The Great Correction...still in business... - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 18 November 2010
PRINTER FRIENDLY | ARCHIVES
The Great Correction...still in business... A  A  A

Baltimore, Maryland

The latest news suggests that we've been right all along. Housing starts are down a surprising 12% - with house prices still soft or falling in most areas.

Jobs? Forget it. Joblessness continues to be a major headache...with no significant relief in sight.

------------------------------ Derive maximum profits from Derivatives ------------------------------
You can make amazing profits by investing in Derivatives - Commodities & Currency. But you need a top analyst to guide you to pick the winners. We have signed up top London based Derivatives expert, Asad Dossani to be the Chief Analyst of our new recommendation service, The Lucrative Derivative Report, and he has already given our premium subscribers 7.9%, 4.9%, 23.8% returns in just a few days! Click here to know more

---------------------------------------------------------------------------

And both consumer and producer prices are flatter than expected. In fact, the core CPI reading is at a record low. For all the talk of 'inflation' - there isn't any. Ben Bernanke is right, at least about 'core' inflation. Prices for people who neither eat, nor travel, nor heat their houses are flat.

Yes, dear reader. We're in a great correction. We just don't know what it intends to correct. Not yet.

"US inflation moves close to zero," says the BBC.

And here's Bloomberg, with the details:

"The cost of living in the U.S. probably rose for a fourth month in October, led by higher gasoline and food prices that aren't filtering through to other goods and services, economists said before reports today.

"The consumer-price index increased 0.3 percent after a 0.1 percent gain the prior month, according to the median forecast of economists surveyed by Bloomberg News before the Labor Department report. Excluding food and fuel, so-called core costs may have increased 0.7 percent from October 2009, matching a record low. Another report may show housing starts last month fell to the lowest level since July."

We were watching the descent of consumer prices this past spring. It looked like the CPI would approach zero by the end of the summer...and then head into negative territory.

But then, with all the excitement around QE, we kind of lost track. The feds were printing money intentionally, right out-in-the-open and without even a "sorry" or an "excuse me."

Everyone knew it was "inflationary." And it was - to the extent that it inflated the monetary base. But it didn't inflate consumer prices. Why not?

"It's the economy, stupid."

When an economy is de-leveraging you get a phenomenon that John Maynard Keynes described as "pushing on a string." You can push money into the system. But the other end of the string...where you find consumer prices...doesn't move.

And now, it looks like Keynes was right. The Fed is pushing in $600 billion. Consumer price increases are still going down.

So we might be tempted to think that the feds can push on the string all they want; they'll never get consumer prices to rise.

But it's not that simple. It may be true that you can't increase consumer prices simply by putting money into the banking system. But the Fed is now going one step further. It's funding the US budget deficit - practically the whole thing. That frees all the money that would have gone into US Treasuries to go elsewhere. Where? Darned if we know.

But just look at cotton prices. And gold. And farmland in Iowa and Indiana. Farmland yields (not crop yields...financial yields, from renting out the land) are at an extreme low. Prices have been bid up - thanks to record low interest rates and record high agricultural output prices.

And look at prices of Indian stocks. They're selling near record levels too.

All over the world, prices are going up - especially in emerging markets, where economies are growing fast.

But in America, consumer prices - when you take out food and energy - are going nowhere.

Just what you'd expect in this strange correction.

And more thoughts:

As you know, the White House put together a bi-partisan commission to figure out how to get the deficit down. The group made what sounded like sensible proposals. Cut this...trim that. But even if the proposals were accepted in their entirety - which they won't be - only about a third of the deficit would be eliminated.

In a nutshell - which is where these things belong - the feds spend about one out of every four GDP dollars in the US. They collect, however, only about one in every five or six dollars worth of GDP. That is a pretty big gap - nearly 10% of total GDP.

If you're going to cut that kind of a deficit you're going to need more than a bi-partisan commission. You're going to need a catastrophe.

Heck, we could cut the budget in half an hour. We'd just get rid of everything that was not part of the original plan - that is, everything that was not necessary for the defense of the country or the maintenance of law and order. We'd have a huge surplus overnight...and lynch mob by daybreak.

Deficits are a big problem. They're not going away. We're not going to "grow our way out" of them. Left unchecked, the country will go broke. So you can expect a lot of pantywaist proposals and pussyfooting around on the subject in the years ahead. And then the country will go broke.

The big item is health care. It seems to grow uncontrollably. Americans don't want to give it up.

We went to the doctor today. We paid $220, in cash. That was the end of it.

"Come back next year," she said.

Seems controllable enough to us. If we don't have $220, we won't go back.

But Americans seem to like going to doctors and hospitals...especially if someone else pays for it.

Here's an example of what's ahead. Bloomberg reports:

"Nov. 17 (Bloomberg) -- Alice Rivlin, a member of President Barack Obama's deficit-reduction commission, is trying to stir a debate over imposing a national sales tax to reduce the deficit as part of a plan that includes steep Medicare cuts and a one-year payroll-tax holiday to spark economic growth.

"Rivlin, as part of a separate 19-member group sponsored by the Bipartisan Policy Center in Washington, offered a plan for a 6.5 percent sales tax. Her recommendation comes as the president's panel prepares a Dec. 1 report on options for Congress to trim the national debt.

"On Social Security, instead of raising the retirement age, as would the Bowles-Simpson plan, the Rivlin group proposes a gradual increase in the amount of wages subject to payroll taxes, currently $106,800, over the next 38 years to cover 90 percent of all wages. It would also trim the annual cost-of- living adjustments and reduce the growth in benefits for the top 25 percent of beneficiaries.

"Targeting domestic discretionary spending cuts alone would require eliminating almost everything from law enforcement and border security to education and food and drug inspection, according to the policy center.

"The nation also can't grow its way out of the deficit, the group's report says. Just to stabilize the debt at 60 percent of gross domestic product, the economy would have to grow at a sustained rate of more than 6 percent a year for at least the next 10 years, it says. The economy hasn't grown by more than 4.4 percent in any decade since World War II. "

"Finally, the problem also can't be solved simply by boosting taxes on wealthy Americans, the report says. Reducing deficits to manageable levels by the end of the decade would require raising rates on the top two income brackets to 86 percent and 91 percent, the report says. "

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Get The Daily Reckoning directly
in your mail box.
Just enter your e-mail address » 

Read our Privacy Policy and Terms Of Use.

Equitymaster requests your view! Post a comment on "The Great Correction...still in business...". Click here!

1 Responses to "The Great Correction...still in business..."

Balakrishnan

Nov 18, 2010

If jobs are to be created, first demand for goods is to be created. For creating demand, goods should be in short supply and people should have money to buy. For this to happen, first restrictions should be made in importing the goods. i.e. the price will go up which shall create a job opportunity to produce locally. Now,(i.e. to produce locally) the money available at low interest shall help. What Mr. Ben is doing is the latter part. He has to do the first part by first i.e. restricting the goods availability.

Like 
  
Equitymaster requests your view! Post a comment on "The Great Correction...still in business...". Click here!

Recent Articles:
Trump Takes a Beating
August 18, 2017
Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.
Which Gods Will Bring Down the US Empire?
August 17, 2017
Mr Trump is in the White House and the gods are in their heavens; what's not to like?
Will They Haul Off Trump's Statue, Too?
August 16, 2017
All across the country, the old gods become devils. New, gluten-free gods take their places...
Farm Loan Waivers: Why Bad Economics Makes for Good Politics
August 14, 2017
It is because the negative effects of the waivers aren't clearly visible.