Angela Merkel, Lone Ranger

Among all of the Heads of State, Ms. Angela Merkel is the only one with the courage to denounce the policies of the world's most powerful central bankers, Ben Bernanke, Mervyn King, and Jean-Claude Trichet. Bertrand Benoit's piece in today's Financial Times describes the important ending of her otherwise uninteresting speech Wednesday.


[Thanks to Costumeco.com.au for the photo.]

She gave "a vitriolic attack on the world's three mightiest central banks"--something which she has never done in the past. People who know her well confirm that it was no slip of the tongue, that she is always careful to mean what she says and say what she means. She said that she is "sceptical" about the powers of the US Fed to control the flood of purchasing media and credit they continue to create, alongside their European counterparts.

According to those who surround her, she "does not blame the implosion of the subprime mortgage market for the economic crisis. She does not see securitisation as the culprit. Rather, she thinks the loosening of monetary policy under Alan Greenspan's Fed chairmanship fuelled the creation of asset price bubbles and encouraged excessive leverage within and beyond the financial sector." [You and my spell checker will have to excuse the apparent typos, but I'm quoting a British text.]

She reminds me of Mrs. Thatcher back when the English Prime Minister touted the economics of the Austrian, Professor Hayek, who if he were alive today would surely agree with both ladies about the origin of our problems.

This recession is being described as a quadruple whammy: The first round seemed to come from the imaginative excesses of the residential mortgage market and the Wall Street math geeks who played with them. The second is coming now from the equally imaginative over-expansion of the commercial development financing market and is undermining some major banks' already fragile balance sheets. The third will soon appear within the retail credit sector. And the fourth is the credit derivatives wild card.

The source of all four, however, according to Merkel, Hayek, and me, is the combined actions of the monetary and fiscal authorities, (1) whose decisions are not predictable, (2) who have too much power to distort our money supply, and (3) whose constant interventions can and will, everywhere and always, throw even the best-performing economies into havoc.

What makes this even worse is that omnipotent power attracts those who would profit from it. Just listen to the big market players--the seemingly indestructible huge banks and automobile companies--as they turn their sheepish bahs towards Washington. (Try out this website to hear what this sounds like.)

We are approaching an interesting crux of this recession. Economists and market players alike are split into two camps: those who think the principal danger (or speculative opportunity) is depression and deflation, and those who think it is inflation.

I'm in the inflation camp, alongside Ms. Merkel. I don't know whether the coming series of monetary bubbles will take one year or ten to appear and burst; but I feel very sure they are coming. When it comes time to pull the punch bowl away, this Fed will be no stronger than any other has been in the past (with perhaps the exception of Paul Volcker, but how short-lived his wisdom was). Our Fed governors' task will be complicated by their lack of real control of interest rates: Just when they will want to reign in credit, the rates will go up, putting them in a quandary.

As far as I know, and in the longer run, there has never been a nation in history that has survived the chronic debasement of its monetary unit. Ironically, this time it's Germany (or at least her Head of State) that seems to be the one ready to speak up. As Ms. Merkel puts it: "The most complicated phase will come when the crisis is over."

Government Intervention Amuck No. 13: Efforts to Avoid the Depression

Doug Noland continues to be one of my favorite pundits. He may not be scientific in the sense some use the term, but he looks at all the figures and draws conclusions that concord with mine.

His latest piece at Prudent Bear says it so well, I'd advise you to read it.

As a summary for those who don't have time, our government is scrummaging around in this economic mess we're in, in order to try to save us from ourselves. They will be unsuccessful in the long run, even though in the short run it may seem to work.

In other words, in my view, we are headed within an unknown time frame for either a good recession/depression, or a good run on the dollar.

Take your pick. And yes, it's our government agents' fault. (See my previous posts throughout the last four years to grasp my "analysis" of the reasons for this.)

And as a postscript, I agree with Noland that Bernanke's conclusions about the Great Depression are wrong.


[Thanks to cards4magic.com.uk for the image.]

One who got it right was Edward C. Harwood. (See this previous post and the first ones of this blog.)

Other economists with a good grasp of monetary science are those academics call "the Austrians," people like Hayek, Von Mises, Schumpeter.

Three-Month Annualized Inflation at 4.7%

Tuesday we get an update of the inflation outlook.


[Click on graph for a larger version. Thanks to the Bureau of Labor Statistics for the image. (Source.)]

And yeah, I know, "core" inflation is only just above 2%. Who cares? Enough of this "core" stuff. Inflation is inflation, damn it. I pay for gas every day. I pay for food every day.

I don't understand where the collective conscience of our professional economists has gone. Our thought processes are completely incapacitated by mainstream rhetoric. Every day, we read or hear that the Western World has conquered inflation. Well, I say the professionals are either lying or their naive.

Does anybody realize that official annualized 3-month CPI inflation is now officially at 4.7%? Rounded up, that's 5%. (Source.) When was the last time we had annual 5% inflation? Around 1990. What did the Fed have to do? They retracted money supply. And we had a "hangover," i.e. a recession -- only normal when you've been inflating the money to hell over the past years. The same thing is happening again, and the Fed will have to retract AGAIN -- either that, or watch the dollar disappear into thin air.

At the same time, we have a slow-down in economic production. Anyone ever heard the term "STAGFLATION" before? Know when we last had a major episode? The 1970's. My memories of those days are as vivid as the memories of 1929-35 were for my father. (See here for some quotes about the 1970's.) For those of you who don't remember or who weren't around, the financial loss was greater than the 1929-30's.

Now, either I'm way off the mark and the next ten years will be more of the same, or I'm right and we're headed for some interesting times. I cannot believe we will not see a serious global correction within the next few years. What form it will take, I have no idea.

What has happened to the economists' conscience? Do our academicians all have blinders on?

And don't ask me to break out the stats. As far as the data are concerned, I guess I'll have to come out of the closet and say I'm an Austrian. (For those who don't know what I'm talking about, I'm referring to a school of economics that keeps statistics in its proper cage, i.e. that does not try to theorize through the use of computer models, mathematical constructs, and graphs of figures, each of which can mean what the utilizer wants them to mean. It is the school of Friedrich Von Hayek and Ludwig Von Mises, a school which has come in and out of fashion about three times since they lived and died. Presently, they're out, and this is a great tragedy.)