Don’t look now but the Fed has pulled liquidity out of the markets! What happened to QE!? Isn’t it supposed to work the other way?

Blah,blah, blah … Stocks actually eked out a gain but…

Bottom line is the markets are moving by themselves there is no connection between Fed activities and the rest of the world. Bruce Krasting submits the idea that Planet Bernanke is getting cold feet about monetary easing. Could be …

Yesterday’s article in Bloomberg gives an idea what inflation is like on the ground:

This is what it was like during the real estate boom in the US, circa 2005. Things feel great and people believe for one reason or another, ‘this time is different’. Shades of Irving Fisher in 1929.

China is a great growth story, it’s a magnet for hot money. It fits right into the post- modern, post- Peak Oil, ‘American Way Redux’ cultural paradigm. Right this second it has everything in the world going for it: American cash is flooding overseas looking for yields and finding Chinese investments. One of its two major export competitors – Japan – is on the ropes due to decades of deflation while the other – Germany – competes in trade sectors that are complimentary with China’s. It has structural wage and energy advantages. It ignores patent and trademark rules so it does not have to spend a large part of GDP for product development. While the developed world struggles it looks to China for cheap goods since they cannot afford any other. The cash- flow/currency exchange outcomes of this process keeps the developed world struggling.

It’s hard not to get the feeling that the ‘top’ is in. Things just cannot get any better while queasiness is filling in around the edges.

Meanwhile, gold bugs and others who rant about hyperinflation need to know what it looks like while it is taking place. The ‘Niewe Monetarists’ believe hyperinflation is going to break out in the US any minute, now.

Right!

In the beginning, inflation is a lot of fun. Particularly for those who can absorb the price increases or can leverage wage hikes from their bosses. For those who can’t there is a sense of desperation, of being a hunted animal. Prices increase monthly, then daily, then between morning and lunch time. Getting more money becomes a nationwide obsession – while the monetary authorities work hard to be accommodating.

There is nothing like this taking place in the US. Everything here seems to be moldering into Detroit or Gary, Indiana. It’s grim: there is no cash, Depression- level unemployment, tens of millions on food stamps, houses for sale sans buyers or even offers.

My area is different – the Treasury Department and ‘Uncle’ Ben Bernanke’s office are a few miles away. Fifty miles will take the traveler to a far more desperate place. Here’s Baltimore:

There is no inflation, here in this house on Benzedrine Street.

September has had a huge rally in all the markets – with very little in the real world to support such a rally. What’s next? The QE magic takes us where, exactly?

Since it would do nothing to help those @ the bottom or relieve distress on small business, QE seems to have outlived its usefulness as a prop. Ditto, stimulus. The establishment has edged itself to the very end of the gangplank. It has run out of ideas.

Countries cannot tolerate austerity as revenues drop faster than do costs. At the same time stimulus spending does not generate new revenue to service the increasing debt overload. The way stimulus is structured assures failure to create more jobs.

There are also structural impediments to increasing hiring such as the increase in automation. Jobs that need lots of manpower have been shipped overseas or are done by immigrants at very low wages. There is so much labor slack that there is little wage pressure – unlike in China – so the amount of final demand that can be credited to the new hires is diminished.

At the same time, most spending is directed toward insiders who typically do not hire large numbers. The industries that at one time employed tens of thousands such as steel making and ship building – are long gone. The one industry that hired lots of workers was house building. The employees in the construction sector are now jobless in large numbers with small prospects. Even with a decline in house prices the massive inventory of unsold and foreclosed houses guarantees construction unemployment at high rates far into the future.

Heavy construction such as for highways or in mines or for large public works is done with few workers and many machines.

Monetary policy won’t work either because any liquidity is immediately hoarded or sent overseas by way of carry trades – abetted by stimulus/deficits. It really is a pickle for the every segment of the world economic order. All countries are effected; even China has to wrestle with large debts. Japan and the US are in their own categories with debt @ + 200% of GDP. Japan can afford to add to deficits as it still accumulates foreign exchange by way of exports.

The US cannot export enough to make a difference in its massive debt load even with a substantially devalued dollar. Adding to ‘reflation’ would simply cause short term rates to rise because these instruments mature the soonest. Rates would be adjusted for to compensate for the amount of perceived inflation. The ‘maturity risk’ includes that of an inverted yield curve. Also, Social Security and Medicare are indexed to inflation. Since these represent $1.2 trillion annual expenditure, any rise in inflation would immediately be a burden on the government budget. Even without inflation – or ‘reflation’ – the interest expense is set to take a larger percentage of the budget as revenues continue to decline with taxable employment. At the same time, obligations of the government continue to expand.

Part of the problem is the exhaustive search for easy solutions that cost little to implement. By this I mean the administrative effort required is small, not the overall expense to taxpayers or to the economy as a whole. Part of the ‘easy approach’ is ignoring fuel and other input costs. Peak Oil is an abstraction to the establishment not worthy of discussion. Nevertheless, the amounts of funds diverted toward fuels and not toward other forms of investment reaches the danger level. $80 oil imports add up to 5% of GDP, a level that has been historically unsupportable. The argument not made – that for conservation as a way to bring the ‘energy budget’ into balance – becomes the one that is needed the most.

The election in two weeks does not promise any beginning to the dialog. The Republicans are coming, ready to stymie the president. How this will turn out is hard to say from here but the least likely outcome is inflation.