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  • JasonC
  • 331 Comments

  Aug 01 07:48 PM
  Will we finally see the financial press stop repeating its endless refrain that "oil is rising because the dollar is falling", every single day? The dollar hasn't move an inch, net, since Bear Stearns day, nearly five months ago. There was a correlation between the Euro and oil between the 2004 elections and this March - (both up, duh), but it has collapsed completely since then, as oil went into a speculative blow-off and the Euro stopped dead. Why? Check out M2. M1 hasn't moved since 2005 - now M2 is declining at double digit annual rates. Not the story commodity bulls are selling, though, and they are tactically allied to the left's economic doom mongering. So you never hear a word about it, or see the slightest comment when it is mentioned (by accident).

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  • paultaut
  • 1057 Comments

  Aug 02 09:26 AM
  Creation of an endless supply of any currency will drive that currency's value down.
  
  When the country of that supply is also the currency used to price most commodities, the rise in those commodities is inevitable. It doesn't really matter whether interest rates go up or down. For the Dollar to strengthen, the supply must stop expanding.
  
  I don't see that happening any time soon. Wealth destruction is occurring internally and our leaders are doing whatever it takes to reverse that trend immediately rather than allowing it to work its way through the economy. The normal recessionary environment which would allow for the excesses to be wrung out of the system will instead find the economy strengthtening from a higher inflationary level.
  
  With another stimulus package possible before the end of the year, the dollars strenght will be short lived.

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  • Will Rahal
  • 114 Comments
  • My Website

  Aug 02 11:10 AM
  The slow loss of jobs cumulative effects will be felt.
  Debt and a heavy tilt to Services has made this economy(and the rest of the world's) vulnerable.
  I posted on the 25-year cycle. In 2007 the Mortgage debacle arrived
  on time to confirm another financial crisis associated with this cycle.
  It will take more that a few months to correct the excesses of a generation.
  See
  
  wrahal.blogspot.com/20...

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  • JasonC
  • 331 Comments

  Aug 02 12:15 PM
  Pauleans endlessly spout that there is rampant dollar creation by the Fed, but they are merely ignorant or lying. M1 hasn't moved since 2005. An inch. In real terms the money supply has been falling since the housing bubble peaked. Even in nominal terms, it has been falling since Bear Stearns day. All the Fed credit provided to banks since last July has been offset one to one by selling treasuries into the market, leaving the size of the Fed's overall balance sheet, and with it M1, completely flat. That isn't "endless dollar creation" and no amount of insane repetition will make it so. Pauleans simply have an ideological narrative line. They can't process facts that do not fit it. Right now we are not in an inflation, we are in a deflation. $2 trillion in past credit will default, and banks are scrambling to force cash flows in their favor, and using it merely to reduce their liabilities. There is no way to turn that into "banks are endlessly creating as much money as they can". In fact, long before the Fed's reserve requirements bind, Basel II capital adequacy requirements bind. And long before Basel II requirements bind, ordinary prudence about volatile assets, binds the banks.
  
  Was the Fed too loose from 2002 to 2004, and too slow to tighten? Sure. Were the banks reckless in expanding credit even beyond that, especially when they lent to deadbeats or at near-zero spreads? Sure. Are they paying the piper for it? You bet - they've lost $1 trillion in market cap in the last year and half the leadership has been fired, and everyone screaming that they are all being bailed out and that there are no incentives yada yada is smoking something.
  
  Flip ideology passes for thought. But it is all hogwash.

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  • Whidbey
  • 769 Comments

  Aug 02 02:44 PM
  Grace
  
  You seem to be walking through a burn house commencing on the progress of the fire. All fiat currency is going to suffer and the relative merits of each is not relevant except to note who is falling faster. The currencies are soon to be backed by some gold regime if we are to have any currencies at all.

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  • paultaut
  • 1057 Comments

  Aug 02 03:57 PM
  Lets see, CNBC's economic advisor put out an interesting statistic, before the passage of the $300 Billion housing aid package, the amount of money created by the Fed to forestall a financial crisis had risen to $1.3 TRILLION dollars...all sources.
  
  Add the "record" borrowing from the discount window just this past week and we will be talking about the creation of $2,000,000,000,000 by the end of the year.
  
  M1 and M2 have not been used in years because they have gone through the same manipulation as CPI.

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  • paultaut
  • 1057 Comments

  Aug 02 04:20 PM
  Took a quick look at Barron's Monetary stats, looks pretty grim if you ignore one stat which IMHO is the only one worth anything.
  
  US Debt held by foreigners has increased by about 17% in just the last year. One year, $357 Billion dollars, internally we are fighting deflation, thats a gimme, we are trying to avoid Wealth Destruction but externally, the amount of dollars sloshing around has been rising at an astounding pace.

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  • LLOYD2K
  • 2 Comments

  Aug 02 06:21 PM
  Do you think jobs were actually created in Finance and Construction as the birth-death model denoted? All figures will be fudged to buy time, get used to it!

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  • Lou Thomas
  • 35 Comments

  Aug 02 07:23 PM
  Fascinating discussion--especially the comments of JasonC. I'm still trying to make sense of this, but here are a few questions and observations:
  
  shadowstats.com's alternate data series shows a continuation of the suppressed M3 figure, and that has indeed fallen off somewhat in the last few months, although overall the trend is *hugely* upward. My thoughts on this would be that it reflects the destruction of balance sheet and now even some off-balance-sheet CDOs, etc., that are being marked to market instead of to model at last. Note the National Australian Bank having written down to zero over $1 billion of such junk, all based on U.S. mortgages, and Merrill Lynch's subsequent writedown of billions of its own such assets to 22 cents on the dollar (see smirkingchimp.com/thre...).
  
  Such admissions should be reflected as a reduction of the money supply, right? Deflation and deleveraging will, in fact, reduce the money supply, all other things being equal.
  
  Of course, the Fed has been backfilling this furiously by lending out treasuries to troubled institutions in exchange for their CDO junk. And that's where I have to ask JasonC: Won't these treasuries, and the ones that the Fed has sold, be used for additional money creation on margin that the CDO junk could not (any longer) be used for?
  
  So, we do have destruction of wealth, and hence money supply, but we also have some re-flation from the Fed, and now from the Federal government with the $300 billion credit line it recently extended to Fannie and Freddie. So, we have a collapsing bubble and desperate attempts of various windbags to breath new life into it.
  
  Considering, though, that this bubble is tied to major asset classes that have been supported by foreign investment, how long will it be before those foreign investors flee en masses from U.S. equities, Treasuries, Fannie and Freddie bonds, etc.? And where will the $7 trillion in cumulative U.S. trade deficit end up, if not in Sovereign Wealth Funds buying up whatever is not nailed down here, and then on to the forex markets to get less degraded fiat currencies, at the expense of the USD?
  
  The export-oriented Asian economies supported the dollar only so long as the U.S. market for their goods was strong. A recression here means less incentive to prop up the dollar, and more incentive to prop up the Euro and to sell more to the Euozone instead.
  
  Anyway, intuitively, you have to ask yourself: how can a collapse of the U.S. economy be good for the dollar?
  
  So, why is the dollar holding its own against the Euro for the last few months? I cannot see any explanation other than active intervention by central banks terrified that the dollar will collapse in an uncontrolled manner. The worse the U.S. news, the better the dollar gets.
  
  As I said, still haven't figured this one out...but there are plenty of other shoes to drop on this centipede of an economic calamity, and eventually one of them is going to hit the dollar right in the middle of the forehead.
  
  
  
  

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  • paultaut
  • 1057 Comments

  Aug 03 01:50 AM
  Dear Mr. Thomas:
  
  Your statement was more concise than most. Certainly I would not have been able to do so on the fly.
  
  I usually log on, look at the header and enter my Usual two bits. One can go back a few wars for the underlying aspects of what is currently occuring. I do not assume to know everything but I do know when others are making assumptions on statistics which can be used either to enlighten or mislead.
  
  You are a breath of fresh air.
  
  Thank You!

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  • zhandax
  • 10 Comments

  Aug 03 02:39 AM
  LouThomas hit it on the head...if you want clarification, go back and read up on 'fractional reserve banking". The texts will tell you that when loans are repaid, it creates money destruction. What the texts don't mention is that loan default creates the same effect. The Fed was playing makeup on a large portion of its money creation the last 6 months. Now that they have run the presses past the largest estimate of the sub-prime losses, we are back into inflation territory.

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