Jesse tells us that S&P has downgraded long-term U.S. sovereign debt while leaving the current rating for shorter term treasuries (2 years or less) intact. Full report here.
Jesse thinks that this is all a set up for QE3, but I think he's wrong. There's no need for QE3 with this downgrade, and QE3 wouldn't work anyway.
I predict that the long term effect of the downgrade will be that people will pile into 2 year treasuries, driving yields down, just as they did during QE2. At the same time, the yields of 10-year and 30-year bonds will rise, just as they did during QE2. This time, however, those yields will rise a bit (if not much) higher because they are no longer tied solely to the prospects of inflation (which are truly non-existent) but to the risk of default (which is also non-existent). This downgrade is all about creating yield premiums that are not warranted in view of the state of the real economy, making long-term treasuries an attractive investment.
I wouldn't be surprised to see equities continue to sell-off because all the yield you need will be found in long-term treasuries that are priced at a premium when compared to inflation expectations (or should I say deflation expectations).
Screwflation is in full effect.
Showing posts with label Screwflation. Show all posts
Showing posts with label Screwflation. Show all posts
Friday, August 5, 2011
Monday, March 28, 2011
Sorry, Jesse, but Stagflation IS Deflation
"Jesse" of Jesse's Cafe Americain is one of my favorite bloggers out there. He's quite insightful and a bit more left of center than I along some dimensions. Generally, I stand somewhere between Jesse and Charles Hugh Smith on the political belief spectrum.
Today's links at the Cafe Americain include this one to an interview of Jesse over at Chris Martenson's site. The quote that prompted this post is front-and-center at the beginning of the interview:
Stagflation is actually screwflation, which is the financial terrorists' solution to deflation, i.e., a contracting economy from a money supply standpoint. But credit diverted into pure speculation does not spur employment because it shifts aggregate demand into staples and, thus, increases unemployment in non-staple industries even while driving down margins in staple industries (because of increased input costs), which, in turn, drives increased unemployment in staple industries.
We're in a spiral to a deflationary bottom. "Stagflation" is merely a strategy for managing the landing to the benefit of the financial terrorists.
Today's links at the Cafe Americain include this one to an interview of Jesse over at Chris Martenson's site. The quote that prompted this post is front-and-center at the beginning of the interview:
Stagflation has been my forecast for quite some time, as the most likely outcome, with a real protracted deflation or hyperinflation as lesser probabilities.The dead horse I beat constantly is that there is no monetary-based inflation in "stagflation," that the price inflation is caused by the diversion of credit into speculative excess in staple commodities, not by wage inflation, which neoliberals argued to be the cause of the1970s stagflation.
Stagflation is actually screwflation, which is the financial terrorists' solution to deflation, i.e., a contracting economy from a money supply standpoint. But credit diverted into pure speculation does not spur employment because it shifts aggregate demand into staples and, thus, increases unemployment in non-staple industries even while driving down margins in staple industries (because of increased input costs), which, in turn, drives increased unemployment in staple industries.
We're in a spiral to a deflationary bottom. "Stagflation" is merely a strategy for managing the landing to the benefit of the financial terrorists.
Monday, February 7, 2011
Two Views of The Role of Speculation In Creating Food Price Inflation
Predictably, Krugman says "nothing to see here; move along."
Dylan Ratigan begs to differ:
You can see the same video at zerohedge along with Tyler Durden's commentary.
At the beginning of the video, Ratigan features Ben Bernanke's response to the accusation that the Fed's QE2 policy is driving food price inflation, which Bernanke scoffs at in response.
I think Krugman's piece was, in fact, a defense of Bernanke's position. While I actually agree that QE2 is not the direct cause of the clear and rampant speculation in staple commodities, I cannot agree with Krugman that such speculation is not, in fact, happening, that the increase in food prices is actually due to organic supply and demand.
QE2 is not the proximate cause of what is currently happening to in the commodity markets. First, QE2 is really just another way of shoring up the banks' balance sheets (something else Krugman denies). It just doesn't require the American people to borrow the bailout money from the banks and pay them back interest on the money we give them. Second, QE2 just isn't large enough to explain what is happening in the commodity markets.
That being said, leveraged speculation IS the proximate cause of what is currently happening in the commodity markets. The problem with the analyses of both Krugman and Ratigan is that they do not consider the amount of existing money that is pouring into the commodity markets seeking yield. The equity markets are a total joke. They're completely simulated by robot traders, who currently account for 50-70% of all trades on a daily basis, and they're exhibiting very low trading volume and no trend whatsoever (a big reason why a lot of hedge funds are getting out of the game). QE2 intentionally took the bond markets off the table. The real estate market continues to slide, and we're only at the beginning of what will be an ugly commerical real estate market.
All this leaves the commodity markets as the only game in town, and it is a game easily rigged because it influences the availability of real-world supplies of materials.
Dylan Ratigan begs to differ:
You can see the same video at zerohedge along with Tyler Durden's commentary.
At the beginning of the video, Ratigan features Ben Bernanke's response to the accusation that the Fed's QE2 policy is driving food price inflation, which Bernanke scoffs at in response.
I think Krugman's piece was, in fact, a defense of Bernanke's position. While I actually agree that QE2 is not the direct cause of the clear and rampant speculation in staple commodities, I cannot agree with Krugman that such speculation is not, in fact, happening, that the increase in food prices is actually due to organic supply and demand.
QE2 is not the proximate cause of what is currently happening to in the commodity markets. First, QE2 is really just another way of shoring up the banks' balance sheets (something else Krugman denies). It just doesn't require the American people to borrow the bailout money from the banks and pay them back interest on the money we give them. Second, QE2 just isn't large enough to explain what is happening in the commodity markets.
That being said, leveraged speculation IS the proximate cause of what is currently happening in the commodity markets. The problem with the analyses of both Krugman and Ratigan is that they do not consider the amount of existing money that is pouring into the commodity markets seeking yield. The equity markets are a total joke. They're completely simulated by robot traders, who currently account for 50-70% of all trades on a daily basis, and they're exhibiting very low trading volume and no trend whatsoever (a big reason why a lot of hedge funds are getting out of the game). QE2 intentionally took the bond markets off the table. The real estate market continues to slide, and we're only at the beginning of what will be an ugly commerical real estate market.
All this leaves the commodity markets as the only game in town, and it is a game easily rigged because it influences the availability of real-world supplies of materials.
Friday, January 21, 2011
State "Bankruptcy": Headfake for Main Street
There's a bit of buzz going around about several states seeking ways to default on their obligations to public employees while honoring their obligations to bond holders. The discussion is proceeding as if it is about "bankruptcy," but what is really being discussed is selective default. While Yves was among the first to post on the subject a week or two ago, Jesse's post today is more concrete. Make sure to check out this post from Jesse, as well, which contains a pithy put-down of POTUS.
Selective default simply isn't possible. Even under federal bankruptcy laws-- which do not apply to states, who are sovereigns-- the debtor cannot arbitrarily decide which creditors to pay back and how. The creditors have a big say.
Nor is state "default" of any sort desirable. Yet. First, states and municipalities still own a lot of valuable property. Second, retired public employees remain a powerful political force. Third, the money these retired employees spend is helping to prop up state economies. Fourth, and perhaps most importantly for the people pushing the "selective default" non-reality: states and municipalities owe a lot of money to banks and institutional investors.
No, all of this talk is aimed at conditioning the public to accept the privatization of state and local property at pennies on the dollar a la Arizona as the only politically feasible solution.
Of course, the states and municipalities will lease back the property, thus ensuring an additional stream of rents that will actually increase the cost of running state and local governments.
Unfortunately, you can only sell what you own once. In 2012, we'll see the same drama play out again, and this time we may actually see states default, which will lead to the destruction of public unions and pension fund obligations.
One way to look at this is as a replay of 1970s stagflation (aka screwflation), but this time public unions and public property are in the crosshairs.
Selective default simply isn't possible. Even under federal bankruptcy laws-- which do not apply to states, who are sovereigns-- the debtor cannot arbitrarily decide which creditors to pay back and how. The creditors have a big say.
Nor is state "default" of any sort desirable. Yet. First, states and municipalities still own a lot of valuable property. Second, retired public employees remain a powerful political force. Third, the money these retired employees spend is helping to prop up state economies. Fourth, and perhaps most importantly for the people pushing the "selective default" non-reality: states and municipalities owe a lot of money to banks and institutional investors.
No, all of this talk is aimed at conditioning the public to accept the privatization of state and local property at pennies on the dollar a la Arizona as the only politically feasible solution.
Of course, the states and municipalities will lease back the property, thus ensuring an additional stream of rents that will actually increase the cost of running state and local governments.
Unfortunately, you can only sell what you own once. In 2012, we'll see the same drama play out again, and this time we may actually see states default, which will lead to the destruction of public unions and pension fund obligations.
One way to look at this is as a replay of 1970s stagflation (aka screwflation), but this time public unions and public property are in the crosshairs.
Wednesday, November 3, 2010
Answer: Screwflation
Question: What do bankers call price inflation caused by commodity speculation?
Seriously. I'm not making this up. I heard it from a banker I work with at Credit Suisse.
Now that the next round of quantitative easing has arrived, expect all of the money the banks get from the Fed to be poured into the commodity markets. The size of QE2 is insufficient by itself to address the coming debt write-downs. And, regardless of size, QE2 would not have enticed businesses and individuals to take on more debt. That leaves financial speculators as the only people out there willing to borrow.
Although the amount of money manufactured by QE2 seems significant, it will have no velocity and will not cause inflation directly. What we'll be seeing is screwflation.
Seriously. I'm not making this up. I heard it from a banker I work with at Credit Suisse.
Now that the next round of quantitative easing has arrived, expect all of the money the banks get from the Fed to be poured into the commodity markets. The size of QE2 is insufficient by itself to address the coming debt write-downs. And, regardless of size, QE2 would not have enticed businesses and individuals to take on more debt. That leaves financial speculators as the only people out there willing to borrow.
Although the amount of money manufactured by QE2 seems significant, it will have no velocity and will not cause inflation directly. What we'll be seeing is screwflation.
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