Thursday, July 19, 2007

Bill Bonner, Fed Speak for Dummies

Fed Speak for Dummies

We're suffering from paradox overload this morning.

We read in the paper that June saw the lowest inflation gains in five months. Ben Bernanke, speaking to the U.S. Congress, dumbed-down his remarks, in a message dumbbells wanted to hear:
"Core net inflation should edge a bit lower," he said.
(More on the Federal Reserve, in today's guest essay, below…)
But food has been rising this year at three times the rate of a year ago - or 6.2% per year. And gasoline already sells for a price 30% more than it did last year.

Go figure.

Meanwhile, from Las Vegas comes word that house sales are collapsing - they're down 42% from a year ago. Nationwide, new housing permits are at their lowest in 10 years. And in Southern California, house sales are at their lowest volume in 14 years. But while houses weren't selling, when they did sell they sold for slightly higher prices.

Go figure again.

Up the mortgage loan food chain, on Wall Street, the big fish at Bear Stearns say that investors are out of luck. There is trouble galore in the CDO market. But over at the equity trading desks, things have never been better. What trouble, ask the stockjobbers? What housing problem, they want to know? The Dow is near an all-time high. Neither housing slump…nor subprime slump…nor any kind of slump is going to stop this market, say the pros.

Dick Gaylord, who will become the nation's top REALTOR next year, claims that the market "isn't down, but just returning to normal."

"I don't know that there's ever been a bad time to buy," adds Gaylord sagely. "If people will hold on, there's no bad time to buy in real estate…"

Many in the real estate market agree with Mr. Gaylord, and think that we've hit the bottom as far as the housing bubble is concerned…but some, like Mish Shedlock, think we have a ways to fall yet:

The End Isn't Quite Here

The whole financial world is full of paradox and contradictions.

Dollars are losing value. But that doesn't seem to stop people from wanting more of them. In exchange for gold, you can tender 673 dollars and get a single ounce. This is 7.80 dollars more than the rate on Tuesday. But it's still lower than the rate at the end of January one score and seven years ago, that is to say, the day Ronald Reagan was first sworn in as President of the United States of America. But that was before the United States had a $9 trillion public debt…and a financing gap over $60 trillion. People still had affordable mortgages…and only half as much debt, generally speaking. The United States was at peace…and still a net-creditor to the rest of the world. Its trade with the rest of the world was still more or less in balance. Derivatives had barely been invented. And the money supply - that is to say the number of dollars in circulation - was hardly a quarter of what it is today (we are just making an educated guess).

You'd think the price of gold ought to be a bit higher. Go figure.

And pity the poor investors in Bear's hedge fund - all their dollars have disappeared. Yes, dear reader, The Greatest Economic Boom Ever is fueled by dollar creation…and yuan creation…and yen creation…and euro creation. My god, this boom has seen a genesis of money everywhere. But just as the great boom giveth, it also taketh away. We are preparing an essay for tomorrow on this subject, so we don't want to give away the whole story, but readers need to be prepared. Just as we watched the geniuses at Bear and the other financial firms create wealth; we can also watch them destroy it. In a flash, billions…no trillions…of presumed, ersatz wealth can vanish.
Money that is created "out of thin air" - courtesy of central banks and financial firms - tends to go back from whence it came. For every genesis of wealth creation…there is an exodus of wealth destruction. Watch out for it…

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