Posts Tagged ‘deflation’
Inflation: An Expansion of Counterfeit Credit
The Keynesians and Monetarists have fooled people with a clever sleight of hand. They have convinced people to look at prices (especially consumer prices) to understand what’s happening in the monetary system.
Anyone who has ever been at a magic act performance is familiar with how sleight of hand often works. With a huge flourish of the cape, often accompanied by a loud sound, the right hand attracts all eyes in the audience. The left hand of the illusionist then quickly and subtly takes a rabbit out of a hat, or a dove out of someone’s pocket.
Japan's Scary Budget
While all over Europe, governments are forced to face up to the fact that the markets have suddenly become alert to the dangers posed by the huge debt loads carried by modern-day welfare states, Japan's government just piles on more and more debt on its existing debtberg with seeming impunity.
In Italy, Mario Monti's 'honeymoon' is already over. He just passed a fairly strict 'austerity' budget (recently denounced by the Northern League as a 'recessionary budget' – and rightly so, as it leaves the bulk of spending untouched and mostly imposes new taxes), but Italian bond yields are already back on the rise. Note here as an aside that the current level of the yield on Italy's 10 year note is not directly comparable to the time when a similar level was first reached, as the benchmark bond used by data providers has in the meantime been changed to a higher-yielding one – alas, it is the direction in which yields are heading that is relevant. Monti's real fight meanwhile is still ahead – he will have to challenge powerful vested interests as he attempts to implement structural reform.
A Paucity of Imagination
We want to return to a theme we have recently discussed in these pages, namely the allegedly exhaustive hypotheses regarding the possible solutions to the euro area's problems that are regularly presented to us in the media.
Leading intellectuals and economists usually list a set of choices based on the views of the current economic orthodoxy, which choices they insist are all that is possible or even imaginable.
We have briefly mentioned the topic last week and so has Mish in a recent post that similar to our article looked critically at Martin Wolf's recent 'Thinking the Unthinkable' editorial at the FT.
The main problem from our point of view is of course that no-one in the mainstream has as of yet really given voice to the so-called 'unthinkable', which in a way demonstrates what it really consists of (if it weren't 'unthinkable', they would have thought of it).
The FOMC Decision – Some Advance Kremlinology
We have tried to get an idea of what to expect from the FOMC on Wednesday, but must admit we couldn't really make up our mind. One line of argument goes 'Ben Bernanke will try to shock the markets by doing much more than most people currently expect'.
This line of thinking has been ably laid out by David Rosenberg of Gluskin Sheff (the details are available at Zerohedge) and Bill Fleckenstein (details at MSN Money).
Both Rosenberg and Fleckenstein are quite capable analysts of the economy and financial markets, so it is certainly worth considering what they are saying. Here is what we like about their idea, aside from the reasons they have laid out themselves: First of all, it is notable for being a minority view at the moment. This is at least our opinion from observing anecdotal evidence and a recent Bloomberg survey confirms that the vast majority of economists expects 'only' a variation of 'Operation Twist' ('OT') to be announced, whereby the Fed will simply alter the term structure of its balance sheet by selling shorter term and buying longer term debt. The aim would be to lower long term interest rates (this is to say, the operation would tend to flatten the yield curve).
A Hampered Market Economy
It would be incorrect to refer to the euro area or the EU more broadly as a planned economy. It clearly is a market economy, but just as clearly, it is not an unhampered one. Unfortunately for economic actors both in their role as producers and consumers, the hampering of the economy in the EU is in a very advanced state.
It has become commonplace to hear European politicians attempting to pin the blame for the euro area's debt woes on 'speculators'. We previously remarked on the prime minister of Italy, Silvio Berlusconi, who refers to financial market participants as 'locusts'.
Free Money in Temporary Abeyance
Yesterday's FOMC statement can be read in its entirety here. Just as we noted yesterday, it contained no surprises. Essentially it was a carbon copy of its predecessors, although it adopted – not unexpectedly – a somewhat more cautious tone regarding the state of the 'recovery'. And yet, in spite of there not being any surprises, the stock market initially registered its disapproval by declining. The sell-off accelerated markedly when Ben Bernanke began his post meeting press conference. A video of the press conference is available here. On Thursday, the market once again sold off, only with even more gusto at first.
Everybody Has A Plan
Before we go into medias res, here is our usual, quasi-mandatory disclaimer on the whole thing, one that will undoubtedly be familiar to regular readers, but we repeat it always for the benefit of those who may have just stumbled upon this site:
We do not believe there should even be such a thing as a banking cartel with a central bank at its center, possessing nigh unlimited money creation power. We don't even think the State should be involved in the business of money production at all. There should be free banking, and what is used by the market as money and in what quantity should be up to the free market itself.
The Bernankean World View – As Misguided As Ever
We actually said last week we would not comment on Bernanke's truly cringe-worthy speech delivered last Thursday. Our reasoning was that he didn't say anything unexpected or anything we have not heard a thousand times before. This is certainly true, but we now feel compelled to comment anyway, if only to shine a light on what a horrible steward of the monetary system he is – while acknowledging that he certainly didn't design said system and is in equal measure its prisoner as much as its director.
1. The Link between Money and Credit in the Fractionally Reserved Banking System
We have gone over some of this ground before, but will do so again after seeing this article at Zero-Hedge: “Deflationists Take Note: Bernanke Succeeds In Offsetting Shadow Banking Collapse”.
It is often said that few things in economics confuse people more than money and that is indeed true – we come across proof of this assertion every day. We will use a few simple examples to illustrate in what way money and credit are interlinked in the fractionally reserved fiat money system and why there nevertheless still exists an important difference between them, a difference that is especially pertinent in today's system.
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