ARC's 1st Law: As a "progressive" online discussion grows longer, the probability of a nefarious reference to Karl Rove approaches one

Tuesday, March 18, 2008

Oh Joy, Another Rate Cut

Delta Airlines is to offer buyouts to 1/2 its workforce, 30,000 people. Reason? Fuel costs.

Any direct connection to this most recent rate cut? Not really. But then again, the two things are not totally unrelated.

Why are fuel costs soaring? As has been noted before, the primary driver for the recent runup in oil costs is the collapse of the dollar. The primary reason for the dollar's collapse is loss of faith in our financial insitutions by foreign investors. The banks are illiquid for a varierty reasons, and that is the rationale for this huge infusion of money. More money, less value and that is not rocket science. This only increases lack of confidence in the dollar. We are in a spiral.

Does anyone remember Paul Volker? He was Carter's Chairman of the Fed that took interest rates through the roof to break the spiral we were in during the late 1970s. After Ford's silly WIN (Whip Inflation Now) buttons, Volker took the hard but necessary steps to bring the dollar under control. I well remember my first mortgage at some 10% with 20% down. Carter's approach worked and set the stage for the Reagan economic miracle that has continued until the last year or two.

Carter paid dearly for what he did. Folks were not crazy about the high interest rates, though I certainly enjoyed the return on my bonds. But he got the job done.

Now I know some folks are really going to hit the ceiling when they read what I just wrote. Carter did something right? "Not possible," they will say. But I think he and Volker did what was necessary at the time and that we are doing exactly the wrong thing now.

As a wise man once said, the first step to getting out of a hole is to stop digging.

We are digging the hole deeper, and pretty soon a lot of folks at Delta are going to be looking for new jobs.


Your Co-Conspirator,
ARC: MontereyJohn

Comments (6)
Brian said...

As has been noted before, the primary driver for the recent runup in oil costs is the collapse of the dollar.

That's just wrong, John. Last friday it was mentioned on CNBC that the dollar's lost value only accounts for about 20% of the price of oil. The other 80% is pure speculation.

The rate cut is needed in the short term. If the fed hadn't cut the rates, the dollar wouldn't have shot back up.

Carter's approach worked and set the stage for the Reagan economic miracle that has continued until the last year or two.

Oh please!... Nothing in Carter's entire 4 years in office "worked".

If you want to see more people default on their mortgages, then just raise those interest rates back to 10%...

Businesses won't be able to get capital to start up new projects. No hiring etc.

Delta is offering buyouts because they are one of the costliest airlines in the world. Not because of fuel costs. That's just the excuse management is using to get lean and mean.

Read beyond the headlines.

As I said, the dollar only cuonts for 20% of the rise in oil prices. There is just plain ol' speculation in the oil (and other commodity) markets.

Jason said...

"The primary reason for the dollar's collapse is loss of faith in our financial insitutions by foreign investors."

I don't want to pretend to be a forex expert, but I believe the dollar's decline isn't based primarily on sentiment. The yield on short-term dollar denominated treasuries is very low. Check out the yield curve: http://www.treas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml vs. the Euro area yield curve:
http://www.ecb.int/stats/money/yc/html/index.en.html

All other things equal, why hold cash in US treasuries yielding UNDER 1% vs. in Euros at nearly 4%.

Brian,

I don't know how well anyone could say the price increase is 20% this and 80% that. However, given that supplies are way ahead of average and demand has flatlined, you have to assume there's large amount of speculation.

Monterey John said...

Brian, I do not think I am wrong.

Oil is up about 30% in the last year.

From the Cato Institute I offer the following: The dollar has fallen sharply, about 30 percent, against the euro during this past year. At the moment, one has to pay about $1.24 for each euro, while three years ago one only had to pay about 80 cents for a euro, but at the beginning of 1999 the euro cost about $1.15. The dollar has also fallen in recent months against the British pound, the Japanese yen and many other currencies, but as much as it fell against the euro."

The 1/1 relationship is NOT likely a conincidence.

As for the rate cuts, Brian, I agree that more credit is needed to get things moving. But it is also obvious that the latest round of rate cuts are only digging the hole deeper for the dollar. I'm not sure which is worse.

As for Carter/Volker, Brian, it DID work. That is beyond dispute. The dollar stabilized and inflation came under control. I watched it happen ( a benefit of being really, really old).

"Read beyond the headlines?" Who do you think you are talking to, sonny? :) Show some respect for your elders.

Jason said...

"The 1/1 relationship is NOT likely a conincidence."

It is not a coincidence, it is wrong.

The 52-week high on the US Dollar index is 83.5 and it now sits at around 71.6. That's a bit over a 14% decline.

WTI Crude oil has gone from below 60 to over 105 -- An over 75% increase.

The exchange-weighted exchange index of the dollar is where it was in 1996. Crude oil was around $15/bbl at the time.

It's possible to piece together 1:1 relationships, but that does not prove causation. When you use old data and incorrect timeframes, it doesn't even show correlation.

I'm sorry if I sound like a jerk, but I've been hearing "the sky is falling" regarding some many areas from so many people. I've been skeptical about the Fed's actions, but I think people have been far too quick to criticize.

Brian said...

Thanks for your comments Jason:

I don't know how well anyone could say the price increase is 20% this and 80% that. However, given that supplies are way ahead of average and demand has flatlined, you have to assume there's large amount of speculation.

I think you pinned it in your later comment, basically oil (and other commodities) increase cannot be blamed on the falling dollar. I heard someone say the other day that the current demand for oil vs. supply would put the price of oil in the 70's not the 100+ we see today.

Obviously, the price is the price in the market, so I'm not disputing that the price of oil is somehow "invalid".

In my conspiratorial moods (after one too many martini's), I wonder if the fall in our dollar and the precipitous rise in commodity prices isn't a a symptom of a George Soros funded monetary attack on our country just in time for the election.

Then I remember that noone is that rich.....

Brian said...

"Read beyond the headlines?" Who do you think you are talking to, sonny? :) Show some respect for your elders.

Then you should know that Delta has some of the highest cost labor in the entire airline industry. And that fuel costs affect everybody. They aren't buying out people to save costs for gas. They are buying out people because their flight crews and maintenance crews and management COST them too much compared to the other guys.

The Dollar will be fine in the long term. Get out of the recession, out of the immediate credit crunch, past the election and it will stabilize.

Unless Barack gets in with a blank check, then all bets are off. It will be like those good old day's your dreaming about in the carter years.

Unless your entirely in bonds and your looking to take a trip overseas, then I can see why your pushing for a better dollar and higher (10%!!) interest rates. But then we're not talking about saving the economy.. We're talking about saving your financial position.