Don’t worry, I’m a central banker!

These two clearly have no clue what they are doing:

“The Bernanke-led Fed … announced on Aug. 10 it will buy Treasuries to set a $2.05 trillion floor on its balance sheet and keep interest rates from rising. Trichet said Aug. 5 that the euro-area economy was surpassing forecasts, which may pave the way for the ECB to look at phasing out its emergency lending measures.

“Their attitudes contrast with the second quarter, when the European fiscal crisis forced Trichet to buy government bonds for the first time and Bernanke discussed how and when to cut the Fed’s balance sheet.”

It’s like watching tennis. And you are the ball.


A number of amusing stuff ups to report on this week:

“The Spanish government may see “a few hundred million euros” in tax revenue delayed after a court ruled that its system of auditing sales tax was illegal, a spokesman for the tax agency said.

“Denying a claim that the figure was more than 5 billion euros ($6.4 billion), the Agencia Tributaria said about 19,000 taxpayers who challenged sales tax bills from 2006 to 2008 will win their appeals because of a flaw in its collection procedure, the spokesman said. The tax agency, however, will resubmit those tax bills affected to eventually collect the money, he said”

Bloomberg reckons this news gave us Thursday’s fall with the Dow below 10,000 for the first time in seven weeks.

The New York Times has come up with some useful advice. “People shouldn’t look at a home as a way to make money because it won’t.” Sadly, it’s about four years too late for Americans. Well done NYT. But then again, maybe the warning was directed at someone else. Someone on the other side of the pacific…

In this amusing video, former Federal Reserve Governor Mishkin struggles with some rather odd facts. If you ever thought central bankers were ethical, this might change your mind.

The US military’s withdrawal from Iraq continues. As do its deployments… Even the soldiers are scratching their heads.

The Financial Crisis Inquiry Commission has had some trouble lately. It was set up to examine the causes of the financial crisis. Sadly, the members of the Commission are dropping out rather rapidly. Their staff at equal rates.

President Obama’s Deficit Commission is faring little better than the FCIC. Its Co-Chair, Alan Simpson, claimed that Social Security is “like a milk cow with 310 million tits.”

Nice one Alan.

End of the election

We regret to inform you that our coverage of election news is on hold for now. While writing about Oakeshott’s radical idea to have a mix and match government, we finally lost it. The sound of whales wailing in the Optus add, which is displayed on just about every The Age website page, has driven us over the edge. I can’t take it anymore.

Since then, some guy called Bob Katter has proposed splitting up Queensland and moving around the Northern Territory. He is also on the front page of the New York Times. Perhaps you should delay any trip to the US until this mess settles down.


Everyone seems so sure about everything these days. That’s a remarkable feat considering the recent performance of the forecasting elite. Still the comments keep coming. From politicians, no less:

“Former Republican House Speaker Newt Gingrich says Barack Obama’s policies are “artificially extending the recession.” Congressman John Boehner, the party’s leader in the House, says “stimulus policies aren’t working.” Republican Senator Jim Bunning calls Federal Reserve Chairman Ben S. Bernanke’s tenure “a failure.”

“The U.S. bond market disagrees. The economy has never contracted with the difference between short- and long-term Treasury yields as wide as it is now.”

Hooray for the stimulus! It’s saved us all! But wait:

“A 2002 study … found that increased spending by government had, in almost all cases, a barely noticeable impact, and sometimes a negative one. Heavily indebted countries that spent more in recessions grew about 0.5 percent less, relative to trend, than countries that didn’t.”

Is this time different? The bean counters have helped us out dramatically by pinning down the supposed effect of the stimulus in the US:

“The Congressional Budget Office estimated that the emergency stimulus spending boosted economic growth between 1.7 per cent and 4.5 per cent in the second quarter this year. CBO said the stimulus law of 2009 also created or saved 1.4 million to 3.3 million jobs in that quarter.”

So even the CBO doesn’t have a clue. That is unless you consider a 3% wide range of GDP growth (12% annualised) an acceptably narrow estimate. Let alone the 2 million wide range in the jobs estimate. Maybe Tony Abbott should submit his policies to costing with the CBO, so that the results are so ambiguous, the hullabaloo will die down.

No matter what the CBO counts, Nouriel Roubini points out the inherent flaw in the stimulus concept:

“All the growth tailwinds of the first half of the year become headwinds in the second half,” he said in an e-mail message, including the government’s $814-billion stimulus plan, hiring for the census, and incentives such the cash-for-clunkers program and tax credits for first-time home buyers.”

So the more you stimulate, the worse the backlash when you stop. Still, some are sticking to their guns and butter. Like Mark Zandi, Moody’s chief economist:

“What needs to change are people’s expectations. The stimulus did exactly what it was intended to do. It was intended to end the recession, jump-start the economy, and it did that.”

So when stimulus doesn’t work, Keynesians make it work by telling people to expect less. At least one Democrat Senator just can’t toe the line on this one:

“We have managed to acquire $13 trillion of debt on our balance sheet. In my view we have nothing to show for it.”

Next let’s to turn to the Prince of Stimulus, Joe Stiglitz, who is at odds with the German Austerians:

“Nobel Prize-winning economist Joseph Stiglitz said in an interview broadcast yesterday that budget cuts may push the euro area, Germany’s biggest export market, back into recession.”


“German order books are still full and domestic demand is picking up,” said Alexander Koch, an economist at Unicredit Group in Munich. “The economy will grow very solidly, just not as fast as in the first half.”

Oh. And then there is the fact that Germany’s growth is its fastest since reunification. And Jim O’Neill of Goldman Sachs has made the call that domestic demand may take over from any export slump.

What Stiglitz sees through his Keynesian eyes is beyond our imaginative capacity. But this comment from a different source (known only as AP) is a truly memorable one:

“At the current rate, Germany will this year overshoot the European Union limit for budget deficits to be no more than 3 per cent of gross domestic product.”

Those naughty Germans! Not following the rules!

While the debate rages on, the mother of all Keynesian experiments, the US housing market, continues its implosion. As far as we know, no one sector of the economy can lay claim to causing two recessions, in quick succession. That is if you consider the US to be out of recession in the first place.

But if Keynesianism is such a shemozzle, why is it so popular? Because it gives busy bodies something to do.

Who will be the first to go?

The be-ratings agencies are back (again) as Europe begins its latest struggle in the media:

“[S&P] said it had lowered its long-term rating on the Republic of Ireland to ‘AA-‘ from ‘AA’, saying the projected fiscal cost to the government of supporting the financial sector had increased significantly.”

Outside the media and in the real world of financial flows (which don’t include rating’s agencies ratings), things are similarly bad for the Irish. Ambrose Evans-Pritchard’s short piece on how the Greeks have stolen the luck of the Irish is an important read:

“Ireland must now pay more than Greece to borrow…. Dublin has played by the book. It has taken pre-emptive steps to please the markets and the EU. It has done an IMF job without the IMF. Indeed, is has gone further than the IMF would have dared to go.”

But still the interest on Irish debt is higher than that of the Greeks. Significantly higher.

“To add insult to injury Ireland is having SUBSIDIZE Greece to meet its share of the rescue fund”

All this shouldn’t be a revelation. If someone takes on another person’s dodgy debt, they can expect their creditworthiness to fall. The US government has taken on what is effectively its entire economy’s debt. Implied guarantees, bailouts and mortgage purchases are the give-aways. Considering the US economy is in a bad enough state to need all this help, it’s likely that the US government will find itself on the hook for a lot of dodgy debt. Then they can either default or print. Either way, interest rates will fly.

In the UK, they have figured this out already. At least some of them have. Warning of the calamities to come, Andrew Lilico, chief economist at the think tank Policy Exchange, has come up with the usual British melodramatic warning:

“Given the constraints of late 2008 and the absurdities of subsequent fiscal, finance and regulatory policy, if we can get away with a recession of only 6.6pc, deflation of only 2pc and inflation of only 10pc for one year, [Bank of England Governor] Mervyn King will deserve a medal.”

Wow, a medal. We’re quaking in our boots…

Over in Germany, Die Bild Zeitung ran an article about what many Germans have been wondering: “How are the Greeks faring with our billions?”

The sub heading claims they “are shivering about losing their jobs and fear their future”. Just to add to the sympathy, their “bankruptcy fear is back”. How this sits with Germans busy engineering their latest Wirtschaftswunder is up in the air.

Morgan Stanley chimed in with the following helpful advice on sovereign debt troubles:

“Global debt woes are severe enough that some governments will default on their bonds, says Arnaud Mares, an executive director at Morgan Stanley.

“Governments will impose a loss on some of their stakeholders. The question is not whether they will renege on their promises, but rather upon which of their promises they will renege, and what form this default will take.”

Hyperinflation isn’t inflation

Gonzalo Lira on laid out the case for “how hyper inflation will happen”. Now you may be sick of this story, but Gonzalo frames the argument in a way that will help you grasp the nature of what is actually discussed.

Firstly, the nature of hyperinflation is not the same as that of high inflation. That is why a hyperinflationary scenario can spring out of a deflationary one without warning. Arguing otherwise displays ignorance of the nature of hyperinflation.

“Inflation and hyperinflation are two very distinct animals. They look the same – because in both cases, the currency loses its purchasing power – but they are not the same.”

Inflation is when the economy overheats: It’s when an economy’s consumables (labor and commodities) are so in-demand because of economic growth, coupled with an expansionist credit environment, that the consumables rise in price. This forces all goods and services to rise in price as well, so that producers can keep up with costs.

Hyperinflation is the loss of faith in the currency. Prices rise in a hyperinflationary environment just like in an inflationary environment, but they rise not because people want more money for their labor or for commodities, but because people are trying to get out of the currency. It’s not that they want more money – they want less of the currency: So they will pay anything for a good which is not the currency.”

While we wouldn’t agree with Gonzalo’s definition of inflation, his distinction is still a valid one.

Consider that the US government is going to have to default or print its way out of the huge liabilities it has and will incur. With Bernanke at the helm of its own private central bank (Europe has to share one), there is little to be said for the default option. So once people realise that the long run will be characterised by money printing, this could cause the outbreak of hyperinflation.

A symptom of this scenario would be a dramatic fall in the value of the US dollar versus other currencies. That is something commonly forecasted by people from all sorts of economic camps.

Nick Hubble
for Markets and Money

Nick Hubble
Nick Hubble is a feature editor of Markets and Money and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about Markets and Money, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails.

Leave a Reply

Be the First to Comment!

Notify of
Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to