Thursday, April 9, 2009

Anti the Anti-Deflation Arguments

If one "Googles" "A Night with the Bears", sponsored a couple of nights ago by Sprott Asset Management in Canada, one can find video and writeups of Nouriel Roubini's latest pronouncements.  Leaving aside whether he is staying too bearish too long, one of his persistent themes is exactly what the Fed has been overtly saying and doing:  fighting the deflation that has not really occurred yet.

The argument of Roubini (and implicitly the Fed) is that we cannot allow any deflation, otherwise the economy will more or less implode because people will stop spending and wait forever for the lowest price.  Thus money-printing must occur, and all the risks in this and related endeavors must be toward higher prices.  Thus it does not matter to Dr. Roubini that consumer  prices rose a combined about 10% in 2007 and 2008.  If prices were to drop 1-2% in 2009, that would hardly reverse the huge rise in 2007-8, a rise which of course was not matched in any way by rising wages per worker, even those workers who kept their jobs, and was obviously not matched by any rise in interest or other investment income.

There is no logic to this argument.  If restaurant prices drop, people will eat out more.  If prices of grapes drop, supermarket shoppers will buy more grapes.  If a couple in a starter home has a melange of hand-me-down and used furniture that looks ugly together sees lower prices on a coordinated bedroom set, that couple will be more likely to buy that bedroom set than if the price continues to rise.  And the more the factory that produces that bedroom set gets its utilization rate above (say) 50%, the more it can further lower its prices as it regains efficiencies of scale, and thus sell more furniture.  

One of the real points of rising prices is that it forces people to entrust their money to the banking system, where the Fed and its clients can use and misuse it.  Absent inflation, people can hold cash, bury it in the backyard, etc.  The Fed must have a positive rate of inflation to allow banks to snarf up every last bit of "cash" and then enrich their executives and other owners to the maximum extent by making that "cash" work harder and harder with such maneuvers as overnight repos and (especially) fractional reserve lending.  That is and has always been the mission of the Fed.  The problem is, as with other stretched paradigms such as explaining planetary and solar motions as being against a fixed Earth rather than a fixed Sun, is that eventually complexity gets too great for the existing paradigm to be sustained.  (See Thomas Kuhn, "The Structure of Scientific Revolutions", available on Scribd or in paperback).  As Kuhn points out, though, the new paradigm generally only takes place when the experts and Establishment that is invested in the old paradigm dies out.  Thus, the misplaced love for Citigroup et al.

Sadly, in pursuit of the old way of doing finance, the Fed has been on a jihad against savers for years, reversing the pro-saving approach of Paul Volcker.  Receiving a negative pre-tax real return on money in the bank drove people to speculate on all sorts of assets this decade.  This is going to happen again in the Fed's playbook.

Be careful.  The huge unexpected profit Wells Fargo pre-announced today is proof of what EBR and others have been complaining about.  This is the largest government transfer of wealth from the taxpayer to financial companies in the history of the world.  All in the name of the banksters allegedly being able to lend us back our own money.   But of course the "money" came out of a combination of thin air, debt to mostly impoverished Chinese and oil sheikhs, and Fed-induced inadequate payments to savers who are now receiving zero interest on money funds while the Wells' of the world will once again have analysts say, on the post-earnings conference call, "Great quarter, guys".

They are earning money the old-fashioned way:  through theft and political influence.

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