Inflation

Although we waxed skeptical here the other day about Warren Buffett’s just-announced $5 billion stake in Bank of America, we allowed for the possibility that the deal will provide a handsome payoff to him no matter what happens to the bank.  B of A could implode, after all, a victim of sinking collateral values for its mortgage loans, and of litigation over its securitized-lending business.  There is also the wild card of homeowners challenging lenders in court to show clear title to properties that are in line for foreclosure. In fact, this issue alone has the ability to capsize the global financial system, since “clear title” is exactly what ceased to exist when the feather merchants of the banking world leveraged out real estate to-the-max earlier in the decade to create an $800 trillion derivatives edifice – the Mother Lode of Digital Money, as it were. All of that sum must be viewed at the moment as deflationary overhang, by the way – not to mention, a key stumbling point for those who argue that The Great Economic Crisis must eventually precipitate out as hyperinflation. So, how do you produce even mild inflation, let alone hyperinflation, with the housing market in a full-blown Depression?  Most surely not by expanding the capacity of banks to make mortgage loans. That’s been tried to death – first moderately, then aggressively, and finally desperately -- with zero success. Despite trillions of dollars worth of mortgage stimulus and supports both implied and real, the residential market looks even grimmer than it did a few years ago.  Existing-home sales fell 3.5 percent in July despite the fact that prices were 4.4 percent lower than in July 2010. Now that’s deflation. There’s also the $6.6 trillion loss of home equity that has occurred since the onset of the

[Guest commentator Edward Furst, introduced here a couple of weeks ago in an essay about Young Americans for Liberty, has some disturbing news concerning the way economics is taught at the nation’s colleges.  It would seem that more than a few professors are either poorly informed about the subject, or, like Paul Krugman, downright nutty. Moreover, their ideological bias is pushing the already dismal science beyond the pale of reason. The good news is that young people like Edward, a Mises Institute graduate and online rabble rouser, are fighting hard to combat economic ignorance. In the essay below, we glimpse the young libertarian and former collegian at work. RA] Over the next seven years, the Federal Government is poised to squander triple the amount of money spent fighting WWII. And that’s adjusted for inflation! Total unfunded liabilities on the federal ledger consistently exceed the GDP of the entire world.  The government could raise the top marginal income tax rate to 100% for all those shysters making more than $250K annually and not even cover the deficit. They could liquidate the assets of every Fortune 500 company and every billionaire in America, yet red ink would still flow from Imperial fountain-pens like human and animal waste down the Ganges. “Fear Not!” say the demagogues. “It’s not a spending problem, but a revenue problem!” Once upon a time, such deluded statements earned one a trip to the doctor.  Now, they get you an esteemed economics faculty position at some prestigious university.  I got to know this phenomenon well when I studied Principles of Macroeconomics under Anne Gongwe, a professor at Colorado State University. Anne is a delightful person, but I must say, her Ph.D. would better serve as kindling for Rick’s readers during the coming collapse than as a qualification to inculcate

[Gary Tanashian writes a technical and macro-fundamental analysis blog, is the publisher of financial website Biiwii.com and the premium-content, market-analysis newsletter Notes From the Rabbit Hole. In the essay below he explains how the interplay between inflation and deflation is used as a monetary policy tool by the Fed and U.S. Treasury. For the record, Rick’s Picks has long predicted a deflationary depression, but with a precipitous and devastating hyperinflationary phase. RA] I would like to thank Rick Ackerman for the opportunity to continue a conversation that began in 2005 with an email I sent to him in response to an article he wrote about deflation that I felt was beyond the usual boilerplate that keeps insisting that a deflationary depression will bring all asset prices down. In fact, Rick’s constructive view of gold hints that he is not a knee-jerk gold booster like so many gold bugs, but rather a realistic believer in the idea that not all assets are created equal, especially during times of great monetary stress. There are several notable deflationists who absolutely hate gold, which makes sense since they have been micromanaging its “price” demise since 2002.  While they may be right for limited periods during an ongoing secular deflation against which ever more exponential inflationary policy is brought forth, they will never be right about gold’s “value proposition” in relation to assets positively correlated to growing (or more accurately, contracting) economies, at least during the current secular trend. The garden-variety deflationist preaches global depression and cash-as-king.  Well, he may be half right: cash is good for short-term liquidity and can play court jester, but gold is king of enduring value in the current system as policymakers fight the dreaded deflation beast ever-further off the macro balance sheets. More astute deflationists do not focus on asset prices, instead

Gotta love those inflationists!  We enjoy getting in their faces now and then because their nutty ideas, particularly that inflation is worth worrying about at the moment, can only confuse and misdirect people who are struggling to sort out the facts for themselves. Imagine waiting…and waiting…and waiting for inflation to “break out,” as the inflationists have been doing all too patiently since 1991.  That’s when the Fed put pedal to the metal to escape the drag of recession. At the time, virtually every monetarist in the land was predicting that a nasty inflationary spiral lay just ahead. All we got in the end was the kind of inflation that no one noticed, let alone complained about: asset inflation. Greenspan sealed his reputation as a bubblehead forever by finally noticing the bubble, although, to his further discredit, he was only explaining at the time that no one with a trained eye who was watching for a bubble could be faulted for having failed to see one.   And now, finally, deflation is overpowering the myth of monetarism itself – the myth that the Fed can fine-tune economic cycles by creating “money” out of thin air.  Turns out it’s not so easy. In reality, the banking system’s feather merchants succeeded only in building, one nearly indiscernible layer at a time, a debt juggernaut that can no longer be controlled, let alone reversed. Deflation has suffocated the monetarists and is about to do in the Keynesians for good measure. It is also continuing to tighten its grip on just about anything that can be bought or sold.  We’ll say more about that in a moment, even after conceding up front that inflation eventually is going to be a huge concern, since an outright hyperinflation will be needed to wipe hundreds of trillions of dollars’

We backed off the inflation/deflation debate a few months ago when we started feeling sorry for the inflationists, who seemed hopelessly out of touch with the real world.  As far as we were concerned there was nothing to debate, since, other than what we’ve referred to as grocery-store inflation, no evidence existed that prices were about to rise, let alone explode. That is still true.  What on earth could they have been thinking? It should have been clear enough that the monetarists needed to revamp their outmoded theories after rampant easing in the wake of the S&L debacle 20 years ago failed to generate any meaningful inflation at the consumer level. What we got instead was a new strain of “good” inflation that seemed to benefit everyone.  Indeed, few complaints were heard from homeowners whose properties were increasing in value by 15% or more per year, nor were financiers whining about the soaring collateral values that made it possible for them to leverage $60 trillion worth of global GDP into a derivatives edifice with a notional value exceeding $600 trillion. And now we’ve got the “bad” kind of deflation, with a moribund housing market that has so far failed to respond to trillions of dollars worth of intended stimulus, either direct or indirect. Freddie Mac, for one, has nearly tripled its book, filling the shoes of all the profligate subprime lenders who nearly took the financial system down a couple of years ago. Thus, rather than gearing the mortgage market toward precipitous failure, the government has been dribbling out subsidies of $10 billion to $15 billion to the GSEs each quarter that we hardly even notice any more. Hyperinflation, But Too Late… We’ve made this point a hundred times, but we will make it again:  Hyperinflation is coming, for sure,

Schizophrenia still reigns at the Fed as policymakers attempt to head off an inflation that, statistically speaking, is almost nowhere to be found. In fact, inflation has fallen by more than half since 2007 if you measure it the way the Fed prefers, using a price index of personal consumption expenditures. What is the diligent monetarist supposed to do?  While some of the Fed governors see the glass as half-empty and want to keep interest rates low, their delusionally sunny colleagues want to tighten because they evidently believe all of the twaddle we’ve been reading about how the economy is in the throes of a strong recovery.  Consider the following headlines from Google’s business-news section yesterday afternoon: “Bets on Growth Buttress Stocks” (Wall Street Journal); “Oil Surges to 17-Month High on Signs of U.S. Economic Growth” (Bloomberg): and, “10-Year Yields Hits 4 Percent on Signs Economy Picking Up” (Reuters). To borrow a line from Goebbels, if the news media keep trying to mislead us with stories like these, eventually we will come to believe them. Or will we?  It’s one thing for the Wall Street Journal et al. to get all stoked about the supposedly robust pace of the recovery.  After all, the Journal’s owner, Rupert Murdoch, didn’t get rich telling readers the world was going to hell in a hand basket. But just because Murdoch has chosen to be a cheerleader rather than risk circulation and advertising revenues by giving it to us straight, that doesn’t necessarily mean that we readers have to believe such bilge. Why should we, when there is no hard evidence of a recovery in the economic lives and businesses that we see, and hear about, all around us? Behind the Headlines Could the newspapers simply be misinterpreting the signs?  It would certainly seem that

What does Fibonacci analysis predict for Comex gold over the coming year?  We recently heard from a skillful practitioner of the dark arts, “Mestre Socrates,” who sees $1490 an ounce by around next May. But there’s a chance the path will not be smooth, he cautions, since prices could first dip as low as $1012 – more than $100 beneath current levels.  That would represent a great buying opportunity, however, according to Socrates – a place where bulls could back up the truck.  How confident is he?  Socrates notes that gold’s long-term price movements have been precisely foreseeable on the basis of Fibonacci sequences that have traced out cup-and-handle formations.  “Gold appears to have a predictable trading pattern of a new high, a slam down to the previous Fib level, reworking back to the previous high, a dull six-month ‘handle formation’ period, and then a two or three-month rally to a new Fib level. This has given workable projections for the comex gold price years in advance.” Socrates studied Fib numbers a decade ago with Larry Pesavento, a well-known technical analyst. “One of Larry’s ‘big ideas,’ ” he notes, “was the particular significance of the 0.786 level, which marked the transition from a simple retracement to a primary bull trend. Furthermore, once breached, a price could take out the 1.00 level and go straight to 1.272. The last major hurdle was to break through the 1.618 level and then ‘the sky was the limit.’ This applied to any financial instrument.” No Mere Oscillation So how does it apply to gold?  Socrates provided a detailed account of bullion’s ups and downs from 2003 forward, noting breakouts and cup-and-handle patterns that played out over periods as long as 18 months.  To bring the forecast up to date, the recent move down from