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Because the idea of money is so highly psychological today, the line between what is money and what is not has become blurred, at least in people's minds, and that is where it matters when it comes to understanding the psychology of deflation.pg. 19, excerpted from 2003, on Bernanke's advice for defeating deflation:
They have met the Wizard of Oz in person, and he is impressive!The Federal Reserve is halfway to that system today...
He is also delusional. Can you imagine the laughingstock that the Federal Reserve System would become if its "assets" consisted of defaulted mortgages, bonds of bankrupt companies and municipalities, IOUs of shaky foreign governments and stock certificates of companies no longer in existence? Can you imagine the panic that would ensue to escape a monetary system with such assets as its reserves?
There is no way that Fed officials will buy junk paper unless and until the social pain gets unbearable and political pressures force it to choose a terrible policy in response to public demand to "do something."Been there, done that. Prechter even accurately predicted the "do something" mentality of the American people.
It may sound crazy, but suppose the government were to decide that the health of the nation depends producing credit and providing it to as many people as possible. To facilitate that goal, it begins operating credit-production plants all over the country, called Federal Reserve Banks.Eventually, everyone has more than enough credit and they do not want any more...but the economy is built around the industry that...
People are working three days a week just to pay the interest on their debts to the banks so the banks can keep offering more credit. If credit stops moving, the economy will stop. So the banks begin giving credit away, at zero percent interest. A few more loans move through the tellers' windows, but then it ends. Nobody wants any more credit They don't care if it's free. They can't find a use for it.And that's where the U.S. economy finds itself in 2008, 2009 and beyond.
Her frugality was forced upon her when the Fulton, N.Y., accountant lost a $60,000 a year salary in 2006 and faced the frightening truth that she was unemployed with $41,000 of credit-card debt, two car payments and a mortgage that her husband's machinist salary alone couldn't cover.Anyone relying on the American consumer for their business needs to face the new reality. Though this is very bullish in terms of long-term recovery, this is not good for retailers and producers of consumer goods and services.
"I didn't really pay attention to my debt," she said. "I always thought that I would pay it off later. But later came a lot sooner than I had planned."
Cash-Only Lifestyle
She's now in year two of a five-year program to be debt-free and is living on cash only. But here's the catch: When all the balances have been cleared and her savings is back to what she would consider a comfortable level, Case, 38, said she will not change the way she lives.
"It's liberating," said Case, who is now making about $45,000 a year in a job she loves. "I had a friend who said, 'You guys are poor.' I've never felt poor. I have to be really frugal now, but it's really all about needs. Do I really need that cell phone? Do I really need that new car?
"I'm happy with less," she added.
Welcome to the new "normal" where keeping up with the Joneses is so last millennium and living within your means is the new cool.
Though the indicators are still showing deflationary conditions in the wake of the economic collapse of 2008, inflation fears have been fueled by the liquidity the government has since pumped into the system. Much of that liquidity is believed to have been captured by the stock and property markets, raising the prospect of an asset bubble.Hebei Iron & Steel June Profit Surges 200%
Analysts do not believe the central bank will adjust policy until 2010 or late 2009 at the earliest, when growth fueled by the stimulus becomes more firmly established. In the second quarter GDP growth rebounded sharply to 7.9 percent from 6.1 percent in the first three months. There is some way to go before the government achieves its full-year target of 8 percent growth but some fourth quarter projections for GDP are running as high as 10 percent.
Hebei Iron & Steel Group's June profit surged nearly 200 percent to 273.7 million yuan as an economic recovery spurred demand. China's steel products price index climbed to 101.98 points at the end of June, up about 20 percent from April's trough, as the government's huge infrastructure-focused stimulus package boosted demand.
China's 72 major steel companies booked aggregate profit of 1.3 billion yuan in May, breaking a seven-month string of losses, after a jump in demand and prices.
But psychologists have long known that people tend to overestimate the odds of rare events. Applying that behavioral insight, finance professor Peter Tufano of Harvard Business School has devised a clever program called "Save to Win." Launched earlier this year for members of eight credit unions in Michigan, it is a cross between a certificate of deposit and a raffle ticket. Members who put $25 or more into a Save to Win one-year CD are entered into a monthly "savings raffle" for prizes up to $400, plus one annual drawing for a $100,000 jackpot. Only Michigan residents are eligible to participate.From the article is sounds as though they pay you a below market interest rate and the surplus is paid out as a gambling prize, with the bank probably earning higher than normal profits. Just another financial innovation meant to separate the fools from their money.
This unusual CD is federally guaranteed by the National Credit Union Administration and pays between 1% and 1.5% annual interest, a bit lower than conventional rates. In 25 weeks, the program has attracted about $3.1 million in new deposits, often from people who have never been able to set money aside.
Takisha Turner, 33 years old, is a dispatcher for the valet-parking department at Greektown Casino in Detroit. Ms. Turner doesn't gamble, but she has always struggled to save. She had only about $10 in her savings account at Communicating Arts Credit Union when she walked in a few weeks ago and heard about Save to Win.
"The teller said somebody else she told about it won," says Ms. Turner, "so I said, 'Well, you must be good luck then.' I thought it was a good idea, because earning interest means you win anyway. So I put down the minimum, $25." This past week, Ms. Turner won $400. She plowed the $400 back into her Save to Win account, getting a second shot at winning the $100,000 grand prize.
People love to gamble and hate to save. With Save to Win, says Communicating Arts Credit Union President Hank Hubbard, "You are sort of betting, but there's no losing." If we are to become a nation of savers again, we will need more innovations like this -- and the regulatory flexibility to allow them.
The China Banking Regulatory Commission is likely to compel banks to carry funds raised for wealth management on their balance sheets, the latest move signaling stricter regulation and monitoring of the business.A small change, but maybe the first step of many to curtail bank lending.
The balance sheet treatment is expected to result in banks holding more capital in reserve, restricting their ability to expand. The rule is likely to be announced this week.
Bawang, one of the top four shampoo retailers on the mainland, climbed 28.99 per cent to HK$3.07 from an offer price of HK$2.38 in the unofficial market yesterday, while coal trading firm Qinfa rose 12.3 per cent to HK$2.83, compared with the offer price of HK$2.52.Exactly right. This is a bull market phenomena fueled by a near complete reversal from fear to greed.
With the Hang Seng Index just completing its best quarter in more than 15 years, increasingly bullish investors are looking for new opportunities.
"I believe Bawang is going to have a better debut performance than newly listed sportswear maker 361 Degrees [International]," said Mr Shiba. "The IPO market is so hot."Bawang (霸王) closed lower, at HK$3.03, following a similar path to 361 Degrees. There appears to be a lot of buying interest, but not a lot of holding interest. As the speculative fever fades, the price declines. Not sure if I would buy either stock, but I think they'll both offer lower entry points.
Shares in 361 Degrees rose as much as 18.56 per cent from the offer price of HK$3.61 before closing 8.03 per cent up at HK$3.90 on their trading debut on Tuesday. The stock finished 6.92 per cent lower at HK$3.63 yesterday.
Index | June % | YTD % |
S&P 500 TR | 0.20 | 3.16 |
MSCI EAFE | -0.77 | 5.64 |
上海 Shanghai | 12.40 | 62.5 |
Fund | ||
1.10 | 13.86 | |
-3.84 | 18.89 | |
-7.09 | 6.93 | |
0.26 | 2.70 | |
2.43 | 8.27 | |
1.11 | 20.73 | |
-6.08 | 4.91 | |
-1.16 | -35.09 |
"In my crazy head, in this day and age when everyone is anticipating inflation, not just inflation—hyperinflation—I'm saying to you...what if we saw it? What if we saw it between 2002 and 2007, and it wasn't the quantitative easing of the Federal Reserve, it was the mercantilistic trading policies of the surplus countries, which kind of suppressed the value, kept their exchange rates cheap and therefore created these foreign exchange reserves, these sovereign wealth funds are really just quantitative easing programs, and if we look at that 5 year period, gold broke a 27-year trend and actually went up. It went from $250 to $1000.
The dollar lost 40% of its value—40! That is one of the biggest collapses in the dollar ever. 40%. Oil went from 10 bucks to 150. (as you said) But maybe we've had all the inflation. And today, prices are falling. Retail prices are falling. And yet, everyone wants to talk about hyperinflation. I'm just curious at these...shifting players, and how they don't seem to be aligned, expectations versus reality are a little bit skewed."
Chinese new bank loans worth about an estimated 1.16 trillion yuan ($170 billion) were invested in the stock market in the first five months of this year, China Business News reported, citing a government economist.Then check out Michael Pettis' Chinese loan table:
That’s 20 percent of the 5.8 trillion yuan loans banks extended in the period, the Shanghai-based newspaper said, citing Wei Jianing, a deputy director at the macro-economics department of the Development and Research Center under China’s State Council.
Wei’s assistant said the economist is traveling and can’t be reached. She declined to give her name. Calls to the press offices of the China Banking Regulatory Commission and the China Securities Regulatory Commission weren’t answered.
China’s Shanghai Composite Index has rallied 61 percent this year, the world’s third-best performer, after plunging a record 65 percent in 2008. The nation’s property sales jumped 45.3 percent to 1 trillion yuan in the first five months, the statistics bureau said June 11, compared with a 19.5 percent decline for all of 2008.
New loans | 2008 | 2009 |
January | 804 | 1,600 |
February | 243 | 1,100 |
March | 286 | 1,900 |
April | 464 | 591 |
May | 319 | 665 |
June | 332 | 1,200 |
Half year | 2,448 | 7,056 |
July | 382 | |
August | 272 | |
September | 378 | |
October | 182 | |
November | 478 | |
December | 772 | |
Total | 4,912 |
It seems that few things are more dangerous than the belief that governments can eliminate or sharply reduce the risk of financial crisis. The idea that a country’s financial system can act as crazily as it likes as long as the government is willing to protect it from its folly runs not only into the problem of undermining government credibility as bad debts surge, but the very belief almost guarantees that the financial system will act in a crazy way.Judging from the commentary I come across, many investors believe China's fundamentals are strong enough to plow through the bad loans via high growth (assuming they aren't ignoring the loans entirely). Several Chinese economists are worried about inflation, however, and the loan growth shows their worries are justified. As we've seen in the U.S., however, asset inflation can be "sterilized" by way of asset deflation. Risk is increasing as loan growth remains high and the equity markets rally, but how that risk manifests itself (other than bad loans) determines the investment strategy. At this point, I'm not convinced of inflation or deflation, though I lean towards inflation because of the government's desire for growth.
