Ben Franklin Report: Reality Sets In

For those uninterested observers, the price of a barrel of crude briefly touched a record of $105.97, which is above the record set during the 1979 oil crisis, adjusted for inflation. As for monetary data, several growth engines are looking at double digit money supply growth, with the corresponding increase in inflation, namely, Saudi Arabia, South Korea, and China. In the United States, figures from the end of February also pointed to growth in inflation in March and beyond.

For less abstract data, one can look at the inflation figures from the European Union. Resisting calls to lower rates to help encourage consumer spending, the ECB and Bank of England have, for the most part, resisted cutting rates for fear of even greater inflation, deciding again today that no rate cut was necessary. Once again, I ask, does Ben Bernanke have doubts late at night about the course of monetary policy here in the U.S.? This move, on the part of the Europeans, will help serve to mitigate some of the effects of the financial crisis, by drawing capital to accounts where said capital can earn more interest.

American employment figures superficially appear stable, with whatever signs of growth that one might be able to pull from them. Better data will be available next week to see if the economy can keep itself sputtering along based on job creation, but this seems like a losing proposition, to say the least, especially with the rising tide of foreclosures.

On the retail side of things, shoppers are definitely out looking for bargains, reflected by strong sales at Wal-Mart and weaker sales at the higher priced Gap and J.C. Penney. In Europe, big box retailer Carrefour is also reporting lower earnings, after having its profit margins mostly wiped out by logistical costs during the second half of last year. While the company expects to see return to strong profitability in the near term, their plan of lowering logistical costs may not achieve fruition with the price of oil not likely to fall in the near to medium term.

In the stock markets, the credit crunch is beginning to be seen in failed margin calls, and perhaps the beginning of a margin spiral. Thornburg Mortgage Co. and the Carlyle Capital Corp. both reported failed margin calls, sending both scrambling for cash. Which, as the spiral metaphor implies, will send stock prices further downward, and other companies scrambling to find enough cash to cover accelerated margin calls from banks.

The bet that companies are wagering their financial futures on, namely that the US Treasury will ensure that agency mortgage securities, such as those issued by Fannie Mae and Freddie Mac, are going to go sour, and have been called "absolutely not true" by a Treasury spokeswoman. The markets are reacting, but in a more direct way, the spread between these securities and U.S. Treasuries is growing, which is a sure sign that investors are having second thoughts about the long-term viability of the GSE twins.

Troubled bond insurer Ambac has announced that it is expected to raise $1.5 billion in capital to keep its business operations going and avoid a rate cut by Moody's. Interestingly, banking institutions do not appear interested in offering Ambac any capital, which may be a sign that the worst is yet to come in municipal bonds. Unfortunately for Ambac, the company is going to require more than this to keep afloat.

As always, theories as to how and why abound. Some, such as Rich Karlgaarld, favor a supply side solution, with a lower tax burden on business. As he argues,

"What's the effect of supply-side tax cuts? As Steve Forbes likes to say, when you reduce the tax burden on a thing, you tend to get more of that thing. Reduce taxes on production and you get more production. More production means that more goods and services must compete for your dollars. That's how prices go down, not up. This is not hard to figure out! It is simple supply and demand. If you want prices to go down, increase supply. Incentivize the suppliers."

Unfortunately, this is meaningless if those who provide demand aren't capable of demanding anything out of the economy. With the dollar losing evermore value, the individual consumer is going to be hard-pressed to find any margin for consumption amidst higher costs for staples, such as energy and food. Oh, and not believing in the evidence of something does not mean that there is no evidence of that something.

On the other side, the Mogambo Guru finds the best way to read the Total Fed Credit, completely drunk. Grumbling about fiat money supply, the fractional reserve system, and the direction of monetary policy in the U.S., the Guru decries those who say Gold is the panacea for the ills of the dollar. Gold, by the by, is already above its previous record high and is pushing towards $1000 a troy ounce.