This in response to a couple of threads discussing everything from housing to deflation vs inflation to market direction.
The general consensus seems to be summed up here :
$this->bbcode_second_pass_quote('oilluber', 'i') just don't see the deflationary scenerio.
Just look at how Greenspan pumps money everytime
there is a slowdown. He will give away free money to
everyone in mortgage debt and also bail out
alll the fannie mae fools with free money.
PeakOil is You
The business cycle
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The business cycle
by shady28 » Mon 22 Aug 2005, 03:13:40
It's been clear to me that the US Federal Reserve, with cooperation from central banks worldwide, has been fighting the normal business cycle since 1996. The normal business 'cycle' that most refer to is a 50-60 year 'K-wave', or Kondratieff wave, along with various smaller cycles. In the 1990s most believed the cycle was dead, defeated in the late 80s and early 90s. However, this time around the business cycle did not truly exert itself until the late 90s. Since the previous deflationary cycle did not end until 1936, 1996 would have been the last year that the next wave would have started.
The backside of this K-wave is characterized by deflation. The cure for deflation, according to greenspan, is to print money. This is exactly what he has been doing since 1996. The federal reserve 'prints money' by purchasing debt from corporations and the US government.
1996 was the year that M3 money supply - the broad measure - took off (graph goes to late 2003) :
The first big test of the central banks came in 1998, when what was called the 'Asian contagion' - currency market turmoil that was caused by a sudden collapse of many asian countries ability to repay their debts. Greenspan and the US Federal reserve cooperated with foreign central banks and more specifically the WTO to bail these countries out. They did so by making more loans, and cooperative intervention in the currency markets.
Round 1 goes to the Fed.
The next big test came in 2000-2002, with the popping of the stock market bubble which he had helped create through loose monetary policy in 1996-1999. The country very nearly slipped into deflation in that time, and by many measures did slip into deflation. Officially, inflation was 0.96% in 2001 - but many who study the CPI carefully believe it was manipulated to prevent public awareness of deflation. A public who, after the secondary recession in the late 70s and early 80s, is still more fearful of inflation than deflation and blissfully unaware of what and why the fed takes the actions it does.
The fed has battled this through a somewhat different mechanism than that used in 1996-1999 - they used low rates, and lowered the minimum casn that banks were required to keep on hand from deposits. This gave the banks more money to loan out and invest from deposits while sumultaneously enabling debtors to take on more debt through the lower cost of debt.
While the fed can pump money into the economy through debt creation, debt purchases, direct purchases, and by manipulating rates - they cannot control where that money flows. That money has since flowed into many sectors, the most prominent being housing. Indirectly the stock markets have been propped us as well - US corporations currently sit on over $600 billion in cash which is being used for stock repurchases. Even so, hundreds of millions of shares disappearing from the markets - and the markets still languish mostly below their 2000 peaks.
Housing is probably an ideal place for this to flow, from the feds point of view. It creates jobs at all economic levels, increase the flow of money, and makes it easy for the fed to control money flow. After all, an ARM mortgage gives the fed tremendeous power to put money into or take money out of the economy by varying rates. At the same time, the very loans themselves create money since their ultimate source is the Fed.
Round 2 - fed wins.
So what does this have to do with oil, you ask?
What people here need to consider, and really ask themselves are 2 critical questions.
1 - Has Greenspan defeated the K-wave
2 - Is oil yet another bubble that Greenspan created
This is really important, because oil unlike housing is not an ideal place for excess liquidity to flow. I believe that #1 is no, and #2 is for the most part yes.
High oil prices do not increase economic activity like housing, moreover it drains money from the economy by further tilting our trade balance and maldistributing wealth into the hands of fewer industries. Despite media pundits comments, money spent for Oil exploration has declined in recent years. Unlike housing, oil companies are not required to expend money for unnecessary exploration, money that would go into the economy, to pump the same amount of oil as they have have been pumping. It is, imo, a 'worst case' use of excess liquidity and a bubble which the fed must pop.
The problem with popping a bubble is that, as noted earlier, the fed can take money out of the economy and put money in the economy but cannot direct which portion of the economy gets affected. The result is likely to be serious declines in all markets. Those declines will be extremely deflationary.
So, who wins in round 3? Place your bets, the game is starting again.
Last edited by shady28 on Mon 22 Aug 2005, 08:56:34, edited 1 time in total.
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shady28 - Coal
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Re: The business cycle
by oilluber » Mon 22 Aug 2005, 08:17:23
maybe, ultimately, the FED will do what they do in 3'd world contries...
eg Argentina, get a good printing factory and just print
and ripp off all the bond and debt holders of the world.
That is the easiest way to ripp off all the idiot debt holders
of US treasuries,,, perhaps the debt holders deserve it.
eg Argentina, get a good printing factory and just print
and ripp off all the bond and debt holders of the world.
That is the easiest way to ripp off all the idiot debt holders
of US treasuries,,, perhaps the debt holders deserve it.
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Re: The business cycle
by Cash » Mon 22 Aug 2005, 12:06:52
Shady, I'm not sure I understand how Greenspan has "created" the increase in oil prices. Could you explain?
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Re: The business cycle
by shady28 » Mon 22 Aug 2005, 12:15:51
$this->bbcode_second_pass_quote('Cash', 'S')hady, I'm not sure I understand how Greenspan has "created" the increase in oil prices. Could you explain?
Liquidity - money - tends to flow to some kind of investment. By putting more money in the economy, greenspan has created a number of bubbles in various investment segments (stocks, then housing).
If you look around these boards, you will find a lot of people speculating on oil. They use oil stocks and oil futures, and some use gold since it has a correlation in price movements with oil. That monetary liquidity the Fed created is now flowing into oil.
That money flowing into housing could be considered a good thing, since it spurs employment and distributes the money widely across many areas of the economy - everything from the architects to the guy digging in the dirt for the foundation. Money flowing into oil is not like that. It takes money from a wide cross section of the population and puts it in the hands of a few. I suspect that this is why Greenspan has said, overtly, that oil was being driven by speculation and that the speculators were going to get hurt. It was a 'threat' as much as Greenspan ever makes a threat.
The best way for the fed to follow through on that threat is to shrink the money supply, then re-inflate it after the bubbles pop (and hope the money flows somewhere constructive).
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