The Cynical Economist

On May 28 proffesor Paul Krugman, op-ed columnist for New Yourk Times and Nobel prize winner in Economics wrote a column - The Big Inflation Scare .  In it he bashes the fears of  inflation as baseless and as right wing conspiracy to scare people to not support current administration spending and borrowing spree. He writes:

It’s important to realize that there’s no hint of inflationary pressures in the economy right now. Consumer prices are lower now than they were a year ago, and wage increases have stalled in the face of high unemployment. Deflation, not inflation, is the clear and present danger.

So if prices aren’t rising, why the inflation worries? Some claim that the Federal Reserve is printing lots of money, which must be inflationary, while others claim that budget deficits will eventually force the U.S. government to inflate away its debt.

The first story is just wrong. The second could be right, but isn’t.

Now, it’s true that the Fed has taken unprecedented actions lately. More specifically, it has been buying lots of debt both from the government and from the private sector, and paying for these purchases by crediting banks with extra reserves. And in ordinary times, this would be highly inflationary: banks, flush with reserves, would increase loans, which would drive up demand, which would push up prices.

But these aren’t ordinary times. Banks aren’t lending out their extra reserves. They’re just sitting on them — in effect, they’re sending the money right back to the Fed. So the Fed isn’t really printing money after all.

Still, don’t such actions have to be inflationary sooner or later? No. The Bank of Japan, faced with economic difficulties not too different from those we face today, purchased debt on a huge scale between 1997 and 2003. What happened to consumer prices? They fell.

What Krugman fails to mention is how much money was Japan printing and borowing. Below is the visual answer of the differences between USA and JAPAN quantitative easing with explanation by MICHAEL KRAUSE’S MARKET TAKE

“Why did Japan not experience meaningful inflation, yet they used QE? The answer is clear – they did not print quickly enough, then tightened supply relatively early into recovery. 4 years to not even double the money base”

I completely agree with the above statement by Michael Krause.

Also by increasing the money supply the monetary authority are hoping to be able to temporarily decrease unemployment, by increasing permanent inflation, and vice versa (phillips curve). But many people are sceptical, that this is going to work(Zoellick Warns Stimulus ‘Sugar High’ Won’t Stem Unemployment)

What I see as the real problem for US is the rise of the commodity prices. Oil is up, food is up, metals are up….They are becoming scarce thus more expensive. And current administration and their policies don’t help, but fuel the price increases. Wait and see how is this not going to affect all other prices and wont result in inflation.

Professor Krugman writes also how the banks are sitting on the money and not lending them out. But take for example  Zimbabwe- there we don’t see the massive printing of Zimbabwean dollars as cause for a hyperinflation, but as a result of it. The cause was political instability, high unemployment, economic depression and the final straw – run on the currency, which made, that currency worthless. 

This is the same scenario I see in the USA future, as more and more countries are dumping the dollar for alternatives, soon we might as well see run on the dollar, which will turn our currency into worthless paper.

*I would not advise you to buy gold or silver, as alternative investment to the dollar, stocks, treasury bonds, but to buy some farmland with easily accessed water. The worst is yet to come!

From CNN Money

Forget toys: with as many as 4.2 trillion marks to the dollar by late 1923, German children played in the streets with worthless money.

Click image for slideshow

From WSJ

Treasury Secretary Timothy Geithner heads to Beijing this weekend to urge Chinese leaders to fundamentally alter the export-oriented economy that has created years of trans-Pacific trade tensions.

… he is also planning to press Beijing to take drastic measures to turn China’s economy into one that depends heavily on sales to domestic consumers and less on sales to the U.S. and other foreign markets, according to a senior Treasury Department official.

…The message signals that Treasury is beginning to look beyond the current crisis toward preventing a return to ever-mounting trade deficits and the constant political tensions they generate between the U.S. and China.

read the rest here

Here we go… The start of the trade wars. At times of global economic crisis, enemy number one is protectionism. Protectionism can only exacerbate the situation, as it did after the Great Wall Street Crash of 1929. Once cooperation in the trade arena breaks down, you are not very far away from non-cooperation on a lot of other issues. The real danger is that you get into a cycle of retaliation. Currently 17 of the Group of 20 emerging and developing nations are considering or imposing restrictions on trade, breaking a pledge they made during an April 2 summit in London. Nothing good is going to result out of  this visit. First thing to come in mind – higher prices.

From Bloomberg

World Bank President Robert Zoellick warned policy makers that fiscal-stimulus plans are insufficient to turn around the “real economy” and rising joblessness threatens to set off political unrest across the globe.

read the rest here

From Economist

The Chinese and Arabs are buying poor countries’ farms on a colossal scale. Be wary of the results…

OVER the past two years, as much as 20m hectares of farmland—an area as big as France’s sprawling farmland and worth $20 billion-30 billion—has been quietly handed over to capital-exporting countries such as Saudi Arabia, Kuwait and China. They buy or lease millions of acres, grow staple crops or biofuels on it, and ship them home. The countries doing the selling are some of the world’s poorest and least stable ones: Sudan, Ethiopia, Congo, Pakistan. Usually, when foreigners show up in these places, it is with aid, pity and lectures (or, in one instance, arrest warrants for war crimes). It must make a nice change to find their farms, so often sources of failure and famine, objects of commercial interest instead.

read the rest here

From USA TODAY

Taxpayers are on the hook for an extra $55,000 a household to cover rising federal commitments made just in the past year for retirement benefits, the national debt and other government promises, a USA TODAY analysis shows.

The 12% rise in red ink in 2008 stems from an explosion of federal borrowing during the recession, plus an aging population driving up the costs of Medicare and Social Security.

The latest increase raises federal obligations to a record $546,668 per household in 2008, according to the USA TODAY analysis. That’s quadruple what the average U.S. household owes for all mortgages, car loans, credit cards and other debt combined.

“We have a huge implicit mortgage on every household in America — except, unlike a real mortgage, it’s not backed up by a house,” says David Walker, former U.S. comptroller general, the government’s top auditor.

Bottom line: The government took on $6.8 trillion in new obligations in 2008, pushing the total owed to a record $63.8 trillion.

read the rest here

From AP

If AIG was too big to fail, how about the world’s eighth-largest economy?

In a move with only one modern-day precedent, California Gov. Arnold Schwarzenegger and Democratic lawmakers are pressing the Obama administration and members of Congress for federal loan guarantees to help the state out of a desperate, multibillion-dollar jam.

California is not asking for cash, like the tens of billions given to AIG, General Motors or Morgan Stanley.  Instead, the state with the worst credit rating in the nation is asking that Washington act as a sort of co-signer on the state’s borrowing, to be backed up with money from the Troubled Asset Relief Program.

read the rest here