Investors Finally Fear the Inflation Precipice

Mises Daily: Thursday, February 10, 2011 by Robert P. Murphy

Well it's about time. The headline on Monday's CNBC article announces: "Investors Starting to Believe That Inflation Threat is Real."

For some time, I have been a proud member of the fuddy duddies who have been predicting the return of serious stagflation. Thus far, our prognostications have clearly been half-right — the "real economy" is indeed caught in a terrible rut, far worse than most of the Keynesian economists recognized even in late 2008.

However, on the (price) inflation front, things are not as clear-cut. Although asset prices and producer prices have surged in response to Bernanke's monetary pumping, retail consumer prices (at least as officially reported by the Bureau of Labor Statistics) have not been rising at alarming rates.

I am not the first economist to explain this apparent anomaly by reference to Wile E. Coyote: The serious inflation won't hit until everyone thinks it is going to hit. And although the "fundamentals" of serious price inflation have been in place since late 2008, we are seeing more and more signs that Bernanke's dam of obfuscation is starting to crack.

A Simple Picture

Simplistic as it may seem, I still cannot shake the feeling that the below chart is all we really need to know that eventually, we will experience large price hikes:

Yes, yes, there are all sorts of sophisticated arguments for why there's nothing to see here, just keep moving along, the dollar will be fine. In particular, there are arguments about the demand for holding "base" money totally offsetting Bernanke's injections, and the huge increase in excess reserves means that the new money isn't "leaking out" into the broader economy.

However, when the serious price inflation comes — as I still believe it will — I think we will all look back at the above chart and be shocked that people were worried about deflation in 2008-2010. And there is precedent for this sort of thing; remember that in 2005 and 2006 plenty of really smart people (including Ben Bernanke) denied that there was a housing bubble[1]:

In Bernanke I Don't Trust

It is true that Bernanke could reverse course before things are too late, as far as the purchasing power of the dollar is concerned. But this would entail devastating pain to the banking sector, since the Fed would have to reverse the policies that bailed out the overleveraged titans in the first place. If Bernanke has to choose between saving rich bankers or the dollar, I am confident he will choose the former.

When Bernanke made his infamous appearance on 60 Minutes, most analysts understandably focused on his absurd claim that he wasn't printing money. But the thing that most alarmed me was this exchange (starting at about 7:20 in this video):

BERNANKE: There really is no problem with raising rates, tightening monetary policy, slowing the economy, reducing inflation at the appropriate time. …

Q: You have what degree of confidence in your ability to control this?

BERNANKE: A hundred percent.

Now that should be terrifying. Realistically, Bernanke shouldn't have 100 percent confidence that he can control his toaster. I mean, he might turn the dial up too high, or someone might spill water on it. It could happen.

By the same token, there are all sorts of scenarios where the natural "unwinding" of the Fed's extraordinary policies won't work as planned. In particular, if even official CPI inflation starts creeping above 4 and 5 percent on an annual basis, while unemployment remains above (say) 8 percent, then it will become apparent that Bernanke's "exit strategy" leads into a brick wall.

"Well, If the Fed Started Monetizing the Debt, Then I'd Worry About Inflation …"

One of the more absurd stances rejecting the inflationist warnings comes from people who think Federal Reserve policy is completely divorced from the Treasury's fiscal position. Such naïve analysts think that Bernanke's decision to soak up more than one trillion in government debt had nothing to do with the massive deficits that the government has been and will continue to run.

Those pooh-poohing our current situation will concede that interwar Germany or modern Zimbabwe got into trouble all right, but those were situations where the central bank "monetized the debt." This supposedly stands in sharp contrast to the scientific monetary policies of the "independent" Federal Reserve.

To put these claims in context, note that in the 2nd quarter of 2009, the Fed's absorption of Treasury debt amounted to 48 percent of the new debt issued in that period. And ZeroHedge posted the following chart showing that the Fed is currently the world's largest single holder of Treasury securities, surpassing China:

Conclusion

No one knows the future for certain. But given the economic and political realities, I still remain confident that prices quoted in US dollars will continue to escalate, not only in commodities and certain asset classes, but eventually in most consumer goods. At some point it will be so obvious that not even Ben Bernanke will be able to deny it.

When will the breakout occur? Again, no one can know such things for sure, but there are growing signs that "the market" will soon recognize that Bernanke & Co. have painted us into a very tight corner.

http://mises.org/daily/5038/Investors-Finally-Fear-the-Inflation-Precipice

Robert Murphy is an adjunct scholar of the Mises Institute, where he teaches at the Mises Academy. He runs the blog Free Advice and is the author of The Politically Incorrect Guide to Capitalism, the Study Guide to Man, Economy, and State with Power and Market, the Human Action Study Guide, The Politically Incorrect Guide to the Great Depression and the New Deal, and his newest book, Lessons for the Young Economist. Send him mail. See Robert P. Murphy's article archives.

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Notes

[1] To my eternal shame, I was one of those (hopefully) smart economists who overlooked the dangers for far too long. So when I say that people can latch on to arguments to dismiss warnings, and later wonder what in the world they were thinking, I speak from personal experience.

French anti-doping expert suggests new analysis for Contador’s samples

...from CN...

Dine says Contador's samples should be re-analyzed

He may have been cleared by the Spanish federation (RFEC) for his positive test for Clenbuterol at the Tour de France, but Alberto Contador(Saxo Bank) is not out of the woods just yet. He’s still waiting for the UCI and the World Anti-doping Agency (WADA) to decide whether they will appeal the decision before the end of March, but he also could face new and more serious doping accusations.

Professor Gerard Dine, one of the founders of the biological profile which became the French “longitudinal profile” and the international “biological passport” used by the UCI, thinks Contador’s samples should be re-analyzed in order to detect plasticizer traces. The presence of plasticizers in a sample would strongly suggest blood bag use.

Asked if new analysis were possible, the French anti-doping expert told Sport24.com: “If the method [of plasticizer detection, Ed.] is validated, we can think that there will be a retroactive process. Then, [Contador] could be incriminated not because of Clenbuterol but because of an auto-transfusion.”

According to The New York Times and L’Equipe newspapers last October, a blood sample from Contador taken on July 20 contained plasticizer, a type of chemical that is found in plastic IV bags such as the bags used to carry human blood. That finding, made by a German laboratory in Cologne, is unofficial as long as the plasticizer test isn’t recognized by the World Antidoping Agency, and that is why the Spanish federation was only investigating the Clenbuterol positive test.

Rather than blaming the science behind anti-doping, Dine highlights the maladjusted rules. “If there’s a problem in terms of the anti-doping fight, it’s because of current rules which don’t follow the reality of scientific doping enough,” he said.

Dine, a haematologist who is also Managing Director of the Institut Biotechnologique de Troyes, says that Contador could have used “Clenbuterol in a period when he was not tested, in order to do power training” and then that people “extracted his blood in order to transfuse him later.”

Commening on the doping charges that were dropped by the RFEC, Dine criticized Contador’s defence. “The substance is strictly prohibited”, Dine said, adding: “That’s confusing and it’s a serious problem of credibility in the anti-doping fight, it’s very clear.”

Catalan police break up doping ring in Girona

...from Cycling News... emphasis added Alberto...

Pro rider tipped off police after being offered banned substances

Police in Catalonia have made seven arrests as part of an investigation into an alleged doping ring based on the city of Girona. No details have been given so far about those arrested, but none of the seven are believed to be professional cyclists. However, one well-connected Spanish journalist has said that a former Kelme pro rider is among those detained.

According to initial reports, the investigation, codenamed Cursa, began after police received a tip-off from a pro rider based in the town on Olot, near to Girona. The rider had been contacted via email and offered banned substances.

Catalan police are reported to have found a number of banned products during searches undertaken as part of the investigation. Among the products found were clenbuterol, steroids, growth hormone and EPO. All are said to have been imported into Spain by one supplier. 

Members of the group subsequently sold them on in local gyms to athletes, triathletes and cyclists.

Follow Cyclingnews on Twitter for the very latest coverage of events taking place in the cycling world - twitter.com/cyclingnewsfeed

Kyle Bass - The Cognitive Dissonance of it All

Kyle Bass Feb 14

Matt Taibbi's lastest salvo to WS

Why Isn't Wall Street in Jail?

Financial crooks brought down the world's economy — but the feds are doing more to protect them than to prosecute them

Illustration by Victor Juhasz

...a few excerpts...link at the bottom,

Over drinks at a bar on a dreary, snowy night in Washington this past month, a former Senate investigator laughed as he polished off his beer.

"Everything's fucked up, and nobody goes to jail," he said. "That's your whole story right there. Hell, you don't even have to write the rest of it. Just write that."

I put down my notebook. "Just that?"

"That's right," he said, signaling to the waitress for the check. "Everything's fucked up, and nobody goes to jail. You can end the piece right there."

Nobody goes to jail. This is the mantra of the financial-crisis era, one that saw virtually every major bank and financial company on Wall Street embroiled in obscene criminal scandals that impoverished millions and collectively destroyed hundreds of billions, in fact, trillions of dollars of the world's wealth — and nobody went to jail. Nobody, that is, except Bernie Madoff, a flamboyant and pathological celebrity con artist, whose victims happened to be other rich and famous people. 

The relationship between the SEC and the DOJ is necessarily close, even symbiotic. Since financial crime-fighting requires a high degree of financial expertise — and since the typical drug-and-terrorism-obsessed FBI agent can't balance his own checkbook, let alone tell a synthetic CDO from a credit default swap — the Justice Department ends up leaning heavily on the SEC's army of 1,100 number-crunching investigators to make their cases. In theory, it's a well-oiled, tag-team affair: Billionaire Wall Street Asshole commits fraud, the NYSE catches on and tips off the SEC, the SEC works the case and delivers it to Justice, and Justice perp-walks the Asshole out of Nobu, into a Crown Victoria and off to 36 months of push-ups, license-plate making and Salisbury steak.

That's the way it's supposed to work. But a veritable mountain of evidence indicates that when it comes to Wall Street, the justice system not only sucks at punishing financial criminals, it has actually evolved into a highly effective mechanism for protecting financial criminals. This institutional reality has absolutely nothing to do with politics or ideology — it takes place no matter who's in office or which party's in power. To understand how the machinery functions, you have to start back at least a decade ago, as case after case of financial malfeasance was pursued too slowly or not at all, fumbled by a government bureaucracy that too often is on a first-name basis with its targets. Indeed, the shocking pattern of nonenforcement with regard to Wall Street is so deeply ingrained in Washington that it raises a profound and difficult question about the very nature of our society: whether we have created a class of people whose misdeeds are no longer perceived as crimes, almost no matter what those misdeeds are. The SEC and the Justice Department have evolved into a bizarre species of social surgeon serving this nonjailable class, expert not at administering punishment and justice, but at finding and removing criminal responsibility from the bodies of the accused.

The systematic lack of regulation has left even the country's top regulators frustrated. Lynn Turner, a former chief accountant for the SEC, laughs darkly at the idea that the criminal justice system is broken when it comes to Wall Street. "I think you've got a wrong assumption — that we even have a law-enforcement agency when it comes to Wall Street," he says.

----------------------

Pause for a minute to take this in. Aguirre, an SEC foot soldier, is trying to interview a major Wall Street executive — not handcuff the guy or impound his yacht, mind you, just talk to him. In the course of doing so, he finds out that his target's firm is being represented not only by Eliot Spitzer's former top aide, but by the former U.S. attorney overseeing Wall Street, who is going four levels over his head to speak directly to the chief of the SEC's enforcement division — not Aguirre's boss, but his boss's boss's boss's boss. Mack himself, meanwhile, was being represented by Gary Lynch, a former SEC director of enforcement.

Aguirre didn't stand a chance. A month after he complained to his supervisors that he was being blocked from interviewing Mack, he was summarily fired, without notice. The case against Mack was immediately dropped: all depositions canceled, no further subpoenas issued. "It all happened so fast, I needed a seat belt," recalls Aguirre, who had just received a stellar performance review from his bosses. The SEC eventually paid Aguirre a settlement of $755,000 for wrongful dismissal.

Rather than going after Mack, the SEC started looking for someone else to blame for tipping off Samberg. (It was, Aguirre quips, "O.J.'s search for the real killers.") It wasn't until a year later that the agency finally got around to interviewing Mack, who denied any wrongdoing. The four-hour deposition took place on August 1st, 2006 — just days after the five-year statute of limitations on insider trading had expired in the case.

------------------------

Three weeks later, Budde was shocked to see Fuld testifying before the House Government Oversight Committee and whining about how poor he was. "I got no severance, no golden parachute," Fuld moaned. When Rep. Henry Waxman, the committee's chairman, mentioned that he thought Fuld had earned more than $480 million, Fuld corrected him and said he believed it was only $310 million.

The true number, Budde calculated, was $529 million. He contacted a Senate investigator to talk about how Fuld had misled Congress, but he never got any response. Meanwhile, in a demonstration of the government's priorities, the Justice Department is proceeding full force with a prosecution of retired baseball player Roger Clemens for lying to Congress about getting a shot of steroids in his ass. "At least Roger didn't screw over the world," Budde says, shaking his head. 

------------------------

Criminal justice, as it pertains to the Goldmans and Morgan Stanleys of the world, is not adversarial combat, with cops and crooks duking it out in interrogation rooms and courthouses. Instead, it's a cocktail party between friends and colleagues who from month to month and year to year are constantly switching sides and trading hats. At the Hilton conference, regulators and banker-lawyers rubbed elbows during a series of speeches and panel discussions, away from the rabble. "They were chummier in that environment," says Aguirre, who plunked down $2,200 to attend the conference.

Aguirre saw a lot of familiar faces at the conference, for a simple reason: Many of the SEC regulators he had worked with during his failed attempt to investigate John Mack had made a million-dollar pass through the Revolving Door, going to work for the very same firms they used to police. Aguirre didn't see Paul Berger, an associate director of enforcement who had rebuffed his attempts to interview Mack — maybe because Berger was tied up at his lucrative new job at Debevoise & Plimpton, the same law firm that Morgan Stanley employed to intervene in the Mack case. But he did see Mary Jo White, the former U.S. attorney, who was still at Debevoise & Plimpton. He also saw Linda Thomsen, the former SEC director of enforcement who had been so helpful to White. Thomsen had gone on to represent Wall Street as a partner at the prestigious firm of Davis Polk & Wardwell.

Two of the government's top cops were there as well: Preet Bharara, the U.S. attorney for the Southern District of New York, and Robert Khuzami, the SEC's current director of enforcement. Bharara had been recommended for his post by Chuck Schumer, Wall Street's favorite senator. And both he and Khuzami had served with Mary Jo White at the U.S. attorney's office, before Mary Jo went on to become a partner at Debevoise. What's more, when Khuzami had served as general counsel for Deutsche Bank, he had been hired by none other than Dick Walker, who had been enforcement director at the SEC when it slow-rolled the pivotal fraud case against Rite Aid.

"It wasn't just one rotation of the revolving door," says Aguirre. "It just kept spinning. Every single person had rotated in and out of government and private service." 

-------------------------

As for President Obama, what is there to be said? Goldman Sachs was his number-one private campaign contributor. He put a Citigroup executive in charge of his economic transition team, and he just named an executive of JP Morgan Chase, the proud owner of $7.7 million in Chase stock, his new chief of staff. "The betrayal that this represents by Obama to everybody is just — we're not ready to believe it," says Budde, a classmate of the president from their Columbia days. "He's really fucking us over like that? Really? That's really a JP Morgan guy, really?"

-----------------------

The mental stumbling block, for most Americans, is that financial crimes don't feel real; you don't see the culprits waving guns in liquor stores or dragging coeds into bushes. But these frauds are worse than common robberies. They're crimes of intellectual choice, made by people who are already rich and who have every conceivable social advantage, acting on a simple, cynical calculation: Let's steal whatever we can, then dare the victims to find the juice to reclaim their money through a captive bureaucracy. They're attacking the very definition of property — which, after all, depends in part on a legal system that defends everyone's claims of ownership equally. When that definition becomes tenuous or conditional — when the state simply gives up on the notion of justice — this whole American Dream thing recedes even further from reality.

http://www.rollingstone.com/politics/news/why-isnt-wall-street-in-jail-20110216?print=true

Tour of Cali - L'Etape 5

Confirmed: Alberto Contador cleared of Clenbuterol charges

Second Edition Cycling News, Tuesday, February 15, 2011

Spanish Tour de France champion free to race after charges are dropped

Alberto Contador is set to line up in the Tour of the Algarve starting on Wednesday after the competitions committee of the Spanish cycling federation decided to overturn its decision to ban him for a year following his positive test for Clenbuterol.  The Spaniard confirmed early reports, saying he had been "officially cleared by the Royal Spanish Cycling Federation and has been authorized to return to competition immediately."

According to his press release, "If everything goes well, he will be at the start of Agarve tomorrow. 

According to a number of Spanish newspapers, the competitions committee decided to rethink its verdict on Friday last week based on article 296 of the UCI’s regulations, which says that an athlete can be exonerated if they prove that they had inadvertently ingested a banned product through no fault or negligence on their part.

Although Contador and his legal team were unable to produce a sample of the meat that they have claimed was tainted with the clenbuterol that resulted in the positive test, the fact that it could not be shown conclusively that Contador had deliberately taken the product worked in his favour.

"First of all, I'm relieved and obviously happy about this ruling. It has been some very stressful months for me, but throughout the case, I have been totally available for all inquiries in relation to my case, and all the way through, I have spoken in accordance with the truth," said Contador. "To both the team and the authorities I have explained that I never cheated or deliberately took a banned substance."

El País is among the newspapers reporting that the four lawyers on the committee may also have been swayed by a tweet posted last Thursday night by Spanish prime minister José Luis Rodríguez Zapatero that said “there are no legal grounds for sanctioning Contador”. The newspaper adds that the committee spent the weekend mulling over their decision and were expecting to announce it officially on Monday, but were delayed by the complexity of the argument explaining their decision to absolve Contador.

It is also believed that the committee have relied on the World Anti-Doping Agency's decision not to appeal against the dismissal of similar charges against German table tennis player Dimitri Ovtcharov, who tested positive for Clenbuterol after a tournament in China.

L'Equipe reported on Tuesday that there was a procedural flaw early in the case, which violated Spanish law. A letter sent from the UCI to the Spanish federation on November 8 was not also sent to Contador and his legal representatives, the French newspaper said. This was said to be in violation of the Spanish constitution and the “rights of the accused to be informed”.

Contador now looks set to defend the Tour of the Algarve title and has also been listed on Saxo Bank’s starters for the Tour of Murcia. His first major target of the season is likely to be the Giro d’Italia title.

Contador's Saxo Bank team reacted positively to the news.  "This decision is indeed proof that the relevant authorities do not find grounds for believing that Alberto Contador has committed any intentional doping offence, which is absolutely vital for us. So I'm obviously happy on behalf of Alberto and the team. We take note of this decision and fully respect it, but we're also sensitive to the fact, that the parties of this case still have the right to appeal this decision," said Saxo Bank team owner Bjarne Riis. He added that the team would continue to do its utmost in the fight against doping.

Follow Cyclingnews on Twitter for the very latest coverage of events taking place in the cycling world - twitter.com/cyclingnewsfeed