No banks failed tonight, so I thought I’d give you a reading list instead. I desperately tried to weave some narrative structure together, but it still looks like a reading list.
Did you catch Krugman’s op-ed yesterday? He titled it The Big Inflation Scare, and it should sound familiar. Krugman says:
Banks aren’t lending out their extra reserves. They’re just sitting on them — in effect, they’re sending the money right back to the Fed. So the Fed isn’t really printing money after all.
…
All in all, much of the current inflation discussion calls to mind what happened during the early years of the Great Depression when many influential people were warning about inflation even as prices plunged. As the British economist Ralph Hawtrey wrote, “Fantastic fears of inflation were expressed. That was to cry, Fire, Fire in Noah’s Flood.” And he went on, “It is after depression and unemployment have subsided that inflation becomes dangerous.”
Where does this put us? Well, we’re still screwed on multiple fronts. Rolfe Winkler has a guest post at Naked Capitalism, Keynesians, Please Exit Stage Left. The entire post is worth a read. The part I particularly like:
Economists love the idea that the Fed is all powerful, that it has some magic wand to wave which can rescue Americans from debt deflation. I suspect this is because, deep down, they harbor ambitions to be Fed Chairman themselves. For most economists, the Fed’s printing press is the ultimate toy….one they’ve always wanted to play with.
And it is a powerful one. Most recessions are easily “solved” because the Fed can always use that printing press to inflate a credit bubble, to inflate demand artificially. This works great until it doesn’t. Eventually the credit bubble becomes so big it’s simply impossible to sustain with more printing.
If you want to know what kind of economist you are, ask yourself the questions:
Is the increase in aggregate demand generated by the Fed policy really artificial?
Why (not)?
And, while I’m asking you to think about economics, think about this: If the government were to issue a tax rebate to every American for $300, and every American sent a thank you note in the form of an email haiku to the President, the impact on GDP would be fairly small (a significant number of people will save the money, so it doesn’t count for GDP). However, if instead, the government purchased a haiku via email from every American for $300, GDP goes up by the same amount as the rebate check, plus $300 for every American. The fact that the $300 check was a purchase instead of a rebate changes how it is counted. George Bush did stimulus wrong.
So, what happens in a deflationary debt unwind? Shouldn’t prices drop? Why isn’t oil still at $30 a barrel? It could be that the oil supply is shrinking faster than the money supply. There seems to be an absurd amount of extra oil hanging around, though. Phil has a guest post at Zero Hedge that looks into this, titled The Good, The Bad And The GDP. It has a lot of good bits. Here’s one:
Of course this strategy blew up in their face and we had to bail them out when it collapsed, but not before the American people were forced to spend over $4Bn a day for petroleum products last summer - that’s $800Bn we’ll never see again - enough money to employ 16M US citizens with $50,000 jobs or enough to pay 12 Arab Sheiks and 1,000 Wall Street bonuses. Guess what they chose and guess what they are choosing again? It was also enough money to destabilize the balance of trade, throw this country into massive debt, crash the housing market and (in the one positive outcome) finally threw the Republicans out of power. Are the Democrats about to prove that they are no better? Can the same nonsense really go on less than one year after we “learned our lesson”?
It’s a punch in the gut to see the amount spent on oil imports converted into a jobs number. I sold some covered calls on USO (crummy oil ETF) a while ago. I don’t recommend USO. It is a terrible way to get oil exposure in your portfolio. Stupid mistake (though it looks like I’ll make about 20% on the trade—better to be lucky than smart). Things like GLD and SLV (gold and silver ETFs) actually get good exposure to the underlying without suffering from the same problems as USO. They actually hold gold and silver in vaults. USO holds futures contracts (not stored barrels of oil) and has to roll them over every month. This gets very expensive, and a significant percentage of your investment into the ETF will get lost in this process. Fortunately for me, oil has gone up considerably since I bought the stock. I can’t wait until my call options expire and I am forced to sell.
Where was I (aside from finished with the arrogant bastard and moving on to the porter?)? I was going back to deflation. Imagine I used the unemployment rate as a deflationary pressure argument. It would have gone something like this: People without jobs can’t spend money frivolously. This weighs on the consumer. That’s bad for economic activity. It’s also deflationary, because it increases demand for cash relative to other things. Also, unemployed people are more likely to default on their debts. This is deflationary by definition. It will also cause credit to tighten. Hey, there’s the segue I was looking for: defaults and tightening credit. I found this bit from the WSJ: Another Milestone: U.S. Corporate Defaults to Date Match Total for All ‘08. I don’t even need to quote from that. You know it’s bad. Click on it to see the list. Ford is in there. I didn’t really know that.
Finally, I need to link to A Return to a Nasty External Dynamic? by Tim Duy. I saw more links to this today than anything else. The first paragraph is rather ominous:
At the moment, the economic dynamic is exceedingly complicated. An understatement, I fear. The crosscurrents in the data and the markets are treacherous, and I suspect will have Fed officials scratching their heads. Hold steady with existing plans? Step up the liquidity provisions? More actively engage plans to tighten policy? The latter option seems almost inconceivable; for the moment, the debate will focus on the issue of further easing. At this point, I think the Fed will sit tight, allowing further easing to come from the already active TALF program, rather than expanding outright purchases of Treasuries.
And it gets better (the writing, not the outlook) from there. Things are complicated.
