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Friday June 12, 2009 - 11:19:42 GMT
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The $18,100,000,000 question!

Key News
• European industrial production dropped by the most on record in April as the worldwide recession ravaged demand for goods. (Bloomberg)
• 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)
• 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)
• Treasuries rose for a second day after Japanese Finance Minister Kaoru Yosano said his country’s confidence in U.S. government debt is “unshakable.” (Bloomberg)
• China’s new lending doubled in May. (Bloomberg)
• 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.

Quotable
“Action 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.”

     Ludwig von Mises

FX Trading – The $18,100,000,000 question!
The numbers are staggering…really incomprehensible…it’s the kind of stuff that if you made it up no one would believe you…I’m talking about the amount of money both the US and European Union have committed to this crisis:

• 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.

• 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 you’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 that’s only trying to “help” 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 of….

$18,100,000,000,000

…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 don’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 haven’t seen a whole lot in the way of global traction in demand, and even more surprisingly we haven’t seen any inflation per se from the “growing” 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 01 921•000         
 1915 01  71.980         
 1916 01 1012•621         
 1917 01  7018.103
 1918 01 8520.438
 1919 01  5114•545
 1920 01 692•646
 1921 01  68-10•825
 1922 01 57-2.312
 1923 01  62•367
 1924 01 420.000
 1925 01  763.468
 1926 01 59-1.117
 1927 01  54-2•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 01 941•449
 1937 01  342.857
 1938 01 18-2.778
 1939 01  440.000
 1940 01 00•714
 1941 01  799•929
 1942 01 409•032
 1943 01  792•959
 1944 01 332•299
 1945 01  52.247
 1946 01 1818•132
 1947 01  898•884
 1948 01 322.734
 1949 01  82-1•830
 1950 01 535.803
 1951 01  75•965
 1952 01 590•907
 1953 01  50.599
 1954 01 70-0•372
 1955 01  890.374
 1956 01 32•828
 1957 01  923.040
 1958 01 201•756
 1959 01  161.519
 1960 01 771•360
 1961 01  870.671
 1962 01 771.233
 1963 01  961•646
 1964 01 171•198
 1965 01  601.920
 1966 01 423•359
 1967 01  603.281
 1968 01 884•706
 1969 01  45•899
 1970 01 415.570
 1971 01  653.266
 1972 01 783.406
 1973 01  398.941
 1974 01 2312•095
 1975 01  927.129
 1976 01 985.036
 1977 01  106•678
 1978 01 658.989
 1979 01  4813•255
 1980 01 8712•354

 1981 01  158•912
 1982 01 613•826
 1983 01  213.787
 1984 01 574.043
 1985 01  973.791
 1986 01 971•187
 1987 01  304.332
 1988 01 34.412
 1989 01  924•640
 1990 01 86.255
 1991 01  852.981
 1992 01 992.967
 1993 01  972•811
 1994 01 732.597
 1995 01  462.532
 1996 01 843•379
 1997 01  351.697
 1998 01 951•607
 1999 01  982.676
 2000 01 263.436
 2001 01  521•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 67-0•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 don’t deny.  But for a global recovery, we still think we need places like the US, Europe, and Japan to recover, don’t you?

When you look at the numbers, it’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 what’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 I’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 can’t make him drink!

If you and I are very worried about our future earnings disappearing because our companies aren’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 “irrational behavior.”  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 “help” 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 it’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. 


Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com

 

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