Funny, I've been finding reasons to have a lot more confidence in the economies of the world in general just the last few days... does the chart indicate direction or just a turning point?
There are three possible outcomes to this debacle: Deflation, hyperinflation or stagflation. Stagflation is the preferred outcome and would require ACE execution which I don't see happening. I really fear hyperinflation. We see a classical credit collapse. Contrary to what friedman thought, you can't simply drop money from a helicopter. That would instantly destroy any credibility of US financial system. So you can play with reserve ratios, bank accounts with the fed and trying to monetize the debt. None of this would address the real issue which is purchasing power of an average american was artificially enhanced by the real estate boom and now that consumer is in deep debt there is no possibility of "going back"(in order to lend money out, you need someone else to be able to pay the interest payments and there is no way of artificially putting money in the hands of customers without causing inflation) That is why money multiplier is (will be) falling. Sure, the fed can try to "churn" money but there will not be "magical growth" and there will be a serious temptation to overdo it, hence hyperinflation.
Landis: I wrote up a fairly detailed response and then somehow clicked "back" in IE so all of my typing was erased. Matched pairs are shorter term liquidity injections that I think we're seeing currently. I'm not going to re-type everything but some of my thoughts on the ability to sterilize the current deficit spending/money creation are in a post I made in another thread: http://www.elitetrader.com/vb/showthread.php?s=&postid=2386459#post2386459 My current thinking is that even if money supply is managed quantitatively to keep consumer prices (for domestic goods or for goods produced by a country that pegs their currency against ours) somewhat flat, those who've hoarded dollars are punished relatively. i.e. had there been no monetary intervention, those with dollars (or on fixed dollar incomes, say) would likely find their purchasing power increased. Notice: I say nothing about the evolution of the general economic environment in a scenario with no monetary intervention. I'm only talking about the purchasing power of the dollar. The more I think about it, I think the dollar would have soared, especially as foreign holders of US debt found it more and more difficult to roll their debts over (credit contraction) and were forced to bid the dollar up to pay their debts. Say hello to cheap Mercedes and Rolexes!!!
Tavakoli also predicted the meltdown in a very specific way. She also predicts inflation in her book, DEAR MR. BUFFETT. It's a fast read, and she names the culprits. http://www.ft.com/cms/s/2/caf27fa0-fedf-11dd-b19a-000077b07658.html http://www.amazon.com/gp/product/04...&pf_rd_t=101&pf_rd_p=470938631&pf_rd_i=507846 Dear Mr Buffett Review by Paul J Davies Published: February 23 2009 04:58 | Last updated: February 23 2009 04:58 Dear Mr Buffett: What an Investor Learns 1,269 Miles from Wall Street By Janet Tavakoli John Wiley £15.99, 282 pages FT Bookshop price: £12.79 In late 19th-century California, Charles E Boles enjoyed almost a decade of robbing the stage coaches of Wells Fargo on the dusty highways before he was caught. Legend has it that âBlack Bartâ, as he was known, was always well-dressed, unfailingly courteous and never fired a shot. For Janet Tavakoli, his activities are a fitting emblem for the âbloodless robberyâ committed by bankers and mortgage brokers in the grip of a credit fever that ultimately led to Americaâs â and the worldâs â financial meltdown. Her new book, Dear Mr Buffett: What an Investor Learns 1,269 Miles from Wall Street, is a clear and pacy run through the multitude of sins and sinners in the modern financial world. Tavakoli is the president of a Chicago-based financial consultancy and an expert in the confusing world of securitisation, credit derivatives and collateralised debt obligations. But she also finds time to rail against regulators, central bankers and politicians, stock options, statistical models and hedge funds. In 2003, after 18 years working at some of Americaâs biggest banks, Tavakoli wrote a book on finance that so impressed revered investor Warren Buffett, he invited her to lunch. So began a friendship out of which this book grew. Dear Mr Buffett is that occasionally grating mixture of autobiography, witness testimony, analysis and polemic common to many books by finance professionals, including Nassim Nicholas Talebâs Fooled by Randomness (2007) or George Sorosâs recent The Credit Crisis of 2008. However, Tavakoliâs writing is full of anecdotes, details and character sketches that add depth and colour to even the best known episodes of the past two years. She also covers events only a few years before the current crisis that should have been big warning signs. The correspondence between Buffett and Tavakoli over the past three years reinforced her existing views on the dangers of complex finance. And with Buffettâs blessing, this book will find a ready-made fan base with little marketing effort. Their exchange is most enlightening in the middle chapters where they discuss the subprime mortgage machine, collateralised debt obligations and rating agencies. A shared base principle is revealed, the seemingly obvious: âDo not lend money to people who cannot pay you back.â This maxim is repeated again and again in a superb and unforgiving critique of the expansion of home ownership, mortgage lending and securitisation. Those who made money out of the crisis propound this sentiment, as do those who stopped buying mortgage bonds before the height of the boom. It only illustrates the short memories of many caught up in the bubble. In this telling, however, only the poor escape without blame: âHousing speculators and over-reaching homeowners took risk with âeyes wide shutâ ... predatory lenders targeted minorities and lower income people who were intellectually and financially mugged, then dumped on the side of the road.â A fundamental message of the book is that a mixture of greed, stupidity and outright fraud drove the US house-price and mortgage-credit âPonzi schemeâ, while a total lack of regard for basic cash-flow evidence and analysis allowed banks to flog dodgy deals to sleepwalking investors. Tavakoli makes for an attractive pundit â she knows her stuff, has strong opinions and turns a colourful quote. And though sheâs no enemy of modern financial technology of itself, she convincingly decries its recent handlers and uses. This is hardly the first time Tavakoli has made such arguments. The book is littered with references to her many cameos in both print and broadcast media â including in the Financial Times and a couple of times in my own articles. There is a healthy dose of âI told you soâ about this volume â but, to be fair, Tavakoli is one of the few who did. Paul J Davies is the FTâs deputy capital markets editor
Fed Relies on Bank Reserves to Stem Inflation When Crisis Eases http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a6k7NCnbwpJg
MArket Ticker has a video posted with her - Q & A with Brian Lamb... Its starts out slow, but she does call some folks out by name.