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"One should either write ruthlessly what one believes to be the truth, or else shut up."

Arthur Koestler 

Thursday
Aug292013

The Sound of Silence

Wednesday
Aug282013

Inflation Is Your Friend

 

I posted a transcript from Dan Ackroyd's parody of Jimmy Carter called "Inflation is your friend."

But reality is now a parody. A Bloomberg article points this out: 

Pretty soon, Harvard colleague Greg Mankiw was advocating higher inflation as a cure for slow growth -- and a preferable option to additional fiscal stimulus. In 2010, Olivier Blanchard, chief economist at theInternational Monetary Fund, put his imprimatur on the idea. In a paper examining the lessons from the financial crisis, Blanchard and his co-authors suggested that the benefits of a 4 percent inflation target, to minimize the risk of deflation in response to shocks, might outweigh the costs. 

Let's ignore for a moment that the government is cooking the books and inflation is higher than that right now. What effect will higher inflation have? 

First it will harm retailers as they struggle to replace inventory at a higher price. It will also artificially increase profits, but these profits are not real. But the taxes the higher profits cause are real. 

Next, interest rates would have to rise. Right now this would have a very negative effect on the economy. Most people do not buy a house, they buy a payment on a house. If interest rates rise, then payments go up and the price that a buyer can afford to pay goes down. The recent rise in in mortgage rates has already caused applications for loans to plummet. I read where one of the bigger mortgage companies layed off 10% of their staff. 

Finally the budget deficit will rise as the cost of borrowing money rises. This would force the Fed to buy even more bonds. While foreign government holders of US bonds are in a tough spot, my guess is that the dollar would fall as "hot" money went elsewhere. 

Investment would be impacted. Imagine that prices double in 10 years. So an investor buys stock in National Widget for $100,000 and 10 years later sells it for $200,000. No profit has actually occurred, yet a tax of $20,000 must be paid. Investment is already suspect, this will only get worse. 

I remember seeing the Ackroyd parody on TV and laughing, I am not laughing now. 

 

Tuesday
Aug272013

Mish Shedlock Interview on Currencies

Monday
Aug262013

"Where You From Boy?"

I remember reading a book decades ago called The Nine Nations of North America. The book did not predict the end of America so much as point out the obvious. America is rather hopelessly divided into rather obvious sections. This was self-evident to me at the time as I had not too long before moved from California to Missouri. I had been asked by a truck driver rather pointedly, "Where you from, Boy?" I was in northern Arkansas at the time. 

With that in mind here is one future map of a possible future US:



The breakup of many countries does seem inevitable. Spain is particularly vulnerable. One thing that is holding back such separatist fervor is the huge debt of these countries, but if that debt ends up repudiated ...

An interesting question that is not particularly important now but may be later is one that you may need to ask yourself. 

"Where you from Boy?" 

Sunday
Aug252013

Mansa Musa