Negative Yielding TIPS and the Beauty of Deflation
In the flagship episode of NSFW Eddie and I got into the subject of QE2. Though I feel it would be better for both my mental and physical health to completely ignore the subject, it keeps coming back to gnaw at me.
I purposely waited a few days to post this topic as I continue to reel from the sort of insanity that has become standard market operating procedure . I realize many of you guys are too busy doing your own thing to notice, but every week we seem to be experiencing new plateaus in the "how low will you..." category.
An old family friend who has long since passed used to tell me:
When you see negative TIPS yields and flying pigs complaining about corn based diets, you ought to run for the hills.
I'm not quite sprinting, but my scalp is starting to flake from all the head-scratching.
How an established institution like the Wall Street Journal could print an article about negative tip yields and make it sound like your average "ho-hum" market event is beyond me.
All I will say is that I am reiterating my strongly held belief that deflation must happen and with deflation some of the following "bitter pills" that cannot be avoided in the long run, anyway:
• Major employment reductions in the public-service sector.
• Rationing of health care services, fewer nurses, health practitioners and support staff.
• Larger reductions to teacher numbers, larger class sizes and tenure eliminations.
• Reduced public pensions and benefits, including social service payments
• Interest rates that will gradually rise and eventually settle somewhere between 5-7%.
• An erosion in the standard of living for those who are in debt.
• Elimination of cherished government programs.
• Cities, states and counties denied bailouts and forced into bankruptcy.
• Services that protect the environment, animal rights and special interests reduced or eliminated.
• Many low grade universities closed or at least privatized.
Manufacturing inflation in a mad scientist's lab will not in any way avoid the medication that we need to take. It will just delay the inevitable. As the week draws to a close I am reminded of my four year old niece...running around screaming, because she refuses to take her medicine...
I guess it's human nature to hang on to youth for as long as possible...
Until the grave...perhaps?
Here is my major issue with everything. We are not learning anything from this recent financial crisis. The economy blew up because people over spent, treated homes as if they were stocks and thought prices could never go down. This country had a negative savings rate and while the times were good, the government increase spending and expanded instead of using the extra revenue to deleverage and save.
Now the shit hit the fan. People are saving, paying down debt, leaving houses they should never of had and going into apartments that they should have been in to begin with. Tax revenue is down (duh) and states and the fed are feeling the pinch. Rather than saving in good times they over spent.
Common sense would tell you that you need to cut the size of government, don't tax people more right now (I don't want to hear shit about low tax levels, states and localities are increasing fines, fees and everything else to steal more money from us, they just aren't calling it a tax, but it is) and when things turn around pay down debt ASAP and start saving. Consumers are doing this and while it is making the economy drag along, once they are debt free and have some savings they will be much more nimble and productive.
This doesn't get people elected though. This is a bitter pill to swallow and since we live in a nation of babies and short sighted morons this will never happen. People are being told to spend, government is just dumping money into things, hiring more people, looking for easy targets to rob (rich, estate tax, soda tax, taxing pot,etc). Nothing will ever change. The cycle will continue until one day it simply cannot.
This is also a perfect situation for anyone who supports socialism or expansion of the government. People do not want to suffer, even if they caused it. People would rather give up their rights, piss on the foundation of this country, as long as they don't have to actually be responsible for this mess. In comes Uncle Sam to the rescue. He will punish those evil bankers and undeserving rich people because we all know they stole from the innocent hard working Americans.
God forbid a person says no to a loan they know they cannot afford or decided to not use their home as a lottery ticket. You can read the bible which is thousands of years old and it basically talks about saving money in good times, not falling for material wealth, being modest, etc. All basic things that the human race has known about for years, but these morons we call Americans cannot simply figure out.
Americans ruined this country. They bought houses they knew they could not afford. They spent money they did not earn. They racked up 100K in debt for degrees they knew they couldn't get a job with. Now they want someone to shoulder their own mess. Welcome to the nanny state boys.
Puke.
I think this article(and many other stories of this sort) is a great example of the age old adage "a lie repeated enough becomes truth". Instead of ranting along with you, which I am very well inclined to do, let me pose a divergent yet complimentary (IMHO) question:
What is an American?
You say Americans caused this mess by buying what they couldn't afford and being generally irresponsible.
I would argue that Americans are the only reason this country is still standing and that the people you are referencing are not Americans at all...regardless of citizenship status.
Touche. Agree. Residing in America does not make one an American. The lack of love and knowledge of where this country came from is appalling.
Those who do not learn from the past are doomed to repeat it
I routinely rant about increased taxes. Here are two articles I think are relevant.
http://www.bloomberg.com/news/2010-10-29/u-s-economy-picked-up-in-third…
Basically saying taxes have gone down
http://www.scpr.org/news/2010/01/01/to-avoid-raising-taxes-states-try-t…
Basically saying fees and side taxes have increased
Now this is my point. It is obvious no one wants to increase taxes. That is an evil word. What they do is slice and dice it. Increase taxes on small, non vocal minorities (rich, people who smoke, sugar tax, etc).
I contend that a fee increase = tax. Increased speeding tickets or camping by police entirely to generate revenue = tax. Increase license plate fees, registration fees, permit fees, parking fees, etc = TAX
Government is robbing us more and more, but they have found a great way to fool us. They just fucking call it something different.
Dude, we have much to discuss which is not for prying internet eyes. But if there's one article that I've read recently that made me think of you, this is definitely it .
Another good line I've heard is "in order to truly become an American, you have to be born or raised elsewhere".
The problem with all the measures you outline is that people wouldn't put up with that. Electoral and popular pressures would ensure that anyone who put such policies in place would swiftly be voted out of office if his home hasn't been burned down by an angry mob yet.
Luckily, people in the US are pretty soft when it comes to protesting in more unruly ways (ala France/Greece), and our govt would have some margin should it decide to make cuts. Nonetheless, the past ten years have been spent going in the opposite direction, trying to spend our way out of every challenge we face. George W. Bush, with his buddy Karl Rove, brought a new style of public governance to the president's office, where more attention is placed on being popular in the polls than making tough decisions. Once the war in Iraq turned out to be a fraud, the house of cards fell and Bush was left with dismal numbers that he could do nothing to prop up. As a result, we just got to wait a few years until the next crisis popped up and Bush watched as TARP and the bailouts were enacted. These two policies flew directly in the face of what we should have learned from the crisis and they are what has brought us to QE2 and negative-yielding TIPS.
Obama's tenure has been straight out of the Bush playbook. Not from a policy perspective, but for his governance style. There's not a whole lot you can point to Obama having done these past two years, just a lot of slick statements and gravitas that only really work when you're running for office, not after. He tries to be everything to everyone and is failing miserably, while his economic policies are simply a continuation of the Greenspan put that would be pretty hard to discredit any further than the past crisis has.
So yeah, QE2 sucks.
Both Bush and Obama are babies compared to Clinton. The majority of the policy related mishaps of the last decade came out of that poor excuse for an administration. Not to mention the complete and final bastardization of Washington (not that it took much doing). That having been said, no individual administration's policies have anything to do with the activity of the Fed.
Simply illustrated the Fed is a slew of coaches who have never been tackled or smelled mud, masterminding a football game...now that a few 350 lb nutjobs has run off the field and cracked a few of their ribs they are freaked out running around in circles talking about how this never happened while they were playing Madden.
Now THAT my friend is QE2,3,4...and all the rest that are subsequent.
If I didn't spend all money on interview suits and interview prep I would give you some silver bananas.
I love Democracy, but this is one of those times when letting the children decide if they want to take their medicine or not isn't going to work. Fact is we are fast reaching (or have already reached) the point where you are going to need a little pain in order to get better. Americans have ZERO tolerance for pain right now.
Imagine fighting WWII right now. Same Hitler, same Pearl Harbor. Americans would lose, hands down. We do not have the fire in our bellies anymore.
Honestly, I identify with immigrants more than native born citizens.
This is so true. Then again, our nation had been through 12 years of economic depression. I do think that can really toughen out a culture.
When the depression finally sets in, I think our culture will change dramatically. You can already see a new found frugality everywhere (besides WS).
The political class in this country has really pulled the divide and conquer move on us pretty hard. Americans are divided on everything. Take a look at the Ground Zero Mosque issue this summer. I remember on 9/11 in years past, Americans would wave "United We Stand" flags and would rally together to remember the events. This year, instead, coverage of the Ground Zero Mosque story was big in the news, and it really managed to polarize the nation. We let politicians and the media divide us on issues that aren't completely relevant to us. These polarizing issues distract us from real issues and aim to divide us (take abortion for example: is it really that relevant to most people? yet, everyone has an opinion about it and people get very edgy when it is even discussed).
We as a people need political leaders that will unite us together behind a common goal. Think about prior generations. The Great Generation focused on fighting World War II. During the 1960's, much of our attention was focused on the Cold War. I'm not suggesting that war is the answer to our problems (although, a full scale conflict would work to do this), but I do think we need some issue to rally behind in order to move forward.
Of course, this is idealist, and in reality, will not happen. Politicians are professionals, and each has a brand that they must preserve. They make back room deals and work with special interest groups. And we let it happen.
I think a new political party is necessary. This party should have a single, united vision, such as working to upgrade our nation's infrastructure. Every aspect of the party's platform would revolve around this theme, and the party would have no official position on divisive social issues. No reason we couldn't start this here ourselves.
Peaceful protest by 4 Singaporeans (protesting the raising of the retirement age) broken up by police in full on riot gear, the opposite side of having controlling "parents". However, they do act swiftly and do what's required when needed. Pros and cons I guess.
http://news.infoshop.org/article.php?story=20050816045705321
I think the majority of people are actually hardier than most would think, it's just the pussies who seem to have to microphone in hand now.
The best thing the government can do is to provide more certainty about what the business regulatory environment is going to be. I think the current uncertainty over regulations and taxes actually hurts more than any potential tax increase or regulation. The government can raise the taxes or put on more legislation, but people will learn to deal with it and innovate. The thing that's hard to deal with right now is uncertainty, because no one knows what's going to happen and whether they should hire or invest more.
The real economy has to be dealt with, then the financial markets will take care of itself. There's already so much liquidity in the markets. QE2 just means more capital flowing out of the US and flooding into the EMs or frontiers, which are already trying hard as hell to cool down their economies to avoid overheating and a crash.
Anyway for anyone that's interested, there's a book called "America's Great Depression", if you google it I think you can find a PDF somewhere. Lots of parallels and great food for thought.
Wow Midas, I see you left out any mention of cuts to America's defense budget. Especially since the defense budget expenditure will exceed 1 trillion dollars for fiscal year 2010.
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