Little Lloyd Blankfein: Congress Better Not Make Me Mad.
(Photo: Wikipedia; Still From The Twilight Zone)
Paul Krugman is a Nobel-Prize-winning Economist, and writes a regular column for the New York Times, "The Conscience Of A Liberal", wherein he provides an unfiltered perspective on trends and occurrences in the general Economy.
Krugman was one of a handful of Economists to warn of the danger to the general economy in the real-estate market bubble as it developed. He was also part of an even more exclusive number of analysts who repeated urgently that Alan Greenspan's decisions were flawed, and that the shadow economy (fueled by trillions in ARM-backed securities, and credit-default swaps) was a perfect storm in the making.
Krugman even went on a sporadic, one-man roadshow between 2003 and 2007 to deliver that message. He wasn't wrong.
(Photo: Steve McConnell / University Of California, Berkeley)
Unlike Noriel Roubini, who often delivers his analyses in Financial Analyst-speak, Krugman's columns and other writings are easily accessible to the likes of you and me. And in his most recent column, when he noted the possibility of Deflation had popped up, I took notice.
Deflation is the condition where the price of goods and services falls, and keeps falling. This may seem great -- hey; stuff is cheap! -- but look at the other side of it: Prices fall because there is a long-term drop in demand.
When the annual rate of inflation for Core goods and services (the Consumer Price Index, or CPI) falls below zero and into negative territory, we're in trouble. During the worst years of the Great Depression (1930-1934), the CPI ran between -1.0% and -4.0%.
Business become so desperate to sell product that they keep lowering prices. When demand continues to drop, they'll fire more workers, and the ones that are left have to work twice as hard to keep their jobs. Existing homes can't be sold, so they fall in price, too. New-home construction? Forget it. And the home you live in is worth less -- suddenly, you owe more on your mortgage than your home is worth.
Prices of stocks drop, too. Your 401(k) is worth less, and the portfolios of corporate and public pension funds, and those of States and Municipalities... which leads to cuts in their payrolls or working hours, and in public services (Welcome to California).
Paul Krugman isn't saying Deflation is about to occur. But he did note that the Core CPI (Consumer Price Index) report tracking prices for essential goods and services (excluding energy, and food) dropped in its most recent report for the first time since 1982.
The Cleveland Fed's Analysis Of CPI, Jan. 2001 - Jan. 2010
Krugman's take as an economist is that the U.S. government's official CPI report isn't as accurate as other measures. A better take on Core prices, he feels, is one created by analysts at the U.S. Federal Reserve Bank of Cleveland.
The Cleveland Fed produces two inflation numbers -- 'Trimmed' (The "official" CPI data, excluding one-time or unusual events), and the 'Median' inflation number -- the same official CPI data, all essential goods and services, but tracking the median price in each category -- the average of an average, if you will.
Krugman feels this is a better method of finding an accurate picture of how much inflation there is and whether it's rising or falling. He won a Nobel prize and we didn't; and, he does this stuff for a living and we don't; so let's give him the benefit of the doubt.
What the Cleveland Fed's Median number shows is an annual inflation rate from September of 2003, to September of 2008 of between 1.5% and 3.7% (September of '08 was when the shadow banking system imploded). Over the past eighteen months since, Core inflation has actually fallen -- to an annual rate of approximately 1.0%.
I find this a scary picture, Krugman writes. For one thing, it suggests that deflation may not be too far in the future. But beyond that, there’s a growing belief among sensible economists that we need higher, not lower inflation. What we’re doing now is moving in the wrong direction, with real interest rates rising even as the nominal rate remains at zero.
Keeping the Federal Reserve's lending rate to banks for short-term loans has been at near zero for years -- a decision made by former Fed Chairman Alan (I Had Teh Sex With Ayn Rand) Greenspan, and continued by current Fed Chairman Ben Bernanke.
Hey! Put Down The Gun, Pal! Money's An Illusion Anyway!
What Krugman tells us is that the interest rates for loans from financial institutions are rising. It's more expensive, long-term, for you and me to borrow money for a car, a house, a college education; whatever -- and that's more profit for the Banks. Meanwhile, the Fed Rate for short-term loans to banks remains near zero. Again, more profit margin for them.
If Deflation becomes a problem, increasing the Fed Rate for lending money to banks would be a principal method to control any deflationary spiral.
But, the Banksters don't want that; they like things for free. They don't want to lend money to people at low rates -- no percentage in it for them -- and what they do lend, they'll make us pay for. And, they're likely to keep getting it all their way, because the Obama Administration's decided over a year ago to side with financial institutions over the common interests of the United States in handling the 'financial crisis'.
Rather than regulate an industry which caused the disaster, for the sake of all of us, the Administration and the President declined. The Masters Of The Universe, the BSD's who did the damage, were trusted to save the economy, and help People. They were loaned tens of billions of dollars (again, for nearly free) to allow them to do just that. So far, their decisions have strengthened their individual businesses and enriched them personally, but nothing else.
The government's relationship with the Banksters is like the early Twilight Zone episode, "It's A Good Life" -- where a ten-year-old Billy Mumy can do anything, simply by wishing it.
Little Lloyd Blankfein, Wishing All America Into The Cornfield
(Photo: Chip Somodevilla / Getty; TIME Online, July 17, 2009)
He "took away the automobiles, the electricity, the machines - because they displeased him". The world dwindled to a few adults living with Billy in a farmhouse -- and if they did anything which displeased Billy, he would Send them to the Cornfield. If they made him angry. If they didn't do what he said. And as the adults look on, horrified, they force a smile and tell him, "...but it's a real good thing you did that. A real good thing."
Politicians, in the main, are the bought creatures of corporate money. They treat the Banking and Finance structure in America as if it were Little Billy -- and, if they challenged the authority of the BSD's in any real way, they would pay for it, personally. But... politicians don't want to do that. They might not get that campaign contribution, or free use of a corporate jet to take a fact-finding trip to Barbados with their mistress.
If real regulation of the banking and finance community were enacted, or if the Fed Rate were raised, the BSD's would squeal and be angry. They might just decide to give money to another, better-looking whore who knows their place and won't talk back. They might send the wayward politicos to the Cornfield... then they wouldn't be Politicians anymore, and... well, they like having power. So making decisions in the public interest, and making the Banksters mad, is Na Gah Happn.
Keep your eyes on the Fed Rate, and the CPI. If the first stays flat and the other continues to drop... well, hopefully other countries will outsource their call center and manufacturing work to the U.S., where there could be a huge pool of cheap labor in the not-too distant future.
UPDATE: The New Yorker has a biographical article about Krugman in its most recent online edition, entitled (appropriately enough), "The Deflationist: How Krugman Found Politics". Good read.
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