Sunday, February 12, 2012

General Write-Ups - The Foxy Central Bankers / Mainstream E-con-omists

Over the last few weeks, a lot of debate has been on-going on the blogosphere as to whether low / near zero rates have helped improve the economy or fuelled inflation and wrecked the economy. The deflationist arguments [most prominently from EWI and some puritan Keynesian e-con-omists] argue that credit squeeze is a leading barometer of deflation. The jobs data also tend to reflect things in good order. Proponents of inflation point to decreasing purchasing power - so what exactly is the real thing?

Well I am no economist to be able to spell out a very articulate document but will just put in some insights that prove that as far as the common man is concerned, across the globe, the inflation theory is in good order for now.

[With near-zero rates, obviously I am referring to the fiat currency nations]
Let us first examine some of the basic tenets measured by the deflation argument that says that near-zero rates have helped the economy.

The first argument is that the asset bubble has been burst well with the dot-com bust and the real estate market crash. The second points to some nice looking graphs that prove that central bankers are close to the low inflation targets. First and foremost, it is still unclear on what basis are mainstream economists central bankers saying that economic growth has been good and that inflation as been pretty much under control. Then there is the argument that a basket of goods needs to be taken into account to arrive at figures [and most calculations are on WPI basis and not what the end-consumer pays]

First, Real Estate did see a big boom as well as bust [and housing prices in many areas are yet to find a bottom as there is excess supply and hardly any demand growth]. So if one assigns a high weightage to that, then it is very easy to say that inflation has gone down. Crude has fluctuated between USD 30 and USD 150 a barrel depending on cycles but that is still way ahead of what crude prices were a decade ago - so the central banker's hypothesis that inflation is under check already goes for a big toss here; gasoline is an integral part of the consumption cycle and hence a major contributor to inflation.

Second, one just needs to look at the price of essential items like corn, soybeans, rice, wheat and these prices have more than doubled over the last decade. It doesn't matter what the graph of the CRB Index [elite Elliotticians like to chalk out a wave structure to this and point to the deflation argument] looks like and how much it has dropped - the bottom line is people have had to spend anywhere between 5% and 10% more per annum as far as supermarket purchases of essential needs are concerned.

The other argument usually leans towards the Dollar Index that moves anywhere between 0 and 100 and tends to throw up a mirage that currencies are adjusting against each other; just look at the price of gold; whilst it may not have utility value as a commodity, the bottomline is mankind still values gold as the true reflector of wealth and a standard measure of inflation. Agreed that the price of gold is certainly over-heated and is due for a correction [my hyptothesis is that a lot of pressure on gold prices stems from the fact that there are excessively leveraged ETFs / Hedge Funds in Long Gold that in due course of time will go through the process of deleveraging and easing gold prices] That being said, will we ever return to an era when the price of gold will be under USD 400 an ounce???

Did the dollar appreciate against the euro or yen against the dollar or whatever - an emphatic no; regardless of fluctuations in these currency exchange rates and the dollar index, the price of gold is pretty much the straight forward reflector that ALL G-8 currencies HAVE FALLEN tremendously. The more central bankers activate the printing press, the greater will be the upside pressure on Gold and all essential commodities.

We have come to an era where our lives are completely under control of the banksters [be it private or central] In recent times, reporters point out to rising consumer credit due to spending via credit cards etc - have we scratched beyond surface as to what those spendings maybe???? The number of people out of labor force have increased so tremendously that they are having to utilize credit cards to pay utility bills and make purchase of essential goods - the amount of individual consumer credit defaults are simply enormous; people are reneging on their credit obligations to banks [be it mortgage, be it credit card debt or car loans]

Hedge Funds are collapsing, enterprises are shutting down and laying off employees, bonuses are taking steep cuts - and yet, the markets seem to be on a roll. So in a way, the deflationists SEEM to be correct HOWEVER the end consumer is not seeing a dime of savings on basic grocery and utility bills.

What the near-zero rates have done is simply provided banks with no-frills cash but that is not translating into business credit. It is only fuelling asset bubbles [first the internet was thought to be a perpetual cash machine, then real estate was considered to be a money spinner and now it is trickling into commodities]

The classical economic model that suggests that mild inflation is good banks upon the old theory of the 'multiplier effect' which would be true if enterprises were indeed flourishing, goods and services changed hands well and people were employed. The stock market is not physics agreed but models need to be altered over time with changes that are taking place in the world. Surely Newtonian Physics was absolutely the best model until Einstein brought in the theory of relativity; the smarter world embraced the change and moved accordingly - this is the first major flaw IMHO as far as mainstream economists and central bankers are concerned on a fundamental level. Of course they are all well learned, possess doctorates and undoubtedly smart and intelligent people - but have they learned to adapt and move ahead with times???? - I don't think so. In a world of relativity, proven literallly undisputed, they are trying to enfore Newtonian Models!!! [What to do??? That is the only model they studied for over decades for doctorates!!!!]

The other part certainly has to do with the fact that politicians and mainstream bankers unequivocally TWIST the arms of central bankers left, right and centre for personal gains.

Typical Central Banker's Basket of Goods/Services to Measure Inflation [just a rudimentary analysis and not a Big 5 consulting model with statistical jargon - I prefer the kick my beer gives me than intellectual m$@&^btion]

Year1:

Average Earning: USD 50000 per annum
Expense on Rental / Mortgage: USD 20000
Expense on Gasoline: USD 3000
Expense on Food and Essentials: USD 10000
Leisure Expenditure: USD 5000
Healthcare and Childcare: USD 10000
Expense / Earnings: 96%

Year2:

Average Earning: USD 55000 per annum [10% increase]
Expense on Rental / Mortgage: USD 22000
Expense on Gasoline: USD 4000
Expense on Food and Essentials: USD 11000
Leisure Expenditure: USD 5000
Healthcare and Childcare: USD 10000
Expense / Earnings: 94%
[Wonderful - hardly any inflation!]

Year3:

Average Earning: USD 60000 per annum [9% increase]
Expense on Rental / Mortgage: USD 22000
Expense on Gasoline: USD 3000
Expense on Food and Essentials: USD 13000
Leisure Expenditure: USD 7000
Healthcare and Childcare: USD 12000

Expense / Earnings: 96%
[Wonderful - moderate inflation!]

Year4:

Average Earning: USD 25000 [a lot of people lost jobs and are on social security]
Expense on Rental / Mortgage: USD 0 [people reneging on debt obligations]
Expense on Gasoline: USD 1000
Expense on Food and Essentials: USD 8000
Leisure Expenditure: USD 0
Healthcare and Childcare: USD 7000
Expense / Earnings: 100%
[Wonderful - moderate inflation despite a weak economy]

Now can somebody please tell me where the @$%# is the multiplier effect [I can only see the multiplier effect in debt and in commodities]; a person can renege on mortgage, a person can renege on credit card debt but can he renege on food and essentials? Maybe the brand choices will change and more private label consumption can come through, but the inflation bug is always looming around. Asset values in terms of housing prices may change and imply change in net worth but again as I mentioned above, just look at how much one has to pay at the supermarkets for a basket of goods. For the same basket of goods, year on year the prices have been escalating to the north. And if we take a representative sample of people under all economic classes, except for the millionaires and billionaires who keep shoving money around, pay packages are dropping and people are a fix to build sustainable lives!

President after president in the US keeps reiterating that every cent of the debt will be paid when treasuries are due to be auctioned or new bonds are being issued for some 'stimulus scheme'. For 7 decades this has been happening now and all that we are seeing is old debt being rolled over into new debt - but not a cent is repaid back in principle because rolling over debt is as good as printing money. The US of course has the advantage of the US Dollar being the mainstream currency of the globe [and that keeps a demand for dollars intact in the market] Everybody is intoxicated and the realities are forgotten. Likewise, with the UK - all that they have been doing is printing money to keep rolling over the debt and these measures do not stimulate the economy. If anything, they wreck the lives of common people who are left jobless, or have mortgages beyond the corrected values and incomes - yet the bulls seem to be on a party.

All this of course is largely fueled by the emerging economies who need to boost exports and hence keep lapping up the treasuries of central banks that can be used as collateral to extend lines of credit for exports. So far so good but the day is not far when this trust will go. The US and UK are 2 leading forces that have an uncanny ability to divert people's attention with wars etc and try to maintain military hegemony; Millions and billions of dollars are spent on space shuttles and nuclear weapons that are best left avoided - in such troubling times, how does it matter whether there is life on Mars when we have so many hungry and jobless people left on ground.

If zero-interest rates indeed helped stimulate an economy, why does a fantastic company like Hertz [a car rental company] denied a bailout when it was cash-strapped [the banks found the fundamentals poor]? And yet, the very banksters' private equity divisions took out a Leveraged Buy Out [LBO] of the firm as a distressed asset and then boasted of turning it around in a couple of years. [so you see what I am getting at? the near zero rates only help bankers to get access to cheap cash, shove it around the way they want - and of course pay a far lower tax rate for being able to shove the money around!!!] Now Hertz is just one example I have right now and GOD alone knows how many small and medium sized enterprises lost out their businesses due to lack of access to credit and ultimately liquidated the business as a distress sale.

Who pays the price for these near-zero rates and bankers profits? Of course it is the tax payers with or without jobs. Nevertheless, this article has gone too far and the bottom line is very very clear - politicians, central bankers and mainstream economists very nicely manage to convince the public at large that 'All is Well' and that they have the interest of people at large in mind - Sorry that is not the case and the faster people learn to challenge the real truth - the better.


A major trend with the current economic situation is that the younger people are out of the work force and the minimum wages deter them to put in those hours of work as the benefits of social security pretty much match the minimum wages and this is slowly translating into a vicious death spiral for the economy. That being said, inflationary pressure on essential goods will keep increasing with money printing. The deflation argument will only take effect if at some point of time, there are countries that say - sorry we are not interested in lapping up Dollars, Euros, Pounds or Yen. Unless people at large simply give up these currencies completely and display an absolute lack of trust - the paradigm shift won't take place.

So it is in our best interest to plan our own financial future, no matter where we are and learn to ignore noises from the e-con-omists [they are living in a different world and their mind clocks are still stuck in old times of their Keynesian economics studies!]

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