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Guest Post: The Sound Of One Hand Clapping - What Deflationists May Be Missing

Tyler Durden's picture





 

Submitted by Chris Martenson of ChrisMartenson.com and creator of The Crash Course

The Sound of One Hand Clapping - What Deflationists May be Missing

My central thesis to this crisis, developed a few years before it even hit, is that the economic troubles are the symptoms while the money system itself is the cause.

My views on this are expressed in the opening of an article I initially penned in 2006, but updated in 2008:

Within the next twenty years, the most profound changes in all of economic history will sweep the globe. The economic chaos and turbulence we are now experiencing are merely the opening salvos in what will prove to be a long, disruptive period of adjustment. Our choices now are to either evolve a new economic model that is compatible with limited physical resources, or to risk a catastrophic failure of our monetary system, and with it the basis for civilization as we know it today.

In order to understand why, we must start at the beginning. While it was operating well, our monetary system was a great system, one that fostered incredible technological innovation and advances in standards of living, two characteristics that I fervently wish to continue. But every system has its pros and its cons, and our monetary system has a doozy of a flaw.

It is this: Our monetary system must continually expand, forever.

The article above provides the big picture backdrop that drives my long-term vision and thinking. I raise it now so that you'll understand that I principally view the economic world through a monetary lens.

The hot topic of the day is "Inflation or Deflation?" and the camps are firmly divided into the inflationistas and deflationistas. When asked which camp I am in, I reply "Yes." Some would say that puts me in the confusionista camp, but I actually have an explanation for why are living in a world of 'both.'

From a technical perspective we are absolutely in one of the most powerfully deflationary periods in history, yet besides housing prices and a few over-produced consumer goods, we find that stocks, bonds and commodities are all well bid at the moment.

While we can ascribe some of this to the artificial wall of liquidity (come to think of it, is there any other kind?) being thrown into the financial market(s) by the Fed, it leaves hanging the question of why that money is not being completely swallowed into the bottomless black hole that the deflationist camp says lies at the heart of our current financial system.

And they are right; there is a black hole at the center. If we treat the credit doubling (from $26 to $52 trillion) that occurred between 2000 and 2008 as a normal bubble that will follow the same pattern of decline as numerous historical bubbles, then we might reasonably predict that some $26 trillion of debt will somehow "go away" over the next 6 years. This is indeed a massive black hole.

Yet everything just keeps perking along. What gives?

The answer, I believe, requires us to ask a Zen-like question along the lines of "what is the sound of one hand clapping?" That question is, "If nobody recognizes a defaulted debt on their balance sheet, does it exist?"

Suppose, for the sake of argument that a world exists where banks are allowed by their regulators to pretend their default losses simply do not exist. And, even more outlandishly, some of these banks are allowed to sell heavily damaged loans to their central bank at nearly their full original price.

What does "deflation" mean in such a world? Not much, as it turns out. At least from a monetary perspective, because money is not being destroyed at nearly the rate that would be expected or predicted by the size and rate of the defaults.

This is the world in which we currently live. Trillions in probable and provable losses quietly exist out of sight on the balance sheets of the Federal Reserve and other financial institutions. If they ever come out of hiding and onto the books, I think the deflationists will be proven correct in spades.

But let me ask this; what prevents the authorities from simply storing them out of sight in perpetuity? Or at least long enough to allow the wave of liquidity to work its inevitable magic? So far, much to my great surprise, they've managed to do exactly that with hardly a squeak from the mainstream press (although the blogsphere is on the job, as usual). I am now wondering if they cannot keep this up indefinitely.

So from a purely monetary perspective, money can only be "destroyed" if banks and other financial institutions have to recognize the losses and take a hit to capital. If the loss is not recognized, no money is destroyed. At least it is not recognized as gone.

Perversely, when a bank sells a ruined loan 'asset' to the Federal Reserve, it is a double shot of money to the system - the money initially created upon the issuance of the original loan which is still out there in circulation, and a second bolus when the Fed creates money out of thin air to buy the failing 'asset' from the bank. One blob of money into the system when the loan is made, another when it is bought by the Fed. One loan, two blobs of money. Many have failed to recognize this feature of the Fed's asset purchase programs.

So from this perspective we could even argue that by employing the 'pretend and extend' strategy coupled to an aggressive Fed purchase policy, it is possible that more money is being created than destroyed right now. Which means that from a strictly monetary perspective I am not yet sold on the idea that money is being destroyed at the rates sometimes implied by the deflationary arguments.

Also, the data is not really in support of that notion either:


Of course, this money needs willing lenders and borrowers which brings us back to the matter of price deflation.

Out in the real world where consumers and producers exist, the bursting credit bubble has severely cut off consumer's access to and desire for new credit and producers have dialed back excessive capacity and cut their prices in order to attract business and survive.

About this process there can be no doubt, but here I would argue that falling prices are currently as much a matter of supply and demand as they are a monetary issue. In other words, the price deflation we are currently seeing is not a pure monetary phenomenon.

Which means I think we are in a bizarre hybrid world, where deflation should be the order of the day but it currently is not because its impacts are being held in abeyance by the simple expedient of pretending the losses do not exist.

My current outlook calls for productive capacity to continue to fall out in the real world even as the Fed conjures more money into existence in the make-believe world of 'high finance' (what are they smoking over there?).

Is this not a recipe for eventual inflation? More money but fewer goods and services? History says 'yes.'

All that said, I would not disagree with the notion that there's another year or three of grinding along as stock and bond prices are concerned, possibly down but maybe not, before the monetary/goods imbalance comes charging out of the chute ready to throw off the unwary and trample them in a blistering round of inflation.

But it could be sooner than that. Or later. The point here is that we really don't know and because our monetary system operates on faith, it means that we have to be prepared for the fact that a shift could happen at any time. Nobody can predict when a school of fish will suddenly turn to the left. Who knows what final trigger will cause a critical minority to suddenly determine that they'd rather hold things than paper?

For now, while I understand, and appreciate the deflationist argument, the only thing that would convert me fully to that camp would be a sudden return to rigorous application of honest accounting. If you derisively snorted at that last sentence, then we share the same assessment of the likelihood of that happening any time soon.

In order to answer the main question of this article we regretfully have to turn to Dadaism* to develop an appropriately absurd non-sequitur:

"What is the sound of one hand clapping? Insanely high stock and bond prices."

 

Chris Martenson is the creator of The Crash Course a free online video explanation of how trends in the Economy, Energy and the Environment are converging on a very narrow window of our future. Additionally at his website


 

* Dada was a protest by a group of European artists against World War I, bourgeois society, and the conservativism of traditional thought. Its followers used absurdities and non sequiturs to create artworks and performances which defied any intellectual analysis.

The founders included the French artist Jean Arp and the writers Hugo Ball and Tristan Tzara. Francis Picabia and Marcel Duchamp were also key contributors.

The Dada movement evolved into Surrealism in the 1920's.

 


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Thu, 10/08/2009 - 11:43 | Link to Comment nhsadika
nhsadika's picture

I believe the same.  The housing market is the lynchpin of this game, keeping prices up somehow and doing a massive transfer in the dark via asset purchases and cheap money.

What that says to me is STAY FAR away from Wall St - don't invest in banks, don't short the Fed.

 

What that also says to me is the MANIA won't easily jump the shark to the real world.  If you're a bear stay on Main St.

 

Long Fed, Short Main.

Thu, 10/08/2009 - 12:08 | Link to Comment ghostfaceinvestah
ghostfaceinvestah's picture

There is no dark conspiracy in the housing market - delinquencies are growing, you can look at any report - Fannie's monthly summary, private label remittance reports, etc.

These losses have not been "recognized" (i.e. houses liquidated) because of the government-imposed foreclosure moratoriums and the HAMP program.

Pretty soon these REOs will hit the market, they are already starting to.

Thu, 10/08/2009 - 11:47 | Link to Comment Project Mayhem
Project Mayhem's picture

Chris Martenson is win.  So is Dada for that matter.

Thu, 10/08/2009 - 11:50 | Link to Comment Anonymous
Thu, 10/08/2009 - 14:05 | Link to Comment defender
defender's picture

priceless if you act on it when no one else will.

Thu, 10/08/2009 - 15:20 | Link to Comment SWRichmond
SWRichmond's picture

No.  Being right at the wrong time is the same thing as being wrong.

Thu, 10/08/2009 - 11:52 | Link to Comment Anonymous
Thu, 10/08/2009 - 11:52 | Link to Comment Anonymous
Thu, 10/08/2009 - 14:57 | Link to Comment Anonymous
Thu, 10/08/2009 - 17:33 | Link to Comment Harbourcity
Harbourcity's picture

The problem is that foreign countries smell blood in the water.

Thu, 10/08/2009 - 11:55 | Link to Comment bruce wayne
bruce wayne's picture

Contracts for commodities are jumping through the roof though.  If we have a prolonged period of shrinking goods and services, these commodities will not need to be used but there is incentive to mine, drill, harvest, etc.; in general pull out of the ground.  At some point these commodities need to hit the market and there will be no way to keep prices up at that point.  Financial assets are skyrocketing in value because they are the only assets that have liquidity at the moment.  When this liquidity ends, i.e. when these goods are not a paper profit but a physical holding that cannot be stored somewhere the shell game must come to an end.

Thu, 10/08/2009 - 11:56 | Link to Comment Mos
Mos's picture

Any chance they, the Fed, pull this off and avoid a total financial and social collapse of the US?  Seems to be working so far other than the dollar sinking, things getting worse for main street, and growing populist outrage.  If they can somehow control those three issues they may have a chance although I think the American people are starting to wise up to what is going on and I see a lot of incumbents getting voted out in 2010. Not to mention black swans that are likely to occur either domestically or internationally that the Fed won't be able to control.

Thu, 10/08/2009 - 12:36 | Link to Comment Anonymous
Thu, 10/08/2009 - 15:05 | Link to Comment Anonymous
Thu, 10/08/2009 - 13:23 | Link to Comment Noir
Noir's picture

Your icon cracks me up everytime I see it :-)

Yes, I'm wondering what will be the Black Swan for this situation. Some European nation goes under? Or is it gonna be the stonewall by the BRIC nations.

Thu, 10/08/2009 - 12:01 | Link to Comment Daedal
Daedal's picture

Dadaism, not to be confused with Daedal-ism.

Great post. I'd like to see if Mike Shedlock has anything to add.

Thu, 10/08/2009 - 12:21 | Link to Comment Project Mayhem
Project Mayhem's picture

Mish would say go long the failbuck -- and there is no systemic corruption or collusion, only 'incompetence'

Thu, 10/08/2009 - 13:01 | Link to Comment pinkboxtrader
pinkboxtrader's picture

lol failbuck

Thu, 10/08/2009 - 13:33 | Link to Comment geopol
geopol's picture

Ripley's,

 

mish the only living brain donor..

Thu, 10/08/2009 - 13:42 | Link to Comment Hephasteus
Hephasteus's picture

But they are about to finally get it figured out. This time it will be different?

Thu, 10/08/2009 - 12:00 | Link to Comment Anonymous
Thu, 10/08/2009 - 12:02 | Link to Comment koaj
koaj's picture

prices on things we dont need like houses and cars and boats are coming in yet prices on goods we need like oil and food are going up

fantastic. FTW American Middle class

Thu, 10/08/2009 - 12:19 | Link to Comment RatherBFlying
RatherBFlying's picture

... except we're not. I'm buying gasoline cheaper than I did the entire past year, rents are going down, natural gas to heat my house is down, food in the grocery is down in price, eating out is cheaper (at least in my neck of the woods.)

The only part of Chris's analysis I see above is that the Fed isn't buying the worthless loans from the Banks... they are taking them on to their books, but they can exchange them back anytime they want. The Banks know that and that's why they aren't restarting lending. These aren't really "reserves" in the traditional sense. They are window-dressing that allows the FDIC to not execute their legally mandated duty to liquidate insolvent banks, which would wipe out equity and bond holders like the Pension Funds.

 

Thu, 10/08/2009 - 13:21 | Link to Comment lovejoy
lovejoy's picture

One of the best explanations I have seen for those large bank reserves. Thus if real estate tanks more, the FED may decide that it longer wants to hold the collateral. I would think that the FED steps in before FDIC if any goes wrong. I can also see why the FED is against any audit. I don't think think they are worried who they money to -- they gave money to everyone. They don't want the public to know that FED that generally only takes AAA collateral has taken junk collateral. That would destroy the FED. CAPUT.

Thu, 10/08/2009 - 12:03 | Link to Comment perfectlyGoodWh...
perfectlyGoodWhiteBoy's picture

I thought we were a credit economy, not a money economy.  Does MZM include credit?

Thu, 10/08/2009 - 15:32 | Link to Comment SWRichmond
SWRichmond's picture

Astute.  It appears the author conflates money and credit.

In a fractional reserve system, what is being loaned?  Capital?  Money?  Credit?  If capital starts off being real store-of-value money capital, then is loaned out at 10:1 in a fractional reserve system, what exactly are you borrowing?  This is not merely a semantic question, because when the loan defaults, exactly what has been lost?  1/10 of the capital?  Mathematically, how can you measure capital destruction in a fractional reserve system?  I've never seen this discussed anywhere, all discussions conflate money and credit.  Is money capital?  Is fiat money capital?  Is borrowed capital, in a fractional-reserve system even capital at all?

I think we would all agree that capital cannot be printed, yet that is what Bernanke is trying to do.  The whole inflation/deflation debate is a red herring.  You cannot understand the impact of printing trillions of thingies and pouring them into a hole that is tens of trillions of thingies deep and try to figure out what will happen.  It makes no sense at all, because what were the thingies that were lost into the hole?  What are the thingies that are being printed?

Fractional-reserve credit / lending affects price.  If we hadn't been loaning out "credit" at 10:1, would house prices have gone as high as they did?  Of course not. 

So when house prices fall, what is lost?  If we can merely print up replacement tokens, what are the tokens worth?  Why don't we print up enough to make everyone millionares?

Thu, 10/08/2009 - 17:36 | Link to Comment Harbourcity
Harbourcity's picture

Don't forget the hole that is tens of trillions of thingies deep is still getting bigger as we speak.

 

Thu, 10/08/2009 - 20:36 | Link to Comment SWRichmond
SWRichmond's picture

If we can't even define what the thingies are, why does the size of the hole matter?  People say Bernanke can't print it up fast enough to fill the hole; they say that like the thingies are more than mere tokens, like they have value.  If they have value, how can Bernanke just print them up?  And if he can just print them up and they ARE valuable, why doesn't he just print up a shitload for everyone and then we all quit work?  If they DON'T have value, then what is the point of printing them, and who cares how many we print, or how many have fallen into the hole?

Fri, 10/09/2009 - 15:50 | Link to Comment Anonymous
Thu, 10/08/2009 - 12:04 | Link to Comment Anonymous
Thu, 10/08/2009 - 12:51 | Link to Comment economicmorphine
economicmorphine's picture

That's only true in the west.  If one looks at global population, it is going parabolic.  If we have a population decline it will be because we outproduce the world's ability to sustain that population, resulting in a massive die off the likes of which we've never seen.  The present environment suggests a genocide the likes of which we've never seen may occur as well.  I hope your comment was satire.  It's incredibly naive if it isn't.

Thu, 10/08/2009 - 13:57 | Link to Comment Galois
Galois's picture

I'm currently reading this book concerning the sustainability of the world population (you may download it for free):

http://www.earth-policy.org/index.php?/books/pb4

It will probably get very ugly in a few years :-( Especially if you read about the problems the big powers India and China will be facing and consider how desperate they might become. 

 

Thu, 10/08/2009 - 14:04 | Link to Comment BobPaulson
BobPaulson's picture

Which is why he cited Malthus in the previous article. The Malthusian end is not pretty, and that is an understatement of the most diabolical kind.

Thu, 10/08/2009 - 14:25 | Link to Comment snorkeler
snorkeler's picture

We hit the "resource wall" quite a while ago. I would estimate 50 to 60 years ago.

Now we are beginning to realize what the true cost of feeding and housing this planet is going to be.

It is unaffordable, especially in light of what the climate change issues are going to cost.

 

As Bob says a "Malthusian" scenario.  The resource wars (no longer disgused by political bs as has been the case to date) begin very soon.

Fri, 10/09/2009 - 04:38 | Link to Comment Anonymous
Thu, 10/08/2009 - 12:09 | Link to Comment Anonymous
Thu, 10/08/2009 - 12:09 | Link to Comment TumblingDice
TumblingDice's picture

Yes. Pretending the losses aren't there is a sure fire solution. How can it possibly fail?

Thu, 10/08/2009 - 12:13 | Link to Comment phaesed
phaesed's picture

Excellent article and perhaps the best analysis I have read from anyone in the present crisis on the actual nature of the problem.

Thu, 10/08/2009 - 12:34 | Link to Comment Anonymous
Thu, 10/08/2009 - 12:14 | Link to Comment Anonymous
Thu, 10/08/2009 - 15:28 | Link to Comment Anonymous
Thu, 10/08/2009 - 12:20 | Link to Comment Anonymous
Thu, 10/08/2009 - 12:21 | Link to Comment Anonymous
Thu, 10/08/2009 - 12:23 | Link to Comment Anonymous
Thu, 10/08/2009 - 12:35 | Link to Comment HEHEHE
HEHEHE's picture

Precisely what has happened.  Bernanke has created a bubble in trader bonuses.  You pay me a salary and tell me I don't have to pay my rent and utilities until 10 year from now and I'll look like Warren Buffet in the short term too.

Thu, 10/08/2009 - 12:40 | Link to Comment Anonymous
Thu, 10/08/2009 - 13:44 | Link to Comment Anonymous
Thu, 10/08/2009 - 20:30 | Link to Comment Anonymous
Thu, 10/08/2009 - 12:44 | Link to Comment Anonymous
Thu, 10/08/2009 - 20:47 | Link to Comment Anonymous
Thu, 10/08/2009 - 12:47 | Link to Comment economicmorphine
economicmorphine's picture

I have a lot of respect for Chris Martenson, but this sounds like capitulation to me.  It is irrational to assume that they can keep the game going forever simply because they've kept it going for longer than we thought they would.  That's a little like being on an airplane with no engines and saying "we're never going to hit the ground because if we were we already would have."  

No, Fed history is such that I have to believe that we're still going to hit the ground, probably right after everyone loosens their seatbelts and they get the drink cart in the aisle.

Thu, 10/08/2009 - 12:54 | Link to Comment ghostfaceinvestah
ghostfaceinvestah's picture

Agree 100%.  There is no conspiracy in the housing market, the Fed is not buying delinquent mortgages and allowing them to remain delinquent.

There is some activity where banks are refinancing marginally crappy borrowers onto the FHA, but as we see today, the FHA is facing losses as well, they are just private losses turned public.

The uptick in the housing market as of late is due largely to the foreclosure moratoriums and the HAMP program attempting to modify deadbeats in hopes they will pay.

Much of this effect is running out, I have seen it in the last two months mostly, where liquidations have started to occur.  This is a vast change from as late as May, when very few liquidations were happening.

Once the lender takes title and kicks out the borrower, it takes a while for the house to be marketed - a realtor has to be hired, the bank has to make a decision to sell as-is or make some improvements, etc.  But there are many more houses at this stage than in the summer.

These REOs are starting to hit the market now, and should hit with force in coming months.  As you say, we will start to hit the ground soon.

Thu, 10/08/2009 - 14:02 | Link to Comment chinaguy
chinaguy's picture

Yup, GFI, I concur.

Thu, 10/08/2009 - 14:15 | Link to Comment Great Depressio...
Great Depression Trader's picture

Economic Morphine:

You misunderstood CM's point. He is not capitulating to anything, he is trying to explain why the deflationist argument is wrong. He is stating that banks wont recognize losses and how the regulators and the fed are going along with this scam. If losses arent recognized, then there is NO debt destruction. Therefore the inflationists are correct. As he states, asset deflation should be rampant right now, but because of all the fraud and money printing taking place, new fundamentals have been enforced. The only way deflation will happen is if ben lets it happen. Odds are he will not.

Thu, 10/08/2009 - 16:31 | Link to Comment RagnarDanneskjold
RagnarDanneskjold's picture

Deflation cannot happen slowly in today's environment. This isn't a 19th Century gold standard we're dealing with.

I know that can sound like a bit of a cop-out, and deflationists could really get burned if they're wrong, but this is either going to happen fast or not at all. Bear Stearns and Lehman died in a matter of days or hours. 

Thu, 10/08/2009 - 12:52 | Link to Comment ahab
ahab's picture

excellent article-

how long they can keep the game up is the question i take from it

Thu, 10/08/2009 - 12:53 | Link to Comment Anonymous
Thu, 10/08/2009 - 12:56 | Link to Comment Anonymous
Thu, 10/08/2009 - 13:28 | Link to Comment Anonymous
Thu, 10/08/2009 - 12:57 | Link to Comment Anonymous
Thu, 10/08/2009 - 13:00 | Link to Comment Anonymous
Thu, 10/08/2009 - 13:10 | Link to Comment Anonymous
Thu, 10/08/2009 - 13:10 | Link to Comment Anonymous
Thu, 10/08/2009 - 13:16 | Link to Comment lsbumblebee
lsbumblebee's picture

I'll let you know what I think about this when unemployment hits 50%.

Thu, 10/08/2009 - 13:17 | Link to Comment RagnarDanneskjold
RagnarDanneskjold's picture

"Our monetary system must continually expand, forever."

And how's MZM doing? Look at the damage done to equity, debt, commodity and real estate markets by that little dip in MZM. 

Let's pretend is a great strategy in a country like Japan, where everyone goes along with the government. It's a great strategy for a time when the average person is ignorant of reality and has no means to educate themselves. How is the Fed going to get everyone to play let's pretend?





Thu, 10/08/2009 - 13:34 | Link to Comment Anonymous
Thu, 10/08/2009 - 13:27 | Link to Comment Anonymous
Thu, 10/08/2009 - 13:28 | Link to Comment Anonymous
Thu, 10/08/2009 - 13:57 | Link to Comment Anonymous
Thu, 10/08/2009 - 14:04 | Link to Comment Anonymous
Thu, 10/08/2009 - 14:07 | Link to Comment DBLTapViper
DBLTapViper's picture

One point is missed in this little game everyone is playing.  The world is made up of people and people have way to much debt and the interest payments can not be paid if you don't have a job.   And once the folks who do have a job figure out that the folks who don't have a job are getting a better deal the folks with a job will stop making their interest payments.  And interest payments is what is paying everyone's salary in this little game.

Debt has to be written off.  Push the reset button. 

 

 

 

Thu, 10/08/2009 - 14:39 | Link to Comment snorkeler
snorkeler's picture

Maybe. Or maybe people will suprise you and show that there is still many of us that fulfill the obligations we signed on for.

I think unemployment would need to get much worse before the "reset" button is considered.

 

Thu, 10/08/2009 - 15:12 | Link to Comment lookma
lookma's picture

"Debt has to be written off.  Push the reset button. "

In the long term exponential growth is unsustainable. 

But its obvious Bernanke and other top policymakers disagree that the reset time is now and believe the immediate solution is to devalue the debt in real terms (see also Roosevelt and Nixon).  Debt is nominal.  The alternative to a real depreciation of the value of debt via monetary infaltion is debt-deflation, and debt-deflation is clearly unpalatable to them and to most other policy makers around the world.

"Although deflation and the zero bound on nominal interest rates create a significant problem for those seeking to borrow, they impose an even greater burden on households and firms that had accumulated substantial debt before the onset of the deflation. This burden arises because, even if debtors are able to refinance their existing obligations at low nominal interest rates, with prices falling they must still repay the principal in dollars of increasing (perhaps rapidly increasing) real value. When William Jennings Bryan made his famous "cross of gold" speech in his 1896 presidential campaign, he was speaking on behalf of heavily mortgaged farmers whose debt burdens were growing ever larger in real terms, the result of a sustained deflation that followed America's post-Civil-War return to the gold standard. The financial distress of debtors can, in turn, increase the fragility of the nation's financial system--for example, by leading to a rapid increase in the share of bank loans that are delinquent or in default. Japan in recent years has certainly faced the problem of "debt-deflation"--the deflation-induced, ever-increasing real value of debts. Closer to home, massive financial problems, including defaults, bankruptcies, and bank failures, were endemic in America's worst encounter with deflation, in the years 1930-33--a period in which (as I mentioned) the U.S. price level fell about 10 percent per year."

http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm

 

Thu, 10/08/2009 - 15:53 | Link to Comment DBLTapViper
DBLTapViper's picture

Look - the powers that be are doing a slow burn (slow collapse) or at least they are trying.  If I was in their position I'd do the same thing.  But it's not going to change the outcome.  People are changing. 

I'm going to give you a personal stupid silly example.  My brother calls me and asks how to buy a used car on Ebay.  I have the secret so I shared it.  Now my brother make a large 6 figure salary.  Back to my claim "People are changing".  My dear brother could easily go out and buy a new car.  But what did he really do....  He is bidding on a 1993 GMC Jimmy that is going to cost him about $2,000.  My brother has never purchase a used car in his entire life...!  He hates cars, he hates working on cars - etc...  This was the biggest step I have ever seen him make.  It also tells me something about what is going on "out there".

DBL

 

Thu, 10/08/2009 - 14:27 | Link to Comment crzyhun
crzyhun's picture

"If a tree falls in the forest, does anyone hear it, is there a sound?"

Yes there is a sound and the hearing, the meaning, is absent. So, the bad assets are there, it is just that no one is listening. How bad is that??

Depends, if the laws here can be suspended, well what are the laws? Is it all merely a relative game. As in, "What do you want that number to mean?" in the old 2+2 = jok3. Unfortunately, the laws can be forgottten only so long, and then, "all fall down."

Thu, 10/08/2009 - 20:56 | Link to Comment Anonymous
Thu, 10/08/2009 - 14:50 | Link to Comment Yossarian
Yossarian's picture

There are loans that can't be serviced.  The Fed buys those loans at book value when they are in fact worth far less.  To do this they use printed money of their own creation (not really printed but you know what I mean) which ends up in the hands of the banks as capital to protect them from their next batch of losses.  The Fed balance sheet baloons as a result of all of these asset purchases.  Nobody knows exactly what is on the balance sheet of this Fed but we know it is supposedly X Trillion $'s.  Assume half of all those loans default- now The Fed balance sheet is half as massive as it was before- would anyone notice?  Would anyone care?  Couldn't they just buy more assets using their own printed money (again, not literally printed) to keep their balance sheet from declining?  The only people who lose are those businesses and individuals whose cash flows were not sufficient to service the original debt and whose budgets were strained under the old prices.  By not allowing prices to decline to cash flows you are undermining the productive in order to benefit the profligate and unproductive.  

Thu, 10/08/2009 - 18:47 | Link to Comment Anonymous
Thu, 10/08/2009 - 14:54 | Link to Comment Anonymous
Thu, 10/08/2009 - 14:57 | Link to Comment Anonymous
Thu, 10/08/2009 - 15:17 | Link to Comment Anonymous
Thu, 10/08/2009 - 15:38 | Link to Comment Joe Sixpack
Joe Sixpack's picture

Well stated. I believe this is what is happening. I may add,

 

Proclamation on the Federal Reserve System of the United States of America

 

www.RevokeTheFed.com



March 2008

WHEREAS, Article I, Section 8 of the Constitution of the United States of America authorizes Congress "To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures";

WHEREAS, on December 23rd, 1913 the US Congress enacted the Federal Reserve System;

WHEREAS, the Federal Reserve System is considered an independent agency within the federal government, with oversight of Congress and containing appointed public officials on its board of directors;

WHEREAS, the Federal Reserve System Controls the Federal Reserve Note, the official currency of the great nation of the United States of America;

WHEREAS, there may be controversies regarding the legality and constitutionality of the Federal Reserve System, it is recognized that the said system has operated continuously as the central banking system of the United States since the inception of the Federal Reserve Act of 1913;

WHEREAS, the Constitution of the United States of America granted Congress the authority to create the current Federal Reserve System, it also does grant Congress the authority to modify or revoke the Federal Reserve System;

WHEREAS, the actions of the Fedreral Reserve System represent the credit and currency of the United Stated of America to the citizens of this great nation and to the world;

WHEREAS, the Federal Reserve System, acting independently within the federal government allowed, supported, and even promoted parasitical and non-productive uses of the money and credit of the United States of America;

WHEREAS, the United States and likely the entire world's financial system is undergoing massive de-leveraging of the said parasitical and non-productive uses of the credit and money of the United States of America (as well as other nations' currencies);

WHEREAS, the US dollar, the "Federal Reserve Note" is declining in value due to these parasitical activites, as well as potentially other causes;

WHEREAS, it is recognized that the citizens of the United States and other nations did willingly participate at some level in the creation and propogation of said parasitical activities;

WHEREAS, it is also recognized that the United States of America, a sovereign nation, has the legal, moral, and God given authority to take actions to benefit its citizens and to protect its good name, credit and money in times of difficulty;

WHEREAS, it is recognized that the current time is such a time of great difficulty;

WHEREAS, it is recognized the parasitical financial institutions and their activities are at odds with citizens of the United States of America and the good credit and money thereof;

WHEREAS, the current indications are that the Federal Reserve System is acting to preserve the financial system currently flooded with the parasitical activities;

WHEREAS, the current indications are that the neither the Federal Reserve System, nor the Congress of the United States, nor the people of the United States have access to the books of the institutions being preserved by the Federal Reserve, and therefor the degree of inter-connectivity and risk associated with the institutions and other entities cannot be determined;

WHEREAS, the Federal Reserve System is accepting non-performing assets as collateral for credit with ultimate taxpayer responibility to entities not under its legislative mandate;

IT MUST BE CONCLUDED, that the Federal Reserve System is not acting to the benefit of the people of the United States of America, its credit, money, and good name;

WHEREAS, it is recognized that the political will and capability of the government of the United States of America may not be up to the task of prosecuting this proclamation ; It is also recognized that this may be the only hope for the continued survival of the United States of America as the great nation as it has historically existed.

NOW THEREFORE, it is PROCLAIMED by those supporting this Proclamation that the Congress of the United States of America FULLY NATIONALIZE the Federal Reserve System, and take full control of the credit and money of our great nation; The Congress must take whatever action necessary to seperate out, sequester, disown, or otherwise neutralize the effect of the parasitical financial activities which led to the current crisis; The Congress of the United States of America must reorganize, replace, or terminate the Federal Reserve System as appropriate; or otherwise devise a system for creation of the national currency.

IT IS FURTHER PROCLAIMED, that the Congress of the United States of America in cooperation with the Executive of the United States of America contact allied nations and any other nation willing to participate in the overhaul of the failing and parastical financial sytem currently in operation and create new treaties and alliances as necessary to create a sane and productive system of finance with the express goal of supporting a productive national, and by extension and through voluntary cooperation, world economy;

FURTHERMORE, it is PROCLAIMED that it should be the goal of such an international effort to maintain fair international trading practices allowing for protection in national interest of labor, resources, and productive capabilities;

WHEREAS, it is recognized that such a move on the part of the United States of America may result in the necessity of an isolationist policy IF the other developed nations do not follow our lead; If such occurs, so be it.

SO HELP US GOD!

 

 

Thu, 10/08/2009 - 15:52 | Link to Comment Anonymous
Thu, 10/08/2009 - 15:58 | Link to Comment DBLTapViper
DBLTapViper's picture

All this marco crap is just that - crap - what are real people doing? 

Is it ass puckerin' time? - not yet but it's close.

DBL

Thu, 10/08/2009 - 17:40 | Link to Comment Harbourcity
Harbourcity's picture

The problem is, at its root, morality and the lack of it on Wall Street. No matter what the Fed does, until there is real punishment for the crime, people will just look for ways around any rules setup and continue the crime spree.

Thu, 10/08/2009 - 17:57 | Link to Comment Anonymous
Thu, 10/08/2009 - 18:07 | Link to Comment Anonymous
Thu, 10/08/2009 - 18:42 | Link to Comment Anonymous
Fri, 10/09/2009 - 00:43 | Link to Comment Apocalypse Now
Apocalypse Now's picture

Firstly, it is a fact that we are in deflation (not just technically but real deflation - real means main street) and have been for some time.  That is the important starting point, and the only question is will we deflate more, will the Fed take drastic actions to prevent further deflation and depression, and will the Fed go too far and cause a currency crisis which would drive everyone out of the dollar and head long into hard assets (hence inflation).

A further weakening of the currency will make necessary imports from countries that are not devaluing their currency more expensive (inflationary).  At the same time, it will make our securities and assets much cheaper for foreigners to buy (capital investment).  Wages and hours worked are declining which keeps the producers producing (recent low PPI).  With a weakening currency, most companies/countries will favor loans in USD which will ensure future dollar dominance.

We are currently in deflation, I believe the government is bidding up the price of securities that compete with gold (return) and which could also be purchased by non -ally SWF's (not single white females).  This is both geopolitical (we don't want to be owned by China or Saudi Arabia) and to sustain the global elites (paper monetary system control).  In addition, this is a cheap and controlled way to increase consumer confidence since the equity markets are very controlled (legal entities owned by the government purchasing through robots in HFT and funded by POMO directed by the "PPT").  Look at the long bonds - the declining yield in the 30 year does not point to inflation.

"From a technical perspective we are absolutely in one of the most powerfully deflationary periods in history, yet besides housing prices and a few over-produced consumer goods, we find that stocks, bonds and commodities are all well bid at the moment." - don't understimate the impact of housing, it's most Americans primary investment vehicle.  Also, vehicle prices are coming down as well.

While we can ascribe some of this to the artificial wall of liquidity (come to think of it, is there any other kind?) being thrown into the financial market(s) by the Fed, it leaves hanging the question of why that money is not being completely swallowed into the bottomless black hole that the deflationist camp says lies at the heart of our current financial system."  A robot with unlimited access to fed funds 1's and 0's and goal seek can make the numbers whatever you want.  You might have a point with commodities, although speculators trying to influence markets are really influencing the prices - the real demand and supply numbers don't change as much as the artificial liquidity given to speculators (including big banks) that drive the figures up and down.  And at the center of the black hole is the trillions in financial derivatives - the recent move by China to default on some of those derivatives is probably a test like pick up sticks or jenga.

Stocks and commodities are increasing because 1. They are liquid markets (more liquid when not crashing) and with the incredible uncertainty it allows managers of real money (money that has been earned by working for it) to jump asset classes quickly and have stop limits. 2. The banks know that if they start providing loans again they will have higher defaults, so instead they are all buying each other's stocks and upgrading each other to improve their financial conditions.  They are getting free money from the fed and buying up securities and commodities - especially securities with dividends.  If you were borrowing at 0% and a security gave you a 3% dividend HOW MUCH WOULD YOU BUY???  I am amazed that nobody has reported on this before.

So, the right question is will we see more deflation, when will we stabilize, and then will the fed cause inflation that exceeds their 2% stated goal and go into a currency crisis/hyper-inflation.  My main question is what securities and commodities will benefit most from the coming war with Iran?  This would be a good topic for discussion from some great minds here and one that is actually related to the topic at hand. 

Riddle me this, another question relates to risk and return and the fact that many investments are now risky including bank deposits and money market funds (not sure what is backing those up).  So if the banks/fed are using low interest yielding accounts that imply low risk, but use the funds to buy up high risk securities and have nothing but unrecognized liabilities on their books - why shouldn't the depositors get the return?  Should everyone exit the supposed low risk vehicles since they are just as exposed through their counter-parties actions/risk so that they can capture some of the return they should be getting for taking a real risk - or should those that are worried about their banks go to gold?

 

Thu, 10/08/2009 - 22:09 | Link to Comment Anonymous
Fri, 10/09/2009 - 02:13 | Link to Comment Anonymous
Fri, 10/09/2009 - 04:17 | Link to Comment Anonymous
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