Wednesday, October 31, 2007

One Comment

Cassandra was mythologically granted the inauspicious ability to "see" things before they might happen, and thus make prophecies. This Cassandra, by no means as gifted as the one whom Apollo bestowed his gifts, has nonetheless seen this particular story clearly unfolding since the Fed first began its nearZIRP experiment. Looking deep deep into the future at that time four years passed, it was clear that, in the absence of fiscal tightening, implementation of a comprehensive energy policy replete with taxes and alternative incentives, and a release of the US bond market's manhood from the little box in Beijing where it resided since 2004 or so, that an eventual Fed Chairman, would be faced with an eventual decision - a most key and crucial decision upon which everything would hinge and which the markets would interpret as seminal - between inflation and hence the foreign exchange value of an already weak dollar, and the pursuit of some Shangra-la-like objective called Full-Employment, suffering as it has been from diminishing marginal returns to a dollar spent to that effect, but costing ever-more in terms of whatever shards of prudential credibility remained.

That moment has come. Here we are, presently, in what was the future. And none of what was so desperately needed was done. NOTHING...as if American policymakers were, en masse gripped by some conspiratorial cabal to undertake THE OPPOSITE! But, the Fed has made its choice, which is evident to all, and slowly as the news travels and the ripples ricochet upon all dependencies we will see the effects. The Fed is biased. It is spineless. And in so doing, it will reinforce all beliefs that a system that rescues, encourages and asymmetrically subsidises leveraged specs is patently unfair to the ones who actually work for a living.

Yet, I had hope, waning as it was, that Fisher or Geithner might influence the others. Argue the case for moral hazard, carry the flame for the FRBs role as savior of common sense, arbitor, and not co-conspiritor with the fiscal whores their K-Street pimps. That hope has now been extinguished, and, like Robert Johnson, I've got the a bad case of the blues. Because when when I look out, it is ugly for the USD, America, and the international monetary system. And we will [almost all of us] be poorer for it.
I went down to the crossroads,
Fell down on my knees.
I went down to the crossroads,
Fell down on my knees.
Asked the Lord above for mercy,
"Save me if you please."

I went down to the crossroads,
Tried to flag a ride.
I went down to the crossroads,
Tried to flag a ride.
Nobody seemed to know me,
Everybody passed me by.

I'm going down to Rosedale,
Take my rider by my side.
I'm going down to Rosedale,
Take my rider by my side.
You can still barrelhouse, baby,
On the riverside.

You can run, you can run,
Tell my friend-boy Willie Brown.
You can run, you can run,
Tell my friend-boy Willie Brown.
And I'm standing at the crossroads,
Believe I'm sinking down.

16 comments:

Anonymous said...

C,
I’ve never been so disappointed to see a holding of mine rise as precipitously as the Barbarous Relic has of late.
Indeed, not going to be fun at all.
RJ

Macro Man said...

Au contraire, RJ, policy mistakes are the stuff from which fortunes are made!

I'd make one small modification to your point, C, as I was discussing this very issue with a friend an hour ago.

The Rubicon has not yet been crossed, and the im possible choice is not yet confronting the Fed in the face. There is still a chance of muddling through.

If (and some would say 'when'), however, crack spreads widen out and gas prices go from $2.75 to $3.75 before you can say the phrase "Chevy Dreadnought", the moment will come when Ben must choose whether to deploy the full capacity of his Sikorsky, or whether to take the train instead (an infinitely less pleasant, yet socially responsible, option.)

Let's just say I'm not expecting to see him on the 6.33 to London Bridge any time soon.

Anonymous said...

No, your right MM. Playing the 'don't come' line has never been a problem, and it won't be now especially! But The Beard is starting to fulfil some worst fears, and one wonders what else he is capable of.
RJ

"Cassandra" said...

You may be right MM, but events unfolding are as I have witnessed in my dreams: the intractable dilemma of USD v. growth+inflation; the tgangential crisis forcing the hand; the hyperbole from Kudlow; the cut(s); the market reaction in USD & Gold and the increasing volatility of daily returns to the correlated anti-dollars;
The reason I think THIS is The Quickening of The Highlander, is that the speed, ease and assuredness with which my "hope" was discarded by Bernanke says he was never an inflation targeter, and that all that tough talk and slow rises was about building cred on the cheap, but in the end he an aparatchnik of the inflationary apologists.

Yes I prophesiced BRICs, but not the magnitude, and bubble. If I am wrong about THIS being the Rubicon, iit is because I have mistaken The BOUNCE to be Western Leveraged Specs reacting to policy moves, rather than BRIC & Asian EM domestic punters coincidentally buying the daylights out of risk assets. IF this prove to be true, then the timing of their enthusiam would indeed be unfortunate for Mr Bernanke.

Anonymous said...

IMO the Problem started earlier. If someone cannot buy what he or she wants, what is the value of the currency? Neither Chinese nor Dubai could buy the US assets they wanted to buy almost a year ago. In my metaphor that was Stalingrad (and the same mistake again in Kursk) for the Dollar.
Now we are observing the effects compounded by the current Fed policy.
Gunther

Jeremiah said...

C
if you go to the online edition of the economist, you will like the front page
http://www.economist.com/daily/news/displaystory.cfm?story_id=10054763&top_story=1
you will the title of the article..

short term there will be a dollar correction though.. gambler's fallacy

"Cassandra" said...

pushover indeed. like the Bush admin, a CB cannot a doctrine of selective asymmetrical pre-emption without serious consequences to reputation - especially when you're wrong.

Gunter-it was apparent that the Japanese could never spend what they accumulated back when to buy strategically either. Overpaying for Trophy is fine (Blackstone?), but and in any event china has 'no entry' signs all over their economy, changing ownership of infratsructure is not a log-term solution for trade sustainability. it must be goods/services for like for that is what employs people. Americans are not going to pay tolls to idle sheiks for use of american assets even if the ownership resulted from defacto equivalent of foreclosure, come what may. Andy Xie has reiterated this political point a number of times as he looks out in the future.

Jeremiah said...

you lose reputation,
but when you are The Fed and the ccy you are meant to be safeguarding is a reserve currency, you have a long way down.. but you cant blame the market, the reputational loss is pretty obvious in breakevens, curve shape, the $ ..

Anonymous said...

Cassandra,
There is a huge difference between the Japanese and Chinese. The Japanese lost WW2 and have to bow to political and ultimately military pressure; the Chinese are sovereign and have enough military to counter a military threat.
If the Americans are not willing to pay back their debt, what does that mean for the international value of the Dollar when at the same time the US military power is not enough to win the war against Iraqi militias.
Who will lend money to them?
To me it looks like the Dollar has a long way to go - down.
Gunther

"Cassandra" said...

The money WILL be lent and borrowed, by definition: The question for-the-kewpie-doll is: at what price and upon what terms??

My moans are really laments... There is always proverbial redemption from crisis (in the practical not evangelical sense). It's relatively easy to do (energy taxes, rollback of corp & income tax rates, large cuts in military spend, single-payer health-care renewable subsidies and you are more than 100% there, but at the cost of recession). And it will be done, because it will have to be done. Sooner or latter. It's easier if its sooner. But authorities - both elected and appointed are intent upon making it later, and therefore like the Vomit Scene in "Team America", redemption will not begin until America hits bottom. I am sure you are capable of conjuring your own version of what this will/would look like. Some like Margaret Atwood, Susan Sontag, Philip Roth have contemplated what this modernity would look like, and that may be a useful point of departure. But I think the more appropriate angle is the impact of $300bbl/oil upon suburbanisation, lifestyles built upon consumption, automobiles, low-cost food and The Factory Meat Industry, and lack of water resources in so.cal and the southwest.

This won't be the end of civilization, but it will make some of America's current societal concerns (gay marriage, right-to-life, illegal immigration) seem rather trivial by comparison. And these are even before the spectre and impacts of climate change...

Anonymous said...

http://www.jetro.go.jp/en/stats/statistics/iip_fdi_01_e.xls

http://www.jetro.go.jp/en/stats/statistics/rnfdi_01_e.xls

"Cassandra" said...

last anonymous -

Did you have a specific point on the FDI?

What I found fascinating was

- the huge the acceleration when the YEN was sub-100;

- the way their $800bn of USD FX reserves dwarfs the stock and annual US FDI;

- the excellent use of Tax havens (Cayman, Panama, Bermuda)

- that the netherlands is the anomaly, presumably Toyota and major transplant supplier network

What did I miss?

Anonymous said...

Cassandra,
Why should the money be lent to the US if the payments are not in dollar?
If the money will be lent, at what terms will Russia or another oil exporter (one resisting military pressure) make loans?
Without American military supremacy I see no reason why a falling dollar will be the world’s reserve currency.
Anyway, with 300 $ oil (slightly more expensive then bottled water today) the American Way of Life will be very different from today.
An interesting question will be if today’s financial system will survive the change.
Gunther

OldVet said...

As a pessimist, or disappointed optimist, I agree the US will need to hit bottom before making sincere and useful changes. Some of those will have to be official, some in lifestyle.

Even so, down the road when desal plants feed Oklahoma water (as I saw in Riyadh back in the early 1980's which proves it can be done) there will be imbedded the seeds of revival. Dollar chute brings growth of exports and jobs in productive industries, hairdressers and psychological counsellors become shop forewomen and grain traders. Agriculture steams ahead for market, not subsidy reasons.

Swords are beaten into plowshares? Darn optimism keeps creeping in to brighten the day, after what promises to be a long night. In the meantime, I polish my nuggets of gold.

"Cassandra" said...

Old Vet,
It has been a recurrent theme in my luscious rants, whether here or elsewhere that pre-emptive pain is not in the American psyche. I believe this is a negatively idiosyncratic pathos, for other nations manage to define a far broader more encompassing sense of the public interest, and therefore have been to accomplish far more far-sighted and painful communal undertakings. I have not been able to get the kernel of why this exist, though I think it is related to their (mis-placed) faith rugged individualism and the market-as-panacea and the (mis-guided) fear and suspicion of things communal, or demanding of something upfront for something more or better tomorrow. It manifests itself in many fields: e.g. compare Dutch levee engineering vs. New Orleans, or American autos to German ones; or American building materials vs. continental ones, or social policies, all which exemplify a penny-wise pound-foolishness that displays an upside-down discounting process.

Put my Cassandra hat back on, the Fed will do its utmost to insure median nominal real estate prices don't fall too much for too loing, (prolonged stagnation is fine) so the fractional banking system built around this collateral doesn't cause banks "to sell position in order to make position" except at the margins. This will cause inflation, or would have were it not for the still-overly leveraged position of the consumer and the Feds. Stagflation, with marginally more emphasis upon the stag, will be the result, and this will be the price of avoiding the wholesale implosion of debt deflation. Out of this fall in the dollar , there will be a silver-lining, and it will benefit those sectors - manufacturing, agriculture, mining - that experienced the worst destruction in terms of trade over last two and a half decades. But as you say, wait 'til you see the blood....

Anonymous said...

I have not been able to get the kernel of why this exist, though I think it is related to their (mis-placed) faith rugged individualism and the market-as-panacea and the (mis-guided) fear and suspicion of things communal, or demanding of something upfront for something more or better tomorrow. It manifests itself in many fields: e.g. compare Dutch levee engineering vs. New Orleans, or American autos to German ones; or American building materials vs. continental ones, or social policies, all which exemplify a penny-wise pound-foolishness that displays an upside-down discounting process.

This is the triumph of the Republican Revolution, i.e. "movement conservatives", which started in 1976.

These meatheads, delirious from snorting freebased pulp fiction (aka Ayn Rand, the graphic novel), intentionally decided on a propaganda movement to convince the average American, apparently successfully, that any communal action other than war is going to be a ripoff.

The Dutch build levees because they think "it will help us". In America, New Orleans isn't "us", it's "them".

As in "them gonna rip us off" and "big guvermnnt screwing it up."

Its potency comes from regionalist and racial bigotry, of course, and now apparently they've discovered homosexuals to pick on too. All fear---fear of "the other", "Them, they're gonna rip *us* off. That's this program is all about."

When they get into government, their ideological conviction that government is evil, immoral and impotent apparently gives them self-righteous justification to sabotage its efficacy and loot the Treasury. They're not thieves, they're not saboteurs, they're righteous capitalist liberators!

Liberating the money into the private sector (our friends), because God wants it that way.

And the incompetence of government that they engineer is taken as empirical verification of their ideology.