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« The Daily Show: 'Microsoft Guy' John Hodgman On The California Budget Crisis | Main | Whalen: Regulators Banking A Deal With The Devil (Truth Bomb Clip) »
Wednesday
Jun102009

James Grant On The Fed's Im-Balance Sheet: Insolvency Rules

Bernanke's Fed Quantitative Easing FAIL

Hall of Fame truth teller, James Grant, publisher of Grant's Interest Rate Observor, made an all-too-rare appearance on CNBC's Squawk Box this morning.  Below are some of the more interesting comments from Grant.

"If the Fed examiners were set upon the Fed's own documents—unlabeled documents—to pass judgment on the Fed's capacity to survive the difficulties it faces in credit, it would shut this institution down."

"The Fed is undercapitalized in the same way that Citicorp is undercapitalized."

"15 out of 16 primary government bond dealers are in agreement that the Fed will not move before the year end."

"There is no such thing as bad bonds, just bad bond prices."

Steve here.  Grant believes that inflation could become a problem sooner than some expect, even without any upward pressure on wages.  His belief is premised on the continuing collapse of the U.S. Dollar.  I wrote last night that 2012 might be about the time we start to see Jimmy Carter-style price hikes begin.  The deflation trade is not very popular.  It's been a slow succumbing to conventional wisdom.  It's an easy shout to say we are Zimbabwe, or Weimar, Germany with the truly unprecedented and masssive liquidy now greasing the skids.  Not so easy to deflect, either.  Still, I believe it will be strictly commodity related hikes.  Still way too many assets on the im-balance sheets of the infirm.

It's been a legendary debate: the truncated battle of inflation vs. deflation, and so far the deflationists have been winning rather easily.  There has been talk of hyper-inflation for more than 18 months as the Fed's balance sheet has expanded dramatically with the crisis, yet no sight of it anywhere outside of natural resource hedges. 

While the U.S. dollar has been falling in value recently vs. other foreign currencies, we have definitely seen a spike in resource prices as a hedge against dollar assets and potential U. S. inflation, but deflation of real and financial assets continues.  Take a look at commodities priced in Yen or Euros, and you will see a different picture.

For those quick to dismiss the deflationist argument, asset deleveraging is a formidable opponent.  And we have barely confronted the leverage conundrum even this late into the crisis.  Who's the natural buyer when all the players need to sell?  Japan has been printing for 19 years and the boogeyman has never appeared.

The excellent CNBC clip from this morning is after the jump.

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Reader Comments (9)

I hate it....but .....it is..... what..... it is. The Fed is a sham and the Professor has failed on his largest experiment. The economy is now the refuse that will have to be removed before a solution can be achieved. Please begin speaking to those in charge on the fact that America will be FORCED to actually MAKE something tangible. Only then, with such HARD goods will we begin top return to prosperity. Our leaders will have to eat crow and admit that the path of getting other 3rd world countries to produce our products with slave labor wages was an IMMENSE FAILURE. Henry Ford said..."I will pay our employees a living wage and therefore we will always have a client to buy our products". When did American business loose this fundamental principal?
Jun 10, 2009 at 4:47 PM | Unregistered CommenterAin't Bullshittin'
i think the comments about inflation are way off the mark- we are already entering an inflationary period, probably the only reason oil is creeping up again. not also that the us dollar is slipping against most other currencies. as the us govt/ federal reserve print more money AND as china japan and europe continue their trend of not buying us bonds the reserve will have to take them - this can only result in inflation
Jun 10, 2009 at 5:54 PM | Unregistered Commenterpeter
@peter

It's the eternal question, undoubtedly. And I do not profess to be an expert on that subject. I simply read everything I possibly can on both sides of the debate and form my opinions accordingly.

I will say however, that James Grant is one of the top 5 most reputable authorities in THE WORLD on interest rates and inflation. When he says deflation is still winning the battle, I tend to believe him.

As for commodites spiking recently, that has coincided uniformly with the fall in teh dollar. If you looked at commodity prices as measured in other currencies you would see a much different picture.

Thanks for reading and sharing you thoughts.
Jun 10, 2009 at 6:15 PM | Registered CommenterDailyBail
The commodity spike is because people....Nations are fleeing the dollar and want to have their net worth held in a tangible asset that wont be killed for political reasons. You can't eat dollars and you can't put them in you gas tank to drive your car. You can eat corn, soybeans, pork bellies and use oil to drive. Things that keep life going are going UP...while things that are NOT life essential are dropping like Equities and Dollars. ......Commodities are a dollar or currency hedge........ IMHO
Jun 10, 2009 at 9:06 PM | Unregistered CommenterAin't Bullshittin'
I'm so glad it's an deflationary environment. It'll make me feel better by Labor Day when I'm back to spending $100 a week for gasoline.
Jun 10, 2009 at 9:51 PM | Unregistered CommenterJohn S
Well...that same week homes would have lost another 1-2% and if you wait a whole year you will be able to pick it up at an additional 25% discount. I would love to pay $10 a week for gas...but my house is dropping at $1,500-2,000 a month. Oh, that's right, I'm only making $3,500 a month in salary. If that ain't deflation...I don't know what is. This Christmas looks like a "jingle blizzard" will be hitting the northeast, south, mid-west. Good Times....Good Times
Jun 10, 2009 at 10:12 PM | Unregistered CommenterAin't Bullshittin'
Jun 10, 2009 at 10:56 PM | Registered CommenterDailyBail
"jingle blizzard" LOL. Giving "Jingle Bells ("Jingle Mail"?) a whole new meaning.
Jun 11, 2009 at 7:55 AM | Unregistered CommenterJames H
The PC terminology is actually "help for the homeless"....You see, the previously employed middle class are giving up their family homes so that the always unemployed and homeless can move in and squat in your former home. It's making us all equally unemployed and homeless.....It's just one great Nation of brothers and sisters living in harmony. There is no competition for jobs or status. We are all sub-prime now and squat where ever we can find a spot. See ya later...maybe under the nearest interstate overpass. I hear the views are still good if you are in CA. Don't go to DC...they are already full and the current unemployed and homeless crowd is abusive towards newcomers!
Jun 11, 2009 at 10:45 AM | Unregistered CommenterAin't Bullshittin'

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