Professor Elam

Ben’s Dilemma

For the first time
since the CPI link was enacted in 1975, Social Security recipients will not
receive a cost of living COLA increase, nor is one expected the following year.

Wilbur Mills then eyeing a Presidential run, linked  Social Security payments  to increases in the Consumer Price
Index. In that 1975 era of inflation, no one imagined that prices would ever go
down. While Wilbur’s Presidential plans splashed down in a fountain with Fannie
Fox, the prospect of no COLA is s shock to everyone, Ben Bernake FED Chief in
particular.

Inflation occurs when too many dollars chase too few goods.
The Paul Volker cure is high interest rates which shuts off borrowing and then
spending. Deflation occurs when dollars are not chasing any goods. In his PhD
thesis, Bernake mused that the FED in the 1930s simply did not print enough
dollars. Flood the economy with money and it will be spent. And so he has. The
FED has spent so many dollars that both Barney Frank and Ron Paul are demanding
an accounting of where they went. The FED has so cheapened the currency that
the buck has fallen to a fourteen month low. Yet deflation persists. Annual car
sales have fallen from three years back 16 million to 8.5 million. While
pundits are certain this will lead to hyper inflation, too many dollars,
deflation persists. Commercial property sits vacant and foreclosures loom.

The White House has brushed the COLA rule aside, suggesting
SS recipients need $250 each, another $13 Billion in spending.   Money is nearly free to banks.
Treasury Bill rates are but 13 hundredths of a percent above zero. So lend lend
lend, with the hope that people will spend spend spend. Yet credit card limits
are being reigned as the public finally begins to save, those that are working
anyway.

This has our perennial ‘allies and trading partners’ vowing
to kick out the buck. The Mid East is now creating its own  currency.  Foreign governments are buying shorter maturities of our
debt. China, Russia, and India call for a new World Currency, not tied to a
fluctuating dollar. Our cheaper dollar makes Russian oil, Chinese cars, and
Indian software more expensive.  
And it has done little to spur our economy.

Neiman Marcus is actually distributing ‘free’ $50 gift
coupons in the store, they are desperate for shoppers.  The Dollar Index is down from 89 to 75,
stocks up hundreds of S and P points. And as predicted, oil rose from $35 to
the $70 range.

I suggested  a
few weeks back that oil might poke above $75 as stocks hit a new exuberant
high. Indeed West Texas Intermediate is $77 and change this morning. It all
hinges on the dollar.  Seasonally
stocks sell off in October and November. Stocks are making new highs on lower
volume. Thursday saw more declines than advances yet recorded a new high in the
indices. And so the lower Dollar drags   gold, oil, and stocks higher still.  A rising tide lifts all boats. A falling
dollar has done the same for the boats of stocks, metals, and oil.  So it is not the booming economy of
1982-2000 but a fire sale on our currency that gives the illusion of the rising
prices. 

Hmm,  Thursday
stocks were down, till the last half hour when some parties started buying in
earnest. Prices rose, the last half hour masking the selling of the day when
declines outnumbered advances. 
Perhaps  this is change we
can believe in.

Positive social mood drives the desire to put equipment to
work in search of more oil production. It used to be that the price of oil
drove the mood. It is not so simple now. The economy has slowed; Americans are
literally driving fewer miles. The demand for electricity is down. And so, a
weak dollar raises the oil price but not the desire to engage a pulling unit or
hot oiler to the lease. Until the Dollar Index reverses course rising above 80,
the oil price looks higher. This will finally spur more service work, but it
will be the siren song of price rather than consumer demand for product. 

When everyone expects the same thing to happen, everyone is usually
wrong.  The Dollar is down for
fourteen months. Everyone is certain the buck will only fall further,  for the moment that is the case.  The Dow is back to the future, 10,000 was
a  1999 level. Commit cautiously
and carefully