Thursday, May 22, 2008

The Debts of the Lenders: An Oily Hot Summer

Officially, summer starts in mid June. Unofficially however, summer starts this Memorial Day weekend.

Traditionally, millions of US drivers take to the roads and add extra strains on gas supplies. I am certain that we cannot sustain this added strain w/o a corresponding surge in gas prices.

But, there is another concern aside from the Memorial Day effects. June 1, Sunday, marks the beginning of the Atlantic Hurricane Season. Scientists are predicting a record active season w/anywhere between 15-20 major storms between June and October. Any of these storms can destroy the offshore energy platforms in the Gulf of Mexico. Combine that w/a still broken port infrastructure in Louisiana and you have a perfect storm brewing.

What is our Government doing?

You already know my stance on this. However, as the November election heats up, expect to see more partisan bickering and shameless pandering from economic novices in Congress.

What Congress doesn't realize is that we are caught on the twin horns of inflation and deflation. Government policymakers are intent on ignoring the effects of inflation in official reports. "Core" inflation is essentially meaningless since it omits food and energy costs - as if Americans don't eat, drive, or use electricity! On the other hand, the government has turned the full focus of its power on deflationary forces like housing, the stock market, and banking credit. What policymakers fail to realize is that inflation and deflation are intertwined. It is politically easier to statutorily implement regulations or similar steps to favor deflation than it is to address inflation,
which requires a more nuanced holistic approach. Just witness Bailout Bernanke's subsidized buyout of Bear Sterns and extension of credit to investment banks.

The result of the government's lack of a coherent policy has led the US into a prolonged period of "stagflation" where inflation and deflation run in tandem.

The 3 Stooges

While foreign central banks from Latin America to the Mid-East and East Asia raise interest rates, the Fed has been stubbornly lowering them. The Canadian and British central banks have started to imitate US policymakers. I call them the 3 stooges since their actions are the blind leading the blind. Their actions are dictated by reliance and shameless pandering to a corporate constituency of money managers (their capital markets are the most developed).

Meanwhile, in Euro land, the ECB has stubbornly resisted pressures to lower rates as well. This has led to a sky high Euro valuation against the US Dollar, Canadian Dollar, and British Pound. Any lowering of ECB rates would have the effect of slowing the rapid de-valuation of these currencies. Admirably, the ECB has demonstrated a sound knowledge of economic fundamentals by resisting all calls to lower rates. In doing so, they've maintained a strong defense against

However, this can't last forever. Although Euro land is not as heavily exposed to capital markets (due to unhealthy socialist attitudes against capital markets), they are still vulnerable to deflationary forces. Specifically, a strong Euro hurts exports. When things become too expensive, how are those bloated union run companies going to justify their existence? Western
European socialism can't work in today's integrated world economy. Expect the ECB to come under renewed pressure on interest rates this summer.