Riick
Elite Member
- Joined
- Aug 14, 2007
- Professional Status
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- Delaware
"The velocity of money is slowing down. The number of transactions is slowing down and prices are beginning to fall on more assets.
"Look for another FED funds rate reduction come December 15 as the FED attempts to increase the money supply."
"Hellicopter" Ben will probably come to the Rescue -- and whatprice the dollar on Christmas Day? ...and what other unintended consequences?
An interesting article by John Mauldin this weekend speaks to this, and I thought this outtake was an intriguing way to look at it.
The title by the way is : "How do You Spell Stagflation?"
OUTTAKE FROM - http://www.frontlinethoughts.com/pdf/mwo111607.pdf
________________________________________________________________
“A Two Dimensional Problem
I recently spent some time with the very brilliant Columbia Professor Graciella Chichilnisky
(the economist whose work created the carbon credit markets, among other things). We got to
talking about the problems the Fed is facing, and she gave me a very interesting insight from
a paper she had written a few years back. I am going to try and re-create it, though I am sure
I will take some of the potency away in trying to put it in my simple terms.
Assume that you have an individual living in a two dimensional world. For them there is only
length and width, but no height. Then let's draw a line between two exactly opposite points
above and below that two dimensional world and connect them with a line. At the precise point
where the lines meet in the two dimensional world, to the individual in that world, it appears
that both points are exactly the same. Two things which would clearly be opposite to anyone
living in a three dimensional world would be equal in a two dimensional world.
The Fed faces a problem something like that. They are living in a two dimensional world,
working with two dimensional tools (they can cut rates or raise them) but the problems they
face are multi-dimensional.
If they cut rates, the dollar will fall and import prices rise, and it will also likely have negative
effects on food and energy prices. If they do not cut rates, the markets will simply throw up as
it will interpret that as a Fed which is not concerned about a slowing economy.
Not cutting rates risks an economy that could easily slip into recession due to a growing risk of
a credit crisis turning into a credit crunch. Usually, that means that inflation will fall. Usually, but not always.
The Fed is faced with a problem I predicted four years ago in this letter and in Bull's Eye
Investing, as the Fed dramatically eased monetary conditions in an effort to fight deflation.
In a word, stagflation. That terrible moment in time when an economy slows (is stagnant)
yet inflation is high, limiting the monetary authority's ability to act.
With a clearly slowing economy, a credit crisis, and rising inflation, they have no good and
clear choices. Whatever they do is likely to create problems in a multi-dimensional real world.”
"Look for another FED funds rate reduction come December 15 as the FED attempts to increase the money supply."
"Hellicopter" Ben will probably come to the Rescue -- and whatprice the dollar on Christmas Day? ...and what other unintended consequences?
An interesting article by John Mauldin this weekend speaks to this, and I thought this outtake was an intriguing way to look at it.
The title by the way is : "How do You Spell Stagflation?"
OUTTAKE FROM - http://www.frontlinethoughts.com/pdf/mwo111607.pdf
________________________________________________________________
“A Two Dimensional Problem
I recently spent some time with the very brilliant Columbia Professor Graciella Chichilnisky
(the economist whose work created the carbon credit markets, among other things). We got to
talking about the problems the Fed is facing, and she gave me a very interesting insight from
a paper she had written a few years back. I am going to try and re-create it, though I am sure
I will take some of the potency away in trying to put it in my simple terms.
Assume that you have an individual living in a two dimensional world. For them there is only
length and width, but no height. Then let's draw a line between two exactly opposite points
above and below that two dimensional world and connect them with a line. At the precise point
where the lines meet in the two dimensional world, to the individual in that world, it appears
that both points are exactly the same. Two things which would clearly be opposite to anyone
living in a three dimensional world would be equal in a two dimensional world.
The Fed faces a problem something like that. They are living in a two dimensional world,
working with two dimensional tools (they can cut rates or raise them) but the problems they
face are multi-dimensional.
If they cut rates, the dollar will fall and import prices rise, and it will also likely have negative
effects on food and energy prices. If they do not cut rates, the markets will simply throw up as
it will interpret that as a Fed which is not concerned about a slowing economy.
Not cutting rates risks an economy that could easily slip into recession due to a growing risk of
a credit crisis turning into a credit crunch. Usually, that means that inflation will fall. Usually, but not always.
The Fed is faced with a problem I predicted four years ago in this letter and in Bull's Eye
Investing, as the Fed dramatically eased monetary conditions in an effort to fight deflation.
In a word, stagflation. That terrible moment in time when an economy slows (is stagnant)
yet inflation is high, limiting the monetary authority's ability to act.
With a clearly slowing economy, a credit crisis, and rising inflation, they have no good and
clear choices. Whatever they do is likely to create problems in a multi-dimensional real world.”
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