Page 4 of 4 CREDIT BUBBLE BULLETIN
Good inflation?
Commentary and weekly watch by Doug Noland
taxes, jeopardizing the funding for critical transportation projects.
Governments depend on tax revenue from gas purchases to fill the Highway Trust
Fund, the main mechanism used to pay for public highway, mass transit and other
transportation projects. Trust-fund revenue is projected to run a
shortfall of at least $3 billion next year, meaning Congress faces a choice
between cutting transportation funding and coming up with a fix."
Fiscal Watch
June 17 - Market News International (John Shaw): "Congressional Budget Office
Director Peter Orszag said - that the US economy faces the
long-term threat of 'collapse' unless major reforms on health care spending are
instituted in the
coming years. In testimony before the Senate Finance Committee, Orszag said the
federal budget is on an 'unsustainable path,' as health care costs continue to
grow much faster than the overall economy. 'When you are on an unsustainable
path, bad things will happen,' he said. Unless this health care spending
trajectory is slowed and then reversed, the American economy faces crippling
problems that 'would make our current economic difficulties look tiny,' Orszag
said. The CBO chief said the 'central long-term challenge' for the United
States is controlling the growth of per beneficiary spending for Medicare and
Medicaid. 'Future growth in spending per beneficiary for Medicare and Medicaid
- the federal government's major health care programs - will be the most
important determinant of long-term trends in federal spending,' Orszag said."
Central Banker Watch
June 16 - The Wall Street Journal Asia: "The biggest problem in emerging
economies isn't 'the credit crunch about which we hear so much . . . but
inflation.' So said Glenn Stevens, Australia's central bank governor.
It's too bad US Federal Reserve Chairman Ben Bernanke wasn't in the audience.
Unlike his Fed peer, Mr. Stevens has ruthlessly resisted inflationary
pressures. Since taking office in September 2006, he has raised Australia's
benchmark cash interest rate to its current 7.25% from 6%. That's a 12-year
high, and it has elicited yelps from homeowners, most of whom have
variable-rate mortgages. It has also ruffled political classes on both sides of
the aisle who support easy money policies. Mr. Stevens pays no heed, explaining
that monetary policy's 'proper restraining role' is to seek 'to head off
further problems' as Australia's economy expands. 'This is why a tight monetary
policy setting is essential,' Mr. Stevens noted. 'It is why the Reserve Bank
[of Australia] has lifted interest rates, even as the Federal Reserve was
reducing them.' Mr. Stevens sees more price pressure on the horizon in Asia,
thanks to strong growth in China and 'very low' regional interest rates, which
generally mirror those of the Fed. That's the key message of Mr. Stevens's
speech: The Fed's actions are putting emerging-market policy makers in a tough
spot."
June 17 - Dow Jones (Patrick Yoest): "A former Federal Reserve official
said Monday the US Congress may need to further regulate the Fed in order to
constrain the central bank's powers. Vincent R. Reinhart, who served as
director of monetary affairs at the Fed until the middle of last year, said
that the Federal Reserve has overstepped its own regulations, and Congress may
need to step in to provide outside regulation. Future policy prescriptions for
the Fed "might include asking whether legislation is needed to bind its future
actions," Reinhart said at an American Enterprise Institute event on Monday.
Reinhart has emerged as a fierce critic of the Fed-engineered bailout of Bear
Stearns Cos., in April calling it 'the worst policy mistake in a generation.'
He maintained that tone Monday, stating that 'we've veered from ( U.K.
economist John Maynard) Keynes' views that economists should become as
confident and uncontroversial as dentists, to central bankers can become rock
stars.' Reinhart also said that, in actions ranging from its infusion of cash
into the troubled student loan market to Fed Chairman Ben Bernanke's recent
pronouncements on the dollar, the Federal Reserve had become too closely
aligned with political powers in Washington. 'I think the Federal Reserve has
to consider ways of constraining its own portfolio choices in order to rule out
future political influences,' Reinhart said."
June 18 - Bloomberg (Kim-Mai Cutler): "Former U.K. Chancellor of the Exchequer
Nigel Lawson said Federal Reserve Chairman Ben S. Bernanke may be 'regretting'
the fastest pace of US interest-rate cuts since 1984 as global inflation
accelerates. The Fed reduced its benchmark rate by 3.25 percentage points
to 2% between September and April 30 to stave off a recession. The
Bank of England cut its key rate by 0.75 percentage point to 5%. The
European Central Bank left rates unchanged at 4%... 'The Bank of England has
been very cautious and careful and it has been much closer to the views of the
European Central Bank,' Lawson finance minister from 1983 to
1989. 'It has not gone conspicuously the way of the Fed, where I suspect
that Mr. Bernanke's now regretting it.'"
June 17 - Bloomberg (Kathleen Hays and Timothy R. Homan): "Former St.
Louis Federal Reserve President William Poole urged US central bankers to raise
interest rates to head off an inflation spiral as energy costs soar. 'We should
be moving sooner rather than later' on increasing borrowing costs, Poole, who
retired in March, said in an interview today with Bloomberg Television. 'I
don't think you can interpret what's happening with energy as a temporary
shock.' Poole warned that the Fed must prevent higher inflation expectations
from feeding through to a surge in wages."
Mortgage Finance Bubble Watch
June 20 - Bloomberg (Josh P. Hamilton and Erik Holm): "Triad Guaranty
Inc. plunged 40 percent and became the first mortgage insurer to stop selling
policies after Freddie Mac disqualified the company as a guarantor of new home
loans."
June 18 - Bloomberg (Laura Marcinek): "Investment in US commercial real
estate fell 70% in the first quarter from a year earlier as banks curtailed
credit, the National Association of Realtors said. Investors spent $48.2
billion on commercial properties in the period, down from $157.8 billion in the
same period last year."
Muni Watch
June 16 - Bloomberg (Jeremy R. Cooke): "Municipal borrowers including
the University of Maryland Medical System shifted out of another $3 billion of
auction-rate debt last week, leaving the market about half as big as before its
collapse four months ago. States, local governments, hospitals and colleges
have converted, refinanced or said they would redeem at least $81.3 billion of
the $166 billion in municipal securities whose rates are set at dealer-run
bidding, typically every week or month."
California Watch
June 20 - Business Week (Alex Veiga): "California's unemployment rate jumped to
6.8 percent in May and the state lost 10,900 more payroll jobs than it
generated during the month, state officials said.... The unemployment rate was
6.2 percent in April and 5.3 percent in May 2007, the Employment Development
Department said."
June 13 - Bloomberg (Michael B. Marois): " California lawmakers likely
will miss a constitutional deadline to pass a budget for the coming fiscal year
amid an impasse over how to close a $17 billion deficit."
June 16 - Bloomberg (Daniel Taub): "Southern California house and
condominium sales dropped 15% last month to the lowest level for a May in two
decades as prices plunged to 2004 levels, DataQuick said."
Speculator Watch
June 18 - Hedgeweek: "Net hedge fund industry inflows slumped to $2.62bn
during the first quarter of 2008, according to the latest Lipper Tass study.
Combined with a net performance loss of some $36bn, this resulted in estimated
net hedge fund industry assets falling to $1.75trn at the end of March
First quarter inflows fell by 81%..."
Crude Liquidity Watch
June 17 - Bloomberg (Matthew Brown): "United Arab Emirates inflation
accelerated to 11.1% in 2007 from 9.3% the previous year, led by rent and
housing costs, risking an erosion of the country's competitiveness. Rent and
housing, which has a 36% weighting in the consumer price index, increased by
17.5% in 2007. Inflation rates have surged above 10% in five of the six
Gulf Cooperation Council states."
June 15 - Bloomberg (Matthew Brown): "Bahrain M3 money supply growth, an
indicator of future inflation, slowed to 32% in April, from a record 39% in
March."
June 16 - Bloomberg (Matthew Brown): " Oman's inflation rate rose to a
record 12.4% in April from 11.6% in March as growth in the price of food
accelerated. Food prices rose an annual 22%..."
June 16 - Bloomberg (Abdulla Fardan): "The economies of the Gulf
Cooperation Council members, including Saudi Arabia and the United Arab
Emirates, may expand as much as 7.5% this year as oil prices remained at high
levels, the state-owned Saudi Press Agency reported."
Doug Noland is a market strategist for the Prudent Bear Funds.
(Republished with permission from PrudentBear.com.
Copyright 2005-2008 David W Tice & Associates. All rights reserved.)
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