How Do You Get to Stagflation?

You don't go to sleep one day while everything is fine, then wake up the next day and suddenly exclaim stagflation. Right? In theory, if stagflation truly was in our future, you'd slowly slip into stagflation and barely realize what is happening.

So what's on the breakfast menu today? Looks like Rooty Tooty Fresh 'N Fruity is popular, from the IHOP(E) menu.

Preparing for 'stagflation-lite'
"The idea that if growth were to fall to 1.8 per cent, for the sake of argument, and inflation to rise to 2.9 per cent it could be called stagflation would be a bizarre use of the term."

Stagflationary Mark is a bizarre name, I'll give him that. I'll most likely change it in the morning.

Good night, Westley. Good work. Sleep well. I'll most likely kill you in the morning. - Dread Pirate Roberts, Princess Bride, 1987

He never did end up killing Westley in the morning though, nor do I ever seem to change my name. Go figure.

We're All Subprime Now (Musical Tribute)

I just want to say that it is now official, at least for Washington State.

1% property tax cap restored
"The 1 percent cap is lower than the rate of inflation."

How is that supposed to work long-term? But that's not all that passed. Check out the deferral.

The rancorous debate on the tax-deferral issue extended the session for several hours. Democrats rejected numerous amendments to the bill offered in both the House and the Senate, including one that would have simply required disclosure to homeowners that they would be charged a variable interest rate on their deferred taxes.

Since reading the fine print has never been more important, it was therefore decided the fine print should be missing.

"This will enable young families to further put themselves in a credit crisis" when it comes time to pay back taxes to the state with adjustable-rate interest, he said.

"What we're doing is enabling them to incur more debt," Zarelli said.

I agree. Congratulations to Tanta at Calculated Risk for not only spotting the trend early, but for naming the trend properly. We're all subprime now.

While I may not agree with everything in the following video, I can say that America does need a wake-up call.



This was based loosely on Network, a 1976 movie.



See Also:
Calculated Risk: We're All Subprime Now

China's Sub-Subprime Housing

November 30, 2007
In Asia, Housing Is Booming
Yi Xianrong, a prominent economist at the China Academy of Social Sciences, a government think tank, is one of those sounding the alarm.

He contends that China's housing loans are riskier than those in the U.S. because most loan applicants give false information about their assets and income.

Because China lacks a comprehensive credit data system, borrowers often manage to qualify for loans using false information, Yi says. He believes that the overall quality of property loans in China may be even worse than the risky mortgages that are causing so much trouble in the U.S.

"I estimate that the large majority of mortgage holders would not meet the standards for even subprime loans," Yi said in an interview with the state-run magazine Oriental Outlook.

A collapse of China's property market would reverberate throughout the world financial system, although few experts believe it would happen anytime soon.

Let's just hope "Corruption and Cronyism" will ride in on white stallions to rescue the damsels in distress.

June 6, 2005
China's Unyielding Banking Crisis
Corruption and Cronyism Often Thwart Efforts to Eradicate Bad Debts

CHENGDU, China -- As he rose through the ranks at China's largest lender, Zhang Guilin helped build the bad debt crisis plaguing his country's banks, the gravest threat to this fast-growing economy. Zhang directed funds to cronies and political allies, authorities here say, adding to a national toll of bad loans estimated at $500 billion.

November 28, 2007
China's corruption a crisis in the making
Financier Warren Buffett and Prime Minister Stephen Harper make an astute team of investment advisers. Mr. Buffett says people should be wary of investing in China. Mr. Harper says people should be wary of Chinese investment in Canada. Now, in a devastating analysis of China's systemic corruption, a distinguished academic predicts - "inevitably" - an end to the country's three decades of rapid economic expansion.

1970: The Year of the Hangover

U.S. Economy: Growth Is Faltering After 4.9% Surge (Update3)
Nov. 29 (Bloomberg) -- The U.S. economy is faltering after a third-quarter expansion as new-home prices dropped the most since 1970 and jobless claims rose to a nine-month high.

1970: The Year of the Hangover
IN business, 1970 was the year of the hangover. The nation suffered the painful consequences of the economic overindulgence that began in 1965 when Lyndon Johnson expanded both welfare programs and the war in Viet Nam without benefit of a tax increase. That policy resulted in one of the longest, most severe inflations in American history: five years of accelerating price increases. In the so-far unsuccessful struggle to contain that inflation, the U.S. in 1970 stumbled into a recession that Richard Nixon had promised to avoid.

If you are like me, reading the entire article may send even more chills up your spine. Using hindsight, the "longest, most severe inflations in American history" party was just getting started. The rest of the 1970s put 1970 to shame. Of course, the article could not have known that since it was written in 1970.

Here's a small portion of other deja-vu items of note.

Unemployment rose from 3.9% in January to 5.8% in November, the highest in seven years, and 4,600,000 people were out of work.

Unemployment is currently low and rising (4.4% in March to 4.73% in October). I expect to see it accelerate higher soon (my gut does anyway).

The board made a special point of offering to advance credit to commercial banks through its "discount window," providing them with much needed funds for relending to corporations that had to pay off commercial paper.

Our Fed recently made a special point of offering to advance credit to commercial banks through its discount window.

The Federal Reserve Board thus narrowly averted a liquidity crisis—but not without a few tense moments.

Yeah, that's what we're told is happening now. Our tense moments began on August 20, 2007. It keeps happening though. The liquidity crisis seems to be getting worse (as one would expect as home prices fall).

Companies that had thrived by borrowing and expanding recklessly simply collapsed.

Borrowing and expanding recklessly? 1970 has absolutely nothing on us (see implode-o-meter link below).

Since November, long-term interest rates have declined more swiftly than at any time in the last century.

We're seeing that now. The outcome was not kind to those who backed up the truck on long-term treasuries though, not by any measure. People point to the long-term treasury market and think it is all knowing. March of 1971 was one of the worst times in American history to invest in long-term treasuries. Investors who locked in a 5.7% interest rate on the 10-year treasury saw inflation average 8.3% per year (over the next 10 years). As an added insult to injury, taxes were imposed on the interest.

The easiest way to put people back to work is to put more money into the economy. That can be done by expanding the budget deficit or increasing the money supply, or by using a combination of both.

Both! That's what we do best. The Fed stands by to help us out, again, and again, and again, just like it did in the 1970s.

I may be in a deflationary mood short-term, but I invest for the long-term. On that note, I think I shall keep my stagflationary name yet another day.

See Also:
The Mortgage Lender Impode-O-Meter

The Mortgage Freeze

Get set for the big mortgage freeze
Borrowers coming to the end of fixed-rate deals should prepare not only for far higher rates but also delays in getting loans approved



“House prices fell 25% in real terms in the 1970s. That is not what I’m predicting, but it gives you an idea of what has happened in the past.”

Real housing prices in the U.S. appear to have peaked in January, 1979 as seen here. The fall was just as impressive as the climb (and ushured in two recessions).

The 3 month seasonally adjusted and annualized inflation rate peaked in March, 1980 at 17.7%.

My inflation mood continues to lean towards deflation in the short-term and inflation in the long-term. We'll see just how well Bernanke can print money to offset the outgoing tide. I'm certainly willing to give him the benefit of the doubt, until proven otherwise. Further, assuming I am right (big assumption!) I'm also not convinced we'll simply slide into 1980s level prosperity generation in the aftermath.



Shaded areas represent recessions.

Source Data:
St. Louis Fed: Consumer Price Index For All Urban Consumers: All Items
National Bureau of Economic Research, Inc.

Why Is Bush So Popular?

Sorry about that. I seem to have lured you in with a sensationalist headline. Shame on me. I'm actually talking about the previous Bush!

Time Magazine: February 26, 1990
Why Is He So Popular?
In the Bush White House, as in high school, there is no such thing as being too popular. Since last fall, Bush's approval ratings have soared to levels unmatched since John Kennedy's first year, and they show no sign of abating. In the TIME/CNN poll, 76% approved of the way Bush is handling his job as President, up from 70% two weeks before. While White House aides publicly feign nonchalance about these numbers, privately they are delighted if a bit puzzled. Explained one: "We're really glad it's there; we're glad people like him. But nobody can explain it."

Much of the credit goes to the three Ps: Peace, Prosperity and Panama. Voters appreciate Bush's affable nature, his no-nonsense wife Barbara and his flock of grandchildren. Add to that low unemployment and inflation...

Unemployment and inflation sure were low in February, 1990. We were ramping up for a serious consumer recession though, not that many seemed to notice. Let's skip forward a few months.

Time Magazine: December 3, 1990
Is The Country in a Depression?
As unemployment climbs, inflation rises and the economy lurches toward an expected slump, economists issue dire warnings about "recessionary psychology" -- a pattern of cuts in consumer spending and investment that tends to feed the downward spiral and make any economic falloff even deeper. But there is another, more profound kind of recessionary psychology. It is measured by psychic indicators rather than economic ones. As people change their behavior in the face of layoffs, cutbacks or a sudden drop in net worth, more and more Americans find themselves clinically depressed.

I wonder would happen if we start with a very unpopular president, a biblical level credit crisis, and ~$90 oil (that we're told is only falling due to "expected" economic weakness). Maybe we'll find out.

November 8, 2007
Bush, Congress Popularity Remain Low
His 32 percent approval for handling the economy was his lowest rating ever for that category in the AP poll.

November 30, 2007
Ax falls on execs as credit crisis grows
"The captains are going down with the ship, whether they are rising stars or not doesn't matter," said David Easthope, a senior analyst at business consulting group Celent. "The losses are so large and embarrassing to the organization that they are getting rid of people to satisfy the public perception that they are fixing things."

November 30, 2007
Crude Oil Falls Below $90 on Concern Economic Growth Will Slow
``The market is simply becoming more concerned about a possible recession that could reduce petroleum demand,'' said James Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois. ``We have been seeing evidence for some time of a weakening economy and weakening oil demand.''

Poll: What Should We Invest In?

I have attempted to organize the answers in a top down fashion from the things we should probably need the least to the things we should probably need the most, in general. Some of that is open for debate obviously.

Bonds includes all forms of long-term debt instruments (including but not limited to normal treasuries and their inflation adjusted counterparts).

Gold is ranked above dollars simply because you cannot buy most goods and services directly with gold. That could of course change at some point. Gold is ranked below stocks and bonds because gold is something, in theory, you could pay the border guard with if you needed to flee the country, lol.

U.S. Dollars also includes short-term treasury bills.

Construction includes skyscrapers, factories, and/or housing.

Food includes canned goods, presumably for your pantry.

You are very bearish if you can't even invest in humans. However, there are some 6.6 billion of us now. Perhaps there is a glut.

Update: I don't mean to seem cold but adding "Humans" to the list probably comes off that way. Just keep in mind where I put them on the list (as the most important). Without people, the rest of the list is rather unimportant. Further, investing in "Humans" might simply mean you are investing in yourself.

Poll Results: How Should We Position Ourselves?

Let it not be said that I didn't at least try to put a happy face on the results.

Now would probably be a bad time to point out that the picture in the background belongs to all of us. It is a work of the United States government.

Image:Jack-in-the-box.jpg
This work is in the public domain in the United States because it is a work of the United States Federal Government under the terms of Title 17, Chapter 1, Section 105 of the US Code.

It would also probably be a bad time to point out why it was created (presumably in 2003).

CPSC, Avon Products Inc. Announce Recall to Repair Jack-In-the-Box Toys
Hazard: A spring mechanism attached to the lid can break and detach from the toy, posing a choking hazard to young children.

I refuse to let this end on a bad note though.

Propaganda
What lies behind us and lies before us are small matters compared to what lies right to our faces.

Really, it's perfect for everybody but Americans. Because we don't do that here.