Minsky Vs Bernanke
May 5th, 2008 by 
reality
Helicopter Ben made it very clear that he would move heaven and earth (helicopters, too) to prevent deflation. He is now starting to panic. Ignoring his words, we look at his actions. Swapping Treasuries for credit card receivables, auto loans and student loans is hardly a sign of a receding credit crisis. The fear is tangible despite the efforts to soothe and jam the markets. He will stop at nothing. This is good, in a way, because the Keynesians must be shown to have exhausted all their options in order for them to be completely discredited. Just a quick post from Sivota (geography test).
May 5th, 2008 at 5:02 am
No matter what Bernanke does, when his term is over, he will not return to just teaching. Ben will go on to earn millions of dollars and euros. The policies he has overseen at the new Fed will leave an impact on the financial structure beyond anyone’s wildest nightmare. Yet he will become very rich and be part of future problems.
May 5th, 2008 at 6:16 am
Would Sivota be a seaside village in the prefecture of Threspotia in Greece? Sounds like a nice place to visit…
May 5th, 2008 at 8:30 pm
I have been reading your site for some time and I really enjoy your commentary. Thank you.
I have been doing a lot of thinking on the deflation/inflation/where we are going in terms of the economy and the stock market. This is what I am thinking:
- Because of wage arbitrage aginst 3rd world countries, wages in the US cannot increase. In fact, they must decrease in the long term in real terms, i.e. a long term decrease in the standard of living.
- The US trade deficit is unsustainable.
- The US gives IOUs to Arabs/China/Japan/etc in return for goods. They in turn have been buying treasuries/bonds and ploughing the money back into the US. This has artifically propped up the dollar and kept interest rates low. This is one of the major sources of the credit bubble.
- With the bursting of the credit bubble, these foreign central banks (FCBs) are no longer willing to buy gunky consumer debt securties.
- The FCBs have been printing their own currency as dollars have flowed into their coffers. This has created massive inflation in the Gulf, China, and the 3rd world.
- Bernanke and the US government intend to continue attempts to float this debt based economy as long as possible. This is seen by the FEDs attempts to monetize crummy consumer debt via all kinds of alphabet soup lending facilities. As they continue to issue more debt, it will attempt to keep the US economy afloat and export more dollars and cause more inflation in the world.
- The inflation in these countries will increase the price of commodities. This will come back to the US mostly as higher oil prices in dollars and somewhat as food and goods (via higher wages in China) inflation.
- Note that the net effect is almost the same as if Bernanke was printing. The FED no longer needs to print as the FCBs are doing it for the FED.
- The dollar will continue to remain under pressure.
- Oil (because of peak oil) is the most likely mechanism for transmission of price inflation and lower standard of living in the US. Other commodities may also play a part
- US discretionary spending will be in a long term downward spiral.
Investment thesis from the above:
- Long oil
- Short US dollar and long resource rich currencies like the loony.
- Short US consumer discretionary (retailers, commercial real estate)
- Long US multinationals that have the possibility of growth in Asia. Tech may or may not work out.
- Short US financials. Their writedowns will continue for years.
- Short LT US treasuries as the government will attempt to borrow/print its way out of this mess.
Bottom line I think we wind up with massive inflation created by the US government issuing more debt/printing, FCB printing, and fierce competition for resources by the whole world. This massive inflation will lower the standard of living in the US until it is commensurate with the productive capacity of the US economy.
May 5th, 2008 at 8:48 pm
Gigi,
you forgot to mention the distorting effect of a perversely incentivized tax system and horrible govt. subsidies for petro, drugs, healthcare, agribusiness, et. al. as well as the psychological and real effect of federal, atate and local govt. that spends tax money as if it is is endless and has absolutely no real value. And to top it all off 45-50% of the GDP is taken as taxes at all levels which is the most inefficient use of capital imaginable.
The USA is the worst kind of Socialist Plutocracy… has it always been this way except for a brief respite from 1946-1970???