...The big financial news yesterday began with a remark by Fed chairman Ben Bernanke.
The Fed will “strongly resist” any surge in inflation expectations, he said.
What he means by that is obvious: America’s central bank is going to fight inflation and protect the dollar. At least, so he says.
Investors neither smiled nor blinked yesterday. Instead, they took him seriously. Oil dropped $3. Bonds sold off – sending the yield on the 10-year note back up over 4%. The bonds that sold off most, by the way, were mortgage bonds. The property market is still weakening. The condominium vacancy rate has risen over 15% – the highest ever. And Floyd Norris of the New York Times says that one out of every four condos built since 2000 is empty. House prices nationwide are down about 13% from the top...but falling more and more rapidly – at a 25% rate in the last three months.
The crisis that began last year seems far from over. But the big losses, yesterday, were in gold. The yellow metal was down $27 yesterday – to $871. Investors must have figured that gold was doomed – now that the Fed has turned its big guns to an inflation-fighting position. Now, the dollar will strengthen...(it went up to $1.54 per euro yesterday)...inflation rates will go down...oil will go down – everything will be okay. Really. Honest. No kidding.
But the big question is: how can the Fed really fight inflation, after the biggest jump in unemployment in 22 years? How strongly can the Fed really resist inflation? We don’t know, but it might not have to. American consumers are buying less from the rest of the world. This leaves less U.S. money in the hands of foreign central banks...and less reason for them to inflate their own currencies. Less demand = less inflation = lower prices. But the price of lower prices is high. It means a worldwide slump...which brings down oil, commodities, gold, employment – and equities. This is not the sort of world in which the Fed raises rates. The Fed’s “fight” against inflation is likely to succeed, in other words, only if it doesn’t need to fight at all.
*** “What’s your solution?” asked a reader in response to Friday’s Daily Reckoning . “Or isn’t there one? If the world’s population is going to implode will that be through mass starvation/dehydration? Or will we run out of beer and all end up killing each other? Or will a terrorist bomb wipe us all out first? Will technology save the day? Isn’t the whole thing survival of the fittest? Is survival of the fittest really the best way of describing it for the human race? Or is it more ‘luck’... Is there a solution, or do we just sit back and watch the world fall apart?
*** Comes no answer, but more thoughts, from our Pittsburgh correspondent, Byron King:
“‘Dearer to God are the prayers of the poor,’ go the words to a sturdy old Anglican hymn.
“Well, at $138 per barrel of oil, I think we are about to find out how dear those prayers really are. This, plus the impending agricultural disaster due to low planting levels and other bad weather, will spell impoverishment for large swaths of the American middle class.
“In the United States, the poor and working poor are already marginalized. Now, with the ongoing melt-up in oil prices the middle class is being financially suffocated.
“Just on Thursday and Friday of last week, wholesale gasoline prices went up 33-cents. No typo. That’s 33 cents, in two days. So let’s round it out and add another $500 to the annual gasoline bill to operate one average automobile in the US of A. If you are a two-car household, make that number $1,000. Just from a two-day spike. And that does not count the impact on diesel (killing trucking & agriculture) and jet fuel (killing airlines).
“We are seeing the rapid evisceration of the guts of the U.S. economy. We are seeing the beginnings of an Energy Recession, if not an Energy Depression.
“Back in the Great Depression of the 1930s, it was different. There were ample natural and energy resources, but the factories were closed. There were factories, of course, but the workers were laid off. There were workers, but no one could afford to hire them. The banks had failed due to lack of funds. Overall there was just not enough money priming the pump to get things moving.
“Problem now? The resources are depleted. Many of the factories are gone and not replaced. Indeed, we have a manufacturing-averse culture in many respects. (The faux-environment movement has not helped.) Our educational system has produced a lop-sided labour force, such that there are critical skills shortages all through key parts of the economy (like energy...).
“And there’s too damn much ‘money’ floating around. Actually, it’s just excess U.S. currency in the form of credit instruments. Much of it has floated into the hands of people who are not ‘us.’ A few key resource-producing areas, along with overseas governments and sovereign wealth funds, have control over immense levels of global cash flow. With the rapid run-up in energy prices they are draining the daily capital out of the United States.
“So the overall view is.... not enough resources, not enough productive capacity (esp with energy), not enough skilled labour, and a decapitalized-indebted-illiquid-insolvent financial system that cannot get traction to move ahead.
“And when you don’t move ahead, you fall behind.
“Start praying...”
*** Here at The Daily Reckoning headquarters we have no solutions...and no prayers. (If we have any hope of God’s intercession in our lives, we’re not going to waste it on the economy.) Instead, we sit back and let the world go whither it wouldst. We just try to figure out where it is going...and get a parking place before everyone else shows up!
Message 24668755 |
