Where We Are Economically (An original analysis)
(First published on Newsvine on Sept 23, 2010 under the name "nofluer")
We are currently in an economic environment that I've never heard the like of before. One of the reasons that this recession/depression will be so hard to crack is the monetary policies of the FED and of the other central banks around the world, and what they did, and what they allowed to happen AND what they are doing NOW. But since I've gone over all that in the past, I'm not going to rehash the whole bubble construction, banking deregulation, & etc. thing.
The way I see it now - and I just figured this out last night - OUR FED has created and is maintaining a rather unique situation with the US Dollar.... It appears to me that we now have simultaneous hyper-inflation, deflation, a stagnant economy and high unemployment. Sort of Stagflation on Steroids.
It's the combined deflation and hyper-inflation that's throwing everyone for a loop and keeping planners and regulators confused and unable to decide what to do and where to go. As I said in a former article - what's killing the recovery is UNCERTAINTY!
If it was simple stagflation, Paul Volcker has the answer to that... hike interest rates until the dollar screams and burn the germs out. ("You can't have a recovery without a stable currency"). But hiking interest rates would play into the deflation - and make that worse... so it seems that everyone who knows what's going on is just sitting there hoping the Good Fairy of Monetary Policy appears and grants them some free wishes.
Ain't gonna happen, Ben. You wanted the job. Now figure it out and DO something... even if it's wrong, it's better than what you're not doing because you can reverse it and try aqain.
(BTW - the FED taking the TAs onto their balance sheet - kind of removing them from the playing field, as it were, was a good move and the only alternative to letting the value of the entire securities industry to go down in flames. But that does NOT mean that I think the mega-banks were or are TBTF - I STILL think they should be taken down one brick at a time or all this will happen again.)
Now - many of you are going to think that I'm nuts-o. You're probably thinking that "You can't have simultaneous hyper-inflation and deflation!!! It's not POSSIBLE!!! since both are monetary phenomenon and they are directly opposed in cause and effect." And before last night, I'd say that you were correct.
But last night it occurred to me that the FED now has control of the entire system of banks and money, including having the US Government/Treasury on a short leash. So here's what I think is happening.
Hyper-inflation
First off, the government is lying about the inflation rate. Since I expect governments to lie about anything that makes them look bad, I do not use their numbers as my analysis metric. For monetary condition (inflation/deflation) I use things like the price of canned tuna (on sale), the price of other foodstuffs, and especially how the US Dollar is doing against other currencies around the world. EVERY ONE OF THESE INDICATES HYPER-INFLATION!!! Food is being repackaged in smaller lots at the same price - the amount of food is about 20 to 25% less than last year or the year before but the price is about the same.
(Want to hear one I haven't mentioned yet? Hills Brothers Coffee - they have been really subtle with their reduction /s. They have re-sized their COFFEE CANS for the 100% Colombian dark roast product. The can and contents have shrunk approximately 25%. I didn't figure it out exactly - but you can just LOOK at the cans - and the new ones look 25% to 33% smaller!)
So we're getting 20 to 30% less product for the same price. By definition that's hyper-inflation. And the companies that are doing it are simply trying to maintain sales - because if you see the PRICE go up that much for the same amount of product, you'll say, "Gougers!" and not buy it. Seeing a hyper-inflationary price increase and reacting to it by not buying is called "price shock" and it's a bugger on sales! By lowering the content and keeping essentially the same package - most people will not notice - and thus you avoid price shock. Very clever these corporate accountants!!! ;-D (Unfortunately you can't fill a coffee can only 75% full and have people "not notice." :-(
Also look at the Japanese yen against the dollar. Ouch for them!
Deflation
Via the money manipulation and the banking regulations (I'm pretty sure I explained the things the FED is doing with the banks and the currency re the TAs & etc) The Fed is essentially removing access to the cash they've been printing up to cover the TAs and the Treasury bonds. Bernanke knows that he can buy Treasuries 'till the cows come home AS LONG AS THAT MONEY DOESN'T "ESCAPE" TO THE GENERAL ECONOMY or it would cause domestic hyper-inflation over all sectors of the economy... which he is trying DESPERATELY to avoid. Once people see overt-domestic hyper-inflation, they adjust their expectations, and mentally revalue the dollar and the effect of inflating the currency (lowering the debt via monetizing) goes away - requiring MORE hyperinflation at higher levels. and people who lend money hike interest rates to keep their real income level. You end up with a Zimbabwe or the wheelbarrow bread of Germany.
So via requiring the banks to keep their TA money on deposit in the FED, he controls it still and the banks can't lend it out. At the same time, the banks no longer have those TAs on their balance sheets, instead they have their "interest bearing" "excess deposits" at the FED - which would be classified as "cash equivalents" on their balance sheets -- and so enable them to pass stress tests even though they are dead broke - bankrupt! And the new regulations requiring the banks to demand higher collateralization of loans also reduces the risk of banks being able to lend.
So by controlling the TA money, and by restricting lending, the Fed has not only avoided broad-based hyper-inflation domestically, but it has induced it's opposite - deflation - which is essentially a shortage of money in the system.
The stagnant economy and the high unemployment speak for themselves - ie require no explanation.
So in my opinion - that's where we are.
We are currently in an economic environment that I've never heard the like of before. One of the reasons that this recession/depression will be so hard to crack is the monetary policies of the FED and of the other central banks around the world, and what they did, and what they allowed to happen AND what they are doing NOW. But since I've gone over all that in the past, I'm not going to rehash the whole bubble construction, banking deregulation, & etc. thing.
The way I see it now - and I just figured this out last night - OUR FED has created and is maintaining a rather unique situation with the US Dollar.... It appears to me that we now have simultaneous hyper-inflation, deflation, a stagnant economy and high unemployment. Sort of Stagflation on Steroids.
It's the combined deflation and hyper-inflation that's throwing everyone for a loop and keeping planners and regulators confused and unable to decide what to do and where to go. As I said in a former article - what's killing the recovery is UNCERTAINTY!
If it was simple stagflation, Paul Volcker has the answer to that... hike interest rates until the dollar screams and burn the germs out. ("You can't have a recovery without a stable currency"). But hiking interest rates would play into the deflation - and make that worse... so it seems that everyone who knows what's going on is just sitting there hoping the Good Fairy of Monetary Policy appears and grants them some free wishes.
Ain't gonna happen, Ben. You wanted the job. Now figure it out and DO something... even if it's wrong, it's better than what you're not doing because you can reverse it and try aqain.
(BTW - the FED taking the TAs onto their balance sheet - kind of removing them from the playing field, as it were, was a good move and the only alternative to letting the value of the entire securities industry to go down in flames. But that does NOT mean that I think the mega-banks were or are TBTF - I STILL think they should be taken down one brick at a time or all this will happen again.)
Now - many of you are going to think that I'm nuts-o. You're probably thinking that "You can't have simultaneous hyper-inflation and deflation!!! It's not POSSIBLE!!! since both are monetary phenomenon and they are directly opposed in cause and effect." And before last night, I'd say that you were correct.
But last night it occurred to me that the FED now has control of the entire system of banks and money, including having the US Government/Treasury on a short leash. So here's what I think is happening.
Hyper-inflation
First off, the government is lying about the inflation rate. Since I expect governments to lie about anything that makes them look bad, I do not use their numbers as my analysis metric. For monetary condition (inflation/deflation) I use things like the price of canned tuna (on sale), the price of other foodstuffs, and especially how the US Dollar is doing against other currencies around the world. EVERY ONE OF THESE INDICATES HYPER-INFLATION!!! Food is being repackaged in smaller lots at the same price - the amount of food is about 20 to 25% less than last year or the year before but the price is about the same.
(Want to hear one I haven't mentioned yet? Hills Brothers Coffee - they have been really subtle with their reduction /s. They have re-sized their COFFEE CANS for the 100% Colombian dark roast product. The can and contents have shrunk approximately 25%. I didn't figure it out exactly - but you can just LOOK at the cans - and the new ones look 25% to 33% smaller!)
So we're getting 20 to 30% less product for the same price. By definition that's hyper-inflation. And the companies that are doing it are simply trying to maintain sales - because if you see the PRICE go up that much for the same amount of product, you'll say, "Gougers!" and not buy it. Seeing a hyper-inflationary price increase and reacting to it by not buying is called "price shock" and it's a bugger on sales! By lowering the content and keeping essentially the same package - most people will not notice - and thus you avoid price shock. Very clever these corporate accountants!!! ;-D (Unfortunately you can't fill a coffee can only 75% full and have people "not notice." :-(
Also look at the Japanese yen against the dollar. Ouch for them!
Deflation
Via the money manipulation and the banking regulations (I'm pretty sure I explained the things the FED is doing with the banks and the currency re the TAs & etc) The Fed is essentially removing access to the cash they've been printing up to cover the TAs and the Treasury bonds. Bernanke knows that he can buy Treasuries 'till the cows come home AS LONG AS THAT MONEY DOESN'T "ESCAPE" TO THE GENERAL ECONOMY or it would cause domestic hyper-inflation over all sectors of the economy... which he is trying DESPERATELY to avoid. Once people see overt-domestic hyper-inflation, they adjust their expectations, and mentally revalue the dollar and the effect of inflating the currency (lowering the debt via monetizing) goes away - requiring MORE hyperinflation at higher levels. and people who lend money hike interest rates to keep their real income level. You end up with a Zimbabwe or the wheelbarrow bread of Germany.
So via requiring the banks to keep their TA money on deposit in the FED, he controls it still and the banks can't lend it out. At the same time, the banks no longer have those TAs on their balance sheets, instead they have their "interest bearing" "excess deposits" at the FED - which would be classified as "cash equivalents" on their balance sheets -- and so enable them to pass stress tests even though they are dead broke - bankrupt! And the new regulations requiring the banks to demand higher collateralization of loans also reduces the risk of banks being able to lend.
So by controlling the TA money, and by restricting lending, the Fed has not only avoided broad-based hyper-inflation domestically, but it has induced it's opposite - deflation - which is essentially a shortage of money in the system.
The stagnant economy and the high unemployment speak for themselves - ie require no explanation.
So in my opinion - that's where we are.