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Gonzalo Lira Proposes Open Debate With Mish On Topic Of XXflation
From Gonzalo Lira
Recently, there has been a raging discussion about the fate of the U.S. currency, and therefore the fate of the U.S. economy, during this Global Depression.
There are essentially three camps: The Deflationists, who think the US economy will putter along like Japan has done since 1990. The Inflationists, who think Ben Bernanke will succeed in slowly inflating away the massive Federal government debt. And the Hyperinflationists, who think that the US economy will spiral out of control and crash.
Mish Shedlock, a prominent financial blogger, is a Deflationist. Mr. Shedlock appeared the week before last on Michael Hampton's Global Edge Radio. Michael early in the show had made reference to a longish post I wrote, laying out the conditions whereby hyperinflation might appear in the United States, following a run on Treasury bonds.
At minute 20 or so, Shedlock—without any provocation by Michael—went off the rails against me and my arguments, claiming I was "inane" and that my arguments were "too stupid to respond to". It was quite a rant, actually.
I have since then expanded on my ideas that Treasury bonds are in a bubble, fleshing out my thesis that, if there is a run on Treasuries, the cash might flow to commodities, and thereby trigger hyperinflation. I have also appeared on Michael Hampton's podcast, to respond to Shedlock's arguments, though without personalizing this, or making it about Shedlock. Or in fact, even mentioning Mr. Shedlock.
Today, however, I woke up and read in Mr. Shedlock's blog how I am a "flat-earther" for claiming that hyperinflation might happen. He goes on for quite the long rant, about me and my ideas.
Mr. Shedlock, however, does two things in today's rant: Number one, he selectively quotes me, so as to make me sound like a fool. And two, he doesn't lay out my arguments concerning the weakness in the Treasury bond market, and how that might trigger a run up in commodity prices, and therefore hyperinflation. He clips my arguments so that I sound as if I were saying that one day—out of the blue—hyperinflation will come, the sky will fall, and the Mayan prophecy of the end of the world in 2012 will come to pass—save yourselves!
So of course, Mr. Shedlock has set up a straw man argument, which he promptly demolishes, and thereby makes himself look like a superhero—at my expense. He also quotes other people—whom I am not affiliated with and don't even know—and allows his readers to infer that I fully agree with them, and that I am part of some conspiracist, gold-bug cabal.
I have—privately—offered to debate Mr. Shedlock in a public forum. He hasn't responded. That is his prerogative.
However, now, he is publicly attacking me on his blog. He is distorting my views, so as to come off the better for it—while deliberately distorting my views so that I come off looking silly, naive and ignorant.
Compare this treatment I received from Mr. Shedlock, with the treatment I gave him and his ideas, when I wrote about them in this long piece on Treasury bonds: I was courteous towards Mr. Shedlock and his work, but I respectfully disagreed with him. I quoted him accurately, so as to fully show my readers his thinking, and thereby contrast it with my own. But at no point was I dismissive of his ideas—on the contrary, I took them seriously.
And nowhere was I dismissive or belittling of him personally, in any way, shape, or form.
Mr. Shedlock, however, seems to think that courtesy, honesty and accuracy are lesser values. And he seems to have no trouble beating up on me and my ideas—but only when I am not around to defend them or myself.
Therefore, I would like to take the opportunity here on Zero Hedge to formally, publicly ask Mr. Shedlock to debate these issues with me, on Michael Hampton's program, whenever it is convenient for Mr. Shedlock. Michael has already agreed to do such a show.
This is a public calling out of Mr. Shedlock: If he is so confident in his views, he shouldn't be afraid to have a debate.
If he fails to meet this challenge, then maybe he is not so confident in his ideas—maybe he realizes he is wrong. Maybe he is afraid that I am right.
Or—maybe—he's just a coward.
GL
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If you can't get along get it on!
A Zero Hedge Pay-Per-View event? Could start a trend...and then maybe we won't have to suffer through anymore of these annoying Cramer pop up ads.
As a second PPV event I'd like to suggest Amanda Dury and Erin Burnett mud wrestling.
Popcorn is ready....
I'll skip the first PPV, but I'll be there for the 2nd.
And forget the popcorn.
Vaseline is ready.... UNGH!
The whole debate seems to center on "If there is a run on treasuries, then that money has to go (transfer) somewhere, likely into commodities." The latter is plausible, the former I have no idea.
Who's interest would dumping treasuries be in? I'm not asking rhetorically, I really don't know.
Anyone who is unhappy with the exorbitant privilege of the US. Good thing we are universally loved around the world by all peoples...
Kevin Oleary(some hot shot Canadian) basically said its in nobody's interest.
http://www.youtube.com/watch?v=bxZbAhJrE7Q
I would say, because its in nobody's interest, its more likely to happen.
What we do know, is that it is a ponzi scheme. Nobody knows when it will end but everyone is making money on it.
I say that it is an inherently unstable equilibrium, and that if no one rocks the boat then they might keep it going for a little while longer until the leaky boat fills with water. But what is clear is that the first one to bolt will get the best price for his treasuries. It is like a bank run, the guy at the end of the line will get nothing.
There might be a mysterious Caribbean based "entity" who has an unlimited stash of FRNs to buy up the market. No way of predicting what a cornered rat will do to survive.
Does someone have to dump treasuries, or do they just need to buy less of them? If there is a perpetual supply of new treasuries, if they dont get bought up like hot cakes, wouldnt that cause the yield on the new issuance to rise?
Couldn't that be the trigger, causing an (initially) small move by a few from treasuries into commodities, which could snowball into a rush?
I think the idea is that the event that would cause this avalanche would be some big event like the Deepwater Horizon explosion, causing a spike in oil price, right before a major treasury auction.
Not if it was masked by the Fed buying treasuries, and attempting to keep rates down, at least in the short run. Because as the prior poster pithily said, QE creates disequilibrium, which ultimately cannot be sustained (although the US gov't has, if nothing else, shown than a highly unbalanced situation can be made to last far, far longer than some thought could happen).
How bout YouTube live stream?!
How about a walk off, a la Zoolander?
Or a multi-event thing, including one on one baseketball, improv comedy, a swimsuit competition, and scored Rorshach tests?
The Girls of XXflation starring Shyla Stylez
She can inflate or deflate me any day.
more like inflate then deflate me.
Come on Mish. DO IT! I bet you can put the bad blood behind you and just talk the issues.
do it, do it
http://www.youtube.com/watch?v=Ra70O9nps6E
What we have here is a simple failure of communication. On one hand, we have a fiery S. American who has seen & experienced the results of government failure. On the other, we have a dour, staid product of the American mid-West who cannot even begin to imagine such a scenario playing out in the USA.
Thus, their respective analyses are colored by their individual experiences. Mish is just a different, mellower version of Denninger: If only the cops would do their jobs, if only we restored some fiscal sanity, then we could all go back to resuming our previous high-consumption life styles.
Gonza, however, as seen & experienced what it really looks like when the SHTF. Even though I wasn't a participant, I too have seen what happens when everyone loses faith & stop believing in the magic of some larger, mythical force aka "The Government".
These two are never going to agree on any final outcome. They can get 99% of the way there & be in complete agreement on all the fundamentals, but ultimately Mish is going to resort to the default (pun intended) narrative that the USA will prevail, well, 'cause we're 'Mericans, gosh darn it!
No one is positioned to prevail. No one. I don't think even the so called elite, no matter how well laid the plans. I have faith in that. We inherited and woke up to fucked-ta-tude. The petri dish is at the outer limits of what can be sustained. I am stunned at how long we have kept the Potemkin reality up and running.
B9K9, I think you are probably right, however, I would still find the exchange between these two fascinating.
@ B9K9,
I read Mish most days. I read almost everything (lately) that Lira does as well.
I think it would be fantastic for the two of them to debate, there might be more common ground than would be thought, particularly re the longer term prospects for the USA.
++ for Gonzalo for inviting him to the debate.
- - for Mitch for calling names and other childlike rhetoric
LMAO
I'd like to see Mish Shedlocks 2008 performance for the sake of the debate. I heard he lost money but I would like to be proven wrong and/or corrected.
I'd like to see Mish Shedlocks 2008 performance for the sake of the debate. I heard he lost money but I would like to be proven wrong and/or corrected.
Absolute Return - positive every year since inception - no leverage and never net short
+6.6% after fees in 2008 - GIPS compliant
http://www.sitkapacific.com/files/Sitka_Pacific_Capital_Management_Absol...
Hedged Growth - a long short strategy was +13.4% in 2008 again without being net short or using leverage
Like most long-short strategy we had a rough 2009 - still beating the market handily over 5 year horizon
http://www.sitkapacific.com/files/Sitka_Pacific_Capital_Management_Hedge...
Roughly 65-70% of assets are in and have been in Absolute Return with no losing years since inception
Annualized rate of return since inception (5 years) +11.21%
Unlike most others, we publish our returns publically every quarter, good bad or indifferent
Those two strategies comprise about 95% of assets under management. It would be nice to see Fisher and Schiff post their returns. All of our Returns are GIPS compliant.
Mish
That appears to be a good piece of intentional disinformation from Sh**luck. He reports results of someone else's money running skill. Sure, he can sell you the deal. My bet is that he cannot execute one trade for the firm. He has never posted anywhere his own investment returns. His actual personal account probably makes Schiff appear to be a genius.
Interesting...Thanks.
SITKA pacific made 12 % in 2008 :)
He is a coward.
GL should write a piece about mish that destroys his arguments and makes him look like the tool that he is. Just beat the shit out of him.
Mish looks like a highschool janitor with a malt liquor problem
Mish and Gary Shilling are the only guys I read that called for deflation when everyone else was crying inflation. Mish is a prominent blogger because he has been spot on about many things and uses austrian school economics and logic AND reality (fed intervention) to make his points. It certainly isn't because he is a great orator or has a charismatic personality (no offense mish). The fact of the matter is, is that both of these guys have written enough in detail about the subject to know exactly where they both stand.
so what. the deflation was to be able to buy up valuble assets at a discount before the inflation destroyed most everyone elses capital/equity. now mish is telling everyone the price will keep going down sell sell sell.
This is a planned event not some " oh we didn't see it coming " thing.
I am an Austrain. Mish is not. You cannot be a deflationist and an Austrian.
Mish has been at odds with the best austrian minds in the world. Antal Feket, Marc Faber, Peter Schiff to name a few.
Spitzer,
I don't think you truly understand Austrian economics. Inflation / deflation are two sides of the same coin. I suggest you read this article from William Anderson, an adjunct scholar of the Mises Institute, "Unfortunately, there is going to be no recovery, at least for a long time. Deflation is the answer, but few are listening. Rothbard understood this fact intimately. Those who reject his wise counsel will live to regret it."
http://mises.org/daily/4602
BTW, Marc Faber thinks ""Before we have the final collapse that will be a deflationary collapse, we will have more and more money printing."
http://www.bi-me.com/main.php?c=3&cg=4&t=1&id=46194
So amongst Austrian economists there is disagreement. Faber thinks we'll have one more wave of inflation before the final collapse which will be deflationary while Professor Anderson & Mish believe we're going to experience deflation before we'll have another inflationary wave.
I know that inflation and deflation are 2 sides of the same coin. That is why I said before, Bernanke printed money and bailed out the US to temporarily stop hyperinflation.(a run on the dollar/treasuries)
Do you think Hank Paulson would have held congress up for a bailout if he thought there was going to be deflation ? Fuck no. He knew there would be hyperinflation by June of 09 if there was no bailout.
You are flat wrong about Faber. Faber says hardcore deflation leads to hardcore inflation, which is true.
Sorry Spitzer, I'm not flat wrong about Faber. That quote I posted was directly from Faber's mouth here's the link to it again:
http://www.bi-me.com/main.php?c=3&cg=4&t=1&id=46194
Regarding your comment "Bernanke printed money and bailed out the US to temporarily stop hyperinflation.(a run on the dollar/treasuries) Do you think Hank Paulson would have held congress up for a bailout if he thought there was going to be deflation ? Fuck no. He knew there would be hyperinflation by June of 09 if there was no bailout."
What the hell are you talking about?
There was not a run out of the dollar and treasuries, there was a run into the dollar and treasuries in late 2008 during the bailout. Hyperinflation occurs when a currency collapses, but the dollar was soaring and so were treasuries during this time. Here's some charts showing the rally in the dollar and treasuries:
http://www.commoditycharts.com/ccharts.asp?sym=ZNZ0&showcc=yes&domain=co...
http://www.commoditycharts.com/ccharts.asp?sym=DXZ0&showcc=yes&domain=co...
The reason Paulson demanded bailing out the banks was because we were in the midst of a deflationary collapse. And the last thing banks want is a deflationary collapse:
http://www.safehaven.com/article/14505/deflation-and-bankers-mix-like-oi...
For being a supposed Austrian you really don't have much understanding of Austrian economics. I suggest you spend some time here http://mises.org/ or better yet enroll in the Mises Institute: http://academy.mises.org/
How long do you think that treasury/dollar run would have lasted with no bailout ?
What would have treasuries been worth if they really let everything collapse ?. GE, GM, Goldman Sachs, Citi, everything, you name it.
Without the backup of GE, GM, Goldman Sachs or Citi, treasuries would be worth NOTHING. There would be no industry left to service the debt. America inc. would be gone. The flight out of dollars would be just as fast as the flight in.
That is why Peter Schiff(Austrain) was so bearish on the dollar. That is why he is still bearish on the dollar. He over-estimated the intelligence of the investment community. Everyone ran toward the blast, that is why everyone is stuck in the dollar now and nobody knows what to do, hence this debate.
You're making a faulty assumption that these companies would've just disappeared and were worth nothing. This is not true. Companies like GE and GM had many assets (plant & equipment) that are worth money. The problem was they were caring too much debt. There were many investors waiting for such a liquidation event to pick up these assets on the cheap. The problem is the taxpayers bailed out the bondholders at par when the bondholders should have received cents on the dollar and equity in the restructured company.
I'm guessing, but the rally would've probably lasted until most those companies had gone bankrupt like they should have and then the money would've rotated out of treasuries back into these companies upon their restructuring.
no
GE and GMs paper games where bigger industries then what they actually produce. GM and GE are just banks that happen to sell cars and washing machines.
Debt payments would have stopped dead in their tracks. Treasuries would be a non performing asset. There would have been a flight out of the dollar and treasuries.
Let's rephrase your arguments, using your own words to show you where you are missing it. "Deflation is the answer, but few (IN GOVT... IN CENTRAL BANKING) are listening." Deflation is of course the prescription for what ails us as a nation, but 3 entities cannot tolerate it. Governments, banks and the unemployed. They all want inflation via "whatever it takes". Faber, whom I have read and listen to everytime I have an opportunuity has called for hyperinflation in the context of a deflationary collapse.
Here's your error in a nutshell. Inflation and deflation are not sides of a coin. Hyperinflation and deflationary collapse share the honors. Trying to wring controlled inflation out of an overwhelmingly deflationary environment will ultimately trash the unit of account being wrung.
If there was deflationary collapse, then the US creditors would have been fine.(China, Japan ect) They could write a check and buy up the whole country.
If there was hyperinflation, US creditors would be wiped out.
There would be anarchy and martial law under a hyperinflation but not under a sustained deflationary collapse. There was no martial law and anarchy during the great depression. Hank Paulson knew that this time would be a hyperinflation, not a deflation.
Those are not my words, those quotes came from Murrary Rothbard. Please see the link I provided.
I agree that banks and governments cannot tolerate deflation, but the unemployed?
If I was unemployed I'd pick deflation over inflation every time. If you didn't have a job what would you rather have falling prices or rising prices?
Maybe you meant debtors cannot tolerate deflation.
The credit boom was way to big to tolerate deflation.
So you think that if Goldman Sachs, Citi, AIG Fmay F,mac and GE went bankrupt, that there would not have been a run on treasuries and the dollar ?
No, there would have been a continued run into treasuries and then once these companies went through bankruptcy and were restructured then money would have come out of treasuries and into these restructed companies.
The bigger the credit boom the bigger the deflationary bust. Please read these articles from your fellow Austrian economists:
http://mises.org/daily/3127
http://mises.org/daily/508
http://blog.mises.org/7608/credit-expansion-and-submarginal-investments/
You don't understand.
They mean deflationary bust when priced in fiat backed by gold, not fiat backed by debt.
"So amongst Austrian economists there is disagreement. Faber thinks we'll have one more wave of inflation before the final collapse which will be deflationary while Professor Anderson & Mish believe we're going to experience deflation before we'll have another inflationary wave"
Or contined monetization preventing the market from deflating...in essence using the natural credit contraction as cover to print.
http://freemarketeconomicsinastory.blogspot.com/2010/08/another-deflation-scare-as-excuse-to_30.html
Spitzer, what do you think happens when you have a collapse in debt/credit crunch/lack of loans/etc. etc. etc.?? Money supply shrinks. That's what happens when you have a quadrillion worth of paper derivative money that collapses. And this is why they have the after burners on the printing presses and any time they stop them for than a millisecond, everything starts to contract. There isn't as much money chasing more goods. Things get cheaper. I don't care what school anyone is, this is a basic fact of life. It's not a theory, or a school of thought.
So why was the Euro inflating before the Euro bailout was even announced ?
why didn't the Euro rise(deflation) when Greece was on the cusp of default ?
Why where people calling for the Euro to go to ZERO (hyperinflation) ?
You are a misguided deflationist. If you think you know what you are talking about then the next time there is bad news in Greece or Spain, buy as much Euros as you can because apparently you think because people are defaulting, the Euro will rise in value.
Nice way to avoid answering the question. It remains unanswered. Care to try again, or do you have no answer for it? And name calling doesn't make your argument any stronger. Hopefully you can do better on your second attempt.
Sure, I will answer.
I will use the Euro as an example. It is very comparable to the US. The EU has Greece, The US has California. The EU is China's biggest trading partner, the US is China's second biggest trading partner. The EU has 10,000 tons of gold, the US has 8000 tons of gold.
So when Greece was on the cusp of debt default, the Euro went from 1.50 to 1.19.(inflation) It did not go from 1.50 to 1.65.(deflation)
When ever bad news comes out of Europe, debt default/lack of loans/derivative unwinds/foreclosures blah blah blah, the Euro falls, it does not rise. Commodities get more expensive for people holding Euros.
The Euro is NOT very comparable to the US dollar. The US has one government and one currency while the Euro is one currency for 16 countries with each having their own government. Greece has its own sovereign government - California does not as it falls under the Federal Government. This why many people believe the Euro will ultimately fail.
Nope
The EU has the ECB and the US has the Fed. California falls under the Fed, Greece falls under the ECB. Governments don't matter. Even the Royal Bank of Canada is a Fed primary dealer.
Spitzer said, "Governments don't matter."
You can't be serious?
I'm not going to waste any more time discussing this with you because you don't know what you're talking about or you're a troll just baiting me. Please don't tell people you're a follower of Austrian economics because you discredit it by your lack of knowledge of it.
governments don't matter in the context that I had it in.
I was trying to tell you that California is under the same central bank as Texas, no different then Greece being under the same central bank as France.
The Euro zone is allot more similar to the USA then people think.
Spitzer: Thank you for the answer. I disagree with your viewpoint, but I do so respectfully.
And I like Schiff, but he is a terrible investor. I've read two of his books, and with the exception of gold, you would have lost your ass investing with him through the crisis.
No actually, most people did not start investing with him in August of 2008. Go see where the Hang Seng was in 2003 and where the S&P was and get back to me.
@ Dr. Seuss
Not true. The rise of the dollar and the fall of commodities in late 08 was an extreme blip that does not discredit Schiff's thesis.
If you got burned, it is only because you were looking for a life boat in the middle of the hurricane.
Edit in: this is in response to I am a man I am, not Spitzer.
Like so many, you misunderstand his books as short term investment advice.
Long term Schiff is absolutely on the money. But even following him, you can miss a lot by jumping in at the wrong time - but then you have to hold on.
Sh**luck is a fan of Elliot Wave and follows that. What does that have to do with Austrian School Economics? And how can an Obama supporter consider themselves Austrian Economists?
"Mish looks like a highschool janitor with a malt liquor problem", too funny!
Bond bull, Schlitz bull, it's all the same...
People who use ad hom, construct straw men, and poison the well are rarely worth debating, let alone quoting. If this Mish guy wants to take the Tim Geithner approach and dismiss any possible inflationary outcome, he can go for it. History will show how his followers were led to their destruction.
Mish does this for the attention.
He tried the same amatuer tactics with Peter Schiff.
I agree with Mr. Lira, that if the doesnt "Nut-UP", then he's a PUUUUSSSSAAAAYYYYY!!!!!
Did Mish & his Mommy, Junk me?
This is one of those kettle calling the pot "Black" things, right?
This is one of those kettle calling the pot "Black" things, right?
OUTFRIGGINSTANDING MsCreant!
Sorry for the delay but in my mind this be the reply of the day.
:)
Shedlock is an insecure coward who will never admit when he's wrong. Several months ago I had a back-and-forth email exchange with him re. "sideline cash", in which he said the whole concept of it was nonsense, and he was "appalled" at people who can't understand this. I then asked him to refute a simple counter-example, and he suddenly refused to reply. So, I think he's intellectually dishonest and insecure, and I thus stopped reading his blog a while ago. Here's the "sideline cash" example I gave him, so if anyone else out there wants to refute it, please feel free:
There's a stock market with three listed companies, Company A, Company B and Company C, each of which has 10 shares of stock outstanding. Tom owns all 10 shares of Company A, Dick owns all 10 shares of Company B and Harry owns all 10 shares of Company C, and they each paid $1/share for their shares. This was the last recorded sale for each of these companies, and thus the total market cap for our stock market is $30 (i.e., 30 total shares outstanding divided among three companies and three holders with a last sale of $1 for each share).
Tom, Dick and Harry are each willing to sell half of their stock (5 shares each) for $2/share (i.e., 5 x 3 x $2 = $30 total).
I now lift up my mattress, take out $30 (the "sideline cash") and hand $10 to each of those guys in exchange for half their stock at $2/share. The total capitalization of the stock market is now up 100% (30 shares x $2/share = $60, vs. the previous 30 shares x $1 share = $30).
July 10, 2006
There's No Such Thing as Idle Cash on the Sidelines
John P. Hussman, Ph.D.
There was a farmer who harvested his field of corn. He sold all but 100 bushels. A few weeks later, he lent the 100 bushels of corn he had saved to a cereal maker, who gave the farmer an IOU that said “100 bushels of corn,” made a big box of corn flakes, and sold it. The next year, a famine struck. People looked hopefully at the farmer, seeing the note that said he had 100 bushels of corn. All that corn, just sitting on the sidelines! If only the farmer would put that corn on the sidelines to work, they thought, then everything would be fine...
One of the hurdles in thinking properly about the financial markets is to understand the idea of “equilibrium” – that all securities issued must be held; that savings must equal investment; that every share bought by someone must be sold by someone else.
… and that there's no such thing as “idle cash on the sidelines.”
That last one isn't easy to grasp. After all, you can look at your own brokerage account and say – “look right there at that cash balance. There it is, on the sidelines, just waiting for me to put it into the market.”
But if you look more closely, what you really have is an IOU. It might be a very liquid one, like a money market fund that holds T-bills and commercial paper, but it's still an IOU. See, your “cash on the sidelines” isn't sitting there idle, waiting to be put to work. The fact is that it has already been put to work.
And when you go to put your “cash on the sidelines” to work, what really happens is that your money market securities (T-bills, commercial paper, etc) now have to be sold to someone else. And at that moment, the cash on the sidelines that you had suddenly becomes somebody else's cash on the sidelines. And that same amount of cash on the sidelines will continue to exist until the borrowers pay it off.
Likewise, investors should not believe that the “cash on the balance sheets” of corporations might suddenly be used, in aggregate, for new investments and capital spending. That cash on their balance sheets has already been deployed as loans to the Federal government and to other companies.
Now, yes, if the government runs a surplus and retires its debt, in aggregate, or the other companies that borrowed the money generate new earnings and then pay off their debt, in aggregate, then those new savings that retire the T-bills and commercial paper then make it possible for the recipients to finance new investment, in aggregate. So as usual, savings equals investment, and new savings can finance new investment. But what investors often point to and call “cash on the sidelines” is really saving that has already been deployed and used either to offset the dissavings of government or to finance investments made by other companies. Once those savings have been spent, you can't, in aggregate, use the IOUs (in the form of money market securities) to do it again.
In other words, the amount of cash that investors hold “on the sidelines” is determined by the amount of borrowing that has occurred in the form of money market securities like T-bills and commercial paper. It's a lapse of proper thinking to believe that investors, as a group, can move their “cash on the sidelines” into the stock market, or that companies, taken together, can turn their “cash on the sidelines” into new investment and capital spending.
I've said this before, but it's important. If Ricky sells his money market shares and buys stocks, then his money market fund has to sell commercial paper to Nicky, whose currency goes to Ricky, who uses it to pay for the stock bought from Mickey. In the end, the currency that Nicky held is now held by Mickey, the commercial paper held by Ricky is now held by Nicky, and the stock held by Mickey is now held by Ricky, and there is exactly as much stock, commercial paper, and currency outstanding as there was before. All that happened is that the owner of each security has changed.
The price of any given security may or may not have changed as well. For example, if Ricky is very eager to buy stocks and Nicky and Mickey are happy with their existing positions, then Ricky probably has to sell his commercial paper to Nicky at a discount, and has to buy the stock from Mickey at a premium. What happens here is that Ricky has to sell more units of commercial paper for a given amount of cash, and more units of cash are required to buy a given amount of stock. So in this case, commercial paper prices fall (interest rates rise) and stock prices rise.
In contrast, it might be that Mickey is eager to sell stock and Nicky is eager to buy commercial paper. This is good for Ricky. In that case, Ricky might sell his commercial paper to Nicky at a higher price, while buying Mickey's stock at a discount. In that case, commercial paper prices rise (interest rates fall) and stock prices fall.
As a final note, we might know that, say, Mickey, tends to be a poor investor, and generally gets out of stocks after significant declines and gets into stocks only after significant advances. So, we might very well want to monitor the amount of cash that Mickey holds. But in this case, the amount of cash held by Mickey isn't a useful indicator because it measures potential “inflows into the stock market” – rather, it's useful because it's a sentiment indicator. It's still true that in aggregate, the cash is going to stay on the sidelines.
In any case, stock prices don't change because money goes “into” or “out of” the market. Prices change because buyers are more eager than sellers, or vice versa. If a dentist from Poughkeepsie is eager to buy a single share of General Electric (which has about 10 billion shares outstanding), and pays $33.30 instead of $33.20 for that single share, that one trade will increase the stock market's capitalization by a billion dollars. But at the end of the day, all securities that were originally in existence are still in existence, and there is just as much “cash on the sidelines” as there was before.
The upshot here is that investors should never look at "cash on the sidelines" as an indicator of potential buying pressure. It just isn't so. The cash is going to stay on the sidelines until the underlying debt securities are retired.
There is an important reason for these considerations here. As I've noted in recent months, it's likely that China and Japan will at least stabilize in their willingness to absorb the flood of government liabilities that they've been snapping up in recent years. That means that more of these liabilities will be forced into the hands of U.S. investors. As that happens, we're likely to observe an accumulation of “cash on the sidelines” that might look like a hopeful sign for stocks. It will be helpful to remember that the accumulating pile of “sideline cash” actually represents money already spent.
Shedlock sent me the same thing. Here is the operative quote:
>>See, your “cash on the sidelines” isn't sitting there idle, waiting to be put to work. The fact is that it has already been put to work.<<
And my answer was (and is): if the cash was under my mattress, it wasn't doing any "work" whatsoever.
Shedlock didn't have an answer for that one.
Hmm...
I think we're getting into FOFOA territory.
Read this post, and pay attention to his description of cash in the system.
http://fofoa.blogspot.com/2010/09/just-another-hyperinflation-post-part-...
Thanks. That's very interesting, although I don't see how it's directly applicable to my point.
My apologies, I tried punching above my mental weight and confused myself again.
Where was your cash before it was in your mattress? What did you DO to earn it?
No, your money is not "on the sidelines", any more than you can use next year's labor as collateral for a loan today.
If you have your money in your savings account, it is effectively invested in a money market fund or something => not on the sideline
If you have your money in your checking account, even if it pays no interest at all: every bank uses sweep accounts (look it up) => not on the sideline
If you have your money paid out in cash and put it under your matress or in your personal safe, you have taken it out of the system and sidelined it. If too many people do and the effects become visible the Fed prints some new money => not effectively sidelined
If you take your money and buy physical gold (or silver or platinum or some other non-decaying commodity that cannot be mined or reproduced easily, and which you have enough space to store) and store it in your personal safe you HAVE effectively put your money on the sidelines. But only then.
You beat me to it Belrev. Well done.
I don't think Mish is as black as he's being painted by some here but he does seem to be getting more impatient/dogmatic as time goes on. It would indeed be great if there was a debate that focused on getting the facts exposed for us ignoramuses rather than on jousting for alpha male status.
Also, it should be added that Mish is positive on gold. I think of it simply as a hedge against fools and criminals in charge of fiscal and monetary policy, which saves me from worrying too much about the XXflation debate. The blatant and brazen corruption from the top of American society to the bottom has certainly been on a parabolic course since the late 90s and that has correlated quite nicely with the action in PMs.
In the past 2 years or so that I have been reading his blog, he had so many write ups and discussions on the topic of deflation, side line cash and other buzz word concepts, that even I want to beat with a bat anyone who comes out and starts making idiotic statements. Just go re-read what Mish wrote many times already, before one starts blabbing about some out of the arse examples about some cash bills under his mattress. Seriously, if you going to tell me that you have $100 billion dollars under your bed sheets you are not worth debating. We are talking about real cash, not your grandma's Great Depression issued currency which does not buy more then a few stocks.
Okay, how about this:
I decide not to lend any more to the overnight commercial paper market, and thus take my cash tomorrow morning and put it in the stock market. This causes incrementally higher interest rates (because I pulled my cash out of that market), and thus some borrowers decide not to borrow any more because the higher rates create too high of a "hurdle" for them to put the money to work. I then take my money and put it in the stock market as per my original example (except that it didn't come out from under my mattress).
@ Belrev,
I have cash (FRNs) under my (metaphorical) bed.
I think that Mish is a smart guy, and I would welcome a clean debate between the two of them.
You mean the 1790s, right?
I generally agree with Mr. Hussman except for one thing: the excess reserves that banks are holding in their regional Fed bank accounts. This is the closest thing to money stuffed in a mattress that you are likely to find in today's economy. Up until QE1, there wasn't much money tied up in excess reserves because banks didn't get paid interest for maintaining them. But during QE1, the Fed purchased securities from the banks and paid for them by incrementing the balances in the banks' Fed reserve accounts. So there is currently a huge amount of money sitting around as excess reserves. Banks are now being paid interest on excess reserves, so they don't have a huge incentive to loan them out.
One thing that I don't understand is why banks are not using their excess reserves to buy things like 2 or 5 year treasuries, since these are paying higher interest rates (0.53% and 1.51%) than the Fed is paying on excess reserves (0.25%). If banks ever did start loaning out their excess reserves, it could create a lot of inflation. It is as if Bernanke tossed a huge amount of money from his helicopter, but it all got stuck in the trees.
They are ... believe me the locals and regionals are doing exactly that.
Why?
There is a dearth of good credits out there to lend to.
And that's a fact, Jack. My conversations with bank FAs and such indicate that banks are buying treasuries, govt. backed agencies and some munis and all in the 1 to 5 range of the curve.
They are in hunker down mode and they don't want any bad loans popping up on the regulators radars.
After all, they've got a tremendous amount of 'iffy' CRE exposure to work through. :-)
@ above.
" .. it all got stuck in the trees."
. beautiful
But, there is still $30 of cash on the sidelines. You took $30 from under your mattress and they sold half their stock to you and now they have $30 of cash to put under their mattress. For every buyer there is a seller. The only way cash on the sidelines gets put to work is in a new or secondary offering.
Exactly.
Also the value of the stock market depends upon people's perception of economic direction. What happens if the farmers think there is going to be a drought and they will only sell 1 share for $30. (Another example could be tullips and everybody wanted one.) Now the market is worth 30x30 = $900.
Yes, of course. This was an "all else being equal" example.
Right, but my "sideline cash" (i.e., new money brought into the stock market) is what drove up those prices.
logical,
You have come to know the real Sh**luck. A real "cut and paste" artist with little understanding but able to create blog trash predicting the end of the world very soon now.
Is it not possible that a run-up in commodity prices will result in a drop in other prices? Pay more for gas and food and there is less left over for other stuff, less demand and the price drops. We get bad inflation only if the money supply, in circulation, increases to accommodate the higher commodity prices.
You bring up a really interesting point. I'm in the deflation camp but a couple of questions are popping up for me. The first is the fact that inflation is rampant in China now. Given that all our previously cheap imports are going up in price, even if credit contracts in an deflationary environment, price increases from China are inflationary. I've heard of Asian money coming in to buy both commercial and residential properties. I'm not sure on the extent of this but I think it needs to be recognized. Secondly, in the event of hyperinflation where commodity prices skyrocket, how is that going to play out? Say oil goes to $150? Unless we start getting paid in wheelbarrows of money, I'm not sure how "hyperinflation" is going to happen. With 16% real unemployment, there is absolutely zero wage increase pressures. Without higher wages, how can hyperinflation take hold?
Look at Zimbabwe for the answers.
Economy a disaster, unemployment through the roof, inflation is immeasureable.
Yes, I always look to kiwis when answering questions about grapefruit.
You're confusing demand-pull inflation (higher wages resulting in higher prices) with hyperinflation (the failure of a currency).
I'm sure the people in the Weimar Republic were not getting awesome raises just because the Allies took a chunk of Germany thus crippling the Weimar economy and destroying the DM.
Are you an ex-Union member, GL? That would explain Mish's animosity beyond just the xxFlation debate.
... and that is why I dislike Mish so much, because of his anti-union crusade. I have read him for years (apart from the last (6? months) and thought a lot of his posts were great, but I never read the comments there. At some point his blog began to remind me of someone preaching "know your place" in the midst of a perverted game of wack-a-mole in which the same recipients come up over and over again.
History will judge Mike Shedlock, in hindsight.
When gold reaches $2000, $3000, $4000 and more, Mish will be saying the exact same things he is saying now. When interest rates rise, he will rant on about how they will go down again. Nothing will change his mind.
He won't reevaluate his position based on the facts.
He will reevaluate facts based on his position.
It is futile to engage someone like this in an intellectually honest debate to arrive at truth. Truth is not what Shedlock is after. He's after making his point.
Mish is a deflationist, and gold will do great in a deflation because it is liquid, Internarional currency. Inflationists who think gold does great only in inflations are so wrong historically, it's hard to know where to start
"When gold reaches $2000, $3000, $4000 and more, Mish will be saying the exact same things he is saying now."
Have you even read Mish's blog???
Mish has kept saying that Gold will continue to appreciate in $ ...
Mish even has as his #1 featured link "Goldmoney"
I find Mish's site unreadable because of his attitude and arrogance. I don't read The Market Ticker for the same reason. Life is too short to spend even a second on arrogant blowhards.
Lira, don't worry about it. Make your case. Mish just acts like an ass. That's his style.
Oh Mish. Don't junk. Act properly on your blog and you won't have bad things said about you.
the worst part is, that he thinks hes an austrian.
if he was, he would know that gold is more then just a half assed hedge
name calling and personal attacks show the lack of merit and belief in one's position
mish is a clown, plain & simple.
He's been pounding table about a lousy economy for a good 12 years.
He was right from 2000 to 2002.
He was also right from 2008 to 2009.
And in between, he got his ass handed to him hard.
Do you hear me, mish? A CLOWN!!!
When we're done with the Mish/Lira debate, can we put a humidifier and dehumidifier in a room and see which one wins?
Oh, yeah. Forgot. They both blow up.
I'll take humidifier and give you 10 to 1 for even money.
I'll take those odds, but if you win you have to accept this California IOU as payment.
After a good laugh at that thought, I pondered longer - could that be the result of the combination of raging deflation & inflation running at the same time? All Circuits blow?
I'm not sure there's a soul on earth that may know the future coming at us; although if there is one, he/she is here at ZH.
The same old mish who blames it all on union people? He is pathetic.
To be fair, he also assigns some of the blame to all the nail salons in his neighborhood....
Like Mish has never had to launder a quarter mil in smack-dealing profits before.
Actually, his main complaint is not unions, but PUBLIC unions. And I would offer he is 100% correct in that assessment.
+ 100
Make it pay-per-view....till the death....that will generate some interest....
Isn't there some financial bet they could make to resolve this? wink, wink
Mmmmm...PPV derivatives.
Gonzalo Lira..
Mish will defend his deflationist view to the bitter end.
this he has on his site....something nobody has..
I like Mish's site and Mish thinking..
I agree....call him out...hell...I would pay $$$ for it
But will he continue to fight like a hysterical little girl, wildly flailing his meat stumps?
What a little biatch (Mush).
"and that I am part of some conspiracist, gold-bug cabal."
I kinda like the sound of that.
mish is a mouthpiece of the establishment ...he was bought in to refute Peter Schiff...now since Lira's article made a huge noise...mish is going after him..
going after him ?
the loser just insulted GL and didn't even comment on his position.
I used to think mish was just an honest misguided deflationist but the way he has responded to GL is pathetic.
This is actually a great way for CNBC to restore sagging ratings. If only they had the wit to realise it. Proper economic Fight Club.
What will the first rule of the economic fight club be?
Everyone talks about deflation/hyperinflationary depression. Then we preempt the timeline with a punch up.
Guys don't forget the incredible contrarian indicator potential for Mish in the future. We'll find a use for him yet: when Mish is buying, say, silver for fear of currency collapse, you know it'll be about time to sell.
I wish everyone would be nice to Mish... at least long enough to draw him in. Then let him have it. Of course there's no way in hell Mish the coward will sign up for this.
I'm glad I'm not the only one who sees him for the tool (of TPTB) he is though. Mish kind of reminds me of another tool of the establishment named Ritholz.
Why are you so rabidly anti-Mish, gentle men? History will not judge you kindly.
because he cant even respect his opponent.
He has no class, he is a jackass who thinks he is an Austrian.
Mish frequently participates here with thoughtful contributions and I welcome him to come back whenever he chooses to do so.
+ 100
Let a thousand flowers bloom!
He's not a coward. He's just right. hyperinflation is not about money supply it's about the money-dominating-credit and not being good for it. In reality, there ain't enough printing that could happen to compensate for derivative and asset devaluation in the last 3 years. We are talking like 100s of trillions.
We already had inflation in the 2000s- it would have been high inflation except that China imports and credit fooled everyone.
Now everyone is hunkering down for he'll and there is no credit market. That's how the US works- credit- not the printing press. The banks made more money out of thin air 30x leveraging and making 8x removed derivatives and pumping that into the market than the Fed ever could.
Hyperinflation is a political and loss of faith in payment, not getting less payment- but getting none.
This is all semantics shit- Weimar Germany cannot happen in a credit system .
Money in fiat society is a unit of labor by the hour. Hence, unless you work for the intelligentsia of the USSA, you can see your labor is worth less and less. This is a dream for many corporations- a competitive work force and getting more labor for cheaper. Japan is selling labor like 500 years in the future- as is Obama and Bernanke for us. When you have a declining population, as a depression tends to do, the ability for the country to pay debt collapses. Any wealth you have is hoarded not spent. People and banks are hoarding my kids money so they can sit on it. And the rush to gold is deflationary and the way reverse repos are going( and the state IRA proposal) gold will be more liquid currency.
Nobody said it was, for sure not GL. The Euro fell from 1.5 to 1.2(inflation) before the EU bailout was even announced.
what the fuck ? you contradicted your first statement. I will stop here, you are an idiot.
Spitzer you clown, just like the avatar you have, are under the pretense that money supply is just what the FED serves up in monetization. The banks create the huge majority of money supply with credit which has nothing to do with treasuries or m2.
Yes, that's right, the banks make mo ey via credit.
There is no credit now so there is no inflation in money supply.
If your dildos are getting more expensive, that's called price inflation and that's in selected industries that have a strangle on supply. Dildos for you, oil for others, food in some areas. Otherwise, there is no inflation in sight.
Credit = money in the US. There is no credit extended. monetization is just going from Geithner to the primary dealers who play the casinos.
I repeat- and did not contradict myself- no matter what the FED does to inflate they cannot combat credit and asset destruction. It's pissing on a forest fire
they will never create demand pull inflation but eventually they will create dollar flight inflation which is what I am talking about
Considering how many people fall into the deflation camp (my self included) on this site Im surprised to see the comments so one sided. Especially since 90% of the people posting dont appear to be regulars. Neither am I but read ZH daily so I know who they are and this is hardley the topic to draw new posters.
Something fishy going on here...
Hi there cuz.
You and I are the same "age." I think deflation too, and then hyperinflation is "possible." Really possible. I recognize some of these posters as oldtimers I don't see much any more. I think it is great that this is dragging them out to post. I do wish it wasn't so ugly. I may not entirely agree with Mish, but I for one found him to be a sweetie and I spent many days lurking on his site hungry to know more before I finally ended up here. I still check his site a couple of times daily. I for one am grateful for my time posting over there as "They Stole My Country." I adore "Fedwatcher" who posts over there, and Blackswan (who can be an arrogant turd, but he has a lot of insight and puts the dots together fast), Tin Hat, slavador, Bay of Pigs, Used, and many others. It is a great little community and they dig deep and pick apart issues in ways that don't happen over here all the time. I for one, while I don't think it is deflation only, would feel like a total asshone punk, dissing Mish. He was a mentor for me. I will not be ungrateful and I think this debate would be cool.
None of this is black and white.
"They Stole My Country." Ah, so that is you! Interesting, and makes sense too.
I too have learnt a lot from Mish and probably more reading the comments on his site. I agree with your list of names of people to read, and would also add Whacked, Bam_Man (who is here too), James Cole, CaneToadCode, Many Arrows and as you say "others". I do find myself spending more time on ZH these days though. The information here seems a little more, um, raw, broad and unfiltered.
Not that I'm into Unions per say, but Mish did have a spate of bashing them incessantly. Sometimes his calls are vague and unsubtantiated, but I do generally respect his opinion, even if I don't always agree with it. I am surprised at his arrogance lately against Lira, seems slightly out of character. Perhaps his ego is getting the better of him, I recall him being more humble in the past.
I think Mish may well see this issue as Black or White.
Doubt you will see this but I like the additions you made to the list very well.
Oh, I see it.
Has anyone actually read what Mish said? Mish is not saying that hyperinflation is not possible! He is saying that Gonzalo Lira fictional account of events leading to hyperinflation is 'too silly' to even consider. I concur.
This is what Mish is saying about hyperinflation:
In case someone is actually interested in economic theory, please read Steve Keen or Michael Hudson and then read Irving Fisher's debt/deflation theory to get your bearings straight. The economy is deleveraging with aggregate demand collapsing. Take away government contribution to the GDP and things are as rosy as they were in 1930s.
Exactly. Thanks linrom. How is it that everyone is bashing Mish, when he makes some very reasonable points. Not one post above actually tried to seriously critique Mish's arguments. It seems most of the commentators above haven't actually read Mish's response, which apparently ridiculed GL (I thought it was a decent discussion of the two opposing views). I think the mistake that GL and many others here make is that they take a certain event as a fact and then make all these wild conclusions and compare the current situation to historical scenarios that are just plain inappropriate.
The US has a debt(credit)-based fiat monetary system. Comparisons to the Weimar Republic are useless as Germany had to pay back debts that were denominated in a different currency, making it increasingly hard for Germany.
Why would there be a run on US bonds? Seriously who would supposedly dump all their treasuries. The US Dollar is the major global transactional currency. There is huge demand for Government bonds lurking in pension fund portfolios needing to match their liabilities (working in that industry I know how many players are looking more and more at Asset-Liability Management, Liability Driven investing, etc).
Then you have a the demand for high quality collateral that is increasing globally. think about all of the deals that used to require no collateral, or could be collateralized with any kind of junk. All of the securities lending programs for example are moving their collateral investments into treasuries etc. How about OTC contracts, re/insurance deals, cat bonds, repo-deals,... everywhere I look the message is clear: Players demand more collateral and this is most of the time in the form of US treasuries. At the same time the Fed and Asian central banks continue to swallow large amounts of treasuries creating a real shortage of these securities.
Stop assuming "people will dump their treasuries" and think about the other side of that equation and you will see that there is a lot of demand for government securities. In addition most of these players don't really care about the yield. For one group it is the duration that they are interested in, the other just cares about the fact that it is a US treasury, making bonds essentially a currency for all kinds of transactions.
Wrong...from Dying of Money: When the inflation was over, everyone who had owed marks suddenly and magically owed nothing. This came about because every contract or debt that called for payment in a fixed number of marks was paid off with that many marks, but they were worth next to nothing compared with what they had been worth when they had been borrowed or earned. Germany's total prewar mortgage indebtedness alone, for example, equal to 40 billion marks or one-sixth of the total German wealth, was worth less than one American cent after the inflation. On the other side, of course, everyone who had owned marks or mark wealth such as bank accounts, savings, insurance, bonds, notes, or any sort of contractual right to money suddenly and magically owned nothing.
Demand by who? UK based Hedge Funds? The Fed?
Because the quality of these bonds will be called into question when it becomes obvious that the economy cannot recover under these circumstances.
Who is going to service the debt that backs the dollar when the tax revenue stops coming in ?
what happens to the value of non performing assets ? Does the value increase or decrease ?
Bond vigilantes bidding up yields is not hyperinflation- it's the market.
Since 99% of the planet knows the stock market is rigged and supposed to crash, they are piling into the last fiat model standing- the US treasury. It's no good but on par or better than any other fiat disaster.
All the goldbugs looking for a collapse of the US dollar in the next year are going to be sorry. They have been begging for a dollar collapse, the FEd has been obliging them and the us dollar is still higher than it was in 2007. Goldbugs act like it fell out of bed.
The sovereign currency will always be strong in a deflation- that's how it works and that's how the English pound operated for decades.
Zimbabwe and Weimar Germany are stupid examples or goldbug wet dreams. There is NO GODDAMN CREDIT system in either examples. japan is your closest example and the JCB has to devalue to yen because it's being hoarded again. History always has currency value getting stronger as hoarding takes over in banks and homes. See 1929, Japan, Rome, pre civil war, the South Seas bubble and countless others. That's how it works and deflation is a bitch
If the debt cannot be serviced, it will sell off and lose value. The dollar is backed by the full faith and CREDIT of the US governemnt. When the tax revenue that services bonds drys up, there will be no more faith and CREDIT to back the dollar.
The US dollar is the most fundamentally flawed fiat currency in the world. the only reason it is the reserve currency is because it WAS backed by gold.
Weren't all the currencies at Bretton Woods backed by gold?
Couldn't it have something to do with decades of economic dominance?
Or being the biggest petrol addicts on the planet?
Or the many, many nukes?
linrom quotes Sh**luck:
However, unlike Mugabe and Zimbabwe, neither the banks nor the Fed nor the political class wants to bail out the poor at the expense of the wealthy.
Mugabe and Zim did nothing to bail out the little guy. They printed the money to buy things for themselves. And the U.S. Govt. is following the same path by handing out money to keep themselves in power.
They fucked their own agricultural exports...they did to themselves what the allies did to Weimar. LOL
I see the mob mentality is gaining momentum nicely....
Man y'all have me so confused. I read Mish every day and zeroHedge every day.
My main question is, can someone tell me EXACTLY (or approximately) when inflation is going to start (if ever)? That's key to my investmenst. If there's going to be 20% inflation in 2 years and I buy a $200,000 duplex on a 30 year at 4.5%, I will be ROCKING!
If there's deflation and I buy a duplex at 4% now I'll be FUCKED...
So all I need to know is, give it plus or minus 6 months, when massive inflation will start?
I hear ya. I read them both too. They both realize the goverment and Fed are full of shit.
I like both of their ideas.You would think they could get along on the main premise of the Ponzi goverment.
Bottom line. Know one knows what is going to happen. People have about as much chance of predicting the economy as they do at predicting the weather; in fact the weather is more accurate.
I doubt anyone will actually try and give you a date for this, and if they did I would not trust them.
Z
I don't, in any way, proclaim to KNOW one way or the other. My FEELING is towards deflation but Gonzalo's pieces have been good and thought provoking. Likewise Mish's missives. I'm wary of any stance that is dogmatic and claims to 'know' the answer at this point.
SO, I would welcome the Mish versus Lira debate (NOT argument!) - is there any way an MP3 debate could be arranged, say, via King World News for example?
I like Denninger's stuff although I'm more of a believer in gold than he is. I like Mish's stuff (particularly his unions posts) although I disagree with some of his dogmatism - like a lot of people I'm trying to find a way through this with a set of personal beliefs but with deference to other peoples' expertise.
With regard to the Prisoners' Dilemma - the common foe here is the Fed, Government and national debt, not each other. I really look forward to an adult, possibly polar, debate but with the common problem as the focus.
DavidC