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    This past Thursday marked the one-year anniversary of the US stock market’s death when stocks saw their last high. Market bulls have spent a year looking like the walking dead. They’ve...

Guest Post: We're All In A Race To The Bottom

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Wed, 08/25/2010 - 14:06 | 543544 Sudden Debt
Sudden Debt's picture

Marianah Baby!

Wed, 08/25/2010 - 14:42 | 543707 curbyourrisk
curbyourrisk's picture

The Bottom......bitchez!

Wed, 08/25/2010 - 14:07 | 543545 NOTW777
NOTW777's picture

good stuff

Wed, 08/25/2010 - 14:14 | 543578 Waterfallsparkles
Waterfallsparkles's picture

That is what I have tried to do is to pay off all of my debt.  I have Rental Properties and still have a few small mortgages I would like to pay off.  That way if the bottom falls out at least you are debt free and have less to worry about.

Wed, 08/25/2010 - 14:58 | 543777 DosZap
DosZap's picture

Water,

the less to worry about is Property Taxes, and new taxes, from Big O, and removal of GWB's lowered tax rates.

Capital Gains goes up a full 5% Jan 1st.

 

Wed, 08/25/2010 - 15:43 | 543979 Amish Hacker
Amish Hacker's picture

Right, but it's probably better to look at it like this: If the capital gains tax goes from 15% to 20%, it means a 33% rise in your CG taxes.

Wed, 08/25/2010 - 21:10 | 544790 dark pools of soros
dark pools of soros's picture

you have capital gains??

Wed, 08/25/2010 - 21:44 | 544859 economicmorphine
economicmorphine's picture

Cap gains tax is irrelevant unless you're selling.  If he's paying them off, he obviously plans to hold them for cash flow, thus, no cap gain, no tax.  

Wed, 08/25/2010 - 16:49 | 544212 septicshock
septicshock's picture

If the bottom falls out, you don't have to worry about bills anymore.

Thu, 08/26/2010 - 00:12 | 545088 Douglasnew
Douglasnew's picture

Right you are Waterfall. No debt and rental property, positive cash flow is good. I only fear the local governments will one day target evil landlords with higher taxes to pay for their bloated worthless existence. You think you'd find sympathy from the general public? Think again. And Gold horders will be taxed to the point of pain on their gains with no sympathy as well. Can't you see a 50% Cap Gain on the stuff after it takes off? They would tax it to the point that people stop buying it and kill those sane enough to seek refuge from their mad QE experiment. Get a farm and a gun (or two).

Wed, 08/25/2010 - 14:17 | 543585 gaugamela
gaugamela's picture

Spoken like a true disciple of the intransigent Austrian School. At least Austrians will acknowledge that deflation will lead to money hoarding. That will pave the way for renewed economic growth . . . for our great-grandchildren. Too bad we can't enjoy it if we follow their advice.

Wed, 08/25/2010 - 21:46 | 544862 economicmorphine
economicmorphine's picture

After a 30 year party you're going to complain about not enjoying it?  Spoken like a true self indulgent westerner.

Wed, 08/25/2010 - 21:46 | 544863 economicmorphine
economicmorphine's picture

After a 30 year party you're going to complain about not enjoying it?  Spoken like a true self indulgent westerner.

Wed, 08/25/2010 - 14:22 | 543591 Mako
Mako's picture

Another confused author.   What spirals up will spiral down.  Yeah, deflation is great... as long as you are not the one being deflated.  Last time 100+ million got deflated, it was wonderful. 

A bunch of rat's looking to pass the blame, not wanting to accept the Truth, not wanting to know what their choices have led to.

"The non-losers will be those who have prepared: no or little debt and some savings for a rainy day (or decade)."

You can have zero debt and you there is a good chance you are going to be deflated this time.  The author is really going to be upset when he figures out choices already made have sealed his doom.  Oh they attack me all they want, you are given choices but that is not to say you will like your remaining choices.

"The Architect - You are here because Zion is about to be destroyed. Its every living inhabitant terminated, its entire existence eradicated"

 

Wed, 08/25/2010 - 14:22 | 543614 Sudden Debt
Sudden Debt's picture

and in those days, a lot more people had gold teeth!

Now it's all ceramics teeth!

 

Wed, 08/25/2010 - 14:31 | 543632 Mako
Mako's picture

The non-performing liabilities are worth less then the last time.  Unfortunately, many more then last time will have to go.

The author has failed to realize why they call them a Death Spiral.

"labor will increase faster than anyone thinks."

Hahaha, yes and 99 virgins are going to show up at every guy's door. 

This guy is a real hoot.

Yeah, a system based on the REQUIREMENT of more will just magically keep running when given less and less.  Welcome to Fantasy Land.

Wed, 08/25/2010 - 16:56 | 544237 Andy_Jackson_Jihad
Andy_Jackson_Jihad's picture

Wait.....is that why all the aspiring rappers have gold teeth?  They will be the ones buying up whats left of America for pennies on the dollar?  NOOOOOO!

Wed, 08/25/2010 - 14:53 | 543760 cougar_w
cougar_w's picture

I came to the same conclusion about half way in. Deflation will certain solve a lot of problems but mostly through destruction, the same way that fire can "solve" problems with termites in your house. Not really worth it, in the end.

I do not see how deflation helps the common man. Deflation fixes balance sheets? Maybe, after everyone defaults I guess. And that helps me personally .... how. It's not all abstractions, ya know. Somewhere in there I need to work an hour for an hour's pay and buy something to eat.

Oh wait I get it, in deflation everyone becomes a farmer/producer because supplies are suddenly cheap.

Yeah like it works that way in reality. How many people alive today can farm or produce anything at all by any means? I can I'll tell you that, but I'm not so sure about all those pasty pencil-necks and blobby fatties munching Doritos stuck in traffic on the 101 every morning. Those folk I worry about, I am not confident they are going to see it as a "chance to man up" and so I don't think even one of them will find a deflationary spiral at all pleasant or rewarding. And when they start feeling self-righteous and entitled regarding their former sacred-american-way-of-life and come after my garden patch, there goes my only attempt at productivity. Nice dream you had there bud, for about a month. We get to see how far down "bottom" really is.

All this sucks, if you ask me. I can't stop it but I'm not going to celebrate it either. Not even if all the balance sheets on the planet are made pretty.

Wed, 08/25/2010 - 15:05 | 543818 Mako
Mako's picture

Yeah the author is very confused.  Has no understanding of how "money" in the current system comes into being.  He would do himself a favor to read "The Modern Money Mechanics" by the Federal Reserve. 

The author has no understanding that once the global system peaked you are not going have this 20 year Japanese flat or slightly down phase.  They are called Death Spirals for a reason, unfortunately this is something our parents or grandparents should have thought about after defeating Hilter. 

Deflation fixes balance sheets?

The books never balance in the system, what you are witnessing is lemmings not wanting an accounting of the books because the books don't balance and never could.

Wed, 08/25/2010 - 16:27 | 544136 Alexandre Stavisky
Alexandre Stavisky's picture

Woman: What makes saloonkeepers so snobbish?
Banker: Perhaps if you told him I ran the second largest banking house in Amsterdam.
Carl: Second largest? That wouldn't impress Rick. The leading banker in Amsterdam is now the pastry chef in our kitchen.
Banker: We have something to look forward to.

Wed, 08/25/2010 - 15:12 | 543852 hugolp
hugolp's picture

I do not see how deflation helps the common man. Deflation fixes balance sheets? Maybe, after everyone defaults I guess. And that helps me personally .... how. It's not all abstractions, ya know. Somewhere in there I need to work an hour for an hour's pay and buy something to eat.

This is actually good. The people that has been responsable and has not gone into excessive debt during the boom gets rewarded while the people that has been reckless and has gone into excessive debt goes bust and defaults. So now, you have the resources in the hand of the more responsable and productive people of society, and away from the more speculative and reckless ones, that learn a lesson and will tend to behave better next time. Now the productive and responsable people can put the resources to good use and restart the economy.

Wed, 08/25/2010 - 15:38 | 543953 MachoMan
MachoMan's picture

If the playing field was remotely flat or, in other words, we were in an academic vacuum, I would be inclined to agree...  however, you have that pesky wealth gap to deal with.  Through our deflation, as government is eroded and liquidated, who are the "productive and responsible" people with "resources"?  I'll give you a hint, not you.

Yes, some of the golden children did not get to the life rafts in time.  But many did and have handsomely prepared.  If we have the controlled, prolonged deflation as some are predicting, then the newly productive will only be playing for a reduced pie...  the remainder having been siphoned off through the "good" years.

If we have mako's scenario (which is obviously incredibly likely, if not certain), then your concepts of fairness and justice will be given all new meaning...  the notions associated with a traditional deleveraging blip (the productive are rewarded) will have no necessary correlation to our future.  In that case, you'll be playing russian roulette instead of playing on the field of dreams.

Wed, 08/25/2010 - 16:03 | 544051 hugolp
hugolp's picture

The japanese style recession is not really a deflationary correction, since the government did not allowed for the liquidation of bad business, but instead created zomby companies.

And I am sure you wont get a real price deflation scenario. It would be the best solution, and it is what would happen if the government did nothing. But I am 100% sure that it will intervene again and again to avoid price deflation at all costs. It showed in 2008 that it can stop price deflation, and will do it again now if necesary. And it will lead us to stagflation (or even hyper-inflation, but I think this is less probable).

Wed, 08/25/2010 - 16:13 | 544091 MachoMan
MachoMan's picture

First, this isn't much of a response to the allegation that in the post collapse economy, our overlords will be able to unmask themselves and directly crack the whip into our backs.  In other words, how, specifically, are we rewarded in this deflationary scenario?

Second, what in the fuck are you talking about?  Price deflation has been happening everywhere...  moreso in...  california...  for example, but I'm confident there is a mcmansion with your name on it if you want.  If credit contracts, so does the ability to prop up asset prices that are purchased with credit...  Think tens of thousands of homes in detroit getting bulldozed...

Third, the FED is impotent to deal with a contraction in credit caused by a lack of willingness to take on new debt.  Period.  End of story.

Fourth, we already have bi-flation...  I agree there may be some largely semantical arguments that we do not have stagflation...  but we're already there...  the FED's actions already caused that...  now the excesses that caused the increase in commodity prices and input costs can give way to the larger deleveraging (deflationary) cycle.

Thu, 08/26/2010 - 03:43 | 545248 hugolp
hugolp's picture

First, this isn't much of a response to the allegation that in the post collapse economy, our overlords will be able to unmask themselves and directly crack the whip into our backs.  In other words, how, specifically, are we rewarded in this deflationary scenario?

I did not say this, dont know where you are getting it. You are rewarded because prices fall, and that is equivalent to a wage raise. Also, the bad companies fail, and the reckless go bankrupt. For example, Goldman Sachs, GM, etc.. would have been bankrupt by now if the government would have not save them.

Second, what in the fuck are you talking about?  Price deflation has been happening everywhere...  moreso in...  california...  for example, but I'm confident there is a mcmansion with your name on it if you want.  If credit contracts, so does the ability to prop up asset prices that are purchased with credit...  Think tens of thousands of homes in detroit getting bulldozed...

Price deflation is defined in macroeconomics as a decrease in the general price level, meaning the CPI. If you want to use your particular definition you should specify it, because otherwise its impossible for me to understand what you are saying. Using the mainstream macroeconomics definition of price inflation neither Japan neither the USA has had strong price deflation. There has been a stock crash, a housing crash, etc... And the most important part, neither the USA nor Japan allowed their bad companies to fail and rescued them. That is not allowing for the correction to happen (and is one of the main reason why there has not been significant price deflation).

Third, the FED is impotent to deal with a contraction in credit caused by a lack of willingness to take on new debt.  Period.  End of story.

What you are explaining about the banking system is true. Lending has been weak (because people does not want to borrow and because the Fed is paying interests in the excess reserves), and that creates deflationary pressures . We agree in that part. But if you are looking at only that to make your analysis you have an incomplete view. If you think that is the only issue to take into consideration, why has the CPI not gone down big time like it did in the 1929 or 1921 crashes? Government spending through monetized bonds injects the newly "printed" money directly into the economy, independently of what the banking system does. So you have to take that part into account as well. And if you take that into account you can see that a government collaborating with its central bank can and do stop the price deflation pressures that happen after the bust of a credit bubble.

Bear in mind, that I am saying they can affect prices, but not create real production, real wealth, so they are just manipulating the prices upward, not healing the economy.

Fourth, we already have bi-flation...  I agree there may be some largely semantical arguments that we do not have stagflation...  but we're already there...  the FED's actions already caused that...  now the excesses that caused the increase in commodity prices and input costs can give way to the larger deleveraging (deflationary) cycle.

I know you dont know me and will have to take my word for it, but I have been saying for a long time that there is going to be a second deflationary correction (the one starting right now), that the government wont allow for it to run its course, and that the end result will be stagflation for several years (with a small possibility of hyper-inflation). It is my educated guess that we will start to see the first signs of stagflation in 1 year, although this kind of timing is impossible to do accurately.

Bi-flation is just a fancy word to include non CPI assets in the inflation-deflation debate, when everybody agrees that non-essential goods are going to go down in price. I really dont care about definitions as long as everyones understand what is going on.

Thu, 08/26/2010 - 11:07 | 545799 MachoMan
MachoMan's picture

We are in agreement that the common metric used for pricing has remained relatively flat due to governmental spending to offset deflationary pressure...  (leading to a double whammy for consumers as their homes, etc. decrease in value, while the cost at the pump and grocery stores go up...)  I get it...  we all get it...

What I want you to address are these comments:

This is actually good. The people that has been responsable and has not gone into excessive debt during the boom gets rewarded while the people that has been reckless and has gone into excessive debt goes bust and defaults. So now, you have the resources in the hand of the more responsable and productive people of society, and away from the more speculative and reckless ones, that learn a lesson and will tend to behave better next time. Now the productive and responsable people can put the resources to good use and restart the economy.

I would agree with your hypothesis if we were in a standard downturn or in an academic bubble.  However, how do you account for the wealth gap in the rebuilding of america?  Who has these resources?  How are they concentrated?  How do the "reckless" get to rebuild?  What does our political landscape turn into?

What you're suggesting only works in specific situations...  what will happen in our future deflationary environment will be an outright and open usurpation of rudimentary human rights.  That the internal political and other pressures built by the wealth gap will not only fail to be corrected in the downturn, but will be exacerbated.  And, sadly, this process is largely complete.  Yes, the "reckless" get cast aside...  but so does everyone else save a select few.

Your theory also fails to acknowledge the intricacies of the rise of corporations...  in which the entity can die, but its principal actors live on through the siphoning of the spoils of "production".  Killing the "reckless" can actually be by design of the reckless...

In short, the traditional notion of a deflationary environment to purge bad things will take on a completely new meaning in our future environment...  the intensity of the necessary purge will be vastly greater than traditionally contemplated.  And because of the potential risks involved in the degree of intensity, it is going to take an approach vastly more creative than "leave everyone to their own devises".  (Some have too good of head start, often times through immoral means).

I'm not saying we ultimately have a choice in the matter...  I don't think we do...  but we're in uncharted waters without a risk in trying. 

Thu, 08/26/2010 - 12:31 | 546008 hugolp
hugolp's picture

Yes, we agree. In my ideal solution to this crisis the government would not bail out anyone, and would let banks fail, etc... Also corporations and its government granted limited liability would not exists (there would be enterprises, just not enterprises with government granted privileges: corporations). Etc...

And I also agree that previously we have not seen a correction like the one needed for the size of the bubble paper currency has created.

But I dont get why you attribute the wealth gap and loosing human rights to a deflationary correction. That is going to happen anyways and even worse if they inflate their way out like they are doing. The system is rigged. In reality, the problem is the bubble. Once you are at the top of the bubble all the options are bad. There is no magic solution to clean the malinvestments and the descoordiantion in the market.

In reality, the only way the system has to keep functioning is to inflate its way out of the bust. A deflationary correction would send the banks and the USA government bankrupt, so its not going to happen. Maybe that's the real reason I advocate a deflationary correction as solution ;)

Thu, 08/26/2010 - 21:09 | 547189 MachoMan
MachoMan's picture

It all depends on the timing.  If we have prolonged deflation, it will likely mean there is some semblance of central control.  Which, could possibly be good.  The problem, however, is that not only will the private sector have to deleverage, so will the public.  Police, fire, medical, teachers, all will be jettisoned along the way...  just trimming the fat.  (it's already happening).  In a nutshell, the size and scope of state and local governments certainly, but also likely necessarily the federal government, will contract.

My question is who gets to fill the power vacuum.  In a period of prolonged deflation, we will see those squirrels who amassed large piles of nuts before winter gorge themselves on their spoils.  After winter, they'll have free roam of the land...   as their other squirrel brethren have succumbed to the cold.  The problem, how did the squirrels get all those nuts?  Was it fair?  Was it honest?  Was it moral?  Should it be protected?  Would capturing the spoils prohibit the future freedom of those who desire to be productive? 

You're right in the conclusion...  we either get a refusal to recognize the dollar as a medium of exchange now or a treasury sell off later when we default, causing the same thing.  I haven't decided which fate is better...  I just think that through a prolonged deflationary period, we will be more likely to be corralled and beaten into submission...  whereas with a hyperinflationary jubilee, I'm thinking there is the possibility it becomes so chaotic and foreign that we're incentivized to truly fix the situation.  We won't...  we'll do the same thing again...  we always do... 

I don't think a lot of people are calculating that we will attempt austerity through defaulting domestically on every imaginable thing prior to international default...  this could push the timeline much further along than commonly thought.

 

Fri, 08/27/2010 - 02:54 | 547643 hugolp
hugolp's picture

Let me remind you that present money (meaning dollars) its not the only way for people to save. If you go into assets and the government inflates, you are getting richer compared to the people that earrn a wage, because your assets are going up against dollars and the wages are being devaluated.

Its a common mistake to think that "rich people" (whatever that exactly means) keep their fortune in dollars, and then inflating is bad for them. Rich people have their fortune invested, in different classes of assets, therefore inflating its great for them since makes their assets go up measured in dollars. Price deflation is bad for them since it makes their investments go down, and if they are leveraged they are in a bigger problem. Meanwhile, the majority of poor people earn a wage. Inflation devaluates their wage, while deflation appreciates it.

So under the present situation price inflation is good for banks, government and "rich people" (specially if they know what kind of assets to buy), and its bad for working people and middle class, while the opposite happens with price deflation.

But apart from this considerations, we should think what is better to get out of the crisis and get an economy where people can make a life for themselves. And that is allowing for the correctin to happen, accept any deflation that may cause, because its the only way to get out of the crisis quick, as has been proven by history again and again. If the USA would have done that the crisis would have been over by now. This two years would have been tougher for sure, but now unemployment would be going down, and the structural problems of the economy would be gone. Probably the government would have had to default and a lot of banks would have failed, but I really think getting rid of GS, BoA, City, etc.. is a good thing for the USA.

Anyway, this is daydreaming since that would go against the status quo and will never happen. You and I know that they will inflate their way out of this like they have done always, even if that means 10 years of stagflation like in the 70's.

Wed, 08/25/2010 - 16:05 | 544058 granolageek
granolageek's picture

I'll cut you some slack because you write as if English is not your native language.

 

Still, you are parroting Austrian talking points while giving no evidence that you rea d asingle word that you quoted.

 

Wed, 08/25/2010 - 15:16 | 543864 Siggy
Siggy's picture

That blobby fattie has a federal job coug, don't worry about her, worry about yourself.

Wed, 08/25/2010 - 16:27 | 544135 augmister
augmister's picture

Stop worrying about "Dorito Bill" and concentrate on your own survival...you'll live longer!

Wed, 08/25/2010 - 16:41 | 544185 cougar_w
cougar_w's picture

Ah, you might have missed the nuance of my "worry" re Bill.

I am not so concerned about my fellow man having a hard go of it, as much as I am worried about my fellow man not manning up and taking care of his own him self. There are a lot of lazy and crazy people out there who are not worried that they cannot cope because they know someone out there will provide for them. And they are perfectly capable of destroying someone out there to make sure that happens, when the time comes.

In other words Burrito Bill with an empty stomach and a gun. Except a couple million of them.

Wed, 08/25/2010 - 22:14 | 544907 chindit13
chindit13's picture

That is how I read your comment.  The sense of entitlement does not go away simply because the means to provide have disappeared.  Woe to those who dare to "have" in public.

Wed, 08/25/2010 - 15:00 | 543793 DosZap
DosZap's picture

Mako.

He's getting da hell outa' dodge............he will not feel the pain of the rest of we schmucks caught here, due to familial obligations.

Wed, 08/25/2010 - 15:09 | 543826 Mako
Mako's picture

getting as far away as possible from the rest of the wackos is not a bad idea at all.   It does increase your chances of survival IMHO.

Unfortunately, we are all basically stuck on this floating rock.  :)

This is going to be a very dark journey this time I suspect.

Wed, 08/25/2010 - 15:33 | 543930 merehuman
merehuman's picture

our island is tipping.

Wed, 08/25/2010 - 23:05 | 544984 StychoKiller
StychoKiller's picture

Kali is licking her chops, waiting for the blood to flow...

Wed, 08/25/2010 - 15:20 | 543883 Eternal Student
Eternal Student's picture

Agreed. I especially liked this quote "labor will increase faster than anyone thinks."


I'm looking forward to seeing that happen. When credit implodes, business stops. And that's not a positive thing for employment.

Wed, 08/25/2010 - 15:42 | 543977 MachoMan
MachoMan's picture

Exactly.  Somehow deflation is always presented with prices necessarily decreasing faster than wages...  I'm not convinced that's a certainty from our current position.

Wed, 08/25/2010 - 16:11 | 544086 Alexandre Stavisky
Alexandre Stavisky's picture

He never looked back at the fire. He just ran. He ran until the sun came up and he couldn't run any further. And when the sun went down, he ran again. For five days he ran like this until every sign of man had disappeared.

Wed, 08/25/2010 - 16:19 | 544104 Ripped Chunk
Ripped Chunk's picture

Then he realized he was only in Nebraska

Wed, 08/25/2010 - 16:43 | 544193 cougar_w
cougar_w's picture

"Fahrenheit 451" if I am not mistaken.

Wed, 08/25/2010 - 17:23 | 544325 RSDallas
RSDallas's picture

Mako,

Please go away.

Wed, 08/25/2010 - 21:48 | 544868 economicmorphine
economicmorphine's picture

Rather bizarre rant.  If you're debt free and holding investments, say a rental house, for cash flow rather than to find some sucker to take it off your hands, you're going to be fine.  Take a deep breath.  Deflation is only a bad thing if you're mortgaged to the gills.  

Wed, 08/25/2010 - 14:20 | 543600 JLee2027
JLee2027's picture

Buy Gold and especially Silver.

Wed, 08/25/2010 - 15:02 | 543806 DosZap
DosZap's picture

As "I" failed to do at $17.38 Spot yesterday, even though I planned on it all weekend.If I drank, I would have my face at the bottom of the pitcher.

$18.99/$1240.80...........2:00 CST

Wed, 08/25/2010 - 15:39 | 543956 Dr Emilio Lizardo
Dr Emilio Lizardo's picture

even Jim Sinclair's site is noticing the wanky behavior in silver

 

http://jsmineset.com/2010/08/25/extraordinary-action-in-silver-helping-p...

Wed, 08/25/2010 - 20:32 | 544725 RockyRacoon
RockyRacoon's picture

What part of "silver will outperform gold" have people not been hearing?

Sheesh.

Wed, 08/25/2010 - 16:30 | 544149 augmister
augmister's picture

When it "flushes", everything will go down the crap hole....plenty of time to buy.  Keep your FRNs safe in the Bank of Sealy and Bank of Whirlpool.

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