[FoxV]

10yr is spiking on this. Thought housing was going down. Wait till this starts hitting the sheeple's consciousness.

[web]http://ichart.finance.yahoo.com/w?s=%5ETNX[/web]


And the yield curve is still inverted so more rate cuts to come. I wonder if Ben is building any muscles from all the strings he's pushing on.

This by the way is extremely bad for gold and now is a good time to think about shorting (the current sucker's rally is making some good opportunities.

That was of course until the rally ended

[web]http://ichart.finance.yahoo.com/z?s=%5EDJI&t=1d&q=l&l=on&z=m&c=%5EGSPC,%5EIXIC&a=v&p=s[/web]

p.s.: hmm, a spike. Guess the market hasn't run out of suckers yet

[seahorse2]

Can someone explain all of this. I understand the 30 yr bond auction didn't go well today, but what does that mean? Did the bonds not sell? Sell for less than expected? How does this affect yields of bonds?

[roccman]

$this->bbcode_second_pass_quote('seahorse2', 'C')an someone explain all of this. I understand the 30 yr bond auction didn't go well today, but what does that mean? Did the bonds not sell? Sell for less than expected? How does this affect yields of bonds?

[FoxV]

Just to add to that, a quick Bond refresher...

Bonds are basically a loan you give to a company for a certain number of years. For the service of doing this, the company says they will pay you interest until the loan is due. No Problems there.

The tricky part comes in when you start talking about the chances of the company defaulting, or the effects of inflation, or both. This is where pricing comes and yields come in.

Lets say you lend a company $1000 for 5 years and there's a 5% chance of that company going bankrupt in that time. Then value of the bond is $950 (as an example). So you're obviously going to want something to compensate you for this possible loss. And that is where interest comes in.

If you're bond is going to be worth 5% less at the end of the 5 years then you're going to want an additional 1% in interest to make up for it.

That's the theory behind it. How it actually works in real life is they offer up a bond auction and say "Any Takers". If there are no takers then they reduce the price, but you still pay the full bond face value, so you ask for more interest to make up for it.

This is also where the "Bond Market Vigilantes" step in. If the bond market does not like the inflation/Risk that banks/fed/government are putting into the economy, then interest rates go up. This reduces inflation and risk because it makes borrowing money too expensive to buy things or take on new "adventures"

One of the reasons we have gotten into this mess is Greenspan's "Conundrum" where the bond market did not respond properly to the risks of the tech bubble (and subsequent housing bubble) and everyone got greedy and out of hand.

This "Conundrum" is a direct effect of derivatives (and why the Bond Market Vigilantes did not step in after the Tech collapse and stop the Fed rate from going below inflation). Under the guise of "shared risk" through derivatives, the bond market felt there was no risk in the economy so they didn't demand higher interest rates.

Now that the entire economy is flying apart at the seems, the Bond Market is noticing.

If the Treasury/Mortgage/Car loans/Credit card interest rates go up significantly this spells big time
D-E-F-L-A-T-I-O-N
And much more than in the 1930s because in the 1930s people still had savings to be able to spend. If interest rates go up now, North America is basically screwed because of the negative savings rate and no cushion till times get better.

btw, Long term I'm a big time Inflationist. However in the short term I believe we'll have a huge deflationary crash. But it will only last as long as it takes Ben to get the helicopters warmed up.

Anyways, sorry for the long post, but this is a HUGE development in the current collapse

P.S.: please correct me where I am wrong about how bonds work. I'm stretching my knowledge a bit

[mattduke]

$this->bbcode_second_pass_quote('BIS', '"')Virtually nobody foresaw the Great Depression of the 1930s, or the crises which affected Japan and Southeast Asia in the early and late 1990s. In fact, each downturn was preceded by a period of non-inflationary growth exuberant enough to lead many commentators to suggest that a 'new era' had arrived", said the bank.

[LoneSnark]

FoxV, you completely forgot the time value of money. $1000 today is worth more than $1000 a year from now. So, even if the chance of default is zero you are still not going to be willing to pay face value for a bond.

[MrBill]

FoxV wrote:
$this->bbcode_second_pass_quote('', 'A')nd much more than in the 1930s because in the 1930s people still had savings to be able to spend. If interest rates go up now, North America is basically screwed because of the negative savings rate and no cushion till times get better.

[efarmer]

Mr. Bill you have once again delivered a masterpiece. Aaron has set up
quite a forum, and it is great to be able to come out here and participate. And then there are these nuggets like your last post,
that are content that you might glean in esoteric and verbose form
in some place or another, but they are here in plain language and
beautiful terse format. Mr. Bill, Montequest, Pup55, and so many
more are laying down these fine works and they are mixed in with
the banter and other traffic and often missed I am sure. I sure wish there was a finest of PO blog, much like JD's debunker format, where you can send someone to sample the finest examples of the inventory
at peakoil.com There is some beautiful music coming out of all of
these jam sessions and it is world class. Kudos Mr. Bill.

[Fiddlerdave]

Indeed. Elegant clarity in a concise summary. I often wish I had MrBill's work in a PDF to send to the clueless. God knows they'll never sign on to PO.com.


And thanks, Mattduke, for pointing out how the Bush's chronic excuse for hitting brick walls of "No one could have foreseen it coming" (as if it were moving instead of us madly speeding into it) by no means originated with his administration. The voices of weathermen and non-sycophant military advisers alike are ignored with regularity to keep the good times rolling against all hope.

[mattduke]

Peter Schiff's latest essay addresses what he calls "the mother of all bubbles", that is, US treasuries.

europac

[FoxV]

$this->bbcode_second_pass_quote('MrBill', 'I') also see deflation, but not for the same reasons as you. I think there is more than enough global capital swirling around as evidenced by asset price bubbles around the world.

[LoneSnark]

FoxV, all of your predictions appear to be unsound. Citigroup reported $3.62 billion dollars in post-write off profits in 2007; to suggest bankruptcy is imminent is rediculous. The financial fiasco has done nothing but reduce otherwise rediculous profit margins.

Similarly, while foreigners have a long track record of losing money in America, to suggest they are stupid enough to get none of their money back is similarly rediculous.

Similarly, we know how to fight inflation; we learned in the 1980s. To suggest policy makers have suddenly become incompetent lacks credibility.

We have evidence from Japan that the tools available may be insufficient to fight persistent deflation. But inflation is easily solved with the policy tools we have, the only question is whether we use them or not. And as the 70s and 80s demonstrate, both parties are willing to sacrifice their political careers to fight the inflation dragon (Carter and Reagan). That Reagan got credit and popularity was sheer luck; had the Fed. induced recession drug on into the election year he would not have kept office. And as he said, he was happy to do it.

[cube]

$this->bbcode_second_pass_quote('LoneSnark', '.')..
Similarly, we know how to fight inflation; we learned in the 1980s. To suggest policy makers have suddenly become incompetent lacks credibility.
....

[Ferretlover]

It still looks like a bunch of people allowed their greed factor to overrule every hint of logic and responsibility, while telling the public one thing and doing another in the backroom.
Goodbye democracy, dollar and America.
Hello, New World Order/North American Union.

Of course, still struggling to understand Economics 101, I could be wrong...

[LoneSnark]

But Ben Bernanke has read Paul Volcker's book. What more do you need?

And lowering interest rates when inflation is 3% is completely different from lowering interest rates when inflation is 12%.

Looking at your graph Paul Volker himself cut interest rates from time to time. Which is only logical: sometimes inflation is a serious risk, other times it is not.

[CrudeAwakening]

The Fed is not concerned with price inflation per se... it is only concerned with "bad" inflation, while it is more than happy to see "good" inflation (i.e. rising asset values) roar away unmolested.

The housing bubble was an example of simple price inflation, which Greenspan massaged by dropping interest rates like a stone.

The Fed is an inflation creating machine, being the ultimate source of money creation. They are more concerned about "inflation expectations" than inflation itself; after all, they are in the inflation business, that is what they do.

[patience]

I expect to set off a storm here, but I only want to get at the truth. Nor am I any kind of expert in this area, just trying to offer a digest of what I have read and believe to be the truth.

The best I have been able to learn, the FED does NOT set interest rates, it sets TARGETS, which it must "defend" with either increasing short term loans to banks, or less of them. That being the case, they end up following the interest rates that are actually set by supply and demand in the credit markets. The tail does not wag the dog. The FED is a bank, with a finite ability to supply money, which may be reaching its' limit, according to the recent news.

Definitions must be given here-deflation is a contraction of the money supply, and inflation is an increase in the money supply. Neither inflation, nor deflation, are caused by price changes, but rather, price changes are often the EFFECTS of them. The tail does not wag the dog here, either. Prices are the result of supply and demand of money supply vs goods supply. Money supply is the total of circulating cash and CREDIT. The amount of credit in the worldwide system dwarfs the amount of cash, by oreders of magnitude.

The supply of credit is contracting at an unprecedented rate, as the toxic investments brewed lately are failing and causing real losses of money to banks/investors. Because fractional reserve banking creates money, by originating credit (loaning money into existence), the reverse is also true, so money is destroyed when credit implodes as it is doing. Less money/credit=deflation. What happens to prices is an effect of less money, and tempered, or offset by, the supply of goods.

The scale of the current credit contraction is unprecedented, from which follows, a deflation of unprecedented scale. Governments and banks will obviously attempt everything in their powers to fight this, and delay,delay, delay it. I've seen credit-loss numbers quoted of many times the GDP of various countries, dwarfing their abilities to inject money to fight the contraction. That being the case, it is not a question of if, but when, and HOW we reach the bottom of this credit cycle. The actions of governments and central banks will define our course to the bottom.

That said, I presently believe that food and energy will remain costly relative to income, whatever the prices become, and am invested accordingly.

Please do not kill the messenger. I'm just quoting what I've read, primarily at Tickerforum.org, search posts by NOTHING, and GENESIS. I am not qualified to answer questions on this, but barely able to re-state their position. I hope I got it right, and I hope this adds something of value to the discussions here.

[patience]

FWIW, I am 61, and the amount I've paid into SS notwithstanding, I don't expect to see much of that again. I expect to work until I die.

Will we see hyperinflation? I have no idea. I don't have enough to hedge against it anyway. I'll be fortunate to subsist on what little we have, using every trick learned from ancestors who survived the Great Depression. It is not a happy prospect for me, and even less so for the younger generations.

[sjn]

$this->bbcode_second_pass_quote('patience', '
') The best I have been able to learn, the FED does NOT set interest rates, it sets TARGETS, which it must "defend" with either increasing short term loans to banks, or less of them. That being the case, they end up following the interest rates that are actually set by supply and demand in the credit markets. The tail does not wag the dog. The FED is a bank, with a finite ability to supply money, which may be reaching its' limit, according to the recent news.

Definitions must be given here-deflation is a contraction of the money supply, and inflation is an increase in the money supply. Neither inflation, nor deflation, are caused by price changes, but rather, price changes are often the EFFECTS of them. The tail does not wag the dog here, either. Prices are the result of supply and demand of money supply vs goods supply. Money supply is the total of circulating cash and CREDIT. The amount of credit in the worldwide system dwarfs the amount of cash, by oreders of magnitude.

The supply of credit is contracting at an unprecedented rate, as the toxic investments brewed lately are failing and causing real losses of money to banks/investors. Because fractional reserve banking creates money, by originating credit (loaning money into existence), the reverse is also true, so money is destroyed when credit implodes as it is doing. Less money/credit=deflation. What happens to prices is an effect of less money, and tempered, or offset by, the supply of goods. .

[patience]

sjn,
Yes indeed, that's what it looks like to me. The fly in the ointment then, is one of scale, that is, what the ratio of cash to credit means to this attempt.

The US economy is about 70% consumer spending, of an approximate $14 tril GDP, or $9.8 tril/yr.. The US consumer is said to be "tapped out", so burdened with debt that they can assume no more of it. The housing ATM is dead, etc. The underlying assets to consumer credit are devaluing. Thus, to stimulate the US economy alone, would require some major amount of money, compared to the US national debt of about $9 tril. Such a degree of spending would destroy the currency, right? Numbers I have seen regarding potential bank losses are many times these amounts, indicating that the finance system cannot be saved. Futile, or not, I'm sure the attempt will be made, only delaying the crash and adding to its' violence, per Mises.

Banks in the UK, Germany, and France are in the news this week, along with US bond insurers. The falling of dominoes, worldwide, cannot be far off.

If we assume TPTB are smart enough to see that this way lies collapse, then what do they choose? Granny's pension fund and Social Security get trashed, along with most of the Federal budget, or, let the banks swirl down the drains? If the answer turns out to be printing un-backed paper, (govt checks, or whatever) then inflation is a given, to the degree that it is done. Meanwhile, credit would be almost impossible to get for the poor. (In the 1930's, my uncle needed a co-signer to borrow 10% of the price of a farm, which he lost when a cannery went bankrupt, to whom he'd contracted a crop.)

So, is this what we are going to see, along with outrageous prices?

It looks to me like the banks are toast, no matter what, and we little folk will first give the banks all we have, through the govt, then starve along with the bankers.