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Why The Downside To The Fed's "All In" Attempt To Spike Shadow Monetary Velocity Is A $4.5 Trillion Drop In GDP (And The "Upside" Is Hyperinflation)

Tyler Durden's picture


It appears that the one topic pundits have the most problems grasping is the spread between the segregation of traditional and shadow monetary aggregates, overall economic deleveraging and aggregate monetary velocity, and how all that impacts GDP. A summary which confirms just how prevalent the confusion is, is this terrific post by the Calafia Beach Pundit, terrific not because it is even remotely correct (the post is so blatantly wrong - one wonders if Western Asset Management even expects its current and former asset managers to count beyond 2... M2 that is), but because it demonstrates how self-professed "pundits", whether of the beach variety or not, don't have the faintest grasp of more than merely trivial monetary topics.

The basis for the above-mentioned post's argument is that since M2 is growing (which it is for 16 weeks in a row now as we have been pointing out repeatedly), and since M2 velocity has performed a dead cat bounce off its 30 year lows following the complete collapse in M2 velocity after the bankruptcy of Lehman, that GDP has to grow. Period. This argument is so flawed and so one-sided, that its refutation and subsequent elaboration as to what reality truly is, is what this post was at first all about. Yet in refuting the simplistic conclusion of a mainstream pundit's myopic perspective, we uncover something far more troubling: namely that should the Fed fail in stoking consolidated aggregate monetary velocity very quickly, as the shadow liability collapse accelerates, US GDP has the potential to drop by up to $4.5 trillion over the next 3 years.

First, looking at M2, it is indeed the case that M2 has been growing. As the chart below shows, since the beginning of 2010, M2 has grown by $288.7 billion from $8485 to $8773 billion.

The problem, as Zero Hedge readers know all too well, is that M2 is merely a small subcomponent of all practical monetary aggregates, including those derived from the shadow credit system. As the beach pundit certainly should be aware, a far more important aggregate is M3, which the Fed has conveniently decided to eliminate, just so those of the permabullish persuasion can spin factless arguments using the far more easily manipulable M2 as a proxy for money demand. And looking beyond M2 is precisely where the entire argument falls flat on its face.

Since the bulk of credit and monetary growth over the past 30 years has occurred not at the observable M2 level, but at the level of shadow banking liabilities (from $620 billion in 1980 to $21.4 trillion at the peak in Q1 2008), and their monetary representation (be it M3, or our broader custom aggregation), a far more indicative view of GDP as a product of monetary aggregate velocity is that of GDP not to M2, but of GDP to M2 and Shadow Banking, which includes in addition to the generic M2 components such as M1 (currency, demand deposits), and retail money funds, savings deposits, and a variety of other deposits, also such shadow components as money market mutual funds, GSE capital, ABS issuers, repo money, open market paper, and agency and mortgage pools. The combination of all that is the most definitive and comprehensive representation of money demand available for the US economy.

The chart below shows just how much more of a factor the shadow economy has become of the past 30 years. While in 1980 the ratio of M2 to Shadow banking monetary aggregates was 135%, the resultant surge in shadow debt, and thus shadow money, as a result of 30 years of declining interest rates, led to a M2/Shadow ratio of under 50% in 2008 (black line in chart below).

A complete and valid representation of aggregate monetary velocity has to take all these excess components: anything else is an insult to the intelligence of one's, in this case, readers. Which is where a far more different picture than that presented by some pundit or another emerges.

Note that in the chart below, as credit has become easier to procure, and increasingly cheaper since the arrival of the Maestro, and as cheap credit-derived money flooded the system, the overall broad money velocity (M2 and Shadow Banking monetary equivalents) has collapsed, even as GDP has been growing. In other words, as more and more credit has gotten added to the system over the past three decades, such new credit has had a progressively smaller impact on true economic growth. And here is the key point that makes a mockery out of the abovementioned "analysis" - even as M2 has grown by under $300 billion, courtesy of QE 1 and QE Lite, shadow banking liabilities and appropriate aggregates have plunged by $2.1 trillion in just the first six months of 2010! Let's see: +$300 billion compared to -$2.1 trillion. Hmmm.

Let's recall that the prevailing theme of the ongoing depression is deleveraging: at the consumer and at the corporate level (courtesy of sovereign leveraging, and $13.7 trillion in federal debt compared to under $9 trillion three years ago, which makes the cost of deleveraging next to nothing), the current collapse in Shadow liabilities, and associated monetary aggregates will persist for a long, long time. Keep in mind the Fed has little control over this, and this is what most pundits (no matter how self-proclaimed) get teribly confused by. All that the Fed can do is hope to increase the velocity of the corresponding circulation of M2, and beyond, money.

Which is where things get really ugly.

Contrary to the beach pundit's conclusion that the growth in M2 most certainly portends a pick up in GDP, we present the completely opposite case: namely that the collapse of shadow credit, and the resultant elimination of shadow money, could result in a plunge in US GDP as high as $4.5 trillion over the next 3 years. And what most don't understand (but Blackhawk Ben most certainly does) is that what M2 does over this period is completely irrelevant as shadow deleveraing will be the far more dominant force vis-a-vis GDP.

And what the Fed is trying to do, more so than anything, is to return the M2+Shadow Banking velocity back to traditional levels, far higher from the current 58%. That the Fed has succeeded in raising it by 8% from its all time low 2 years ago, is purely a function of Quantitative Easing. The real question is whether QE2 will have the same success in stoking at least some consolidated velocity and its resultant GDP pick up.

As the chart below demonstrates very vividly, the upside-downside case for the Fed is blatantly obvious: either the Fed will succeed in spurring velocity to surge to over 80% over the next 3 years, in which case GDP will merely stay flat over the next three years due to the ongoing collapse in consolidated shadow liabilities, or it will fail. Should the latter case materialize, and should velocity be stuck in the current range in the upper 50 percentile, GDP will plunge by nealy 30%, or $4.5 trillion to $10.3 trillion by the end of 2013! Furthermore, if velocity once again begins to contract, which in the context of ZIRP is a distinctly possible outcome, the impact on GDP will be even more dire.

So now you know pretty much everything there is to know about the curve of economic growth over the next several years, and why the Fed is gambling virtually everything on succeeding in increasing money velocity with wave after wave of QE. Since Bernanke is unable to stop the deleveraging onslaught, and indeed via what will be an endless case of ZIRP (at least until the Fed is ended) is encouraging it, all he can do is to attempt to accelerate the velocity of money. Yet as many claim, where QE1 succeeded as it was a program to restore liquidity in a liquidity-strapped system, and thus managed to boost velocity marginally, the fatal flaw of QE2 is that it is the wrong prescription for the symptom ailing the economy. Namely, adding more liquidity to a system which no longer needs a liquidity injection but instead is in dire need of a fundamental restoration in the belief of the job creators (small and medium businesses) that the economy is if not sound, then at least without further threat of central planning interventions by the very same Fed which is now playing Doctor Nick to the US economy, and prescribing nothing less than a terminal poison to what is ailing the US.

The problem is that by adding virtually infinite liquidity to the system, the Fed has doomed a favorable systemic outcome from the very onset: at this point there are two real outcomes: either velocity dips again and GDP plunges by almost $5 trillion, or velocity explodes and hyperinflation arrives, resulting in a debasement of the dollar, and leading to a complete collapse in the system, as GDP becomes irrelevant (how many economists study the GDP over the many months of Weimar Republic hyperinflation?).

So the next time someone points out the growth in M2 and uses it as a flawed validation for a growth in GDP, inform them that until M2 annual growth is $4 trillion and at least offsets the annual deleveraging in the shadow system, and the resulting monetary extraction, that they should look for greater fools elsewhere.


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Sat, 10/30/2010 - 23:27 | 688615 hamurobby
hamurobby's picture

Straddle trades everywhere! oh the humanity!

Sun, 10/31/2010 - 00:20 | 688653 tpberg7
tpberg7's picture

Shinola, Bitchez!

Sun, 10/31/2010 - 02:50 | 688733 More Critical T...
More Critical Thinking Wanted's picture


Why The Downside To The Fed's "All In" Attempt To Spike Shadow Monetary Velocity Is A $4.5 Trillion Drop In GDP (And The "Upside" Is Hyperinflation)

Tyler, you got it the wrong way around, again.

The downside is deflation, and it is already happening. A drop in nominal GDP (and the resulting crippling increase in the effect of existing debt) is just the natural effect of deflation. Could you please start using the d-word?

The upside is not hyperinflation but just inflation. We'd all be off much better if there was any 'hyper' side to it - but unfortunately there is not.

The thing is, even a junior economist fresh out of college can whip up sufficient measures to effectively fight any 'hyper' inflation in the matter of a few minutes, should it happen. Even the chinese are able to do it, so the US should be able too, right? It's really that easy.

Deflation on the other hand is much more crippling - as Japan and the Great Depression has shown it to us. Soaring unemployment, soaring suicide rate, a whole generation of youth with few prospects - a collective contraction and the resulting psychosis. You might want to live in such a society - most others dont.

To characterise it in military terms, deflation is the a-bomb from hell, while hyperinflation is a water pistol.

Sun, 10/31/2010 - 05:06 | 688752 taraxias
taraxias's picture

We'll be paying $100 for a loaf of bread and f@cktards like you and Mish would still be telling us that we're having deflation.......yeah,yeah, I know, contraction in credit and all that but commodities skying should be your clue that you missed something here.

Let me keep it simple for you: deflation is a myth

What you are witnessing is deleveraging, not deflation. Big f@cking difference. One of this days, you and Mish will understand.

Sun, 10/31/2010 - 05:15 | 688755 Dismal Scientist
Dismal Scientist's picture

I doubt it. They seem to be more comfortable in the classroom than observing real world effects. There's always a 'definition' issue with the deflationists, which allows them to excuse sharply rising commodity prices as something other than 'true inflation'.

Have said before here, I care nothing for the theoreticians and their semantics. I do care if it costs more to live than previously in a no wage growth environment. Its called biflation and its what is happening today.

Sun, 10/31/2010 - 05:22 | 688758 More Critical T...
More Critical Thinking Wanted's picture

Have said before here, I care nothing for the theoreticians and their semantics. I do care if it costs more to live than previously in a no wage growth environment. Its called biflation and its what is happening today.

FYI, no need to define your own economic term for it - it's the textbook definition of stagflation.

Sun, 10/31/2010 - 12:53 | 688977 rocker
rocker's picture

Sorry to insert here, but, some live on Clould 9 and have no clue what inflation means to those who actually spend money to buy food and services. And to say, Japan has no inflation is and is not right either. Tell the room service maids in Japan there is no inflation. For her it cost more to eat but she is paid less. So this is the reality. You will be paid less in America for actually making something, but you will pay more for Food, Fuel, Energy and Taxes. Taxes which pay for public servants. The ones who want to lock you up because your pissed off that some fool is telling you there is no inflation and your loosing everything because you do not make enough money to pay for deflation. Hmmmm. By the way, hotel rooms and food cost more in Japan now than they did ten years ago. Deflation ???  Hmmmm. 


Sun, 10/31/2010 - 14:54 | 689201 unununium
unununium's picture

Candy bars in the nearest vending machine just went from $0.75 to $0.85.

That's a 13% price hike.

Sun, 10/31/2010 - 05:17 | 688757 More Critical T...
More Critical Thinking Wanted's picture

We'll be paying $100 for a loaf of bread

Yet you are paying around 1.50-2.00 dollars for an average loaf of bread today.

Let me keep it simple for you: deflation is a myth

Only if you call a clear downtrend in inflation (closely matching Japan's inflation curve in the 90s as it headed into crippling deflation) a 'myth'.

Sun, 10/31/2010 - 07:59 | 688791 blindfaith
blindfaith's picture

what crappy worthless bread are you buying, pal?  Or does your maid do the shopping, and you remember what bread cost when you were a little Boy?

Bread is $3.69 a pound average whole wheat.  Maybe some worthless white is $2.50 but I don't see anyone who reads english buying it or else it is the NEW 12 ounce pound I see all over the grocery store.

Sun, 10/31/2010 - 09:33 | 688818 Blindweb
Blindweb's picture

Good point.  The quality of our food has gone down dramatically since WWII masking even more price increases.  Is there any middle class or up person who doesn't filter their water?

Sun, 10/31/2010 - 13:28 | 689038 grunion
grunion's picture

I don't.

I grew up swimming in Buffalo Bayou in Houston. Doctor tells me I am immune to damn near anything.

Not everyone middle class and above is an effete snob!

Sun, 10/31/2010 - 09:58 | 688827 cowdiddly
cowdiddly's picture

That'a what I was thinking. Were does this Mofo shop to get bread at 1.50

Mine here runs about 2.99-3.59 a loaf(I like homepride brand)plain wheat bread and I live in a low cost of living area. He is either going to a bakery thrift store, buying some dryed out super generic or else his wife does the shopping.Standing in his wife beater T shirt," Here honey, take this $20 dollar bill and buy us groceries for the week. And don't come home with less the 5 bags Bitch"

Sun, 10/31/2010 - 14:16 | 689123 linrom
linrom's picture

I can buy all the bread that I want for $0.99.

Sun, 10/31/2010 - 15:20 | 689234 Eternal Student
Eternal Student's picture

I don't know about the OP, but I'm paying about $1.25 a loaf for bread that is far, far better than what you can get.

Of course, I buy my own wheat berries in bulk, mill them myself, and bake my own bread. It's far superior to any store bought bread. All of this is really quite easy, once you start doing it. Even if I weren't concerned about today's environment, I'd still do this. It's quite rewarding.

And I bought the wheat berries a while ago, when things were cheaper. Even at today's prices, it's still cheaper. Plus, if TSHTF, I'm good as far as food goes.

Screw gold. Buy wheat. Ok, Ok, buy gold after you've got your wheat.

Sun, 10/31/2010 - 21:31 | 689723 CitizenPete
CitizenPete's picture

Hey bread boy: no issue here with the wheat storage or the Betty Crocker philosophy, but unless your baking with solar heat it's gonna cost you more in the future if your using electric or Gas.  Gas is cheap at the moment but that won't last.  As for electric -- just look at coal prices (delivered).  Fuel is 70-80% of the total cost of power production at a plant.


So I hope your using a wood burning stove to bake your tasty bread muffins. 



Sun, 10/31/2010 - 21:58 | 689763 Katharotes
Katharotes's picture

yeah, what he said. (edit) I agree with the poster about bread being much more expensive than "$1.50 to $2.00" Even the cheap white stuff is only $1.79 on sale. Same goes for most things on the grocery/drygoods store shelves. I get sticker shock at least once a week.

Sun, 10/31/2010 - 12:24 | 688930 Yits and the Yimrum
Yits and the Yimrum's picture


Sun, 10/31/2010 - 14:55 | 689135 linrom
linrom's picture

Deflation is a myth? LOL. All you pundits are betting on the least likely outcome.

Sun, 10/31/2010 - 05:15 | 688754 Snidley Whipsnae
Snidley Whipsnae's picture

"To characterise it in military terms, deflation is the a-bomb from hell, while hyperinflation is a water pistol."

If you believe that hyperinflation can be quelled by a water pistol you don't understand the difference between inflation and hyperinflation.

Hyperinflation is a general loss of confidence in the currency by the citizens of a soverign. Once it has begun, no water pistol, nor interest rate hikes (a la Volker), will stop it.

"Inflation can be pursued only so long as the public still does not believe it will continue. Once the people generally realize that the inflation will be continued on and on and that the value of the monetary unit will decline more and more, then the fate of the money is sealed. Only the belief, that the inflation will come to a stop, maintains the value of the notes." Ludwig von Mises

Sun, 10/31/2010 - 05:40 | 688760 More Critical T...
More Critical Thinking Wanted's picture


Hyperinflation is a general loss of confidence in the currency by the citizens of a soverign. Once it has begun, no water pistol, nor interest rate hikes (a la Volker), will stop it.

Yet there have been been numerous high inflation or even hyperinflationary episodes in democracies in the past 100 years, all quelled quickly within a few years, with no global effects. Tell me a single hyperinflationary democracy that lasted as long as Japan's deflation, or that lasted as long as the Great Depression. There's not a single example, and exactly for the reason I mentioned: compared to deflation hyperinflation is a wash.

Sun, 10/31/2010 - 05:55 | 688765 equity_momo
equity_momo's picture

Have you been to Japan in the last 20 years? Have you spoken to anybody that has been to Zimbabwe or lived through Germany in the 1920s? if not , you really should stop espousing which is the lesser of 2 evils.

You analogy with Japan is wrong anyway : the Japanese HAVENT ALLOWED TRUE PRICE DISCOVERY or liquidated their bad loans. They are stuck in sinking mud which is drawing out their process of bankruptcy.  The US are following a similiar strategy although one false move and Bernanke will get escape velocity to inflation but it will be uncontrollable.

Sun, 10/31/2010 - 06:28 | 688770 jeff montanye
jeff montanye's picture

not sure which way i feel vs. your debate here but looking for hyperinflation of years duration seems irrelevant: if one gets a couple years (months?) of weimar style inflation it's done its evil work: all assets denominated in currency (money market, checking, savings accounts, bonds, etc.) are worthless.  what does it matter if the hyperinflation ends or continues to those impoverished?

Sun, 10/31/2010 - 14:05 | 689107 High Plains Drifter
High Plains Drifter's picture

Mr. Critical T,


Never, ever underestimate the cleverness and the power of the Rothschild Banking Cartel. Believe me, they can do tricks, tricks you and I have never seen. Can they however, continue to cheat, the physical laws of finance?  Probably not. Sooner or later, the system will collapse. They know this. They are planning it and planning for it. It is all by plan. The one world government, the thing that they have longed for and wanted for generations is within their grasp.

Sun, 10/31/2010 - 16:44 | 689326 FredHayden
FredHayden's picture

I love the Ludwig von Mises quote.  Which book is it from?

"Inflation can be pursued only so long as the public still does not believe it will continue. Once the people generally realize that the inflation will be continued on and on and that the value of the monetary unit will decline more and more, then the fate of the money is sealed. Only the belief, that the inflation will come to a stop, maintains the value of the notes." Ludwig von Mises

Sun, 10/31/2010 - 21:10 | 689679 ThreeTrees
ThreeTrees's picture

I do believe it's from Human Action.  Could be from his Theory of Money and Credit as well though.  Two closely related treatises.

Sun, 10/31/2010 - 05:52 | 688764 equity_momo
equity_momo's picture

Oh dear , where to start with your completely backwards view of deflation and hyperinflation Mr More Critical ....

There is no putting the pieces back together after hyperinflation strikes as it happens due to a LOSS OF FAITH in the paper money used to keep the system spinning. Rates can go to 100%, 200% , 300% , it will not be enough to prevent the death spiral of said currency.

On the other hand , deflation is a natural process that needs to be allowed to penalise those that took out excessive debt and leverage and malinvested. Through default and liquidation , said deflation creates a natural clearing of the system , like a forest fire. Once the market is allowed to find true PRICE DISCOVERY , the winners and losers will be easily identifiable and onwards we go.

I will take your water pistol and trump it with the thermo-nuclear bomb of Weimer Republic and Zimbabwe , not to forget , the recurring problems in the 80s , 90s and finally turn of the 21st century Argentina - the only thing that stopped them printing money was a lack of ink and paper in the print works , i kid you not.  Alas we have no such luck these days with Bernankes IBM.

Sun, 10/31/2010 - 06:24 | 688769 twotraps
twotraps's picture

Finally a sane explanation...'not being able to put the pieces back together' is a great way to put it.  Also, where is all this first hand experience with inflation and deflation coming from?  Weimer is one thing and Zimbabwe is another but it is pure speculation what can happen when 100 Bazillion dollars can move with a few key strokes.....the sick part is that the HFT Gang will have tried to move 9.5 Gazillion Bazillion before all you'all can reach over the click your mouse once!   My question to everyone is layered on top of the current argument......why would the Fed risk a blow-up situation that would do more damage to their ultimate ability to exert influence over money and banking??  Can we read their moves as a guage of their actual fear of further loss of control rather than some well thought out economic thinking?

Sun, 10/31/2010 - 07:03 | 688775 equity_momo
equity_momo's picture

Precisely - deciding how to invest or protect ones wealth now is almost impossible due to the nature of the men pulling the strings : what is it they want ?

I would assume their own survival but that doesnt necessarily mean the survival of the financial system in its current form , or even the survival of the Fed.  Bernanke isnt and never has been calling the shots.  The owners of the Fed are calling the shots. When the Tea Party cry out "End The Fed" they are in reality saying "End the System"

Capital markets are now a political minefield.  It is futile trying to study any company's or even country's balance sheet to make an informed investment decision - you need to be a political strategist or psychologist to understand where we are going from here or have Rothshilds cell number and be on first name terms.

Given the tail risk , the only investment advice i feel able to give friends is

1) be debt free

2) split savings 3 ways : 50% in physical PM outside the system ; 25% in cash outside the system ; 25% in cash INSIDE the system (assuming that 25% isn't well in excess of any FDIC gaurantee limit - even then i wouldnt feel comfortable holding much - as someone mentioned earlier , COUNTERPARTY risk is going to take over moral hazard as the new buzzword)


Deviating from no1 and no2 have an unquantifiable amount of risk , and i like to sleep at night. If you're flush , buy land , preferably land that can be cultivated. DEBT FREE.


Those still trading these markets, best of luck to you - as 90% of you will be fleeced and bled dry till you have nothing. Its the nature of the game , especially in turbulent times , no matter how well youre doing now or how smart you think you are. Bagholders for the beast.

Sun, 10/31/2010 - 08:08 | 688795 blindfaith
blindfaith's picture

I no longer feel alone in my thinking! As if you read my mind, read over my shoulder.


Sun, 10/31/2010 - 09:03 | 688812 Bendromeda Strain
Bendromeda Strain's picture

the men pulling the strings : what is it they want ?

...Bagholders for the beast.

It took a couple paragraphs but there it is - your question, asked and answered internally. Now capitalize Beast and ruminate on that.

Sun, 10/31/2010 - 13:54 | 689087 Oquities
Oquities's picture

what is it they want?  as always, to transfer wealth at the most opportune time, from intangible to real wealth.  we'll all be buying tulips, at the top, in hell.

Wed, 11/03/2010 - 18:09 | 697332 tsx500
tsx500's picture

insane to have anywhere near 50% of your wealth  in one asset class (PM). 

Sun, 10/31/2010 - 12:24 | 688932 merehuman
merehuman's picture

twotraps, consider that the USA, bernanke and the dollar were tools for the PTB, now those tools will be discarded as our final dismemberment begins. I believe they are done with the dollar and us. To their point of view we are useless eaters and they will come back to harvest us again in a few years.

Sun, 10/31/2010 - 13:33 | 689047 grunion
grunion's picture

I'm curious. Loss of control of what exactly?

Sun, 10/31/2010 - 09:45 | 688822 Charlie Bravo
Charlie Bravo's picture

Well said.

Charlie Bravo

Sun, 10/31/2010 - 11:23 | 688885 trav7777
trav7777's picture

the banksters have mindfucked you if you believe this.

Deflation in a monetary system where the money itself carries a compound interest component places the entire system into default on behalf of the bankers.

You really need to read history between the lines to understand why banking clans have been run out of countries or executed en masse over the centuries.  The system itself is a fraud.

The principal is created, but the interest is not - the system itself is in default as of its inception.  The terms of the loan "contract" then makes the real property available to the bankers as collateral.

Going into default via deflation and letting the fucking BANKS come collect all the real property and productive assets on account of their SCAM would be grotesquely unjust.

You bankster drones don't seem to understand why hyperinflation and printing happens and why austerity a la IMF follows:  it's because the nations inflating are trying to AVOID the inherent implosion in debt-based money!

Debt-based money is a TIMEBOMB that will inevitably go off...when it does, at the end, the foreign interests and banks swoop in and end up owning the land under your feet.

We do not "need" to just let this crime "run its course" and clear out the "deadwood."

Sun, 10/31/2010 - 11:47 | 688899 SWRichmond
SWRichmond's picture

...the system itself is in default as of its inception.

This is a really hard concept for people to accept, but it is of course true.  As I read this post (skimmed it, actually; when anyone starts talking about how the monetary aggregates mean anything at all I just tune out, it's too stupid to bother with) and the comment stream following it I am struck by the depth of the embedding of the paradigm that is fiat money and interest banking.  People just can't believe that an entire economic system is premised upon a lie, and that a lie-based system can appear to be "working" for one's entire adult lifetime.  People also seem to need to believe there is a board of wise men who are competent and honest enough to manage an economy made up of 300 million souls.  The concept is absolutely ludicrous on its face, yet people hope and pray that it's true.  Amazing.

Sun, 10/31/2010 - 12:32 | 688944 Sean7k
Sean7k's picture

++++ Textbook deflation in a market economy has a purpose within the boom bust cycle. As you have pointed out- we are in a fiat credit creation system. It changes the parameters and most fail to include it in their analysis. Well said.

Sun, 10/31/2010 - 19:35 | 689499 Bohica
Bohica's picture

" . . . deflation is a natural process . . . [which] creates a natural clearing of the system . . ."

It sounds so innocuous, so antiseptic, desirable even; at least so long as one imagines the process will affect everything but one's own income and assets.

The process of deflation is certainly different than hyperinflation, but I suspect the final outcomes of each would be awfully similar.



Sun, 10/31/2010 - 09:38 | 688821 Quinvarius
Quinvarius's picture

Really?  A junior economist can whip up a cure for hyper inflation?  China is doing it now?  Dude, you are ignorant.  You don't understand what hyper inflation is.  You might as well try to tell people that a junior economist can somehow convince the public that dirt from their backyard is valuable money.

Sun, 10/31/2010 - 10:11 | 688833 tmosley
tmosley's picture

Oh, and tell us, oh wise one, EXACTLY which steps our Junior Economist-in-Chief can take to simply and easily stem hyperinflation?

There are none, except to change the currency.  If they just reissue it, there will be more hyperinflation within a few years, as there isn't any faith in that currency either (witness Zimbabwe's constant re-issuance of currency).  If it wee that easy, it would never happen, yet it has happened DOZENS of times over the last hundred years.  What simple measures has your "mighty" brain discovered in your college economics class that can stem hyperinflation in minutes.  I'm sure central banks around the world would LOVE to know.

What people like you fail to understand is that you can, in fact, have deflation and hyperinflation at the same time.  Sound crazy?  When you think about it it isn't.  Deflation means contraction in the money supply.  You are right, credit money is contracting, but if you look back over the course of history, credit contraction has ALWAYS preceded hyperinflation.  Yes, this is a money supply issue.  Hyperinflation, however, is a PRICE issue.  What happens is that people start losing faith in the currency, so the velocity of money picks up as people try to get rid of it.  Once the money loses its ability to store value, because no-one wants to hold it, all is lost.  There is NOTHING that can be done to restore that confidence.  What follows is a series of desperation measures by the central bank fueled by politics.  With the velocity of money going out of control, prices of vital necessities (and non-dilutable money) skyrocket while non-vital goods fall precipitously.  Eventually, it gets so bad that people can no longer afford to EAT on their salaries.  In order to prevent mass starvation, the political authorities FORCE the central banks to print larger and larger denominations of currency in order to pay off the people so they can eat.  Wheelbarrows full of money don't cause hyperinflation, they are an effect of it!  Of course, the printing of money to serve such ends does nothing to restore confidence in the currency.  Quite the opposite.

If the political authorities avoided printing money, there would be Revolution within three days.  They print to stop, or at least delay that, and it is pretty effective.  In most cases of hyperinflation, the government persists.  

And another thing--your military analogy is completely ass-backwards.  Deflation lasts a long, long time, and is not a jarring attack.  It is more like an embargo.  It's tough, but survivable.  Hyperinflation is like nuclear war, it's short, and there is not a 100% likelihood that the government will survive.

Sun, 10/31/2010 - 10:32 | 688848 mark mchugh
mark mchugh's picture

You're right, of course, but won't it be cool when we're all Trillionaires?

Sun, 10/31/2010 - 12:44 | 688961 Sean7k
Sean7k's picture

And we must remember the death blow- scarcity as people whom have goods refuse to sell them at any price. At this point, no number on the bill matters anymore. You must bring in a new currency that restores confidence- in Zimbabwe, that was the dollar. Ironic, no?

Sun, 10/31/2010 - 12:44 | 688962 ElvisDog
ElvisDog's picture

The most consistently prosperous time for England in the late 18th and early-to-mid 19th centuries occurred during persistent mild deflation. Same for the US in the later part of the 19th century. For anyone who is prudent and saves a little money and doesn't have debt deflation is good. I say "bring it on".



Sun, 10/31/2010 - 13:42 | 689070 RockTime
RockTime's picture

I am not going to get into a pissing match about the "d-word", but to say "we'd all be off much better if there was any 'hyper' side to it" is by far the dumbest thing I have read in the comments on this blog so far. 

You obviously have no clue what "hyperinflation" means, I'd suggest you educate yourself and fast, this will help you make the right decisions about your assets, once we start seeing the signs of it coming (which one could argue we are, based on food and commodities, and the USD decline). Otherwise, I expect you will be rummaging through the trash piles looking for food for your family 2-3 years down the road.

Sun, 10/31/2010 - 20:55 | 689638 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

More, you got it right! For rest of you, deflation bitchez!!

Sun, 10/31/2010 - 21:39 | 689733 CitizenPete
CitizenPete's picture

To characterise it in military terms, deflation is the a-bomb from hell, while hyperinflation is a water pistol.


I think the more appropriate analogy would be: Deflation is like a long drawn out never ending battle with horrible suffering, while hyper-inflation is a neutron bomb - devastating everything in the blink of an eye, leaving the survivors to sweep up the dust.

Sun, 10/31/2010 - 12:20 | 688928 Yits and the Yimrum
Yits and the Yimrum's picture

superb analysis Tyler!

this is why I don't give rat's ass anymore about who will be right on the inflation or deflation debate; its down to a craps game and the only winners are those with secret bunkers in far away mountain villages loaded to the gills with the goods.


but on that cheery note, this article is very important in that we can navigate the best we can through the smoke screen the bankters are lighting and those that implement austerity on a personal level might have a fighting chance

this information may have been a threat to the squid 30 years ago, but no worries, it's NFL sunday for the masses.


Sat, 10/30/2010 - 23:39 | 688618 frankTHE COIN
frankTHE COIN's picture

Kalafia is a Bull in this environment, And i want my steak Well Done !

Sat, 10/30/2010 - 23:45 | 688624 Mako
Mako's picture

There is no helicopters to come and save you guys... the system ie Credit System will collapse into a heap of mess and there isn't much that can be done except a slowing of the rate of the collapse, eventually the rate will begin to pickup again. 

Sat, 10/30/2010 - 23:47 | 688626 hamurobby
hamurobby's picture

The choppers cant come save the pilots without them.

Sun, 10/31/2010 - 01:35 | 688702 tictawk
tictawk's picture

It all spells DEFLATION and the Fed is trying desperately to counter it with QE.  It cannot work because credit demand collapsed.  A debt based system has to continually grow to the point of saturation.  We clearly passed that point and we were levered.  Leverage cuts both ways and there will be more pain to come.

Sun, 10/31/2010 - 02:11 | 688719 tmosley
tmosley's picture

Funny you should say that as they have been buzzing Wall Street for more than a year.

And the helicopters aren't coming to save us, they are coming to kill us you idiot.  NO-ONE wants the helicopters, any more than they want a Hellfire missile crammed up their ass.

But oh, I guess it can't happen here.  There has never before been a hyperinflationary event, and there never will be.  Hold dollars 4eva (or whatever you want people to do--you never provide guidance, only doom-mongering).

Sun, 10/31/2010 - 09:55 | 688825 Quinvarius
Quinvarius's picture

I suggest you google "glass ass" before you decide who does not want a hellfire missile crammed up their ass. 

Sun, 10/31/2010 - 05:04 | 688753 taraxias
taraxias's picture

I can't take any post seriously that includes the word "eventually" in it.


Yeah, mako, we get it......."EVENTUALLY" we'll all die some day.

Sun, 10/31/2010 - 10:11 | 688834 JW n FL
JW n FL's picture

if you sit by the edge of the river long enough... you will see everyone float by.

Sun, 10/31/2010 - 23:21 | 689875 merehuman
merehuman's picture

is it worth the wait?  Think i will have that with my tea!

Sun, 10/31/2010 - 00:10 | 688644 bob_dabolina
bob_dabolina's picture



This assumes the shadow banking system continues deleveraging which is why Bernanke telegraphed to the WS journal that he will "tap lightly"

I think your entire argument/analysis is moot because there are so many exogenious events that can/will be amplified by orders of magnitude to obsucre this data. The purview of the creditsphere is ultimately going to be confidence in the government and the economy. If the landscape of credit changes than the entire dynamic of both outcomes becomes extinct. This event I am describing could be as simple as the GOP winning in a couple days...this would cause gridlock in the government and give investors confidence that the government can't change the rules on them as easily. It could be a flap as small as that (the elimination of uncertainty) to utterly change the course here.


Sun, 10/31/2010 - 00:46 | 688671 Spalding_Smailes
Spalding_Smailes's picture

The shadow bank is done. Look at the credit since 1982 the leverage raised all asset classes,everything. So now that its broken they cant come close to credit growth like that....

At the eve of the financial crisis, the volume of credit intermediated by the shadow banking system was close to $20 trillion, or nearly twice as large as the volume of credit intermediated by the traditional banking system at roughly $11 trillion.



Bill Gross

In addition to the pyramid shape of its securitized assets and the endless chain of its letters, finance and especially modern finance is centered around banking and now, unfortunately, around shadow banking. Both, The Economist magazine points out in its September 22 nd issue, are built on a fundamental (and ever present) mismatch: they borrow short and lend longer and riskier. Recognizing this flaw, governments have for over a century mandated that banks have an ample percentage of reserves in order to bridge the liquidity and investment risks that periodically ensue. Like Jimmy Stewart in It’s a Wonderful Life, the critical job of a traditional banker was to have enough reserves or cash on hand to prevent a run. Stewart’s modern day counterpart must follow similar guidelines, although a 21st century banker now can always look skyward for a guardian angel in the form of the Fed, the ECB, or the Bank of England. Recent infusions of over a half a trillion dollars by this triumvirate point to the perennial need for reserve banking in either an earthly or a more heavenly sense.

But today’s banking system as pointed out in recent Investment Outlooks, has morphed into something entirely different and inherently more risky. Our modern shadow banking system craftily dodges the reserve requirements of traditional institutions and promotes a chain letter, pyramid scheme of leverage, based in many cases on no reserve cushion whatsoever. Financial derivatives of all descriptions are involved but credit default swaps (CDS) are perhaps the most egregious offenders. While margin does flow periodically to balance both party’s accounts, the conduits that hold CDS contracts are in effect non-regulated banks, much like their hedge fund brethren, with no requirements to hold reserves against a significant "black swan" run that might break them. Jimmy Stewart—they hardly knew ye! According to the Bank for International Settlements (BIS), CDS totaling $43 trillion were outstanding at year end 2007, more than half the size of the entire asset base of the global banking system. Total derivatives amount to over $500 trillion, many of them finding their way onto the balance sheets of SIVs, CDOs and other conduits of their ilk comprising the Frankensteinian levered body of shadow banks.



Sun, 10/31/2010 - 08:30 | 688798 blindfaith
blindfaith's picture

Lehman went down when their 'competitors' decided in unison that nobody wanted to play the roll over game with them any more. 

The credit on one bank balance sheet is the liability on another's sheet, and at some point one of these banks is going to call the liability due or won't roll it over.  Dog eat dog, there is no remorse, the end game is to have it a game of poker. 

So, at some point some bank is going to believe that they hold a full house and try to be the last bank standing.  What is the final catalyst, a simple withdrawl of cash, or an insider passing info...who knows.

It that so hard to believe?  They do not live in my world or your is like trying to understand what living on Mars would be like.  It is a game to them, one we just can't grasp.

Sun, 10/31/2010 - 10:14 | 688836 JW n FL
JW n FL's picture

perma-bear, bond-boy... bill gross is a puppet cheerleader...

Sun, 10/31/2010 - 11:44 | 688886 Rollerball
Rollerball's picture


Sun, 10/31/2010 - 11:34 | 688892 Rollerball
Rollerball's picture

Another intravenous crack Hopium dealer.  

If sideline petro-dollars are being held, they hedge physical (war, resource/commodity backwardization, etcetera). Excepting a global jubilee, they will not inflate overcapacity/under-utilization; for example:  cheaper products for cheapened labor (excludes state-sponsored Monsanto security contractors).   


Sun, 10/31/2010 - 00:25 | 688655 gwar5
gwar5's picture

80 years ago during the Great Depression we had industry and less sovereign debt. Now, not so much. The Great Depression is going to be the good old days.


Sun, 10/31/2010 - 00:28 | 688658 Jasper M
Jasper M's picture

It's "Calafia", with a "C". And you shouldn't make fun of him. Didn't your mother ever teach you not to make fun of retards?

Sun, 10/31/2010 - 00:33 | 688663 trav7777
trav7777's picture

so much gd bullshit.  Velocity?  Velocity is an unmeasurable ABSTRACT concept.

It has no effect on anything and won't solve shit.  Let's say you owe $105 and there is only $100 in the system.  There's no way to fuck with that by swapping $10 of the base back and forth at light speed.  Monetarism is a COMPLETE sham, a crock, and a fraud.  It was concocted by people who appear to FAIL to understand how our monetary system is constructed.

All these charts and graphs and they are so much wasted time.  The bottom line is that the credit base MUST grow or else it implodes.  Idiots who think that a foundational issue like this can be rectified by fucking with the nonquantifiable "velocity" part of some laughably bullshit equation like PV=MQ or wtfever, are utter fools.

velocity like the authors talk about is when people are trying to get the HELL out of cash, meaning its value as a confidence instrument is in a process of severe impairment.  I got no frakin clue how any economist would think that the rate at which money changes hands can solve a problem with the fact that there is NO demand for credit.

Sun, 10/31/2010 - 00:58 | 688686 RockyRacoon
RockyRacoon's picture

You can't be right.  You don't have a PhD in economics!


Sun, 10/31/2010 - 13:41 | 689064 grunion
grunion's picture

Hah! Made me snort my tea on to screen!

Sun, 10/31/2010 - 01:21 | 688698 Shiznit Diggity
Shiznit Diggity's picture

Velocity is an unmeasurable ABSTRACT concept.

Velocity = GDP/base money supply

It's measurable to the extent that GDP and the monetary base are measurable.

Sun, 10/31/2010 - 11:27 | 688889 trav7777
trav7777's picture

And you know that GDP is measured in terms of velocity, right?

Sun, 10/31/2010 - 20:02 | 689532 JW n FL
JW n FL's picture


If the Government is making shit it up... it stand to reason that we could allow a fellow poster to make shit up.

The equation for constant acceleration is:

V = V0 + at

Where V0 is the initial velocity (Which can be 0 if the initial velocity is unknown), a is the acceleration and t is the time.

The_equation_is_distance_over_time!">The equation is distance over time!
The equation for velocity is:

?V-is the velocity
?d-is the change in displacement
?t-is the change in time

note that ?d and V are vector quantities so direction is important. ? a scalor quantity so it needs no direction.

?d=15 km[south]

?t=30 min

let south be positive

V=15 km[south]/30min
V=0.5 km/min[south]

if needed convert min to sec by multiplying by 60

30*60=1800 sec

Mon, 11/01/2010 - 00:28 | 689938 RockyRacoon
RockyRacoon's picture

If the Government is making shit it up... it stand to reason that we could allow a fellow poster to make shit up.

By golly, I believe you've got it!  Iron-clad argument there.

We are ALL effing geniuses.    Thanks for the comment.

No sarcasm intended, just a genuine admiration.

Sun, 10/31/2010 - 10:26 | 688844 tmosley
tmosley's picture

Rising monetary velocity solves this problem like a bullet to the brain solves a headache. And no, monetary velocity is NOT an abstract concept, any more than physical velocity is. The lower the velocity of money, the better, in reality.  It implies that money is valuable, and is being used as a store of value.  You should never have to spend money to get a good return on value.  You only need to supply the fruits of your labor to the economy in exchange for a placeholder, like a stable currency, or precious metals.  The increase in production by society, and the associated price deflation will be your reward.

Sun, 10/31/2010 - 12:43 | 688958 AssFire
AssFire's picture

I'm with Trav on this one. Equations are meaningless with too many unknown variables...

like people investing in physical gold and silver and dumping their greenbacks.

Sun, 10/31/2010 - 00:56 | 688684 unum mountaineer
unum mountaineer's picture

changes nothing for me..still strongly beleive that given these jerk asses' track record, I have zero confidence that any of this will end well...thanks for the insight, but this fucking guy is like a 500 pound obese, two left foot s.o.b. trying to walk a tightrope with no fucking safety net and a pit full of hungry lions waiting for supper. fucking economist..that religion should be outlawed..velocity..fuckin shit

Sun, 10/31/2010 - 03:52 | 688743 Troy Ounce
Troy Ounce's picture


+ 31.1035

Thanks for the valuable contribution.

Sun, 10/31/2010 - 01:15 | 688693 Shiznit Diggity
Shiznit Diggity's picture

John Hussman just put out an excellent piece on QE2's likely effect on monetary velocity. His conclusion:

The belief that an increase in the money supply will result in an increase in GDP relies on the assumption that velocity will not decline in proportion to the increase in money. Unfortunately for the proponents of "quantitative easing," this assumption fails spectacularly in the data - both in the U.S. and internationally - particularly at zero interest rates...

Once short term interest rates drop to zero, further expansions in base money simply induce a proportional collapse in velocity.

Sun, 10/31/2010 - 02:09 | 688718 snowball777
snowball777's picture

Overall a very good article, but his analysis on Weimar was a little weak since it implied that the Germans paid wages to strikers for a lark, and not because the French had taken the Ruhr (in what could possibly be the stupidest means to encourage payment of defaulted reparations possible).

One might notice that the default and occupation kicked off the hyperinflation as much as the printing (would you want currency from a country that looked like it was about to be pummeled again by half of western europe?). There might not have been any printing otherwise.

Sun, 10/31/2010 - 02:38 | 688725 sweet ebony diamond
sweet ebony diamond's picture

When the local grocer sold bread for 50 million marks one day, and then 100 million marks the next, then I think that tells who "kicked off the hyperinflation" in Weimar.

America's "local" grocer is big and fascist.

Make it smaller please.

Sun, 10/31/2010 - 05:42 | 688761 frankTHE COIN
frankTHE COIN's picture

Ebony, i dont know the rules of blogging etc,etc.

In general, what city and state are you from ?

Sun, 10/31/2010 - 05:58 | 688766 sweet ebony diamond
sweet ebony diamond's picture

I am not from America.

But I have family that go to America all the time for long periods of time.

Sun, 10/31/2010 - 11:16 | 688878 snowball777
snowball777's picture

Why single out A&P from some ancient article when you could reference ADM today?

Sun, 10/31/2010 - 23:29 | 689891 merehuman
merehuman's picture

i want fun-bucks. Good for today only dollars.100dollars comes with hourglass or timer of your choice.

Get your xtra bucks for spending more. After all what do you give a woman who has everything? MORE!  The more you spend we up your limit, in fact we will pay you to spend it.  Funny times we are in  for sure.

Sun, 10/31/2010 - 02:22 | 688720 Paul Bogdanich
Paul Bogdanich's picture

Dear God I hate these people.  They punish the ones who live by your ordnance and reward the thievs among us.  not that this is any news to you you as you have been watching the same pettern since you first breathed life into the man.  But as a man I would ask, why do you permit it?  For what purpose?  It is incomprehensible to us. 

Sun, 10/31/2010 - 08:43 | 688804 tip e. canoe
tip e. canoe's picture

great idea

Sun, 10/31/2010 - 11:28 | 688890 snowball777
snowball777's picture

I write myself in for every office that doesn't have a viable choice in each election. I'm gettin' writers cramp.

Sun, 10/31/2010 - 03:41 | 688742 Samual Adams
Samual Adams's picture

you ever faught a false war?  Perhaps when the iraqi's(insurgents, whatever that is) bomb your base and you don't shoot back even though you have radar, motar platoons, m1a1's, black hawks, apache's,   and high resolution cameras on the blimps watching  your sector of the city.   And your commrades are dying?   Oh yeah, we all sign up to be sacrificial lambs for a thing called "Counter Insergency" tactics,   yeah read the book, it's hundreds of pages thick.


False flag Terror.    Live it love it.Watch for the military to revolt against the system.   yet again this just a specialist Cavalry Scout talkin his mind.

Watch for the military to revolt against that BS.

Sun, 10/31/2010 - 07:14 | 688779 Ricky Bobby
Ricky Bobby's picture

How many times did the Legions lead the new emporer into Rome, or fight each other to decide. Of course this did not become common until the Republic morphed into the Empire. OH how many countries do we have troops in? Me thinks we are no longer a Republic but now an Empire. So when will our Generals show up?

Sun, 10/31/2010 - 08:44 | 688805 blindfaith
blindfaith's picture

We already had one...Eisenhower.  And, I do not think the military industrial complex wants another General as President.  I can't imagine what the Republicans and Tea Party folks would have done to him today for raising the benefits of Social Security and advocating a national health care system as well as a host of other anti-American concepts.

Sun, 10/31/2010 - 10:45 | 688854 Snidley Whipsnae
Snidley Whipsnae's picture

The US became an empire when we took on Spain for ownership of Cuba, the Philippine Islands, etc, circa 1898.

Some place the event even earlier, at the onset of the US Civil War, circa 1860.

If you read 'The Fall Of The Roman Empire' by Gibbons, you will find that not many roman generals entered Rome leading an army. Amazing as it may sound, Roman emporers (after Rome had ceased being a republic, of course) were chosen primarily by the initial opinion of the masses of citizens toward said emporer. Of course, the masses were swayed by those that weilded money and power. That the emporers paid homage to the common citizens, as happens today in the West, there can be no doubt.

Rome had some emporers that never set foot in the old Eastern Roman Empire (the city of Rome) nor were these emporers, in abstentia, inhabitants of the Western Roman Empire. That a Roman emporer could rule effectively should inform us of just how effective and efficient long distance communications were throughout the Roman empire.

Popular modern opinion has it that Nero was the worst of Roman emporers, and Nero was bad, but Caracalla and a long list of others were far worse. Caracalla had the habit of travelling from one Roman district to another causing total chaos, death and destruction, where ever he went. He was so bad that the citizens, upon hearing of his coming, would flee to other Roman districts even if it meant abandoning all that they owned.

Rome had the good fortune of having some good emporers along with the very bad ones. Reading the history it seems the ratio was about one good one for every two or three bad ones.

The history of Rome is far more complex than most people living today believe, and reading about the decline of Rome is essential to understanding what is happening in the Western powers of today.

Sun, 10/31/2010 - 12:47 | 688963 Rusty Shorts
Rusty Shorts's picture

"This lesson provides a different strategic perspective on the latter half of the 20th century that helps make better sense of that history and the day-to-day events we see in the media"


"The lesson describes where globalization is taking the world in the 21st century over the course of the next several decades. Understanding the strategic direction helps eliminate the stress and confusion of the daily noise we get from the media that doesn't help at all."


 - listen carefully as he describes the liquidation of Germany in WWII.

Sun, 10/31/2010 - 12:38 | 688953 Things that go bump
Things that go bump's picture

Who is our Sulla do you think?  McCrystal?  Petreus? 

Sun, 10/31/2010 - 13:53 | 689084 grunion
grunion's picture

What is required is a professional soldier class and since we have now created one, don't worry, it won't be long before the generals find them.

And the empire is complete?

Sun, 10/31/2010 - 04:17 | 688745 poydras
poydras's picture

Perhaps another perspective is to look at Japan.  In Japan, government debt replaced the deleveraging private debt.  Many write of Japan's demise but fail to recognize their chronic trade surplus and large, positive international investment position.  The focus here is how long the US is able to replace deleveraging private debt with public debt.

The US has a long way to go with private sector deleveraging yet is looking at another round of significant QE or money printing.  The unfortunate reality is that the US lacks the headroom to displace the private debt as it has a large trade deficit and a large, negative international investment position.

It works until it becomes abundantly clear that there is no further hope of solvency.  Where is that point?  Who knows?  Confidence is incredibly unpredictable.

What may be especially dangerous for the US is the reserve currency status.  Reserve currency status requires additional confidence as global participants ultimately choose to trade in the reserve currency for security (economic and otherwise) reasons.  The danger lies in global participants using USD to buy anything else of value.

In summary, US hyperinflation is likely to begin externally.

Allen C

Sun, 10/31/2010 - 06:40 | 688772 twotraps
twotraps's picture

Nice explanation, have to agree with you.  How can that be played?  Buy property overseas priced in dollars as a hedge if it gets out of hand?

Sun, 10/31/2010 - 11:06 | 688866 Bob
Bob's picture

We share a few thoughts there.  To focus upon simple domestic flows in isolation from the larger global system is a problem . . . and it is the Reserve Currency status of the US dollar that is just one of several wild cards. 

Sun, 10/31/2010 - 04:33 | 688746 Eduardo
Eduardo's picture

... and wasn't 4 trillion the number Goldman Sachs mentioned recently as the necessary one for QE 

Sun, 10/31/2010 - 04:53 | 688750 tony bonn
tony bonn's picture

"Fed which is now playing Doctor Nick to the US economy"

abley assisted by nurse hunicutt.

falling prices are a sign that the economy is cleansing itself...avoidance of deflation is a fool's errand - one perfectly suited to bernankrupt.

Sun, 10/31/2010 - 11:32 | 688893 trav7777
trav7777's picture

you are a myopic idiot.

There isn't enough money in the system to pay back all the banks the money they are "owed" plus interest.  The entire monetary system is in effective default.

This system CANNOT cleanse itself; it is mathematically impossible.

Sun, 10/31/2010 - 13:19 | 689017 tmosley
tmosley's picture

Must have been looking into a mirror.  Default is part of the cleansing process.  There can be any amount of default necessary.

Yes, it is mathematically possible.  It always is.  If it were possible for a society to get itself into a monetary situation that there was no escape from, then humanity would have gone extinct long ago.  Sure, a lot of people are going to get burned (figuratively or literally), but human systems will always self correct when they are allowed to.

Problem is, we have a central bank, and the central bankers won't let it happen.  This is why we will have hyperinflation.

Mon, 11/01/2010 - 17:22 | 691665 ZeroPower
ZeroPower's picture

Trav i tend to see eye to eye with you...but to say the system cannot cleanse itself is shallow.

Cleanse ITSELF, maybe not. We can help it though. Believe it.

Sun, 10/31/2010 - 05:15 | 688756 Silversinner
Silversinner's picture

Why try to compete in their fiat wold,most people will

loose this game.You have to work hard for the money

while they can print it at wil.

I really believe gold and silver can save you financially.

Everybody deserves the fruit of their own labour and

for their savings to maintain value,so one is able to

spend the money when to old for working.

We always had a upperclass of profiteers,it's when

they turned into parasites the real trouble begins.

End the FED,we the people can take care of the econemy

ourselfs,we really do not need these scumbags!

Sun, 10/31/2010 - 07:08 | 688777 RunningMan
RunningMan's picture

QE is trying to save the shadow banking system more than anything. Securitization sliced up mortgages and other collateral (with no apparent titles) into 'riskless' AAA tranches that turned out to be more BS than MBS. Cash rushed for the exits in October 2008 through March 2009 when everyone saw what was coming as the result of this shadow system - some cash has returned some has not. What has come back to the market has done so through massive government liquidity (socialist state anyone?). But normal people, while hungry for yield aren't going after anything more exotic that a lousy certificate of deposit (and apparently the occasional 50-yr Goldman debt issue at 6.5%). Can you blame people for not wanting the crapola foisted on them for the last 20 years by the financial system? BUT, I believe Bernanke thinks if he makes it painful for everyone - through negative rates on saving combined with commodity inflation through a weak dollar (prices on basic goods are going up as many here have observed - one need only look), he can break the back of the current psychology to get people back to hunting yield in whatever form it comes. I don't think it will work, but then again I'm part of the economy not seeing the surge in activity due to government actions (I'm in the group seeing the Q4 economy is in a full stall). 

Sun, 10/31/2010 - 13:25 | 689032 Things that go bump
Things that go bump's picture

Physically held gold and silver seem to be yielding nicely or at least holding its value in the face of the debasement of the currency.  Why would I chase some risky paper yield when I can add to that?  I've seen my grandparent's life savings dwindle to inconsequence during the inflation in the 70s and they were small business owners and, while not rich by a long shot, were considered well-to-do.  There was a few thousand left after my grandmother was buried for my mother and my aunt to split.  My parents started an IRA as soon as those became available and scrimped and sacrificed so that they could retire in some comfort.  They had a paid up house and money in the bank and were quite proud that there might be some inheritance for me and my sisters.  Fat chance of that.  What looked like a nice nest egg has again dwindled to inconsequence in value and my widowed mother has to economize, and worry about her finances and give up her paltry little pleasures.   I'll never again invest in this system.  Its like trying to collect water in a sieve.   There will be no 401K or IRA of mine to be either grabbed outright or inflated away to rob me thus of the value of my labor.  I sold my house in 2007, near the top of the market, thanks to the warnings I found on the internet, and I have moved my loot out of their reach and out of their control. 

Sun, 10/31/2010 - 07:30 | 688783 pagan
pagan's picture

This article pretty much sums it up. The deflationary forces from the shadow banking sector are overwhelming. The QE:s are small compared.

But Bernanke must be pretty clever. He sure didn't solve any fundamental issues with QE 1 but he sure kept the boat pretty steady. Can he do the same trick with QE 2 perhaps...QE 3 don't think so...

Sun, 10/31/2010 - 07:54 | 688789 Humpty Pundit
Humpty Pundit's picture

"The problem is that by adding virtually infinite liquidity to the system, the Fed has doomed a favorable systemic outcome from the very onset: at this point there are two real outcomes: either velocity dips again and GDP plunges by almost $5 trillion, or velocity explodes and hyperinflation arrives, resulting in a debasement of the dollar, and leading to a complete collapse in the system, as GDP becomes irrelevant (how many economists study the GDP over the many months of Weimar Republic hyperinflation?)."

Could someone explain to me why there are just the two outcomes? What would enable an explosion in velocity that would not enable growth in velocity but not an explosion?

Sun, 10/31/2010 - 08:48 | 688807 SDRII
SDRII's picture

GDP is a circular argumrent about the debt creation machine anyway - witness the 9% annualized spike in fed spending. 107bps of Q3 came from household services - in other words more utilities. One wonders how the individual price indicies reconcile to the headline deflator. Perhaps that is what the shill in the previous article meant by "growing" GDP via basics price spikes (nominal bias).

Sun, 10/31/2010 - 08:58 | 688809 taint
taint's picture

I am surprised at the degree to which people debate a bipolar result of deflation v. hyperinflation.  To me, one causes the other.  As this article rightly points out M3 is shrinking, this is deflation.   The FED's response is to increase M2 via QE but requires it in such large pacels as to notably weaken the dollar.   IF BB is a stubborn SOB, we will have hyperinflation and it will result from Ben's desire to prevent deflation and save the TBTF.


Sun, 10/31/2010 - 09:29 | 688816 f16hoser
f16hoser's picture

Government reported 2% GDP growth....what's the problem? Oh yeah, the unraveling of a Quadrillion Derivatives. How much QE will be required to counter that so we can maintain a positive GDP? Not sure but I'll bet BB is flopping around like a "one legged cat trying to bury shit on a frozen pond" in his efforts to figure it out.



Sun, 10/31/2010 - 10:03 | 688831 mark mchugh
mark mchugh's picture

QE is the process of acknowledging the money that's already been printed - ZIRP money given away to banks, swaps with other CB's, etc. all to create the false demand for Treasuries Tyler reports on day in and day out.

Is there anyone out there that really believes there is $3 chasing every $1 in US debt?  Anyone at all?

The process poydras describes of replacing private debt with public debt is being stuffed down the American people's throat through Treasury auctions that can only be described as fraud (unless you believe in the tooth fairy too).

So far, people haven't warmed up to the idea that no one actually wants US debt, but none of those people (including Tim Geithner) can actually answer the very simple question, "Who is actually buying Treasuries?"   That's because no one is.  You can count people who get free money from the Fed and go bid at these auctions, as purchases if you want, but I don't.  Nor do I count traders who buy US debt, and whose only intention is to flip it back to the Fed.

So the most of the money was printed when the Treasury was purchased - the Fed "buying it back" just lets you spend it on something else...

When your entire economy is based on fraud, isn't the rest just details?

Sun, 10/31/2010 - 10:23 | 688841 RockyRacoon
RockyRacoon's picture

True enough.  All this QE focus is just to divert the eye from the hand that is picking our pockets.  The scam has moved forward as planned without a care for the "mandates" of the Fed.  Jobs?  Now that's a good one....  Price Stability?  Right...  Whatever that is.

The reason we cannot audit the Fed is the same reason we are not invited into the magician's back room.    Their is no magic -- just sleight of hand.

Sun, 10/31/2010 - 10:43 | 688853 mark mchugh
mark mchugh's picture

Well said, Rock.

There seems to be this "you can't prove it's fraud" faction trying to hold the system together, but at some point, you have to treat them like the guy pulling rabbits out of his hat.  (i.e. I don't care how you do it.)

Sun, 10/31/2010 - 11:35 | 688895 trav7777
trav7777's picture

Our monetary system has been picking our pockets for a century.

This is the real scam.

People cannot see the forest for the trees.  When you let institutions or people earn interest on the issuance of money such that the mere presence of money means that someone is owed a vig, you have a system which is mathematically and morally bankrupt.

Mon, 11/01/2010 - 09:43 | 690279 RockyRacoon
RockyRacoon's picture

The word, as you have eloquently expressed it in the past, is "unsustainability"!


Sun, 10/31/2010 - 11:09 | 688868 Snidley Whipsnae
Snidley Whipsnae's picture

Well put MM.

Some of the 'free money to buy treasuries' that you mention will seep into the real economy.

More dollars seeping into the real economy mean the dollars held by the world are worth less. All commodities rise in fiat terms = hell is coming to breakfast.

No one realizes yet just how low the standard of living in the world, including the Western world, can fall.

Gold/silver are my economists.... 

Sun, 10/31/2010 - 12:21 | 688927 mark mchugh
mark mchugh's picture

Agreed.  But letting money seep into the real economy through government spending is a very slippery slope.  The government's big ticket items (defense, education and government salaries and propping up TBTF institutions) are bottomless pits of greed, not to mention money poorly spent.  So at some point, the American dream becomes getting an easy, high-paying government-subsidized gig that doesn't require you to produce results (this process is in bloom now).

A bloated, goverment bureaucracy can't possibly be expected to be the driving force of an economy, yet here we are....

And while this insane journey will surely drive precious metals prices ever higher, I'm still not too keen on what I think that world's gonna look like.



Sun, 10/31/2010 - 10:08 | 688832 Madcow
Madcow's picture



The Fed is shooting a bb gun (QE2) at a hurricane ($xTrillions of vaporized shadow banking system issued money).

Basically, its now becoming clear just how much economic activity and financial gains over the last 30 years were driven by criminal activity.  Now that the gangsters have to scram, there's no one - and no money - left to keep the lights on.

So the result is the mother of all deflationary collapses. In that environment - EVERYTHING falls against real money.

Gold will continue to rise against all measuring sticks until the investing public is convinced that a final mark to market has arrived and there are no longer criminal agents and motivations driving the system.


Sun, 10/31/2010 - 10:25 | 688842 mark mchugh
mark mchugh's picture


Love it!

Sun, 10/31/2010 - 11:13 | 688871 Canucklehead
Canucklehead's picture

Calafia is correct as usual...

This article should comment about the use of US currency outside the US economy.

Sun, 10/31/2010 - 11:14 | 688872 Gloomy
Gloomy's picture

I think it is odd  that on this website such a small probability is placed on the likelihood that Ben may succeed in finding the middle ground. If both extremes are highly likely why can't the middle ground be a reasonable probabalistic outcome?

Sun, 10/31/2010 - 11:56 | 688900 Bob
Bob's picture

IMO, the problem is that the system is so mindbogglingly complex--once interdependent global systems are recognized--that it literally cannot be modeled with any greater accuracy than the weather.

What we have in the case of economics, however, is the appearance of a system that, since it is clearly man-made, we feel compelled to take positions on based upon our own belief systems.  Unfortunately, different fundamental beliefs yield very different possible outcomes. 

Ultimately, we are essentially reduced to arguing about things that are, as a recently posted article on ZH pointed out, very similar to religion.  Or predicting the weather.

In that vein, I see Bennie trying to seed clouds to produce rain that will end a drought.  Will it work?  Who knows.  I certainly have my doubts.

A few things seem reasonably sure, though, including a continued shift of worthless debt "owned" by financial corporations that front for the criminal elite onto the backs of taxpayers and further contraction of the real US economy. In the absence of a popular revolt, of course. 

Sun, 10/31/2010 - 13:01 | 688981 Saxxon
Saxxon's picture

The Fed is trying to slowly coax stateside jobs back to fruitition with their extremely complex, meddling, roundabout, 'trickle-down' methods.  Fact is, jobs are still exiting our shores, being shoveled to India, the Phillipines and China etc. as fast as INTC and their like can do it.

As long as this continues, the American system is damned.  Not just in trouble - buried alive.

And when the oil flow slows, even stutter-steps a little, then hell will break lose.

Look to us dividing along racial lines; and a religious right coalescing as fear trumps whatever propaganda the mediaFed throws out of the idiot box.

Double gas prices for starters.  Only the wealthy driving to work.  National Guards at corner pumps.  Cheese food dumps in the publick square.

None of this is too far down the line, so long as the Fed refuses to repatriate jobs to these shores.  But the Fed is bought and sold.

It's 3 and 2 and the bases are loaded, two out.  Something has to give on this pitch.

I'm not wrapping myself in the flag here; just considering simple and obvious survival tactics for this country, where my ass happens to live.


Sun, 10/31/2010 - 12:12 | 688918 Biosci
Biosci's picture

I'll offer two possible explanations.  The first is feedback:  either extreme outcome reinforces itself.  Both deflation and hyperinflation are self-reinforcing trends.

The second is prejudice:  people's predictions are based on their underlying beliefs, and data be damned, or at least marginalized.

Choose for yourself.

Sun, 10/31/2010 - 12:38 | 688951 Implicit simplicit
Implicit simplicit's picture

The bottom line is that we are spending way more than we take in. There is no magic bullit of QE and M3 that will change that fact.

 The majority of the highest paid people spending money work for the goverment, banks, military industrialist complex and other goverment subsidized organizations.

The taxes from these groups spending is not enough to sustain their out of proportion salaries when compared to private business, whose salaries have been declining.

The positive relationship between unemployment and GDP is valid. The ecomomy cannot grow from this point unless GDP is above 3%, and stimulus money is not reaching the private business and entrenpreneurs that would create growrh.

The falling wages of private business employees will not support (through taxation) the growing wages of goverment related spenders; and thus mathematically will not support a growing GDP.

Cycles of capitalism consisting of peaks and troughs are necessary periodically. Preventing these through QE will only make the peaks and valleys larger. The systemic problems have not been resolved, and the simple math will not be denied.

The system will find equilibrium through debt default of the middle class which has already started, and will accelerate from here.

Sun, 10/31/2010 - 17:13 | 689379 Madcow
Madcow's picture

Right now, there's an epic Mexican standoff that can't last - 

Would you rather be shot in the head or stabbed in the heart. that's the "middle ground" here - which is basically a refusal to choose and move forward.

Either all that shadow bank money was illegal and is never coming back, in which case the bond markets collapse - starting with munis and leading straight to treasuries - and the entire financial system collapses - 

Or it was illegal and it IS coming back - this time as sanitized Fed-approved, central bank laundered money - and we get a 10X boost to money supply aggregates and unspeakable price inflation. 


We can be stabbed in heart, shot in the head, or stabbed in the heart and shot in the head. Or stabbed in the head or shot in the hear. It really doesn't matter at this point - 


The choice to stay here in the middle and not choose anything and not move forward in either direction is not a tenable position. the markets will force the hand of those who wish to remain in delusional financial Purgatory. 


Sun, 10/31/2010 - 11:18 | 688880 hooligan2009
hooligan2009's picture

As with the theoretical yet elusive discovery of the Grand Unifying Theory, (here I find the economic arguments that link historic economic output and behaviour with future economic output and behaviour also elusive. Economics interprets and describes a current situation but can only predict the future (with a given statistical probability for a range of possible outcomes) if all future behaviour is identical to past behaviour.

Since the key variables of politics, productivity, possible living standards, global innovations are not represented as key variables in the past, I prefer other methods to describe the "economic path" we are likely to follow and then attempt to impact or nudge that path in another direction when it seems to wander off into a box canyon.

Monetary economics, as far as manipulating money supply to achieve an expected outcome, has largely been discounted as an exercise in futility. Except for the large ticker purchases of houses and cars by adults, an alternative monetary policy setting might just as validly be that money supply can only grow from retained earnings of companies and individuals, plus government/state borrowing and from interest rates.

Note there has been no debate about the growth of real (inflation adjusted) money supply or the growth of money supply from interest rates themselves. Neither has there been much debate about the behaviour of people when there is no interest rate, other than the fact that soon to be retired baby boomers are being impoverished by the Fed’s Q/E by the lowering of long term interest rates. Every $100,000 now buys a $4,000 annuity, rather than an $8,000 annuity in 2000 for someone expecting 15-20 years in retirement. (Or put it another way, $100,000 is now worth $80 a week form $160 a week and you probably need a minimum of $300,000 to exist compared to $150,000 ten years ago). You can put these numbers in terms of an entire ten year population cohort of baby boomers about to be impoverished by the Fed from the upcoming discretionary spending and taxes that won’t be available to the economy. Who says the Fed isn’t a purely political organisation by accident or design doesn’t matter.

Anyway, let’s get back to the debate. What is the point of describing a situation in economic terms of inflation, deflation, growth or recession? The economy was “inflated” in terms of activity and prices by flawed Fed actions supporting the criminal elite within the banking sector. The players are still there, the Fed is TBTF as are the banks, that is, TBTF in the current system. The “economy” produced too many “assets” with too many people and is now faced with the issue of how to correct the error.

You either reset the clock back to when the problem began (pre-TMT, pre the exporting of manufacturing/industrial jobs to dodgy foreign political regimes with shady labour markets, before free expensive housing for all and before military spending/creation of veterans in Iraq/Afghanistan) and suppose that the economy can be regulated within more reasonable bounds;

OR ;

(as the Fed is doing) impoverish everyone until they take risk by borrowing huge amounts of money with their newly found poverty since this is the only way out from the poverty the Fed is creating.

I tend to favour the reset button. The level of output was false, prices in the economy are false, and so the entire premise for maintaining the status quo is false. The huge 12 year party that was funded from borrowing against future earnings is, quite simply, over.

The economic term for “right sizing” the economy may be deflation, stagflation, disinflation, recession, depression, sub-par growth, etc, but these terms have little to do with the reality of what needs to be done or the solutions we should be considering. Whether the existing system of Ben Franklin’s, George Washington’s and Barack Obama’s is still useful is irrelevant if there is belief and transparency in what is actually going on.

Sun, 10/31/2010 - 11:23 | 688887 JW n FL
JW n FL's picture

Angus Maddison

Emeritus Professor

Faculty of Economics

University of Groningen

This is the last version of the Angus Maddison homepage, last updated on March 2010. Further information can be found on the Maddison-Project Website

Articles and papers

New Estimates of Chinese Growth Performance and Potential 1952-2030
World Development and Outlook 1820-2030: Evidence submitted to The House of Lords

Sun, 10/31/2010 - 11:37 | 688896 hooligan2009
hooligan2009's picture

I may not be invited to Amsterdam, over 5-7 November! :)

Sun, 10/31/2010 - 12:15 | 688921 RobotTrader
RobotTrader's picture

No weakness found in the Investor's Business Daily Top 100 yet.

Many of the cloud computing stocks which broke hard last month have fully recovered.

Top 100 stocks charted here:




Sun, 10/31/2010 - 12:19 | 688924 Garth
Garth's picture

What's with all the Ms?

The Treasury has a large pile of unprinted paper and ink ready to go.  How much does this count and in which M?

PS: They haven't decided which denomination to print yet, 1's, 100s, or something else...

PPS:  Or Timothy could just take some existing $1 bills and add a T to them and initial the change?

Sun, 10/31/2010 - 12:25 | 688934 hooligan2009
hooligan2009's picture

Miller and Modigliani is M2, Dr Doom is m00 plus a D, but is a little backwards, if you understand terms like "pwned" then M3 should make sense, otherwise you have to go to:

(and turn wiki upside down to get another m).

Sun, 10/31/2010 - 12:28 | 688936 JimboJammer
JimboJammer's picture

Bank  of  America  is  the  next  Domino  to  fall ....

November  8th   >  >  11th   get  out  of  Israel ...

Sun, 10/31/2010 - 12:28 | 688938 Eric L. Prentis
Eric L. Prentis's picture

The crazies at the Fed are making Halloween, SPECIAL!

As Bette Davis says in All About Eve, "Fasten your seat-belts, it's going to be a bumpy night!"

Sun, 10/31/2010 - 12:33 | 688946 JimboJammer
JimboJammer's picture

Like  James  Dean  said  to  Liz  Taylor  in  the  movie  " Giant "

>>>    " Honey , You  are  Good  Enough  to  Eat " 

Sun, 10/31/2010 - 13:20 | 689020 Eric L. Prentis
Eric L. Prentis's picture

Jimbo (I assume you are female), just checking, who do you want to eat?

Sun, 10/31/2010 - 12:33 | 688947 Akrunner907
Akrunner907's picture

So,  tell me this, if hyperinflation does happen, and to some extent inflation is already spooling up, will it be across the board?  I think that we will see hyperinflation in commodities but an erosing, or deflation, in real estate.  Something has to go down for the others to go up.  Since real estate equity is paper only, it is easier to erode that operating costs (home ownership for future buyers) in order to prop up commodity prices.

Sun, 10/31/2010 - 12:51 | 688969 Fearless Rick
Fearless Rick's picture

My best guess is that Uncle Ben will inflate infinitely. Gold, silver, bread, your utility bill and everything else one needs to pay to survive will soar in price. There will be no end demand because the banks still won't lend (why should they when they have free money and the stock market). The economy will basically collapse; the largest banks, the root of all evil (because they love money) must fail. Prudence tells us to do the following:

Cash out all intangible assets (stocks, bonds, any paper). Money in 401ks and retirement accounts is DOA as of 3Q 2012 at the latest. Stop all debt repayment. The creditors are going to get their clocks cleaned permanently. Your FICO score will be replaced with RICO charges.

Hold as much in tangible assets as possible. Home (you need a place to live), land, gold, silver, functioning transportation or even spare parts, arable land, foodstuffs, the basics for survival. Get some guns and bullets. You may need to defend your family and land.

Learn to make bread. If it's really going to $100 a loaf, you can "cash" in. Sell it for gold if you can.

After the dust settles and the tyrants are thrown out - we need a cleansing, badly - some new form of capitalism will emerge. Your gold and silver will have exceptional value. 

While many of us are contemplating which direction to go or follow, personally, I am at a crossroads. I have a small amount of credit card debt at extreme rates (>20%), but tomorrow, I am calling their bluff. They will be told that they either lower my rate to 10% (still pretty f-ing high) or pound salt. They'll get one more monthly payment from me (gives me time to see if a local CU will take on my debt), and then, adios.

With another inept congress about to be elected - one which will undoubtedly be capable of nothing good, and Ben printing $$$$ until he runs out of zeroes, plus the unbridled fraud in the banking system, it's time for men and women of good moral fiber to take action. If the banks and creditors won't play fair, put a gun to their collective heads. Non-usurious loans only, no games, straight interest at reasonable rates. If they don't like it, get in line. They'll take years to work through the courts, if ever, and that's if any of them survive.

The government is already bankrupt. They will repudiate a great deal of debt, most of it owed to US, the US taxpayers. My plan is to beat them to it by six months or more.

Sun, 10/31/2010 - 13:23 | 689026 rocker
rocker's picture

Somebody with some common sense. The public at large is cashing out their 401K. 

This is what Ben is all flipped out about. The collapse of the stock market. What he calls the economy.

Who will pay CEO's their hyper inflated wages that they demand when they tell their workers to except less.

It seems it is deflationary only if we pay the workers less. Millionaires want to be Billionaires, and they want more.

The elite are draining the wealth of the workers. CEO's and Bankers demand more money or they will quit as they say.

And yes, bread will go up because the price of real things cost more, like commodities.

Sun, 10/31/2010 - 23:40 | 689905 JW n FL
JW n FL's picture

The 100's of billions.. pulled from the 401k's have been re-invested +/- 5% into EFT's. The dumb money is playing it safe.

Sun, 10/31/2010 - 13:02 | 688987 Atomizer
Atomizer's picture

You will not be paying $100 for a loaf of bread, nor will you draw up an agreement by the IMF to pay off US debt.

That's all I will say. Time will prove itself. Ignore the US MSM fear stories. It's all nonsense and a desperate $$$ funded control factor.


Sun, 10/31/2010 - 13:16 | 689015 Fearless Rick
Fearless Rick's picture

Thank you for the fully inadequate comment.


Sun, 10/31/2010 - 13:29 | 689040 Atomizer
Atomizer's picture

Your welcome. We aim to warn the mentally challenged serfs.

Sun, 10/31/2010 - 13:26 | 689031 FreedomGuy
FreedomGuy's picture

What I reject is the whole idea of manipulating the economy through (unsound) currency. Put me in the Austrian camp that the best we can do is a sound currency and let the markets go where they will. There is a natural balancing act to the billions of economic decisions that get made each day. The reason we are in deflation is from an inflationary credit and property bubble that permeated the whole country. It created sloppy if not fraudulent loan policies and processing and misallocated resources to construction, housing and financial alchemy. All that has to be unwound in terms of finance and millions of people who did everything from creating lumber, to laying drywall to paving roads to new neighborhoods that were unneeded. Other articles here have touched on this concept quite well.

The article states is dead on when it says "Namely, adding more liquidity to a system which no longer needs a liquidity injection but instead is in dire need of a fundamental restoration in the belief of the job creators (small and medium businesses) that the economy is if not sound, then at least without further threat of central planning interventions by the very same Fed which is now playing Doctor Nick to the US economy, and prescribing nothing less than a terminal poison to what is ailing the US." Exactly right! Bravo for clear thinking and analysis!

The roots of all this are in government policies. I consider the Fed part of the government as it truly governs our currency and economy. So, fire away at deflation or inflation. It's the manipulation (in either direction) that's the problem.

Layoffs continue regularly and employment at your old income seems nearly impossible outside of finance, at least.  No one in their right minds will take a loan or expand until things are proven over time to stabilize or improve.

Sun, 10/31/2010 - 13:27 | 689034 CHaas
CHaas's picture

I just finished reading an article in the Houston Chronicle which sites a cessation of foreclosure for a a couple in Texas.  The most compelling part of the article describes how BofA has purchased mortgages and attempted to collect on these loans.  The problem is that this loan, and others like it, are a result of refinancing and, as such, have already been repaid.  This begs the question:  How many loans like this, that don't exist, have been purchased by banks?  The Mortgage Electronic Registration System, a nationwide service that has become the nominee for lenders, saved the banks time and money, but it often resulted in incomplete loan documents, often because they weren't filed with the county clerks.  How does this resolve?  Food for thought.

Sun, 10/31/2010 - 13:47 | 689073 tom
tom's picture

The Calafia article was dumb, but I doubt it represents the opinion of asset managers. I was especially intrigued by the conclusion that money demand as measured by M2/GDP was the cause of the 2008 GDP decline. So does that mean that if M2 had declined in pace with GDP, thus keeping the M2/GDP ratio stable, GDP wouldn't have declined? Kinda metaphysical.

Saying that an increase  or decrease in any kind of velocity of money (GDP/M-takeyourpick) caused a decrease or increase in GDP is like saying that an increase or decrease in GDP/capita caused an increase or decrease in GDP. It's not saying anything.

Tyler's right that the broadest counts of money supply have been shrinking, but I don't think it's as big of a decline as he's painting.

Since M3 isn't published I'm not certain, but I would guess its decline is about leveling out. M3 is not shadow banking, it's just ordinary corporate banking - eg large time deposits, repos, eurodollars, institutional money market funds. These are deposit types offered by US commercial banks to corporate clients to skirt the US ban on paying interest on demand deposits. Except time deposits they are held outside banks, but they're linked to corporate deposits at banks through sweep programs.

Real shadow banking is a mixed bag. The main factor in Tyler's numbers is the demise of securitization. That will indeed continue. This mainly affects real estate.

Other kinds of ao-called shadow banking seem flatter (mutual funds, retail money market funds), while some kinds that are really and truly in the shadow (hedge funds, broker margin) seem to be on the rebound.

Sun, 10/31/2010 - 14:53 | 689199 pak
pak's picture

"Credibly irresponsible", hehe.. They have to be INcredibly irresponsible. But where do you stop?

Mr. Bernanke is trying to micromanage a nuclear fission reaction. Good luck Ben.

Sun, 10/31/2010 - 14:58 | 689210 steveo
steveo's picture

Fear Factor, going south is increasing fear.   Doctor copper and FF say this market is in trouble.   Big Ben says I got a printing press and I don't care how that hurts the savers of the country, I have academic policies to carry out and my handlers are happy that I am carrying this view.

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