supply - the stuff that US citizens have in their own bank accounts and which they can actually spend - has barely moved. And indeed it hasn't (M2, the most widely used measure, is up barely 3% year-on-year).

But that is only what's happened so far. There is now a superabundance of the Fed's high octane fuel sloshing around, and sooner or later there's going to be a spark. An inflation spark.

Maybe it will be the current lift-off in world commodity prices. Or maybe it will be a collapse of the dollar. Or more likely it will be both, feeding into a vicious spiral just like back in the 70s.

And what happens then?

I'll tell you.

Accelerating inflation means money is worth less. You need more of it just to stand still. The real world money supply starts to grow. And because of all that high powered money in the reserve accounts of the commercial banks, and because they have every incentive to exploit excess reserves, the money supply can grow quite fast.

Higher prices will feed higher money growth, higher money growth will feed a weaker dollar and yet higher prices, which will feed yet higher monetary growth.

It could all happen very quickly. Suddenly the Fed is facing an inflationary conflagration with no off-switch.

Reverse the printing presses pdq?

Yeah, sure. And you honestly think the Obama/Bernanke combo is capable of doing that.

No. The horrible truth is that the US has embarked on a 70s style inflation, only with even more fuel on board.

And the even more horrible truth is that it may well be deliberate. Faced with the prospect of a US economy weighed down for decades by the huge debt burden it's built up, its current rulers have decided they'd rather take the escape hatch labelled inflation. Who cares if the rentier Chinese get burned?

There will of course, be consequences down the line. But they'll be for someone else to sort out.

Bye bye Miss American Pie.

Meanwhile, we've said before and we'll say it again - sell money.

Fast.

PPS We don't usually do this, but Rob has suggested in the comments that we should redraw the graph with a log scale. Good suggestion so here it is:

Conclusion? The rate of increase under Bernanke really has been higher than at any time since 1918 (ie the line is steeper than it has ever been before). As we say in the main post, the monetary base has more than doubled in the last two years, something that took five years during that last ramping up you can see in the late-30s/early-40s (and you know, at that point there was a war on).

PPS It's not quite a Chevy to the levy, but we must mark the sad passing of 84-year old Pontiac - the original all-American muscle car. And the reason we care is that Mrs T's Dad owned a Pontiac back in 50s London. No, he wasn't rich but he did work in a garage, and this car had clearly been brought over originally for some rich yank stationed here. A pic is in order (not that said Dad is in this particular pic):

TUESDAY, NOVEMBER 02, 2010

Going Batty

Anyone got one of these?

Tyler is thinking of having some building work done. You know, support the construction industry in these difficult times etc.

But it turns out there could be a problem - a serious problem. With bats.

Bats? Yep. These days, if you're going to do any building that involves disturbing a possible bat roost - like your loft, or the Major's head - you're going to need permission. And that's going to cost.

To start with, you'll need a bat survey from a qualified bat surveyor. At a cost of up to £2 grand, the surveyor comes round to your house in the early hours of the morning, crouches down behind the bins, and looks for bats. Well, not so much looks as detects. Using a bat detector. No, really.

You then get a written report which you have to append to your planning application. Increasingly, planners won't even consider the app without a survey.

And if bats have been found - as they almost certainly will have been - you are going to have to pay some more.

You'll have to apply to quango Natural England for a licence to proceed, spelling out in detail how you propose to mitigate the damage caused to the bats. The application will need to be written by a bat expert at goodness what further cost.

You'll have to lay on alternative bat accommodation, initially at a temporary bat residence (such as the Holiday Bat Inn), and longer-term in your new loft space. Yes, if you're say converting your existing loft, the remodelling will have to incorporate new bat access and a centrally heated roost - right alongside your new bedroom.

What's that? Bats carry rabies?

Well, yes they do. And your point? Under EU habitats directives, bats are protected. You are not.

And it isn't just bats. Great crested newts, TB badgers, and the famous Dartford Warbler are all protected. As is Mrs T's personal favourite the Great Raft Spider.

And trees. Don't even think of assaulting a tree during your building work. Not only can you not fell it, you must also ensure its quality of life isn't harmed. Yes, its quality of life:

"...special conditions may be applied regarding the design of the foundations, or the method of construction. Such conditions should ensure that the tree continues to have a quality of life comparable to that experienced prior to the development."(Swindon Council Tree Protection guidelines).

A tree experiences life? It will be grass next. Grass has been downtrodden for far too long. How can it possibly be acceptable that grass is denied the right to vote?

Now of course, EU rules and planning licences are one thing, the Real World quite another. Out in the Real World what seems to happen is that people planning to apply for planning permission now take scorched earth measures before ever contacting the local council.

Take the discussion on the UK Farming Forum, where one farmer has just been told by local council planners he can't build any new barns today without first getting a £2 grand rare species survey. A fellow farmer advises:

"If you want anything these days then you have to beat them at their silly game. The only way to get it is to first kill off all the vegetation to do away with any rare orchids etc. Then concentrate on the wildlife by finding up some old can of lethal stuff you have hidden away in the garage knowing you might need it one day. Reason you didnt keep it locked in the spray shed was if its found when the b..g.rs come round to inspect then you end up doing time."

Other farmers agree. Whereas they'd once have left those rare orchids in place, these days they're a real liability. Best practice these days is to eradicate them so they can never cause a problem. Same with anything else on an EU list (which may be why the EU now pays billions of OUR FRIGGIN' MONEY to farmers not to farm at all).

On the home front, best advice is to fell all trees within 100 feet of any planned building work before approaching the planners (or clear your entire garden if smaller). And hunt down and destroy any badgers, newts, or warblers within warbling distance.

As for bats, they seem to be a bit trickier. Ultrasonic bat scares don't seem to work. Ditto mothballs. Really bright lights left on 24/7 may work, but then again they may not (plus they can set fire to your loft, which is somewhat less than ideal).

Owls. They may work. They're reportedly the bat's biggest natural predators. But then again, Amazon don't seem to list Owls. And neither do they list racoons or possums.

Which only leaves something promisingly called the Bat Hawk (see pic).

Or snakes. Snakes in the loft. Maybe that's it.

Mrs T thinks I'm going batty. She thinks this has finally tipped me over the edge.

She may be right.

Why do we need EU directives again?

PS Yes, I know - bats are endangered and Tyler should be more responsible. Yes, yes. But in reality not all bats are endangered. The bats most likely to be found in our Surrey loft are pipistrelles, which are very common, with a population that seems to have increased by around two-thirds just in the last decade (see the annual bat survey from the Bat Conservation Trust). The tax-funded Euro-bat industry has got totally out of control, and is now in the process of destroying many of our fine old country churches - see here. Sorry, but in the worng place, bats are a pest.