By Barry Ritholtz – October 28th, 2010, 2:20PM
October 25, 2010 Bernanke Leaps into a Liquidity Trap
For example, it is widely believed that lower real interest rates will result in higher economic growth. But in fact, the historical correlation between real interest rates and GDP growth has been positive – on balance, higher real interest rates are associated with higher economic growth over the following year. This is because higher rates reflect strong demand for loans and an abundance of desirable investment projects. Of course, nobody would propose a policy of raising real interest rates to stimulate economic activity, because they would recognize that higher real interest rates were an effect of strong loan demand, and could not be used to cause it. Yet despite the fact that loan demand is weak at present, due to the lack of desirable investment projects and the desire to reduce debt loads (which has in turn contributed to keeping interest rates low), the Fed seems to believe that it can eliminate these problems simply by depressing interest rates further.
A good example of this “toy block” thinking is the notion of forcing individuals to spend more and save less by increasing people’s expectations about inflation (which would drive real interest rates to negative levels). As I noted last week, if one examines economic history, one quickly discovers that just as lower nominal interest rates are associated with lower monetary velocity, negative real interest rates are associated with lower velocity of commodities (hoarding). Look at the price of gold since 1975. When real interest rates have been negative (even simply measured as the 3-month Treasury bill yield minus trailing annual CPI inflation), gold prices have appreciated at a 20.7% annual rate. In contrast, when real interest rates have been positive, gold has appreciated at just 2.1% annually. The tendency toward commodity hoarding is particularly strong when economic conditions are very weak and desirable options for real investment are not available.
How much does the federal government subsidize the cost of college in the United States?
That’s the subject of today’s chart, where we’ve taken historical data from the White House’s proposed budget for Fiscal Year 2011 and plotted it over time. The chart below shows both nominal and inflation-adjusted figures for all federal outlays for higher education since 1962, with projected values through 2014.
October 19, 2010
Ben Bernanke Out-Miers Harriet Miers
*By* *John Tamny*
To make basic what is basic, inflation and deflation aren’t the result of too much or too little economic growth as Bernanke presumes, nor do they have much to do with consumer prices which change all the time for non-monetary reasons including, but not limited to, productivity and competition. Inflation and deflation are monetary concepts, and with the commodities most sensitive to currency error continuing to spike upward, it’s clear that we’ve had an inflation problem for quite some time.
As it applies to our economy, Bernanke naively links slow growth with deflation, but the greater truth is that economy is weak precisely because the dollar is weak, and as such, inflationary. When we devalue, investors go on strike, and with the dollar once again testing all-time lows, the very investment that would author our recovery has gone into hiding.
Our Debt Is More Than All the Money in the World
September 9, 2010 5:32 P.M. By Kevin D. Williamson
I have argued that the real national debt is about $130 trillion. Let’s say I’m being pessimistic. /Forbes/, in a 2008 article, came up with a lower number: $70 trillion . Let’s say the sunny optimists at /Forbes/ got it right and I got it wrong.
For perspective: At the time that 2008 article was written, the entire supply of money in the world (“broad money,” i.e., global M3, meaning cash, consumer-account deposits, checkable accounts, CDs, long-term deposits, travelers’ checks, money-market funds, the whole enchilada) was estimated to be just under $60 trillion. Which is to say: The optimistic view is that our outstanding obligations amount to /more than all of the money in the world/.
Global GDP in 2008? Also about $60 trillion. Meaning that the optimistic view is that our federal obligations outpace /the entire annual economic output of human civilization/.
Mina Kimes, writerOctober 11, 2010: 4:14 AM ET
Emerging-markets economies seem to have it all these days. Their lands are stocked with natural resources. Their national finances are strong. And a rising middle class is spurring breakneck growth in their businesses.
Yet China, India, Brazil, and other developing countries share a glaring problem: inadequate infrastructure.
For example, 400 million people in India don’t have electricity, according to the International Energy Agency. Brazil is one of the world’s biggest commodities producers yet has one of the weakest port systems. Meanwhile millions are moving to cities in countries like China, increasing the need for power and transportation.
Emerging-markets governments are committing $6.3 trillion to address the infrastructure problem, according to a new report by Bank of America Merrill Lynch (BAML). The bulk of it is going to water systems, energy, and transportation. Kate Moore, one of the authors, says governments will increasingly direct the money to public-private partnerships. “They have plans to have private companies take a larger role,” she says.
Peter Foster October 8, 2010 – 10:24 pm
A sign that shale gas has great potential is that greens are trying to shut it down
That is due to the stunning improvements in the technologies of hydraulic fracturing and horizontal drilling that have made the production of vast amounts of shale gas feasible.
This gas not merely presents the possibility of an economic bonanza in many areas, including B.C. and Quebec, but of enhancing much-coveted U.S. energy independence. It also promises to rearrange energy geopolitics. But for the moment, it is aggravating a supply glut in North America. On Thursday, prices on the New York Mercantile Exchange slumped 6.4% to US$3.62 per million British thermal units (which is roughly equal to a thousand cubic feet).
Last year, the “Potential Gas Committee,” a group of specialists linked to the Colorado School of Mines, reported the biggest increase in U.S. natural-gas reserves in its 44-year history, from 1,532 trillion cubic feet (TCF) in 2006 to 2,074 TCF in 2008.
The Marcellus shale field alone, in New York and Pennsylvania, has been estimated to be worth as much as US$2-trillion. The American Petroleum Institute has calculated that it could support 280,000 jobs. In Quebec, a report this week suggested that the industry could create almost 5,000 jobs a year for the next 10 years.
So much for running out of hydrocarbons.
Copper rallies on strong emerging-market demand
Commentary: Copper prices as a gauge of economic trends
Copper’s /quotes/comstock/21e!f:hg\z10 (HGZ10 *378.50*, +10.55, +2.87%) economic sensitivity is so great, in fact, that traders often refer to it as “Dr. Copper,” suggesting that it holds a Ph.D. in economics because of its ability to help predict economic trends.
“Copper is not easily replaceable so often end users cannot substitute” for it as they can for other base metals, said Kevin Kerr, editor of Kerr Commodities Watch. “That is one of the elements that makes copper such a good gauge of real value in the industrial metals.”
The market for gold may show signs of a bubble, but it’s one that hasn’t burst yet, columnist Brett Arends says.
And right now, Dr. Copper’s value gauge is rising off the charts.
Futures prices for the metal climbed to a 26-month high in New York this week, with many investors convinced that demand for the industrial metal will continue to climb from countries such as China and India.
| WEDNESDAY, OCTOBER 6, 2010
By RANDALL W. FORSYTH
On Oct. 6, 1979, the Federal Reserve embarked on a fierce campaign to restore the dollar’s value, both in terms of inflation at home and in the global currency markets. It meant extreme actions, culminating in short-term interest rates reaching the unprecedented heights of 20%. The U.S. economy sank into what then was the worst contraction and the longest period of sustained 9%-plus unemployment since the Great Depression. Once inflation was finally crushed, the economy embarked on the longest expansion ever known, interrupted only by two trivial recessions until the great credit collapse beginning in 2008.
Since then, monetary policy has been the polar opposite—short-term rates cut to an irreducible zero; massive Fed asset purchases to push down yields on intermediate- and long-term Treasuries and especially mortgages; and now, stimulus through a lower dollar, albeit unofficially. The aim has been to arrest a decline in inflation that now has been explicitly deemed as too low—which couldn’t be much more different than 31 years ago. And while the U.S. economy emerged from the worst recession since the Great Depression, unemployment remains elevated above 9% for the longest stretch since the 1930s.