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Post by unlawflcombatnt on May 18, 2006 16:01:35 GMT -6
Updated 5/23/06May 19th 2006 Economy Overview. (Note: I will try to updated the numbers here as often as possible. The latest day of "update" will be denoted at the top and the title. The updated part will be in brown.) As of May 18th, the Stock Market (DJI) had declined approximately 500 points in the last 8 days. The U.S. dollar has declined 3.7% in the last month in relation to Euros, 4.7% in relation to the Yen, and 5.2% in relation to the British pound. This can be seen by the relative 1d and 30d gold prices. These can be seen at the Kitco gold site at the following links: www.kitconet.com/charts/metals/gold/2a-euro-us-d-Large.gifwww.kitconet.com/charts/metals/gold/2a-euro-us-30d-Large.gif www.kitconet.com/charts/metals/gold/2a-jpy-us-d-Large.gifwww.kitconet.com/charts/metals/gold/2a-jpy-us-30d-Large.gifwww.kitconet.com/charts/metals/gold/2a-gbp-us-d-Large.gifwww.kitconet.com/charts/metals/gold/2a-gbp-us-30d-Large.gifLeading Indicators posted a decline of 0.1%. Combined with March's +0.4 and February's -0.4, this leaves a 3-month change of -0.1%. April's real hourly wages declined 0.1%. (Though nominal wages increased 0.5%, the Consumer Price Index increased 0.6%.) The Philadelphia Fed Index, though showing a slight (deceptive) increase in its sum total (due to a huge increase in prices paid), gave an overall negative reading. The monthly change in the employment index declined from 21.7 in March to 1.1 in April. The index of the average work week declined from 9.3 to 8.5. The New Order Index declined from 12.2 in March to 2.7 in April. Shipments declined from 19.0 in March to 11.7 in April. The Unfilled Orders Index declined from 7.0 in March to -2.2 in April. The actual numbers for this can be seen at: www.phil.frb.org/files/bos/bos0506t.html What gave the Philadelphia Fed Index a positive reading? Prices paid increased from 29.0 in March to 55.3 in April. (Is that really a positive?) Delivery times increased from -4.1 in March to 9.6 in April. The increase in inventories also added to the positive (Since less goods were delivered.) Even Briefing.com maintains that the initial positive reading of the Philadelphia Fed Index is deceiving. All measures of employment and consumer demand DECLINED. Increased inventories, decreased new orders, decreased deliveries, and decreased prices received indicates declining consumer demand for production. The result of this is a decline in the demand for labor to provide production. This is born out by the huge decline in the Number of Employed Index and the decline in the average workweek index. The decline in labor demand will lead to further declines in employment, wages, and aggregate labor/consumer income. In turn, the decline in aggregate labor income will further reduce consumer spending, and still further reduce labor demand, employment, and wages. Once again, consumer spending is the engine that drives our economy. It is 2/3 of GDP. And if there is a long-term decline in consumer spending, capital investment will also decline. With out consumer spending and the production demand it creates, there are no opportunities for investment. Returns on investment are funded by consumer spending. Even capital equipment producers depend on consumer spending, because the goods produced from the equipment require consumer purchase. Without demand for consumer goods, there is no demand for the equipment to produce them. The economy cannot "grow" without consumer spending growth. It is an absolute requirement. And consumer spending cannot continue to increase exclusively by increased borrowed money, as it has over the last year. This is a completely unsustainable course. And the record profits from the returns off this debt-financed spending are not sustainable either.
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Post by lc on May 18, 2006 17:38:14 GMT -6
STAGFLATION ALERT!!!
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Post by unlawflcombatnt on May 18, 2006 21:02:33 GMT -6
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Post by lc on May 19, 2006 8:49:33 GMT -6
Stagflation is a term in macroeconomics used to describe a period characteristic of high inflation combined with economic stagnation, unemployment, or economic recession.
Stagflation is thought to occur when there is an adverse shock (a sudden increase, say in the price of oil) in a country's aggregate supply curve. The effects of rising inflation and unemployment are especially hard to counteract for the central bank. The bank has one of two choices to make, each with negative outcomes. First, the bank can choose to pursue a loose money policy to stimulate the economy and create jobs by increasing the money supply (by lowering interest rates) and exacerbate the inflation problem further. Or second, pursue a tight money policy (by increasing interest rates) to try and rein in inflation at the cost of perhaps increasing unemployment further.The conditions are all present: stagnant economy, inflation, shock cuased by oil price increase, stymied Federal reserve. The last time this happened the solution was to endure a period of prolonged inflation with interest rates in the high teens. We did not have a large national debt at the time. There isn't any historical precendent that I am aware of wherein stimulating the economy by lowering interest rates improved a stagflated economy. Then there are the specifics, the non theoretical aspects that drive the growth or suppression of the economy. Today these are debt, high markets following a long deep stimulation cycle and the creation of bubbles. And we still have a liquidity surplus. And as a nation we are not well suited to compete economically with much of the worlds labor. And there is the loss of the dollar as the worlds sole reserve currency and a new era of weak dollar confidence spurred by excessive money supply. Ben Bernanke is between a rock and a hard place.
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Post by unlawflcombatnt on May 19, 2006 13:49:43 GMT -6
Ben Bernanke is between a rock and a hard place. LC, I agree here. But I think you and I see a much greater problem with inflation than Bernanke does, or anyone else in the government does. The Corporate financial propagandists are chafing at the bit to see Bernanke stop raising interest rates. I think the financial arm of the Bush dictatorship, as well as its Corporatocratic supporters, will devote every ounce of their effort to "proving" that inflation is really under control. And I think Bernanke will go along with them in the end. Evidence of this vigorous propaganda campaign is in the "adjusted" calculation of the BLS's Consumer Price Index, which was reported as only +0.6%, when the calculation of 201.5 divided by 199.8 actually comes out to +0.85%. They're going to also trump up the "core" CPI and gloss over the total CPI. An increase in food and energy prices should reduce the "core" CPI, because it reduces the money consumers have to spend on non-"core" items. In other words, the higher food and energy prices are, everything else being equal, the lower the "core" CPI will be. That's the whole essence of "demand-pull" inflation. And by excluding the most "inflated" items, the remaining items show less inflation. There is less spendable consumer income to "inflate" their prices. Though when confronted with this contradiction the NeoCon-Artist propagandists are going to start blaming this on "supply shock," and start babbling all the rest of their supply-side mythology. But this response is debatable, especially given their concern about keeping wages down. Of course here they'll falsely claim it's because lower wages keep the cost of production down. But again, this is a dubious assertion. Corporate profits are at record levels, which indicates there is plenty of room for wages to increase without any increase in price. Prices are not increasing because of increased labor "costs." They're increasing mainly because consumers are willing and able to pay those higher prices. And that's because of the ever increasing ability of consumers to borrow money to finance spending, despite decline in real wages. And that ability to borrow is what's fueled Corporate America's record profits, despite declining real consumer income. Consumer borrowing has allowed Corporate America to reduce labor costs (and consumer income), and still increase product sales and prices. Prices are limited by consumer ability to pay those prices. Production costs cannot be passed on to consumers unless consumers are willing and able to pay higher prices. And retailers charge as much as the market allows them, regardless of production costs. If an item costs $1 to make, and the market price is $100, retailers will sell it for $100. If the same item costs $70 to make, and the market price is $100, retailers will still sell the item for $100. It is consumer spending power, not production costs, that is the major determinant of price. Once again, the demand-pull element of this inflation is not being created by increased wages. In fact, it is occurring while real wages are actually declining. Price inflation is being created by the increased borrowing ability of consumers. However, if the Fed reduces this borrowing ability, it will also reduce the asset inflation that Corporatists thrive on. And it is these Corporatists who really pull the strings on the Fed and the government. I think the maintenance of asset inflation will trump price inflation. The government will just find more ways to reduce the calculated inflation rate, thus eliminating the need for Fed rate increases. At least that's what I think will happen. Once again, this is a completely unsustainable course. And we may see the fruits of this course in the very near future.
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Post by unlawflcombatnt on May 19, 2006 15:15:26 GMT -6
The "no inflation" propaganda has started in earnest. Below is a statement by Treasury Secretary John Snow from a Yahoo News Story: Treasury's Snow says U.S. inflation in check"DON'T WORRY
'While it's true that headline inflation has picked up, core inflation remains in check," he said, adding that U.S. central bank policy-makers fully understood how vital it was that the rate of price rises remain under control.'"Just what I expected. It looks like we're going to "fix" inflation by just denying it.
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Post by lc on May 19, 2006 19:47:52 GMT -6
I thought the exact same thing. I don't think Ben has the balls GSpan had and I think he will cave to pressure from within and without the board of presidents.
Eventually we are gonna end up with 10%-20% short term interest rates and the stagflation propably can't be checked unless they go that route.
The thing is, all they need is to hold off the public perception of inflation increases 2.5 more years. Right about that time the whole country is gonna know things are getting much worse.
You made some really good points about the debt still providing the consumer spending. But it is slowing down. We are reaching the impasse point. I think your post at the begining of the thread bears that out beyond much doubt.
So from here on out the message that people need to hear is proof of a real inflation rate.
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Post by unlawflcombatnt on May 21, 2006 14:46:23 GMT -6
10-20% short term rates certainly would pop the "borrowing" bubble that's fueling our economic pseudo-expansion. But it would put us on the path to a more sustainable course.
The sooner the housing and borrowing bubbles burst, the sooner we can get back on the road to a "real" recovery, unlike the house-of-cards path we are currently on.
This reminds me of something I was just reading in my continuing medical education course about "early" defibrillation following a heart attack. The recommendation referred to treatment of someone in full cardiac arrest, due to ventricular fibrillation. (Which is the result of excessive and abnormal cardiac electrical activity.) The goal of de-fibrillation is to temporarily stop all cardiac electrical activity, with the hope that normal electrical activity will return. But if you wait too long to do this, it may be too late for normal electrical activity to return. The heart may be too far gone to resume "normal" activity.
This is a perfect parallel to our economy. If we don't "defibrillate" the economy now, and terminate the abnormal "electrical" (borrowing) activity, it may be too late for normal activity to ever return.
I think 10-20% interest rates would successfully "defibrillate" our economy.
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Post by lc on May 21, 2006 17:03:53 GMT -6
Yeah, except for the national debt. Once we do defibrulate the economy we would be faced with a ballooning national debt a slowdown in consumer spending (maybe) a rising cost of personal debt and an economy that was already having trouble getting traction further burdened with further slowing all around.
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Post by unlawflcombatnt on May 22, 2006 3:08:51 GMT -6
I'm not necessarily recommending early "defibrillation" of the economy. But that would certainly reduce current tendencies to spend more than we earn through borrowing, and hoping the bill would never have to be paid.
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Post by lc on May 22, 2006 7:28:14 GMT -6
I am not disagreeing, I just don't relish the effect that interest rates are gonna have on debt.
The odd thing is that as the economy grows it automatically requires a certain amount of debt as shirt term interest rates are based on debt and they drive the economy if you ask the Fed reserve/monetarists. And the money supply begins with debt and it naturally contracts as that debt is paid off. Agregate debt more or less = agregate economic stature.
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Post by unlawflcombatnt on May 22, 2006 15:16:46 GMT -6
LC,
It seems that if some of that debt was paid off by higher taxes on the top 2% and higher taxes on Corporations, we'd decrease our debt without having any significant reduction in investment, as investment capital is overabundant at present. And the anti-inflationary effect of paying that debt down would increase consumer buying power by increasing "real" wages. It seems like the effect of a relative increase in "real" wages would increase consumer spending, increasing demand for production, investment returns, and investment demand.
Of course this could be largely, if not completely, offset by the decline in deficit-financed consumer spending. The trick would be to increase taxes sufficiently, and target them appropriately enough not to have a dampening effect on the economy.
With record Corporate profits, record levels of cash-on-hand, and severely limited investment opportunities, its seems Corporations and high-end taxpayers could easily pay more taxes while reducing capital investment little. In fact, if the deflationary effect of paying off the debt increased "real" consumer income enough, and consumer spending & demand increased as a result, it could actually increase capital investment, despite the decline in the quantity of capital available.
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Post by lc on May 22, 2006 21:29:48 GMT -6
Unlawful,
In my dream economy the only taxes would be corporate taxes, excessive wealth taxes, user fees, death tax of 100%. The balance of revenues would come from a handful of state owne industires like banking, utilities, health care, insurance.
I am very uncertain, with the personal debt and national debt at such high levels the inflation adjustment is currently and will probably reduce real wages by staggering ammounts as wages remain static and prices rise. The inflation tax basically works by maintaining wage stability while prices rise at a rate of 5.3%/year.
I can't yet imagine a painless correction of the imbalance. We will survive.
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