The MasterBlog: Rick Santelli On The Fed's Upcoming "Nixonian" Price Controls
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Sunday, October 10, 2010

Rick Santelli On The Fed's Upcoming "Nixonian" Price Controls


Rick Santelli was on King World News today, discussing the distinction between deflation and deleveraging, or what some have dubbed the phenomenon of surging prices in things that one can buy without leverage (Friday's limit up open in various commodities being one example), and plunging prices in everything that requires debt (i.e., one's house).

And while the Fed can game the CPI as much as it wants, once middle America see the cost of basic foodstuffs double (and it will once producers hit negative profit margins and are forced to pass input cost inflation to end consumers) they will realize just how serious this problem will be. Of course, the only way to offset this localized inflation is by returning to the time when America could use its houses as piggybanks in the form of taking out equity lines of credit. The problem with that, of course, is that the Fed will be forced to increase home prices at all costs, even as speculators take basic commodity prices up in anticipation of the coming hyperinflation. Which means that the Fed will be behind the ball, and will be forced to increasingly devalue the dollar as it is now obvious that no matter how cheap credit becomes, and how pervasive free money is, the last thing to go up are home prices which make up the bulk of US consumer "wealth." As such, today's collapse in the ceasefire in monetary talk is no surprise: every central bank is fully aware that with the monetary component to intervention, via cheap credit, now priced in, but priced in in terms of equities and commodities, the only way to create equity value in housing (of which per some estimates, 25% of all homes (and rapidly rising) are underwater to the underlying mortgage) is to broadly debase the currency. This is now a virtual certainty, and the higher gold (and soybeans, and corn, and what) goes, the faster the Fed will need to destroy the dollar, making the vicious loop of hyperinflation spin faster and faster...

We dare the deflationists out there to look at the charts of coffee, barley, oranges, pork, cotton, rubber, iron ore, and tell us where is this much-hyped deflation...The right answer, of course, lies in one simple word - and as Santelli confirms what every Zero Hedge readers knows, it is "monetization."

All that is well-known. What is more interesting is Rick's discussion of what will be the Fed's next step after another failed QE round: price target levels. This Santelli qualifies as a "Nixonian" approach of price, or specifically, yield controls, such as i.e., 2% on the 10 Year, and the Fed will keep bidding up securities until one after another target is achieved. Of course, for the abovementioned home equity values to reappear, the marginal cost of debt has to be as close to zero as possible, so that readers can refi into a new debt piece, which would make home prices essentially explode as consumer become price agnostic vis-a-vis taking one one dollar or one trillion in new loans: if the rate is zero, there is no cost. And this is what will ultimately happen, and be preceded by outright monetization and the collapse of the reserve currency system, and of monetarism as a result. That is, pure and simple, the end game.

Naturally, all of Rick's logical objections to the Fed's launch on this road to dollar debasement will be ignored by the relevant people.

Another amusing observation is the question by Jim Rickards addresed to Rick, and predicted by a Zero Hedge analysis on what is a statistically impossible perpetual upward revision in initial claims, as to whether "someone is finessing the data for the labor statistics." We agree and disagree with Rick that these adjustment are like noise in the grand scheme of things: agree in that indeed whether it is 450k or 455k is largely immaterial, when in both cases the economy is not generating jobs, yet when it comes to headline scanning robots, the difference can mean a world of difference to the marginal trader, who is being games by both the HFT system and the BLS bias.

A last observation, on what will likely be the source of the next major rant by Santelli in the upcoming week, now that FX wars are the topic du jour, is Santelli's very correct highlighting of Geithner's hypocrisy in damning FX intervention by others, when the Fed is the biggest FX debaser courtesy of Bernanke's printing press, whose only purposes these days it appears is to end the dollar's status as a reserve currency.

For all this and more, including Santelli's take on the upcoming mid-term elections, the link to listen to the always entertaining and informative Rick Santelli can be found here.

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