By Robert Reich, Robert Reich
If you can’t sell the pig, figure Republicans, put lipstick on it and maybe no one will notice. Add some perfume and maybe you’ll even attract enough Dems to get it enacted.
A Senate proposal by Republican Bob Corker of Tennessee and Democrat Claire McCaskill of Missouri would save $7.6 trillion over 10 years. How? By capping federal spending at 20.6 percent of gross domestic product within a decade. That’s down from 24.3 percent now.
This is the Ryan plan with lipstick. The Ryan plan puts spending at 20.25 of GDP in 10 years. By comparison, spending under Republican President Ronald Reagan from 1981-1989 averaged 22 percent of GDP at a time when no baby boomers had retired.
As a result, Corker/McCaskill would have the same dire result as the Republican plan: According to an analysis by the Washington-based Center on Budget and Policy Priorities, Corker/McCaskill would require “enormous cuts” in Medicare and Medicaid and other programs, and likely force similar policy changes to the entitlement programs that Ryan has proposed.
The reductions would total more than $800 billion in 2022 alone — which would be the equivalent of eliminating the entire Medicare program or the Defense Department. “The Ryan plan is at least quite explicit about the changes that are proposed to be made in specific programs,” says Paul Van de Water, a health-care expert at the Center on Budget and Policy Priorities. The Corker-McCaskill plan “at first blush may sound sort of benign,” he adds. “The effects on real people in many cases would be extremely dire.”
Watch your wallets. Other Senate Dems are showing interest in the lipsticked pig as well. The Corker/McCaskill proposal is being actively supported by West Virginia’s Joe Manchin. Not surpringly, Joe Lieberman is on board.
Under the McCaskill-Corker plan, if Congress fails to limit spending and keep it under the annual cap, the Office of Management and Budget would have to make evenly distributed cuts throughout the budget. If the automatic cuts took place, they would total about $1.3 trillion in Social Security, $856 billion in Medicare and $547 billion in Medicaid reductions over the first nine years. To avoid the automatic across-the-board cuts, Congress would be under the gun to enact policies for Medicare and Medicaid exactly along the lines of what Ryan has proposed.
The McCaskill/Corker spending cap would also make it impossible for government to boost the economy in recessions.
Don’t be fooled, and don’t let anyone else be. McCaskill/Corker is the same Republican pig.
By Robert Reich, Robert Reich
Exxon-Mobil’s first quarter earnings of $10.7 billion are up 69 percent from last year. That’s the most profit the company has earned since the third quarter of 2008 — perhaps not coincidentally, around the time when gas prices last reached the lofty $4 a gallon.
This gusher is an embarrassment for an industry seeking to keep its $4 billion annual tax subsidy from the U.S. government, at a time when we’re cutting social programs to reduce the budget deficit.
It’s specially embarrassing when Americans are paying through their noses at the pump.
Exxon-Mobil’s Vice President asks that we look past the “inevitable headlines” and remember the company’s investments in renewable energy.
What investments, exactly? Last time I looked Exxon-Mobil was devoting a smaller percentage of its earnings to renewables than most other oil companies, including the errant BP.
In point of fact, no oil company is investing much in renewables — precisely because they’ve got such money gusher going from oil. Those other oil companies also had a banner first quarter, compounding the industry’s embarrassment about its $4 billion a year welfare check.
American Petroleum Industry CEO Jack Gerard claims the gusher is due to the “growing strength in our economy.”
Baloney. If you hadn’t noticed already, this is one of the most anemic recoveries on record. $4-a-gallon gas is itself slowing the economy’s growth, since most consumers are left with less money to spend on everything else.
Gerard then claims the giant earnings “reflect the size necessary for [American] companies to be globally competitive with national oil companies” around the world.
Let’s get real. The crude oil market is global. Oil companies sell all over the world. The price of crude is established by global supply and demand. In this context, American “competitiveness” is meaningless.
Republicans who have been defending oil’s tax subsidy are also finding themselves in an awkward position. John Boehner temporarily sounded as if he was backing off – until the right-wing-nuts in the GOP began fulminating that the elimination of any special tax windfall is to their minds a tax increase (which means, in effect ,the GOP must now support all tax-subsidized corporate welfare).
Boehner is now trying to pivot off the flip-flop by reverting to the trusty old “drill, drill, drill” for opening more of country to oil drilling and exploration. “If we began to allow more permits for oil and gas production, it would send a signal to the market that America’s serious about moving toward energy independence,” he says.
This argument is as nonsensical now as it was when we last faced $4-a-gallon gas. To repeat: It’s a global oil market. Even if 3 million additional barrels a day could be extruded from lands and seabeds of the United States (the most optimistic figure, after all exploration is done), that sum is tiny compared to 86 million barrels now produced around the world. In other words, even under the best circumstances, the price to American consumers would hardly budge.
Whatever impact such drilling might have would occur far in the future anyway. Oil isn’t just waiting there to be pumped out of the earth. Exploration takes time. Erecting drilling equipment takes time. Getting the oil out takes time. Turning crude into various oil products takes time. According the federal energy agency, if we opening drilling where drilling is now banned, there’d be no significant impact on domestic crude and natural gas production for a decade or more.
Oil companies already hold a significant number of leases on federal lands and offshore seabeds where they are now allowed to drill, and which they have not yet fully explored. Why would they seek more drilling rights? Because ownership of these parcels will pump up their balance sheets even if no oil is actually pumped.
Last but by no means least, as we’ve painfully learned, the environmental risks from such drilling are significant.
Let’s not fool ourselves – or be fooled. There’s no reason to continue to give giant oil companies a $4 billion a year tax windfall. Nor any reason to expand drilling on federal lands or on our seashores.
But there are strong reasons to invest in renewable energy – even in a time of budget austerity. Use the $4 billion this way. And why stop there? Why not a windfall profits tax to the oil companies, to be used for renewable energy?
By Charles Hugh Smith, OFTWOMINDS Without speculating on where housing valuations “should” be, what’s your takeaway from these charts of individual home prices? Does this look like a “recovery” to you? Since everyone knows “real estate is local,” I selected three homes in very desirable but not overly exclusive neighborhoods with excellent school districts and a history of strong price appreciation: two in Northern California and one in the Greater Boston region. For context, here is the most recent Case-Shiller Index, which shows national home prices declining to 2003 levels. This chart traces a classic “bubble” with the top around the first quarter of 2007, followed by a sharp decline and a period of stabilization as the Federal Reserve and the Federal government intervened to support the housing market in an unprecedented fashion–buying $1.1 trillion in mortgages, issuing tax credits to buyers, etc. etc. Recently, the index turned down again, the dreaded “double dip.” Interestingly, the charts from highly desirable neighborhoods have much different characteristics. The top of the bubble valuations occurred in a timeframe stretching from 2005 to 2008. There was no sharp decline in price, followed by a plateau; prices have dropped grudgingly but steadily from their apex. Prices are still in a free-fall, and there is still plenty of room left on the downside to fully retrace the bubble. The cliche is that housing prices are “sticky” and decline slowly. While prices have been dropping for a few years, the decline seems to be accelerating rather than stabilizing. If we had to characterize the difference between the national chart and these left/right coast homes in desirable, upper-income areas, we’d have to say there was not much of a plateau, that price has “only” returned to 2004 levels and that declines accelerated in 2010. Here is a home that was completely renovated in 2002-3 in a middle-class suburb of San Francisco. The green line reflects the town’s pricing history. This home is in the highly desirable “hills” of a San Francisco-area suburb, a desirability reflected in the bubble valuations above $1 million. The green line is the town’s price history, the yellow is the zip code’s price history. Clearly, some pricey sales in the neighborhood caused the value of this home to spike. Good schools and proximity to jobs–what’s not to like in this Boston-area suburb? Strong price appreciation continued into early 2008, but since then price has fallen 22%. My takeaway is that price depreciation in these desirable areas has been orderly, but that it is far from finished. What I see is price surrendering in late 2010 as the “recovery” story loses credibility. The “story” in desirable neighborhoods has been that “there was no bubble here” or “prices aren’t falling.” The declines have certainly been less severe than those experienced by bubblicious areas where prices rose on pure speculation. BUt the fact that prices continue to weaken even as the “recovery” is supposedly gaining steam should give believers in the “recovery” story pause. 2010 was the perfect opportunity for housing in desirable areas to turn up. Instead, price declines accelerated to the downside despite record-low mortgage rates and a supposedly “firming” economy. It looks as if home buyers are voting on the “recovery” story with their feet. Readers forum: DailyJava.net. Order Survival+: Structuring Prosperity for Yourself and the Nation (free bits) (Mobi ebook) (Kindle) or Survival+ The Primer (Kindle) or Weblogs & New Media: Marketing in Crisis (free bits) (Kindle) or from your local bookseller. Of Two Minds Kindle edition: Of Two Minds blog-Kindle
House prices in desirable areas are declining, contradicting the “recovery” story.
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Without speculating on where housing valuations “should” be, what’s your takeaway from these charts of individual home prices? Does this look like a “recovery” to you? Since everyone knows “real estate is local,” I selected three homes in very desirable but not overly exclusive neighborhoods with excellent school districts and a history of strong price appreciation: two in Northern California and one in the Greater Boston region.
For context, here is the most recent Case-Shiller Index, which shows national home prices declining to 2003 levels. This chart traces a classic “bubble” with the top around the first quarter of 2007, followed by a sharp decline and a period of stabilization as the Federal Reserve and the Federal government intervened to support the housing market in an unprecedented fashion–buying $1.1 trillion in mortgages, issuing tax credits to buyers, etc. etc.
Recently, the index turned down again, the dreaded “double dip.”
Interestingly, the charts from highly desirable neighborhoods have much different characteristics. The top of the bubble valuations occurred in a timeframe stretching from 2005 to 2008. There was no sharp decline in price, followed by a plateau; prices have dropped grudgingly but steadily from their apex.
Prices are still in a free-fall, and there is still plenty of room left on the downside to fully retrace the bubble. The cliche is that housing prices are “sticky” and decline slowly. While prices have been dropping for a few years, the decline seems to be accelerating rather than stabilizing.
If we had to characterize the difference between the national chart and these left/right coast homes in desirable, upper-income areas, we’d have to say there was not much of a plateau, that price has “only” returned to 2004 levels and that declines accelerated in 2010.
Here is a home that was completely renovated in 2002-3 in a middle-class suburb of San Francisco. The green line reflects the town’s pricing history.
This home is in the highly desirable “hills” of a San Francisco-area suburb, a desirability reflected in the bubble valuations above $1 million. The green line is the town’s price history, the yellow is the zip code’s price history. Clearly, some pricey sales in the neighborhood caused the value of this home to spike.
Good schools and proximity to jobs–what’s not to like in this Boston-area suburb? Strong price appreciation continued into early 2008, but since then price has fallen 22%.
My takeaway is that price depreciation in these desirable areas has been orderly, but that it is far from finished. What I see is price surrendering in late 2010 as the “recovery” story loses credibility.
The “story” in desirable neighborhoods has been that “there was no bubble here” or “prices aren’t falling.” The declines have certainly been less severe than those experienced by bubblicious areas where prices rose on pure speculation. BUt the fact that prices continue to weaken even as the “recovery” is supposedly gaining steam should give believers in the “recovery” story pause.
2010 was the perfect opportunity for housing in desirable areas to turn up. Instead, price declines accelerated to the downside despite record-low mortgage rates and a supposedly “firming” economy. It looks as if home buyers are voting on the “recovery” story with their feet.
Readers forum: DailyJava.net.
Order Survival+: Structuring Prosperity for Yourself and the Nation (free bits) (Mobi ebook) (Kindle) or Survival+ The Primer (Kindle) or Weblogs & New Media: Marketing in Crisis (free bits) (Kindle) or from your local bookseller.
Of Two Minds Kindle edition: Of Two Minds blog-Kindle
for the full posts and archives.
— ‘Don’t waste the mining boom: IMF’ says today’s front page headline in The Australian.
— Wouldn’t it be great to be a part of the IMF? Just waltz around the world, pop into countries and provide advice so obvious that it’s worthless? The IMF’s little gem for Australia is to establish a sovereign wealth fund to ensure future generations share in the mining boom.
— But over at the Financial Review we read ‘Blow out in budget deficit to $50 billion’. Where hast thou mining spoils gone?
— Well the past and present spoils of the mining boom have gone to: the homeowners who sold out to those sucked in by the first-home owner’s bribe; the manufacturers and other beneficiaries of home insulation products; and to the thousands of tradespeople (not to mention the big building companies) who have apparently built an education revolution over the past few years.
— Meanwhile, Australia’s struggling non-resource economy is not providing the tax receipts the government was expecting. So we’re looking at a near $50 billion deficit this year (2010–11). According to the Treasury, the deficit will shrink to around $16 billion next financial year, which represents a decent fiscal contraction. Along with an outrageously strong dollar and a bias for tighter monetary policy, it’s little wonder the equity market is struggling.
— The performance of the Aussie market might appear to be in stark contrast to the US markets but it’s all money illusion over there. It’s Alice in Wonderland stuff. The worse things get, the higher the market goes. It’s melt up time in the US as commodities, precious metals, equities and bonds all rise in price.
— Fundamentally, such price action makes no sense but in a world of monetary madness, individuals are doing what they can to preserve their wealth. When there is not even a semblance of a sound monetary foundation, price action will be all over the shop.
— The US system of finance is corrupt to its core. Bernanke may state that a strong US dollar is good for the global economy, but it is an Orwellian statement and one he has no intention of following through on. Bernanke is an extreme Keynesian. He may have a big intellect but he has a bigger ego and what’s worse, not an ounce of wisdom.
— Unbelievably, Bernanke is still feted by the media and, consequently, the general public. People still think this bloke has some idea about what he is doing. The Keynesians have the upper hand in the policy debate because they control the debate. Keynesianism and statism go hand in hand. When the state provides for you, you provide for the state.
— We can only shake our head in wonder at the absurdity of it all…and laugh too. Check out this hilarious follow up to the Keynes V Hayek debate. It may be funny (especially at the start), but it is deadly accurate.
— In case you don’t notice, the bloke walking through the security doors at the start is Bernanke…he pops up in the background on a few occasions, in full support of Keynes’ statements.
— Here’s one of ‘Hayek’s’ best lines (among many choices) in the intellectual rap:
‘Spending’s not free, that’s the heart of the matter.
Too much is wasted as cronies get fatter.
The economy’s not a car, there’s no engine to stall,
No expert can fix it, there’s no ‘it’ at all.
The economy is us, we don’t need a mechanic,
Put away the wrenches the economy’s organic.
— The lure of Keynesian thinking, and why it remains so popular despite being constantly discredited, is that it offers ‘help’. Help by the government or a central bank. This sounds compassionate and progressive. Only a hard right conservative would look down on the idea, right?
— But the government can only ever provide a short-term boost. They can lead the horse to water, but the horse won’t drink it if it has been fouled by past actions.
— Here’s what the real Hayek had to say about the issue in ‘The Constitution of Liberty.’
There is perhaps nothing more disheartening than the fact that there are still so many intelligent and informed people who in most other respects will defend freedom and yet are induced by the immediate benefit of an expansionist policy to support what, in the long run must destroy the foundations of a free society.
— And that is exactly what Bernanke and Co is doing, while the media hang on to every word and portray meaningless press conferences as adding to transparency to monetary policy. Perhaps they need to read 1984 again, assuming they’ve read it in the first place.
— The flipside of Bernanke’s weak dollar policy is the soaring Australian dollar. With the ASX200 down around 50 points at the time of writing, it looks like the market is finally starting to realise that such a rapidly appreciating currency is not good for the economy or for profits.
— The US’s attempts to inflate are having an impact on the rest of the world in varied ways. For a country like Australia, which has a sensible interest rate setting, our currency is soaring beyond what could be considered reasonable. A policy of currency depreciation doesn’t create more demand. It just steals it from somewhere else.
— That demand theft is arbitrary and it occurs via exchange rates, which set prices for Australia’s imports and exports.
— The US is really trying to take a bigger share of Asia’s demand, or more accurately it’s trying to increase the purchasing power of Asian households, by increasing the value of their currency relative to the US dollar. But the region isn’t playing along. They are still trying to control the rise of their currencies to maintain their export sectors. Consequently, low capital control countries like Australia are suffering.
— Something must give soon though. Failure to contain inflation in China will probably lead to a boom/bust scenario there. This could see a rally in the US dollar as the punt on Asian currency revaluation unwinds.
— Then we’ll be back to roughly where we started…
— Before we sign off today just a quick post-script on the ANZAC Day Special. Cheers to everyone who wrote in with their stories and thanks. One theme of the responses was ANZAC Day has been celebrated at the town of Villers-Bretonneux for many years prior to 2008. We stated 2008 was the inaugural ceremony. According to one response some diggers returned there as early as the 1960s and 70s. The local communities recognise ANZAC Day on each year on the closest Saturday.
— The 2008 service was a special one to commemorate the 90th Anniversary of the 1918 battles and its popularity meant subsequent official ceremonies were organised.
Daily Reckoning Australia
- Stock Prices Down Signals Bears to Hold onto Cash, Treasuries and Gold
- Ben Bernanke Pays Homage to Milton Friedman’s Theory
- Vandalism vs Keynesianism
- Unsound Money in China
- Obama Insists That Not Only Can We Detect Bubbles We Can Also Deflate Them
Yes, he held a press conference. Why would the world want a press conference from a central banker? Ah…good question. Because he’s a celebrity… He’s powerful. He moves and he shakes. He’s as popular as William and Kate put together.
In the past, a central banker was meant to be anonymous…quiet…hidden away somewhere so far in the background that the ordinary man wouldn’t know his name or recognize his face.
A good central banker was one you never heard of. He did his job. He made sure that the country had enough gold to cover its foreign debts and domestic currency issuance. He did not worry about full employment. Nor did he concern himself with “growth.” His job was to make sure the money was good. That’s all. If he did it well, he was practically a nobody.
If he did it badly, on the other hand, he might be castrated. Or, at least he would be disgraced.
Times have changed. Alan Greenspan turned central bankers into celebrities. He stood with Hillary Clinton at her husband’s State of the Union address…thus signifying the union of money and power, much like the Pope and the Holy Roman Emperor standing together on the balcony of the Vatican.
And now, who wouldn’t recognize Ben Bernanke’s mug?
In fact, he is widely thought to be responsible for saving Christendom, Jewry and all of western civilization. Yes, he stepped in where fools feared to tread – and rescued the whole shebang.
And now what?
Well, the rescue effort has proven to be a big failure. TARP, TALF, QE1, QE2… The US feds put at risk more than $10 trillion to turn the situation around. Federal deficits alone add up to $4.5 trillion over the last 3 years.
And for what? Housing is still falling. The unemployment rate is still over 10%…unless you stop counting people who haven’t been able to find work. More than 40 million people are on food stamps. And every increase in gasoline or food pinches household budgets like a tax increase.
But now, not only does the central banker play a much bigger role in the life of a modern economy, so does the government. A report earlier this week told us that more than half of “income growth” in the last 10 years comes from the feds!
Wait a minute. Where does government get any money? How can the feds give more than half US households more than half their income gains? Who pays for it?
Doesn’t that money really belong to someone else? Aren’t they just robbing Peter to pay Paul?
Yes, Of course they are. But Peter isn’t old enough to vote. So who cares?
And now The Fiscal Times reports that US voters – as a whole – receive more in payments from the government than they pay in taxes.
The feds have turned half the population into incipient zombies…feeding off the other half of the population…and their children…and their children’s children.
But let’s get back to Bernanke. What did he have to say yesterday? Well…nothing!
Here’s the AP report:
WASHINGTON (AP) – The US economy and job creation have strengthened enough for the Federal Reserve to end on schedule a program of buying Treasury bonds to help the economy, the Fed said Wednesday.
Fed Chairman Ben Bernanke spoke at a news conference after the meeting. It was the first time in the Fed’s 98-year history that a chairman has begun holding regular sessions with reporters.
Bernanke said that as long as the Fed continues to say rates will remain at historic lows for “an extended period,” rates won’t rise until the Fed has met at least twice more. The Fed board meets about every six weeks.
Bernanke said he expects the economy to continue growing through next year and 2013.
He acknowledged that higher gasoline prices are creating a financial hardship for many Americans. But he said the Fed doesn’t think gas prices will continue to rise at their recent pace.
And more thoughts…
With Bernanke’s dulcet assurances still echoing in their ears, investors went back to their errors. They bought more stocks – pushing the Dow up 93 points. They bought more gold too. The yellow metal rose $13.
One thing they didn’t buy was the dollar. The greenback is at an all- time low against the Swiss franc. Against the euro, it seems to be returning to its all-time low. And against gold, of course, it passed its all time low many months ago.
And now that the economy is slowly but surely recovering – Bernanke said so! – many investors are beginning to wonder if gold may have passed its all time high too.
Let’s hope people believe it.
The more who think so, the better. Yes…sell gold…please! Sell it in a panic. Sell it cheap. Sell it to the rag and bone man! Sell it to the pawnshop! Sell it at parties organized by newspaper ads! Sell it to people who put notices on eBay! Sell…sell…sell…
And then, you know what to do, don’t you, dear reader?
*** An old friend has written a delightful book. Alex Green is an investment analyst. We have never completely shared his investment philosophy; he is optimistic, capable and earnest, with little appreciation for our end-of-the-world-as-we-have-known-it perspective.
But we share an interest. His new book Beyond Wealth is about what interests us both – that is, what money can’t buy.
The burden of the book is obvious, but not inconsequential. It reminds us of who we are and what we are. Making and spending money is part of what we do and much of what we care about. But it is not everything.
Getting rich is a competitive activity. We can’t all be rich. Only a few can. There’s no secret to it. Those who become rich tend to work harder at it than most people. Getting rich requires you to stay focused, to exclude from your life many of the distractions, idleness, chitchat and casual entertainments that make life interesting, lively, and agreeable. Rich people are often highly competitive, single-minded, and self-disciplined. That is, they are dull workaholics and terrible dinner companions.
Enjoying a rich life is an entirely different matter. You have to let your mind wander a bit. You have to be willing to “waste time” with friends, to spend time reading, thinking and amusing yourself with no apparent or immediate prospect of a reward. You have to travel, with no particular destination in mind…and be prepared for the serendipitous encounter along the way.
Where’s the pay off? Well, it comes later…unbidden…unmeasured…and untaxed. It shows up on no balance sheet and no portfolio review. You will not be able to put a number on it…nor brag about how much it exceeds the benchmark. And yet, it is what you need to live a “rich life.”
Alex’s new book covers values, not prices. He describes the value in all manner of things – friends, long walks…hobbies…travel…philosophy…poetry…music – all the things the hard-charging wealth maximizer eschews.
The book itself is a distraction from the world of money…a delightful one. Click here to find out for yourself.
For Daily Reckoning Australia
- Buying Bad Debt to Return Bank Solvency
- Ben Bernanke “Respectfully Disagreed” With Angela Merkel
- Can the U.S. Central Bank Really Begin Fighting Inflation in a Serious Way?
- Central Bank Creates Excessive Amounts of Money to Expand Government Spending
- Do Away With the IMF, World Bank, and Central Bank
Our family has a milkman. Yes, a milkman, just like in the old days.
He comes every Friday and drops off a crate full of cold bottles of milk, along with tubs of yogurt and butter, cheeses and sometimes meats. You place your orders online, and the milkman brings it your doorstep, fresh from a local family-owned farm not far from where I live.
I mention this because I got an interesting e-mail from the farm over the weekend, which I think sums up what we face in today’s economy. The problem we face is particularly insidious because lots of people don’t really understand what causes it, which allows it go on.
But before getting to abstractions, let’s look at the e-mail I got from my milkman.
“We would like to take the time to tell you,” it begins, “that due to some large price increases we are facing on materials we use to bottle milk…we must raise the price of our glass bottled products.”
The e-mail then goes on to show, in some detail, exactly what price increases the farm sees. The milkman is a model of good disclosure and transparency. Many of our banks and corporations should use this e-mail as a model for communicating with the public.
The sources of the pain include a 4% increase in the cost of glass bottles and a 6% increase in the cost of plastic caps. The farm has also seen a 14% increase in shipping costs in just the last six months due to the rising price of fuel. There is more: a 2% increase in materials such as latex gloves and hairnets, a 5% increase in lab supplies for milk testing and an 8% increase in the chemicals used to clean the plant and equipment.
“I hope that you can all see that we have seen a huge increase in total,” The e-mail continues. “This is why at this point it has become a must to increase the price of our bottled products 7%. This is always an agonizing decision for us, but sometimes can’t be avoided.”
We might call this the Milkman Indicator. I can tell you that this is happening across the economy right now. I follow a lot of companies, and rising raw material costs are at the top of the list of concerns facing anybody who makes anything.
Naturally, as investors, the idea would be to play those who benefit from such rising raw material costs and fade those who cannot pass on these costs to their customers. So for example, the rising cost of glass bottles makes me think of Owen-Illinois. This is the world’s largest glass container company. I recommended it in my investment letter, Capital & Crisis in December. Part of the thesis there is that price increases in 2011 would help raise margins and profits. So far, the stock hasn’t gained much ground, but the core idea behind owning it is still very much in play.
This has actually been something of a mini-theme in Capital & Crisis, where I have recommended several specialty producers of materials that are rising in price. Another idea is to own the producers of the commodities rising in price, like many of the energy and mining stocks I have recommended.
This phenomenon of rising raw material costs brings us around to causes. Why is this happening?
The short answer is that our Federal Reserve is printing a lot of money. It’s funny how I can explain this to my 12-year-old using monopoly money – and he gets it – yet it seems economists with Ph.D.s and fancy titles in think tanks and government agencies don’t get it all.
When you create a lot of money, that money loses some value. It buys less than it did before. That’s what we’re seeing, in essence.
The main barometer for monetary creation is the Fed’s balance sheet. When it expands, so too does the amount of money sloshing around. All that money sloshing around has to go somewhere. People buy stocks, commodities and gold. There are many, many ways to show this, and I’ve seen many different kinds of charts that all show the same thing. But I grabbed the one below from today’s Wall Street Journal to show you:
So “QE2” is the fancy name given to a very base and simple act: money printing. And you can see that as the Fed’s balance sheet has swelled, so too have stocks and gold surfed the wave of cash. The dollar has also weakened (buying less), and rates on mortgages have gone up.
This is just the beginning. We know how past bouts of money printing ended. Badly.
[If you want to read up on the hazards, no book details it better than Adam Fergusson’s When Money Dies. Take 20% off when you buy a copy from Laissez Faire Books right here.]
Look again at that table above that shows mortgage rates. Those rates are in the 4-5% range. In the 1980s, it was rare to see new home mortgage rates below 10%. In 1982, the average interest rate on a new home mortgage was 15.12%.
These cycles often take a generation to play out from peak to trough and to peak again. Mortgage rates of 10% didn’t just happen in one year. It was a slow buildup over a good two decades. The average mortgage rate in the 1970s was 8.8%, compared to 11.79% in the 1980s. In the 1960s, mortgage rates were in the 5%s.
Look at gold. It didn’t jump to $1,500 in a year. It’s been in a 10- year bull market.
So to wrap up here, I think we’re looking at a long period when prices rise and the cost of money rises. I doubt the Fed’s resolve to take back the cash it put in, until it gets really bad. Then another Paul Volcker will arrive on the scene to break the inflation and a deep recession will ensue, like a nasty hangover.
Until then, I think the Fed will keep the bar open and let the good times roll. This means gold up, dollar down, interest rates up and commodities up. And the prices the milkman charges will go up as well.
For Daily Reckoning Australia
- Inflation is an Artifice Caused by Government
- Australian Dairy Prices Up Due to Grain Prices
- China Fueling Inflation in Australia & New Zealand
- Crude Oil vs The All Ordinaries… Who Will Win?
- Consumer Prices for the Essentials are Skyrocketing
Join The Fed’s Chat Board Alongside The Chairman During His Address At The Community Affairs Research Conference
As the Fed Chairman is about to commence his luncheon address (and yes, take more moronic questions) at the Community Affairs Research Conference (webcast below), it has offered readers the option of joining in and commenting alongside in realtime on the Fed’s very own chat board. Everyone is suggested to participate and tell the Chairman what they really think. The chatboard link is here.
Even as America has an insolvent government and a debt ceiling to deal with in the only way it knows – Mutual Assured Destruction, Europe still has a insolvent banking system 10 times greater than America’s to worry about. Which explains the following Friday night bomb (because it is past 6pm in Europe). From DJ:
- 15:52 29Apr11 DJN-DJ EU PAPER: LARGE PARTS OF BANK RESTRUCTURINGS YET TO COME
- 15:54 29Apr11 DJN-DJ EU: “DISTINCT VULNERABILITIES REMAIN” IN EU BANK SECTOR
- 15:55 29Apr11 DJN-DJ EU: ROLL-OVER RISK STILL PRESENT IN SOVEREIGN DEBT MARKETS
- 16:05 29Apr11 DJN-DJ EU: EXIT FROM GOVERNMENT BANK BAILOUTS MAY SPUR M&A WAVE
- 16:13 29Apr11 DJN-DJ EU: THREAT OF PRIVATE CREDITOR LIABILITY “BADLY RECEIVED”
Translation of bolded: if you hear gronin’, MAD’s a-bonin’ (taxpayers)
The headlines come from the following 72 page report which has so far not been caught by anyone in the press.
For The First Time Since The Great Financial Crash, Taylor Rule Implies A Federal Funds Rate Higher Than Actual
Following yesterday’s release of advance Q1 GDP and deflator data,for the first time since the full unwind of the Great Financial Crisis in late 2008, early 2009, the Taylor rule is not only positive (it hit 0.1% in Q4 2010, in line with the federal fund’s rate) but has now jumped substantially above the prevailing interest rate, hitting +0.4% in Q1 2011. Needless to say this will not remove any of the latent animosity between John Taylor, whose rule, or at least a special case thereof, is used by the Chairman in determining monetary policy, and the Chairman: as the possibility of a hike is negligible for at least one more year, with a far greater possibility for another QE episode, we expect to see this number continue to diverge substantially from the Taylor implied number for a long time, which in turn will mean that the Fed will be forced to scramble, just as it did in the 05-07 period to catch up with runaway inflation. Only this time it will have $3 trillion in asset to unwind as well. We hope Volcker will not mind being thawed from carbonite a second time when runaway inflation surges in about a year or so, and Volcker’s expertise is needed more than ever.
Stone McCarthy has more:
For the second consecutive quarter, the original-specification, quarterly version of the Taylor rule, based on real GDP figures and the GDP price deflator, produced a positive result.
The previous day, the BEA released its advance estimate for real GDP figures in Q1 2011. Based on those numbers, the Taylor rule prediction for the federal funds rate target in Q1 2011 is +0.4%. In the previous quarter of Q4 2010, the Taylor rule prediction was +0.1%.
We still believe it will be some time before the federal funds rate target is lifted by the Federal Reserve but at least it is moving in the right direction.