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106 comments on DrumBeat: June 2, 2006

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BrianT on June 2, 2006 - 12:50pm Permalink | Subthread | Parent | Comments top
What the Fed wants is high inflation combined with a strong dollar. The problem is how to bring this about.
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tate423 on June 2, 2006 - 1:03pm Permalink | Subthread | Parent | Comments top
I don't think the Fed WANTS inflation, but it will be totally unavoidable due to them just ignoring the problem and helping to sweep the details under the rug.

As a private bank how does inflation help you?  Your assets (debts other people owe you) become worth less each and every year, so why would I really want that?  I must be missing something.

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BrianT on June 2, 2006 - 1:59pm Permalink | Subthread | Parent | Comments top
There is too much debt in the US economy (it is at a record level). Because the level of debt to GDP is so high, a deflationary collapse is always a threat and would actually occur should the Fed follow a stable monetary regime. The rate of monetary growth needs to continually be raised as the debt grows in relation to the size of the economy which will service the debt. The trick is to keep expanding the money supply (which is inflationary) while keeping the dollar from collapsing. Very tricky. But you make a good point: it is not impossible that the Fed could decide to raise rates and let the chips fall where they may (but unlikely).  
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tate423 on June 2, 2006 - 2:15pm Permalink | Subthread | Parent | Comments top
All this is true.  However there lies a bigger problem.  We are literally in a game where the point is to print more money to pay for old debts.  You think they won't raise rates?

Inflationary monetary policy works in a classroom, it generally stops there.  The fed can't control inflation.  They try and alter it, but they can't pick what it should be.  Inflation has decimated the real returns on Wall Street.  It's great to say it's avg historical return is above 10%.  That's great, but once you factor in inflation, the money made is eaten by it.  

There is little the Fed can do now to stop inflation.  It's nearing 10% annually.  So they should stop raising rates and just let it get worse?  I highly doubt they will really let that happen.  If they Fed follows public policy (which is to control inflation) then they will be raising FF rates.  Please convince me otherwise.

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BrianT on June 2, 2006 - 2:53pm Permalink | Subthread | Parent | Comments top
You might be right about the rates going up. It is hard to be confident one way or the other.
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tate423 on June 2, 2006 - 3:18pm Permalink | Subthread | Parent | Comments top
You're right, but when financial plans have to be made you have to decide what you think they will do.  I just can't see them suddenly turning their back on inflation especially when that's all they talk about most times.

Secretly they may not mind either way because as a private bank they will make plenty of money regardless.

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LevinK on June 2, 2006 - 1:27pm Permalink | Subthread | Parent | Comments top
Actually a weaker dollar works great for the FED as it effectively reduces external debt and stimulates the economy. My version is that they will try to prop it up on the levels around the current ones and go for a slow but steady dollar decline.

But they will try to avoid a major dollar collapse by all means - if this ever happens the reprecursions will be horrendous. No more cheap credit for abroad, no more inflation export and cheap labor from China, no more American empire buying everything and everyone in the abroad with the money it actually borrowed from the very same people.

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tate423 on June 2, 2006 - 1:39pm Permalink | Subthread | Parent | Comments top
That's true.  But as the dollar declines due to various macro economic factors (twin deficits, etc.) what incentive is there to continue to hold it?  I keep harping on this one more problem idea.  I truly believe that we're not going to see one big woosh and here comes the $hit to the fan.

If a stable country realizes it is in their best interest to completely minimize FX exposure by drawing down their US reserves almost entirely.  The value will drop farther (billions more pumped into the system).  Now at this even lower point another country starts feeling nervous and they too dump it.  It's just like a bank run and to think it can't happen is plain idiotic.

It's only going to be a matter of time before many countries realize it's not in their best interests to keep holding dollars.  Yeh we need them to trade, but after they've been recycled, let's get rid of them!

If we think a little further down the road it's easy to see us in some type of stagflation for some time.  We are going to have to convince the world that this is a hiccup and we'll be alright.  How do you think that's going to go?

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LevinK on June 2, 2006 - 2:09pm Permalink | Subthread | Parent | Comments top
But as the dollar declines due to various macro economic factors (twin deficits, etc.) what incentive is there to continue to hold it?

Methinks that the key variable here is time. Just like with inflation if you inflate your debt slowly enough, if you make some short-lived upturns here and then, you may avoid a total bank run (OK, at least for a while). The dollar has already declined some 30% for the last 6 years, but the decline was slow enough for the dollar holders not to panic. Therefore I expect a similar trend to continue or at least to be maintained by whatever is needed.

IMO, the only thing that stands in the way of a dollar collapse currently are the central banks of Europe, Japan and China, which (along with the FED of course) doubtlessly are aware of this danger and are prepared to counteract it by all means. I can even speculate that there are plans for coordinated efforts should such thing start to happen.

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tate423 on June 2, 2006 - 2:24pm Permalink | Subthread | Parent | Comments top
I'm sure you're right.  There should be planning, but I'm curious as to what could really be done.  The answer to 9/11 was to flood the market with cash.  It worked short term, but the liquidity that stuck around for the last 5 years has put such a long term hurt on us, that we should ask if it was the right thing to do.

Then again if they didn't do that we would have corrected back 5~6 years ago and things would be different.  I bet we would have wasted less enegy though.  Speaking of the dollar decline it broke the $84 price floor that everyone keeps talking about.

I pulled this from itulip.com

Soon credit spreads will widen and liquidity we shrink even more.  If you have not noticed, the Yen carry-trade died and global money supply has fallen below nominal GDP.  If you think that extremely low default rates will support tight spreads, recall that our nation's all-time low default rate was during the second quarter of 1997, which was on the eve of our worst default cycle since the 1930s. High default rates are symptoms of economic malaise, not its cause. During these periods, quality credits and high quality stocks bests low quality securities, which reverses the trends seen since December 2002.  Stocks smell The Devil.

I don't know how to verify the Yen carry trade ending, but I'll take Eric Janszen's word for it.  Bush has touted that the highest % of home owners ship has been attained under his leadership.  Yet the devil in the details says that it's only because all of those who SHOULDN'T have gotten a house, got one with a big fat AMT loan.  People really have little financial sense, so the bankers bilked them.  Should we expect different?  Those houses are being repo'd and will be available for discount soon at a subdivison near you.  

Point: We have to be near the edge of the cliff, or at least the mole hill we've built.

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AlanfromBigEasy on June 2, 2006 - 3:08pm Permalink | Subthread | Parent | Comments top
I keep some of my :cash: in GIM.  Almost all sovereign debt.  In Yahoo discussion board is a graph of currency exposure over time.  Just a few % in US $.

4 cents dividend every month, closed end fund with about a 1% discount (been higher in past).

Just for your review.

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IFeelFree on June 2, 2006 - 2:17pm Permalink | Subthread | Parent | Comments top
If central banks around the world are going to diversify out of the U.S. dollar, an interesting question is where will they put their money? It seems likely that some portion of the money will go into gold. Even if there is a deflationary collapse (not likely, in my opinion) gold will probably hold up reasonably well, as people may seek a safe haven. If there is inflation, we may see a repeat of the 1970s, except that gold could go much higher.
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tate423 on June 2, 2006 - 2:32pm Permalink | Subthread | Parent | Comments top
Someone posted a gold article detailing the argument between is gold money or a store of value?  With 6.5 Billion people on the planet how many have to assume that gold is worth more than my fiat money to make me want gold too?  There will be demand for gold.

Markets are irrational.  Gold is the worst.  According to many models is follows a random walk and you can not predict the price necessarily like a security with pro forma cash flows.  So instead many times you have to hold on to your fundamentals and wait to be proven right.  That can be a problem though as you may be right about the end point, but wrong about when.  Many times it's about playing the people.  In the case of the dollar, I think it's a high stakes game of chicken as many around the world are starting to get nervous about the worlds largest economy.

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enviro attny on June 2, 2006 - 9:49pm Permalink | Subthread | Parent | Comments top
In regards to precious metals, there was a very strange announcement by NYMEX today.

http://www.nymex.com/press_releas.aspx?id=pr20060602a

The New York Mercantile Exchange, Inc. today announced that the COMEX Division has eliminated price fluctuation limits for all COMEX contracts beginning with the NYMEX ACCESS® session on Sunday, June 4 for trade date June 5.

This change was made in order to better facilitate the core functions of price discovery and hedging provided by COMEX products.

This is one of those announcements, like the M3 reporting announcment, that only makes sense if something very, very funny is going on.  If I had a little more tin foil in my hat, I would say that this means that the PTB are going to crash the market for PMs in order to eliminate their shorts, then scoop up all remaining gold and silver in storage.  Eliminating the price limits would allow this to happen almost instantly and prevent the general public from participating.  I am sure, however, that thinking is insane and they are really making the change "in order to better facilitate the core functions of price discovery and hedging", whatever the hell that is supposed to mean.

Keep an eye on gold and silver Sunday at 7 when the ACCESS trading starts.  It might be interesting.

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R W Reactionairy on June 2, 2006 - 7:47pm Permalink | Subthread | Parent | Comments top
Smoke? Mirrors? Adjustments to published statistics [not that they haven't done about all they can with this angle.]?

The best opportunity for obfuscation at least the short term is for Democrats and Republicans to vociferously acuse each other of things that both groups are fully complicite in. Phoey.

The game will end when the Chinese want it to until. Until then "pary hardy dudes and dudette."

BTW, this particular glob of "S" will IMO "HTF" before peak oil becomes an immediate concern for the mainstream. In that respect we may actually owe Greenie, Rubin, Clinton and Bush II and almost every Senator and Congress Critter except for Ron Pual a debt of gratitude for creating a longer transition period from a lonwer base toward a post peak state.

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Oil CEO on June 4, 2006 - 3:36am Permalink | Subthread | Parent | Comments top
Important points. You are probably correct on many of them. I'm not sure if they are smoke, or mirrors, or just our variable rose-colored glasses. The hoi polloi must take some credit. I think you mispelllled 'Phooey' :)
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