a means of dealing with this sort of criminal malfeasance that, while I don't necessarily agree, I think they may be onto something.

Execution and organ harvest (they might say OH is illegal and not done today, to which I'd call them liars to their face).

Now if only they had a workable Justice system (remember 'Red Corner'?).

-5.75,-4.05
"We're all fucked. It helps to remember that." --George Carlin

that if you look at Money supply right now and consider the fact that the spigot of the shadow banking system has been shut off, the amount of money the Fed is pouring into the system is huge in comparison to past possible recessions. In essence, the Fed is trying to create as much money as the old line banking system can, PLUS what the shadow banking systems, which is completely shut down now, was producing. Numerian, would that be correct?

^{“Is not our first thought to go on the road? The road is our source, our vault of treasures, our wealth. Only on the road does the ‘traveller’ feel like himself, at home.”
Ryszard Kapuscinski}

There has been a sudden jump up in bank deposit balances, presumably from all the repos the Fed has been doing. It doesn't mean the banks are lending this money out; they are merely arbitraging it by buying long term Treasuries and pocketing what is called short funding profits.

There is also the TAF liquidity, the new facility that allows for longer term borrowings up to one month. This facility now has $60 billion in loans out to banks. I don't know how they account for this, but it may be included in the M2 deposits.

The problem is what used to be called M3, which is the shadow credit system run by Wall Street. These balances have been cut by the huge losses experienced by the big banks, and the growth rate is now considerably less than last year's 12%. Even though the Fed is trying to accommodate some of this lost credit, it can't match anywhere near what Wall Street was doing.

Two other observations. First, you may have noticed this week that Blackstone Group announced it was going to raise money for its private equity buyouts from hedge funds directly, rather than go to Wall Street or to the commercial banks. Apparently these traditional sources have dried up, and Blackstone feels there is enough "liquidity" out there to be tapped directly. JP Morgan earned over $400 million in fees from highly leveraged loan syndications last year, so this will definitely cut into bank earnings. More important, it represents even more distance being created between the shadow banking system and the regulated banking system. The hedge funds are accountable to nobody, regulated by nobody, and with no one to back them up if they get into trouble. To the extent they can create credit and lend money to private equity funds, our financial system is even more at risk. In any other country the central bank would be screaming about this move and insisting the hedge funds be regulated and subject to the same oversight and reserve discipline as banks.

The second observation relates to the other creators of credit - overseas central banks, specifically China and India. Their growth rates in money supply exceed 15% annually and are not slowing down much. At least in China's case, these loans come back to the U.S. as financing for our imports from them, but there is plenty of credit being created in the domestic Chinese economy, and a lot of it is wasted on excess capacity in manufacturing, services, hotels, office buildings, etc.

Whatever liquidity is being created now is going mostly to commodities speculation, and until this changes it is hard to see investors putting money back into paper assets.

...

There are, empirically, three kinds of inflation, all of them recognized by Smith and Hume, though not labelled as such.

The first kind of inflation is macro-inflation. Macro-inflation is caused by an increase in currency base over supply of denominatable goods and services. In Hume's time he was noting that the increase in specie, gold and silver, had increased prices in Scotland and England without increasing production. This was, at that time, part of the argument that mercantilism - and it's obsession with increasing the amount of specie held by the national unit - was only going to be inflationary.

Macro-inflation is the most clearly recognized kind of inflation, and the one which conservatives would like to blame all inflation on. It is capable of the greatest extremes of inflationary activity, hyper-inflation and deflationary spirals. As a consequence getting macro-inflation wrong is a deadly sin for a central banker.

The other kind of inflation which is easily labelled is micro-inflation. Micro-inflation comes from using monopoly power, withholding of information or other market anomoly, to increase the price of a good or service without a tendency to equilibrium. This last is important, because usually exercising market pricing power is either going to generate equilibrium, or is a move towards equilibrium from artificially low prices. Land is the natural monopoly that Smith labels, and he goes into price fixing schemes in some depth.

The third kind, also recognized in Smith, is meso-inflation. Meso-inflation is when incentives become out of alignment between productive and unproductive labor in Smith, but more generally when incentives no longer send the correct signals to allocation of activity in an economy. A simple and obvious example of meso-inflation is a government over or under taxing. Running persistent budget deficits and accumulating national debt, or pouring money into government projects which do not return. Meso-inflation can, therefore, be driven by, or drive, macro- and micro- inflation, and is seen through the creation of micro- and macro- inflationary imbalances.

What we have been seeing is meso-inflation in the form of devaluation of the US Dollar to fund the war in Iraq and shifting of money from the middle class to the wealthy.

Meso-inflation can be used to mask inflationary pressures, by reducing the costs of some goods, and increasing the price of others, keeping some arbitrary market basket measure of inflation lower. An example is China's interior suffering deflation, while it's coastal region has high inflation. The net result is that China, as a whole, seems to have lower inflation, when in fact it is suffering from deflationary pressures in its large subsistence areas, and high, and now chronic, inflation in its coastal regions.

In the case of the US what we saw first was spiraling prices of houses
compared to the rest of the economy, and now the reverse, a housing crash - unprecedented in the post war economic era, which can conveniently be terminated somewhere in the Bush era, because Bush has broken the Post-War American hegemony - with rising prices for resources.

Central bankers are almost always complicit in meso-inflation, even if they are not making the decisions, per se, that leads to it. Meso-inflation looks like high inflation to some people, who are not producers of its inflationary sectors. If one looks at a dirt poor farmer in Bolivia, then in his world, this is simply an inflationary time. It looks like deflation to other people. Americans, flush with house credit, saw goods such as televisions and computers as being extremely cheap.

The root of meso-inflation is an imbalance of incentives. At a certain point this imbalance becomes so pervasive that it makes monetary policy useless. If you think about it, monetary policy increases activity, or decreases it - incentives being misaligned means that increasing interest rates will slow the wrong things before it gets at inflationary behavior, decreasing interest rates will encourage the wrong behavior before it increases production. This means that there will be a progressive decoupling of monetary policy from the actual economy, and monetary moves will produce less reduction in inflation, or less increases in real production. We have been seeing this decoupling from monetary policy for nearly 20 years. Which means that meso-inflationary policies have been going on for longer than that.

All three kinds of inflation are not entirely evil. Some macro-inflation introduces necessary risk to holders of currency. That is it gets them off their butts and investing, lest they lose the buying power they have. Sucking money out of the mattress is a good thing, but once that is accomplished, macro-inflation has done its discounting work. Micro-inflation is often a periodic spur to innovation - when some good or service becomes a roadblock, the ability to increase its "customary rate of profit" without generating more competition, can force people to search for alternatives. Meso-inflation is, likewise, often a normal part of a market economy coming back into balance.

The key is whether the inflationary pressures are generating equilibrium pressures in return. If macro-inflation is spurring investment sufficient to increase production, then it is good. If micro-inflation is spurring the search for alternative supply, then it is good. If meso-inflation is reshaping the economy to produce a higher pareto optimality, and thus equilibrium with the increased profits being taken, it is good. Beyond this, they are bad.

The job of most policy makers most of the time is to maintain equilibrium in the broader economy, while promoting it in small sections of the economy where disruptive technologies are entering. Macro-stability is produced by micro-instabilities.

The underlying charge against late Greenspan and Bernanke is that they have created meso-inflationary pressures which do not tend towards equilibrium, and instead continue to spiral. The US spends on bombs and billionaires, devalues the dollar to pay for this, increasing the prices of resources, which increases the wealth of oilarchies and substitute production, which is met with spending on bombs (to get the resources, specifically oil) and billionaires (to keep assets in national hands), as well as greater protectionism (such as forbidding the Chinese from buying out American companies). This reduces production even more, while increasing demand for oil, which fires the cycle all over again.

Failure to act towards equilibrium was done to be accomodative to the bombs and billionaires, borrow and squander, policy. Ultimately, a central banker's job is to make "Say's Law apply in practice even though it doesn't apply in theory." and keep General Equilibrium in place. Greenspan and Bernanke's failure to swiftly act to equilibrium, but in favor of a false stability, has accomodated a misalignment of incentives. This misalignment of incentives is seen as the housing and energy bubble - because, let's face it, in a peak-oil/pit carbon world, pumping or scooping every hydrocarbon out of the ground possible is not a sustainable situation - and the consequent reduction in wages and asset accumulation by the middle class, as well as the return to chronic budget deficits.

EOM

EOM

You need the 12-gauge for grocery shopping and law enforcement.

Shall we start a betting pool when the whole Ponzi scheme that is our economy collapses? James Kunstler is predicting that the financials won't be able to keep up appearances for another month.

Things are going to suck, so you might want to start buying fruit trees, vegetable seeds, and shotguns.

Its just that the Ponzi scheme collapsed two years ago, kind of like the Titanic took a while to sink after it hit the iceberg.

is hard to foresee with clarity, but whatever foreign investors do it won't be enough to save our bacon.

Very likely we will slowly--locality by locality, family by family--revert increasingly to a subsistence economy as our taken-for-granted social supports and global economy become impractical. Whether that ultimate end is due to hyperinflation, energy and resource depletion, or the collapse of government services and infrastructure is hard to determine yet.

We should be heeding California's experience right now if we want to see how the collapse of the US government might transpire, and how it might impact things. I understand there is a growing exodus of people from that state as jobs vanish, and the Governator is set on letting criminals out and closing schools. At some point, the state's infrastructure (e.g. courts, hospitals, police) will become so distressed and nonresponsive that more people will leave, or they will elect to do without. Now imagine this on a more extensive scale, when more states are unable to pay their bills.

That is the endgame.

I've been saying this for some time... oil's price is a speculator tax. Americans need to get the rich off their backs.

Slouching towards Petroeurostan

Today, Iran’s Oil Minister Nozari concedes that Iran’s share of the global oil trade is still very low. Enter the bourse, which is the solution to eliminate the middlemen. Everyone in the oil business knows that high oil prices are not really due to OPEC - which supplies 40% of the world’s crude - or "al-Qaeda threats". The main profiteers are middlemen - "traders" to put it nicely, "speculators" to put it bluntly.

parking carry trade money.

Low interest rates are coming back as oil inflation.

This is an inflation tax pure and simple.

Had enough of Ben Bernanke raising your taxes to bail out Bush's friends?