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GeorgeB

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Reply with quote  #151 

Kohn says Fed can prevent inflation surge


NASHVILLE, Tenn (Reuters) – The Federal Reserve will not allow its unorthodox policies to lead to a surge in inflation, but may need to do more to ease credit if the economy fails to respond to stimulus measures, the Fed's No. 2 official said on Saturday.

But even with U.S. economy now in its sixth quarter of recession, Donald Kohn, vice chairman of the Federal Reserve, said the central bank's attempts to heal ailing credit markets and spur an economic recovery have been working, in ways that include lowering mortgage interest rates.

"The situation in financial markets and the economy would have been far worse if the Federal Reserve hadn't taken the actions we did," Kohn told a conference at Vanderbilt University in Nashville.

As the economy begins to recover, suitable policy responses by the Fed will prevent a rise in inflation, he said.

"The key to preventing inflation will be reversing the programs, reducing reserves, and raising interest rates in a timely fashion," Kohn said.

He emphasized the importance of inflation expectations in holding down future inflation.

"If expectations are not anchored -- if they vary in response to our actions or to persistent gaps between actual and potential output -- inflation itself will follow," he said.

On Friday, a survey-based forecast of one-year inflation expectations, from the University of Michigan, jumped surprisingly to 3 percent in April from 2 percent in March.

Kohn said the policy-setting Federal Open Market Committee is still mulling the value of setting an explicit objective for inflation -- a step further than it went earlier this year, in publishing "longer-run" inflation forecasts.

At its January meeting, the FOMC said most participants saw a long-run inflation goal of 2 percent as appropriate.

SPARRING WITH VOLCKER

Kohn was quizzed about that goal by former Fed Chairman Paul Volcker, who is famous for halting runaway inflation in the U.S. economy in the 1980s by raising interest rates sharply.

Volcker questioned Kohn on how the Fed can talk about "price stability" in the same breath as a 2 percent inflation goal, arguing that the target should be lower.

But Kohn said a 2 percent goal would give the Fed more flexibility at times of economic shock, because real interest rates start off higher as the economic cycle turns down.

The parrying ended with Kohn saying to Volcker: "I'm not going to convince you, am I?"

Kohn, who did not discuss the economic outlook at length, said the current recession is "global and will require a global response."

A heavy reliance on U.S. consumer spending to power global growth "was never a sustainable response," he said, noting how "U.S. consumers are pulling back, obviously, and are going to be amassing savings by not spending."

Among other things, the Fed is considering including jumbo mortgage loans in its newest lending program, the Term Asset-Backed Securities Loan Facility -- a move that could bolster the upper end of the housing market.

INTERVENTIONS CAREFULLY CHOSEN

Kohn conceded that some Fed officials are uncomfortable with what is seen as selectively allocating credit across various markets, but said the interventions have been carefully chosen.

With the Fed's independence under threat from Congressional scrutiny, Kohn said the central bank would give Congress the additional information it seeks about its lending programs, and welcomed a review.

"The public is naturally interested in our lending practices, and we will be releasing even more information about what stands behind our loans in coming weeks," he said.

The FOMC has embarked on a process often known as quantitative easing since lowering its main monetary policy tool, the fed funds rate, to almost zero percent in December.

The central bank's balance sheet has been run up to some $2 trillion and is expected to go much higher.

"High levels of Federal Reserve assets and resulting reserves are likely to be essential to fostering recovery," Kohn said. The Fed has also discussed whether making explicit objectives on the size of its balance sheet would help to better communicate the Fed's thinking, he added.

(Additional reporting by Kristina Cooke; Editing by Leslie Adler)

http://news.yahoo.com/s/nm/20090418/bs_nm/us_usa_fed_kohn;_ylt=AkwIcKBtdzGfU3FHzKG4BAp34T0D


JohnnyCash

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Reply with quote  #152 

John Mauldin, a well known economist and investment advisor has just released a partial text version of his seminar from two weeks ago. He gives his thoughts on money, credit and deflation vs. inflation.

His analysis and conclusions are surprisingly in-line with our previous discussions on these topics. Note that he estimates our money supply leveraged at about 25 to 1, our discussions had centered on 20 to 40 to 1. Note his somber adjusted estimate of China's real GDP increase at the end.

Also note that he hedges his bet on inflation by discussing the failure of the banking mechanism, which is tending to retain the new cash rather than inject (lend) it so as to replace the "poofed" or vanished (as we discussed) credit which he includes as part of the money supply (as we discussed). This is consistent with the MEW (Mtg Eq. Withdrawls) which sustained the economy in earlier years when such loans were readily available as home prices were much higher, something that will not re-occur for many years.

Text of Mauldin's presentation:

What Is Money?

jm041709image003

Let's talk about what money is. For some people it's M-1 or M-2, and they worry that the money supply is growing too much. For some people it's gold; gold is the only real currency. I think those ideas each have their place, and there's some truths to them, but they focus us on the wrong thing.

It's a bit misleading to talk about money supply, because what money really is is roughly $2 trillion of cash and then $50 trillion in credit. Because what do the banks do? They take deposits in and then they borrow money to leverage them up. I take my credit card and I spend with it. I borrow against a house. I have an asset that rises, and I borrow against it.

We have two trillion dollars of actual cash propping up $50 trillion in credit. If we all decided to settle and pay off everything, we couldn't do it because there is not enough cash. There would be massive asset deflation. We, as a nation, are levered 25 to 1, or we were. Now, that $50 trillion is in a real sense the money supply because that is what we are all pretending is real money. I lend you money and you pretend you are going to pay me back. Then you pretend he [pointing at another attendee] is not going to call your debt for cash, and we are all going to keep the system going. Because if we all try to pay each other back at once, we are all collectively -- and this is a technical economic term -- screwed.

So we keep the system going. Now, where are we today? We are at the Great Deleveraging. We are seeing massive losses and destruction of assets, on a scale that is unprecedented. There was massive destruction of assets during the Great Depression, which caused a lot of problems, and we are seeing the same thing today. We are watching trillions simply being poofed (another technical economics term – which will drive my poor Chinese translator crazy!). We are watching people pay down their credit lines, which is one way of saying the supply of money and credit is shrinking.

This is not just in the US, but all over the world. Because when you start adding European cash-to-credit, and Japanese cash-to-credit, and Indonesian and Chinese cash-to-credit, it becomes multiple tens of trillions, and we are watching a goodly portion of that credit be vaporized. So we -- individuals and businesses -- are trying to find that $2 trillion in real cash and get some of it to pay down our debts. We are reducing that massive leveraged money supply down to some smaller number. We are hitting the Blue Screen of Death. We don't know what it is going to reset to, but we have permanently seared the psyche of the American consumer, and it is going to get reset to some lower number, about which I will speculate in a minute.

Now to give you some idea of how important credit was in our recent period of economic growth – and I keep using this slide, but it is an important slide because it shows you what would have happened in the economy without mortgage equity withdrawals. The red lines are what GDP would have been without MEWs. Notice that in 2001 and 2002 we would have had negative GDP for two years, that's 24 months. It would have been as long as or longer than the current recession. Not quite as deep, because we had the Bush stimulus and Bush tax cuts at the time. The Bush tax cuts were very important in keeping the economy rolling over in 2001 and 2002.

jm041709image004

But notice that the recovery for the next four years would have been under 1%. We would have had under 1% GDP for four years running, without mortgage equity withdrawals, without people being able to spend more. That doesn't even count the leverage we increased on our auto loans, on credit cards -- you saw the two charts that Louie [Gave] and Martin [Barnes] used yesterday about the growth of credit, and we are now seeing it in reverse. Do you think George Bush would have stood even a small chance of being reelected without mortgage equity withdrawals?

Quarter 1-2006 we had $223 billion in mortgage equity withdrawals. Quarter 2-2008 it was $9.5 billion. Is it any wonder we were in recession by 2008? By the third and fourth quarters there was no money to keep the treadmill going That $50 trillion in credit was shrinking fast. We were imploding it. Further -- just as a little throwaway slide -- if you look at 2010 and 2011, we are getting ready for another huge wave of mortgage resets.

Now, we've gone through the last wave and we saw what happened; it created a lot of foreclosures. We are not out of the woods yet. It is going to be 2012 before we sell enough houses to really get back to reasonable levels, because we had 3.5 million excess homes at the top. We absorb about a million a year, it takes 3 years, that's kind of the math.

[Skipping some attempts at humor that you had to be there to get] ... By the way, this AIG thing and the bonuses, that's so bogus. I mean, the 40 people that created the problem were gone, they go to 40 other people and say, stick around because we've got to have somebody who actually knows what these things are to try and unwind it, and we'll give you a bonus. Some of them worked for a dollar against getting that bonus, and now we've told the world that a contract isn't a contract in the US of A, for a lousy 160 million dollars. No bank is going to want to play with the US again, because you don't want to be hauled up in front of Barney Frank.

MV=PQ

Okay, when you become a central banker, you are taken into a back room and they do a DNA change on you. You are henceforth and forever physically incapable of allowing deflation on your watch. It becomes the first and foremost thought on your mind: "Deflation, we can't have it." So let's move along to the next point, and then I'm going to tie them all together.

MV=PQ. This is an important equation; this is right up there with E=MC2. M (money or the supply of money) times V (velocity, which is how fast the money goes through the system -- if you have seven kids it goes faster than if you have one) is equal to P (the price of money in terms of inflation or deflation) times Q (which roughly stands for the quantity of production, or GDP)

So what happens is, if we increase the supply of money and velocity stays the same, if GDP does not grow, it means we'll have inflation, because this equation must balance. But if you reduce velocity (which is happening today), and if you don't increase the supply of money, you are going to see deflation. Now, we are watching, for reasons we'll get into in a minute, the velocity of money slow. People are getting nervous, they are not borrowing as much, either because they can't or because the "animal spirits" that Keynes talked about are not quite there.

To fight that deflation (which we saw in this week's Producer and Consumer Price Indexes) the Fed is going to print money. A few thoughts. The Fed has announced they intend to print $300 billion. That is different from buying mortgages and securitized credit card debt -- that money (credit) already exists.

When they just print the money and buy Treasuries, like the $300 billion announced, they can sop that up pretty easily if they find themselves facing inflation down the road. But that problem is a long way off.

But sports fans, $300 billion is just a down payment on the "quantitative easing" they will eventually need to do. They can't announce what they are really going to do or the market would throw up. But we are going to get quarterly or semi-annual announcements, saying, we are going to do another $300 billion, another $500 billion.

When we first started out with TALF and everything, it was a couple hundred billion here and there, and now we throw the word trillions around and it just drips off of our tongues and we don't even think about it. A trillion is a lot. It's a big number. And the total guarantees and back-ups and all this stuff we are into -- I saw an estimate of $10-12 trillion. That's a lot of money.

Understand, the Fed is going to keep pumping money until we get inflation. You can count on it. I don't know what that number is, I'm guessing $2 trillion. I've seen some studies. Ray Dalio of Bridgewater thinks it's about $1.5 trillion. It's some big number, some number way beyond $300 billion, and they are going to keep at it until we get inflation.

Side point: what happens if the $300 billion they put in the system comes back to the Fed's books because banks don't put it into the LIBOR market because they are worried about credit risks? If that happens, it does absolutely nothing for the money supply. Okay? It's like, goes here, goes back there -- it doesn't help us. If the Fed creates money which is simply deposited back with the Fed, then there is effectively no money creation. We are still faced with deflation. The Fed has got to somehow get it into the financial system. They've got to figure out how to create some movement.

Will it create an asset bubble in stocks again? I don't know, it could. Dennis [Gartman] talked about being nervous yesterday. I would be nervous about stock markets, both on the long side, as I think we are in a bear market rally, but also there is real risk in being short. Bill Fleckenstein will be here tonight. He is a very famous short trader. He closed a short fund a couple of months ago. He says he doesn't have as many good opportunities, and basically he's scared of being short with so much stimulus coming in. So it's going to work, at least in terms of reflation, but the question is when. A year? Two years?

(This is about as good a break point as I can find in the speech, so we will end here and take it up again next week.)

One note from today's data on deflation. The headline in the Wall Street Journal says China grew at 6.1% last quarter. That doesn't sound bad. But what was not in the story is that nominal growth was just 3.7%. The other 2.4% was because of deflation. To get real (after-inflation) growth you subtract inflation and/or add deflation. Growth in China is slowing down more than the headlines suggest.


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ISamson

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Would you  "experts"  call this an accurate description ?



Pick Your Poison: Inflation, Deflation, Stagflation

Lauren YoungMonday, April 27, 2009

Analysts see possible scenarios for each of these to strike the U.S. economy. Stay alert and invest accordingly.

Will the real 'flation please stand up?

Experts are arguing about where the U.S. economy is heading as the global financial system tries to right itself. Is it on the path to inflation, deflation, or, worse, stagflation? Rising unemployment and excess production capacity are making it hard for the U.S. economy to climb out of recession. And that, in turn, is putting a strain on pricing power and wage growth—raising fears of deflation, which develops when a broad decline in prices amid falling demand feeds further price-cutting.

But what happens if the Federal Reserve's efforts to jump-start the economy take effect? Stimulus to the tune of $787 billion is supposed to rev up economic engines. Prices could climb too high as too much money chases after available goods and services—the classic formula for inflation.

"I describe [the potential dangers in] this economy in the form of a snowy Minnesota road," says Peter Rekstad, a financial adviser at TruNorth in Oakdale, Minn. "A car slid off the road into the deflation ditch. The way out of the ditch is to get a bunch of friends pushing while you rock the car back and forth. The big danger is that you get out of the deflation ditch and race across the road into the inflation ditch."

Or to take Rekstad's analogy further, say a car is straddling the road, with its wheels mired in both ditches at once—the worst of both worlds. That situation, where growth slows while inflation soars, is known as stagflation.

Here's an investor's guide to protecting your portfolio from these three forces.

Deflation

Deflation is the threat dominating headlines. "You've got a strong supply of goods and weak demand. That's a recipe for prolonged deflation," says A. Gary Shilling, economist and author of Deflation: How to Survive & Thrive in the Coming Wave of Deflation (McGraw-Hill). The problem is deflation's ripple effect: When banks stop lending, businesses stop expanding and wages fall. Consumers stop spending, which pushes prices lower. Why won't massive stimulus pull the economy out of the deflationary lane? Shilling fears that the U.S. government's economic tampering will have a "Big Brother effect," hurting innovation and permanently curbing growth.

The Signs. The surest sign of deflation is a decline in the consumer price index, which tracks the prices of consumer goods and services. But it's hard to ignore lower real estate values, which aren't in the CPI. Home prices fell more than 18% in 2008, according to the S&P/Case-Schiller U.S. National Home Price Index. Another deflation indicator: the higher savings rate, which we're seeing for the first time in 25 years. Shilling expects the savings rate to rise from 4.2% to 10% in the next decade.

Investment Strategy. "Quality is paramount in deflationary markets," Shilling says. He thinks most investors should be in short-term certificates of deposit or money-market funds. Those with a 10-year time horizon should also buy tech stocks, such as semiconductors, he says. Companies facing deflation can't cut prices and must boost productivity through technology.

Inflation

The Argument. Many of the economists and financial advisers polled by BusinessWeek for this story believe the huge amount of money being pumped into banks by the Federal Reserve (chart, right) makes inflation a real threat. Hans Olsen, chief investment officer for JPMorgan Chase (JPM)'s private wealth management business, says the stimulus plan ultimately will lead to higher inflation. However, total inflation is basically nonexistent at -0.4%. The trick is figuring out when it will be a problem. "The nasty thing about inflation is that it's insidious," Olsen says. Banishing inflation from the economy once it is "infected" is hard.

The Signs. The leading indicator used to measure inflation is the CPI.

Commodity prices, particularly those of oil and copper, are another bellwether. One indicator Olsen tracks is government debt as a percentage of gross domestic product, which he sees surging from 40% to 80% over the next few years.

Investment Strategy. Mild price inflation is considered healthy for stock investors because it is a sign that the economy is growing. But when inflation spikes, as it did when it hit 13% in the 1970s, interest rates rise and borrowing stops. For bondholders, soaring inflation eats away at asset values over extended periods.

The most direct way to fight this is to buy Treasury Inflation-Protected Securities (TIPS)—government-backed bonds pegged to inflation via the CPI. (TIPS belong in tax-deferred accounts because they are not tax-efficient.) A study by economic consultancy Peter L. Bernstein Inc. found that, for an aggressive investor who is worried about inflation, a 47%/53% proportion of TIPs to stocks (the study tracked broad stock market indexes) provided the best risk-adjusted real returns over a wide range of inflationary environments.

Among mutual funds, advisers favor the Vanguard Inflation-Protected Securities Fund (VIPSX), which had an annualized return of 5% for the past three years. Other plays include the iShares Barclays TIPS Bond exchange-traded fund (TIP) and Pimco Real Return Fund (PRTNX).

Commodities are another classic hedge. A well-diversified commodity play is the Pimco Commodity Real Return Fund (CRIX), which combines commodities with TIPS. Many advisers also like the SPDR Gold Trust ETF (GLD) and the First Eagle Gold Fund.

Stagflation

Stagflation is caused by the combination of slow growth and surging inflation. Slower growth will come from extreme caution by lenders, households, and businesses, while a shortage of production capacity will create inflationary bottlenecks, argues Mohamed El-Erian, chief executive officer at Pimco. "Stagflation will be part of the new normal," he says.

The Signs. The misery index, which combines the unemployment and inflation rates, is the best gauge of stagflation. In March it was at 8.1%. El-Erian predicts that unemployment will hit 10% by yearend, and 2% inflation could bring the misery index up to 12% by the end of 2010.

Investment Strategy. Insulating your portfolio from stagflation is tough. Equity investors need to take a very conservative stance, focusing on high-quality growth stocks such as Johnson & Johnson (JNJ) and PepsiCo (PEP), says John Boland, financial adviser at Maple Capital Management. Gold, as well as TIPS, will help mitigate some of the inflation risk. El-Erian considers TIPS a bargain because 10-year TIPS are pricing in inflation

kaihacker

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Reply with quote  #154 
I came across that article a couple days ago...good stuff.

My question is...what happens to home prices during stagflation? 

It seems like if you could get fixed financing at a good rate...an new homeowner could benefit from stagflation. 


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JohnnyCash

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Reply with quote  #155 
Quote:
Originally Posted by ISamson

Would you  "experts"  call this an accurate description ?



Pick Your Poison: Inflation, Deflation, Stagflation

Lauren YoungMonday, April 27, 2009

This article takes us all the way back to the begining of the conversation. I think we are beyond this now.

At some point in time all three of these possibilities will occur. Our discussion was about the order of occurence. In other words if someone says the stock market will go up and another person says it will go down then I say both of them are right. However this is useless for investment purposes.

If we can pick the correct sequence of events then we have a useful investment strategy.

Our discussion went towards deflation and then inflation (perhaps) but the Japanese are still in a deflationary period which began in 1990, inflation has not appeared after almost 19 years though the Japanese government tried everything Obama is now proposing for the US.

In our discussion we also noted the breakdown of the Feds' inflation mechanism. Most of the TARP money is landing in the bank vaults and not going into circulation as loans. The reason is the weak bank balance sheets  which need additional capital/reserves to cover the weak loans/investments which have not yet gone officially bad. In addition new stiff lending guidelines which are a reaction to the higher default rates are eliminating most homeowners from borrowing. 

Given the strength of the dollar, the historically high and rising unemployment, the 6% rate of decline in GDP, the massive destruction of credit, the collapse in stock prices, commodities and real estate and the Feds' unprecendented moves to inflate, it is clear we are in a period of deflation.

So the pertinent question is how long will the deflation last and what will happen next?

I would generally agree with the investment proposals of the author
under the 3 possible ocurrences (inflation, deflation or stagflation).

About 7 months ago  I wrote a letter to 3 friends analyzing all of this with specific investment strategies, it's 7 pages long, I'll email it to you if you like.
One friend saved $60,000 using the advice. It is as true and useful now as it was 7 months ago.

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ISamson

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Reply with quote  #156 
For the record some of these threads get so long that it is not  "our"  conversation but the few who actually read the whole thing.

I appreciate your input on my question,  this is one area that is more of a shell game and speculative arena than most,  always many subjective hypotheses  "predicting"  what may be coming next.

I am very curious how your Friend  "saved"  anything from your suggestions on the issue.

Is it because they chose to change their investment strategy and moved some capital that you describe this as  "saved" ?    ( similar to how many of us sold our California real estate when the indicators lined up  4  years ago ?)

Thanks !




JohnnyCash

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Reply with quote  #157 

Quote:
Originally Posted by ISamson
For the record some of these threads get so long that it is not  "our"  conversation but the few who actually read the whole thing.

OK, but I used "our" so as to include everyone and avoid singling out anyone.

I appreciate your input on my question,  this is one area that is more of a shell game and speculative arena than most,  always many subjective hypotheses  "predicting"  what may be coming next.

I don't think it is a "shell game". The  aim of a shell game is to first confuse and then cheat another person. I've haven't done that and it is not my goal. I have always answered questions to the fullest.
 
I'm not sure what "subjective hypotheses" you mean. I've quoted many facts which lead to a logical conclusion.

I am very curious how your Friend  "saved"  anything from your suggestions on the issue.

Are you sure you want an answer from a "shell-gaming, subjective hypothesizer"?

Is it because they chose to change their investment strategy and moved some capital that you describe this as  "saved" ?    ( similar to how many of us sold our California real estate when the indicators lined up  4  years ago ?)

Thanks !






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ISamson

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Reply with quote  #158 
Somehow you turned my post into an accusation of a personal attack.  Perhaps you are mistaking me for some of the other posting members around here  . . .

Notice that I wrote  "this is one area"  not  "you and your posts"  when I was discussing the big  D  I  S  debate.

In the future please refrain from lumping me into that category,  I asked questions because I am interested in the answers.




JohnnyCash

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Reply with quote  #159 

Quote:
Originally Posted by ISamson
Somehow you turned my post into an accusation of a personal attack.  Perhaps you are mistaking me for some of the other posting members around here  . . .

Notice that I wrote  "this is one area"  not  "you and your posts"  when I was discussing the big  D  I  S  debate.

In the future please refrain from lumping me into that category,  I asked questions because I am interested in the answers.

It was a failed attempt at humor, no offense taken.


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JohnnyCash

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Reply with quote  #160 

Rep. Alan Grayson (Orlando Florida) grills the Fed and Big Bank CEOs

Watch these few minutes of videos, Grayson confronts bureacrats and big execs leaves them looking either incompetent or guilty. Grayson remains cool and in control while suspects fumble and equivocate. Incredible!!









 


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kaihacker

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Reply with quote  #161 
The last couple days there has been a lot of talk about America loosing its AAA rating:

http://www.dailyfinance.com/2009/05/22/can-the-u-s-repay-its-debts/

Yesterday, S&P reported that Britain's AAA debt repayment rating was endangered -- lowering it from "stable" to "negative" -- because the U.K.'s debt is approaching 100 percent of its GDP. Since the U.S.'s national debt of $11.3 trillion -- 82 percent of our $13.8 trillion GDP -- is approaching the level of the U.K.'s, it stands to reason that our debt repayment rating might also be vulnerable.

And:

http://www.dailymail.co.uk/money/article-1186195/Rating-threat-Americas-national-debt.html

America could be the next major economy to be slapped with a debt alert after Standard & Poor's issued an unprecedented warning to Britain yesterday.

The US national debt is expected to hit critical levels even sooner than Britain's, suggesting it is also at risk of being placed on 'negative' watch by the credit rating agency.

Standard & Poor's yesterday threatened to remove Britain's coveted AAA status for the first time since it began assessing the public finances in 1978. America has enjoyed a gold-plated rating since the 1940s.



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http://www.ibdeditorials.com/IBDArticles.aspx?secid=1501&status=article&id=328834028106396&secure=1&show=1&rss=1

"It's never a good sign when you want to borrow money and your potential lender laughs in your face. But that's exactly what happened to U.S. Treasury Secretary Tim Geithner on his recent trip to China."



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reijoe

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Reply with quote  #163 
Is it time to discuss inflation yet? We have incredibly low mortgage rates, stock markets rallying back, oil on the rise, gold continually up. I was originally thinking that we were in a bit of a sucker's rally here for the last couple months. But with all this new money floating around, it's hard to say. I suppose it is still sitting to shore up the bank balance sheets, but it's hard to tell where the money is sometimes.
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Reply with quote  #164 
So, what should Americans prepare for?
No food? No housing? What?
Allegiance to what country?
Under what form of government?
In what official language?
Is what was America sinking into a melt down society?
What?

Can the private market bail out its government? When?

Perhaps the Private Greed Machine can kick in.  Paybacks are hell.

Are there charts for this, in English?

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Cork,

My suggestion would be to read historical examples of economic collapse...Argentina, Iceland, ect...


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Reply with quote  #166 

Quote:
Originally Posted by corkhorner
So, what should Americans prepare for?
No food? No housing? What?


The government has long been involved in big projects such as utilities: Electric, Gas, Water, Telephone, Roads.  It has generally done this as a monopoly.  First world country are marked by the monotonous perfection of these institutions.  Your electric clocks will go years with needing to be reset, water is so cheap and available, drinking fountains are an expected courtesy, the telephone is always there, especially for 911, and roads are always available and in good shape.  Third world countries fall below this.  You will of course remember the Enron inspired electricity blackouts.  We have insufficient water.  Utilities prices can spike at the drop of a hat (or cartel).  Road money has been consistently borrowed and now we need new money for roads.  America is heading toward being a third world nation.  When America goes broke the monopoly utility institutions go dead.

Quote:
Originally Posted by corkhorner

Allegiance to what country?
Under what form of government?

I'm sure there will need to be adjustments to freedoms as social unrest increases with the breakdown of free social services and breakdown of the aforementioned utilities.  It will be necessary for the government to exert more and more control over the individual.  Once universal health care passes the government will have the responsibility for everything you do.  They will then have the authority over every thing you do.  No more, sodas, bacon cheeseburgers, pizzas or cheesecake.  No more personal aircraft, parachuting, skiing, motorcycling, car racing or football.  To much unnecessary expense for the health system.  The individual will have to sacrifice for the good of society.  Imagine how good health care will be when all doctors work for a politically determined flat rate.
  Piracy and Kidnapping are common abroad and could so easily come home as the police are so easily overwhelmed.

I
Quote:
Originally Posted by corkhorner
n what official language?

En California, yo no se.

Quote:
Originally Posted by corkhorner
Is what was America sinking into a melt down society?
What?

Can the private market bail out its government? When?

Perhaps the Private Greed Machine can kick in.  Paybacks are hell.

I'm sure the private market doesn't care about saving the government, it cares about profits.  The system of politicians becoming very wealthy on self described low government wages will continue.  They always look at the power they wield on behalf of the public as their own personal power.  Hilarious how all these convicted government officials talk about the failures of the justice system they used to exert control over.  They sound just like common felons.  Money, power and celebrity are practically the same thing.  If you have any one you can get the other two.

Don't own dollar denominated assets: cash and bonds.  Do own physical assets like real estate for instance.  Commodity investing will do well over the long haul. 

When government institutions breakdown gated communities will become obligatory.  They can have their own utilities and police and control of who enters.  Ooh, I'm accidentally on topic!




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Reply with quote  #167 
wow!  I thought Robert's charts were downers.
The sod buster farmers had the right idea long ago.

Mebbe it's time to join David Caradine. Maybe I need to get the hemp franchise for 'Ameriker'. [as pronounced by the Kennedy's]

as to gated communities, La Jolla must be ahead of the times. Guards included.

c h

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Reply with quote  #168 
I had the pleasure of attending Robert Campbells presentation yesterday to the SDCIA. I have never seen anyone extract so much humor and audience attention over a stream of graphs. Roberts' information was as sobering as it was useful. His conclusion that deflation would continue prompted a re-examination and update of my discussions in this group.

Update

 

The stock market went into a tizzy today when the 10 year note temporarily pierced the 4% yield line, but then settled to 3.92%. The Dow dropped over 100 points almost immediately. The 10 year note is also a benchmark for Real Estate lending. The Treasury estimates a $1.82 Trillion deficit for this year and revised upwards next years’ deficit to $1.25 Trillion. The Treasury is auctioning $30 to $60 billion per week scattered across the short term bills, longer term notes and long term bonds. It was only last month that the 10 year was at a 3.1% yield, a couple of months ago it was about 2%. This is almost a 100% rise in yield in just a couple of months.

 

When yields start to rise this quickly money typically moves out of the stock market and into the bond market. Real Estate is likewise affected in a negative way. The Federal Reserve has stepped in to buy new Treasury paper when the market demands higher rates. The bonds issued by the Treasury are used as collateral by the Federal Reserve which creates new money (based on that collateral) to pay for the new Treasury bonds. If this sounds like magic it should, however this is how it works. The proper phrase is “debt monetization”.

 

If my numbers are correct the Treasury has sold about $900 billion of this years’ estimated deficit, just about half of the $1.82 Trillion, and we are half way through the year. $900 billion/26 weeks = about $34 billion in new Treasury debt per week for the rest of the year. Whatever the market won’t buy the Federal Reserve will be forced to monetize. This is inflationary however it is more of the Fiscal type than the Monetary type which uses the amplifying power of fractional reserve banking to greatly multiply the inflationary effect. Fiscal policy is not as effective as Monetary policy in generating inflation.

 

For those unfamiliar with Treasury auctions these amounts, $30 to $60 billion a week are unprecedented. When the government borrows so much it crowds out private enterprises. The primary impetus to the rising stock market is Consumer Sentiment which has risen much recently. This is a whimsical indicator as was evidenced by today’s quick decline. The rising 10 year yields added upward momentum to the US dollar, but later in the day the dollar began to sink against all major currencies.

 

Treasury Secretary Geithner has gone to China to convince that country that the US does not want to devalue their tremendous dollar holdings. The estimate of the dollar reserves held by the Chinese varies between $1.2 trillion to $2 trillion depending on who totals the numbers. The Chinese have been very skeptical but they are also locked in to their dollar assets as there is no other market large enough to hold such a vast quantity of wealth. Rash selling on the part of the Chinese would rapidly reduce the price on their remaining dollar assets long before such a huge pile of bucks could be effectively liquidated.

 

So the Chinese Communists and the American Taxpayer are in the same boat desiring the dollar to remain a reliable store of value and not be devalued by the liquidity attempts by the Fed. The US Treasury Secretary received open laughter from an audience of Chinese University students when he said the US would do everything to maintain the value of the dollar. Other Chinese monetary officials did not laugh but said "We will be closely watching you". This is a very strong reaction from the usually reserved Chinese.

 

The past 3 month rise in the stock market has been influenced by the PPT (Plunge Protection Team) or more formally "The Presidents' Working Group on Financial Markets". This group was established by a Presidential Directive (basically a Decree by the President resembling those once issued by European Kings) many years ago. For almost two decades the Wall Street Journal has hinted at the existence of the PPT which has been given the mission of maintaining stability in the American financial markets. However the PPTs actions are hidden by purchases made through its' market agents such as Goldman-Sachs, JP Morgan and other Wall Street brokers. Typically the PPT will intervene on days with low volume and purchase certain stock indices to drive the DOW and S&P higher. Usually newspaper reports will say "Buyers entered the market" without reference to the identity of those buyers.

 

After the market crash in 1929 the market recovered 50% of the loss in 1930-31 but then continued the downtrend with a couple more bear market rallies until it hit bottom in about 1933. These bear market bounces are very typical in a secular bear market which usually lasts 16 to 18 years.

 

The dollar is still up about 10% over it's low of last year but it is now below the highs of last year and early this year. The Fed and Treasury are in a bind and running out of "bullets", if they dilute the currency too much they will anger the Chinese and US Taxpayers and cause US interest rates to rise during the worst recession since the Great Depression. Short term US Treasury instruments are best because they are safe for now because they will mature in a short time so the investor will be protected from any loss in principle (bond value) if rates to take a sudden hike upwards.

 

From what I see the US will continue to experience deflation before the much heralded and expected inflation/hyperinflation. Still the Japanese experience indicates that the inflation could be a long time coming. See the SDCIA discussion group for more on this topic.

 

Oil, gold, silver and some commodities have risen in value (autos and Real Estate continue to fall) but this is primarily a reaction to the fall in the dollar over the last 3 months and the false stock market optimism generated by Federal and later by Pension and Mutual Fund purchases. The news media have been heavy handed in portraying the end of the recession even though they were slow to see the recession coming.

 

The dollar Velocity allows one dollar to do the work of two dollars if it changes hands twice as fast. So doubling the velocity can give the effect of doubling the “money in circulation”. Likewise cutting the velocity in half has the effect of cutting “money in circulation” in half or in other words 50% deflation.

 

When “money in circulation” is inflating each cash dollar loses value day by day. Therefore people want to pass the dollar on fast as possible by exchanging it for some good or service today, because tomorrow that same good or service will cost more dollars. However when “money in circulation” is deflating just the opposite effect occurs, people hold on to their dollars longer because tomorrow the price of that good or service will be less. When people hold their dollars longer velocity decreases, and deflation increases.

 

The interesting thing about Velocity is that it is controlled by the economy, the millions of individuals making dozens of economic decisions each week. Velocity is how the economy “increases or decreases” the money supply (“money in circulation”). Money creation (“printing dollars”) is how the Federal government through the Federal Reserve increases the money supply. Velocity is highly susceptible to psychology, much as market moves are susceptible. Markets can turn on a dime, markets fall much faster than they rise, likewise Velocity. Velocity can reduce the money supply much faster than the Federal Government can increase it.

 

The current graphs for velocity, M1, M2 and Shadow M3 (the Fed quit releasing M3 data a few years ago) show velocity decreasing over the last couple of years. M2 and Shadow M3 have significantly decreased and M1 has increased.  This is consistent with people hoarding cash (into M1 from M2 & M3) which is highly deflationary as shown above. M2 and M3 are the more leveraged forms of cash, M1 is the more traditional form of cash currency. This is another example of the “de-leveraging” in the economy that Robert mentioned last night.

 

Other countries throughout Europe and Asia are also following our lead and inflating their currencies. As bad as our situation is Americans often overlook the even more serious problems everywhere else.

 

Oil is a good example of how soft the commodity markets can be. About this time last year oil was at $145 a barrel, then it collapsed with a speed I have never seen before to $30 in about 6 weeks. In fact about this time last year Goldman-Sachs predicted $200 oil (it never happened). Now GS has just predicted $170 oil. I don't believe it. For the last 16 months US consumption of gasoline has declined every month. Over 1,000 oil tankers are anchored and idled at Asian and European ports. The US refiners have significantly reduced their production of gasoline products. This is unprecedented for the US which was famous for paying any price for gas.

 

Real Estate and economics are entwined. There are economic forces which may have an overwhelming effect on real estate. The central question to most investors (real estate and others) is how to obtain safety for accumulated wealth, whatever form that wealth may take.

 

The key to the investment future and that of the U.S. is the direction of the money supply. There are two very different strategies, one for deflation and another for inflation. In theory the strategies are easy to understand, implementation is the difficulty. The strategies are for the most part mutually exclusive, pick the wrong one and your wealth will be hammered. Each strategy has two parts, one “long” and one “short”. An inflationary strategy moves personal wealth into things, such as real estate, commodities and stocks. It also includes “shorting” those things which prosper during deflation. A deflationary strategy moves personal wealth into dollar denominated paper, such as bonds, mortgage securities, commercial paper, accounts receivable, money markets and dollars. Likewise it also includes “shorting” those things which prosper during inflation. A caveat about a deflationary strategy should be remembered. Be prepared to take ownership of the collateral on certain types of defaulted paper. Some investors consider this a good outcome. A second caveat concerns bond prices under the effect of massive new Treasury bond offerings. In the immediate present this will drive down the price of all outstanding Treasury bonds but only if such outstanding bonds were sold at the time of the new offering would a loss be incurred. If your bonds are two to five years then it is guaranteed you will get the full price (in appreciated dollars) at the time of maturity. So,just hold on to your short term bond investments, sell at maturity, and you will avoid the whipsawing paper losses in the deflationary market.

 

The investment universe for most of us is relatively limited to 5 areas:

1) Stocks (equities of all type, common stock, preferred, convertible, mutual funds, Master Limited Partnerships (MLPs), Exchange Traded Funds (ETFs), Indexed Funds ---- and options on all the aforementioned)

2) Bonds (including Treasuries, CDs, Corporates, municipals, 1stTDs, 2nd TDs, AITDs, Land Contracts, Accounts Receivable (factoring), life insurance (viaticle settlements), hard money loans, pay-day loans, debentures, Letters of credit, car loans, money market funds, currencies and cash)

3) Commodities (Oil, gold, wheat, hogs, cattle, sugar, orange juice etc. and options and futures on all of them)

4) Real Estate (equity in SFRs, Multi Family, Apt Houses, Commercial, High Rise, farm land, mobile home parks, mining property, water rights, mineral rights, timber land, windmill land, REITs (which fit in the stock catagory too))

5) Personal Business (Proprietorship, corporation, LLC, ---however the individual makes a living)

 

So, given the above choices our investment alternatives are more manageable. Items 1, 3, 4 & 5 flourish under inflation, item 2 flourishes under deflation.

 

Each element in item 2 has a different risk associated with it, obviously there will be defaults so the investor must be prepared for this and price the investment accordingly.

 

It's interesting that real estate covers both inflationary and deflationary periods. However the investments are completely different, equity during inflation and debt during deflation.

 

 

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Reply with quote  #169 
Quote:
Originally Posted by JohnnyCash
The current graphs for velocity, M1, M2 and Shadow M3 (the Fed quit releasing M3 data a few years ago) show velocity decreasing over the last couple of years. M2 and Shadow M3 have significantly decreased and M1 has increased.  This is consistent with people hoarding cash (into M1 from M2 & M3) which is highly deflationary as shown above. M2 and M3 are the more leveraged forms of cash, M1 is the more traditional form of cash currency. This is another example of the “de-leveraging” in the economy that Robert mentioned last night.


M2 is up and shows no signs of slowing down.

http://research.stlouisfed.org/fred2/series/M2?cid=29



http://research.stlouisfed.org/fred2/series/M2NS?cid=29


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Reply with quote  #170 
That is where I get confused...

The M indicators are showing inflation...CPI is showing deflation. 


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Reply with quote  #171 

Quote:
Originally Posted by reijoe
Quote:
Originally Posted by JohnnyCash
The current graphs for velocity, M1, M2 and Shadow M3 (the Fed quit releasing M3 data a few years ago) show velocity decreasing over the last couple of years. M2 and Shadow M3 have significantly decreased and M1 has increased.  This is consistent with people hoarding cash (into M1 from M2 & M3) which is highly deflationary as shown above. M2 and M3 are the more leveraged forms of cash, M1 is the more traditional form of cash currency. This is another example of the “de-leveraging” in the economy that Robert mentioned last night.


M2 is up and shows no signs of slowing down.

http://research.stlouisfed.org/fred2/series/M2?cid=29



http://research.stlouisfed.org/fred2/series/M2NS?cid=29


I used the rate of change graph, not the absolute quantity graph. I think the rate of change is more revealing.

Chart of U.S. Money Supply Growth


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Reply with quote  #172 

Quote:
Originally Posted by kaihacker
That is where I get confused...

The M indicators are showing inflation...CPI is showing deflation. 

See the rate of change graph above and compare with the absolute quantity graphs from reijoe. The rate of change graph is consistent with the CPI deflation.

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JohnnyCash

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Reply with quote  #173 

Here is the recent unemployment info. Remember the unemployment rate during the Depression was 25%, as you can see we may be within a few percentage points of that now.

Chart of U.S. Unemployment

Here is the current CPI.
Chart of U.S. Consumer Inflation (CPI)


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Reply with quote  #174 

This is from an interesting and relevant article I read today:


Borrowing Hurts

Fisher warned in his speech that in addition to all the new Treasury borrowing, there's the enormous overhang of unfunded entitlements, such as Medicare and Social Security, whose present value he estimated at $104 trillion. That's roughly 20 times the size of the new debt the Treasury will accumulate between 2009 and 2014, Fisher estimated.

These are very big numbers. The standard response of debt-laden countries — running the printing press — "cannot be allowed to happen in America," Fisher said.

The Fed and the Treasury had looked like they were in collusion in March, when the Open Market Committee announced that it would fund up to $300 billion in Treasury securities, over the protests of inflation hawks such as Fisher.

But the easy (and potentially inflationary) alliance may be waning. Bernanke's strong statement last week about not monetizing the debt suggests that he's in no mood to extend the $300 billion purchase plan any further.

There are no simple options as we begin to crawl out of the recession.

If the politicians take Bernanke's medicine, we can look forward to modestly higher interest rates, higher taxes and reduced government spending. If the politicians balk at Bernanke's austerity diet, we can look forward to higher inflation, a falling dollar and sharply higher interest rates.

The recession has been painful, but the recovery won't be any picnic. The problem with borrowing is that it costs money.


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JohnnyCash

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Reply with quote  #175 
Quote:
Originally Posted by kaihacker

This is from an interesting and relevant article I read today:


Borrowing Hurts

Fisher warned in his speech that in addition to all the new Treasury borrowing, there's the enormous overhang of unfunded entitlements, such as Medicare and Social Security, whose present value he estimated at $104 trillion. That's roughly 20 times the size of the new debt the Treasury will accumulate between 2009 and 2014, Fisher estimated.

These are very big numbers. The standard response of debt-laden countries � running the printing press � "cannot be allowed to happen in America," Fisher said.

The Fed and the Treasury had looked like they were in collusion in March, when the Open Market Committee announced that it would fund up to $300 billion in Treasury securities, over the protests of inflation hawks such as Fisher.

But the easy (and potentially inflationary) alliance may be waning. Bernanke's strong statement last week about not monetizing the debt suggests that he's in no mood to extend the $300 billion purchase plan any further.

There are no simple options as we begin to crawl out of the recession.

If the politicians take Bernanke's medicine, we can look forward to modestly higher interest rates, higher taxes and reduced government spending. If the politicians balk at Bernanke's austerity diet, we can look forward to higher inflation, a falling dollar and sharply higher interest rates.

The recession has been painful, but the recovery won't be any picnic. The problem with borrowing is that it costs money.

It's an interesting article. I am not so confident that Mr. Bernanke can resist the temptation to monetize. His only other avenue is monetary policy and that route is blocked by lenders who can't lend and borrowers who can't borrow.

Months ago Mr. B's voice was confident, but now that old quiver has returned, he's getting scared again. In fairness he has a great deal to be scared about. Mr. Ken Lewis of the Bank of America gave testimony in Congress today. Mr. Lewis' voice halted and stammered when asked if Messrs. Paulson and Bernanke had threatened him into buying a failed competitor last year. Paulson had a reputation as a bully and/or backstabber. Mr. B may have gone along with Paulson. He may go along with the next rash suggestion.



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JohnnyCash

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Reply with quote  #176 

Incredible arrogance as Fed Vice Chair Kohn refuses to give bank names, gives unintentionally funny definition of "mark to market", then wilts under Graysons' questioning on lack of accounting for $1.2 Trillion.



Former AIG head Liddy can't remember the 25 agents who lost $100 billion. Very funny, Liddy seems to have sudden lapses in memory and confusion on clear and obvious questions.

Liddy has recently resigned from AIG.



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JohnnyCash

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Reply with quote  #177 
Did TARP Work?
 
The Treasury Department reported that the total value of of loans held by the 21 largest institutions receiving TARP funds declined by 0.8 percent. This is the fifth decline in six months. The TARP funding was passed about 10 months ago, allocation of the funds was delayed for weeks.

The total value of all consumer loans, first mortgages, home equity lines of credit and credit card loans declined 1% in the month of April.

This confirms some of the things we have discussed over the last months. First the TARP money remained in the banks and not the economy. Second the existing credit (money) available to the American consumer is declining at the rate of 12% per year. Both of these effects are highly deflationary.

The "green shoots" optimism hinges on the revival of the American consumer. There is growing evidence that the US consumer will not have the necessary credit (money) to provide a resurgence in the US and world economy. 

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Reply with quote  #178 

The Presidents' new "Systemic Risk" bureaucracy.
 
Corrections: "OTP" should be "OTS", "Indy Mac" should be "Downey Savings", see Nicolas Talebs' "Black Swan" book for logical fallicies which lead us to overlook the possibility of unexpected or "Black Swan" events.

"Systemic Risk" is the more elegant phrase for "too big to fail". Bear in mind that neither situation has been proven to lead to complete failure of the economy but wise and respected members of the banking profession and Federal Reserve adhere to the faith. Today the President proposed new regulatory bodies to prevent the occurence of Systemic Risk. The OTP, Office of Thrift Supervision, has been disbanded for it's failure to prevent Systemic Risk in the cases of Washington Mutual, Indy Mac Bank and others. Interestingly OTP was formed in the early 90's after it's predecessor had likewise been disbanded for failure in the late 80's S&L crisis. The old members from the failed predecessor returned from lunch one day to find all the office signs changed to OTP and went right back to work.

The President was clear that current regulatory bodies were unprepared to handle this problem. They were not empowered to act by existing law, they were able to watch but not intervene, they were underfunded etc.. (many excuses but no one was responsible ... except for the OTP). Now a whole new set of laws and regulatory institutions are to be conjured against "Systemic Risk".

So, what is "Systemic Risk"? In a nutshell it is the risk of catastophic, widespread economic failure caused by risky behaviour of one or a few large financial institutions. Any financial institution capable of causing "Systemic Risk" is currently labled "too big to fail".  The stated goal of the Presidents' new legislation is to prevent any institution from becoming "too big to fail" in the future.

Still there is a part of "Systemic Risk" to which the new strategy seems blind. Since the time of LTCM, Long Term Capital Management, the rocket scientists of Wall Street and prestigious Universities have sought to reduce, diffuse and eliminate risk through sophisticated mathematics and computer driven algorithms. To a certain extent these efforts work, but in the late 90's LTCM failed, in the late 00's the economy failed ... well at least many in Washington and Wall Street thought it had. The central problem is that the future is always unknowable in the exact sense required by these algorithms. In the case of LTCM something unexpected occured (asian currency markets)and within a few short days a remarkably profitable company was made bankrupt. Clearly neither Wall Street or Washington learned from LTCM but went on to greater glory in the late 00's.

Modern Risk Management relies on hedging and spreading the risk from one entity to one or more other entities. Hedging is the use of a contrary investment to offset the risk in another investment. If the primary investment falls in value the contrary investment rises in value. Spreading of risk is similar to insurance, a policy is purchased to cover the loss of the initial investment.

However here the similarity ends. Insurance actuaries (usually Phd. Statisticians) have precise, long term data which shows with great accuracy the risk in various lines of insurance. Policy premiums and the policies themselves are constantly re-evalueated and adjusted for changes in risk. Think of a life insurance policy which uses the publicly available data on death rates and ages. Once the policy base reaches a certain size the expected life spans will be almost exactly the same as the public data. There is no such public data for the Casino policies written for Wall Streets' CDSs (credit default swaps). Nor do I think there were any actuaries for such policies.

Modern risk strategies work well for the individual and give the appearance, in the mathematical sense, of risk reduction by moving the risk from the individual to the "system". In the short run these strategies work. However when everyone does this it has just the opposite effect in the aggregate. The probability of systemic breakdown increases with the shifting of each individuals' risk to the aggregate. Then something unexpected occurs and initiates an avalanche of unpayable (deflationary), interlocked risk agreements.

Is "Systemic Risk" a new development of modern society or has it been with us awhile? This  is not new. In the old days the term was "bankruptcy". In the 19th century the failure of a large bank would cause a panic which might last a year or two. Modern technology allows us to create many more interlocking risk agreements but it is not clear if on a relative basis these are larger in impact than those of the 19th century.

In any event even the experts are unable to provide a definition of an institution able to create Systemic Risk as this funny video shows:




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kaihacker

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Reply with quote  #179 
Systemic risk...is thier way of trying to sell fear....something that I think Obama is better at than even Cheney.





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Reply with quote  #180 

Would you trust this man?

Somewhat humorous exchange as Treasury Sec. Geithner implies more regulation would have prevented AIG from $500 Billion derivative risk, but waffles when when defending the $1.5 Trillion derivative exposure of Fannie Mae (regulated by the Federal Gov!).



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