Friday June 12, 2009 - 11:19:42 GMT
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Black Swan Capital - www.blackswantrading.com
The $18,100,000,000 question!
â€˘ European industrial production dropped by the most on record in April as the worldwide recession ravaged demand for goods. (Bloomberg)
â€˘ German wholesale prices fell 9 percent in May from a year earlier, the largest decline in nearly 23 years as Europe's largest economy wallows in recession, the Federal Statistical Office reported Friday. (AP)
â€˘ European governments have approved $5.3 trillion of aid, more than the annual gross domestic product of Germany, to support banks during the credit crunch, according to a European Union document. (Bloomberg)
â€˘ Treasuries rose for a second day after Japanese Finance Minister Kaoru Yosano said his countryâ€™s confidence in U.S. government debt is â€śunshakable.â€ť (Bloomberg)
â€˘ Chinaâ€™s new lending doubled in May. (Bloomberg)
â€˘ Dueling Forecasts: The World Bank said Thursday it expects the global economy to contract by "close to 3%," far bleaker than the bank's March estimate of a 1.7% contraction, partly because of a slowing stream of cash and investment to the developing world. But a global recovery in 2010 may expand at a 2.4% clip, according to a briefing paper by the International Monetary Fund, which credits the faster-than-expected rebound to stimulus spending by developed nations. (WSJ)
Key Reports Due Today (WSJ):
8:30 a.m. May Import Prices: Expected: +1.5%. Previous: +1.6%.
10:00 a.m. Mid-June Reuters/U Mich Sentiment Index: Expected: 69.8. Previous: 67.9.
â€śAction is purposive conduct. It is not simply behavior, but behavior begot by judgments of value, aiming at a definite end and guided by ideas concerning the suitability or unsuitability of definite means. . . . It is conscious behavior. It is choosing. It is volition; it is a display of the will.â€ť
Ludwig von Mises
FX Trading â€“ The $18,100,000,000 question!
The numbers are staggeringâ€¦really incomprehensibleâ€¦itâ€™s the kind of stuff that if you made it up no one would believe youâ€¦Iâ€™m talking about the amount of money both the US and European Union have committed to this crisis:
â€˘ The US government and Fed spent or lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year.
â€˘ European governments have approved $5.3 trillion of aid, more than the annual gross domestic product of Germany ($3.3 trillion).
If we break the US spending down to per person living in the US, we get:
$12,800,000,000,000 divided by roughly 304,000,000 = $42,105 per person
Now I know what youâ€™re thinking; if our government, in its infinite wisdom simply doled out that much money directly to every man woman and child, you can bet our crisis would be solved. Heck, in the Crooks family alone, four kids, my wife, and I would have racked up a cool $252,630! Granted, the kids would want their pound of flesh given that all are of age, but still, we could have paid off a whole lot of debt and bought some pretty cool toys with that, deleveraging and stimulating along the way. And I bet you a dollar to a donut that I could more efficiently spend that money than some government agency thatâ€™s only trying to â€śhelpâ€ť me by saving various dinosaur financial institutions and companies throughout our fair land.
Before I went off that tangent, I was going to say that what is really quite amazing is that with a total ofâ€¦.
â€¦committed by the US and Europe, one wonders about a couple of things:
1) How in the heck can banks screw up so catastrophically? Still an open question.
2) Why in the heck donâ€™t we have ragging inflation by now? Still an open question.
When you consider that other governments besides the US and EU (China has been busy along with Japan, Brazil and Russia) are into the money pumping game, and we havenâ€™t seen a whole lot in the way of global traction in demand, and even more surprisingly we havenâ€™t seen any inflation per se from the â€śgrowingâ€ť countries, it has to make one very nervous.
In fact, as John Ross pointed out yesterday, we keep seeing deflation instead. Just today, as highlighted in the key news above, German wholesale prices fell 9% in May from a year ago! Say what? Yikes!!!!
And did anyone notice US consumer prices went negative year-over-year for the first time since 1954! Yikes!!!! [Highlighted below; source Economagic]
Annual Inflation Dec-Dec 1914 to 2008:
1914 01 921â€˘000
1915 01 71.980
1916 01 1012â€˘621
1917 01 7018.103
1918 01 8520.438
1919 01 5114â€˘545
1920 01 692â€˘646
1921 01 68-10â€˘825
1922 01 57-2.312
1923 01 62â€˘367
1924 01 420.000
1925 01 763.468
1926 01 59-1.117
1927 01 54-2â€˘260
1928 01 41-1.156
1929 01 400.585
1930 01 65-6.395
1931 01 1-9.317
1932 01 4-10.274
1933 01 280.763
1934 01 761.515
1935 01 792.985
1936 01 941â€˘449
1937 01 342.857
1938 01 18-2.778
1939 01 440.000
1940 01 00â€˘714
1941 01 799â€˘929
1942 01 409â€˘032
1943 01 792â€˘959
1944 01 332â€˘299
1945 01 52.247
1946 01 1818â€˘132
1947 01 898â€˘884
1948 01 322.734
1949 01 82-1â€˘830
1950 01 535.803
1951 01 75â€˘965
1952 01 590â€˘907
1953 01 50.599
1954 01 70-0â€˘372
1955 01 890.374
1956 01 32â€˘828
1957 01 923.040
1958 01 201â€˘756
1959 01 161.519
1960 01 771â€˘360
1961 01 870.671
1962 01 771.233
1963 01 961â€˘646
1964 01 171â€˘198
1965 01 601.920
1966 01 423â€˘359
1967 01 603.281
1968 01 884â€˘706
1969 01 45â€˘899
1970 01 415.570
1971 01 653.266
1972 01 783.406
1973 01 398.941
1974 01 2312â€˘095
1975 01 927.129
1976 01 985.036
1977 01 106â€˘678
1978 01 658.989
1979 01 4813â€˘255
1980 01 8712â€˘354
1981 01 158â€˘912
1982 01 613â€˘826
1983 01 213.787
1984 01 574.043
1985 01 973.791
1986 01 971â€˘187
1987 01 304.332
1988 01 34.412
1989 01 924â€˘640
1990 01 86.255
1991 01 852.981
1992 01 992.967
1993 01 972â€˘811
1994 01 732.597
1995 01 462.532
1996 01 843â€˘379
1997 01 351.697
1998 01 951â€˘607
1999 01 982.676
2000 01 263.436
2001 01 521â€˘604
2002 01 42.480
2003 01 492.035
2004 01 153.342
2005 01 223.443
2006 01 522.521
2007 01 364.152
2008 01 67-0â€˘076
And Japan is getting bear hugged again by deflation despite being stimulus gurus. Yikes!!!
This is a subject we have been harping on for a while and it goes to the point that there must be still massive amounts bad paper still on the balance sheets of a lot of institutions everywhere, not to mention private balance sheets too. This goes to the point of why this incomprehensible amount of stimulus is not getting the requisite traction, despite signs of hope and glee flowing from some of the emerging markets, which we donâ€™t deny. But for a global recovery, we still think we need places like the US, Europe, and Japan to recover, donâ€™t you?
When you look at the numbers, itâ€™s easily understandable why many expected hyperinflation once there is even a modicum of traction.
Inflation is, and always has been, the preferred route out of trouble by governments past who issued too much debt i.e. inflate away the debt problem by paying it off with even more worthless paper. This is why you might have heard bonds referred to as, Certificates of Confiscation.
The scary part about whatâ€™s going on now is that governments present are running out of trees to cut down so they can print more paper in their vain attempts to conjure up a little headline inflation; it makes them look very bad compared to their inflationist counterparts past. A pathetic performance indeed it is. Mr. Summers, put down that Diet Coke and get going buddy! We still have plenty of trees in our neighborhood, and Iâ€™ve even seen a few around Washington. No excuses!!! In fact, if we really cared about our country, we would each donate a tree to help out our Treasury. It is the least we could do for all they do for us.
Anyway, back to some semblance of what this missive is supposed to be about. A few charts and a little quiz:
(Charts unavailable in text format.)
Do you notice which of the charts reflects why our government is having so much trouble achieving their goal of inflationism?
If you said Velocity of Circulation, you would be correct! Congrats! For those of you not versed in such arcane jargon, and be very thankful you are not, let me put it this way:
You can lead a horse to water but you canâ€™t make him drink!
If you and I are very worried about our future earnings disappearing because our companies arenâ€™t doing so well because there is little demand for its products or services, which represents most real people I know, then we are not predisposed to heading out to the store to find something shiny new to buy for us or our loved ones. Multiply this human action, which by the way is the title of the best book on economics ever written, by Ludwig von Mises, over and over and over again amongst the US population that does not either work for, or do business directly with, the US Federal Government, the only place with booming growth, and you can see why the Velocity of Circulation of money is falling, off a cliff.
And this goes to one of the major problems, I think, for all those neo-Keynesian economists that keep flowing from the woodwork to tell us we need more spending:
Econometric models still have a little problem with human action. They have a little trouble measuring, what they would say is â€śirrational behavior.â€ť But those of us that live in the real world would call it quite rational behavior. When we are nervous about the future we make a logical decision to change the way we act with a thing called money. We viciously cut waste out of our budget. We change our spending habits dramatically. Our incentive system adjusts accordingly.
And when we watch our government commit $42,105 for every man women and child to â€śhelpâ€ť us, and eat away at the stored wealth built up by hard working Americans past, it makes us even more nervous. Thus, what the neo-Keynesians see as a rationale response, we see as incredibly irrational. And thus, we decide itâ€™s time once again to reduce the Velocity of Circulation of our money.
Thus we end up with a self-reinforcing nasty feedback loop created by people who actually believed everything Keynes said in the General Theory, instead of moving on to von Mises Human Action and getting it right. And so it goes.
Black Swan Capital LLC
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