2011 April 06 | timiacono.com

Anyone wondering whether financial markets in the year 2011 are going to “rhyme” with either 2010 (when inflation was quiet and a mid-year market downturn was resuscitated by the Fed) or 2008 (when soaring energy prices played a major role in the tumult that followed) might want to review what oil prices looked like at this juncture three years ago versus today, courtesy of these charts cobbled together from INO.com.

There is a stunning resemblance in the eight months worth of price data for the May WTI crude oil contract for these two years. The scales are virtually the same and the only real difference is in the price history prior to August of the year before as reflected in the 200 day moving average. This might be something worth keeping an eye on…

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The broad disagreement between Keynesian and Austrian economists on the subject of “liquidity traps” is discussed in this item over at The Freeman blog. It’s kind of an important question as it is fundamental to where the global economy finds itself today and whether the disease and the cure (i.e., excessive debt) can really be the same.

Under the Keynesian paradigm, if monetary authorities cannot stimulate private spending by forcing down interest rates, then the only other avenue is for the government to borrow and create new money, and spend on its own projects. If the first option does not work, the second, by definition, must.

(Murray) Rothbard (in The Great Depression) continued that the very things Keynesians claim will worsen an economic downturn – including falling wages and prices and liquidation of capital – actually are necessary to speed up the readjustment. The Austrian-Keynesian divide is fundamental on this point; Austrians not only reject the liquidity-trap paradigm, but also hold that the problem is boom-induced malinvested capital rather than idle capital.

The distinction is important because Austrians say the economy cannot recover until the malinvested capital is transferred to other uses, liquidated, or abandoned altogether. Keynesians, on the other hand, claim that if government can spend enough money, the same capital that Austrians say is malinvested will be returned to full employment.

I suppose that if you were trained as a Keynesian economist – having invested years of your life academically and then finding yourself surrounded by the same sort of thinking professionally – it’s the path of least resistance to just dismiss the Austrian viewpoint about malinvestment out of hand. But, for anyone who doesn’t have that bias already instilled, it’s hard to argue against the Austrian viewpoint since taking a contrary position would imply that what we’ve seen over the last decade was not malinvestment.

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The Future Course of Federal Spending

Not having looked closely at either of the proposed budgets for the decade ahead, no keen insights will be offered as to the merits of either President Obama’s plan or the one offered yesterday by Rep. Paul Ryan, but, as shown below from this story over at the Cato@Liberty blog, either way, we’re looking at government spending of $5 or $6 trillion before long.

[Note: There's also this neat interactive graphic at the Washington Post.]

I’m not sure if it says more about the U.S. dollar or about U.S. government spending, but it wasn’t that long ago when federal spending in the $2.5 trillion range was being decried as reckless and irresponsible, setting the nation on a course certain to end in disaster.

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Wednesday Morning Links

MUST READS
Gold at New High; Bulls Eye $1,500 – Kitco
Congress struggles to find budget deal – Reuters
States Fear Local Effects if Shutdown Cuts Off Cash – NY Times
Portugal pays nearly 6% to borrow 12 months – MarketWatch
Fed Officials Divided Over Whether to Remove Stimulus – Bloomberg
Republicans embrace Ryan’s government budget plan for 2012 – Washington Post
GOPocalypse Now: How The GOP Is Contemplating Mass Suicide – Forbes
Fed’s Biggest Foreign-Bank Bailout Saved U.S. Muni Bonds – Bloomberg
Could 2011 Be Worse Than 2008? Don’t Rule It Out – CNBC
Crony capitalism strikes again – Stockman, MarketWatch
It’s Time to Rethink Everything – Mises
The Inflation Solution? – WSJ

MARKETS/INVESTING
Oil hovers above $108 amid mixed US supply report – AP
Gold hits fresh record-highs, silver at 31-yr peak – Reuters
‘Secular Bear’ Market Has Years Left to Go: Advisor – CNBC
Stock mutual funds have their best first quarter since 2006 – USA Today
Currency status to further boost gold as it breaks new records – Mineweb
Mega-Deficits and Your Investment Portfolio – HuffPost
Euro strikes 15-month high against dollar – AP
The truth about hedge funds – MarketWatch

ECONOMY/WORLD/HOUSING/BANKING
Rising oil prices beginning to hurt US economy – AP
15 Facts About Income Inequality That Everyone Should Know – HuffPost
China to keep buying gold to fight inflation – Commodity Online
UK austerity measures to check growth – Telegraph
China housing-price controls weak: CICC – MarketWatch
Principles for Reforming the Housing Finance Market – AEI
Prices are low! Mortgages cheap! But you can’t get one – CNN/Money
Kocherlakota: Housing’s Reliance on Government Isn’t Sound Strategy – WSJ
Bernanke Faces Possible Fed Split on Maintaining Stimulus – Bloomberg
What exactly does the Federal Reserve do, anyway? – USA Today
The Cure (Low Interest Rates) Is the Disease – Mises
Greenspan Panders for More Money – aucontrarian

 
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