Bernanke Cuts Another Quarter

We here at the Agonist (most notably Stirling) have been saying for a long time that Bernanke is a conservative inflationist. Cutting the rate by another quarter on Wednesday is pretty much what you'd expect. End result? Probably stagflation. As Stirling has noted, post Bretton Woods "expansions" go on until people aren't willing to pay the price for keeping them going. This "expansion", if Bernanke manages to keep it on life support, is going to wind up being very expensive for ordinary Americans. The dollar is dropping like a rock, the price of imported goods is soaring and the price of oil is headed for one hundred dollars a barrel. The American standard of living is being horribly eroded right before people's unbelieving eyes.

All to bail out Wall Street, hedge funds and to keep defense pork flowing like blood from an artery. And there are good odds it won't even work, because the fools in the financial sector have so over-leveraged themselves with such utter crap that even the Fed may not be able to save themselves from their stupidity and greed. The Fed can give the banks money, but it has trouble making them spend it on the worthless pieces of paper that is most of what a lot of funds are holding.

But for you, what this means is simple enough: the prices of food, heating oil and transportation will keep going up. If you're in an inflated housing market, expect the value of your main asset to drop. And expect inflation to break out from food and energy into a lot of consumer goods.

And no, contrary to the press, this cut will not save the housing market for ordinary people. Combined with other ways of giving away buckets of cash Bernanke might be able to paper over enough of the financial sectors losses so that not too many of them go belly up, but it won't do squat for ordinary home owners.

Ian Welsh November 1, 2007 - 2:32am

Ian Welsh's diary | printer friendly version |

( categories: Economics: USA )

The Market Agrees With You

This has been a limited rally, enjoyed by those sectors benefiting from inflation: commodities, precious metals, energy. Even within the stock market you'll find that companies associated with these sectors are rallying, but broad swathes of the market like retail, brokerage, banking, housing, and transportation are not. This is why the Dow can reach new highs even though earnings are coming in around a 1% growth rate.

Oh yes, technology is doing well too. Certain headline companies like Google and Apple continue to either steal market share from others or sell new computer gadgets to a global market (especially in Europe and Asia where growth has not slowed as much as in the U.S.). But notice that it is the NASDAQ 100, not the broader NASDAQ that is attracting all the buying and momentum/hedge fund investment money. The profit growth in the broader pool of technology companies is slowing down like it is everywhere else.

It's as if Bernanke is squeezing the balloon one last time and little bubbles are erupting in inflation protection sectors. How long these bubbles will last, and whether Bernanke has any more bubbly industries to inflate next, are the critical questions.

Numerian November 1, 2007 - 6:43am

Very succinct overview

Ian and Numerian, you really get this stuff. But there is something more insidious going on that will need to be faced. The price of food, heating oil and transportation is not going up per se because of 'inflation.' It is rising out of a very real SHORTAGE of these basic commodities.

The traditional rule of commodities is that they do not inflate. Rising price results in a rush to bring on more product causing the price to fall. There is no profit made over and above a low return on the fixed assets and costs to provide the commodity. New technologies can bring the cost of production down through efficiencies, etc. But this time it is different, and there are a lot of economists scratching their head right now. The question is, has the fundamental cost of providing these commodities changed. But that is not even the question.

It is shortage. MORE commodities cannot be brought to market. Demand is going up and supply is staying flat or declining because we have reached the limit of the planet. In shortage the price goes up and cannot be met with an increase in supply, I guess it can be called inflation but it is really something else altogether.

What will have to happen is substitution out of the commodity altogether. Moving from oil to oil sands for example, but it is an entirely different cost structure. Or from oil to coal, or oil to wind or . . .

Food is different still. I just don't see how harvests can keep improving, arable land is being overfarmed already, the inputs are all rising, so wheat is $9 a bushel. Unheard of. But could go higher. Grain stocks are the lowest in 60 years, which puts us back to the war years. Remember the 30's were a period of deflation, too much supply, there was too much food relative to demand. Prices fell, and wiped out whole industries. Piles of grain being destroyed as people starved. Deflation is far worse than inflation.

But this time, oil could go into a terminal 4% to 6% ANNUAL decline, wheat production living off the oil boom would likely go into a similar decline or at least flatline. Population keeps rising and every single person simply gets a little less. Imagine that. Over the last 100 years oil production has increased at 3% annually and GDP has trended at 4% annually, so what does GDP do with -4% decline in petroleum annually?

In the face of this, a 1/4 point drop does nothing. You are absolutely correct. In the face of shortage, the savings on debt is offset by a falling dollar, and rising commodity price. It is as if you have three items of value, and give everyone more money to buy them with. Well, everyone will simply pay more for the precious objects. Shortage isn't solvable by economists. The real danger is that there is a gap between imagination and reality. An inability to change the behaviors to adjust to the very real change washing over us. In a sense it could look like running the clock backward. People in 1970 ate 1/3 as much meat in the US as they do today, with food prices rising we will be back to 1970's meat consumption, back to 1960's fuel consumption. Back to food making up 10% or even 20% of a household budget instead of the 4% and 5% today. Eating out less, driving less. Less stuff. Relocalization. How it plays out is difficult to foresee, a decline in living standard, absolutely. But it is not economics it is hard reality - this is NOT a theoretical wall we are running into, but a very real and hard wall.

This is not bad policy or bad economics or anything else. It is a planetary limit, it is shortage of the basic commodities that we have over the years convinced ourselves are limitless.

Scotjen61 November 1, 2007 - 9:26am

I agree

Which tends to be a rare thing, where you and I are concerned.

About all Bernanke can do is act like he's in control and hope enough people believe him to stave off wholesale panic.

I did inhale.

Don November 1, 2007 - 9:37am

It is a planetary

It is a planetary limit

Several powerful forces are converging that are changing the entire global dynamic.

1. Overpopulation in a world of finite resources -- Malthus -- you get the idea. Basically, the world is using up more resources than it has and the pressure is increasingly upward instead of in the direction of sustainability. "Conservation" is still a dirty word in the growth-oriented, resource-wasteful US, and the populous developing world is coming on line with similar expectations of a world of infinite resources.

2. Global Warming -- Global warming is reducing the already finite resources of the planet and the rate of change is accelerating rapidly. Moreover, shifting climate patterns are increasing the risk of pandemics. Nero fiddles while Rome burns.

3. US Imperialism -- The US push for global hegemony is based on neo-imperialsim and neo-colonialism politically and neo-liberalism economically, all anachronistic, hence moribund. However, as the world's sole superpower the US is able to enforce its will despite the dislocations this is causing. This is not only inhibiting necessary transformation but also encouraging and increasing counter-productive factors.

4. US Domestic Policy -- The US is in the process of formally institutionalizing the military-industrial-governmental "revolving door" complex under a supreme leader, making this the face of the corporate state, instead of letting it remain in the background as previously. There is no more pretending that the US is a liberal democracy rather than a plutocratic oligarchy. This is not only a naked power grab, it is also a willful destruction of the middle class that arose out of the Great Depression. This is leading to a level of overreach that is undermining national coherence, dividing the country and leading to social dissonance that requires increasingly authoritarian methods to control. Moreover, the reputation of the US globally has been willfully and arrogantly trashed. This is disastrous when the US is in the position of being the world's leader in a time of crisis, indeed, extremis.

What this means is that the world is racing an unprecedented challenge while the leadership of the US is being undermined and perverted, and there is no obvious power structure or vision to take its place. As a result events are spinning rapidly out of control, and disasters increasing in frequency and intensity. Bad omens.

Natures response historically in such situations has been to radically reduce the population pressures. Go figure.

tjfxh November 1, 2007 - 9:57am

Maybe it's all those Chinese and Indians

The world can't cope with over 1.5 billion new consumers demanding a U.S. lifestyle. There is a very unhealthy synergy that allows these news consumers - or at least about 10% of them moving into the middle class - to manufacture the cheap goods and services demanded by the west. That dynamic allows the U.S. to go ever deeper into debt to maintain consumption, feeding the export boom in Asia, and giving Asian governments the hundreds of billions of dollars needed to buy the new debt.

We've "papered over" the reality of scarce natural resources with mounds of IOUs. When that mountain of debt becomes so heavy that it crumbles of its own accord, there will be a moment of recognition of the reality underneath that will certainly shake the complacency that passes for politics these days.

Numerian November 1, 2007 - 11:49am

The expectation that ...

the "mountain of debt" will collapse has been going on for decades. Why can't they keep the balls in the air for a few more decades?

LJ November 1, 2007 - 11:59am

Letter

Remember Dumb and Dumber when they found that briefcase of money. They kept borrowing from it and putting in paper IOU's. Your comments reminded me of that.

Scotjen61 November 1, 2007 - 12:03pm

oil is rising

due to a combination of overdemand and speculation. Speculation has made the rise faster than it would have been otherwise. I absolutely agree that the basic problem, however, is not enough supply. Still there are things the Fed (and others) could do to dampen demand and discourage speculation and if they had been doing so for the last 7 years the price of oil would be significantly less.

I haven't entirely go my head around what's going on in food prices beyond

a) ethanol subsidies squeezing out food production
b) oil flowthrough effect (our agriculture has oil as the major input)

But for so long we've produced so much more than we need that I'm not sure that there's really a food peak. But as I say, I haven't looked into in detail.

Certainly though you could be right that we are running into the wall on food. It's something I need to look into seriously.

Ian Welsh November 1, 2007 - 1:36pm

You have obviously

been reading Herman Daley. Good for you.

jtruett November 1, 2007 - 2:02pm

Goldfinger was a dunce...

...rather than some convoluted plan to nuke Fort Knox to increase the value of his gold, all he had to do was give a few thousand to the GOP and have them appoint Ben Bernanke. Same difference.

Mr. Flibble November 1, 2007 - 9:27am

Didn't work...

Dow tumbles on Citi, Exxon news

http://money.cnn.com/2007/11/01/markets/markets_1030/index.htm?cnn=yes

creativelcro November 1, 2007 - 10:07am

Credit crunch hits markets

Credit crunch hits markets

Nick Fletcher and Angela Balakrishnan
Thursday November 1, 2007
Guardian Unlimited

Stock markets around the world were in retreat today as fears of the credit crunch re-emerged, pushing the FTSE 100 index down by nearly 130 points.

Traders were spooked by a £910m write down from Credit Suisse this morning, to take account of the effect of the US sub-prime crisis on credit markets.

A downgrade of Citigroup, the biggest bank in the US, by CIBC World Markets sent shares falling both in London and New York, where the Dow Jones index slipped sharply in early trading.

Article continues

The Dow's fall was exacerbated by oil group ExxonMobil, which produced worse-than-expected quarterly figures despite record crude prices.

By 2.45pm, the FTSE 100 index had lost 128 points, almost 2%. In New York, the Dow Jones shed 209 points, and there were similar sharp falls in markets across Europe.

Further gloom came with the latest survey on US manufacturing growth, which slumped to its slowest pace since March as tighter credit conditions and the crumbling housing market took their toll on output.

The Institute for Supply Management said its manufacturing index fell to 50.9 from 52 in September, below forecasts of around 51.5. The current level is just above the 50 mark, which separates expansion in the sector from contraction.

Analysts said the ISM data raised fears that the Federal Reserve's cuts in the interest rate to 4.5% will not be enough to soften the impact of the credit crunch on the US economy.

"It does appear that the impact of the slowdown in the financial, housing and transportation segments has spilled over into manufacturing," ISM said in its report.

Tina November 1, 2007 - 10:28am

We are in a period where it is

Imagination vs. Status Quo. This has so felt like the 19th Century gilded age. The great inventions then: railroad, internal combustion engine, electricity. The wave of nationalism then (globalism now), the anarchists opposed to the changes then ('terrorists' now) and waging assassinations of National leaders across the world eventually leading to WWI. The Plutocrats entrenched, and an imbalanced economy skewed rich (though todays imbalance is nowhere near what it was then). Booming populations in the West.

That combination of unbelievable technological advance facilitating the emergence of nation-states, coupled with an entrenched elite resistant to the change. Then we had Teddy Roosevelt, and imagination won.

We wills see?

Scotjen61 November 1, 2007 - 10:40am

One difference...

is that very few people think they are getting screwed. They are being told and they are believing that their well-being is inexorably tied to the corporate economy. In order for imagination to win, first you have to have that imagination.

Oh, wait. We have Hillary, she'll save us. Sorry.

LJ November 1, 2007 - 11:03am

I like the Democrats

Every one of them would be better than the Republican lot. I don't see any Teddy's or Franklins out there. I do think the problems this time round are bigger, with higher stakes then before.

Just remember next time you complain about the cost of gasoline, that at least your village isn't being burned to the ground, or your electricity being shut off 20 hours a day, or your hot water cut off from September to May.

Cross your fingers.

Scotjen61 November 1, 2007 - 11:25am

Slight alteration

Very few know they are getting screwed. A nice bout of hyperinflation or uncontrolled contraction should clear away the cobwebs rather quickly.

Careful what we wish for though, the modern American public hasn't been conditioned to compassion and looking out for one another. The only thing worse than semi-rich Republithugs might be dirt poor Republithugs.

zot23 November 1, 2007 - 12:03pm

Dirt poor Republithugs with guns.

I should add...

creativelcro November 1, 2007 - 12:47pm

Citigroup Chief Is Set to Exit Amid Billions in Losses

New York Times, By Eric Dash & Landon Thomas, Jr., November 3

The embattled head of Citigroup, the global banking giant, has told directors that he would resign from the bank after an emergency meeting this weekend in the wake of a $5.9 billion write-down and sharp drop in profit, people briefed on the situation said last night.

Charles O. Prince III, 57, the chairman and chief executive, took responsibility for the bank’s disappointing results and said it would be better for the bank if he left, these people said.

At the meeting on Sunday, directors are expected to formally accept his resignation and discuss the possibility of another write-off, just weeks after announcing large losses related to subprime mortgages and the credit market turmoil. Mr. Prince did not return calls yesterday for comment.

A search committee will begin looking for Mr. Prince’s successor immediately, according to a person briefed on the situation. “The entire organization is in uproar, and people have been looking for leadership,” said one Citigroup executive close to the situation. “The organization is waiting for something.”

_{"Vanity, Vanity, all is Vanity."}

Raja November 3, 2007 - 11:55am

Citigroup Doesn't Deny Prince Exit as Shares Drop 31% (Update1)

Bloomberg, By Yalman Onaran & Hugh Son, November 3

The crisis of leadership at Citigroup Inc. may come to a climax this weekend amid widespread speculation that Chief Executive Officer Charles O. ``Chuck'' Prince III will resign, undermined by widening losses from bad mortgage debts and disgruntled shareholders who have suffered a 31 percent loss in the market capitalization of the largest U.S. bank.

Just a week after New York-based Merrill Lynch & Co. ousted Stan O'Neal, Citigroup provided no comment on front-page stories throughout the U.S. that said Prince, 57, will step down.

``This might become a weekly occurrence, getting rid of a Wall Street CEO,'' said James Ellman, who manages about $200 million as president of Seacliff Capital in San Francisco.

Citigroup's board will hold an emergency meeting this weekend, the Wall Street Journal reported, citing unidentified people familiar with the situation. ``We are completely declining to comment,'' said Leah Johnson, a Citigroup spokeswoman and member of the New York-based company's management committee.

The biggest U.S. bank by assets reported $6.5 billion in writedowns and losses in the third quarter, casting doubt on the length of Prince's tenure.

``The board may have simply reached the point where they can't take the pressure from stockholders and they have to remove him,'' Punk Ziegel & Co. analyst Richard Bove said in an interview yesterday. ``They have to have some issue which is huge, pregnant and wasn't previously considered to justify removing him. The only issue that they could utilize is that there's a big writedown.''

_{"Vanity, Vanity, all is Vanity."}

Raja November 3, 2007 - 12:06pm

an oldie

Tina November 1, 2007 - 10:52am

Thanks, Tina.

Really appropriate! :)

creativelcro November 1, 2007 - 11:10am

Negative Impact on Euro countries

Spiegel Online - ...Just how large the inflation problem in the euro-zone has become is apparent from numbers released by the European statistics office Eurostat on Wednesday. Economists there estimate that prices have risen by 2.6 percent in October, against rises of 1.7 percent and 2.1 percent in August and September respectively. The stated goal of the ECB is to keep inflation below 2 percent. The pressure to do something is growing.

Powering the growing inflation are rising energy costs. The price of a barrel of oil this week skyrocketed by $6 in just 24 hours to hit a record high of $96 per barrel on Thursday before dropping slightly. Oil prices rose on an announcement by the US Department of Energy that American oil reserves were lower than expected. Experts now believe that prices of $100 per barrel are not out of the question. Prices for grain and other foodstuffs are also rising around the world, as are costs for raw materials.

Export Risks

The US economy has so far managed to defy this development, with the Department of Commerce reporting that the American economy grew by 3.9 percent in the third quarter after an expansion of 3.8 percent in the second -- though a report on slower consumer spending caused the Dow Jones industrial average to plunge by 200 points in early trading on Thursday.

Still, growth of just under 4 percent is solid -- and comes primarily thanks to strong exports. US products can be had cheaply on the world market these days.

In Europe, though, the situation is a completely different one. The stronger the euro, the more expensive European goods become. "The weak dollar is not a good thing," says Kay Mayland, head of Germany-based SMS Demag, which sells metal-working equipment the world over. Many other managers and investors from across the European continent are likewise becoming impatient. Should the euro climb to $1.50, analysts say, exporters will likely experience a drastic slowdown in sales.

For Germany -- Europe's largest economy -- the consequences could be horrendous. Much of the country's economy, after all, is based on exports.

_{1."George Washington did not cross the Delaware for Capitalism," -Shmuley Boteach.
2.The Dems haven't punished the GOP enough, so you're going to reward the Republicans?}

nymole November 1, 2007 - 1:26pm

Historically, it's really a good move

Asset bubbles are terrible things--they're persistent and have a long life. Japan is only now crawling out of the one that started in the late 80's. I suspect that the Fed policy is to decrease interest rates moderately to ameliorate the correction, then increase them substantially when real inflation begins to get out of hand.

It'd be a great thing if we could generate overlapping independent bubbles, so that the economy wasn't such a roller-coaster ride. But reality seems to be otherwise.

Middle East/Nigerian/Venezuelan oil isn't the be-all-end-all of energy; it simply represents the cheapest route to portable energy. When conventional oil gets dear enough, we'll start making our own Nazi Petrol from coal, or mining oil shale--all at a substantial environmental cost, just as Alberta is now doing with tar sands.

For what it's worth, most of the Aisan Tigers are facing asset bubbles; collapse of the American economy will only hasten their onset.

Petronius November 1, 2007 - 3:32pm

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Bernanke Cuts Another Quarter

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