8 November 2007

reflections on central bankers

Why are the Central Banks in laying awake at night?

The central banks are over run with Milton Friedman junkies, the Jackson Hole crowd who devalued the emphasis on fiscal restraint present in Friedman’s as well as Keynes and Schumpeter's work and then tried to steer the ship with monetary policy alone a route that that all three of great economists warned would fail without fiscal restraint, the fear they have been wrong all along (thats what they fear).

On the opening day of Fox Business Alan Greenspan discussed whether closing down the Federal reserve is a good idea and suggests we return to the gold standard except this time he says it directly


Yes I suggest you watch it again (he really said that) Greenspan is a goldbug J

The situation is ludicrous here we have Bernanke who's previous claim to fame was Professorship at Princeton, with zero practical management experience and the only thing in his locker of qualifications is a bunch of papers of an average length of say 50-100 pages., 100% of which very few people have read outside academia.

If you actually read all these papers they are naive nonsense and outstandingly stupid. In 1999 he suggested that money supply financed tax cuts combined with a discounted interest rate would (using his words) transmitted money to the consumer via the Real Estate asset channel………….(using his words again) this through the wealth effect (consumers feeling wealthy due to asset inflation) would cause the consumer to borrow against assets and consume, as a further measure he suggested that if this didn’t cure deflation the Fed should deprecate the currency and cause import price inflation………if deflation was still persistent he suggested the purchase of real services and assets in the open market…..he believed that a determined central banker could always cure deflation by using these measures..

Is there anything about that last paragraph that feels kind of spooky ? These were the measures that Bernanke winning academic acclaim for in 1999 (many years before he joined the Fed) and he was by no means the only one Brad Delong, Marty Feldstein, Paul Krugman , John Taylor, Bruce Bartlett , Summers etc etc…..letting the academics takeover monetary policy is like handing over the asylum to the lunatics

Again all academics with zero real management and business experience and yet Bernanke was placed in charge of the entire US economy………….I guess its not much worse than electing a baseball team owner as President.

the US market on a currency weighted basis has been in a bear market since 2000 and now the commodity backed currencies are appreciating at the same pace as gold .

The world is transitioning to new economic leadership there are shortages of nearly everything that are unlikely to be impacted by the demand destruction of a US recession.

The old paradigm has the US at the center of the world, whenever the US turns down the rest of the world follows, the consumer of last resort, the old thinking says that Asia (and the rest of the world) isn’t big enough to survive on it’s own .

Kondratiev said the cause of the shortages were caused by cyclical upswings in prices that lasted 20-25 years and that during these upswings new economies were transitioned and incorporated into the global economy. The Great depression occurred 10 years after the 1900-20 commodity boom. From 1920-30 the only country that really prospered was the United States, this was achieved with very expansionary monetary policy after the commodity crash that sucked capital out of the rest of the world and into the US speculative bubble. One of the aspects of Kondratiev’s waves that was supported with the strongest data was that the down wave was always correlated with falling agricultural prices, agriculture prices are rising not falling. For those who think we are heading to a 1930 global depression please realize that the depression happened on the back of a 10 year old commodity bust. It didn’t happen at the height of the boom.

These shortages might look coincidental but shortages like this occur in every upwave (that’s what Kondratievs work was about)

The reason these tides turned in the 1930’s was that the rest of the world declared economic war on the US system and sucked the capital back out of the US market. This economic war included interest rates, currencies and tariffs the reason for the depth of the depression was government protectionism (read economic war) closed down international trade.

The US will head into recession and the Asian economies (after large corrections) will continue to grow . This is a Kondratyev transition , during the transition the US economy will collapse and the rest of the world (after barely keeping its head above water during the collapse) will continue to grow and transition to leadership.

During this phase economic war will break out between the US and the rest of the world and the like England in the 20’s the US will continue to attempt to reinitiate it’s previous economic primacy. America will attempt to control international liquidity and capital flows like the English attempted in the 20’s , in an attempt to stop the bleeding they will attempt to impose capital controls on their own citizens , the only people that will be able to get their money out of the US economy will be the wealthy because they are doing it now while they can.

Commodities are still cheap, most when inflation adjusted are still 60-70% less than of their 1974 prices highs, yes the US and Japan have been inflating like crazy for 2 decades and they will again, eventually ruining America economically forever.

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