-- Posted Friday, 16 January 2009 | Digg This Article
| Source: GoldSeek.com
Rick’s Picks
Friday, January 16, 2009
“Phenomenally accurate forecasts”
Yesterday’s news seemed oddly becalmed, as though world events were in a holding pattern. Until a U.S. Airways jet crashed into the Hudson River in the middle of New York’s afternoon, it was the kind of day, news-wise, when the seasonal debut of American Idol could claim headline status on Google News, at least for a short while. TV-dom’s big story of the day was that one of AI’s contestants, nominally a singer, showed up in a bikini. Bloggers appeared to divide over whether she was too skinny to get excited about. Here’s her photo, so judge for yourself:
A sampling of the news just before the airline mishap suggested the furies were at rest: Democrats Unveil Stimulus, and Republicans Cry ‘Pork’; Israel Focused on War Aims in Gaza; Vicks’s VapoRub Hazardous for Children Under 2. Concerning that last item, Baby Boomers who so far have survived a potentially toxic exposure to Vick’s are probably breathing a literal sigh of relief.
Even the stock market was quiescent in its psychotic way. Newscasters would note in their daily business summaries that the Dow Industrials had closed up 12 points on the day. In fact, that was the net result of a nearly 500-point swing intraday. We had seen it coming in yesterday’s touts, including a mini-crash in crude oil that would have knocked the likes of Katrina Darrel from the front page of Dubai’s tabloids. Would that 2009 passes so very peacefully that any of us might remember Katrina Darell come December.
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Inflation vs. Deflation
We continue our exploration of the inflation/deflation conundrum today with a contribution from Ranganathan Krishna, known by the handle “Ranga” in the Rick’s Picks chat room. He writes as follows:
“Your point is well taken that in good times the ‘moneyness of credit’ effectively expands greatly the available money well in excess of M1 estimates. Heck, in good times we have ‘Cisco bucks’ and ‘Google dollars’ when referring to their stock which acts as money. After a collapse the only bucks we accept are the ones the Bernanke prints. So, a huge reduction in effective money supply even as he is running the printing press overtime, and therefore a reduction in aggregate demand.
“I will take it by ‘inflation’ you mean the average price level rather than the monetarist meaning of available money, which in the above definition of ‘money’ is collapsing. The question is what happens to the average price level as the aggregate demand collapses. Our intuition is that price levels will go down and indeed this is borne out by the first reaction to the credit collapse.
Less Money, Lower Prices?
“However the longer-run evolution of price level is unclear and may not conform to the expectation that ‘less money in the system implies lower prices going forward.’ This is because rather than the predictable trends we see in a stable environment we have chaos in the prices. This also we have witnessed in the various commodities.
“The agricultural sector is a key one to watch. Food grain prices are going down -- now why is that? -- certainly not because demand for human consumption of grains has gone down (I am leaving out ethanol use so take out corn in this analysis). Rather it is because there is expectation that the inputs to grain production (fertilizers) are less expensive. However if credit to farmers for grain production gets curbed due to bank conservatism or chaotic conditions lead to very expensive credit we will see that grain prices will actually move up due to reduced supply despite lower fertilizer prices.
“Said in other words we are focused too much on the demand curve while the chaotic conditions affect the supply curve in unpredictable ways and leave open the possibility of higher price levels at lowered consumption levels.
Unmolested System
“However the question is would this be likely. I would argue, but cannot prove, that if the Fed did not drastically increase money supply to try to prevent the collapse in aggregate demand, the end result of an unmolested system would work out to lower prices in the longer term. However, if the Fed does monetize and fiscal measures are introduced to hold up the demand curve, it is in fact the supply curve movement that becomes more significant. The absence or expense of credit will in fact lead to reduced supply and consequently to increased price levels.
“Now you asked what the indicators might be for this coming inflation. I would watch grain and oil and metal businesses and what they are saying about project cancellations, credit availability and profitability, while keeping an eye on consumption levels (with government now becoming a more significant consumer). If the consumer-demand collapse shows signs of slowing while there is significant distress among farmers and miners, then you can be sure we will see significant inflation.
Hyperinflation a Currency Event
Hyperinflation is another story. It is a currency event. A collapse in confidence in a currency and can happen as Peter Schiff describes. However my view is that the collusion of central bankers avoid this. In times of war between governments it is an entirely different story. However today they understand this scenario and well have the means and desire to prevent it. The Chinese and gulf oil kingdoms have more to lose from a collapse than others. This is not to say they will not alter their voracious appetite for Treasuries over time; rather, they will do it very slowly and not now. They are in fact buying more Treasury debt now and we saw a reassertion of their commitment to it over the last few months when everyone was fearing their exit.
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Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2007, Rick Ackerman. All Rights Reserved. www.rickackerman.com
-- Posted Friday, 16 January 2009 | Digg This Article | Source: GoldSeek.com
