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To: richardred who wrote (94)	4/20/2007 4:54:58 PM
From: Peter Dierks	Read Replies (1) \| Respond to of 340

Four Dead Bodies Right now, gold, the dollar, bond spreads, and commodities all point to inflationary money from the Fed. By Larry Kudlow In my book American Abundance, published in 1998, I talked about the Four Dead Bodies theorem of inflation. Just as you should strongly suspect murder if you discover four dead bodies in an alley, you should be very wary of future inflation if four key market-price indicators are acting in unison. These include rising gold, a soft dollar, expanding bond spreads, and strong commodities. Right now, all point to inflationary money from the Fed. Four Dead Bodies 04/13 Caveat Emptor 03/23 Any Hedgehogs Running for President? 03/13 Liars, Inc. 02/23 Bernanke & Goldilocks 02/15 When You Tax Profits, You Tax People 02/09 Stout: Using the Children Zalenski: April 22, 2007 Goldberg: Emotional Vampirism Thompson: Signs of Intelligence? Boyles: Fear Factor Gvosdev: Viva Putin? Weber: A Sane Decision Kahane: Virginia Psycho Murdock: He’ll Make You Green with Envy Ponnuru: Thompson’s Tort Trouble Suderman: Breaking Point York: Alberto Gonzales’s Disastrous Day Krauthammer: Psychosis Control Lowry: Madness at Virginia Tech Some of my supply-side colleagues have been warning of higher inflation for the last few years on the basis of three dead bodies: rising gold and commodity prices and a soft dollar index. But I have avoided the inflation call because the bond market hasn’t signaled a move to higher price indexes. Frankly, the bond market is a far more broad, deep, and resilient indicator than gold, commodities, or the dollar. Hence, it deserves a disproportionately high ranking in the body-count scheme. Additionally, the Treasury bond has even greater analytical meaning because of the inflation-adjusted bonds (or TIPS) that trade in the open market. Basically, the 10-year Treasury bond can be deconstructed into a growth component (the real rate) and an inflation component (the TIPS spread). And so far this year the 10-year TIPS inflation spread has risen about 21 basis points, putting it above its 5-year average. So is it the fourth dead body? Well, the modest widening of the TIPS inflation spread may be a weak signal of inflation risk. But it also may be confirming the other inflation warning signals. The Fed must take notice. The JoC industrial metals index is up 16.5 percent year-to-date, gold is up 12 percent, and the dollar index has declined 3 percent. Added to this, the core inflation rate for the personal consumption price index (which is closely tracked by the Federal Reserve) has climbed from 1.4 percent last December to 2.8 percent in February on a 3-month annualized basis. In short, the body count is climbing. Therefore, the Fed should maintain the current 5.25 percent fed funds rate in order to protect the value of the dollar and limit the risk of future inflation. Meanwhile, there is good reason to believe Fed chair Ben Bernanke is watching all of these indicators, with a particular emphasis on the TIPS spread. (He has revealed as much in speeches and congressional testimony.) If so, the chief detective on the inflation case may very well make the right policy call. As he must. Inflation is the bane of financial assets. Bonds lose value when future interest and principal payments are made in cheaper dollars. And stocks lose value when the rising interest rates necessary to compensate for inflation reduce the present value of future earnings. And since the capital-gains tax is not indexed for inflation, significantly higher inflation elevates the effective tax rate on real capital gains in the stock market. Think of it as an inflation tax on top of statutory cap-gains taxes. What’s more, higher inflation increases capital costs for businesses and reduces consumer purchasing power for individuals. It doesn’t matter if you’re the head of a family or a business CEO — those greenbacks in your bank account are worth a lot less when inflation rises. And here’s another problem. Contrary to the Keynesian/Phillips-curve dogma, economic slowdowns do not necessarily produce lower inflation. If the economy’s output of goods and services continues to slow, the existing money stock will become more inflationary in relation to the scarcity of goods. This would weaken the dollar and raise inflation. Today the housing slump and a slowdown in business investment are both drags on the economy. Yet inflation remains a threat. We’ve seen this before: During the 1990-91 recession, inflation actually increased by 4.5 percent. Going back a couple decades, when the economy was in recession between 1980 and 1982, the inflation rate was nearly 8 percent. Milton Friedman labeled this inflationary recession. However, during the 1992-99 economic boom, inflation was only 2 percent annually. When the Reagan boom took over, inflation eased to about 3 percent. In other words, bad money is what causes inflation, not strong economic growth. But it is a strong dollar that will curb inflation. Loose talk from a protectionist-leaning Congress is arguing for a lower dollar to curb the trade deficit. This would be exactly the wrong policy. The Fed should ignore this banter and instead keep its eye on all four dead bodies in the inflationary morgue. — Larry Kudlow, NRO’s Economics Editor, is host of CNBC’s Kudlow & Company and author of the daily web blog, Kudlow’s Money Politic$. article.nationalreview.com

To: richardred who wrote (94)	8/19/2012 10:56:42 PM
From: greatplains_guy	Respond to of 340

Private Debt Is Crippling the Economy There won't be a recovery until credit card and household debt levels come down Anthony Randazzo August 10, 2012 America’s economic pundits are not very creative. For the past several years, their gripes about economic growth have fallen into several staid categories: Monetary policy (“the Fed should do less” vs. “the Fed should do more”); the struggling housing market (“let housing bottom out” vs. “we must save housing”); income inequality (“it doesn’t matter” vs. “it does matter”); and the federal deficit (“lower taxes, pretend to lower spending a lot” vs. “raise taxes, pretend to lower spending a little”). While most of these are legitimate causes of economic stagnation, there is another category that is having an outsized negative impact on growth: privately held debt. The housing bubble should have been the warning needed to correct American thinking on debt, but the media’s positive spin on reports that borrowing is “coming back” suggest the lessons have not been learned. The concept of debt has a troubled history. Historically when debts accumulate to a breaking point, the associated social unrest can lead to revolution and insurrection. This sociological trend gave rise to the Occupy Wall Street movement, particularly regarding debt from student loans. However, debt isn’t inherently a bad thing. Innovation in the past three centuries has sped up societal evolution and technological breakthroughs at breakneck speed compared to the last 5,000 years, and much of this has been built on borrowing and lending. Entrepreneurs with ideas often don’t have the capital to launch their business, and organizations with capital often don’t have the ideas to grow that money on their own. The beauty of finance is that we have developed tools to connect these two groups so that the entrepreneurs and capital investors have mutual benefit. The biggest challenges of debt come when loans are taken out irresponsibly (like no income, no job mortgages), when money is borrowed for consumption rather than investment (like excessive credit card debt), and when lenders are guaranteed a return of their money by law even in the case of bankruptcy (like student loans that are not discharged in bankruptcy, one of the leading reasons for the Occupy complaints). Unfortunately, all of those examples of irresponsible borrowing and lending are from the past few decades in America. Since the mid-1990s, privately held debt has soared to record highs. Promises that housing prices would rise forever deluded households into taking out big mortgages. At the same time a bull market in equities and low interest rates for several years made the costs of borrowing appear inconsequential. Many borrowers believed their debt was for a good investment (and therefore “good” debt), or weren't concerned about taking on a high mortgage or big credit card balances because perpetual economic growth would solve all the problems. But the bursting of the housing bubble left households with high levels of debt to deleverage or to take into bankruptcy court. This part of the story is well known in towns across the country, but what is not widely recognized is that this debt level is also preventing the private sector from rebounding after the recession. For those who believe that the problem in the economy is aggregate demand, high debt levels mean households are limited in what they can contribute to consumption. Even if stimulus was able to build a bridge through a recession, the historically high levels of debt have years of deleveraging ahead of them, keeping consumption off the table as a way of spurring recovery. For those who believe that aggregate supply could boost growth, small businesses too are saddled with having to pay the bill for decades of fun since many are linked to individuals and households, and therefore don’t have the capacity to invest at levels needed for a robust recovery. Washington has tried to solve this problem by encouraging more borrowing to get the music going again. Public support for more quantitative easing is primarily focused on pushing down interest rates so that businesses and households will borrow again. The Federal Reserve’s purchases of housing debt are about lowering mortgage prices so households will borrow again to buy homes. This has led to the media buying into the idea that if only Americans could borrow again, aggregate demand and supply would bounce back. An article from Businessweek on Monday referenced recently increased bank lending as “supporting” economic growth. This is totally backward thinking. Literally. Recovery should not be defined as moving backward to the way the economy used to be structured. That was a bubble, built primarily on cheap credit and not long-term investments. Moreover, much of the recent borrowing increases have been in revolving credit, primarily credit card debt, in order to meet basic needs. That is not the kind of consumption that will generate a recovery, especially since the costs of credit card debt are high and will weigh back down on household balance sheets in the months and years to come. A recovery built solely on expanding consumer credit and mortgage credit is simply another bubble and unstable economic foundation. America had started the process of household balance sheet deleveraging after the bubble burst. Mortgage debt levels have fallen sharply. And consumer credit—all debt other than mortgage debt—was declining as well. But in the summer of 2010, as the post-recession faux-recovery created false hope that the good times were back and as savings decimated by the bursting bubble began to hit zero in the midst of a weak economy, consumer credit levels (led by credit card purchases) began to rise again. The figure below shows that consumer credit fell 7.1 percent from June 2008 to June 2010, but since then has grown 6.9 percent to June 2012 (according to data released this month by the Fed). The rising aggregate consumer credit level means that household balance sheets are not shedding debt like they need to in order to contribute substantively to economic growth. Unless this changes, we’repretty much screwed. High household debt means less economic and labor mobility. Families cannot move to better employment if they are stuck in a house they cannot sell or have credit card bills crushing their credit score and making it harder to move. Private sector debt also means fewer family vacations, no upgrades on household appliances, and less investment. Perhaps most damning is that households deep in debt mean downward pressure on entrepreneurial expansion. Many small businesses are family run, or are financed from household balance sheets. As long as entrepreneurism is stagnant, the U.S. economy is not going to see real growth. Rather than public policy seeking to make borrowing cheaper, American leaders need to allow for household balance sheets to deleverage. That will mean short-term economic pain in exchange for a more robust economic growth period on the other side. And since the economy is in stall mode currently, the directly-associated pain will be muted anyway. Both President Barack Obama and his Republican opponent Mitt Romney are kidding themselves if they think they can inspire a recovery in the next several years without consumer credit levels falling and household debt levels coming down. Anthony Randazzo is director of economic research for Reason Foundation. This commentary first appeared at Reason.com on August 9, 2012. reason.org