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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: DOUG H who wrote (6686)	5/19/2004 3:13:45 AM
From: Elroy Jetson	Read Replies (2) \| Respond to of 116555

Here's the difference between Rist and Friedman. Both see the deflationary period, but interpret it differently. Rist and Schumpeter believe deflation is a normal event in a growing economy and certainly does not need to be stabilized or interfered with. It results from lowered production costs through efficiency and results in lowered debt through reduced borrowing and bankruptcies of inefficient producers and increases available capital through higher interest rates from money scarcity. This brings supply and demand back into balance, but based on greater efficiency. This is Capitalism's "creative destruction" Schumpeter wrote about. The lowered debt levels provide the basis for a renewed expansion of the economy. Friedman believes deflation signals demand is below economic potential so increasing the money supply, by lowering interest rates and loosening borrowing standards, will bring demand up to supply stabilizing prices. When the economy strengthens (from who knows what cause) you remove the excess money by raising interest rates before "inflation happens". I think as you will see, Friedman's monetary policy is very effective in stabilizing panics but it's disastrous in stabilizing a deflation. The Fed represents the interests of the banks and so choose Friedman's approach of "stabilizing" deflation before it erodes the value of loan collateral causing bank losses. Rist and Schumpeter, although both are dead, correctly forecast the outcome of Friedman's plan. In short this "stabilization" creates a far worse problem. First, the excess money and expanding debt, while stabilizing general prices, cause wild speculative bubbles in investments such as stocks, bonds, and real estate. Secondly, this does not correct the economic imbalances signaled by deflation. Debt levels expand dramatically rather than decline. Marginal producers can borrow new cheap money to remain in business, weaken efficient competitors, and mis-allocate capital into expanding surplus supply. Third the reduction of returns on capital discourage capital formation. Because of these factors there is no recovery. Spurts of tax-cuts or even lower interest rates provide short-lived recoveries on the road to further ruin. Eventually interest rates can't be made lower. Asset prices collapse and so does demand. You now get the down-turn which should have originally occurred, except magnified many-fold. As Schumpeter said, "policy does not allow a choice between depression and no depression, but between depression now and a worse depression later: inflation pushed far enough would undoubtedly turn depression into the sham prosperity so familiar from European postwar (WW-I) experience, and would, in the end, lead to a collapse worse than the one it was called in to remedy. For recovery is sound only if it does come of itself. For any revival which is merely due to artificial stimulus leaves part of the work of depressions undone and adds, to an undigested remnant of maladjustment, new maladjustment of its own which has to be liquidated in turn, thus threatening business with another worse crisis ahead" This is where I believe we're headed. Japan started before us. Although their interest rates are zero and mortgage rates are 2%, real estate prices have been declining for 14 years while general prices rise. home.pacbell.net Stock prices are heavily manipulated but they have also collapsed without significant recovery. In the harshest perspective, I don't think Milton Friedman is a Capitalist, in spite of what he would like to believe. He represents the Monetarist system which depends on a strong banking and debt creation system. It is the antithesis of Capitalism, a centrally-planned economy run by money fiddlers.

To: DOUG H who wrote (6686)	5/19/2004 10:06:49 AM
From: mishedlo	Read Replies (1) \| Respond to of 116555

UK discussing shocking consumers with steep rate hikes UK rate rise in June on cards after BoE discusses shocking consumers Wednesday, May 19, 2004 11:26:42 AM ----by Pan Pylas---- LONDON (AFX) - UK homeowners are bracing themselves for another increase in mortgage payments next month after the Bank of England's rate-setting body discussed shocking consumers into reining back their spending. Minutes of the May 6 meeting showed that the nine-member Monetary Policy Committee had a long discussion on the pros and cons of lifting its key repo rate 0.50 points before concluding on the expected 0.25 point hike to 4.25 pct. "The MPC is clearly thinking of picking up the pace of monetary tightening in the coming months and, as such, the chances of the next rate hike coming in June, rather than July's meeting which we currently expect, have increased," said Paul Dales, UK economist at Capital Economics The markets clearly interpreted the minutes that way, with sterling rallying strongly against the dollar and the euro, while market interest rate expectations rose to above 5.00 pct The minutes helped push the pound up to above 1.78 usd from a low overnight of 1.7632 usd, while the euro headed back towards day lows of 0.6722 stg The MPC argued that a 0.50 point hike could have been "warranted" given the central bank's economic forecasts last week, which showed inflation rising above target over two years even if interest rates rise as the market expects It argued that "more rapid increase in interest rates than the market currently expected" could address some of these concerns about inflation as well as shocking consumers into moderating their indebtedness However, George Buckley, economist at Deutsche Bank, noted that this does not necessarily mean the MPC thinks interest rates need to rise above what the market is pricing in, but that they meed to get there quicker to generate a more gradual rise in inflation Nevertheless, Buckley said these minutes were more hawkish than usual, because the discussion of a surprise 0.50 point hike was not limited to "one" or "some" members "The absence of such attributive wording suggests that the Committee as a whole felt there was a need to discuss a more aggressive tightening," he said Analysts said the upshot of all this is that the MPC will look to raise rates again before the next Inflation Report in August, provided the economic data continues to come in firm, though March's surprisingly weak industrial production data may mean GDP growth in the first quarter is not revised up from the initial 0.6 pct estimates, as the MPC expects "These minutes highlight that the MPC is likely to break away from raising rates only on Inflation Report months, as has been the case since November," said Buckley, who predicts rates at 5.00 pct by the year-end Even analysts who expected a more modest rise in interest rates cannot ignore the message from today's minutes Alan Castle, economist at Lehman Brothers and one of the handful of economists still predicting a rate peak of 4.50 pct, conceded that the chances of another 0.25 point hike in June has risen to 40 pct fxstreet.com

To: DOUG H who wrote (6686)	5/19/2004 10:15:33 AM
From: mishedlo	Respond to of 116555

U.S. mortgages activity slows further in latest week Wednesday, May 19, 2004 11:15:48 AM WASHINGTON (AFX) -- Despite lower interest rates on fixed-rate mortgages, the Mortgage Bankers Association's composite index tracking the nation's mortgage loan applications dropped to a seasonally adjusted reading of 654.1 in the week ended May 14, down 11.9 percent from the prior week's 742.2. Both refinancings and purchase applications dropped in the latest week, with the refinance share of mortgage activity slipping to 37.4 percent of total applications from 39.8 percent. Adjustable-rate mortgages rose to 35.2 percent from 34.8 percent, the MBA said. Thirty-year fixed rate mortgages carried an average contract interest rate of 6.21 percent last week, down from 6.32 percent in the week ended May 7, while the rate on 15-year mortgages fell to 5.58 percent from 5.72 percent. One-year ARM's saw their rates rise to 3.75 percent from 3.74 percent