Aloha, Ian!

Will RANT for food . . .

Excellent analysis. I do believe that now is the critical time for us to invest in developing alternatives for petrol as well as a reduction in sprawl and a renewed interest in city living (all necessary for our nation’s longterm economic health in an era of global warning). I had kind of hoped that $100+/barrels would do this.. I can only hope that the recovery sees higher oil prices :P

“line is that the US economy basically did nothing for the last 7 years”

What I want to know is who can we punish for this appalling failure of a presidency. I want punishment :)

Hi Ian!

IMO, like Ian’s we are in for some terrible times. Several states have early voting and we should all take advantage of early voting. McCain is getting out the whackos and it would be important for them not to stand in our way.

America: Also too big to fail

What I would like to know is what all of us lowly apartment and other rental unit dwellers who don’t have yards for gardens and no control over the kind of heating/cooling equipment etc are supposed to do. Info is all over the place for stuff for home OWNERS but there doesn’t seem to be much for those of us who don’t own a home.

High real interest rates are bad for real growth. Low (or negative) real interest rates are good for real growth (which may eventually, but not immediately, lead to higher inflation).

Deflation makes monetary policy impotent because nominal real interest rates cannot go below zero (as a general rule; some exceptions). Depending on the rate of deflation, real interest rates can be quite high.

Therefore deflation is worse than inflation because the former removes one of the most powerful tools of economic policy.

It’s apparently possible to grow a fair bit of food in an apartment, though I confess I’ve never tried (I don’t even have that much room, personally.)

an interesting question is what industries should we, as a country (including with the active engagement of the Obama administration) be developing that’ll attract some of these investment flows back to the US. The problem is that once investors come to see places like China and India (as well as a resurgent EU) as appropriate, safe and lucrative destinations for their FDI, the harder it will be for us to ever attract these flows back. We need a plan. New industries. New strategies. Competent and happy workers. I’ll use the longstanding epithet of all fiscal rethugs: we need ‘industrial policy’.

Will RANT for food . . .

So will I… ;-)

I was just telling my brother how ironic it was that I’ll soon be trading Depression Glass for food.

I think the industries are of course in the ‘green tech’ field. Solar panels, different types of wind turbines, water turbines (waves, non-dam river alternatives), geo-thermal stuff, and the like.

All of these will require new technology (we can do this!) that technology can be exported. And with the right type of subsidies and partnerships, we can become and exporter of equipment (lots of new jobs!)

oo me too!

von hoffman’s been howling about deflation for a couple a’weeks… over at the nation…

Yes. What I’m hearing however is that they think they know how to deal with a skirt with deflation, because they think they just barely avoided one in the early 2000’s.

I think, also, that the choice right now is essentially not between inflation and deflation, but between hyperinflation and deflation. They’re pumping a TON of money into the financial sector. If it were to hit the real economy, BOOM.

Right now the problem is that inflation is much higher than than central bank rates, and banks don’t want to lend at that. There will be a point during the inflation drop where they can do so profitably. Then, of course, if we get into real undeniable deflation, monetary policy will go away.

But let’s be honest, at 1.5%, monetary policy is almost at an end anyway. .5% to go, 1% might as well be zero, in effect.

Gee, I just assumed that neighbor I spied herding a sheep into his apartment was a weirdo.

Commercial banks, investment banks, finance companies, insurance companies and hedge funds are not lending because they are delevering their balance sheets.

Yeah! to industrial policy. Seems like we’re the only ‘developed’ country that doesn’t have a good national ___________(fill in the blank) policy.
Choices: Industrial, energy, healthcare, educational, transportation, infrastructure replacement, natural resource, etc. I’m sure there are others.

I’ve often heard the term “deflation” applied to the period of 1929-1940 in the US. There apparently was a collapse of prices in certain sectors but in public utilities and telephones the regulated rates resisted falling to the point of having the companies challenge the rates all the way to the US Supreme Court, which also refused to allow forced price reductions. economists and the Roosevelt administration applied the term “loss of purchasing power” to this phenomenon, which to me gives a greater meaning to what people experience when their wages are falling or disappearing and they are unable to even afford the now cheap commodities flooding the markets. The paradox of poverty amidst plenty.

Today, we have the Keynesian inspired programs that at least partially prevent total destitution as existed during that period and unemployment has not begun to rise to those levels but I wonder if we’re not going to see something similar with some many people employed but in low wage or part time jobs, no health insurance or pensions and the safety net so derided by the right tattered and full of holes.

They are delevering by: choice- increasing reserves for the inevitable increase in corporate defaults; and by necessity- maintain credit ratings, lessen deterioration of cost of funds, and to accomodate redemptions.

Thanks Ian.
digg

Everyone is very puffed up about avoiding the worst in 2000, which makes then think they can do it again. But the economy, esp the consumer, is in much worse shape today. During the 00s, they were able to borrow against their houses to spend. Try as I may, in the period ahead I can think of no visible means of support.

As for the liquidity, it kinda looks like a liquidity trap. What economic actor, receivin the liquidity, would increase spending? It might get the banks willing to lend again, but where is the demand for credit? Are consumers with stagnant real wages (the drop in oil prices will, at best, merely repair the damage from the prior rise in oil prices, so is not stimulative), declining employment, where’s the consumer demand for credit?

And with consumer spending weak, corps aren’t going to do capital spending, which is derived from sales, and interest rates have little influence.

The export sector has been strong recently, but is small, and the world economy is slowing.

So liquidity is useless. And even if it did spur the real economy, there’s be plenty of time to raise rates again before systemic inflation set in.

Need a govt infrastructure package as well as more tax cuts for low & middle income.

OT
Charles Swift, Hamdan’s lawyer, is on cspan2. He’s one of the few Americans who has made me proud in the last 8 years.

Ian, would you elaborate on the phrase in italics? Does this mean the U.S. government will then be forced to pay foreign governments back for U.S. debt they are financing? Will U.S. Treasuries be worth much?

“…all through the dollar’s rise, investors will be getting out of everything but Treasuries and securities which they believe are government backed, but it will be overwhelmed by the huge sucking sound coming from the Treasury building.”

Solar Thermal Reading assignment:
Earth: The Sequel
How to capitalize alternative energy and R&D
There is great capital in USA as well just not investing until we get a carbon tax…that is what big oil has been fighting with all their political power Bushco/Cheney and the Jett Rinks of America. Without carbon tax and cap and trade it won’t happen. Like banks won’t loan until they are sure of recapturing their investments, Noone in alternates are investing on the scale we need witjout payback.

Barefoot Solar

I agree, but who will provide the leadership for us to create and implement this policy. By all accounts, Americans with college degrees are stagnating (oddly enough for the last 7 or 8 years) at around 28% of the population. We produce a mere 70,000 engineers a year… effectively the same number per capita as China, and this is decline. Many many of these engineers went straight into high finance for many years, where we now find out that they’ve been destroying rather than creating value.

Who will pay for this renaissance? Should the government be the lender of record to provide the debt necessary to fuel this industrial development? Will there be a new form of financing, with a whole different set of return expectations and much longer term horizons? How do we restructure the financial system to enable it to provide liquidity for businesses and innovation at minimum cost while, at the same time, prevent that system from getting swamped by speculative insanity?

Tough questions.

RE: heating and cooling and ‘gardening’ for renters and apartment dwellers. I started to write something and it just went on and on, so I’ll go and stick it up in a diary.

What will be done is to put money into the reserves of US subsidiaries of foreign banks. They will then buy treasuries, and hold them in their reserves, since the Fed is paying interest on reserves. That means effective returns for treasures will be 1.5% (I believe) higher than the otherwise seem, as long as you’re a bank.

Note that you, an ordinary person, will not be able to get a part of this action. Treasury is pumping a ton of money out, they need to make sure it doesn’t get into the real economy in a significant way beyond restoring normal lending and borrowing.

However, once debt expansion stops, the natural outflow will, I think, be negative, and thus the US dollar will start to drop.

That’s why we need a real ‘industrial policy’. That policy gets set at the Administration level. I realize why that hasn’t happened to date as the entire admin was/is populated with oil tycoons and oil tycoon wannabes. But with the advent of an O admin – and his comments that he would like to have Gore be involved, plus he statements that lead me to believe that he has bought into many of the ‘wecansolveit’ principles, this can be done.

Remember – we need strong Dem control of Both houses of congress so don’t forget the down-ticket!

OT.

In the event you haven’t heard. The good folks in Pennsylvania had the decency to roundly boo Sarah Palin off the ice tonight.

-G

Woo hoo. How did she react? TheraP sez she is probably insecure & needs adulation to keep her ego intact. Did she throw a hissy fit?

Ian,

out of curiousity, how low do you think the dollar can go (relative to say Euro). Given the partial link to the Renminbi, it can be argued that China provides us with a floor for the dollar, but that only works for as long as we remain a viable market for their goods…. and with sufficient enterprise liquidity to trade.

This needs to be addressed asap…

Shocker: Pentagon’s Secret Budget Numbers
The Pentagon has been struggling with what to spend money on in light of the coming financial squeeze, and now they have made their choice…everything!

several questions:

They proceeded to march up for a time, but they’re now doing what I expected would happen for the reason I expected: collapsing demand.

of course, i expect demand to crater – but i don’t see a demand decrease to account for the lower prices since june. could the decrease in price not be, at least initially, in large part due to the bursting of a speculative bubble? in any event, could you point me to your sources for collapsing demand? thanks.

This sounds like good news and it is. It will be part of a general drop in prices, as inflation gets clubbed over the head as the economy stops thrashing around in the bathtub and just lies there, slowly rotting. If you were to include housing prices in inflation indices, the US is already in deflation

why is deflation good news? i’d think that’s one of the worst things that could happen and i’m already worried about it – we’re in the process of watching trillions, perhaps tens of trillions of dollars go poof. and yet i hear people talking about inflation or even possibly hyperinflation. the only way i see for that to happen is a dollar crash (which i’m not discounting).

The main reason banks aren’t lending isn’t fear of counterparty risk, it’s because inflation is much higher than they are expected to lend at.

i asked about this in a previous thread, but apparently at a time you weren’t around to explain why you think this is so.

at times of high inflation, it doesn’t help the institution cope with inflation to keep cash on the books. as it now stands, i’d expect that the fear of not getting their principle back (aka insolvency of the debtor) is the greatest concern. in fact, i’d think high inflation would encourage investment (and lending if interest rates were non zero), even if the returns did not keep pace with inflation – because cash will be in a worse position.

but you draw the opposite conclusions… i don’t understand.

thanks. i really want to understand at least some of your thinking on this.

Industrial policy (in most other developed nations) is a co-equal partnership between the government and industry. That partnership entails investment from both partners – something the Rethugs equate with socialism. (It’s not) This is a high hurdle, and is going to require some mass re-education of the population. And unfortunately, that re-education is going to have to be done first. We have all been brainwashed to believe that the ‘gub’mint’ is evil, and that must be turned around. Step One.

As far as all the banking and finance stuff – I frankly believe that the new investment in infrastructure and ‘green tech’ MUST happen side-by-side with efforts to unravel this banking mess. My personal ideas are to declare the CDS null and void – and to mandate ALL subprime mortgages be changed into 30-year fixed-rates at the original ‘teaser’ rate. Borrowers would then be able to afford to pay them, and the banks would begin getting some of their capital back.

Anyway, infrastructure construction provides good jobs (highway and bridge reconstruction, new electrical grid, etc). The reason we have so few engineers and they are working in areas not engineering is because we have no jobs for them. We have outsourced all the engineering stuff to India. That needs to stop. Companies need to be offered incentives for keeping jobs here, not for sending them overseas as is the case now.

There are lots of ways to get this started – all we need is the political will to do it. That’s where I believe Obama can be successful. Sure, he cannot do all this stuff by himself. But he can lead.

Will RANT for food .

lol. don’t even need to feed me, at least not initially.

I was going to say the same thing. Just give me an encouraging word now and then.

Read my 26!!! The formula or plan created in collaboration with Al Gore is well documented has broad scientist support and big capital is ready. Many corporations have been formed.
We are not starting from scratch. Samll winf turnines are available for $1,000.00 to go on rooftops where prevailing winds provide energy. On our freeways and farms 2′x3′ panels provide power for telephone and other equipment.
When the carbon credit/tax comes the cost will drop 50%. These thing are achievable with the resources we have in the USA.
Thjere is a pot of gold at the end of this sustainable rainbow. Just 1% of the photons that hit earth are enough to drive all energy needs.

that’s probably true for most of us here in the comments *g*

1) I stated in the past that I thought there was a bubble and that caused the rise over the summer. I stated it while it was happening, actually, when folks like Krugman though otherwise. I now think the bubble is done and we’re into demand contraction.

But support from the rate cut was eclipsed by persisting worries about demand, which has fallen in the United States and other developed economies due to the financial market turmoil and high fuel costs.

– http://www.guardian.co.uk/busi…..le/7846922

2) Stirling had a piece at the Agonist on inflation numbers vs. LIBOR, complete with graph. I wrote a piece just the other day stating the inflation figures, which are running between 5 and 7%. It’s simple enough, why should they lend to banks for low interest rates when they can lend to non-banks for more? Despite all the screaming, long term credit markets have not seized up significantly the way short term ones have. Why? Because long term you can lend above the rate of inflation, short term you can’t, because people want something not too high above central bank rates, and central bank rates are lending far below inflation. Banks are lending to the customers, long term customers, who can pay. Yes, they have constricted credit somewhat, but it hasn’t seized up. Why? Yes, lending at even a loss is better than making no money, but that’s not the choice they are faced with. They are faced with the choice of lending for a gain or keeping cash on hand to snap up distressed assets or lending at a loss. They’re choosing either to lend at a gain, or to keep cash on hand. Remember, Citi almost managed to buy Wachovia for $1 a share. Other folks have snapped up competitors for cents on the dollar. Cash is KING and you aren’t giving it up for 2 or 3% returns, annualized.

3) Inflation dropping is good news because it will get banks lending again. If it goes all the way into general deflation, as opposed to just housing deflation, then that will be bad. Probably not worse than hyperinflatin, however.

Obama has in fact talked at length about creating 5 million good wage jobs in alternative energy. Gore and a host will not let him forget for one second. Their will be an enegy policy tha addresses global warming and shoftds the capital back to american investments instead of hemmoraghing to OPEC.

seems like there is an economic war going on (who are the targets, was it intended or just taking place since the failure could not hold until after the election, questions questions questions).

I saw this war start with the lead pain toys right shortly before last Christmas (the announcing of it).

The low price of oil will not do any favors for our enemies. We are going down fast – do you suppose part of the moves we are making are trying to make it relativly worse for others, is that far beyond the governments control, are we actually LOSING a financial war, if one is going on is it more ad hoc and low level or are we seeing a “nuclear option”.

Perhaps its beside the point.

thanks.

if i understand what you are saying:

1. decreases in oil prices due to demand contraction (as opposed to bubble bursting) are for only the last few weeks – and not over the summer?

2. the issue isn’t that banks are lending, it’s that they aren’t lending short – only long? i will look for previous posts from you and stirling.

3. depends on 2.

thanks.

oh I agree with you.. I just think that to do this we need a new type of financial system AND a new commitment to education and workforce development, under strong national leadership. Perhaps Obama should make Gore his industrial and infrastructure reconstruction czar… for a clean, green and prosperous America. Thank you.. now I’m getting excited again.

You and others have talked about Russia living on the crest of huge oil prices. Are they in danger of total collapse? If so how long at these and lower prices can Putin hold it together?

Lokywoky,

A great deal of food can be grown in urban areas. Not nearly enough for one’s daily calorie intake, but a lot of vegetable and fruit can be grown to supplement low cost staples like rice, beans, etc.

Do a Google search on “Cuban urban food production” and you’ll get some useful ideas.

It’s simple enough, why should they lend to banks for low interest rates when they can lend to non-banks for more? Despite all the screaming, long term credit markets have not seized up significantly the way short term ones have. Why? Because long term you can lend above the rate of inflation, short term you can’t, because people want something not too high above central bank rates, and central bank rates are lending far below inflation.

Banks operate on the difference between two interest rates, so in principle inflation is irrelevant to them.

Of course they’d like to loan as much as possible at the highest rate possible. But, they now have a lot of ready cash available at very low (below inflation rates). So, they should loan all the money that they can (subject to appropriate risk calculations).

Thanks for the idea. I read one of the articles – very impressive. Doesn’t apply much to me. I live in an apartment that is halfway underground – no deck or balcony. It is also situated on a steep hillside that is covered with knapweed, cheat-grass and one other knoxious weed. Deer come by almost every day and eat everything. The bushes and trees are all ’scalped’ as high as they can reach. And then the landlord has an outfit called “Tru-Green Chem Lawn” come by about once a month and spray weed-killer everywhere. They are not careful (my neighbor had some strawberries in a pot on the sidewalk. Dead.) We have steep pitched roofs on top (snow load in winter) and that’s about it. I would be willing to try to ‘farm’ the hillside if it wasn’t for the deer. Building a fence to keep them out is physically impossible for me – and the property owner would probably not be happy at all. I should mention that I am physically disabled too.

So, I’m still up against the ‘what do I do’. I drive a Prius. I changed all my light bulbs. I keep the furnace set low. I don’t use A/C. I shop at the farmers market – we don’t have a CSA here.

Lokywoky,

As the need becomes greater, hopefully gardening will become a concern of the whole community.

“The main reason banks aren’t lending isn’t fear of counterparty risk, it’s because inflation is much higher than they are expected to lend at”

You keep writing this, and it’s not rational. Even if the return is less than inflation, where are the Bank’s going to get a return that is the same or better than inflation. Hard to believe, becuse of the leverage banks get from interest payments on loans. Every dollar back in interest enables the banks to lend another 7-10 in loans.

Please explain your assertion. All the number I’ve seen don’t take into affect the capital and deposit ration of banks.

Talk to the landlord, rent the hillside, fence the lot, terrace the hillside, and get two big dogs.

Rent for hillside – $ for landlord, and less yard maintenance expense.
Fence the lot – keep the dogs in. Keep the neighbours out.
Terrace the hillside – Make as much arable land as possible.
Two big dogs – Oh Dear Deer.

You can always participate in community gardening. See if there is one in your area.

I too was going to suggest community gardening. The metropolitan Washington DC area has many — of course there’s a lot of open land very close to the city.

Many new oil fields found recently, has any one heard of this before? I hadn’t.

For oil-rich countries the slump has come at a bad time. As the oil price began rising during the past few years, governments and big oil companies plowed billions into exploring and developing new fields in Russia, Angola, Mexico, Brazil and Saudi Arabia — projects whose costs have more than doubled in the past few years, in part because soaring steel prices drove up drilling equipment costs and oil-rig rentals. Just as global demand has begun to slow, millions more barrels of oil a day from new fields have hit the world market.

http://www.time.com/time/busin…..ml?cnn=yes

Blub, I’m not sure I understand this. I thought that the people that live outside the cities would be the ones that put up wind turbines and fields of solar panels, etc because they have the area to do it. Those in the city and in apartments don’t have as much land. Cities can get bogged down with building codes and regulations that the mega monoplolies/lobbyist have already put in place in some areas. My deepest hope is that individual families will have enough power from clean renewable energy that our homes can become self sufficient (off the grid) and electrical and gas monopolies nearly extinct.

a reduction in sprawl and a renewed interest in city living (all necessary for our nation’s longterm economic health in an era of global warning

Maybe you could talk to the owner about putting solar panels and/or wind turbines on the roof. The initial cost would be high but in the long run it would be worth it.

Also, many cities are doubling the price of their water and sewer bills or charging by the gallon now which in effect doubles the price. I believe any new sewer lines put in cities should have 2 lines, 1 for gray water (sinks, showers, washing machine water) and another for brown water (toilets). We are contaminating the gray water by adding it to the brown water and it is expensive to clean from what I understand.

For people who have enough land they can do this and send less water to the sewer plant to be cleaned and save money on their sewer bill. The gray water can be filtered when it leaves your house and put in a tank (could be under ground) and saved to water lawns, trees or wash a car which would mean lower water bills.

Got papers from JC Penneys today. They have raised their interest and late fees and lowered maxium amount I can charge. If I am late twice in 6 months I go in the dirty little shit category and have to pay a higher interest. Oh and if you have given them a cell phone number they have permission to call it and the charges will go to you if their are any charges. And other changes but I haven’t read the entire minature contract yet. Guess those Congressional hearings last year didn’t do any good with these loan sharks.

Russia is rich, filthy rich. They have lots of oil and have lots of new millionaires and made a ton of money with the high prices of oil. That’s waht I read abt 5 months ago.

They’re pumping a TON of money into the financial sector. If it were to hit the real economy, BOOM.

When do the baby-boomers start cashing out their retirement funds?
Is it overnight or more gradual than that?

Cash is KING and you aren’t giving it up for 2 or 3% returns, annualized.

Does that mean we’ve hit bottom and now is the time to sell the gold and other commodities to get cash to buy useful things with, things like houses and stock in Green companies and the like?