How are we going to pay for all this shit?

.

I'm going to do something really stupid, argue with Captain Midnight about economics. I already know I'm going to get my ass kicked. Actually I already got my ass kicked when I argued a similar point with Lusty Lad a few years ago. But I'm a glutton for punishment.

Since this is a little like stepping into the ring with the Muhammed Ali of old, I'm going to need to train first so I can survive. So this is the part where I go run a couple of miles and then come home and drink some raw eggs, like Rocky. OK, actually maybe you should try to picture Pee Wee Herman instead of Rocky, but you get the picture.

I'm going to try to insert an image. If it doesn't work, see this link,



https://ibb.co/HCLW6LD



The blue line on the graph is YoY CPI. The white line is the real interest rate, calculated by subtracting the GDP deflator from the "LENDING interest rate." I didn't go to the trouble to figure out exactly how that's calculated, but I bet the lending rate is something like the prime rate, which is currently 3.25%.

The white curve (real inflation rate) only goes to the end of 2020. The blue curve (CPI) goes to October, 2021. If you extended the white curve to present, the real interest rate would be about -3%. That's the lowest anywhere on the graph, going back to 1960.

Look what happened around 1969 to 1978. The real interest rate slumped to low levels and inflation was sky high, by our historical standards.

Right now my banker will lend me money at 3%, or so he told me. My stockbroker will loan me money against my share portfolio at 0.75%. Meanwhile inflation is 6.2%. Now I'm a conservative fellow, but I imagine a lot of people and businesses are borrowing money hand over fist.

And yet the Fed's still buying bonds! The Fed Funds Rate is 0%, and Fed Funds futures appear to imply the first 0.25% increase won't occur for another 6 months.

More to come. And thanks for your response. While I'm willing to risk my pride for the sake of an argument, I'm sure as hell not willing to risk money. And I agree with WTF, your "macro" thoughts, unlike mine, are worth considering when making investment decisions. I would however part company with my friend in that I believe LustyLad is the other true economic brain in this forum. Originally Posted by Tiny

OK! But first, if you say you wished to "argue" with me, I need to be sure I understand exactly what your argument is so I can make some effort to respond on point.

You noted condition(s) that existed during the "great inflation" of the 1970s, and I assume (but am not sure) that your primary point is that the existence of steeply negative real interest rates was what caused (or exacerbated, or prolonged) the high inflation rates of that period. Just to be clear -- is it your contention that the current existence of these conditions portends that high inflation is here to stay for a few years?

If so, you're in pretty good company, since it now appears that my side of the debate (the belief that high inflation will only be about a 2-year story) is trailing about 13-9 in a forum where I'm discussing this very topic with a group of private equity managers and key principals. And all of them, by way of academic and/or professional background, not only have reason for developing a keen interest in this issue, but would be expected to have at least a fair understanding of it.

.

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And both you (LL) and TheWackoKid better hope CM does not start posting his view about David Stockman.

Tiny may change his mind about your economic prowess. Originally Posted by WTF

Not sure exactly what view or views to which you may be referring, as it's probably been a few years since I posted anything on this site about Stockman or any aspect of policy in the Reagan era. In any event, I've probably written only a very minuscule amount in this forum compared with other sites and journals, so it's difficult for me to remember what I may have posted here in the past.

(Drop a hint as to exactly what policy viewpoint(s) you may be thinking of, though, and I'll be happy to post my share of bullshit!)

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(Drop a hint as to exactly what policy viewpoint(s) you may be thinking of, though, and I'll be happy to post my share of bullshit!) Originally Posted by CaptainMidnight

My share:

Thank you Jesus!

Any how....I stand by my statement that Reagan started this nonsense of spend more money and cut taxes too. Trump tried it and ran trillion dollar deficits even before Covid.
Originally Posted by WTF

WORD.

The federal budget deficit hit one trillion in 2019.

https://datalab.usaspending.gov/amer...eficit/trends/

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OK! But first, if you say you wished to "argue" with me, I need to be sure I understand exactly what your argument is so I can make some effort to respond on point.

You noted condition(s) that existed during the "great inflation" of the 1970s, and I assume (but am not sure) that your primary point is that the existence of steeply negative real interest rates was what caused (or exacerbated, or prolonged) the high inflation rates of that period. Just to be clear -- is it your contention that the current existence of these conditions portends that high inflation is here to stay for a few years?

If so, you're in pretty good company, since it now appears that my side of the debate (the belief that high inflation will only be about a 2-year story) is trailing about 13-9 in a forum where I'm discussing this very topic with a group of private equity managers and key principals. And all of them, by way of academic and/or professional background, not only have reason for developing a keen interest in this issue, but would be expected to have at least a fair understanding of it.

. Originally Posted by CaptainMidnight

I'm going to do something really stupid, argue with Captain Midnight about economics...
More to come. Originally Posted by Tiny

Sorry, I posted that at about 10:00 PM and was going to follow up with a second installment but never did. I was intending to throw out Indonesia and Turkey as examples. They're not ideal, because they're emerging markets. But I know a bit about their economies and know comparatively little about developed markets.

Anyway, Indonesia had extremely negative real rates, maybe around -25%, at the beginning of 1998. Because of a crumbling currency and external debt crisis, the country had to accept conditions imposed by the IMF, including sharply higher interest rates. The real rate went from -25% to +10%. Inflation went sharply lower. From time to time in the years since, inflation went as high as low double digits for short periods of time, but in recent years has been in low single digits -- 1.75% YoY in November. The central bank and government have been reasonably responsible in setting interest rates at appropriate levels and in not running up large budget deficits.

Turkey on the other hand has suffered under a president, Recep Erdogan, who believes the best way to bring down inflation is to lower interest rates. From time to time either a plummeting currency or high inflation would force Erdogan to install competent people at the central bank and finance ministry. They'd set interest rates higher than inflation. Inflation would go down, the currency would strengthen, or at least stop free-falling. Then Erdogan would replace them with sycophants who subscribed to his bizarre theory about negative real rates and the cycle would repeat itself.

Inflation is out of control in Turkey, and it's going to stay out of control until interest rates are jacked up.

Anyway, the IMF is never going to impose tough love on the United States of America, like it did on Indonesia. There's no multilateral entity that's going to impose discipline on our central bankers or politicians. And it looks like we're following the "Turkey Lite" program. The Fed Funds rate has been lower than inflation for the majority of the period since 2010. Our politicians spend with abandon. At the slightest hint of a slowing economy, the Fed shifts into overdrive. COVID set a precedent. Now when we go through an actual recession, expect politicians to open the spigots and pump trillions of government money into the economy, especially if the recession coincides with an election year.

And with negative real rates, it's not just the politicians who are spending with abandon. It's the consumer too. If you believe your dollars will be be worth 7% less a year from now, and your bank is paying you 0.5% interest, then you might as well go out and SPEND SPEND SPEND. Buy a car, electronic items, whatever. Take your money out of the bank and put it into land, houses, stocks, gold, whatever you have to to avoid getting killed by inflation.

As peoples' expectations change, as they come to believe inflation is not transitory, this is what may happen. And it will feed upon itself. You'll have what George Soros called a vicious cycle. And the only way to stop it will be high real rates and a steep recession.

And, finally answering your question, yes, I believe our central bankers and politicians have no balls and these conditions may stay with us for several years.

Btw, Mohamed El-Erian said today that "the characterization of inflation as transistory -- it's probably the worst inflation call in the history of the Federal Reserve." I wonder if El-Erian is one of the 13 in your forum. I guess not if they're mostly private equity people.

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Not sure exactly what view or views to which you may be referring, as it's probably been a few years since I posted anything on this site about Stockman or any aspect of policy in the Reagan era. In any event, I've probably written only a very minuscule amount in this forum compared with other sites and journals, so it's difficult for me to remember what I may have posted here in the past.

(Drop a hint as to exactly what policy viewpoint(s) you may be thinking of, though, and I'll be happy to post my share of bullshit!)

. Originally Posted by CaptainMidnight

I've mostly been arguing where this trend that our debt seemed not to matter...I say it started with Reagan. To lazy to look back how Stockman came up...probably because he was on the inside. Not sure why I brought you in even. Maybe my memory is slipping and I mistakenly thought you may be in agreement with his views...here from 2016. I think he is way more right than wrong though bitcoin seems to be the new gold.

https://octavianreport.com/article/d...central-banks/










OR: How does the GOP go from Reagan to Trump in three decades?

Stockman: After 30 years, it lost its way entirely. It drew all the wrong lessons from the 1980’s, it came to embrace the idea that deficits don’t matter, that entitlements can be left to ride indefinitely into the future, that you can grow your way out of any fiscal problem. Reagan never really said that: it was a different environment, he had double-digit inflation, we needed to cut rates because of bracket creep. But after 30 years of being lost in the wilderness and giving up on the job of what the Republican party is supposed to do — which is to be the party of fiscal rectitude and sound money — you end up with a wildcard like Trump.

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Here's a quick rundown of the reasons why I'm doubtful that the US's current situation will turn out to resemble our experiences during the 1970s, or to those of other nations that have gone through prolonged periods of high inflation.

And, finally answering your question, yes, I believe our central bankers and politicians have no balls and these conditions may stay with us for several years. Originally Posted by Tiny

Although skeptical of the view that these conditions will stay with us for several years, I certainly agree with you that our central bankers and other politicians have no balls and are not about to make any tough decisions.

For starters, one friend of mine noted recently that Fed officials always seem to be trying to find the "path of least embarrassment." I think that's a pretty good way of putting it. Often that means avoiding a recession, but right now it's hardly possible to check any news source and not immediately see stories on how America's working- and middle-classes are pretty freaked out about rising costs for food, energy, cars, housing, etc.

That's why we may see announcements after this week's meeting that they are committed to "tapering acceleration" and will likely steer guidance into expectations of two or three rate hikes during the first half of 2022. Most observers now seem to expect a doubling of the tapering rate to $30 billion/month.

At least a couple of private-sector economists have posted recently that the mere mention of Fed "semi-hawkishness" will be likely to dampen inflation expectations for the next 2-3 quarters.

As a long-time Texas economist named Ray Perryman always said, "the most important thing is what people think."

Perryman also said that he decided between taking classes in economics and psychology with a coin flip, and says it's very fortunate that economics won out. Otherwise, he said, there might be a lot more really fucked-up people! LOL

https://www.baylor.edu/giving/foster....php?id=873949

(To be continued later today ...)

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Btw, Mohamed El-Erian said today that "the characterization of inflation as transistory -- it's probably the worst inflation call in the history of the Federal Reserve." I wonder if El-Erian is one of the 13 in your forum. I guess not if they're mostly private equity people. Originally Posted by Tiny

I like El-Erian and generally read all of his stuff. Although I have probably agreed with him in more cases than not over the last decade or so, he seems to get a bit carried away at times. For instance, he has praised the Biden fiscal agenda, saying that it "holds the key to enhancing productivity, increasing labor force participation, and providing greater opportunities for advancement to more Americans." Then he says that it would be tragic if Fed policy "derailed this administration's economic agenda."

https://www.washingtonpost.com/opini...bidens-agenda/

(I wouldn't find that quite so tragic!)

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.

Indonesia had extremely negative real rates, maybe around -25%, at the beginning of 1998. Because of a crumbling currency and external debt crisis, the country had to accept conditions imposed by the IMF, including sharply higher interest rates. The real rate went from -25% to +10%. Inflation went sharply lower. From time to time in the years since, inflation went as high as low double digits for short periods of time, but in recent years has been in low single digits -- 1.75% YoY in November. The central bank and government have been reasonably responsible in setting interest rates at appropriate levels and in not running up large budget deficits.

Turkey on the other hand has suffered under a president, Recep Erdogan, who believes the best way to bring down inflation is to lower interest rates. From time to time either a plummeting currency or high inflation would force Erdogan to install competent people at the central bank and finance ministry. They'd set interest rates higher than inflation. Inflation would go down, the currency would strengthen, or at least stop free-falling. Then Erdogan would replace them with sycophants who subscribed to his bizarre theory about negative real rates and the cycle would repeat itself.

Inflation is out of control in Turkey, and it's going to stay out of control until interest rates are jacked up.

Anyway, the IMF is never going to impose tough love on the United States of America, like it did on Indonesia. There's no multilateral entity that's going to impose discipline on our central bankers or politicians. And it looks like we're following the "Turkey Lite" program. Originally Posted by Tiny

I don't know much about Indonesia and haven't seen much coverage of it in the financial press lately, but Turkey has been a real basket case for a while now, with multiple debt and currency crises going back a few years. The Turkish lira started dropping like a stone against all major currencies during the pandemic era. Sure hope we don't ever become "Turkey Lite." If so, it's time to head for the hills -- literally!

In contrast, the US dollar remains strong against almost every major global currency, and in fact has strengthened slightly against many of them during the last few weeks. Compare that with what happened around 1978, when the USD crumpled against other currencies, dropping 30% or more vs. the yen and the West German mark. 10-year treasury rates, already very high at about 8%, shot up over the next three years to over 15%.

Also, there were repeated wage cycles as automatic COLAs were built into many labor contracts, quite unlike the case today. Oil and other commodity prices were also spiraling out of control. Crude oil prices skyrocketed more than 10-fold between 1972 and 1980. We don't see anything remotely like any of that today.

Wage-push and demand-pull inflation seemed to come in waves and form continuing viscous cycles.

(Thankfully, a certain Mr. Volcker was available to do some heavy lifting!)

The Fed Funds rate has been lower than inflation for the majority of the period since 2010. Our politicians spend with abandon. At the slightest hint of a slowing economy, the Fed shifts into overdrive. COVID set a precedent. Now when we go through an actual recession, expect politicians to open the spigots and pump trillions of government money into the economy, especially if the recession coincides with an election year. Originally Posted by Tiny

Although the Fed funds rate has been "negative real" for well over a decade, the government has only been pouring money into household accounts like there's no tomorrow for about 18 months. This vastly exceeded missing salary and wage income during the pandemic era. JPM put out a note recently saying that the median household bank balance is about 50% higher than in February 2020. Another note said there's $2-2.5 more liquidity available to households than would be the case if COVID (and rescue packages) had never happened.

That's why I see this as much more comparable to 1946-48, when a vast pool of saving immediately following the war collided with an unprepared level of industrial capacity as producers were shifting from wartime to consumer goods. Double-digit annual rates of inflation occurred for about a 2-year period, receding just in time for Truman to rescue his presidential campaign, which had begun looking hopeless.

If a recession commences sometime in 2023, and if republicans then hold the house, the last thing they're likely to do is hand Biden (or Harris) a lifeline. Extensions of unemployment benefits, maybe, or something like that, but no more. I suspect the days of extreme largesse will be done and gone.

So I think the primary challenge in 2023-24 is much more likely to be economic weakness and stagnation than enduring high rates of inflation.

.

.

Here's a quick rundown of the reasons why I'm doubtful that the US's current situation will turn out to resemble our experiences during the 1970s, or to those of other nations that have gone through prolonged periods of high inflation.



Although skeptical of the view that these conditions will stay with us for several years, I certainly agree with you that our central bankers and other politicians have no balls and are not about to make any tough decisions.

For starters, one friend of mine noted recently that Fed officials always seem to be trying to find the "path of least embarrassment." I think that's a pretty good way of putting it. Often that means avoiding a recession, but right now it's hardly possible to check any news source and not immediately see stories on how America's working- and middle-classes are pretty freaked out about rising costs for food, energy, cars, housing, etc.

That's why we may see announcements after this week's meeting that they are committed to "tapering acceleration" and will likely steer guidance into expectations of two or three rate hikes during the first half of 2022. Most observers now seem to expect a doubling of the tapering rate to $30 billion/month.

At least a couple of private-sector economists have posted recently that the mere mention of Fed "semi-hawkishness" will be likely to dampen inflation expectations for the next 2-3 quarters.

As a long-time Texas economist named Ray Perryman always said, "the most important thing is what people think."

Perryman also said that he decided between taking classes in economics and psychology with a coin flip, and says it's very fortunate that economics won out. Otherwise, he said, there might be a lot more really fucked-up people! LOL

https://www.baylor.edu/giving/foster....php?id=873949

(To be continued later today ...)

. Originally Posted by CaptainMidnight

Ray Perryman
President and CEO, The Perryman Group

He also lives in Odessa while working in Waco, is the father of five young Texans (ages 27-32, although some temporarily reside elsewhere) and the grandfather of one, gets lost on his own block, and once ran one of his cars into the other one. His current academic roles include Senior Research Fellow of the IC2 Institute of the University of Texas and Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies. His duties in these positions include many things, but work is not among them.

In the professional arena, Dr. Perryman has authored more than 2,000 trade articles, publishes a subscription forecasting service and a monthly newsletter, writes a weekly syndicated newspaper column, hosts a daily radio commentary, and appears regularly on National Public Radio. His firm engages in a broad range of complex projects for major corporate and governmental interests and has served the needs of more than 2,000 clients. In other words, he is an obsessive-compulsive workaholic.

Sorry, COVID set a precedent. Now when we go through an actual recession, expect politicians to open the spigots and pump trillions of government money into the economy, especially if the recession coincides with an election year.
Originally Posted by Tiny

I would argue that precedent was set in the early 1980's!

Unless a President wants to be a one termer like Carter and Bush (LBJ), it will continue.

How do we pay for hookers.

How do we pay for hookers. Originally Posted by Ripmany

Just promise them more benefits while cutting their taxes and remind them a growing GDP will make everything alright!

How do we pay for hookers. Originally Posted by Ripmany

... How?

That's easy, mate.

Ask Hillary and Perkins-Coie to "MANUFACTURE" some for you.

It's that simple.

### Salty

... How?

That's easy, mate.

Ask Hillary and Perkins-Coie to "MANUFACTURE" some for you.

It's that simple.

### Salty Originally Posted by Salty Again

This help you off your high horse
https://www.wbur.org/cognoscenti/202...mp-rich-barlow


To Trump supporters gloating that the MSM messed up, I say: You're right. And this: You’re messing up worse, for a similar — but deadlier – inability to confess error