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Guest Post: Taking On The Fed - What The Deflationists Are Missing
What the Deflationists Are Missing
by David Galland, Managing Editor, The Casey Report
An interesting article by Ambrose Evans-Pritchard came my way the other day. It’s worth a read, if for no other reason than that he paints an appropriately dark picture of the current state of the U.S. economy. You can read it here.
While I very much share Mr. Evans-Pritchard’s view that the global economy is far from out of the woods, our views diverge in that he sees devastating deflation speeding our way down the tunnel. Casey Research readers of any duration know that we see devastating inflation.
While we could both be right, with deflation first and inflation later, I’m not so convinced.
For starters, there is already a massive inflation operation being run by the Fed, evidenced in a historic spike in the monetary base over the last two years.
And the Obama administration is far from done.
The Democrats’ reinvigorated focus on jobs – the single most important factor in this November’s elections – will soon translate into a flurry of new initiatives designed to put people back to work, most of it funded at taxpayer expense.
To believe in the deflationary case would seem to require believing that Obama and his minions are ready to forgo any further political aspirations by collectively putting their feet up on their desks for the balance of their sole term at the apex of global power.
Given Obama’s meteoric rise to power – evidence that he possesses a certain drive and competence in the game of politics – that seems highly unlikely. And so it seems safe to assume we’ll soon witness aredoubling of his efforts to keep interest rates down… to make it easy and cheap for strapped consumers and businesses to keep borrowing… and to otherwise flood the economy with money.
In a deflation, the value of the money increases – which is actually a pretty desirable thing, if you ask me. Inflation, by contrast, means that pretty much everything you own in the local currency steadily loses value – forcing investors into a perpetual game of catch-up. It’s hard for me to calculate how the government can dramatically increase the money supply and yet have each of the currency units become increasingly more valuable over a sustained period of time.
Arguing against that point, Evans-Pritchard makes the case that the U.S. government is making much the same mistakes that were made in the first part of the Great Depression, i.e., being overly tight with the money. And that the velocity of money is falling.
There are a couple of key differences between now and then, however. First, the Fed didn’t actually know what the money supply was back then. They literally had no monitoring tools in place, mostly because no one thought it was important enough to track. Second, they didn’t have fiat monetary powers. Today, neither of those factors apply.
Everyone knows what the money supply of the U.S. is and watches it keenly. Including our foreign creditors. And so it is not surprising to see the Fed publicly talking about tightening up a bit. But it’s just talk at this point.
With the economy continuing to struggle, the only reasonable assumption that can be made is that the Fed – in cahoots with the entirely politicized Treasury – will keep shoveling money onto the economic embers, and continue to do so until economic activity again flares up.
That will, of course, require increasing the quantity of money that actually makes it into the economy – but that should be child’s play for Team Obama – with direct hiring and spending, continuing to buy mortgages and other loans to suppress interest rates, forgiving the bad debts of banks, or changing accounting rules so that banks can postpone reckoning day. And that’s just for starters, all of it packaged nicely in the name of the public good.
And once the money starts to flow, there will be a pick-up in economic activity, which will beget yet more money moving around. At first, this money will be a palliative for the economic worries, but then comes the inflation – a small trade-off, the politicians will decide, if it buys them enough of a recovery to make it through the November elections and get the president the second term you know he so strongly desires.
There is something else that I think the deflationists are missing, and that has to do with confidence in the currency. If the U.S.’s many creditors come to agree with our point of view – that the dollar is being led to the altar as a sacrificial lamb to political expediency – then they’ll further reduce their purchases of our Treasuries and start trading their dollars for stronger currencies and tangible assets, including precious metals.
At that point, interest rates will have to begin rising to attract new buyers. As you can see in the chart of long-term Treasury bond rates, a significant move off recent lows has already occurred, and rates are looking poised for a breakout to the upside.
Of course, the higher those rates ratchet, the more it will cost the U.S. government to carry its massive debt. While rising rates will continue to drive demand to the short end, suppressing those rates, in time the sheer quantity of paper that will have to be rolled over, and the rising tide of inflation, assures that short-term rates will have to rise too.
At that point, the train begins to leave the track.
As the train wreck approaches, the government is going to have to find creative new ways to fund its social contract with impatient voters. Perhaps, for instance, pegging everyday fines and assessments to the amount of income a person makes. Executed brashly, such policies might even allow the government to charge a person of means, say, $290,000 for a speeding violation.
I know what you’re thinking: C’mon, let’s be realistic – that could never happen. Think again…
Europe slapping rich with massive traffic fines
By FRANK JORDANS
The Associated Press
Sunday, January 10, 2010; 11:30 AM
GENEVA -- European countries are increasingly pegging speeding fines to income as a way to punish wealthy scofflaws who would otherwise ignore tickets.
Advocates say a $290,000 (euro203,180.83) speeding ticket slapped on a millionaire Ferrari driver in Switzerland was a fair and well-deserved example of the trend.
Germany, France, Austria and the Nordic countries also issue punishments based on a person's wealth. In Germany the maximum fine can be as much as $16 million compared to only $1 million in Switzerland. Only Finland regularly hands out similarly hefty fines to speeding drivers, with the current record believed to be a euro170,000 (then about $190,000) ticket in 2004.
The Swiss court appeared to set a world record when it levied the fine in November on a man identified in the Swiss media only as "Roland S." Judges in the eastern canton of St. Gallen described him as a "traffic thug" in their verdict, which only recently came to light.
"As far as we're concerned this is very good," Sabine Jurisch, a road safety campaigner with the Swiss group Road Cross.
Or maybe the government will force you to convert some or all of your IRA or 401(k) into Treasuries, perhaps packaged up in an annuity. You’d be given the choice of making the switch or making a withdrawal and paying all outstanding taxes at that point. This is something that Doug Casey has warned about for several years now.
The seeds of that possibility may be headed for the soil: the following article from BusinessWeek reveals that the Treasury is now looking very hard at the trillions in retirement accounts and trying to figure out new ways to “help” the owners of those accounts.
In my view, what’s important in this little dissertation can be summed up as follows:
- The current administration and its congressional allies have powerful political motives to soak the economic soil with fresh dollars. The Christmas Eve announcement that the Treasury is removing the $400 billion cap on losses it will cover for Freddie and Fannie is a classic example of how far they are willing to go to keep the money moving.
- Unlike the Great Depression, the U.S. is now on a fiat money system – which is purpose-built for the current scenario. Open the taps, and if that doesn’t work, open them even wider. Failing to do so would be political suicide, and Obama and his team are just not into the idea of serving a single term.
- Given the size of foreign holdings of U.S. dollars, the nation is faced with a “rock and a hard place” situation, where a sharp loss in confidence on the part of our creditors would likely lead to a currency crisis that drives the value of the dollar quickly lower, at the same time that it drives interest rates higher.
Something will have to give. We think that something will ultimately be the U.S. dollar, as it’s politically more acceptable to have a failing dollar than a smoking hole where the economy used to be.
Before this thing is over, I would not be surprised to see a new currency regime adopted that introduces exchange controls and a different category of dollar to be issued for the purpose of paying back foreign creditors. Such a dual-track currency system is nothing new but has been used by desperate regimes numerous times throughout history.
Forecasting the future is actually impossible, as there are just too many variables. But that doesn’t mean that we can’t step back and make certain logical assumptions about the policies the politicians are most likely to deploy in their efforts to retain power.
In the case of today’s world, the only politically logical decision will be to keep on spending until that spending itself becomes a pressing problem, at which point the politicians will turn their attention to “solving” the newest in a long list of problems they have created.
At which point they will no doubt find some creative way to blame the inflation on speculators, profiteers, and the free market.
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Deflationists have too much faith in paper. That's understandable because paper had a few hundred-year run as long as the real economy was growing.
But, now it's not. Paper is a claim on the future, all money is that. A future of more.
Deflationists think that paper with the right ink has "worth"? That's absurd, ab initio.
What is the paper in question? Backed by the MOST levered institutions on the planet, the US Gov't and Federal Reserve.
This is an axiom: deflation kills ANY levered institution. Anyone who thinks "banks" and "lenders" do well in deflation should review what happened to "banks" in 2008. Even GS, the ultimate "leech creditor," was days away from total collapse. Nevermind all of the commercial banks. They're ALL LEVERED. That's how they make their money!
Deflationists seem to believe we live in a world of George Bailey lending of actual capital. Jeez, if deflation happens, the loans default, the banks are crushed. They don't care about "real" asset "value," wtf is a bank going to do with a bunch of houses or other real bs??? That's not their business! Their business is riding an inflation wave. If inflation were to go double-digits, the banks would be lending always at above that, and seeing immense notional profits.
I cannot fathom how ANYONE who looks at banks' performance between 1982 and 2007 then from 2007-Mar 09, and then from Mar 09 till now could possibly believe that banks do WELL or even better under deflation!
Inflation helps the elites and the banks! That is what the Fed DOES, it is their system. Growth in credit=growth in profits for them. If they cannot grow credit, banks collapse, "lenders" collapse, the government collapses. That is why in the 1930s, they did a brute force devaluation. That is what is coming.
This deflation cannot be stopped because the future is contractionary and there is a net decrease in demand for credit in the aggregate. So, they will be *forced* to devalue.
But, in the absolute, paper as an institution is failing, because it is and always was a PROMISE to pay something more in the future.
Anyone who thinks prices fall forever has never been to Brazil. I said this 50x on TF, go there and see how goods are priced. See how much stuff costs. The axiom of business is that they cannot sell at a loss. They will reduce prices during liquidation then they revert UPWARD. If Toyota cannot sell 100k cars at a profit, they will sell as many as they can, but at a profit. If that's 20k, then that's what it is.
It means less goods. The apparent CPI "deflation" is capacity glut being worked off. At the other end of that, people in lesser nations live in apartments, don't have cars, can't afford Nike shoes and iPhones. Their wages go less far.
Watch when things start to tumble down and everybody runs for the dollar and sell every asset they have to keep their head above the water.
lol...what's the gov't gonna sell?
Deflation kills levered institutions.
Besides, people won't liquidate, they'll just default and WALK. That's what they are doing now. Keeping the car and the personal property and walking on the loans.
And the Fed/Gov is FF&Cing every kind of paper trash out there. CMBS is going to be backing the dollar.
I have no clue why in the midst of a financial crisis ANYONE would put faith in paper notes.
Study how people coped with the economic collapse in Argentina in 2001. Then buy some gold and silver to store some wealth, just in case. Not as a trading vehicle to try and make a 25% IRR in the next twelve months or whatever your target may be, but just in case.
Beans, bullets, bandaids and bullion. The 4 B's works for me in 2010.
To a starving man (think Haiti) what has more value an oz. of gold or a case of soup? Gold and silver are for optimists.
should be interesting to see how 60 million gun owners react
Hyperinflation would lead to the inability to tax. The elites lose power and end up with probable regime change.
Good luck with that
Existential crisis in paper, which is a claim against a future that is DIFFERENT from what we have come to expect from 500 years of growth. Period.
Inflation/deflation, whatever.
Deflation kills ALL levered institutions, which is ALL OF THEM. After 90 years of credit inflation there is NOT ONE ENTITY OUT THERE, not a bank, not a government, NOBODY who is unlevered!
Deflation does not help ANYONE. It causes the immediate insolvency of everybody. Can't people SEE THAT? What happened in 2008? You had nearly EVERY major bank nearly go BK simultaneously; these are supposed to be LENDERS who deflation "helps"! That is what the deflationist idiots tell us, bankers want deflation. NO, THEY DON'T. If we get it, their banks go TITS UP.
The system is built to grow credit. But the future isn't one of GREATER credit demand than today! The future is one of LESS. Therefore, PAPER as a fundamental *institution* faces a crisis, because paper is all about promises of a future of MORE.
“Deflation does not help ANYONE”? Really? While some may see their incomes going up above the rate of inflation—movie stars, CEOs, stock brokers, speculators, professional athletes, Federal employees, Wall Street bankers—others see their incomes stagnating, like lower-middle- and middle-income workers, retired people on pensions and Social Security, savers earning negative interest rates…the unemployed. These people want inflation?
The Fed screams about deflation, according to Ron Paul, because borrowing endlessly is not the road to permanent prosperity and real debt must be reduced. “Depreciating the value of the dollar does that,” says Rep. Paul.
“If the dollar loses 10% of its value, a national debt of (say) $6.5 trillion is reduced in real terms by $650 billion dollars. That’s a pretty neat trick and quite helpful—to the government. That’s why the Fed screams about a coming deflation, so it can continue the devaluation of the dollar unabated. The politicians don’t mind, the bankers welcome the business activity, and the recipients of the funds passed out by Congress never complain.
"The greater the debt, the greater the need to inflate the currency, since debt cannot be the source of long-term wealth. Individuals and corporations who borrow too much eventually must cut back and pay off debt and start anew, but governments rarely do. But where’s the hitch? This process, which seems to be a creative way of paying off debt, eventually undermines the capitalist structure of the economy, thus making it difficult to produce wealth, and that’s when the whole process comes to an end. This system causes many economic problems, but most of them stem from the Fed’s interference with the market rate of interest that it achieves through credit creation and printing money…”
“Just as we must eventually pay for our perpetual deficit, continuous manipulation of interest and credit will also extract a payment… The piper will demand payment and the downturn in the business cycle will see to it… Let there be no doubt: the business cycle, the stagflation, the recessions, the depressions, and the inflations are not a result of capitalism and sound money, but rather are a direct result of paper money and a central bank that is incapable of managing it.
“Our current monetary system makes it tempting for all parties, individuals, corporations, and government to go into debt. It encourages consumption over investment and production. Incentives to save are diminished by the Fed’s making new credit available to everyone and keeping interest rates on saving so low that few find it advisable to save for a rainy day. This is made worse by taxing interest on savings. It plays havoc with those who do save and want to live off their interest. The artificial rates may be 4, 5, or even 6% below the market rate, and the savers—many who are elderly on fixed incomes—suffer unfairly…” Representative Ron Paul, Paper Money and Tyranny, September 5, 2003
ok...you're right, of course.
Deflation helps the LITTLE PEOPLE.
So how likely an outcome do you think it is when the ONLY PEOPLE it helps are the people with cash in a mattress?
You're pitting the interests of the powerless and poor against every single bank and government in existence. Compare the power of the levered versus the unlevered.
There is no bank that will not go BK due to deflation. NONE. The biggest banks are the worst. The Wall Street power players know that deflation destroys their businesses within a week. In the span of 7-10 days in Sep 08, nearly every single wall street institution, big insurer, and large banks went Tits Up. Even the mighty GS was days away from collapse.
This outcome is one that those in CONTROL of the money supply wish to avoid at ALL COSTS because GS and the moneychanging machine is THEIR LIVELIHOOD.
Seriously, deflationists are *expecting* those IN POWER to let their OWN gravy trains end voluntarily. Yes, they will PRINT MONEY to avoid the bankruptcy of Goldman. They will bankrupt thousands of little people with mattress cash and SS stipends to do it.
In what nation, anywhere, ever, has it gone the other way? I cannot find a single example in the entirety of history where the little guy came out ahead on this.
At this time, nothing could be more dangerous to America’s economic future than to praise inflation. Anybody with that line is simply a banker apologist. And misinformation about the subject is even more dangerous than ignorance.
Examples of deflation misinformation:
*There is no bank that will not go BK due to deflation. NONE.
*The ONLY PEOPLE it helps are the people with cash in a mattress.
*I cannot find a single example in the entirety of history where the little guy came out ahead on this.
*Allowed deflation from the Sept 08 crisis would have caused instant collapse (paraphrased).
Solvent banks throughout the nation despised these bailouts of the behemoths, whom they were forced by the FDIC to help prop up. Who wants to bail out a ruthless, insider competitor?
Many people, as well as the trade cycle, benefit from deflation after runaway inflation.
Says Ludwig von Mises: “The favor of the masses and of the writers and politicians eager for applause goes to inflation. First: Inflationary or expansionist policy must result in overconsumption on the one hand and in malinvestment on the other. It thus squanders capital and impairs the future state of want-satisfaction. Second: The inflationary process does not remove the necessity of adjusting production and reallocating resources. It merely postpones it and thereby makes it more troublesome. Third: Inflation cannot be employed as a permanent policy because it must, when continued, finally result in a breakdown of the monetary system.”*
The Sept 08 crisis could have been managed fiscally for the benefit of the economy, letting the TBTFs fail and be broken up. It was a mega-catastrophe, an exploding derivatives time bomb, 20 times the size of the real economy that crashed the Dow, a bubble compounded by corruption where derivatives were concentrated in the hands of just 3 banks: JP Morgan Chase, Citigroup, and Bank of America—in deals made behind closed doors by a few powerful men. And all the while, Ben Bernanke was cheerleading them on, saying that derivatives were good for the economy, making the U.S. economy resilient to risk.
The question is, Do you want to protect the central bank to protect its system, or do you want to see it fail from its own incompetence and fraud and permit the immediate resumption by the community of its Constitutional prerogative over the issue of money including its modern credit substitute? I choose the latter.
As to finding “a single example in the entirety of history where the little guy came out ahead on this,” the marketplace will finally take precedent over the “POWER” of those driving their own gravy trains at 200 mph on the rails of the economy—it’s called a crack-up boom, i.e., the breakdown of the whole monetary system.
*Ludwig von Mises. Human Action A Treatise on Economics (third revised edition), p. 432.
You think I'm PRAISING inflation?
My god man, I am praising nothing, I am merely PREDICTING it.
The interests align to inflation. It helps the government, elites, the leveraged, and the big fish. Deflation would help the littlest guy. Consequently, I see no possibility for a deflationary crash. None.
And, there's never been one ever. In every case, they have gone brute force devaluation at the trough. It's either that or immediate insolvency and sovereign collapse.
A breakdown of the monetary system will not help the little people or those with paper notes.
I mean, seriously, read first before hitting the post button.
Hey shitbag, we need banks, but we don't need these banks. We never gave them permission to take our money and lever it up, we never gave permission to make fraudulent loans and then play hot potato with them, we never gave them permission to do any of that. In fact, we have laws that prevent them from doing what they did. Our only fault was that we assumed those laws would be enforced. Like I said we need banks, but we sure as hell don't need these ones. Fuck em, the system will recover, let them fail.
Respectfully Mr. Galland, you seem stuck in an 1980's economic textbook time warp. In age of not fractional reserve lending, but ZERO reserve lending, the money supply has become meaningless. Furthermore over 800 Billion of that money supply is sitting as bank deposits at the Federal Reserve Board so than the FRB can buy the MBS and other garbage from China, the banks and the bank's SIVs.
Credit worthy borrowers dont want to borrow so there is no other place for that "money supply" to go.
We are in a liquidity crisis, and going deeper into debt is only going to make it worse. US individuals are reducing their debt, but the US Treasury is more than making up for it.
I believe the US would inflate if it could. But I agree with Ambrose on this one. Even helicopter drops to individuals instead of banks wont work, since the increased transfer payments and lower taxes only end up as larger US Treasury debt.
As an individual it is a no brainer to pay down 5,6,7,8 percent debt rather than tie it up in 30 day Treasuries. The US increasing debt, consumption economy is going down.
Before this is over, I guarantee you you'll see the FedGod mailing (or dropping from Apache gunships) a version of money to people that will "expire" unless spent within a certain period of time.
We keep forgetting that at this particular moment in history, the Federal Reserve and Treasury have essentially unlimited financial power, and will continue to wield it until they are forced not to.
As others have said above, deflation simply will not be allowed.
I believe that even if foreign creditors stopped buying our debt that the Treasury would simply "Lie" and say that all bills/bonds were sold at the expected price, the Fed will credit the Treasury's account, and who's to say anything about it.
Who's to say that this isn't happening right now?
Walmart gift cards to help China hit double digit growth this year?
Deflation is Poorly Understood; Bernanke's only good idea to date was dropping money from helicopters...
Return to basics. Money times Velocity equals GDP. Money is money. Velocity is how many time it circulates (or multiplies) in an annual cycle. Velocity becomes how effectively we use the money supply. With a proper risk weighted interest rate it becomes valuable to circulate lent money and circulated lent money not only compounds interest(for profit) it is the gasoline of a capitalist production engine.
In an inflationary scenario a ‘slippage’ in the process comes to ‘devalue’ the currency. Instead of 100 dollars one needs 125 dollars
to purchase the same thing. This is distressing most of all to those who have a fixed pool of savings…the elderly for example…and even more so for the wealthy whose money is not producing anything or in the case of a bank, money that is not being lent because the return is not worth the risk if rates are artificially low... Commodities become ‘more expensive’ in this scenario. A house worth a hundred thousand dollars comes to cost $125,000 "cheaper" dollars.
Deflation is an "identical process," only the sequence of ‘interior’ events is somewhat reversed. As has happened after the mortgage bubble popped the fundamental asset real estate got marked down FIRST from its inflated value. So money did become more valuable relative to the corrected asset price. However...
If one owed 125 inflated dollars lent money pre-bubble one only has a 100 dollars of assets post bubble. While the dollars are worth more you have to come up with 25 of your more valuable dollars to reborrow or continue borrowing the 125 pre-bubble contract inflated dollars. Net you can wind up with only 75 dollars if you pay the 25 from selling the house for 100 -- if you survived covering the difference in say a home short sale….Going forward with less money and no asset to borrow against you don’t buy and you can’t re-borrow enough to buy even the now 100 post bubble dollar house.
This pits the nominal value of real estate contracts written during the bubble at 125,000 dollars against the current currency "more valuable" dollars you have less of, hence the deflation, because borrowing and spending cease and producers have no reason to borrow and banks cannot lend profitably without higher rates reflecting the risk in lending since rates are QE artificially low.
The tension and cause of the crisis is that this two ‘realities’ cannot resolve themselves without tremendous social pain and disorder as long as old value inflated price contracts remain creating the more valuable dollars against the diminished value collateral that is now insufficient to cover the inflated value contract. The world grinds to a halt and then hyperinflation ensues as people pay more and more dollars to buy the diminishing supply of commodities available to be purchased because producers don't produce and lenders don't lend and have less demand for lent money.
I would suggest that neither the bubble nor the revalued post bubble values is any more real than the other. The contracts need to be unwound as imaginatively as they were created.
Rather than lending to the banks to support the former mispriced inflated real estate price contract, instead the money could and should be spent closing out the short sale difference by adding say half to to new buyer and providing half to the seller and issuing a new loan that at properly priced in the post bubble 'real' priced assets and dollars which provides banks with “free money” covering the bubble contract losses and buyer and seller with funds to cover the short part of the sale. This would work if the owner was also the buyer.
Banks then should be obliged to lend or lose the "free" money immediately if they don't lend and eventually pay some of it back because they encouraged the mispricing that created the bubble in the first place - they are culpable. Rates should then rise to a risk based value not left at the ridiculous "inflation protection" levels we have seen which also caused these latest problems - the government is also culpable.
Inflation was never the problem as much as disingenous rate suppression in the name of inflation protection mythology. Taking the free money from banks if they don't lend with the stipulation they will be expected to return some to the government should keep uncontrolled inflation in check while allowing the market to raise rates in keeping with lending risk and supply and demand instead of governments now controlling inflation by suppressing rates so low bubbles happen and we stumble as we are now into deflation simply because most of these economists are idiot academics and nothing more with no grasp whatsoever of actual economies.
As its stands we have been screwed more than twice and we remain screwed going forward.
Deflation is Poorly Understood; Bernanke's only good idea to date was dropping money from helicopters...
Return to basics. Money times Velocity equals GDP. Money is money. Velocity is how many time it circulates (or multiplies) in an annual cycle. Velocity becomes how effectively we use the money supply. With a proper risk weighted interest rate it becomes valuable to circulate lent money and circulated lent money not only compounds interest(for profit) it is the gasoline of a capitalist production engine.
In an inflationary scenario a ‘slippage’ in the process comes to ‘devalue’ the currency. Instead of 100 dollars one needs 125 dollars
to purchase the same thing. This is distressing most of all to those who have a fixed pool of savings…the elderly for example…and even more so for the wealthy whose money is not producing anything or in the case of a bank, money that is not being lent because the return is not worth the risk if rates are artificially low... Commodities become ‘more expensive’ in this scenario. A house worth a hundred thousand dollars comes to cost $125,000 "cheaper" dollars.
Deflation is an "identical process," only the sequence of ‘interior’ events is somewhat reversed. As has happened after the mortgage bubble popped the fundamental asset real estate got marked down FIRST from its inflated value. So money did become more valuable relative to the corrected asset price. However...
If one owed 125 inflated dollars lent money pre-bubble one only has a 100 dollars of assets post bubble. While the dollars are worth more you have to come up with 25 of your more valuable dollars to reborrow or continue borrowing the 125 pre-bubble contract inflated dollars. Net you can wind up with only 75 dollars if you pay the 25 from selling the house for 100 -- if you survived covering the difference in say a home short sale….Going forward with less money and no asset to borrow against you don’t buy and you can’t re-borrow enough to buy even the now 100 post bubble dollar house.
This pits the nominal value of real estate contracts written during the bubble at 125,000 dollars against the current currency "more valuable" dollars you have less of, hence the deflation, because borrowing and spending cease and producers have no reason to borrow and banks cannot lend profitably without higher rates reflecting the risk in lending since rates are QE artificially low.
The tension and cause of the crisis is that this two ‘realities’ cannot resolve themselves without tremendous social pain and disorder as long as old value inflated price contracts remain creating the more valuable dollars against the diminished value collateral that is now insufficient to cover the inflated value contract. The world grinds to a halt and then hyperinflation ensues as people pay more and more dollars to buy the diminishing supply of commodities available to be purchased because producers don't produce and lenders don't lend and have less demand for lent money.
I would suggest that neither the bubble nor the revalued post bubble values is any more real than the other. The contracts need to be unwound as imaginatively as they were created.
Rather than lending to the banks to support the former mispriced inflated real estate price contract, instead the money could and should be spent closing out the short sale difference by adding say half to to new buyer and providing half to the seller and issuing a new loan that at properly priced in the post bubble 'real' priced assets and dollars which provides banks with “free money” covering the bubble contract losses and buyer and seller with funds to cover the short part of the sale. This would work if the owner was also the buyer.
Banks then should be obliged to lend or lose the "free" money immediately if they don't lend and eventually pay some of it back because they encouraged the mispricing that created the bubble in the first place - they are culpable. Rates should then rise to a risk based value not left at the ridiculous "inflation protection" levels we have seen which also caused these latest problems - the government is also culpable.
Inflation was never the problem as much as disingenous rate suppression in the name of inflation protection mythology. Taking the free money from banks if they don't lend with the stipulation they will be expected to return some to the government should keep uncontrolled inflation in check while allowing the market to raise rates in keeping with lending risk and supply and demand instead of governments now controlling inflation by suppressing rates so low bubbles happen and we stumble as we are now into deflation simply because most of these economists are idiot academics and nothing more with no grasp whatsoever of actual economies.
As its stands we have been screwed more than twice and we remain screwed going forward.
I’ve never understood why we can’t have a dollar based on free market valuation, of agreed upon worth. In general, people who say deflation is a killer and not a cleanser are the bankers—because they can’t do anything about it, because it kills them. If the marketplace can take away the reins of control from the private owners of the Fed, from these insider bankers, there must be some good in deflation.
What you suggest—unwinding mispriced inflated real estate price contracts with “free” money-- would be equitable only if all inflation distortions were corrected across the board. Otherwise, confidence in the system is lost. That means also reimbursing, say, those who lost value on a paid-for home bought at an inflated price, or on a high-interest student loan, or on savings that earned negative interest rates or on inflated property taxes or stagnated wages and social security income and life insurance or…
Honest money and freedom are inseparable. Your way leads to malfunction and distortions, inequality and injustice—to mistrust and destruction of a market economy. It is unworkable in a free society. It creates a disincentive to work, innovate, or save for a rainy day; productivity and standard of living would plunge.
The evils of paper money cannot be assuaged by selective tinkering. The manipulated wealth of Wall Street and the welfare state cannot forever be supported by government cheating—by robbing Peter to pay Paulson and Blankfein. It is dishonest. Money is a moral as well as an economic and political issue.
Paper money, said Founder James Madison, destroys…”the necessary confidence between man and man, on necessary confidence in public councils, on the industry and morals of people and on the character of republican government,” i.e., exactly what I believe your proposal would do.
With electric power consumption down in the U.S., employment going up, spending down, credit card defaults now on the table behind foreclosures...the deflation has already begun.
Short everything except toilet paper and whiskey.
Give me a break. Deflation should happen b/c trillons of dollars are going to be written off. For those of you that went to goverment schools: That means the dollar appreciates which = deflation.
There is inflation because the dollar is being debased. Food is going back up again. Oil up despite lower demand. Car prices up. Computer chips and memory up. Gold up. Besides real estate, what the hell is going down in price? The idea of the dollar increasing in "value" is ludicrous. It is decreasing in value.
Deflation in everything priced in wheat. Excess capacity, credit contraction, unemployment and fear = implosion. Social catastrophe is near... it's only a matter of a few years at most. A nice ticket to a New Zealand farm that is self sufficient is highly recommended.
I must say the intellectual debate put forward by all can be likened to a 1st year college students pissing contest. These guys running the Government are criminals so maybe best get 50cent or Snoop dogs opinion as to what is more favourable to the cartel, inflation or deflation? For the record I say inflation cause even an uneducated chum like myself knows prices only ever go up. Having said that I love all your work.
To the ordinary citizen this discussion must seem academic and irrelevant. The destruction of jobs and lower incomes is making everything more expensive relatively.
if they were to force a portion of your 401k or IRA from stocks into bonds wouldn't that destroy the stock market? I believe this administration (under Larry Sumners) is trying to use the "wealth effect" to bail out some of its problems.
The other major flaw in your thinking is that this fed does not want another massive asset bubble. I am 100% sure they are trying to cause inflation to push the price of stocks and real estate. As you are aware the fed is not trying to help out the moms and pops out there, but is very interested in bailing out the banks that have billions in bad debt off balance sheet.
The fed would love for there to be inflation. Inflation would cause housing prices to go up, bailing out banks, making people think they are richer causing them to spend more money.
So if you are correct, then the fed has done its job. The win of inflation over deflation is exactly what the fed wants. They believe they will be able to control inflation, but the deflationary beast will destroy all wealth.
I personally would love to see deflation so I can buy some assets on the cheap....
Think your thinking is flawed, best of luck.
We don't need your stinking "slap on the wrist" TAXES!!!!!
WE NEED YOU TO BREAK UP THE BIG BANKS NOWWWWWWW!!!
Capitalism without failure is like christianity without HELL, Sir--it just wont work, and what we see today is the results. Had you not interfered to save the status quo for your big banking cartel buddies, we would be well on our way to REAL recover right now---
BANKS CAN AND MUST FAIL!!! STOP the life support!!
Deflationists: The Flat-Earthers of our time.
read the post and comments in their entirety last night and while lots of interesting points, the market is totally bi-polar on this issue.....and it is perhaps the KEY issue for us personally going forward. As I thought about it in personal terms I realized that in my personal actions and my business, I am acting as a deflationist ( curbing spending, retiring debt, no new business expansion), yet with my personal finances,I am investing as an inflationist. So, am I subconsciously hedging, or am I just like the markets in general? I think the answer for now is we dont yet know the outcome since future policy actions/mistakes still need to play out.
Again: deflation is the MORTAL ENEMY of the leveraged.
Remember that.
Look around you...see who is leveraged and see who isn't. Compare their access to power and figure out who will get their way.
They will inflate and bail out the leveraged and leave the rest of us to rot - that is what they are doing!
Slow deflation ->> Global debt crisis ->> Massive QE ->> PIIGS default and leave EURO ->> Economic Depression ->> Japan default black swan event ->> Currency crisis worldwide ->> Global default ->> gold $2,500-$10,000 ->> Trade war + possible world war 3 over resources ->> Countries nationalize all gold/silver reserves still in the ground, and use to back new currency ->> Gold stocks/companies become worthless
Trav777 may be correct in theory but that doesn't mean those who have leverage will make things happen as they wish. A top-heavy boat can tip over no matter how expert the skipper is. There is so much debt, and the monetary system is so unstable, that I don't think the "captains of finance" can be assured of navigating to the port of their choosing. They would if they could but it seems to me that there is considerable uncertainty up on the bridge.
There's never been a government that has failed to inflate. Ever.
If they want to go that route, they will get there. I have confidence in their ineptitude. The system will not be saved by inflation, it will just be destroyed less quickly.
Money is not a real system, it's a contrivance. So is debt. It's a concept; it has no force and effect of its own. We are not playing with the weather here, they are numbers on a balance sheet.
If we granted debt jubilee tomorrow or we printed up $100 and eleventy trillion for everyone, the oil would still pump, the turbines would still turn, life would go on. That's what I mean.
Letting these stupid balance sheets of idiots like bankers and economists ruin our societies and lives is the pinnacle of stupidity. Perhaps this is why periodically the banker class gets purged from various countries.
I have studied history and cannot find one example of a deflationary implosion that a sovereign was "unable" to prevent...what, are all those FRNs going to sprout legs and take up guns and start demanding interest in flesh? Debt is a line item on a piece of paper. At some point, the morons in charge are going to figure that out and someone stupid will say, hey, that is only on paper, why don't we just print up that amount and repay our debts?
In fact, that's kinda what the Treaserve has been doing for the fatcats. Paying THEIR debts off.
Oh you really shouldn't use such words as never, ever, always. The Roman Empire failed to inflate. The English Empire failed to inflate. The Spanish Empire failed to inflate. The Soviet Union failed to inflate. While you are correct, no existing government has ever failed to inflate, you didn't consider the ones that don't exist as anymore as they did, in fact, FAIL to inflate
Finally someone agrees with me that deflation is a good and desirable thing. I seen some of the comments that suggest that deflation is bad and inflation is good. All I can say to these people is keep drinking your flouride and ignore history at your own peril. Deflation is an increase in purchasing power (a good thing) compare to inflation which is a destruction in purchasing power (a bad thing). Yet ironically the dumbed down sheep want inflation and actually believe it to be a good thing. This is a triumph for the Orwellian Police state where the people cannot even have their own thoughts, but instead only repeat what the official media tells them.
I am starting to believe that these deflationists are the same people who claimed that house prices could never fall nationwide. In a fiat monetary system it is impossible to have deflation. And dont give me that tripe about Japan. Japan is a historical outlier and is not a reliable example for the US. Give me another country who printed money and experienced a deflationary situation. Zimbabwe, Argentina, Weimar Republic, Brazil, Roman Empire, Hungary and many more all prove that the risk is towards hyperinflation.
USSR
The debt backed system in the US is fronted by the network of primary dealers themselves the modern day equivilant of the Knights of Malta/Praetorian Guard. The inflation deflation debate is like arguing the difference between republican and democrats. Is keeping the water mark level, a vastly inflated GDP that is (on the back of previous asset bubbles), not itself inflationary if not hyperinflationary, especially with no transmission vehicle to act as a wage suppliment in the decade long absence of job creation? Deflation has become a function of tax bracket.
Considering that the Fed has unlimited powers to create money, I do not see a deflationary environment occurring anytime soon. Plus, if you have listened to Bernanke's speeches from before he was Chairman, then you would know that he has stated that he will create as much money as is necessary to combat deflation. So, I am fairly confident that when the dollar crisis hits, it will have double digit inflation rates to go along with it.
Read Bernanke's speech to the national economists club in november 2002. then decide if you think prolonged deflation is likely. (it is not).