Yikes!

To those of you who still read this blog, the amount of mild sensationalism has become commonplace. However, now we must consider the probability of far greater sensationalism coming down the pike.

There is a growing feeling amongst the population that the fed controls the economy, and, believe it or not, investors are seriously worried the fed will not inflate adequately.

When it seemed that this was a possibility, when Bernanke seemed to be indicating he would not aggressively pursue quantitative easing and swaps, the stock market went down. When a new rumor came out that he would keep the amount of cash flowing into the economy at the same level, stocks recovered.

Odd as it may seem to anyone schooled in economic theory, this seems to be the accepted wisdom of the day. Inflation in money inevitably leads to inflation in price, and we are seeing that right now. Food prices seem to have jumped about 20% of late. Due to a lot of factors, it is not unreasonable to expect that food prices will probably jump more, but that is not part of this diatribe.

So, the accepted wisdom is that we're seeing inflation in food prices, mild inflation in raw materials but deflation in assets. To 'fix' this, Bernanke is expected to engage in greater monetary inflation, which will lead to more of exactly what we're seeing.

It's pretty simple, really: if the price of subsistence rises, the cost as a percentage of income rises, leading to a reduction in disposable income, leading to a reduction in the purchase of capital goods, leading to a reduction in the price of those capital goods, otherwise known as price deflation. It's like trying to get a bigger ham by blowing air up a pig's butt. All you get is pig all over the place.

It's simple, really. A given family makes, say, $5000 a month. They pay, say, $1000 in food. This is not unrealistic. An increase in food cost of just 20% is another $200. Now they pay $1200. As I have pointed out before, all activity is at the margin, and, in this case, their margin is $200 narrower. So, instead of spending $1200 on a new TV, which they would have paid for on their credit card, $200 a month every month for six months, they have to make do with the old TV. There is a reduction in the purchase of capital goods.

This relates to the housing market, as well. As the cost of subsistence rises, the amount of money available to pay for mortgages goes down. This is one of the pernicious effects of inflation, that people who were previously stable financially suddenly find their margins thin to nothing and thus must sell capital goods to free up cash flow.

If you can't sell your house because, for instance, it is upside down in one of the worst housing bear markets in history, you either cut other spending or you walk away from it. Neither is good.

So, in the exact case where people will see their disposable income go down and thus reduce capital spending, the stock market goes up. Oh, well.

[Posted with iBlogger from my iPhone]

Aliens Among Us

This is actually a twofer installment, as there are two common uses of the word aliens, one meaning those not of this country, and the other meaning those not of this world.

Recently, a Vatican scientist and an Air Force (USAF, retired) officer both predicted the arrival of aliens (pointy eared green variety) some time this coming decade. The Bureau has decided they are potty and probably unreliable, and that the sudden increase of serious discussion of space aliens is a part of the grander cyclical nature of idiocy that has gripped man as surely as death and taxes.

The other type of alien is becoming an endangered species. As the economy here continues to sputter and plotz, many of the illegals are going back home and fewer are coming over. One thing is certain, though, and that is that Republicans will take credit, calling it a result of their increased enforcement...

[Posted with iBlogger from my iPhone]