Monthly Archives: April 2011

re: inflation here we come

Hi, Glenn-  Agree.  I’ve also seen articles that suggest that QE2 has not had that much of a positive effect on the economy beyond what has already been happening, so in that view it’s a potentially big loos for relatively little possible gain. But I think your basic insight about always living on the edge of a cliff gets to the heart of it; if not this particular cliff, then some other one.  Perhaps one with a better view if you look to the left on your way down?

I read an interesting piece the other day about the lopsided distribution of wealth, which as you know has reached 1929 level highs and i think is probably headed towards 19th century (i.e., Vanderbilts to sweatshops).  It’s a product of two key factors:  the Fed has kept interest rates low, by historic standards, for the last 20 years, and capital gains are lightly taxed at 15%.  That means there’s a lot of easy money out there to speculate with, so we get bubble after bubble.  While many people get hurt when each one deflates, enough people have been smart enough to get out in time with lightly-taxed speculative profits to produce the current results.  You could perhaps argue they deserve to be rewarded for their smarts, except that I suspect pure dumb (adjective intended) luck was also in play, and more seriously such activity is non-productive, i.e. it adds nothing to the economic wealth of the society.  At least the Vanderbilts gave us the railroads, and the Rockefellers gave us the oil industry.  Maybe “gave” isn’t quite the right word, but you get the point


re: re: inflation here we come

Dear Tiger,

john lawyer wrote:

I read an interesting piece the other day about the lopsided distribution of wealth, which as you know has reached 1929 level highs and i think is probably headed towards 19th century (i.e., Vanderbilts to sweatshops).

Oh, like when kids take out huge loans (and the only type of loan which is NOT discharged in a bankruptcy) in order to pay for the privilege of getting “educated” by spending 80 hours/week doing s**t work for companies? You do know that there is a huge market for college-loan backed securities?

No, no, that’s not quite it. In a sweatshop, you pay the workers. Having the workers pay you is a different system. Sorry, my mistake. Yes, yes, I agree and hope that we quickly return to the sweatshop system. Improvement is always welcome.

It’s a product of two key factors:  the Fed has kept interest rates low, by historic standards, for the last 20 years, and capital gains are lightly taxed at 15%. 

And nothing to do with the natural tendency of power to seek out even more power, coupled with a total breakdown in accountability and rule of law for those at the top of the pyramid? And total disregard at the top of the pyramid for those underneath?

You do recall that at least some people were prosecuted during the savings and loan scandal. In our most recent financial scandal/collapse/whateveryoucallit, do you know how many prosecutions there have been? I think the number starts with “z”, and is less than 1 zillion.

Oh, dear, am I slipping into “rant” mode?

It does help to be distanced from it all.

And in the historical perspective, a narrow-pyramid system does seem the norm. Most people live like rats, which a few sit at the top as kings. Maybe we are just reverting to the norm, and the 20th century was the exception. Fun while it lasted, as they say.



inflation here we come

You were concerned about the US government debt ceiling and the current game of chicken being played by Congress. I am sanguine regarding this; I see it as mostly posturing for the base.

But you perhaps have missed the real risk, the Fed. Two major problems. First, it is leverage at over 50:1, giving new meaning to the term “fractional reserve system.” An exogenous shock, and they become insolvent.
The second is with regard to QE2, the massive expansion in the monetary base, which has put things in a historically extreme situation. The key figure is the ratio of cash holdings to GDP. Give me a few paragraphs to spell it out.

The ratio can be modeled by a non-linear function of short-term interest rates. When interest rates are low, people are more willing to hold cash, when interest rates are high, the money moves into interest-paying investments.

This also means that when interest rates go up, the ratio will change, which means either the money supply shrinks or GDP increases. The fastest way for GDP to increase is for prices to go up, i.e. inflation.

Currently the ratio stands at 17 cents, which is a historical extreme. Worse, this is the extreme (of the non-linear function) when small changes in interest rates have huge impact on the ratio. Increasing the short-term treasury yield to even 0.25% would require either QE2 to be completely undone (reducing the numerator) OR the denominator to increase by 40%.

So there really is no easy way out under the current “rules”.

I am not as worried as I perhaps should be. My thought is that civilization is always at the edge of a cliff– a cliff created by the rules. The usual solution is to cheat, or change the rules. Money and the monetary system are really nothing more than convenient fictions. When the fiction is no longer convenient, the usual solution is to re-define it. Change the story, change the outcome. So I also have a strong curiosity as to what is going to emerge.

US incomes by county

Inspired by the choropleth map challenge (mapping US unemployment rates by county)

I have created my own graphs showing reported income by county, according to the IRS 2007 dataset.

Yes, Teton County in Wyoming IS the winner. Think Jackson Hole,_Wyoming
Also note it is interest/dividend income, not wage income…

RE: edge of the cliff

Hi, Glenn-  I tend to go with my guru’s (CPL) assessment as to history, politics, the market, bond prices, and roughly everything else in the public sphere, which can be roughly summarized as the “hell in a hand basket” approach.  Why a hand basket rather than, say, a supermarket cart, I haven’t yet figured out.  Or as he has also been heard to mutter, “Would that the country were going to the dogs!  It would be much more sensibly run.”  Hard to argue with, whether one takes the short run or the long historical look.

RE: edge of the cliff 2

Hi, Glenn-  I think putting money into tulip bulbs is a pretty good idea, actually, and invested a reasonable sum last fall.  They are now poking up their green pointy heads.  To diversify I also put some into daffodils.  The snowdrops, an earlier position that I took, did quite well, and have at least doubled in number and are quite perky to look at.  The star magnolia holds steady, has not increased a lot, certainly not doubled, perhaps its because I had to prune back some in-growing branches last fall.  In any event it always lifts the heart because it comes in so early, and is so reliable.

Edge of the cliff

Maybe France could go into Lybia? The whole place is a mess, since rabble almost never stands a chance against an organized force. We will see what difference air support means. Odd mix, though. Organized but de-motivated ground troops vs motivated rabble with support “angels” (unpredictable and uncontrollable yet overwhelming air power). This could make a fun religious narrative…

I think civilization spends more time than anyone knows on the edge of one cliff or another. But it will be hard for the dollar to collapse since there is no other reserve currency. On the other hand, PIMCO (the big huge bond fund) is selling its dollars, since it doesn’t see anyone else buying dollars. Certainly the Japanese are out of that game for a while, and the main buyers of QEII have been, well, the US. So really we are the only ones buying our debt, which means yes, prices should fall/rates should go up, and this could happen fast.

On the other hand, Europe hasn’t sorted out its problems by a long shot. The best they did was kick it down the road, but we are now very close to (if not at) the point to which the can was kicked last time. The only reason this isn’t major headlines is that it feels like old news and the media is bored with it. We had some excitement in Asia and the Middle East, which allowed concerns here to be brushed under the media rug. Technical analysis (which is usually advanced bunk) suggests that 1.40-1.45 is a historical resistance level for EUR/USD, so the dollar should strengthen vs the EUR from here. I’m not basing the conclusion on the technicals, rather on the fact that both regions have screwed up finances and one has to give. I think it will be the Euro. The US can at least pretend to put together a coherent policy, and since about 1865 or so no-one else takes the thought of a state leaving the Union as a serious possibility (not that any of them could afford to at the moment, given their budget messes).

Yes, money is a commodity, so the funds could flow into something else (cough *gold* cough) but what are you going to do with the gold? It is no longer a currency, despite recent law proposals in Utah. So central banks and the really big players are a bit limited. The rest looks like a big bubble. Gold is also not limited in supply, and we are pulling record amounts out of the earth. Maybe I could write a book “Peak Gold” about the decline of this precious resource? Which is actually worth, well, umm, well, it is shiny, and girls like it, so it makes you look sexy, so it is probably pretty valuable. I wonder if tulips do the same thing? I read someplace that girls like flowers…

Which reminds me of something I read once explaining how tulip mania really wasn’t that irrational. They had so much money floating around and really nowhere else to put it. Tulips sounds better than Florida real estate. One tulip bulb for a house, yes, but a nice high end (not top end, just high end) mercedes will set you back the price of 3 condos in North Port, and has a similar rate of depreciation…

We are seeing this really weird kind of inflation right now. Weird in that inflation IS actually very low (yes, I believe this). It is only prices which are going up!