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

To: mishedlo who wrote (92495)	1/11/2009 9:17:09 AM
From: THE ANT	Respond to of 116555

I agree with your post.This is the way I sum things up:The Fed did a fair job of controlling inflation as measured by their measures of PPI/CPI.They just missed another whole dimension of inflation,that being asset price inflation.Now lets look at assets in isolation.Asset prices should over the long run rise or fall based on the return on these assets.Over the long run houses tend to trade at 4-5X average family income or 0.7% a month rent and stocks at PE 10-12.Any increase or decrease from these ratios is likely short term and speculative(could be positive or could be negative).If stocks rise but PE stays at 10-12 then productivity/return has increased and this should not be inflationary.Now there is the possibility of a paradigm shift.What if the financial system creates a series of novel products that somehow allow debt to GDP ratios to go from a long term 130% of GDP to 380%.Houses now trade at 10X family income and stocks at PE 20.Asset holders have in effect doubled the value of their assets relative to wages.Lets give the Asset/Wages ratio as 1/1 for the period 1940-1980.During the recent bubble the ratio goes to 2/1 and asset holders feel like the have doubled their claim on wages.They can retire on these assets and live on asset return and gradual sale of assets.The new ratio of 2/1 distorts all decisions made by the public as they think the ratio is permanent.Now Lehman goes belly up and overnight the emperor is seen to have no clothes.The asset/wage ratio must return to 1/1.Lending freezes up and borrowers do not want to borrow (both good economic decisions)The govt steps in to try to return Debt/GDP ratios towards 380%.They can not recreate this masterpiece which required two generations to die in the desert,20 years of Minshkys "stability creates instability",absent regulation,and tens of thousands of our best and brightest working on Ponzi schemes.A 2/1 Asset/Wage ratio can not return.Any attempt to create inflation would only raise both assets and wages and not change the ratio.Infact I will argue that inflation will decrease Debt/GDP and make the Asset/Wage ratio go in the direction of 0.9/1 by furthur driving down real asset prices.Since the Fed did not monetize all these years they only stretched the rubber band and it is snapping back with a vengence as there was no paradigm shift.I agree with you and Elroy that debt liquidation and deflation is the best course as it should allow lower rates and a Asset/Wage ratio in the direction of 1.1/1 vs .9/1 for the inflationary route.Lower rates will keep Debt/GDP ratio from falling so far.Just like the Great Depression there is no true way to avoid the pain.Just like the Great Depression income disparity will fall as the rich go down towards the poor

To: mishedlo who wrote (92495)	1/13/2009 4:45:17 PM
From: All Mtn Ski	Read Replies (1) \| Respond to of 116555

Great, another crook for the Treasury position. I don't buy that he didn't know this, he is a "money man" and should know his tax liability. Either that or yet another reason to abolish the tax code and replace it with a flat tax: Source: Geithner failed to pay personal taxes Source: Geithner quizzed about failure to pay personal taxes, housekeeper's immigration status Brett J. Blackledge, Associated Press Writer Tuesday January 13, 2009, 4:24 pm EST WASHINGTON (AP) -- President-elect Barack Obama's choice to run the Treasury Department and lead the economic rescue effort disclosed to senators Tuesday that he failed to pay $34,000 in taxes from 2001 to 2004, a last-minute complication in an otherwise smooth path to confirmation. Timothy Geithner paid most of the past-due taxes days before Obama announced his nomination in November, an Obama transition official said. The unpaid taxes were discovered by Obama's transition team while investigating Geithner's background, the official said. The transition official requested anonymity because the source was not authorized to discuss Geithner's situation. Obama reiterated his support Tuesday for Geithner as senators who are considering the appointment quizzed Geithner behind closed doors. "He's dedicated his career to our country and served with honor, intelligence and distinction," incoming White House spokesman Robert Gibbs said. "That service should not be tarnished by honest mistakes, which, upon learning of them, he quickly addressed." Geithner failed to pay self-employment taxes for money he earned while working for the International Monetary Fund from 2001 to 2003, the transition official said. In 2006, the IRS notified him that he owed $14,847 in self-employment taxes and $2,383 in penalties from 2003 and 2004. Transition officials discovered last fall that Geithner also had not paid the taxes in 2001 or 2002. He paid $25,970 in taxes and interest for those years several days before Obama announced his nomination, the transition official said. Geithner also didn't realize a housekeeper he paid in 2004 and 2005 did not have current employment documentation as an immigrant for the final three months she worked for him, the transition official said. Geithner is the second Obama nominee to face controversy. New Mexico Gov. Bill Richardson withdrew his name on Jan. 4 as Obama's Commerce secretary after questions surfaced about an ongoing federal investigation. Associated Press writer Nedra Pickler contributed to this report. finance.yahoo.com