Sunday, August 7, 2011

The Sarcasm Report v.122

August 5, 2011
What happens after the meltdown?

While it's almost over, price damage calls into question the 3-year-old bull market.

Does it also call into question the nearly 13-year-old stagnant market? I think not! The S&P 500 is now trading at December 1998 levels again (like it did in 2001, 2004, 2005, 2008, and 2010).

It boils down to this: Easy credit fuels an asset bubble, the asset bubble implodes into a banking crisis, the banking crisis spawns government bailouts and stimulus, and government largess results in a sovereign debt crisis and default.

1. Easy credit
2. Asset bubble
3. Asset bubble implodes
4. Banking crisis
5. Bailouts and stimulus
6. Sovereign debt crisis
7. Default

It didn't have to be this way. We had a nice tailwind in June and early July.

What tailwind?

St. Louis Fed: Real GDP Growth (YoY)

Click to enlarge.

We successfully completed step #1 (easy credit). We were doing so well on step #2 (asset bubble). Here we are at Step #3 (asset bubble implodes) again. Shocking!

The good news is: There is still a narrow path out of the darkness. And like last year, it could have everything to do with the Federal Reserve. The Fed wraps up a two-day policy meeting next Tuesday and will host a global powwow for central bankers in Jackson Hole, Wyo., later this month.

By all means let's rely on the Fed to clear a path out of the darkness. They've done it SO many times. What do we care if the path keeps looping back into the darkness with higher and higher debt loads?

Both will present an invaluable opportunity for Fed Chairman Bernanke to announce his ability and willingness to deploy creative new monetary policy measures to stave off another recession -- one that could devolve into a global, synchronized depression, given current sovereign debt problems.

When old monetary policy fails there can be only one solution. Let's experiment with creative new monetary policy!

I'm hearing chatter that Bernanke could announce a new policy initiative such as an interest rate cap or shifting the average maturity of the Fed's Treasury holdings to more forcefully bring down long-term interest rates -- rates that affect the price of mortgages, auto loans and other forms of consumer credit.

We need to be promised that long-term interest rates will become cheaper (you know, like Japan). The 20-year TIPS rate is 0.99%. As a potentially biased long-term TIPS investor, that's just not good enough. It needs to be lower, much lower. Mwuhahaha!

November 10, 2005
Four Thousand Years of Price Control

With the wave of a hand, or the flash of a legislative pen, they promise to make everything cheaper. And for more than four thousand years the results have been exactly the same: shortages, sometimes of catastrophic consequence; deterioration of product quality; the proliferation of black markets on which prices are actually higher and bribery is rampant; destruction of a nation's productive capacity in the industries where prices are controlled; gross distortions of markets; the creation of oppressive and tyrannical price control bureaucracies; and a dangerous concentration of political power in the hands of the price controllers.

I couldn't be bothered to read the entire paragraph but that first part sure sounds good. Sign me up. Let's make interest rates cheaper!

And oil too! And food! And health insurance! And tuition! And housing costs! The Fed needs to force everything to be cheaper!

Okay, maybe not everything. We don't want to grossly distort the markets and/or risk deflation. Let's concentrate all the power within the hands of the price controllers. They'll know what should be expensive and what should be cheap far better than we do. It's the only possible way our country can prosper.

All those in favor of oppressive and tyrannical price control bureaucracies? Let's see a show of hands.
France! Please stop putting up both hands. This isn't a war! ;)

See Also:
The Economics of Price Controls


Jazzbumpa said...

Wow - those von Mises guys leave Cafe Hayek in the dust. I'd sure like to get my hands on that 4000 year data base!

Marginally more seriously, though, the Easy Credit --> Asset bubble process is not always so simple and straightforward. I think it also involves lax regulation, and a specific set of situations where rent seeking is favored over real investment in physical plant, technology and OJT - in other words, an aggregate demand shortfall.


Stagflationary Mark said...


It is my belief that price controls don't work over the long-term. I think the long-term historical evidence backs that belief (and not just in the link I provided).

It is also my belief that ultra-low interest rate policies intended to goose the economy aren't working over the long-term either, unless one wishes to point to $80+ oil as a success. This is also why I turned bearish in 2004. I could see what these policies were doing to the housing market. It's also why I owned gold and silver from 2004 to 2006.

The last thing this country needs is everyone stocking up on basic necessities like I have. The Fed wants investors to embrace risk. I embraced Costco and Sam's Club instead. No complaints. Garbage bag prices have risen 38% and I neither need to pay tax on the gains nor do I need to find a greater fool.

It might seem like a win for the economy (since I bought a LOT of consumer products), but I'm just pulling future demand into the present. Those who extrapolate my demand on a long-term chart will be very disappointed to say the least. For example, I doubt that I will ever need to buy aluminum foil or t-shirts again. At best it will be 30 years. That's what I call a price controlled market distortion. Seriously.

Stagflationary Mark said...

One more thought. Since you opted for marginally more than seriously, I'll opt for gallows humor more than seriously.

I see plenty of real investment in plants. Foxconn is adding a million robots. If each robot builds two robots and they each build two robots, and so on, and so on...

D'oh! ;)

Nanute said...

In my best Mr Rogers voice: boys and girls today's word is rubicon. Can you say rubicon?

GawainsGhost said...

You're exactly right that cheap money fuels asset bubbles. And that price controls don't work.

The only thing that concerns me is the price I can sell the next repossessed home for. Even at 3.5% interest, buyers aren't buying. So sellers can't sell.

The whole thing is a mess. Because it's all based on borrowed money.

First, it was tech. Then it was real estate (no big surprise there). Now it's gold or stocks, which are headed toward an inevitable crash.

Bubbles, bubbles, everywhere, and all of them must pop.

I wouldn't invest in real estate or precious metals at this point. I'm 100% cash. But following the inevitable curency downgrade, where does tht leave me?

Just asking.

Stagflationary Mark said...


Scary times. I can't do a Rubicon joke until we cross ABOVE 1200.

I hope this isn't relevant. I'm 47 years old. Sigh.

Stagflationary Mark said...


100% cash would seem to be better than some alternatives today!

I-Bonds still look good to me even at 0.0%. Can't deflate and offer some inflation protection. Don't need a greater fool when you sell.

Jazzbumpa said...

I don't know how I gave an impression that I favor price controls. I'm using "rent-seeking" in a broad sense of using money to make money via financial instruments (passive), as opposed to real investment in capital equipment, worker training, and even robots, I guess (active.)

I'm basically in a cash position as well. And I feel really good about it. With deflation on the horizon, the dollar is not in any immediate danger. Besides, it's been beaten down for 30 years. The biggest declines, oddly enough were under Reagan, and the only major advance since was under Clinton.

Stagflationary Mark said...


I see monetary policy as a form of price control. Bond prices are being set are they not?

I got the impression that you favor the monetary polices of the Fed to set negative real interest rates in order to boost the economy. Krugman does. I don't.

I am not necessarily saying that it is an ultra-bad plan but I am suggesting that it probably won't work. The unintended consequences (higher oil prices) may indeed outweigh any benefit (wage and housing inflation).

I would also point out that as a retired saver, I have cut back on my discretionary spending thanks to lower real interest rates. I just don't have the income coming in like I once did. I am surely not alone.

So even if inflation did appear where we'd like to see it (wages, housing prices), at least some of the people in this economy are no longer supporting this country's many strip malls and restaurants like they once were.

There are so many unintended consequences to all of our policies, and few seem to see them.

Stagflationary Mark said...

I want to make it clear that I cannot see all the untintended consequences either clearly.

If I could then I'd be a billionaire by now, lol.