INFLATION really is a dirty word!

[EZ_E]

THE NATURE OF INFLATION

 

 

Earlier this month, for the first time in history, the price of oil hit $100 a barrel. Oil prices have increased 5-fold in the last six years, starting from a low of less than $20 a barrel in early 2002. In 2007 alone, crude oil prices jumped nearly 60 percent. Analysts blame a weak dollar and rising demand for the spike in prices. Rising oil prices have brought into sharp focus the economic challenges facing our nation. In recent years the value of the US dollar has dropped, consumer debt has reached an all-time high, and we've entered into a nationwide housing crisis in which about one out of every 100 mortgages could end in foreclosure.

 

While some experts speculate that we may be headed for a recession, others say its already here. Top economists from two major Wall Street firms - Merrill Lynch and Goldman Sachs - recently predicted that the US economy would go into a recession this year. They cited a rise in unemployment and lower than expected retail sales as indicators. On Tuesday recession fears prompted the Federal Reserve to take emergency measures - reducing the federal funds rate from 4.25 percent down to 3.5 percent. It's the fourth time the Fed has cut rates since mid-September.

 

The Hidden Tax

 

The black horseman of the Book of Revelation speaks of a condition wherein a man's daily wages are so poor, he can barely support himself, much less his family. For the first time in the history of mankind we are seeing a condition which could fulfill that prophecy: global monetary inflation.

 

Inflation is essentially a massive, hidden tax imposed on citizens without their understanding or consent. Suppose you earn $10 for something you sold or a service you performed. You receive a $10 bill in exchange for your work. It represents the value of your hard work. It also means that at current market prices, your $10 will buy x amount of goods. Along comes government, which prints another $10 bill. It looks just like yours and spends just like yours. The only difference is that government did nothing to create its $10. Remember, you had to work for yours. At first, both $10 bills buy the same amount of goods. But after awhile, merchants notice there is more money "out there" and with it, more demand for their products. So they raise their prices. Suddenly, your $10 is worth $5 less than it was before. It is not the products and services which have become worth more; the currency is worth less than it was before.

 

Some economists say that inflation is a normal part of a healthy economy. This is false. It only exists when a monetary system has no sound base. We are also told that the boom and bust cycle is a normal part of all economic activity. It isn't. It's only part of an inflating money supply, and today that inflation is worldwide.

 

Economists say inflation between 3% and 5% is normal to moderate - a sign of a healthy, expanding economy. But let's assume 5% inflation over the lifetime of an individual. That 5% devaluation applies not only to the money earned this year, but to all money saved from previous years. At the end of year one, a dollar is worth 95 cents. At the end of year two, 95 cents is reduced again by 5%, being worth 90 cents and so on. By the time a person has worked 20 years, government will have confiscated by inflation 64% of every dollar the person saved over those years - not by taxes but by inflation. By the time the person has worked 45 years, the hidden tax will be 90%. The government will take virtually everything a person saves over their entire lifetime, not counting what they will pay in income taxes!

 

Koinonia House

[MikeInFL]

With all due respect, global monetary inflation is hardy a recent occurance.

 

That's not to say inflation isn't hideous, but rather to say it is not a new concern.

 

I would argue that inflation is a byproduct of capitalism, fiat money, and governments with a penchant for printing money rather than fiscal resposibility.

[EZ_E]

 

I would argue that inflation is a byproduct of capitalism, fiat money, and governments with a penchant for printing money rather than fiscal resposibility.

 

'Zactly!

 

The main point I got from the article is that fluctuating inflation is NOT healthy and normal for an economy despite what the economists spout. It is self-destructing system and it is only normal in a fiat money system with a continuing increase in money supply with no backing. This is a recipe for disaster which will eventually result in a grand economic collapse. Borrowing from the FED and infusing more dollars into the economy is only a short-term fix (like in 1987) which will eventually catch up and cause the whole system to come crashing down like a house of cards.

[CHABSENTIA]

I predicted a Recession on these Forums several months ago. What you hav e stated is classical Economic theory from the text books.

 

 

 

History shows us that since the Creation of the Federal Reseve that any time the Federal Funds rate has increased 6 times that there has been at least a mild recession sometime in the following six months and conversely anytime the Rte has been decreased 6 times there has been good Economic times. When Bernake took charge of the FED he increased the rate 17 consecutive times which is three times that figure which not only guaraeed a rcession but was so excessive that it created a Credit Crunch etc.

 

Oil is a different situation. We have to import over 60% of our Oil. Since the dollar is weaker against all Currencies including the Indian Rupee it takes more dollars to buy the same unit of goods then it did previously and the Price of Oil is adjusted to compensate for the decrease in the Dollar.Oil is also used to make Plastics as well as Fuel and Kerosine etc. Since Food uses wrappings etc made out of Plastics and it costs more for the Fuel to Transport the Food then Food costs more.There is also a Government Tax on a gallon of Gas.. The National average is $.48 and if you live in New York City then the total of Local, ,State and Federal Tax is $.60 a gallon so if a gallon of Gas costs $3.00 then it was actually $2.40 before the Tax which means that the various levels of Government in this case have raised the Price of a gallon of Gas 25% in this case alone.

 

 

So Inflation is not that cut and dried. It is a result of the decrease in the value of the Currency due to various actions including to a large degree the actions of Government. and not just because the Price of Goods increase on thier own or whaat people are willing to pay for them.

 

This goes for Houses which use many Industries in their Construction such as wood ,Cement, Roofing materials, Nails, Insulation,Paper etc. and Cars that use Rubber, Aluminum, Metals, Glass and Wires.This is also why Housing and Automobiles are also used to Predict an upturn or downturn in the Economy.

 

While Inflation can be a hideous hidden charge I have no sympathy for the people who complain about the rise in the Price of Gas with no information on the reasons for it while spending Thousands of Dollars on attending an NFL game.

 

 

[TomB]

Isn't it possible that inflation may also be stimulated in a metals-backed economy with the mining of new and large deposits of metals?

[physics-fan3.14]

Oh, damn. I had a great post almost finished and my computer crashed. Bummer.

 

Basically I was going to say that you have to remember that inflation is not rising prices. Inflation is an increase in money supply, which in turn causes rising prices due to supply and demand (if the money supply increases without an increasing demand, then it takes more money to equal the same demand). If inflation and economy growth were *exactly* matched, prices would not rise. The problem is that, as with any government intervention, knowing the precise state of the economy and exactly what to do is impossible. There are so many variables, and they are working with such incomplete models, that they cannot accurately determine what to do.

 

And yes, TomB, since inflation is just an increase in the money supply, it doesn't matter what the money is. This was actually rather a problem after discoveries like the California gold and Nevada silver - there was suddenly a whole lot of money just there for the taking.

[MikeInFL]

That's simply not true. Inflation is more than just an increase in money supply. Sure that's part of it, but not all of it.

 

For example, profit as a fuction of total costs is a factor that isn't taken into account if you link inflation entirely to money supply. Varying cost of capital and wages are other factors that aren't taken into account, and there are others -- basically anything that goes into the ultimate price consumers pay...including demand.

 

In short, inflation is linked to the price of goods and services for good reason, and money supply is only part of the picture.

 

That said, there are inflationary pressures on both commodity-backed and fiat currencies due to an increase in money supply, however if the fiat-based currencies are issued by governments that do not print more money to pay their debts (i.e. increase total money supply) then much of the inflationary pressures would go away -- but not entirely as per the above.

[MBA101]

Got Gold?

[Conder101]

The black horseman of the Book of Revelation speaks of a condition wherein a man's daily wages are so poor, he can barely support himself, much less his family. For the first time in the history of mankind we are seeing a condition which could fulfill that prophecy:

Actually that would pretty much describe most of human history. Most of the average working class has never earned much more than a subsistance level wage.

 

Economists say inflation between 3% and 5% is normal to moderate - a sign of a healthy, expanding economy. But let's assume 5% inflation over the lifetime of an individual. That 5% devaluation applies not only to the money earned this year, but to all money saved from previous years. At the end of year one, a dollar is worth 95 cents. At the end of year two, 95 cents is reduced again by 5%, being worth 90 cents and so on. By the time a person has worked 20 years, government will have confiscated by inflation 64% of every dollar the person saved over those years - not by taxes but by inflation.

This assumes of course that that dollar has been saved by just stuffing it under the matress and not saved in such a way that it is reinvested into the economy causing growth of that economy and earning a return of its own which would offset some if not all of the loss from inflation..

[MikeInFL]

Got Gold?

 

Yeah, but just a pound or two.

[BillJones]

I’ve stated my positions on these issues before based upon my studies of economics. Adhering to the gold standard or any other commodity standard only puts limits on the amount of money a government can issue. That can work out to the right money supply level, but history has shown us that it more often than not resulted in the wrong level. An intelligent monetary policy, such as that which Alan Greenspan practiced, is the best solution.

 

I’ll agree that inflation can be extremely destructive. One need only look at Germany in the early 1920’s to see a clear example. Other less publicized nationalities have suffered from inflation as well. Virtually every Latin American and African country has been devastated by it at one time or another or even continuously.

 

BUT deflation can be just as bad. That’s what we had in the 1930s because few people (and many people could not) spend money to drive aggregate demand and hence the economy. We can complain all we want, but during most of my life (since the 1950s), the economy has been better than it ever has been in all of history for the vast majority of Americans. This system has not been perfect, but it’s worked better than now than it has at any time in our history. And if you don’t believe that, you can as Casey Stengle said, look it up.

 

[jtryka]

An intelligent monetary policy, such as that which Alan Greenspan practiced, is the best solution.

 

Alan Greenspan provided over some of the largest increases in money supply in the history of the planet, the only reasons it did not result in huge increases in reported price inflation at either the wholesale or consumer levels was because of 1) the changes made to calculations regarding CPI made during the first Clinton term that have subsequently understated consumer inflation by anywhere from 2%-6% and most importantly, 2) the creation of the two most massive asset bubbles in the history of mankind, the first in the stock market and the second, larger one in housing. We are now reaping the benefits of the collapse of the second one, and that more than anything in the last 70 years has the potential to throw us into a real depression.

[BillJones]

The Federal Reserve has done things FAR WORSE.

 

Back in 1937, just as the economy was coming out of the Great Depression, the Fed cut the money supply and sent it right back into the tank. Why? Because the Board of Governors was concerned about inflation and cut the money supply in response to those unfounded concerns.

 

If you want to go back a 100 years, in 1837 President Andrew Jackson would have been your kind of guy. He retired the national debt – the only president ever to do so. He also got the country on a strict gold standard, and enforced it by forcing buyers of public lands in the west to pay for them with gold not paper. The net result was that much of the gold was sent out west to pay for land leaving less of it in the east. Banks were forced to suspend specie payments and credit crunch resulted from the money supply falling to too low of a level. The result was the Panic of 1837, and very nasty depression that lasted for seven years.

 

Nope. These are the good old days.

 

[CHABSENTIA]

Look at how far the Price of Copper has increased in the Past few years. The demand is responsible for most of this increase. If there is a demand for something say Coffee and either because of drought or other reasons there is less available and the demand stays approximately the same then the Price goes up.

 

If there are Farm Subsidies by the Government for say Sugar then the Price is artificially high. If the Price of Oil is high because we have to import it and then the Dollar is driven down by certain Government actions then assuming the demand stays the same or increases then anything that is Oil based such as Plastics and the cost of the Transportation to get it there then the Price will go up.

 

 

There are many underlying currents in the Present day Economies and to say that Good have gone up in value and try to simplfy is not the case.

[CHABSENTIA]

You are correct. The Government used to put a lot of weight on the Money supply and had a Formula for the Movement of Money that has declined in importance over the year.

 

 

There is also something known as the " Multiplier effect " that is used to give examples of the Banks creating Money. In other words if a Bank loans Money which in turn............. then that same ampunt may increase the Money Supply many more times.The Fed can regulate this to a certain extent by controlling the Interest Rates Banks charge to Lend Money to each other.This is different fron the Federal Funds Rate which affects the whole Economy.

 

lIn short because of all these different possibilities the Money Supply is merely a part of it.Then the Government may come back later and say it has been changed because they re-calcuated it based on different fiigures etc

 

It amy sound nice but there is no simplified way or definition that can directly ascertain the exact reason for an increase in the Price of goods. I have mentioned only a few.

[CHABSENTIA]

Correct. There are many Myths and/or misconceptions today regarding many facets of the Economy.

 

One of my favorites is the one that People are getting a windfall via Social Security Payments. If a Person averaged $1000.00 a month in Salary over the last 40 years and that Money earned that same 5% for each of the last 40 years then the amount of Money accumulated by the payments of both Employer and Employee which is turn is invested at 5% would return about a $1000.00 a month and the Principal would remin intact.The average Social Security payment is nowhere near that figure.

 

 

 

 

[BillJones]

The average Social Security payment is nowhere near that figure.

 

Social Security is a welfare wealth transfer system that takes money from those who work and gives money to those who are retired and any other group the Congress wants to put on the dole. The system is headed for the crapper, and in future years it's going to be a bone of contention between the generations.

 

Years ago more people died before they collected anything or much of anything. Now with longer exptected lives, the government will not have the funds to pay up.

[cladking]

Money supply can be increased at the same rate as the economy expands without causing inflation. So essentially inflation is the confiscation of the improvement in the economy plus more besides.

 

In our case we're experiencing pent up inflation. We've been spending money at an unsustainable rate since at least the '80's and hiding the inflation by not printing the money. We now have no choice but to pump every nickel possible into the economy whjile pushing on the string as well.

[BillJones]

Money supply can be increased at the same rate as the economy expands without causing inflation. So essentially inflation is the confiscation of the improvement in the economy plus more besides.

 

Well put Cladking. (thumbs u

 

And the growth of the economy is not tied to the growth in the stock of gold. The growth of the economy should not be tied to the supply of gold. If it were, it will be time to dust off William Jennings Bryan's "Cross of gold" speach.

[DC Dawg]

[We are now reaping the benefits of the collapse of the [housing buble], and that more than anything in the last 70 years has the potential to throw us into a real depression.

Ummm... no. It is far more complicated than that!

 

If you look at the market crashes in the United States, they are all due to the misuse of credit and not being able to meet margin calls when the conditions exist. For example, in 1812, the United States floated bonds to finance the war effort. In 1819, European wars were buying from the US on credit and could not pay their bills. Napoleon was one of the biggest culprit whose defeat caused the new French government to ignore its debts to the United States. Thus, the Second United State Bank could not pay the bonds and other obligations coming due in 1819. This caused a run on the banks and the Second US Bank could not keep up. The central bank became insolvent and put the country in its first depression.

 

Several Panics and crashes followed in the late 19th century. While many were because of scandal (e.g., an attempt to manipulate the gold market in 1869), the crash was created because the margin calls came in with no liquidity to even service the debts. Many of these panics and crashes were centered around gold, silver, or the effects of reconstruction on the resources from the south.

 

While there are many stories as to why these problems occurred, the only aspect that was agreed upon was that the US lacked a central bank to control the problems. Following the bank failures and panic of 1907, the Federal Reserve System was created to help manage monetary policy.

 

Unfortunately, with any new venture there is a tendency to let the wolves guard the hen house and protect their own while reaping the benefits. While the new federal reserve system helped bring liquidity to the US markets, they also were permissive in allowing new credit lines, allowing banks to over extend their credit, take greater risk without appropriate mitigations (collateral requirements), and so on. The result was the margin calls of October 24-29, 1929 that put the country into its worse depression in history.

 

Under the direction of FDR, William Woodin created new policies for the banks and US markets. Everything was going well until the crash of 1972. The crash of 1972 was an anomaly in that this was not a credit problem but an overall liquidity problem. For nearly 40 years, through the economic cycles, the Fed were able to keep inflation in relative check by controlling the money supply. Even in the early 1960s when governmental policies looked for expansion, the Fed kept the money supply tight to ensure the dollar's power in the world markets. It was artificial and came back to hurt the country.

 

Times had changed but monetary policies had not and while the US was no longer on a precious metals standard, the economy was run as if it was because international accounts were settled in gold. In the mean time, there was a need for more. There was more innovation, more growth, and greed entered the market place. While there were other factors, the issues came to a head when OPEC started to manipulate the oil market. Rather than let markets sort themselves, OPEN started to dictate what they wanted from the market. That did not work with the US economy still with its precious metals attitude. The result was an economy caught flat-footed by not being able to meet the demand.

 

The Fed started to solve that problem but at arms length by pumping more money into the market but at a price. Interest rates went up and the cost of money began to rise. It was supposed to fuel the supply, but as economists should learn, there is a natural equilibrium between supply and demand that was being artificially skewed by these policies. Rather than the demand raising to the supply, the supply was lowered to the demand. In fact, as the supply was lowering, the general feeling that the economy was in bad shape, so the supply and demand equilibrium was lowering. The economy contracted because the cost of money was too high.

 

In 1973, the Nixon administration released the price of gold to find its own equilibrium on the market. US accounts were not longer settled in gold and debt securities began to be sold on the open market. But it took a while for gold to find its equilibrium in the market and accounts were expected to be settled somehow. Subsequently, there was no "good" attempts to expand the US economy within the new market standards.

 

That changed in the Reagan administration with the concept of supply-side economics. The theory is to artificially raise the supply to lower the price in order to drive the demand higher. Theoretically it sounds wonderful except that in order to raise the supply, there has to be an incentive for companies to create the supply. In the 1980s, it started with the federal government. Programs to increase production were new government programs used to increase spending to put money into the economy. Other sectors were "protected" as they were asked to increase production. Oil, food, and heavy manufacturing were the immediate beneficiaries. This was the last hurrah for US manufacturers.

 

The cost was paid in credit. Federal debt skyrocketed and laws were passed to allow companies to finance their own debt with debenture bonds. However, like the early federal reserve system, the fox was watching the hen house and the federal government did not put limits on the amount of debt paper that could be issued. This led to two economic crises that lead to the causes of the crash of 1987: junk bonds and the S&L failure.

 

Sure, the history books list "program trading" and "over-valuation" as the causes, but why were these issues? Program trading at to arbitrage its debt... or cover its positions to ensure liquidity. But the debt it was covering was too expensive. Bonds were oversold at phenomenal prices. Thus the programs had to cover their positions or lose valuation. In other words, the debt was under water--or worth less than their paper value. In other words: JUNK.

 

The S&L crash was an example of backing the bonds and other debentures that had shaky backing for one reason: Greed! Bribes, kickbacks, and other illegal activities played into the backing of these bonds and other financial instruments causing the worst series of bank failures since the Great Depression.

 

The crash of 1987, also called Black Monday, was the perfect storm of the modern margin call. The computers knew and they tried to cover their positions, the S&L's did not, and the people went into panic mode. Again, it was a credit crisis that brought the market down. As a result, the market contracted a bit in 1987-89 only to see monetary policies change in 1989-90 that help start the slow economic stimulation in 1991 that lasted until early 2000.

 

NOTE: I am discounting the downturn in 2000 through 2002 because there were other factors (e.g., Y2K, 9/11/01) that present very different lessons learned.

 

Today, we're seeing it again. First, the amount of debt just being serviced by this government is at an all-time record high in terms of actual spending capabilities. Debt is created by, essentially, printing money--whether it is at the Bureau of Engraving and Printing, US Mint, or the computers at Treasury that manages Treasury-based securities. The more money printed, the less it is worth overall. If there is a lesser demand for the dollar, the dollar loses value. With no policy to buy back securities in order to reduce the supply, the trust in the value of the dollar continues to decrease creating crises in the world markets.

 

Bonds and other securities are now worth less. In order for the holders to gain value, they have to be sold. If they are not bought, the lack of circulation or use causes their value to drop. Thus, in order for the US to purchase goods on the world wide market, more money has to be raised to meet the obligations. That money can be raised either by economic expansion or borrowing the money. Since we have limited economic expansion compared to the amount of money in existence, we have to rely on debt.

 

Now lets add some of the artificial issues. For example, to fund the expansion, the government allowed the creation of new programs to add new debt to the market in the form of trading the commodity of land for debt. This created new markets that allowed debt to be traded as a general security. These new policies were created by the government, run by "experts" who have interest in the markets--once again allowing the fox to guard the hen house to allow the current mortgage crisis.

 

Another artificial crisis is world instability. When there is world instability there is the tendency to use money to advert risk. In the 1970s, it was forcing the US to settle its accounts in gold because of the ongoing situation in southeast Asia. In the beginning of the 21st century, the modern day version of gold--known as oil--is being used as economic leverage because of the ongoing situation in the Middle East. As in the 1970s, the world oil markets are being manipulated--this time by speculators--and not in a manner where the market can absorb the prices. Money just does not have the value to keep up.

 

In fact, money does not have the value necessary to prevent the inevitable. Sure, we can give "rebates" to try to force up the demand curve, but it's artificial and not going to have a long-term effect. It will help the politicians get elected or re-elected, but it does nothing to resolve the issues. There is too much money in the market in the form of debt. Debt does not grow an economy. It is an albatross that needs to be reduced either by writing it down (a disaster) or paying it off. Once again, the mis-management of debt will be this economy's undoing.

 

When I learned public policy analysis, we are taught to look at history and learn its lessons because politicians are too myopic to understand the long look at history. Doing things right won't get them re-elected. Doing things now will!

 

My prediction... get your financial house in order now because by the end of the second quarter (June) or beginning of the third quarter (July) we are going to be in for a very bumpy ride. It will not be pretty!

 

Scott

 

(gee... I can't believe I wrote that as a stream of consciousness!)

[cladking]

Very remarkable post. While I don't agree with all of it, you obviously know more about the subject than I.

 

What I see it is that we're about to enter "the crash phase II". I don't think it will be so much worse than phase I except this time it's going to get different people. This time it will be uglier because it's depreciating money and bonds rather than stock and derivatives. This time it's real decrease in total wealth rather than a decrease in paper.

 

I believe we'll avert a recession and not go into phase III where people lose confidence in the system. In fact we may be getting close to the time that the stock market explodes upward caused by inflation which is concentrated on the bottom line. It should be a couple years off yet though.

[EZ_E]

Very remarkable post. While I don't agree with all of it, you obviously know more about the subject than I.

 

 

(thumbs u (thumbs u (thumbs u

 

Cladking, I think that the world is already losing confidence in US dollars. Once confidence is lost in the dollar so confidence is also lost towards our great nation which will fuel a recession or worse, IMO.

[World Colonial]

I agree with you but I would add that inflation, which is the result of the fiat money monopoly, is the government's way of picking winners and losers. The winners are the successful speculators, spenders, debtors and consumers. The losers are savers, creditors and producers. Since the creation of the Fed in 1913, monetary policy has been exclusively for the benefit of those who live beyond their means and to the detriment of those who do not. Political populist demagogues love income redistribution and a free lunch at someone else's expense. And ultimately, that is what Fed monetary policy is: redistributing income. All of the other supposed reasons for it are a bunch of claptrap.

 

In an economy where a fiat money monopoly did not exist, I do not believe that inflation would be inevitable. Now whether someone would consider that good or bad depends upon which of the two categories you fall into. Obviously today, since most Americans are net financial debtors and many are in debt up to their eyeballs, that is why they would not consider it good. The "normal" outcome in an economy without these distortions (that is, where these deadbeats would not be able to borrow such absurd amounts of money under such ridiculous terms) would be deflation though there could be temporary periods of inflation such as when the Spanish increased the money supply by importing silver and gold from Latin America or price inflation if there was a natural catostrophe (like a drought) or a man made one such as war.

[just-john]

I wouldn't call borrowers deadbeats I would agree they were loaned absurd amounts of money by people who knew many or most were over their heads.But would make a profit on late fees closing costs refi's and with the housing values and market moving up made these

as it turned out high risk loans .When ever I have loaned moneys it's always to a person or business that I know is able to pay me back.I have to since I don't spoon them on fee's and late charges and I don;t receive a commission on loans I've made . Financial INCOMPETENCY by both creditors as well as borrowers

as the greatest generation starts to die off and leave their estates to their children the redistributing of wealth will have to be deverted

[physics-fan3.14]

Wow, Scott. Amazing, lengthy, informative post. Very interesting, and I learned alot, it really puts the current crisis in perspective.

[CHABSENTIA]

You are correct in that this all started with GreenSpan. .Greenspan started things by lowering the Federal Funds rate to a ridiculous low level. As I mentioned before that six consecutive Interest rate raises has historically signaled some level of Recession the converse is true witht he Lowering of Interest rates.

 

 

The Lowering of these Rates to such a low Level not only expanded the Money Supply but these excesssive low rates made it possible for amnh more Loans which encouraged people to buy Big icket items such as Houses and Cars.

 

 

As I mentioned earlier these Loans have a "multiplier" effect that results in in the Original Sums being magnified many more times. The lowering of these Rates to such a level was bad enough but resulting Financing arrangements backed by

such Instruments as CDOs and CMOs that nobody including the Rating Agencies such as Moodys and Standard and Poors did not understand but still gave high ratings made it even worse.

 

 

With all of this Bernake , increased the Federal Funds rate 17 times which again was about 3 times the Historical Rates that signal a Recession. Here we have the opposite affect which further restricted the Money Supply and Resulted in a Credit Crunch. Unlike the Savings and Loan Crisis in which the Fed stepped in early with enough Emergrncy Measures to keep it from going Global ,Bernake decided to wait until the next Fed meeting about 3 weeks away. This allowed it to go Global while the European, Asian and Australians Central Bank was pouring Billions of dollars into their Economy to stifle the problem.

 

The Icing on the Cake were the Mortgages that nobody now trusted and the Banks and Instiutions in all the Economys mentioned above started making Margin calls for Loans they not considered worthless.

 

I saw the other day where Societe General announced that their prior claim where thier rogue Trader lost a few Billion Dollars was not so. After three days of looking at Accounts etc the Loss is 70 Billion dollars.

 

 

 

[CHABSENTIA]

This is true/ My Father told me long ago that the Collapse of the Markt etc and the 1929 that everybody talks about was a cake walk and that the real Problems and damages were doen in the thirties but everybody wants to focus on 1929.

 

 

It takes a while for these things to show in the Economy and things are a lot more complex now then 70 years ago.

 

 

The point here that Bernake who was fixated on Inflation raised the Federal funds rate 17 times or almost three times the number of times that Historically signalled a Recession.He did thie seventeen consecutive times without resting to see how the changes were absorbed in the Economy. Greenspan started it by going to the extremes the other way without a pause to see how the Economy absorbed them,

 

 

This is pretty much the first year of Economics and there have been numerous articles etc made on these raise and decreases and how it affected things.

 

 

We seem to not Learn by our Mistakes and unless one believes that these actions are deliberate for whatever reason then the only other explanation is that we have People with PHDs in Economics ignoring Principles of Basic Economics.

[CHABSENTIA]

I did not mention the inner workings of the Social Security system.I only mentioned the Fact that the same amount of Money invested over the same period of time even at 5% was vastly superior. At the time Social Security was started People did not live that long.

 

 

 

People that worked in the various levels of Government had the option of whether or not to be in it. One of the times that Congress needed to shore it up they changed the Law to force even thises people to be in i but still excluded themsleves.Social Security has been expanded to include such things as Aid to Dpendent Children and many other programs.This is part of the Problem and one of the reasons it won;t disppear in my Lifetime.

 

It has become too Political and everyhting necessary will be done to keep it. Any Party that tries to dissolve it will sufferHuge Election losses.

[CHABSENTIA]

As I mentioned earlier, all of this repeating of Past History especailly 200 years ago menad nothing if we do not learn by our Mistakes. Also addressing theories and not underlying Mechanics does nothing to address the real problem/s You Mention Oil so lets talk about it.

 

1. The U.S. has to import over 60% of its Oil.

2. China and India and their need for large amounts of Oil were not a factor 200 years ago or even 30 years ago.

3. Ethanol has been announced as a Substitute for Oil. There was a big deal about it in Comgress. Guess what? There is no way to transport it as Water is a by-product of it whether using Corn or Sugar and it would be corrosive and damage the present day Pipes etc. Therefore you would have to truck it or ship it long distances from its Plants not to mention re-fitting service station to accept it at much Greater Economic Costs. Not only that but we can't even import it from Brazil which is almost self sufficient with it because Congress has put large tariffs on any importsd of it to protect U.S,. Farmers.

4. Nuclear Power is the least Expensive once it is built but the Most expensive to build.. If the Enviromnentalists aren't stopping it out right they are putting large amounts of Obstacles in the way that increase the Costs.

5.Oil Refineries are another Obstacle. The above has got Congress to not allow any New Refineries to be Constructed. If the Supply of Oil was greater there would not be enough Capacity to Refine all the Necessary Oil as the Capacity does not only exist but they have to go down for Repairs and Maintenence which means that the existing ones only operate at 70% to 85 % Capacity. And this doesn't include the different Blaend needed as different States have different Environmental Regs.

6. The Governnment has a Tax on Gasoline in the U.S.. It is a National average of $.48.In New York City because of Local, State and federal Taxes there is a $,.60 tax per gallon of Gas. This means that a Gallon of Gas that costs $3.00 is actually $2.40 and this $.60 increase is a 25% raise.. I have not heard one Senator or Congressman in any State raise this fact . I have certainly not heard either of the two Senators in New York one who is running for President of the U.S. mention it. In fact, they accuse the Greedy Oil compnaies as being 100% responsible.

7. Then we have the Futures Exchanges where Speculators bid the Price of Oil because a group has blown up a Pipeline in a Country from which we Import Oil. Wouldn't happen so much if we did not have to Import over 60% of our Energy needs.

8. Now we have the Dollar dwn because of the recent Credit Crunch.The Middle Easr as a result have been talking about a different form of Currency which will mean since everybody elses is stronger then an increased Price for a barrel of Oil . This Oil is also needed to make Plastics etc so anyhting made in those materials wil increase in Cost.

 

These are just the more Major things that can be attributed to the Price of Oil. I don't have time to talk about the Disruptions in the Prodcuce Market because of Treaties with Cnada and South America. I mentioned in another Forum the other day where Florida here which is a Large Citrus State has to ship it all outside Florida because of these Treaties while accepting it from other places to help their Economy thus an increae in Cost.

 

 

All of that Theory sounds good and if exercised in a vaccumm or a Perfect untouched Economy without Interference would work. If you go back several months you will see where I predicted this Recession based on the actions of Greenspan and especially Bernake along witht he Exotic Financing of the Housing Market with Instruments such as CDOs and CMOs etc.

 

 

 

 

[World Colonial]

I wouldn't call borrowers deadbeats I would agree they were loaned absurd amounts of money by people who knew many or most were over their heads.But would make a profit on late fees closing costs refi's and with the housing values and market moving up made these

as it turned out high risk loans .When ever I have loaned moneys it's always to a person or business that I know is able to pay me back.I have to since I don't spoon them on fee's and late charges and I don;t receive a commission on loans I've made . Financial INCOMPETENCY by both creditors as well as borrowers

as the greatest generation starts to die off and leave their estates to their children the redistributing of wealth will have to be deverted

 

From your post, you must work in this industry and have first hand knowledge. I work for a major financial services company though not in the credit area.

 

My comment was not directed toward just mortgages, though because of the recent problems that is what most people are aware of. And incorrectly, they also think that this is only limited to "subprime" mortgages. It is not but actually applies to a substantial part of not just the mortgage market but also much of every other credit area including commercial real estate, car loans, credit cards, leveraged corporate buyouts and even the municipal bond market.

 

Let me be clear, there has NEVER been a greater mania in the history of human civilization that the current credit bubble. To date, the credit creation facilitated by the Fed's and other central banks monetary policy and extended by the global financial system has "worked' if you want to call this giant ponzi scheme a "success". And the only thing holding up this house of cards is creditor and debtor confidence and if and when this ends, the game is over regardless of what the Fed (or any other central bank) does or does not do. That is what happened in residential real estate which is why that mania ended when it did and not sooner.