Karl Denninger Retires

I thought it interesting that blogger Karl Denninger has retired from economic life as much as he can, while he will continue to blog sporadically. I understand the rational behind it. It is getting more and more difficult to figure out how one should invest. And even if one does invest, too much is taken away from success.

Good luck Karl.

Here is an interview he did that I found interesting. Not a good video, but still worth "watching."

Prison Paradise

While I do not recomend Max Keiser very often, as I find him more and more annoying, I thought that this interview with one of my favorite bloggers, Charles Hugh Smith, was worth suffering though Max. 

If Max is too much for you, you can fast forward to 12:30 and be more calm! 

Interview With Paul Craig Roberts

While I can not embed the interview, nor is it video, I still think it is worth your time to listen. 

I am not convinced that Obama attacking Syria is a war crime; part of the interview dicusses this, and it is an interesting argument. 

The main part of the interview is the short term economic outlook, and I mostly agree. 

However he is a little too pessimistic, as most hard money types are. I think that the point Roberts makes about the huge internal China market, eventually after a lot of sweat and tears, also applies to the US. Thus I am guardedly pessimistic. 

Here is the interview. 

Inflation

"The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists."

Ernest Hemingway, The Next War

Economically most nations have been lucky. Yes, as Jeremiah Wright once said, the chickens are coming home to roost. Unemployment in Greece and Spain are in the 20% range. As this figure involves government statistics, no one knows for sure. India's currency is tanking. So is Brazil's. Brazil's case is ironic, as the president complained last year that the Real, the Brazilian currency, was too high. Be careful what you wish for. 

We have a lot of inflation right now, inflation defined as an increase in the money supply. While the monetary inflation rate is quite higher than the CPI government figures, even that rate is not as high as one would expect looking at actual prices. The beef bacon I buy just went up 20% since the last time I bought it. I see lots of examples. I am sure you do too. 

But what the US is doing is exporting inflation to other countries. Well, I suppose US citizens should be grateful that the US can export something. Other nations have no choice but to also inflate their currencies to match the US Fed. 

All is well, until it isn't. Eventually all these dollars overseas may come home. The US debt owned by China and Japan is on the decline. While both China and Japan understand that they cannot sell these bonds all at once, they will be sold. Especially in the case of Japan. 

The chickens will come home to roost as the US dollars return to their place of origin, like homing chickens. 

While I am not expecting hyperinflation, modest inflation in the 10% range seems almost inevitable. (Yes, I see 10% as modest.)

Get ready. 

Inflation Is Your Friend

I posted a transcript from Dan Ackroyd's parody of Jimmy Carter called "Inflation is your friend."

But reality is now a parody. A Bloomberg article points this out: 

Pretty soon, Harvard colleague Greg Mankiw was advocating higher inflation as a cure for slow growth -- and a preferable option to additional fiscal stimulus. In 2010, Olivier Blanchard, chief economist at theInternational Monetary Fund, put his imprimatur on the idea. In a paper examining the lessons from the financial crisis, Blanchard and his co-authors suggested that the benefits of a 4 percent inflation target, to minimize the risk of deflation in response to shocks, might outweigh the costs. 

Let's ignore for a moment that the government is cooking the books and inflation is higher than that right now. What effect will higher inflation have? 

First it will harm retailers as they struggle to replace inventory at a higher price. It will also artificially increase profits, but these profits are not real. But the taxes the higher profits cause are real. 

Next, interest rates would have to rise. Right now this would have a very negative effect on the economy. Most people do not buy a house, they buy a payment on a house. If interest rates rise, then payments go up and the price that a buyer can afford to pay goes down. The recent rise in in mortgage rates has already caused applications for loans to plummet. I read where one of the bigger mortgage companies layed off 10% of their staff. 

Finally the budget deficit will rise as the cost of borrowing money rises. This would force the Fed to buy even more bonds. While foreign government holders of US bonds are in a tough spot, my guess is that the dollar would fall as "hot" money went elsewhere. 

Investment would be impacted. Imagine that prices double in 10 years. So an investor buys stock in National Widget for $100,000 and 10 years later sells it for $200,000. No profit has actually occurred, yet a tax of $20,000 must be paid. Investment is already suspect, this will only get worse. 

I remember seeing the Ackroyd parody on TV and laughing, I am not laughing now.