Mish's Global Economic Trend Analysis

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Ron Paul Ruins a Great Economic Rant, Being Seriously Wrong on One Key Point Posted: 04 Oct 2013 12:31 PM PDT It really pains me to see Ron Paul (or anyone else) make a masterful statement on an issue, then blow it at the end with a nonsensical reference to something that is not going to happen. To understand what I mean, please consider Ron Paul's article A Grand Bargain for Liberty? As heartened as we should be by the fight against Obamacare, we should be equally disheartened by the fact that so few in DC are talking about making real cuts in federal spending. Even fewer are talking about reductions in the most logical place to reduce spending: the military-industrial complex.  The US military budget constitutes almost 50 percent of the total worldwide military spending.  Yet to listen to some in Congress, one would think that America was one canceled multi-million dollar helicopter contract away from being left totally defenseless. What makes this military spending impossible to justify is that is does not benefit the American people. Instead, by fomenting resentment and hatred among the world population, our costly interventionist foreign policy makes our people less safe. Thus, reducing spending on militarism would not only help balance the budget, but would enhance our security. Yet both the House and the Senate continuing resolutions not only fail to reduce military spending, they actually authorize $20 billion more in military spending than authorized by the "sequestration" created by the 2011 Budget Control Act.  Most of the supposedly "draconian" sequestration cuts are not even cuts; instead, they are "reductions in the planed rate of spending." This is where Congress increases spending but by less than originally planned—and yet they claim to cut spending. Under sequestration, military spending increases by 18 percent instead of by 20 percent over the next ten years. Yet some so-called conservatives are so opposed to these phony cuts in military spending that they would support increased taxes and increased welfare "military" spending. This "grand bargain" would benefit the DC political class and the special interests, but it would be a disaster for the American people. Instead of grand bargains of increased spending and taxes, those of us who support limited government and free markets should form a coalition with antiwar liberals to reduce spending on both the military industrial complex and domestic welfare programs. Instead of raising taxes on "the rich" we should also work to reduce all corporate subsidies. This "grand bargain" would truly be a win-win for the American people. Sadly, even if a congressional coalition to cut both warfare and welfare spending was formed, it would be unlikely to carry the day as long as the Federal Reserve is willing to enable Congress's debt addiction by monetizing the debt. But this cannot last forever. At some point the Fed's policies will result in hyper-inflation and an economic crisis that will force Congress to reduce spending. Hopefully, the growing number of Americans who are awaking to the dangers of our current path can convince Congress to reduce overseas militarism and begin an orderly drawdown of the welfare state before this crisis occurs. Hyperinflation Nonsense I agree with every bit of that, save one key phrase "At some point the Fed's policies will result in hyper-inflation". I certainly do not agree with Fed policy, as the Fed has created asset bubble after asset bubble (with help from misguided policies in Congress and fractional reserve lending). But with total credit market debt approaching $60 trillion, it is absurd to believe $85 billion a month in QE will cause hyperinflation. Total Credit Market Debt Owed Worthless US Dollar? The above chart is surely a sign of inflation, but it's hardly the kind of stuff that will make the dollar become worthless. The Fed's policies are not going to cause hyperinflation. The idea is silly. Congress could cause hyperinflation (in theory). Yet, Congress is highly unlikely in practice. And that's just from the US dollar perspective alone. Money supply growth is running rampant in China and numerous other places as well. Credit is exploding in China. Japan is on a mad monetary experiment the likes of which the wold has never seen. Is the US dollar really going to become worthless against the Yen, Yuan, Euro, and the British Pound? The answer is no (but hyperinflation requires a yes answer, by definition). Yet, month in and month out readers send me articles predicting hyperinflation "soon". Please stop. Every reference has been and remains downright idiotic. Parade of Hyperinflationists, All Wrong A parade of people predicted hyperinflation by 2008, 2010, 2013, 2014. I will be polite and leave the names off. I will readily admit that just because something has no happened yet, does not mean it can't. But the odds are about as close to zero as you can get within a 5 year time frame (and probably decades). On the other hand, all the people who said deflation would not happen or that hyperinflation would happen first were dead wrong: Total credit declined, consumer credit declined, mortgage credit declined, housing prices and asset prices were smashed, and even the CPI declined. CPI Deflation Happened Three Ways If your view of inflation and deflation are credit-based, the US experienced deflation.  If your view of inflation and deflation are price-based, the US experienced deflation.  If your view of inflation and deflation are based on the purchasing power of money, the US experienced deflation. The only conceivable way that one could say the US did not experience deflation during the great financial crisis is by money supply alone, ignoring credit. Given credit dwarfs money supply, that is a foolish leg to stand on. Where to From Here? Given the renewed advance in credit, rising asset prices, and rising home prices, it's crystal clear the US is back in a period of inflation. We can debate by how much. I suggest more than noted in the CPI as the CPI ignores home prices. But, is it unimaginable that credit will turn down again? I think not. And my call (based on credit) was the US was likely to go in and out of deflation for a number of years. Some may disagree with my in-and-out of deflation view, but there is absolutely zero case for hyperinflation. And when Ron Paul and others says such things, they looks silly. More on Hyperinflation (and Why It's Not Coming) Reader Questions On Hyperinflation; Would Printing $50 Trillion Tomorrow Do Anything? Hyperinflation Nonsense in Multiple Places "Great Hyperinflationary Great Depression"; A Very Easy Rebuttal Debating the Flat Earth Society about Hyperinflation Summation Ron Paul made a very nice point on Congressional spending in general, and military spending in particular, then ruined it with a one-liner that is sure to invoke cat-calls from Keynesian and Monetarist clowns who will then ignore asset bubbles and numerous other economic distortions caused by the misguided stimulus they seek. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Never Has Arrived; The Last Mile Posted: 04 Oct 2013 09:19 AM PDT Train drivers working for Australian miner Rio Tinto make as much as A$240K (US$224K) per year to haul ore. According to BLS data, that is as much as surgeons in the US, and more than the $151K average of New York State lawyers. Does that pay schedule make any sense? I do not think so, nor does Rio Tinto. When costs are ridiculous, companies seek ways to lower them. Thus, the following Bloomberg headline should not be surprising: Rio Replacing Train Drivers Paid Like U.S. Surgeons The 400-plus workers in the remote Pilbara region who earn about A$240,000 ($224,000) a year probably are the highest-paid train drivers in the world, according to U.K.-based transport historian Christian Wolmar. Australia's decade-long mining boom has sucked up skilled workers, raising wages for engineers to drivers at Rio, the second-largest exporter of the mineral, and its closest competitors, Vale SA (VALE) and BHP Billiton Ltd. Rio, which last year approved spending of $7.2 billion to expand the iron ore operations, is aiming to have the world's first, fully automated, long-distance and heavy-haul rail system operating in 2015. Its automated rail will have 1,500 kilometers (930 miles) of track, 10,000 wagons and individual train sets 2.3 kilometers long, according to Credit Suisse Group AG. The company is spending $518 million on the program that was announced last year. "You need to have quite a significant amount of scale" in fleet and volumes to benefit from automation technology, said Evy Hambro, manager of BlackRock Inc. (BLK)'s $7.7 billion World Mining Fund. Laser Detectors Rio's rail, port and truck movements are all watched over from a control center in the Western Australia state capital of Perth, 1,500 kilometers to the southeast, that has about 250 controllers working three shifts a day. The rail automation is part of the company's push to use technology to improve productivity and safety and wring out extra capacity from existing assets, Simon Prebble, general manager for Rio's automated trains project, said in an interview yesterday. The trains have on-board systems that check speed, signals and operate the brake, Prebble said. Rio has installed a new radio-based network to communicate with the trains as well as close-circuit television at every public level crossing, he said. "We also have an obstruction detection system which uses laser scanners to continually look for any obstructions." Never Has Arrived Why stop with train drivers? So, what about trucks? For those who said truck drivers would never be replaced by robots, it appears "never has arrived" because Rio is also going to automate trucking. From Bloomberg .... Rio also plans to automate about 40 percent of its Pilbara truck fleet by 2016. The goal is to reduce costs to $15.60 a ton by 2020, from $23.10 a ton in the first half of this year, Paul Young, a Sydney-based analyst with Deutsche Bank said in a report after touring operations last month, citing Rio data. Automation is set to help shave $1.90 a ton off costs and boost output by 20 million tons, or 5 percent, he said. Technology Progress Technology progress starts at high end specialties then permeates everywhere. Think of all the features in cars first found in Mercedes or BMW, now found everywhere. And so it goes with automation. Truck driving will be automated for mines, and in a few years or sooner, it will spread. Message to 5.7 Million Truck Drivers "No Drivers Needed" On August 15, 2013, I wrote Message to 5.7 Million Truck Drivers "No Drivers Needed" Your Job is About to Vanish; Time Marches On, Fed Resistance is Futile I made the claim "Over the next two decades, machines will drive themselves and 5.7 million truck driving jobs will vanish." Many readers said that I was wrong, citing insurance reasons,  city traffic, tight ports, etc. Truck drivers in particular said it would not happen, some citing "last mile" problems. Check out a few comments from ATA: Self-Driving Trucks Are "Close To Inevitable" Poli: C'mon guys even if they make it work, comes up some crazy guy with few thousand dollars buy one Russian 150 miles radius GPS/communication jammer and you'll see how many deaths in one minute!! Hotrod: Are you kidding me? With all the glitches and failure of computers you would have more accidents than ever. Andrew: And in the beginning, self piloted trucks will all slam into a low clearance bridge in Chicago because the programmers forgot to take into account truck routes in various cities. Angelo: This is a fantasy and nothing more until we arrive at the "George Jetson" generation. The infrastructure doesn't exist as it took 200 years to build the existing model which is certainly not designed for it, nor can it be retrofitted for such an endeavor. Kay: I doubt it will happen in our lifetime. There are too many critical components to driving a truck on the road. Decisions have to be made by humans, not machines. If they can ever create a robot with a mind as complex and brilliant as humans and with the dexterity of arms and legs then they might be able to have automated-driving trucks. We aren't there yet and we won't be for another 30-50 years, IMO. Alchemist: Who will have money to buy the products these automated trucks are hauling? I'd like to know how they expect to sell anything to the vast nation of jobless, impoverished obsolete humans? One rational person offered this pertinent comment: Jon: Of course trucking companies are excited about this. So should everyone else. Passenger cars will get the same treatment, just a little slower. Yes us truck drivers will be out of a career. Welcome to the world of technological advancement. It happens to all professions eventually. Get used to the idea. The Last Mile Truck drivers talk about how they can never be replaced because of city traffic, tight spaces, etc., etc. It's the "last mile" problem. One possible solution is automated trucking stations just outside major urban areas, where human drivers take over the "last mile". Recall the "last mile" problem with high speed internet? It's been solved in numerous ways: DSL, Fiber, Cable, Satellite, Wi-Fi. And so it will be with robot-operated trucking. Automated trucking will not be here tomorrow, in the US, but it's coming far sooner than anyone thinks. Fed's Battle Against Technology The Fed is fighting the deflationary trend of technology. It's a battle it cannot win. Real wages have not and will not keep up as asset bubbles in stocks and equities get bigger and bigger (and income inequality soars). The problem is not low wages. The problem is high prices, fueled by the Fed and fractional reserve lending. The middle class has be ravaged by Fed policies. Finally, please note that higher minimum wage laws do nothing but encourage use of more robots. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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