Breaking Point
http://money.cnn.com/2005/09/02/news/economy/
katrina_widerimpact/index.htm
http://www.economist.com/agenda/displayStory.cfm?story_id=4362200
This blog has attempted to describe the fundamental economic imbalances they have layed the foundation for a severe and extended world recession driven primarily from the US economy, but with aggravating factors present in many other western economies.
The key factors have been:
If Katrina does indeed prove to be the precusor to the expected economic implosion no doubt many will make the argument that the recession was because of Katrina. The recession was not. That is like driving a car at high speed towards a wall and then blaming the wall for your broken legs.
I cannot see flexibility the US Federal Reserve has in lowering US interest rates, without precipitating a run on the US Dollar.
The US economy, in particular, has already been brought to breaking point. This hurricane potentially marks that spot.
katrina_widerimpact/index.htm
http://www.economist.com/agenda/displayStory.cfm?story_id=4362200
This blog has attempted to describe the fundamental economic imbalances they have layed the foundation for a severe and extended world recession driven primarily from the US economy, but with aggravating factors present in many other western economies.
The key factors have been:
- chronic growing indebtedness,
- negligible savings,
- reckless expansion of the money supply,
- and related non-CPI inflation,
- speculative asset bubbles.
If Katrina does indeed prove to be the precusor to the expected economic implosion no doubt many will make the argument that the recession was because of Katrina. The recession was not. That is like driving a car at high speed towards a wall and then blaming the wall for your broken legs.
I cannot see flexibility the US Federal Reserve has in lowering US interest rates, without precipitating a run on the US Dollar.
The US economy, in particular, has already been brought to breaking point. This hurricane potentially marks that spot.
posted by Peter at 6:27 pm
5 Comments:
http://www.economist.com/finance/displayStory.cfm?story_id=4352087
"Moreover, Mr Greenspan, who until recently gave short shrift to the idea of a housing bubble in America, said that the property boom was an “imbalance” and that prices of homes could fall. He argued that in future the Fed will need to pay more attention to asset prices."
Yes Mr.Greenspan, the Fed will have to pay more attention to asset bubbles.
It will also have to pay more attention to the gross monetisation of the world economy and to protacted periods of asset based non-CPI price inflation.
Ah excuse me Prem? Isn't inflation contained? What do you mean double digit inflation! The CPI is 2-3%.
CPI is only one measure of inflation. It measures the prices of consumer goods. However, globalisation the world labour supply has probably trebled access to manufacturing and service labour supply from countries such as China and India. By replacing expensive Western labor with inexpensive asian labour, price growth has been curtailed. Prices for consumer goods, like manufactured electronic goods have been falling for sometime.
The expansion in the money supply has flowed into investment assets. In the United States this was initially into equities and subsequently into property.
If inflation was say 2.5% over the last ten years
then 1995: $100,000
would equal 2005: $78,000.
However, if you wanted to use that money to say...um buy a house. Well you would appreciate that the money would have fallen in value by a much greater percentage that 2.5% per annum.
Using my own heuristic test for the Australian economy that would indicate a broad inflation rate of around 7.9% per annum. This is probably close to the actual rate of monetary expansion. Once you have high liquidity in property assets and the ability to monetise unrealised capital gains, then property-based monetary expansion can become systemic.
This is very visible in the US housing market at the moment where property based monetary expansion appears to have been running at manic levels for around 5 years.
We have also seen a misdirection of wealth over this period from labour to capital. This also makes the expansion unsustainable as consumption has to be driven by debt rather than earnings (wealth).
The scenario we face today with massive asset price bubbles, record consumer indebtedness, abused currencies (US dollar) is very pre-recessionary, and in the first two points, reminiscent of the period preceeding the Great Depression.
When the correction of these inbalances begins, inidividuals will not have a lot of time to react. By the time that 'mainstream wisdom' believes that monetary contraction has arrived it will be too late.
Small point for today....
I like to follow the gold price as a recessionary barometer. I also own some bullion personally (I put my money where my blog is, so to speak).
Because gold is priced in US dollars it usually just tells you how much the US dollar has been sold off.
Since the beginning of September gold has risen in CHK (Swiss Franc) by 0.5%. Furthermore, the Franc has moved with the US dollar. The Swiss and the United States do not share many similarities in monetary policy :)
This movement over the past month suggests a few possibilties. It is possible that a monetary risk premium is developing. By this I mean the belief that currencies per se, bare inate risk. While I do hold some gold I don't regard myself as a "gold bug". However this recent movement could signal some shift in market sentiment after the oil price appreciation of the last year and more recently with Katrina.
Keep your eye on this indicator in the coming days and weeks. That's Gold/CHK by the way....not Gold/USD!
A most useful commentary Prem - thankyou. We happen to concur but this is, at present, very much a minority view. Please feel free to join our forum at:
http://p2.forumforfree.com/jk5.html
You may also be interested to contribute to some of the pages on our site or offer articles for our RSS feed.
http://news.ft.com/cms/s/677f17e4-2ebd-11da-9aed-00000e2511c8.html
A red flag from one of the big three ratings agencies. It seems that Fitch may be joining Prem in viewing the world as sub-investment grade.
About 10 years of particularly irresponsible monetary policy and five years of ludicrous fiscal policy in the United States have brought the whole world to this place.
More from Fitch......
http://www.freep.com/news/statewire/sw121801_20050926.htm
The venerable General seems headed inexorably to financial extinction.
GM had long ago turned itself into a financier instead of a manufacturer (much like the US economy!). With a steady stream of credit rating downgrades from the ratings agencies, a prediction of bankrupcy in 12-24 months seems no more than stating the obvious.
Post a Comment
<< Home