Fed: We Promise to Steal From You

“significant risks that inflation could decline and persist for a time at uncomfortably low levels,” –Fed Minutes Dec. 15 – 16 2008

Is it even possible for inflation to be so low as to be uncomfortable? Awww crap, my wealth isn’t decreasing in value nearly fast enough? Dammit, I can’t pay this loan back if it isn’t inflated away faster? My money is worth way too much! Print more to depreciate it! Is that the thought process?

It is now clear that the very real specter of deflation has the Fed publicly panicking.

The discussion at the Fed now revolved around the proposal of setting an explicit target for inflation. While the discussion, the proposal and the mechanics of enforcing it are all pretty complex the whole sordid thing can be summed up and explained to even a young child such that they would understand completely. The explanation would go something like this:

“We promise to do everything in our power to steal at least 1% of all your wealth each and every year. If we discover that for whatever reason we were able to only steal less from you, we hereby promise to try harder. Make no mistake about it, you should expect and plan for us to steal at least 1% of your wealth from you, whether you like it or not. However, we will take great care not to steal more than about 2% every year.”

Isn’t a fiat currency regime coupled with central banking fun?

(We will deflate anyways. But that’s another story for another post.)

Fed Officials Revive Discussion of Explicit Inflation Target: “Federal Reserve officials revived the prospect of setting an explicit target for inflation to counter the risk that the worst economic slump in the postwar era will trigger a broad decline in prices.

The Federal Open Market Committee at its Dec. 15-16 meeting discussed ways to avert deflation while approving a reduction in the benchmark interest rate to as low as zero, according to minutes of the gathering released yesterday. The FOMC also considered increasing emergency loans that have doubled the Fed’s balance sheet to $2.3 trillion in the past year.

Policy makers “face considerable uncertainty about how inflation expectations could evolve,” said Brian Sack, deputy director at Macroeconomic Advisers LLC in Washington and a former Fed economist. “That enhances the argument for taking the further step and adopting an explicit inflation objective.”

By setting a goal for price increases, the central bank would adopt a measure that the U.K., Sweden and other countries have used to anchor policy and build credibility with the public. Chairman Ben S. Bernanke made a target one of his priorities when he took the helm three years ago, though a 2007 review of Fed communications stopped short of that objective. Now, with inflation retreating and the economy contracting, a target could be used to justify a more expansive policy.

One measure of inflation, the personal consumption expenditures price index, minus food and energy, could rise at less than 1 percent this year, and only 0.5 percent in 2010, according to forecasts by Sack’s firm.

‘More Explicit’

Central bank officials discussed providing “a more explicit indication of their views on what longer-run rate of inflation would best promote their goals of maximum employment and price stability,” the minutes said. Such a target may “help forestall the development of expectations that inflation would decline below desired levels, and hence keep real interest rates low.”

An inflation goal would reinforce expectations that the central bank will make a commitment to withdraw cash when the economy shows signs of a recovery.

Some policy makers last month saw “significant risks that inflation could decline and persist for a time at uncomfortably low levels,” the minutes said. Price increases will probably “continue to abate because of the emergence of substantial slack in resource utilization and diminishing pricing power.”

Fed officials saw “substantial” risks to the slumping economy last month and indicated “the economic outlook would remain weak for a time and the downside risks to economic activity would be substantial,” according to the minutes.

‘Dark Document’

“Rates are going to be low for a long time,” said Vincent Reinhart, former director of the Fed’s Division of Monetary Affairs, who is now a visiting scholar at the American Enterprise Institute in Washington. “They see the economy as extremely weak. It is a dark document.”

Economic growth declined in the third quarter at the fastest rate since 2001 as unemployment rose and home values, housing starts, auto production and consumer spending fell. Analysts downgraded forecasts last month, with economists at Morgan Stanley and JPMorgan Chase & Co. predicting a contraction in gross domestic product of about 6 percent for the fourth quarter, the biggest decline in 26 years.

“The current downturn is likely to be far longer and deeper than the ‘garden-variety’ recession,” Federal Reserve Bank of San Francisco President Janet Yellen said in a Jan. 4 speech. “It’s worth pulling out all the stops” in a fiscal stimulus.

U.S. employment fell by 500,000 jobs in December, bringing last year’s decline to 2.4 million, the most since 1945, according to the median estimate of economists surveyed by Bloomberg News ahead of Labor Department figures due Jan. 9.

Alternative Tools

Policy makers discussed an array of alternative policy tools at the meeting last month, including communicating their expectations for interest-rate changes and expanding the balance sheet by taking on more loans and bonds that private creditors refuse to hold.

The FOMC also discussed setting a target for growth in measures of money, such as the monetary base. While a “few” policy makers favored a numerical goal for money growth, most preferred a more open-ended “close cooperation and consultation” with the Fed board on how to expand assets and liabilities.

“Going forward, consideration will be given to whether various quantitative measures would be useful in calibrating and communicating the stance of monetary policy,” the minutes said.

The central bank will have difficulty scaling back its auction of loans and other emergency programs without upsetting the bond market, former St. Louis Fed President William Poole said in a Bloomberg Television interview.

‘Substantial Reaction’

“The market will take that as being a signal that monetary policy is tightening and that is going to set off substantial reaction in the bond market, maybe the equity markets too,” Poole said.

President-elect Barack Obama yesterday called for a record stimulus to prevent the recession from deepening. His plan aims to create or save 3 million jobs and may cost about $775 billion.

Policy makers discussed “possible refinements to the committee’s approach to projections,” including providing more information about individual views on “longer-run sustainable rates” of unemployment, inflation and economic growth.

The committee, after Bernanke’s urging, started publishing three-year forecasts for growth, inflation and unemployment in the minutes of the October 2007 FOMC meeting.

The third year of those projections is viewed by analysts as a signal of policy makers’ preferences for prices, unemployment and growth. The third-year projection may be less valuable in communicating goals because slack in the economy may continue to depress inflation through 2011, Sack said.”

Economic Masochism or Bulltardation

Apparently some neuroscientist has come up with a fancy new mental disorder. He calls it "Economic Masochism". I call it "Searching for the truth" or "Trying to figure out what the hell is really going on."

You decide.

A quick fix of course would be to ban all negative words and symbols. We could spin everything in a positive way… oh wait… that would be the highly contagious mental ailment commonly known as BULLTARDATION.

The last global pandemic of Bulltardation finally burned itself out in 2007 after 'going global' for the first time in history. Academics and medical professionals still aren't sure if those who suffered from the disease had permanent brain damage before they became infected, or if it was a consequence of being ravaged by the disease. Either way, survivors of the disease will never quite be the same.

Catching the economic anxiety bug: “Hymie Anisman, a neuroscientist at Carleton University in Ottawa, has diagnosed a new and highly contagious ailment for the recession era: economic masochism.

It was a pal who first exhibited the symptoms many people are experiencing these days -- although this man's case is extreme.

"I have a friend who sits all day going through various journals online and various blogs as if he wants to find more bad news. He's read it all 20 times, he's knows what's there. It's almost like he's addicted by it. But every once in a while he'll get some little glimmer that will reinforce some little glimmer of hope," Dr. Anisman, who studies the effects of stress, said in a recent interview.

Indeed, whether they are seeking it out or not, people seem to be digesting unhealthy doses of bad economic news these days, through hysterical headlines, their own bank statements, their investment brokers' grim excuses or water cooler commiseration sessions.

Even those who still have jobs and who aren't depending on their life savings to enter retirement aren't immune, Dr. Anisman said.

All the doom and gloom of the market mentality may be helping make the economic dire straits a self-fulfilling prophesy.

"This is one of the problems of course in the economy is that everybody follows the leader even if they don't understand," he said. "Look at yesterday's stock market. Not much has happened other than to reduce the interest rate, the prime rate ... but the stock market suddenly went up 300 points on some ephemeral hope. We have this herd instinct. If everyone is feeling crappy, we feel the same way."

Uncertainty and a lack of knowledge is what the market mindset feeds on.

People who experience loss -- of their job or all their money -- typically feel depressed, said Dr. Anisman, while those who aren't sure what's wrong or who are waiting for the other shoe to drop are afflicted by anxiety without knowing quite how to cope.

He likens it to the contagious fear of another terror attack in the aftermath of 9/11 -- but on a much larger scale and with the potential to affect many more people.”

Angry Jobless Indians, Social Contracts

Allow me to highlight some of the scary stuff below…

Indian Exporters May Cut 10 Million Jobs on Recession (Update2): “Indian exporters may fire as many as 10 million workers by March as the global recession curbs demand for clothes and jewelry, eroding Prime Minister Manmohan Singh’s popularity before nationwide elections.

“The year 2009 is going to be the worst year in history,” A. Sakthivel, president of the Federation of Indian Export Organisations, an industry lobby group, told reporters in New Delhi today. “Exporters don’t have orders beyond January.” The commerce ministry estimates 500,000 jobs may be lost out of 150 million workers at textile mills, manufacturers and jewelers.

Singh’s Congress Party-led government faces an election contest by May as the economy grows at the slowest pace in six years and a record stock-market rout erodes savings. Singh’s top adviser Montek Singh Ahluwalia on Jan. 2 ruled out further aid for the economy after two stimulus packages in a month.

“There’s really nothing the country can do to avoid a further period of economic pain and job losses over the next few months,” said Robert Prior-Wandesforde, an economist at HSBC Group Plc in Singapore.

International trade will shrink in 2009 for the first time in more than 25 years as economic growth slows and commodity prices slide, the World Bank said on Dec. 9. World trade volumes will probably contract next year by 2.1 percent, hampered by exchange rate volatility and flagging import demand.”

Probably, in the first quarter of 2009 optimism will carry prices up to the major resistance level of around $26 on the India Fund (IFN). This level provided support from 2006 thru to the middle of 2008 and will bring formidable supply to market. The declining 200 day EMA (green line) is already below this level and will provide resistance as well.

Patiently sitting in ambush with orders to sell short around these levels will provide the lowest possible risk entries for the inevitable drop into the Abyss...

10 million unemployed you men make for a 'volatile' political environment in the world's largest, messiest democracy where an election goes well if only a few small bombs go off.

Other major export economies are in just as much trouble. In China: “The figures are horrifying.” In China, the social contract is that the government creates widespread economic prosperity. In return, the plebs won’t make trouble for the ruling patricians. They also won’t demand political liberty. Export jobs in China are disappearing as fast as in India and the social contract is about to be severely stressed.

Foreclosures Triple: Housing Recovery is Just Crazy

The lag between failing to pay your mortgage and ultimate foreclosure is quite a number of months during the best of times. The sudden and complete implosion of the economy has made it all but impossible to process all these foreclosures in a timely manner. Therefore, even these horrific numbers are in actual fact much much worse.

Everybody has heard of the people who stopped paying months ago but haven’t been evicted because the bank just can’t get around to them. So imagine how long it will take fore the massive job losses in October and November of 2008 to translate first into stopped mortgage payments and then second into actual foreclosures?

Foreclosures in 2009 will absolutely rocket. House prices will go cliff diving from even these levels…

A 2009 recovery in real estate prices is pure delusional fantasy. Foaming at the mouth, bat-shit crazy type fantasy… Gary Busey style crazy… zero interest rates or not.

Metro-Area Foreclosure Sales Tripled in First 10 Months of 2008: “Foreclosure sales in the 25 largest U.S. metropolitan areas almost tripled in the first 10 months of last year as rising unemployment and falling home values made it tougher for homeowners to sell or refinance their mortgages.

Motivated sales, which include foreclosure auctions and banks selling homes taken over for non-payment, increased 193 percent from January to October 2008 from a year earlier, New York-based real estate data company Radar Logic Inc. said today in a report. Conventional sales rose 6 percent in that period.

“Lenders are motivated to sell foreclosed houses as quickly as possible to get as much of the loan recovered as possible,” Radar Logic Chief Executive Officer Michael Feder said in an interview. “They have a tendency to accept deeper discounts relative to other sales, to the point where motivated sales are driving the market.”

Home prices fell in 24 of 25 U.S. metropolitan areas in October, Radar Logic said, as unemployment hit a 15-year high in November. Almost half the homeowners who bought in 2006 now owe more on their mortgages than their houses are worth, making it difficult for them to refinance without bringing cash to the closing, according to Seattle-based real estate data company Zillow.com.

Forty-one percent of October home sales in Los Angeles and Phoenix were foreclosure auctions or financial firms trying to recoup lost loan value, Radar Logic said.

U.S. foreclosure filings increased 71 percent in the third quarter from a year earlier to the highest on record, according to RealtyTrac Inc., a Irvine, California-based provider of default data.”

Bailout Bitter

A new beer called Bailout Bitter.

Brilliant. I suspect people will be drowning their sorrows in this brew for years to come... especially after really high taxes (to fund the bailouts) and the ravishes of first deflation and then massive inflation leave Joe Sixpack with just enough discretionary income to afford nothing else.