August 17, 2007

Fed Governor Poole just yesterday - "Only a calamity" would justify interest rate cut. The market and MSM got it wrong today.

The bankruptcy of Countrywide (I'm short) and a classic run on the banks would be a calamity. 10 Million homedebtors losing their homes would be a calamity. $8 Trillion in housing wealth going bye-bye would be a calamity.

What Poole told the market yesterday is that the Fed ain't gonna lower rates anytime soon, and not until something big happens (i.e CFC goes BK). And the market and MSM got it wrong today - the Fed didn't lower, they simply opened up the discount window. Big difference.

They opened the window to improve liquidity. They didn't cut the ever-important Fed Funds rate, which is what Poole was talking about. Those exploding ARMs are still exploding, Mozilo is still selling, Countrywide owns cancer loans, panicked customers and a defunct business model, housing is in meltdown, and the ARM homebagholders don't have any access to refi loot anymore. Tilt.

Bottom line - lowering the discount rate, or even the funds rate, won't make the bad man go away - they were called "liar's loans" for a reason don't forget... And don't forget that the Fed is hilariously for the first time taking mortgage CDO's as collateral. In other words, the lender of last resort (the taxpayer), like with the S&L disaster, is about to get slaughtered.

Here's Poole yesterday:

William Poole, president of the St. Louis Federal Reserve Bank, said the subprime mortgage rout doesn't threaten U.S. economic growth, and only a ``calamity'' would justify an interest-rate cut now.

Poole, who confers regularly with regional business contacts and votes on rates at the Fed this year, said in an interview yesterday that ``no one has called up and said the sky is falling.'' The best course is for officials to assess economic figures, including the August jobs report, when they next convene on Sept. 18, he added.

``It's premature to say this upset in the market is changing the course of the economy in any fundamental way,'' Poole, 70, said in the interview at the bank's St. Louis headquarters. ``If the Federal Reserve were to act when it turns out there is no impact, then clearly the market would say these guys really don't have the intelligence they need to have a policy actually based on solid evidence.''


Gwk said...

Banks do not like this rate window because it gives the impression they are in danger if they draw funds from it but the Fed assured them they would not look at it that way and Cramer is taking credit for this Fed action we are all safe this weekend.

Anonymous said...

So he should tell that to Countrywide employees who will lose their jobs within a month. As this article says "typically these bank lines are supposed to be just there and not used".

Friday, August 17, 2007
Countrywide taps $11.5 billion credit line from banks
The nation's top mortgage lender turned to the emergency loan a day after Merrill Lynch & Co. raised the prospect of bankruptcy.
Bloomberg News

Countrywide Financial, the nation's No. 1 mortgage lender, was forced to tap an $11.5 billion line of credit Thursday as the global financial crisis curbed access to short-term financing.

Countrywide turned to the emergency loan, which it said was provided by a group of 40 banks, a day after Merrill Lynch & Co. raised the prospect of bankruptcy for the Calabasas-based lender.

"When a company draws on its bank lines, it just basically gives off the impression that it has run out of options," said Christopher Wolfe, managing director at Fitch Ratings, which Thursday dropped Countrywide to BBB+, its third-lowest investment-grade rating.

"Typically these bank lines are there but not really meant to be used."

Credit rating agency Moody's Investors Service downgraded Countrywide's senior debt rating to "Baa3" from "A3."

First Magnus Financial Corp., the second-largest privately held U.S. mortgage lender, said Thursday it would stop funding new mortgages amid the worst U.S. housing slump in 16 years. Irvine-based New Century Financial Corp. and American Home Mortgage Investment Corp. filed for bankruptcy earlier this year. They joined about 70 companies with links to the mortgage market that have had to close or put themselves up for sale since the start of last year.

Countrywide, which has lost more than half its value on the New York Stock Exchange this year, fell for a sixth consecutive day. Its stock tumbled $2.34, to $18.95.

Equity analyst Friedman, Billings, Ramsey Group said a continued liquidity crunch for more than three months could send Countrywide into bankruptcy.

Other analysts said the credit situation will have far-reaching consequences.

"We're in this situation where one of the biggest home lenders in the country is in significant financial difficulty and is being forced to take fairly extraordinary action to maintain its financial viability," said Tony Hughes, managing director of credit risk for Moody's

"This means the threat of a credit crunch is very real. It means that mortgage finance generally will be hard to come by," he said.

Goldman Sachs analyst James Fotheringham said "it would not be in this country's best interest to have its largest mortgage lender cease operations." He did not elaborate.

Fotheringham said in a research note the country has yet to see the worst of the ongoing mortgage credit crunch.

"Industry trends are not improving," he wrote. "Home prices are 13 percent to 14 percent overvalued (which could take several years to play out)."

Some analysts said Countrywide had bought time with its huge loan.

John Kriz, a managing director of Moody's real estate finance team, believes Countrywide now has enough liquidity to meet debt obligations through 2008.

Countrywide President and Chief Operating Officer David Sambol said in a statement the company has "taken decisive steps which we believe will address the challenges arising in this environment and enable the company to meet its funding needs and continue growing its franchise."

Homeowners who make their monthly mortgage payments to Countrywide should not be affected by the company's troubles, experts said.

The nation's credit worries have grown as the secondary market for mortgages all but disappeared in recent weeks. Investors have worried about the value of loans and rising delinquencies and defaults.

Mortgage lenders rely on the secondary markets to borrow money to make more loans. The problems started as subprime mortgages – loans given to customers with poor credit histories – started going delinquent and defaulting at faster rates.

The problems have spread to the broader mortgage market, making investors nervous about nearly all types of loans that cannot be purchased by Fannie Mae or Freddie Mac.

Such "conforming" loans are considered safer because Fannie and Freddie are government-sponsored entities. Countrywide said some 90 percent of the loans it originates from now on will be conforming loans or will meet its internal bank criteria.

The move to beef up its portfolio of conforming loans could erode Countrywide's earnings prospects, because such loans "suffer thin margins barely covering overhead costs," Fotheringham wrote.

"Credit costs are set to increase even further than we had anticipated as riskier loans are added to an already troubled portfolio," he wrote.

By adjusting its product mix to originate Fannie and Freddie-approved loans almost exclusively, Countrywide will be cutting out most subprime, alt-A and jumbo loan products.

Alt-A mortgages are given to customers who either have minor credit problems or who cannot provide full income documentation required to get a traditional prime loan.

Jumbo loans are mortgages for more than $417,000, the cap at which Fannie and Freddie will purchase loans. Jumbo loans typically are given to customers with excellent credit histories.



Anonymous said...

Poole shmoole.

We win.

You lose.

Game over HP.

Anonymous said...

PS: How's gold doing these days? 2% up this year. W-O-W!!

serindippity said...

Uh, the Fed DID cut rates.

They cut the discount rate to make it more appealing and didn't increase margin requirements. That isn't nothing.

And, in reality, Fed Funds rate is 4.75-5.0%. Remember that Fed Funds is a market rate, but Fed intervenes to keep it close to the target.

If they don't intervene to keep it at nominal 5.25% target, it means that they have, de facto, lowered their target.

Reality, they cut by 0.25-0.50 in fed funds, but not yet official, and they cut by 0.50 in discount, which is what's important in 'illiquidity events' like now.

Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward. In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably. The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets.

Voting in favor of the policy announcement were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Richard W. Fisher; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Michael H. Moskow; Eric Rosengren; and Kevin M. Warsh.

Directly from

Notice who isn't on that list: Poole.

On the discount rate cut: In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York and San Francisco.

Poole is Fed Reserve Bank of St. Louis. The statement didn't give any votes.

Summary: Poole got shivved.

Brenda said...

This cut in discount rates was just in time for profitability to come into play for the lenders before the ARM resets. The yield spread is still terrible and now the lenders can no longer make a profit by bundling loans and selling them to hedge funds/foreign investors, so the Fed had to do something or the troubled "reset" borrowers were not going to find any lender to bail them out. That would have CALAMITY I'd say!

dagg said...

Fed has already cut

The Fed Has Already Cut the Fed Funds 4.79%

Anonymous said...

The discount rate may be a minor item in the finance world - BUT THE POINT IS :
Wall St. has managed to scare him with visions of a cascading collapse and his strategy going forward is to satisfy their desire for more credit bubbles...
Watch out for a tsunami of money to pour forth into the bags of wall st...


oh man the 'god bless george bush' post is funnnnay.

Everyone knows bush fans are the left half of the IQ bell curve. (they wont even understand that sentence!) teehee.

ggm said...

Keith, you have to post this video. It's hilarious.

Quentin Hardy, Forbes Silicon Valley, calling so called free market capitalist Kudlow on his hypocrisy in demanding a federal government bailout in the current credit/mortgage crisis essentially saying that when millionaires get in trouble it’s time for the government to help. The look on Kudlow’s face was priceless and he had absolutely no reply.

Anonymous said...

If Fed is willing to accept CDOs as collaterals, how they will ascertain the true value of such instrumets?

SPECTRE of Deflation said...

Keith, interesting read. The FED did not accomplish much with the discount cut:

Asset-Backed CP Yields Rise in Face of Fed Rate Cut (Update2)

By Mark Pittman

Aug. 17 (Bloomberg) -- Asset-backed commercial paper yields soared by the most since the Sept. 11, 2001, terrorist attacks after the Federal Reserve cut its discount rate to try to calm financial markets.

Top-rated asset-backed commercial paper maturing Aug. 20 yielded 5.99 percent, up 39 basis points since yesterday and the most since a 45 basis point increase on Sept. 20 in the wake of the terrorist attacks in New York City and Washington.

Issuers are offering the highest rates in almost seven years to entice lenders who are trying to avoid taking mortgage- backed securities as collateral to avoid exposure to losses from U.S. subprime mortgage delinquencies.

The Fed's action ``may help add confidence that action will be taken when it's necessary, but further action is needed to actually offset the credit contraction we have had,'' Ashish Shah, global head of credit strategy at Lehman Brothers Holdings Inc. said in interview from New York. ``No one actually wants to tap the Fed window. So while this is good, it doesn't actually add any liquidity into the system. It's more of a confidence booster.''

Yields on asset-backed commercial paper rated A1, the second-highest at Standard & Poor's, and maturing the next day rose 39 basis points to 6.01 percent, the highest since January 2001, according to data compiled by Bloomberg. The increase is also the biggest since September 2001.

Removing the Stigma

Almost $44 billion in market value has already been lost on Merrill Lynch & Co.'s broadest index of floating-rate securities backed by home-equity loans. The index shrank to $635 billion on Aug. 16 from $679 billion in face value.

The Fed said today that while recent reports indicate economic growth continues at a ``moderate pace,'' risks to the expansion have risen ``appreciably'' and ``financial market conditions have deteriorated.''

The Fed is trying to encourage banks to buy commercial paper by allowing institutions to borrow for 30 days rather than overnight and making it renewable at the borrower's option, according to Drew Matus, an analyst at Lehman Brothers Holdings Inc. in New York.

The Fed's action ``essentially removes the stigma of accessing the discount window as well as providing a means of financing a wider range of collateral, Lehman said.

`Buyers' Strike'

Federated Investors in Pittsburgh is buying some asset- backed commercial paper because it's a good value, said Deborah Cunningham, chief investment officer for Federated who oversees $193.4 billion in money market funds including commercial paper.

``They are obviously sending a signal to the marketplace that, `We're in with you on this,''' said Cunningham.

The asset-backed market still ``lacks sponsorship'' and is having a ``buyers' strike,'' Mark Amberson, who runs the $5 billion Russell Money Market Fund for the Russell Investment Group in Tacoma, Washington, said in an e-mail. Amberson said he was enticed to buy some commercial paper at an overnight yield of more than 6 percent today and that he won't buy asset-backed debt maturing in more than seven days.

The Fed is trying to help find buyers for commercial paper after the market seized up this week for Countrywide Financial Corp., the biggest U.S. mortgage lender. Countrywide borrowed its entire $11.5 billion available in bank credit.

Countrywide turned to the emergency loan, which it said was provided by a group of 40 banks, a day after Merrill Lynch & Co. raised the prospect of bankruptcy for the Calabasas, California- based lender. Australia's Rams Home Loans Group Ltd. and Canada's Coventree Inc. also sought emergency funding today.

`Credit Spigot'

``Confidence equals liquidity,'' said Tony Crescenzi, chief bond market strategist for New York-based Miller Tabak & Co. and author of a 2007 edition of Stigum's Money Market, a textbook first published in 1978. ``Credit spreads will tighten and, with the Fed supplying credit, fears should subside and help to open the credit spigot again.''

Investors began to demand higher yields on asset-backed commercial paper conduits, some of which own mortgages, after BNP Paribas SA froze withdrawals from three investment funds that invested in subprime bonds. BNP's decision caused overnight lending rates between banks to soar and prompted the European Central Bank to lend 94.8 billion euros ($130.2 billion).

The gap between similarly rated asset-backed and direct- issued paper is 79 basis points, the most since Bloomberg began keeping the indexes in 1999. Sellers are offering direct-issued commercial paper at yields of about 5.2, the same as yesterday and down 5 basis points this week.

Commercial paper is bought by money market funds, mutual funds that invest in short-term debt securities. In asset-backed commercial paper, the cash is used to buy mortgages, bonds, credit card and trade receivables as well as car loans. Some of the programs are backed by subprime loans.

To contact the reporter on this story: Mark Pittman in New York at
Last Updated: August 17, 2007 16:38 EDT

bruiser said...

Countrywide is smoking its own dope.

Drawing on credit to fund operations? Did the lenders assure Countrywide they could refi their debt after 2 years as well?

Anonymous said...

According to housing tracker, here's Los Angeles county since the peak:

-Median priced house DOWN 14%
-Upper 75% percentile DOWN 22% from a cool $999,000 to $780,000 a mere $220,000 loss.

A $220k loss! I bet half of those people think their house is still worth $999k or more. Won't they be in for a shock when that Option Arm resets, their mortgage triples and they cant sell their house for much less than 1/2 what their mortgage is.

Can you say HOUSING PANIC!!

Anonymous said...

Home prices are 13 percent to 14 percent overvalued

Haha... someone has a sense of humor.

RJ said...

Decreasing the discount rate and increasing the repayment period to 30 days just extends the credit line to the big players so that they don't have to keep liquidating in a panic. Temporarily stopped the bleeding.
I don't believe this shock to the market is the real turning point however. The Bear still isn't awake but is beginning to stir. The consumer is way overexteneded and will be a long time in repairing the financial damage done by this credit orgy. Already the big box retailers, like Walmart, have reported lower earnings. More telling is that freight numbers are down (See "Are we in a freight recession?" Dan Goodwill and Associates)Wall St. lags the real economy and economic reality has yet to sink in fully.
In the meantime, the dollar got a little bounce in the panic but IMHO, once the recession we're already in deepens, China will start to pull the plug. No point in propping up the U.S. economy if they're propping up a near corpse.
Also, oil production is down this year by about half a million barrels per day (IEA revised numbers downward). This means no margin for production disruptions.
In short, no amount of credit pumping is gonna keep this ship afloat.

Anonymous said...

We are witnessing another classic case of market breakdown due to asymmetric information. The Fed can lower rates as much as they want because the problem is not really with liquidity, but lack of info.

So, can ANYBODY really put a price on CFC or IMB? Why in the hell then some "analysts" are upgrading these companies from sell to hold? Why people are buying stocks they cannot value is beyond me.

"(BusinessWeek) The Federal Reserve is doing its best to restore confidence—most notably by cutting the discount rate by half a percent to 5.75% on Aug.

But the Fed is running up against a big obstacle: If you don't trust the value of an asset, you won't be willing to buy it no matter how cheap your borrowing costs are. In an Aug. 17 commentary, Merrill Lynch (MER) economist David Rosenberg wrote: "Financial institutions, in general, are paralyzed by the lack of information [about asset values].… What brings this to an end, ultimately, is better information and transparency.

It's clear now that many of those hastily made mortgage loans are worth less than 100¢ on the dollar, but the still unanswered question is: How much less? Are they worth 90¢, 50¢, 10¢? Until people figure that out, they can't tell how much mortgage-backed securities are worth—whether to lend money to banks and hedge funds that have invested heavily in those securities—and so on."

foreclosureboy said...

Im still in shock that the FED relents to Cramer's pressure and 'opens the discount window'.

WTH is happening in this county!!??

The man runs a howard stern like show.

Anonymous said...

Cramer Takes Credit for Fed Rate Cut; Then He Doesn't

On CNBC two weeks ago, Cramer blasted Fed Chairman Ben S. Bernanke and William Poole, president of the St. Louis district bank, calling them ``nuts'' for leaving interest rates unchanged as global credit was under siege. The segment drew more than 1.6 million hits on YouTube, the video-sharing Web site.

Cramer singled out Poole as being ``shameless'' for favoring a cautious approach and accused Bernanke of having ``no idea how bad it is out there.''

Poole said in an interview Aug. 15 that only ``a calamity'' affecting the economy would justify an interest-rate cut. Poole didn't address Cramer's remarks, and his spokesman, Joe Elstner, said he would have no comment. Michelle Smith, a spokeswoman for the Fed in Washington, declined to comment on Cramer's remarks directed at Bernanke.

Altruistic Motive

Cramer said today that he wasn't seeking interest-rate cuts just for Wall Street investors but also to help average homeowners on the verge of default.

After taking credit on-air for nudging the Fed, he backpedaled.

``It's obvious they didn't listen to me,'' Cramer said in an interview later.

``Things have now happened that make me look good, but it wasn't really my video,'' he said. ``I may be prescient, but I'm not taking a victory lap for something that didn't happen right away.''

Anonymous said...

Parallels to 1998 Fed Easing?

(BusinessWeek) While parallels to the current situation are often drawn to the 1998 Fed easing after the long-term capital management hedge-fund blowup, the associated global financial crisis actually began in mid-1997. The Fed withstood market pressure to ease policy for more than a year, despite widespread belief on Wall Street that the Fed was not correct in its evaluation of the balance of economic and inflation risks.

It took a specific domestic financial crisis that threatened the U.S. banking system for the Fed to act, and that easing was, predictably, followed by a period of heightened economic and inflation growth that grew problematic for the Fed through 1999 and 2000. Though the easing of policy in 1998 may have been a necessary step at the time by then-Chairman Alan Greenspan, this policy-easing proved counterproductive for Fed efforts to steer the economy and inflation, as the Fed itself had suspected through the prior year.

It's our guess that Fed Chairman Ben Bernanke shares this interpretation of that period and would prefer to avoid that outcome. As such, we think that Bernanke will be resistant to addressing market liquidity concerns with an outright policy-easing until he legitimately perceives significantly greater economic risk, or believes that inflation pressures are subsiding. Short of that, as with his predecessor Greenspan, it will take a specific insolvency event that requires the Fed's immediate intervention to mitigate systemic risk to the banking system. And such an event, though a distinct risk in the weeks ahead, will be impossible for the markets to predict in advance.

Adam said...

The important take away of this Fed action was the move to an easing bias intra-meeting. The signal is a nod for an ease at the Sept. meeting. Maybe 50bps. I don't agree with what they're doing, but they're doing it. This will cause the curve to steepen dramatically and long rates (10yrs and over) will actually skyrocket. Inflation expectations, dollar diving and therefore foreign purchasers staying away (and possibly selling) are a few of the reasons why... I'm shocked they didn't at least co-ordinate with other central banks (so they could all devalue their currencies together)... Buy precious metals and I think you'll have better levels to short CFC from. Good luck.

Anonymous said...

Another dealer announced in a cheeky e-mail the creation of a new structured product: a Constant Obligation Leveraged Originated Structured Oscillating Money Bridged Asset Guarantee, or COLOStOMyBAG. One trader noted on the product - a parody of the increasingly bizarre acronyms that have become commonplace in the world of structured finance - "It's basically full of shit."

Anonymous said...


oh man the 'god bless george bush' post is funnnnay.

Everyone knows bush fans are the left half of the IQ bell curve. (they wont even understand that sentence!) teehee.


Hey moron,

Do some research on voting demographics for 2000 and 2004. People with a college degree voted for Bush over Gore and Kerry.

The demo that voted against Bush both times was "less than high school".

Anonymous said...

Face it HPers, you were wrong. Come on Keith, be a man and admit it.

If you really think the fed is going to let stocks and real estate free fall you're a fool.

Anonymous said...

Anon 1:11:

Yes an no. Bush got the middle of the pack educated people (high school, some college and college). Kerry and Gore got the high school dropout and the egghead vote. None too surprsing. High school dropouts want the government checks to keep coming via welfare, Section 8, food stamps,ec. The PhDs want the government checks in the way of grants to keep coming. Both groups cannot make it without the government supporting them so both groups for Democrat who then steal the money of those who can make in on their own.

Results from 2004:
No High School 50/49 Kerry
H.S. Graduate 52/47 Bush
Some College 54/46 Bush
College Graduate 52/46 Bush
Postgrad Study 55/44 Kerry

Results from 2000:
No H.S. Degree 59/39 Gore
High School Graduate 49/48 Bush
Some College 51/45 Bush
College Graduate 51/45 Bush
Post-Graduate Degree 52/44 Gore

SPECTRE of Deflation said...

Keith, great points on what the FED's actions actually meant yesterday. Not much. In fact it can be argued that they did much harm to themselves in pulling this stunt before the open before trades could of been squared.

They now have zero credibility with the markets. It actually increases the chance of a crash. This is a solvency problem, and not a liquidity problem. Throwing more money at a business that is technically in default does nothing but throw good money after bad.

A crash is coming gang, but the FED will pull every trick it has out of it's hat to pospone the inevitable.

I had read earlier in the week about the Greenspan Put, and the Bernanke Kaput. Now I know whence it comes.

RJ said...

anon said:
Face it HPers, you were wrong. Come on Keith, be a man and admit it.

If you really think the fed is going to let stocks and real estate free fall you're a fool.


I don't understand why some people don't get it. Ultimately, all the FED can do is devalue currency, create more debt. That is all that's been happening since rates started falling six years ago. When the FED rate started rising the dollar rose with it, albeit, tentatively. When the FED paused the dollar began to sink to its previous all time low. So the FED opens the spigot and the DOW goes to 20,000. So what? No real wealth has been created. Only paper gains which can only be realized by selling to suckers.

Westchester Chick said...

Not that it really matters - but where do those statistics on education and political party alliance even come from? I don't remember filling out my level of education on my voter registration. Is this from a gallup poll? I would certainly consider anything they said gospel. The success of a poll depends largely on how well the random sample represents the entire population. Many people will not even respond to those polls. Neilson still thinks their sampling represents all of us. That's why there's nothing on but American Idol and So You Think You Can Dance.

sausage servant said...

"I don't understand why some people don't get it....So the FED opens the spigot and the DOW goes to 20,000. So what? No real wealth has been created. Only paper gains which can only be realized by selling to suckers."

Apparently you are the one who doesn't get it. The burden of debts will be inflated away because they are denominated in USDs! The "suckers" are the ones holding treasury paper because those dollars will buy diddly after the revaluations.

Central banks in China, Japan, and Korea all know this, but without our market for their exports they are even worse off than if they just take it in the shorts as Bernanke and Paulson inflate away our debts.

The alternative to reflation is a mind-numbing, worldwide economic depression possibly leading to WWIII. Gee, I wonder which one they'll choose...

Lost Cause said...

So you think that the Fed can fix everything? In the first place, the Fed can only be effective in only a narrow range of remedies. Namely, it can raise interest rates to counter inflation. Nothing else can it do with any certainty. It cannot effect the bond market, and it can only be lucky to drop rates to get out of a recession. Do you really think that they can be all things to all people?

Laura said...

Bruiser said "Countrywide is smoking its own dope.

Drawing on credit to fund operations? Did the lenders assure Countrywide they could refi their debt after 2 years as well"?

No, they will just write it off!

RJ said...

sausage servant said:
Apparently you are the one who doesn't get it. The burden of debts will be inflated away because they are denominated in USDs!


You're wrong on so many levels I don't know where to start.
The Chinese are many things but stupid isn't one of them. They have drastically slowed down purchases of U.S. debt over the last two years and will not continue to finance a sinking U.S. economy even if we currently, and I emphasize currently, represent a quarter of their export market. Not to mention the fact that we are their major competitor for global energy supplies which means at some point, which is coming sooner than later, they are going to pull the plug on the dollar.
And you some to think that an inflationary depression is better than a deflationary depression because either way that's where we're headed. Global oil supplies peaked in 2005 and actually dropped a bit this past year. The energy pie may not be drastically shrinking but it ain't keeping up with global demand which means a limit to economic growth which in our perpetual growth economic model means a depression. Print all the money you want, it isn't going to change a thing.
So enjoy your sausage while you can sausage servant.

sausage servant said...

"And you some [sic] to think that an inflationary depression is better than a deflationary depression"

Please define "inflationary depression" for us RJ. AFAIK, Mr. economic genius, none has ever been observed on this planet. Inflation is always preferable to deflation because inflation is self-limiting and it scales-down debts. There is no limit to the downside in a deflationary spiral, and existing debts become even more burdensome.

As for peak oil, OK let's say it's here. Do you honestly think constrained oil supplies mean lower prices? That's what we'd need to believe for your deflation scenario to play out. At some price point the huge reserves of tar sands in Canada and the bituminous crude in Venezuela will be brought to market to fill those tankers. Oil used to cost $1.25 a bbl and now it's $75. The world GDP did not decline during that interval even though the price is 6000% more expensive. Sorry, your gloomy argument doesn't work on that level either.

Don't worry RJ, I'll enjoy my sausage. Plenty of people will be bending over when I "serve" it.

Anonymous said...

"Kerry and Gore got the high school dropout and the egghead vote. None too surprsing. High school dropouts want the government checks to keep coming via welfare, Section 8, food stamps,ec."

Hmmm...anyone with half a brain knows that the blue states are the richest ones who carry the entire country on their backs, while voting predominantly democratic.

Your reasoning is totally idiotic and unfounded.

RJ said...

Sausage servant said:

I apologize for not defining my terms.

By "inflation" I mean the Austrian sense of inflation of the money supply, what we now call loose monetary policy. I prefer that use because it focuses on inflation as a cause rather than an effect. By "depression" I mean a prolonged contraction of economic activity. I don't mean a deflation, the opposite of inflation.

Given those definitions, there is no upper limit to the devaluation of currency in a hyperinflation leading to the destruction of purhasing power. Obviously there's a lower limit to economic activity - zero.
So pick your poison.

As far as peak oil is concerned economists make a common fallacy with regard to energy. They treat it like any other commodity on the market but its not. It is the commodity which is the limiting factor for all modern economic activity. So they assume that as prices rise projects that were not viable at $40 per barrel will be at $100 per barrel. The problem is the assumption that oil production costs will remain flat while revenue increases. But costs are in fact rising along with revenues since oil companies must use the same resources, oil,copper,steel, etc., as everyone else which means that extremely costly projects like the tar sands are barely cost effective if at all. Furthermore, there is the ratio of Energy Returned on Energy Invested which makes many of these projects exercises in futility in the long run. If we're going to extend our oil supplies at all, the best bet would be ethanol from sugar which, as I understand, has an EROEI of 8. Corn ethanol is a disaster.

As far as the price of oil and GDP - Oil has been dirt cheap for decades ( with the exception of the price spikes in '73 (or was it '74?) and '81. Oil dropped in price tremendously in real 1980 dollars throughout the 80s and 90s. That kind of boon is coming to an end. Another problem, as pointed out by Daley in "Steady State Economics," is that energy throughput is included in GDP instead of being treated as a cost. We're are going to learn the extent of that cost soon.

The reason I'm concerned about energy is because of the rapid growth in Asia. As is endlessly pointed out, the U.S. uses a quarter of the world's energy to support 5% of the world's pop. If China and India achieve raising another 10% of the world's population to a modicum of western middle class comfort we're looking at another 25 or 30% of the world's energy supplies. Where will it come from? In '99 Dick Cheney stated in a speech at the London Institute of Petroleum that given modest demand and depletion projections, by 2010 we would have to produce an extra 50 mbd. He's probably about 5 years too early in his projections. But we're not even remotely close to that kind of production increase and there is no more slack in global oil supplies. So competing for energy is now a zero sum game which I fear will turn nasty in the next couple of years as Asian economic growth becomes strained by energy shortages.

There's an excellent interview at with Matt Simmons who wrote "Twilight in the Desert" which is an analysis of Saudi oil production. He runs one of the largest energy investment firms in the country. The man knows what he's talking about.

"Goodnight and good luck"

ECON 101 said...

Cheers, "FORECLOSUREBOY", is it any wonder why we are in this state of things to begin with....? [says with mourn for Average Joe Taxpayer]