Christopher S's List: Economics and Statistics

• hinese military officials want to "punish" America by selling Treasuries, Asia Times Online is reporting that an explicit directive by the Chinese government has notified reserve managers to sell all risky US assets, including asset backed and corporates, and just hold on to explicitly guaranteed Treasuries and Agency debt.
• China will now focus on doing precisely the opposite of what America would urge Chinese authorities to do, in order to establish itself as the focal point of negotiating leverage and increasingly humiliate the Obama regime.
• The China Securities Journal, a government-backed daily, accused the U.S. in a tough-worded front page editorial of playing the "exchange rate card."

  
  

  It said that, just as China didn't interfere with Federal Reserve purchases of U.S. Treasuries, "the U.S. has no right to interfere in China's exchange rate policy."

1 more annotation...

• in 2008 for the first time ever non-OECD countries surpassed OECD countries in terms of global energy consumption as the developing nations became more important than the developed countries in gauging world energy consumption.
• 
• 
• 
• 
• 
• using the price and time pattern for the last secular bull market in commodities signals an end for the current bull market in commodities in 2014-2015.
• 
• 
• 
• 

9 more annotations...

• if too many and too big homes were built at the expense of other possible uses for those inputs — then government financial transfers per se won't do anything except redistribute the losses.
• The basic Austrian story is that during the artificial boom, workers' labor and other resources get channeled into investment projects that aren't compatible with the overall level of real savings. Sooner or later, reality rears its ugly head, and the unsustainable projects have to be abandoned before completion. Entrepreneurs realize they were horribly mistaken during the boom, everybody feels poorer and slashes consumption, and many workers get thrown out of jobs until the production structure can be reconfigured in light of the revelation.
• But, Krugman explains, people in the economy have to spend their income somewhere. If the income isn't going towards $10 million office buildings, it must be getting channeled into movie tickets, or electric generators, or copies of Peter Schiff's book. So it's not at all obvious, Krugman concludes, why massive unemployment should accompany the onset of the "hangover" from the credit binge. The jobs destroyed in the "higher-order" (in Austrian jargon) stages ought to be offset by newly created jobs in the lower-order stages.
• Cowen wants to know why people should feel rich during the Fed-induced boom, as the Austrians allege. In fact, because workers and materials are shifted into producing higher-order goods like tractor trailers and orange cones for road crews, the fact of scarcity implies that there should be fewer consumption goods (TVs, steak dinners, sports cars) being cranked out when the boom first sets in. If fewer consumption goods are being produced, then per capita real income has to fall, which again is the opposite of what the Austrians claim.
• they are ignoring the all-important notion of capital consumption.
• let's examine a hypothetical island economy composed of 100 people, where the only consumption good is rolls of sushi.
• The islanders believe this increase is due to use of the motor, but really it's mostly due to the rearrangement of tasks.
• He finally got the crowd to disperse by talking about "Cobb-Douglas production functions" and drawing IS-LM curves in the sand.
• The 5 people looking for ways to synthesize gasoline and motor oil will have to abandon that task, because it was never appropriate for the islanders' primitive capital structure.
• in modern economies workers use capital goods to augment their labor as they transform nature's gifts into consumption goods. Because of the time structure of production, it is possible to temporarily boost everyone's consumption, but only at the expense of maintaining the capital goods (the boats and nets), which are thus "consumed." At some point, engineering reality sets in, and no "stimulus" policies can prevent a sharp drop in consumption.

  • This is the key point.
• When the islanders first implement Krugman's advice, they all feel richer. After all, they really are eating 6 rolls per day instead of 5; there is no arguing with results.
• This is analogous to the arguments about the "New Economy" during the dot-com boom, or the confidence placed in the new financial instruments used during the housing boom.
• This is analogous to Americans' consuming a massive amount of imported consumption goods during the housing boom, because they erroneously thought their rising house values would more than compensate. In other words, had Americans realized that their real-estate holdings would plummet in a few years, they would not have consumed nearly as much.
• But during a central-bank-induced boom, there hasn't been real savings to fund the new investments. That's why the boom is unsustainable, but it also explains why consumption increases at the same time.
• The elementary flaw in Krugman's objection is that he is ignoring the time structure of production.
• People in grad school would sometimes ask me why I bothered with an "obsolete" school of thought. I didn't bother citing subjectivism, monetary theory, or even entrepreneurship, though those are all areas where the Austrian school is superior to the neoclassical mainstream. Nope, I would always say, "Their capital theory and business-cycle theory are the best I have found." Our current economic crisis — and the fact that Nobel laureates don't even understand what is happening — shows that I chose wisely.

14 more annotations...

• In his April 18 New York Times op-ed, Harvard professor (and Bush adviser) Greg Mankiw calls on the Federal Reserve to promise future inflation, in order to fix the economy.
• Mankiw's op-ed is chock-full of faulty analysis
• Recessions result from an insufficient demand for goods and services
• The problem with negative interest rates, however, is quickly apparent: nobody would lend on those terms.
• Unless, that is, we figure out a way to make holding money less attractive.
• there is a more prosaic way of obtaining negative interest rates: through inflation.
• Suppose that, looking ahead, the Fed commits itself to producing significant inflation. In this case, while nominal interest rates could remain at zero, real interest rates — interest rates measured in purchasing power — could become negative. If people were confident that they could repay their zero-interest loans in devalued dollars, they would have significant incentive to borrow and spend.
• Perhaps the single biggest mistake in Mankiw's worldview is his treatment of the interest rate as merely a brake or governor on "spending."
• But in reality, interest rates coordinate production and consumption decisions over time. They do a lot more than simply regulate how much people spend in the present
• A related problem is that Mankiw doesn't explain why we just so happen to be in "the worst recession since World War II." His article gives the impression that golly gee, consumers just decided to stop spending money, and so the Federal Reserve has to hit Ctrl-Alt-Delete.
• we are in our current mess because of the very same "medicine" that Mankiw proposes.
• Because the Federal Reserve pushed down interest rates below their free-market levels, the complex capital structure of the economy was steered into an unsustainable configuration.
• But if you make the effort to study the Mises-Hayek approach to capital, you will see all that Mankiw's simplistic analysis leaves out. You will understand why the boom period is actually wasteful and unsustainable, and the bust period is the market economy's attempt to salvage the best of a bad situation.
• Remember, the Fed's printing of new money doesn't create more physical resources; it simply gives the big banks more dibs on bidding those resources away from other potential users.
• Mankiw's analysis is the suggestion that the Fed needs to inflate in order to give households the ability to save!
• It is no coincidence that Mankiw's worldview leads him to literally propose destroying the currency in order to fix the economy.
• he subscribes to the basic Keynesian aggregate-demand framework shared by all mainstream economists — whether at MIT or Chicago — he doesn't recognize the horrible implications of his proposals.

15 more annotations...

• Also overlooked was Hyman Minsky, another 20th century economist who asserted that financial markets are inherently unstable and, in turn, can destabilize the real economy.
• • Interesting, might want to read up on Minsky
• Austrian view
• The only prevention for boom and busts are sound money, which is impossible with government-controlled central banks. Once the bust comes, the only cure is to let it run its course; allow the malinvestments go bankrupt and let the market reallocate the capital to productive uses.
• But the Austrians were the ones who could see the seeds of collapse in the successive credit booms, aided and abetted by Fed policies, especially under former chairman Alan Greenspan.
• As the credit expansion pumped up asset values to unsustainable levels, the eventual collapse would result in a contraction of credit as losses decimate banks' balance sheets and render them unable to lend. That sounds like an accurate diagnosis of the current problems.
• Austrian economists assert the current crisis is the inevitable result of the Fed's successive efforts to counter each previous bust.

5 more annotations...

• Since August 15, 1971 the US dollar has been an irredeemable paper currency. Every irredeemable paper currency in history has failed. Yet, the experiment of the US dollar and the rest of the fiat paper world continues.
• Through its monetary policy, the Fed is trying to bail out an insolvent and illiquid banking system to maintain an unsustainable structure of production.
• In order to assess the ammunition left, one should have a look at the balance sheet of the Federal Reserve — especially at the assets the Fed can still obtain. The Fed's balance sheet also gives insights on the condition or quality of the dollar.
• the assets the Federal Reserve holds have deteriorated tremendously. These assets back the liability side of the balance sheet, which mainly represents the monetary base of the dollar.
• n the first stage of the crisis that lasted until September 2008, the Federal Reserve did not increase its balance sheet. Instead, the Fed changed its balance sheet's structure.

  • Good analogy
• The Federal Reserve sold good assets in order to acquire bad assets. The good assets were not gold but mainly the still highly-liquid US treasury bonds in the category of "securities held outright."
• 
• Thus, the average quality of the Federal Reserve balance sheet deteriorated in the first stage of the crisis
• Later the Fed decided to supplement the AMLF with the Commercial Paper Funding Facility (CPFF). Now unsecured commercial paper is also eligible as collateral. (Unsecured commercial paper is not backed by specific assets but only by the name of a company.)
• Quantitative easing is when a central bank with interest rates already near zero continues to buy assets, thus injecting reserves into the banking system. In fact, quantitative easing is a subsection of qualitative easing. Qualitative easing can be defined as the sum of the policies that weaken the quality of a currency.
• This figure implies an increase of the Fed's leverage from 22 to 50. As we have seen there are large new positions of dubious quality on the Federal Reserve balance sheet. More specifically, should only 2% of the Fed's assets go into default — or if there is a loss in value of 2% — the Fed becomes insolvent.
• The other possibility is concealed in the hidden reserves of the Fed's gold position, which is only valued at $42.44 per troy ounce on the balance sheet. A revaluation of the gold reserves would boost the equity ratio of the Fed to 12.35%
• It is ironic that in troubled times a revaluation of the "barbarous relic" could save the Fed from insolvency.

11 more annotations...

• CENTRAL bankers were compelling figures in the 1920s, not least because they preferred to operate in secret.
• Benjamin Strong, Norman’s principal collaborator, ran the Federal Reserve Bank of New York, which was responsible for America’s international financial relationships.
• Norman and Strong were wedded to the gold standard.
• The quartet, united by a belief that they knew best, had persuaded the great powers to leave the fate of their economies to the antique workings of the gold standard—“a barbarous relic” in the view of John Maynard Keynes.
• The problem was that there was not enough gold to finance world trade. Stocks were concentrated in America and France, and countries like Britain, where it was scarce, had to borrow heavily, and to adjust interest rates and government spending at the expense of employment in order to replenish gold reserves.
• he writes that the Great Depression was “the direct result of a series of misjudgments by economic policymakers…by any measure the most dramatic series of collective blunders ever made by financial officials.”
• George Warren, whose study of long-term trends in commodity prices led him to believe that, since falling prices were associated with depression, recovery ought to be encouraged by rising prices. The president liked the idea and decided to devalue the dollar—despite vigorous opposition from the gold bugs—simply by increasing the gold price.
• likens central bankers to Sisyphus. This was the man whom the gods condemned to roll a large stone up a steep hill only for it to roll down again when it reached the peak. These great central bankers were so wedded to a dogma that they were incapable of imagining its failure.

6 more annotations...

• I will   note that the eternal default position on economic crises – the   Keynesian one – arises because academic economists foolishly have   rejected Austrian Economics and the wise counsel it provides.
• In order   to even comprehend the Austrian claim, the mainstream economist   needs to discard the simplistic homogeneous notion of the capital   stock, and seek a richer framework that reflects the time structure   of production. In a modern economy, if we picked a random consumer   good off the store shelf, it would probably have a "life history"   going back many years, and involving thousands of workers handling   resources originating in dozens of countries. (Leonard Read's   wonderful essay "I,   Pencil" is apposite.)
• There really is no such thing as "aggregate demand" or   "aggregate supply"; they are figments of economists’ imaginations.)
• I read The   Biggest Con by Irwin Schiff,
• In fact, almost all modern   economists have grown up in a time when fiat "money"   has been the norm.
• Austrian Capital Theory and the Austrian Theory of the Business   Cycle.
• The   Keynesian "solution" is a disaster which is made worse   because most academically-trained economists are ignorant of the   causes of the problem and, thus, are not intellectually equipped   to recommend the needed steps to put the economy back into balance.
• In my view, the reason they get them wrong is   because most economists do not have a clue as to understanding money
• We have a financial   and economic crisis that is going to turn into a major depression   because the economic mainstream is intellectually incapable of understanding   causes and solutions

7 more annotations...

• serves as a medium of exchange, is universally acceptable to  all participants in an exchange economy as payment for their goods or services,  and can, therefore, be used as a standard of market value and as a store of  value, i.e., as a means of saving
• medium of exchange should be  durable
• metal is generally chosen because it is homogeneous and  divisible
• use of a single medium is  highly advantageous for the same reasons that a money economy is superior to a  barter economy: it makes exchanges possible on an incalculably wider scale
• A free banking system based on gold is able to extend credit and thus to  create bank notes (currency) and deposits, according to the production  requirements of the economy
• Whether the single medium is gold, silver, seashells, cattle, or tobacco  is optional, depending on the context and development of a given economy
• under  the gold standard, a free banking system stands as the protector of an  economy's stability and balanced growth.
• so long as there are no  restraints on trade or on the movement of capital

  • Big caveat here. Most gov'ts do restrict the movement of gold so there is a tendency for a true free banking system not to exist, even under the most ideal circumstances experienced in the past.
• For example, if banks  in one country extend credit too liberally, interest rates in that country will  tend to fall, inducing depositors to shift their gold to higher-interest paying  banks in other countries
• Compared with the depressions of 1920 and 1932, the pre-World War I business  declines were mild indeed.
• process of cure was misdiagnosed as the disease: if shortage of  bank reserves was causing a business decline — argued economic  interventionists — why not find a way of supplying increased reserves to  the banks so they never need be short
• Credit extended by  these banks is in practice (though not legally) backed by the taxing power of  the federal government.
• When business in the United States underwent a mild contraction in 1927,  the Federal Reserve created more paper reserves in the hope of forestalling any  possible bank reserve shortage. More disastrous, however, was the Federal  Reserve's attempt to assist Great Britain who had been losing gold to us  because the Bank of England refused to allow interest rates to rise when market  forces dictated (it was politically unpalatable).
• The excess credit which  the Fed pumped into the economy spilled over into the stock market, triggering  a fantastic speculative boom.
• As a result, the American economy collapsed.
• If the gold standard had not existed, they argued, Britain's  abandonment of gold payments in 1931 would not have caused the failure of banks  all over the world. (The irony was that since 1913, we had been, not on a gold  standard, but on what may be termed "a mixed gold standard"; yet it is gold  that took the blame.)
• the realization that the gold standard is incompatible  with chronic deficit spending (the hallmark of the welfare state)
• welfare statists were quick to  recognize that if they wished to retain political power, the amount of taxation  had to be limited and they had to resort to programs of massive deficit  spending, i.e., they had to borrow money, by issuing government bonds, to  finance welfare expenditures on a large scale.
• the amount of credit that an economy can support  is determined by the economy's tangible assets, since every credit instrument  is ultimately a claim on some tangible asset.
• The abandonment of the gold standard made it  possible for the welfare statists to use the banking system as a means to an  unlimited expansion of credit.
• The  holder of a government bond or of a bank deposit created by paper reserves  believes that he has a valid claim on a real asset. But the fact is that there  are now more claims outstanding than real assets.
• In the absence of the gold standard, there is no way to protect savings  from confiscation through inflation. There is no safe store of value
• Deficit spending is simply a scheme for the confiscation of wealth.

21 more annotations...

• Nobel Laureate Milton Friedman of the seminal A Monetary History of the United States, has worked with the National Bureau of Economic Research since 1941,
• It's like there's a bunch of guys that are making it up as they go along
• With the bailouts of Bear Stearns, AIG, and the failure of Lehman Brothers, we have yet to receive a full explanation of the reasons for either rescuing the banks or, in the case of Lehman, letting them fail.
• The Federal Reserve has used its balance sheet in ways never before seen, leveraging it by 25%.
• The problem comes from the introduction of new instruments and the difficulty in pricing these securities or pools of mortgages.

  • If that's the problem, then why are regulators focused on stabilizing housing prices. Rather, they should focus on these instruments and let housing prices fall where they may. Perhaps?
• There was no way of evaluating what effect a downturn would have on the derivatives markets and their counterparties. Few who deal in the derivatives market have a clear notion of their responsibilities.
• The problem comes from a lack of ability to price the instruments, not a lack of liquidity.
• the week ended Oct. 1, the banks had $167 billion of balances with the Federal Reserve, whereas on July 2 there was only $14 billion.
• We arguably have an obligation to help clean up Europe because we persuaded investors there to buy these securities, because of their high ratings, and they've been left high and dry.
• there's too little information about how these loans are being made
• How are they going to price the assets that the Treasury ultimately purchases? No one has come up with a way to price these new securities. Now, however, the bad-asset programs seem to have been set aside in favor of a program to recapitalize financial institutions.
• But won't all these multi-billion-dollar programs in time create inflation?
• The Fed pooh-poohs inflation because of a perceived slowdown in oil and gas prices. But theoretically any increase in the monetary base must be met with a tightening if inflation is to be avoided.
• They're not even considering inflation.
• he program now is to recapitalize financial institutions on the questionable premise that the accounting of potentially bad assets on the bank balance sheets is correct and accurate.
• The current program offers no way of determining who is solvent and who is insolvent. We have a dilemma.

14 more annotations...

• Peter Schiff
• This crisis resulted from government reluctance to regulate the unbridled greed of Wall Street
• Absent from such conclusions is the central role the government played in creating the crisis.
• Our leaders irrationally promoted home-buying, discouraged savings, and recklessly encouraged borrowing and lending, which together undermined our markets.
• over the past generation, government has removed the necessary counterbalance of fear from the equation
• created advantages for home-buying and selling and removed disincentives for lending and borrowing
• are the mortgage interest tax deduction and the exemption of real estate capital gains from taxable income
• slashing interest rates to 1 percent and holding them below the rate of inflation for years, the government discouraged savings and practically distributed free money
• But given our already staggering debt burden, perhaps more loans are not the answer.

7 more annotations...

• This is especially critical in deciding how the government will set the price for the assets it purchases. An impaired mortgage security might yield 65 cents on the dollar if held to maturity. But because the market is so illiquid and suspicion about mortgage values so high, it might fetch just 35 cents in the market today. Recapitalising banks would mean paying as close to 65 cents as possible. Those that valued them at less on their books could mark them up, boosting their capital. On the other hand, minimising taxpayer losses would dictate that the government seek to pay only 35 cents. But this would provide little benefit to the selling banks, and those that carried them at higher values on their books could see their capital further impaired.
• That’s one reason Japan’s many efforts to bail out its banks failed to revitalise its economy: the institutions that took over the loans were hesitant to dispose of them for fear of pushing insolvent borrowers into bankruptcy, says Takeo Hoshi of the University of California at San Diego.

• What's missing is the role politicians and policy makers played in creating artificially high housing prices, and artificially reducing the danger of extremely risky assets.
• Beginning in 1992, Congress pushed Fannie Mae and Freddie Mac to increase their purchases of mortgages going to low and moderate income borrowers. For 1996, the Department of Housing and Urban Development (HUD) gave Fannie and Freddie an explicit target -- 42% of their mortgage financing had to go to borrowers with income below the median in their area. The target increased to 50% in 2000 and 52% in 2005.
• annie and Freddie were important contributors to the demand for subprime securities.
• Community Reinvestment Act (CRA)
• First passed in 1977, the CRA was "strengthened" in 1995, causing an increase of 80% in the number of bank loans going to low- and moderate-income families.
• Fannie and Freddie were part of the CRA story, too. In 1997, Bear Stearns did the first securitization of CRA loans, a $384 million offering guaranteed by Freddie Mac. Over the next 10 months, Bear Stearns issued $1.9 billion of CRA mortgages backed by Fannie or Freddie. Between 2000 and 2002 Fannie Mae securitized $394 billion in CRA loans with $20 billion going to securitized mortgages.

  • Fannie and Freddie along with Bear Stearns were the genesis of securitization of bad mortgage debt - backed by US gov't guarantees.
• Fannie and Freddie and the banks opposed these policy changes at first through both lobbying and intransigence.

5 more annotations...

• we remain convinced that the US is ultimately going to face a funding issue down the road
• May of 2006, 100% of foreign purchases of US Treasuries were undertaken by Brazil, Russia, India, China and OPEC. Japan was a net seller over the period.
• We suggest that one of the most important consumer confidence surveys of the moment is the monthly tally of foreign purchases of US financial assets.
• • Could not agree more
• Although we know we have covered this in the past, we believe it's critical to keep an eye on foreign capital flows into US financial markets.
• data is current through July
• beginning last summer, Treasuries have been the asset class of choice for the foreign community
• 90-day T-bill yields kissed .2% in trading a few weeks back in what was clearly a panic run into the short end of the Treasury market
• Although we’re guessing, if gold zooms higher from here, we’d take it as a sign the markets have lost considerable faith in the Fed and Treasury.

  • Yavor!

  • Major indicator? Keep a watch on this.
• 

  • Chart indicating foreign purchases of US treasuries from 1984-2008 with 12 month average.
• we believe the important data point in the chart above is the twelve month moving average of purchases
• into the last US recession, the foreign community was a seller of Treasuries in aggregate
• Will we see a repeat performance of foreign liquidation of UST's in the US recession to come? If so, it could not come at a worse time. We watch and wait.
• Key question being, will the pie chart we see above change in character as this balance sheet expansion occurs? Will households become big UST buyers? How about domestic banks that currently own the smallest slice of the pie?
• sale by the foreign community of US government agencies in July was a record
• the 12 month MA has already been telling us for some time that the foreign community is growing weary of continuing to acquire agency paper
• now that agency paper is essentially government paper with a yield premium, foreign community percpetions may change ahead
• the foreign community indeed was a key provocateur in funding the macro US mortgage market from the mid-1990’s through to late 2006
• there is no way the US economy is about to reaccelerate until corporate bond spreads contract.
• Stick a 30% off sign in a retail store and it attracts buyers immediately. Stick a 30% off sign on Wall Street and everyone avoids the place like the plague.
• the big issue looking ahead is how the US government and greater economy funds itself. Who provides the funds and at what cost?
• What we believe is most meaningful right now is the powerful issue of change at the margin. At the exact time macro US funding needs are increasing, one of the largest buyers/holders of US financial assets is changing their behavior at the margin.
• But what is changing is the very important need of the US government to expand its balance sheet very meaningfully.
• The foreign community has been treated to the new wrinkle that US authorities are now willing to "change the rules" without any prior notice. Again, at the margin this creates investment uncertainty
• IF the European financial sector encounters meaningful credit issues ahead, as have their financial sector brethren in the US, we could indeed see Treasuries continue to be the safety trade of choice

23 more annotations...

• further progress in the repair of problems in financial and credit markets, a gradual ebbing of the drag from the deep housing slump

  • Really? What with Lehman and UBS just about to go underwater?!?
• The Fed is paying close attention to the extent to which consumers, investors and businesses believe prices will rise in the future, he said. If consumers, investors and businesses believe inflation will continue to go up, they will change their behavior in ways that aggravate inflation, turning it into a self-fulfilling prophecy.
• In recent years, though, information from futures markets has “underpredicted commodity price increases ... leading to corresponding underpredictions of overall inflation,” he said. The “poor recent record” on that front raises the question of whether policymakers should continue to use this source of information and, if so, how, Bernanke said.

  • It's incredible that rather than note that commodity prices indicate high inflation, Bernanke instead moves the "bar" by saying that commodity prices do not reflect what they believe inflation to be.

1 more annotation...

• These representative countries, chosen and graphed by Ed Hyman and ISI, have averaged nearly 7% inflation for the past decade, while the U.S. has measured 2.6%. The most recent 12 months produces that same 7% number for the world but a closer 4% in the U.S.
• but the U.S. dollar over the same period has declined by 30% against a currency basket of its major competitors which should have had an opposite effect, everything else being equal. I ask you: does it make sense that we have a 3% – 4% lower rate of inflation than the rest of the world?
• The U.S. seems to differ from the rest of the world in how it computes its inflation rate in three primary ways: 1) hedonic quality adjustments, 2) calculations of housing costs via owners’ equivalent rent, and 3) geometric weighting/product substitution.
• Product substitution and geometric weighting both presumed that more expensive goods and services would be used less and substituted with their less costly alternatives:
• As your new model MAC or PC was going up in price by a hundred bucks or so, it was actually going down according to CPI calculations because it was twice as powerful. Hmmmmm? Bet your wallet didn’t really feel as good as the BLS did.
• • Interesting here that the headline inflation was meant to smooth out the path of inflation is it swung wildly back and forth. But in chart 3 on this page, one can clearly see that it is constantly "Above" the core inflation measure, thus never accomplishing its purpose. Interesting...
• Fed policy has for years focused on “core” as opposed to “headline” inflation, a concept actually initiated during the Nixon Administration to offset the sudden impact of OPEC and $12 a barrel oil prices!
• A readjustment of investor mentality in the valuation of all three of these investment categories – bonds, stocks, and real estate – would mean a downward adjustment of price of maybe 5% in bonds and perhaps 10% or more in U.S. stocks and commercial real estate.
• It perhaps was better to be “entertained” with the notion of artificially low inflation than to be seriously “informed.”

  • Good point!
• 1) Treasury bonds are obviously not to be favored because of their negative (unreal) real yields. 2) U.S. TIPS, while affording headline CPI protection, risk the delusion of an artificially low inflation number as well. 3) On the other hand, commodity-based assets as well as foreign equities whose P/Es are better grounded with local CPI and nominal bond yield comparisons should be excellent candidates. 4) These assets should in turn be denominated in currencies that demonstrate authentic real growth and inflation rates, that while high, at least are credible. 5) Developing, BRIC-like economies are obvious choices for investment dollars.

  • Good investment advice?

8 more annotations...

• The gold price tends to rise in brisk fashion when the yield ratio rises. The gold price consolidates when the yield ratio tends to consolidate.
• When inflation is WINNING the battle, the monetary spigot flows fast. Inflation floods the financial system, as much of the money flow comes OUT of the long end in response to price inflation deep concerns. At the same time, the USFed monetizes the short end so as to keep it close to the current Fed Funds rate. They purchase short-term USTBills with printed money, plainly told.  When deflation is WINNING the battle, the destruction of asset values occurs faster than newly created money can replace it. Inflation still floods the system, but its directed locations are not where needed, rather where power controls it

• 
• Moreover, since the 1990s, the CPI has been subjected to three other adjustments, all downward and all dubious:
• Under John Kennedy, out-of-work Americans who had stopped looking for jobs — even if this was because none could be found — were labeled "discouraged workers" and then excluded from the ranks of the unemployed.
• Lyndon Johnson orchestrated a "unified budget" that combined Social Security with the rest of the federal outlays. This innovation allowed the surplus receipts in Social Security to mask the emerging federal deficit.
• Richard Nixon created a division between "core" inflation and headline inflation.
• Under Ronald Reagan, the Bureau of Labor Statistics decided that housing was overstating the Consumer Price Index and substituted an entirely different "Owner Equivalent Rent" measurement, based on what a homeowner might get for renting his house
• Clintonites tinkered with the unemployment number, in part, by changing its housing economic sampling, disproportionately eliminating inner city households.

5 more annotations...

• It reports a more ominous financial picture: a $760 billion deficit for 2005. If Social Security and Medicare were included — as the board that sets accounting rules is considering — the federal deficit would have been $3.5 trillion.
• Congress has written its own accounting rules — which would be illegal for a corporation to use because they ignore important costs such as the growing expense of retirement benefits for civil servants and military personnel.
• Last year, the audited statement produced by the accountants said the government ran a deficit equal to $6,700 for every American household. The number given to the public put the deficit at $2,800 per household.
• Congress and the president are able to report a lower deficit mostly because they don't count the growing burden of future pensions and medical care for federal retirees and military personnel.

2 more annotations...