Will We Have Inflation, Deflation, or Hyperinflation? Part 2
From The Daily Capitalist
This is Part 2 of a four part article that deals with what I feel is the primary question investors must now answer: is our future to be inflation or deflation? The answer has vast implications to our investment planning and decisions for the near term, and possibly for our long term. It is a very complex question with a lot of moving parts involving economics and politics.
Like it or not, it is economic theory that is driving macroeconomic policies and political decisions that determine whether we will have inflation or deflation. Since not all of my readers are sophisticated traders I have tried to present the issues in a direct and hopefully understandable way. To those sophisticated readers, please bear with me.
Part 2
The Inflation Argument
The argument for inflation rests on the money supply charts. The inflationists show various measures of money supply increasing, including the version used by Austrian theory economists, called True Money Supply (TMS)[1]:
Note: The M1 chart shown in Part 1 more clearly shows the trend in the M1 money supply increase.
Again, the YoY percentage change is more revealing:
The inflationists also point to the Consumer Price Index (CPI) which shows price increases:
The YoY rate of change of the CPI clearer:
As the chart reveals, prices have been rising since mid-2009. Even the measure of Core CPI (CPI less energy and food, CPILFENS) appears to be rising:
The inflationists would say that this effect of inflation, rising prices, is a classic measure that proves new money is hitting the economy and that has caused, among other things, prices to rise.
The Deflation Argument
The deflationists have a different take on the data. They point to theories by economist Steve Keen which states that first banks make loans, and then the Fed increases money supply to meet demand. According to Keen and Mish, money supply is created first by banks making loans, then by the Fed supplying the money, because you can’t increase money supply without getting it into the economy. If there is no lending the money supply remains unchanged. Thus it is a rise in credit that leads to money supply growth.
Mish also argues that excess reserves don’t really exist; they are a fiction created by the Fed, a mere computer entry. If you consider all the loans made by lenders, and the actual or potential defaults of their loans, those losses would absorb all the “excess” reserves. Therefore, those “reserves” are more or less spoken for and don’t represent money for making new loans.
Mish also believes that reserves aren’t the problem with banks; rather it is their shaky capital base. Lending is constrained by their lack of capital and financial instability rather than by reserves.
The deflationists say that because the size and breadth of the crash in the real estate markets and related debt, the problem is too big for the Fed to handle. Until debt is deleveraged and banks and businesses repair their balance sheets, the Fed’s effort to increase the money supply is like pushing on the proverbial string.
The result is that real estate asset prices are declining and that results in deflation. They say it is similar to what the Japanese experienced in the late ‘80s and ‘90s, when they experienced almost zero growth, no inflation, and declining asset values. Banks, they say, are not going to lend until this deleveraging occurs and businesses become solvent and creditworthy.
The deflationists say that the current measures of prices are inaccurate because they don’t reflect the declining values of real estate. If real estate was factored in, then prices would be shown as declining. The only measure of real estate in the CPI computation is what is called the real estate rental equivalent which measures the rental value of homes rather than their asset value.
They suggest that prices are indeed falling anyway if you look at Core CPI (CPI less energy and food) on a year-over-year percentage change basis:
Obviously there is some evidence of declining prices as shown by this chart.
Which is it: Inflation or Deflation?
Let me suggest a way of looking at the problem.
We understand that inflation or deflation is a monetary phenomenon, not just an increase or decrease in prices. And, in order to cause inflation new money must find its way into the economy.
There are several ways the Fed can do that.
The Fed can make cheap money available by lowering the interest rate on money it lends out, which increases money supply. Even with the Fed Funds rate at 0.18%, effectively zero, this doesn’t seem to be working.
The Fed can make it easier for banks to lend. This seems to be a problem for the Fed right now. As we have seen previously, lending is way down, excess reserves are high, and the money multiplier has fallen dramatically. This hasn’t worked either.
Yet money supply has been increasing despite the failure of these policies.
There is another tool in the Fed’s arsenal called Open Market Operations (OMO) whereby it buys and sells securities with its primary dealers. For example, buying Treasury paper from dealers increases money supply and selling decreases money supply.
Starting in January 2009, the Fed began a program of buying mortgage backed securities (MBS) issued by Fannie, Freddie, and Ginnie Mae. At its peak, they bought $1.25 trillion of these assets, pumping up money supply by that amount. The purpose was to get liquidity into the economy and try to revive credit and economic activity. Further it absorbed the risk of these “toxic” assets, relieving the former holders of their bad investment decisions.
This form of money inflation does not have the impact of the money multiplier were those funds in the hands of bankers who would lend out the new money, but it does represent a substantial amount of new money injected into the system.
This money infusion is being used by the very willing sellers of these toxic assets, the big investment banks or the investment banking operations of the big commercial banks, not so much for making loans, but for their own investment purposes; this money has been driving the financial markets.
Deflationists vs. Inflationists vs. Modified Inflationists
This is the point where the inflationists and deflationists part. The inflationists believe that the Fed can and will increase the money supply any time they wish through open market operations. The deflationists believe it doesn’t matter what the Fed will do because banks are not in a position to resume lending, thus counteracting the Fed’s attempts at increasing the money supply.
I have a different take on this, but it is a bit complicated to explain. To try to put it in a nutshell:
- I don’t agree with the deflationists that we will be just like Japan: continued deflation which would be the result of keeping alive bankrupt (zombie) banks and corporations.
- I part a bit with inflationists because I don’t believe Open Market Operations will have the inflationary impact they believe will occur. I believe that bank lending, the best tool for inflating money supply will remain constrained and be a drag on the economy.
- I believe that as the economy goes into a double-dip recession, the Fed will create ways to inflate that will be effective.
I refer to my position as Modified Inflationism.
Predictions and a Decision Tree
Here is the problem in trying to forecast what will happen in the future: tell me what the Fed and the government will do. Remember the Freakonomics’ humorous take on forecasting:
The future will be different from the present to some degree and some point, and I have anecdotes and hearsay to prove it.
Austrian types don’t believe that you can use econometric models to predict the future because such models are usually wrong. You can’t distill millions and millions of economic decisions down to a simple or even complex formula of human behavior because the data set is too vast to be useful. We believe you have to understand why individuals do things in the economy first before you can study data. These were some of the breakthroughs of the great economists Mises and Hayek.
To figure out what the Fed might do involves a lot of probabilities. And that is my method of analysis: what are the probabilities that the Fed will do one thing rather than another when faced with different circumstances. It is much like constructing a decision tree to see where they can go. If X happens, then the Fed’s choices are A, B, and C. What are the consequences of each and what is more likely to happen.
Stick with me.
Tomorrow, Part 3. The double dip economy, the Fed's choices, and their fear of deflation.
After Part 4, I will publish the entire article as one downloadable PDF.
[1] The True Money Supply (TMS) was formulated by Murray Rothbard and represents the amount of money in the economy that is available for immediate use in exchange. It has been referred to in the past as the Austrian Money Supply, the Rothbard Money Supply and the True Money Supply. The benefits of TMS over conventional measures calculated by the Federal Reserve are that it counts only immediately available money for exchange and does not double count. MMMF shares are excluded from TMS precisely because they represent equity shares in a portfolio of highly liquid, short-term investments which must be sold in exchange for money before such shares can be redeemed. It includes: Currency Component of M1, Total Checkable Deposits, Savings Deposits, U.S. Government Demand Deposits and Note Balances, Demand Deposits Due to Foreign Commercial Banks, and Demand Deposits Due to Foreign Official Institutions. There are different takes on TMS. See http://mises.org/content/nofed/chart.aspx?series=TMS.
(6 votes)
»
-
- Login or register to post comments
- Printer-friendly version
- Send to friend
on Fri, 06/25/2010 - 23:56
#434853
Thanks for tackling this issue.
Here's my take on it. I've hated to see two great market observers - Mish + Gary North - have such bitter disagreements. I've no idea about either of them as traders or money managers (I suspect that they're mediocre at best), but as observers, they're trenchant.
Inflation is asymmetric. Government workers have been overwhelming beneficiaries of Fed printing and implicit backstops on government debt. Housing is of course the beneficiary of powerful inflationary forces. Higher education workers also benefit from inflation. Insurance benefits from this.
Nothing, of course, needs to be said about financiers who have unlimited free money. They live in a fantasy world. You can see it with your own eyes in TriBeCa. That neighborhood might as well exist on a different planet from the East Village or Chinatown. That's where the inflationary royalty go to play.
They live in an inflationary bubble, while the peasants struggle with deflationary forces - as untermenschen.
In addition, a lot of new money and credit goes overseas. It takes a long time for that money to re-circulate back to the US. We see inflation (in both the Austrian and Keynsian senses) striking China with sudden force today. That new credit will eventually recycle back to the US, as Chinese interests buy up failing American businesses, government assets, and land.
That will be inflationary. But right now, we aren't affected by it.
Another example of asymmetric and tough-to-measure inflation occurs through warfare, smuggling, and other grey/black market activity. The military and the intelligence agencies dump pallets and pallets of money onto their warlord allies all over the world. Those dollars often take a long time to cycle through the economy, and in many cases, never return to the banking system.
It's been my perspective since 2008 - and I've written as much under my real name, back then - that the Mish / North split is fundamentally based on politics.
No, the banks won't lend, unless they're forced to.
Mish believes that the government won't force the banks to lend. He trusts that the rule of law will hold together. He believes that the politicians can be induced to promote austerity and that the Fed can be convinced to take action to rescue the dollar (at least temporarily).
Gary believes that the government will nationalize the banks and force them to lend. He takes P-Krug seriously, because that's been the ur-Keysian platform since the bailouts occurred. However, the banks have heretofore balked at ramping up lending, and consumers haven't been demanding it.
Part of this, I suspect, has to do with the restraints of the FICO system. Mish is correct that the tangle of regulation in commercial banking prevents a resumption in lending.
FICO, by the way, is extremely corrupt. If you have a little extra money, you can bribe your creditors to erase any and all negative entries. You just have to be crafty about it. It's legal, too.
If P-Krug gets his way, then North will be correct. If he continues to be stymied, Mish will win the day. Mish focuses on "main street." North is more concerned with the overall picture.
We have major inflation among the over-class, but deflation for the little wretches.
I think Gary is ultimately correct... but Mish is really good at analyzing the regulatory tangle of commercial banking.
Accurate predictions are impossible because humans have free will. Barry could nationalize the banks tomorrow, or on the pretext of some future crisis.
They have the guns, they can change the rules.
Mish, I think, is naive on that point. He trusts in the legitimacy of government on a basic level. You can see it from his ridiculous phone and fax campaigns. He really believes that this can be fixed by electing enough mobsters like Christie into office.
I'm unsure if I'd prefer a Democratic mob or the Sopranos ruling over me... I just know that I wouldn't want to hitch my reputation on the behavior of any politician that I would support.
Similarly, Peter Schiff and Rand Paul will probably be disasters as Senators. The whole point of being a Senator is to steal as much loot as possible for your constituents.
Libertarians are no good at theft, which is why they keep losing elections. They have no stomach for it.
on Sat, 06/26/2010 - 00:54
#434916
The part about "forcing" banks to lend doesn't make any sense to me. It's like forcing a retail store to sell stuff. If banks don't lend, they don't make any money. The problem isn't the banks don't want to lend. Anybody with a high credit rating and a job can get a loan. The problem is that the people that easily qualify for loans don't want or need credit and the ones that need the credit aren't good credit risk. If the Fed buys more MBS, that will keep rates low and inject more available capital in the lending system - but without the borrower going into the bank and putting his name on a mortgage, nothing happens.
on Sat, 06/26/2010 - 01:28
#434935
Re-capitalizing the SBA and pushing them to lower standards again. Totally making them government outlets. They could introduce processes to other types of loans similar to the ones pushed onto student loans.
"Ve haff ways of making you lend!"
on Sat, 06/26/2010 - 03:43
#435008
You miss the point. Do you "haff ways of making you borrow"?
on Sat, 06/26/2010 - 06:47
#435131
Exactly. My bank, JPM, has made it clear that they would be thrilled to lend me money, but in the present and likely future economy, it is not necessary or in my interest to borrow money.
on Sat, 06/26/2010 - 11:24
#435395
No, but they can implement tax incentives to make it extremely attractive. Like they did with HELOCs, etc.
I try to never underestimate the enemy.
on Sat, 06/26/2010 - 12:48
#435473
Precisely why we have a debt crisis now. Demand has been stripped from our future. If they DO find a way to force borrowing, expect a worse crisis later.... and you won't have to wait long.
on Sun, 06/27/2010 - 10:13
#436480
One way to think about how the Fed would "force" new lending is by demanding that banks write-down losses faster. By doing so and keeping credit flowing to the banks, they will have to make new loans, lest their balance sheets get smaller. That's the real problem with TBTF; it's a binary world that less means failure, and, so they believe, larger/more is progress. What is very clear is their margins are going to be under much more pressure for the foreseeable future and i do wonder if the new finregs are simply setting the markets up for another credit bubble by allowing TBTF to continue, albeit very much hobbled?
on Sat, 06/26/2010 - 02:20
#434971
got that right about Rand Paul. He's spent the past month feeling BP's testicles and loving every moment of it. Brazen apologist for what they've done.
on Sat, 06/26/2010 - 10:35
#435335
I liked reading your analysis, Apostate.
"Asymmetric inflation" nice.
Another force at work is credit destruction and other forms of money destruction.
on Sun, 06/27/2010 - 23:26
#437755
Apostate:
Wow, what a great comment. Thanks for reading this piece. I think North is somewhat "off" and I don't understand his personal attacks on Mish. I very much appreciate Mish's independent thinking. I don't agree with all of his conclusions but the guy thinks. His timing was pretty good too. Don't know about North. But I really don't agree with North's hyperbolic prognostications that have been mainly wrong over the years. You can't predict the end of the world for 20 years and be taken seriously. As far as banking, I think Mish has been proven correct in the strict sense. We had a bailout not nationalization. The very worst happened yet there wasn't nationalization. I don't wish to argue semantics here; I think you know what I mean. Please stay tuned for Parts 3 and 4.
on Sat, 06/26/2010 - 00:15
#434887
Inflation, yes. Deflation, yes. Hyperinflation, probably. Why is this so hard to understand? China and other developing countries in the East are inflating. As they inflate, they are exporting deflation and disinflation, (pick your poison.)
The US will tolerate this as long as the Chinese buy our Treasuries and we allow them to buy some US assets.
There is one wild card though. For those of you questioning whether the US is a fascist State, China is really not a free country. Regardless of what politicos are saying the Chinese economic miracle is built on the backs of a billion impoverished workers. Who is the Chinese Samuel Gompers?
on Sat, 06/26/2010 - 07:44
#435163
You forgot cancer stricken...
http://www.chinahush.com/2009/10/21/amazing-pictures-pollution-in-china/
on Sun, 06/27/2010 - 01:28
#436131
Thank you for pointing out the reality of China.
It amazes me how the iConsume USA crowd seems to have some idyllic vision of happy Chinese workers living in freedom and Zen like harmony and don't realize or care to realize that the majority are SLAVES.
on Sun, 06/27/2010 - 10:45
#436517
Me too ebworthen. But what amazes me even more is how the indoctrinated masses of the USA seem to have some idyllic vision of happy American workers living in freedom and Christianity-like harmony and don't realize or care to realize that the majority are wage slaves.
Regards
on Sat, 06/26/2010 - 00:24
#434896
Won't the proposed EU austerity force U.S. austerity?
on Sat, 06/26/2010 - 00:54
#434917
Econophile I love your work but there is more than one way to skin a cat. You do not need a change in money supply to cause inflation or deflation.
I would argue we are going to have inflation simply due to capital destruction.
on Sat, 06/26/2010 - 06:33
#435121
I second kudos for Econophile.
What happened to the banks when "assets" on balance sheet (all the derivative trash) just ... vanished? Deflation, me-thinks (in the near term at least).
What happens when there are millions of homes on the market and artificial housing price support? Deflation hanging around the corner as supply-demand imbalance is (maybe) being steered to "soft landing."
- Ned
on Sun, 06/27/2010 - 23:37
#437761
Thanks for the compliment. But, it's money supply, not capital assets, that leads to inflation/deflation. Perhaps you could explain.
on Sat, 06/26/2010 - 01:04
#434923
The government has several ways to expand the money supply & create inflation in an under the radar type of way.....funding of the ongoing wars, the bp disaster, ever increasing cost of obamacare, etc. Unfortunately, this type of inflation is not productive & is unsustainable.
The contraction in lending is the most powerful of all the current forces. Our banks should be, and still are, bankrupt. If lending comes to a standstill, the money supply doesn't level off, it drops in a negative multiplier fashion up to -10x. Asset prices still have a long ways to drop before they stabilize. No amount of stimulus is going counter the law of supply & demand. The death spiral has a long ways to go. The money supply will drop dramatically.
It might be the case for while that we'll have inflation in all of the areas where government dollars flow....food, energy, healthcare, etc., and deflation in all areas where government dollars don't flow.
Our government has shown it wants to keep printing. If so, the G20 countries are going to start dumping dollars & cost of financing our debt could go suprisingly high. We would then have a double whammy on inflation.
I'm hopeful obama will did the right thing & stop the spending now. About 50% of USD's are outside of the U.S. That's a pretty weak position to be in. I think it's soley up to obama (& the G20 countries) in the next month or two whether this depression will be hyperinflationary or hyperdeflationary in terms of the USD's.
on Sat, 06/26/2010 - 01:53
#434953
Major point, Dryam. For every $ destroyed by falling real estate, charged off credit cards, etc., 10 $'s are destroyed. Yes, the negative multiplier. The horror of reverse fractional reserve. But if banks are levered to 30 to 1 or 60 to 1, its -60X!
It seems unlikely that the debt based money system can survive this. It would be dead now without changing the accounting rules for bank asset values[March 2009?]. Maybe the system can muddle through by just changing the rules when reality bumps up against them?
Then there are the actuaries and math types who say its just a matter of time before $ destruction through debt liquidation crashes the system. Kinda like once the "Doomsday Machine" is triggered; the wheels are set in motion for a rendevous with the event horizon of the black hole.
ZH-ers are getting their affairs in order....gold, H2O system, freze dried
on Sat, 06/26/2010 - 01:31
#434936
And, the answer is "Yes." We have already seen deflation with regard to gold, and, inflation with regard to fiat. So, I am not sure why this is still a question.
Or, can speculators not take "yes" for an answer?
on Sat, 06/26/2010 - 01:32
#434940
PS: Rothbard was/is wrong...
on Sat, 06/26/2010 - 01:34
#434942
PPS: Gold is money too - and the only true measure of value.
on Sun, 06/27/2010 - 23:39
#437768
Nice photo. Gold is a monetary commodity and is real money, but it isn't legal at this point. The legal tender laws rule that out. If it were used as a money in transactions, then it could be counted toward an increase in money supply. Good comment. You may enjoy my article, "Money: A Semi Fictional Fable."
on Sat, 06/26/2010 - 04:17
#435042
Agree here, if you hold gold and you classify deflation as a drop in prices, the deflation has been massive as the gold price has risen 4 fold in 10 years and keeps on going. So for gold holders the deflation argument is over.
For Fiat currency holders, you can rest assured that the supply of fiat will increase as the Fed tries to create inflation to counteract the general deflation.
So, if you hold gold, your sitting pretty with deflation while everything gets cheaper, if you hold fiat, your f...ed with inflation
on Sat, 06/26/2010 - 09:57
#435271
The deflation measured in gold is, simultaneously, inflation in the form of Fiat prices. Which is to say, if the price of gold increased four fold, the purchasing power of fiat fell by the same proportion. I AM NOT SURE WHY THIS IS SO DIFFICULT TO UNDERSTAND!
This argument only continues because people insist in swallowing the CPI as a measure of inflation. What friggin' dolts! You have been robbed, and you stand here debating whether it happened!
on Sat, 06/26/2010 - 10:01
#435278
Only Austrians could be this dense!
on Sat, 06/26/2010 - 10:41
#435342
There is a time to short the dollar and a time to short gold.
If I buy a stock, in a real sense I am shorting the dollar.
If I short a stock, I am long dollars.
There's timing to these things (and politics)
on Sat, 06/26/2010 - 10:52
#435357
Actually I see deflation of all assets in regards to the value of MY cats. Point is that although my kittens are not as liquid as gold, I have placed a minimum value on them which is currently rising in regards to everything else including gold. In other words, although gold may be regarded as money historically, it's still remains a human perception and not a natural phenomena bounded by universal laws.
on Sat, 06/26/2010 - 12:31
#435442
Yes. Money is a human perception...like starvation. All animals can starve, only humans perceive starvation as an social abstraction.
To wit: not as a lack of food, but as a lack of money.
on Sat, 06/26/2010 - 12:28
#435457
Listen, the fact that there was never secular inflation until money was debased from gold, implies that there is somethinmg about the material quality of gold that is not reproduced in dancing electrons on a computer terminal. If you think thiis something is only our perception of gold versus our perception of dancing electrons, you are now a mainstream economist - change your name to Ben or Paul.
on Sat, 06/26/2010 - 12:57
#435481
I don't even know what you mean. According to your logic, speculators are now "gold standard" economists. You are as much of a gambler as those hitting red 32 right now.
on Sat, 06/26/2010 - 13:05
#435485
Fiat "Money" = Dancing Electrons
I like that.
on Sat, 06/26/2010 - 01:36
#434945
Thank you for posting these articles. The inflation/deflation debate is indeed the major theme of our time, and it is quite extraordinary that there is no universal certainty on the matter, despite the fact that there are many people who are certain that they are right on both sides of the debate.
As a general rule debtors welcome inflation, because it inflates away their debt. Sovereign governments are no exception to this rule, and since they represent the largest debtors in history, they are no doubt keen to induce some inflation. So far, as you note, their efforts have been unsuccessful, because the liquidity they have provided has not found its way into the wider economy.
The question that I should like answering is this. Why do governments not pay some or all of their payroll with printed rather than borrowed money? If they borrow the money, they are faced with adding to their accumulated debt burden, they must pay interest and fees, and since they are not in a position to repay this borrowing other than by incurring futher borrowing, or by printing, they might as well have printed in the first place.
If the printing causes some inflation, then job done; they will see their debts eroded over time. If it does not, then at least they can meet their payroll without incurring further debt.
Providing bail outs with money that they don't have and must be borrowed from the very institutions that they are bailing out so indenturing sovereign states to these institutions is a concept that Lewis Carroll might well have struggled with.
on Sun, 06/27/2010 - 23:41
#437777
Massive inflation and the destruction of the dollar is the answer to your very excellent question.
on Sat, 06/26/2010 - 01:57
#434956
Very good article that presents the cases of others and shows the will to place an intepretation.
My take is closer to this.
Economics is like art or history, and as with all art and history, there are artists and observers and the writer describes and inteprets events. No single art form dominates any other and no depiction of history is complete. (Rome may have sponsored an empire, but it removed countless kingdoms and, viewed from the perspective of those enslaved, was an abject failure).
Economics does not create or cause outcomes, but has some use as a description of how the same events have occurred in the past. The interpretation of art will attract connoisseurs who do it more often and are referred to by sycophants who have no original view, hence attracting followers. It is this aspect I will follow closely in these articles, to see if the analysis is original, or leads to a better description of past events.
Herein lies the rub, an artist assigns a bias towards the art form that reflects their personality and interpretation of life. Some AC/DC songs are mellow but most are not. Warhol fascinates observers and holds their attention. Both AC/DC and Warhol change the behaviour of the observers of their art, by making them stop a current behaviour for a while, but the behavioral change is temporary, but the knowledge of the art form remains for reference.
In that sense, artists are politicians (good and bad) and observers are central banks and economists, who try and impose their intepretation of the landscape or music by holding themselves out as connoisseurs of the art form of politicians.
Economics can be made "scientific" and predictive by saying that "painting by numbers" or "guitar hero" is possible and is as good as the original. Japan has fallen into this trap and (excuse the bigotry) cannot produce an original. (Perhaps because Japans creativity turned out the wrong way in the Second World War and was removed by the victors, turning Japanese people into followers).
To achieve an economic intepretation that is useful (causal) with this backdrop, requires a leap of faith that the evolution of economics (art and the intepretation of history) into its current state, contains solutions for us today. You will gather that I think this improbable and I will simply see what past masterpiece Econophile constructs with "painting by numbers". I think the quality of the work will be every bit as good, if not better than the Fed!
I am intrigued by "swarm", "chaos" and "behavioural finance" theories as, unfortunately, I think the human species is now more an uncontrollable "swarm" than in charge of its own future, meaning that "chaos" is the likely outcome and "behavioural finance" most closely describes the likely chaotic outcomes of surging mob law.
Governments (good or bad artists/historians) and central banks (connoisseurs/recorders appointed by artists/historians to agree) now only regulate a mob they have created. Shrugs. The spirit of individualism, creativity and simple joie de vivre is heavily shackled.
Okay guys, sorry if this sounds at all condescending or fatalistic, but I am a little down at the moment!
on Sun, 06/27/2010 - 23:45
#437779
Check out the definition of "epistemology" and then read this: http://nobelprize.org/nobel_prizes/economics/laureates/1974/hayek-lecture.html
on Sat, 06/26/2010 - 01:56
#434957
What is at the very top of the Feds list of priorities? Funding the national debt? Keeping the banks alive? I think it's the later. Whatever the answer is may be the best clue to where we are headed.
on Sat, 06/26/2010 - 19:31
#435762
that was more or less what I was going to say before I saw your comment...although there are limits, sometimes people revolting can change their behavior, but it usually has to been extreme. I understand people are the most angry when their expectations are dashed, not when they have it quantatively real bad, but when its real bad qualitatively to what they expected, to much dashing and they have problems on their hands.
Also, there may be a limit to what these arrogant folks can control, maybe a century or three of their schemes working has embolden them to the point of going too far.
but in the short term, what ever works for them, so be it
on Sat, 06/26/2010 - 02:00
#434961
Can you clarify the second graph? It shows >>100% y-o-y growth for TMS, but that is not what is shown on the first graph.
on Sun, 06/27/2010 - 23:48
#437783
The YoY change shows volatility in money supply changes which may indicate a slowing in growth but not a decline in growth, although a decline may follow if YoY continues to decline. Good question.
on Sat, 06/26/2010 - 02:28
#434976
Mish has a formula for this monstrousity so I say he wins:
http://globaleconomicanalysis.blogspot.com/2009/02/fiat-world-mathematic...
on Sat, 06/26/2010 - 02:32
#434977
says page not found...
on Sat, 06/26/2010 - 10:21
#435312
http://globaleconomicanalysis.blogspot.com/2009/02/fiat-world-mathematical-model.html
on Sun, 06/27/2010 - 04:36
#436208
thanks..kind of makes you wonder why the cost of borrowing isn't a multiple of the leverage. that is, if fed has a balance sheet that is 60 times what is needed via excess reserves, why economic models don't work out that the fed fund rate is 60 times the FF rate of 0.25% or 15%. Same with banks who are 30 times leveraged with an average life of 2 years on their debt = 30 times 1 or 2%!
on Sat, 06/26/2010 - 02:36
#434978
One of Gary North's key points when he argues against Mish and others, is that, as the Japanese situation shows, there is a big difference between asset deflation, and price inflation or deflation on necessities, and that it is really misleading to combine the two.
Japan has had huge losses (75 % and more) on equity shares and real estate, yet consumer prices on necessities have not really gone down, but continued their slow overall increase. That is the key for North. The fact that the 'asset deflation' is a larger amount of money 'deflation' on paper, is irrelevant to the mass of real people paying more money for food and necessities.
For real citizens leading real lives, 'inflation' is the mostly constant experience under the world financial oligarchs with the fiat - central banking system. It simply doesn't get cheaper to be a human being, however much assets are plunging in value and money & credit are disappearing from the system, and despite the supply of cheaper but un-needed products from low-labour-wage countries.
on Sat, 06/26/2010 - 03:14
#434997
most excellent point. fiat money deals in funny money for banks, not the reality of life for as you aptly put it, "the cost of being a human being".
on Sat, 06/26/2010 - 04:41
#435073
This is quite a party, where no one (including myself) has ever lived through deflation, and everyone sits around coming up with elequent theories for a new kind of inflation, which is always found in quotes.
on Sat, 06/26/2010 - 06:50
#435132
Great points--the lightbulb just turned on: Consumer Staples are "Defensive Stocks" vs. going into treasuries. - Ned
on Sat, 06/26/2010 - 10:25
#435317
So this will play out like Japan? Where's the hyperinflation that destroys their fiat? Two, three lost decades?
on Sat, 06/26/2010 - 12:02
#435431
bank- You are describing stagflation, that looks like US scenario to me, absent total
loss of Dollar confidence, and the 10-yr rate spiking.
on Sat, 06/26/2010 - 02:41
#434979
Despite $1.5T QE and massive gov stimulus, total credit growth in the US has been negative since early 2009; i.e., the US as a whole is deleveraging. That is textbook deflation.
Per Irving Fisher, it is essential during the deflationary unwind, to fight against currency appreciation in order to stop the self-reinforcement of the deflation/liquidation cycle. It is clear this is the Fed's goal; it is not clear they will achieve it.
The world economy consists of economic zones or blocs, each using its own currency or de facto currency peg within the zone. Nearly all of these are debt saturated in 2010. Appreciation of a currency that results from deleveraging reduces the income in that zone/bloc that is necessary to service existing the debts within the zone. When there is loss of confidence a zone/bloc can repay its debts the currency falls and the interest rates rise -- the zone is seen as unsafe.
Coming again to Fisher, during the deflationary unwind, the interest rates on perceived safe credits fall (or in the case of safe currencies, their value rises), the interest rates on perceived unsafe credits rises (or in the case of unsafe currencies, their value falls).
Pulling it all together, the global macro trend is deflationary. The unwind will put pressure on all debtors. The pressure will be so great, that some economic zones (currency blocs) will crack. The fiat currency within that zone will be destroyed, and to those in the zone that will feel like a Weimar event. See Iceland today as a small example.
The Euro bloc is seriously in question. The Yen and Pound "zones" could also see crises of confidence. The USD bloc has its own sets of problems, but probably among the last to fall. The question is whether or not an implosion in another currency could liquidate enough debt to relieve some pressure on the global system to stop other dominoes from falling.
on Sat, 06/26/2010 - 02:58
#434992
just to inject some conspiracy theory in here... there is a sense that this is all happening by some "accident"... namely, that there happened to be a massive asset bubble that got people to sign their lives away to debt, and the banks just miscalculated the risks. what really is the end result? millions who have signed away their lives to debt, who feel rich yet own nothing. who wins at the end of this? the one holding the lein and who has the goons to make people pay... and make no doubt, this will be the government and the fed.
so, just a super simplistic version cuz im tired... as an evil illuminatus, i want total control over a population. indeed, i want to have each one to have an implanted RFID chip that they will use for all future transactions. i want the state to be the largest employer. i want totalitarian rule. how do i do it? i first get everyone to become as much in debt to me as possible. i give them loans i know they cannot pay back. i feul a massive asset bubble, and when everyone is so doped up by the promise of ever increasing prices on real estate and equities, i bring the whole thing crashing down. first deflation, to fleece anyone with anything worth selling (because in my mind, that is what deflation is... a massive margin call). then hyperinflation, to ruin currency itself and force the idea that we /need/ a new method of commerce... 'ordo ab chao', order from chaos, the idea will be welcomed, people will line up for their RFID chips after having a period of wheelbarrows full of money to buy a loaf of bread, they will scream out for an answer... and the answer will be provided. give the people a government job and an RFID after the deflation/hyperinflation whiplash, and they will be thankful when you give them a govenrment job and an RFID chip.
deflation is the necessary precursor to hyperinflation...
anyway, it is my opinion that this has all been an orchestrated collapse. we are being sucked dry to the point where we have no more blood to give, and will then be conscripted into a orwellian nightmare Foxconn factory like existence. the gold will only be good for those with a good escape plan.
on Sat, 06/26/2010 - 03:17
#434999
whilst i agree with your forecasts, i think that the conspiracy is one of ignorance rather than planning. :) have a beer!
on Sat, 06/26/2010 - 10:19
#435307
Many participants are and have been completely ignorant of the end game, seduced by the status and bonuses, but there are certainly many other participants who were certain of the end result but uncertain as to the exact timing.
The construction of the security state just in time to handle the political fallout is no accident.
on Sun, 06/27/2010 - 04:48
#436212
I am willing to be convinced of the conspiracy theory, but I can't see the benefit to consparicists of impoverishing a nation. Conspiracists would be poorer as well. If it's some kind of psychosis then ok I can beleive it. I think it is evolution and the "group think" that represents the political system, the MTM, global bankers and cental bankers is about to emerge into a new reality. That is I think the "group think" of conventional wisdom will eventually lead to an epiphany of a new economic theory. I favour no vote without taxation above a threshold, so an improvment of "no taxation, without representation" into "no representation, without taxation".
I agree fully that the G7 is turning into a fascist police state, sponsored by central banks, but I think this will be overturned within the new economic theory.
My money is on the emergence of "logistics based allocation of scarce non-human resources to plentiful human resources". It includes a theory that focuses on, for example, the recycling of human waste into energy, living underground rather than on top of land occupied by cities and the collapse of democracy that is not based on ability to pay for pork barrell employment policies or welfare provision. But thats me!
on Sat, 06/26/2010 - 11:06
#435375
While it is hard to believe that there is a conspiracy this vast, the first step to overcoming it is to realize that it is real. Only when as many people as possible realize what is really happening, can we become free people again.
on Sat, 06/26/2010 - 11:06
#435376
While it is hard to believe that there is a conspiracy this vast, the first step to overcoming it is to realize that it is real. Only when as many people as possible realize what is really happening, can we become free people again.
on Sat, 06/26/2010 - 05:12
#435083
"If the American people ever allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered." - thomas jefferson
one of our greatest founding patriots predicted the conspiracy you fear is in play well before it was even conceived. we were doomed to this outcome by president woodrow wilson on december 24th, 1913 in a move he later publicly regreted... now we all regret it!
oh... and... i don't think you can accurately and graphically have an arguement about inflation vs deflation without a chart of M3 money supply... the fed stopped publishing this data years ago... mostly because if you look at that chart now it will scare the s$%& out of you!... but the data is still available... it screams deflation!
on Sat, 06/26/2010 - 20:28
#435825
OK, let's suppose your theory is correct: "... and millions who have signed away their lives to debt, who feel rich yet own nothing. who wins at the end of this? the one holding the lein and who has the goons to make people pay... and make no doubt, this will be the government and the fed."
A little numbers work suggest "they" may have miscalculated: 3 to 6 million men/women in the armed services plus another few million in various police and enforcement agencies against 100+ million armed citizens? Yes, "they" have tanks, bazookas, and so on, but using them domestically destroys the assets they're trying to seize plus doing so will make a lot more people a lot more angry. Moreover, a citizen militia does not win by taking a better-armed force head-on. Indeed, the original Revolutionaries did not begin winning until they used unconventional tactics like targeting officers, using snipers, and so on. People who go to work as ordinary Janes and Joes by day but who work in the resistance by night are a formidable danger. To see one possible outcome in this connection, see John Ross's (fictional book), "Unintended Consequences." A bit Rambo-esque, but still enlightening and entertaining.
The second amendment follows the first for a very logical reason. When peaceful means of seeking redress break down (as they arguably have in our bailout oil-polluted nation), the resort to force ultimately rests with the (well-armed) people.
on Sat, 06/26/2010 - 21:35
#435879
The real beauty of the second amendment is that it leaves ultimate political power diffused so broadly that it cannot be effectively brought to bear except under extreme circumstances that rouse a large portion of the citizens to action.
on Sun, 06/27/2010 - 13:19
#436724
+ 9 mm SWR.
Your comments are always very good.
So many brilliant minds here at ZH...
on Sat, 06/26/2010 - 03:40
#435006
Funny... Ability to lend is frequently mentioned here, but I didn't read anything about "desire to borrow", which Mish mentions very frequently. And how is "desire to borrow" ever going to rise while jobs are lost to labor arbitrage. And add in those clever people that think that borrowing while deflation is pounding on the door my not be too wise.
Be careful when someone claims to represent their antagonist's views, and proceeds to debunk those views.
on Sun, 06/27/2010 - 13:30
#436738
+ $
Two great posts in a row.
I do not want to borrow anything! Most people I know have no interest in borrowing. I could not guarantee that I could pay it back even at 0%. I have no trust in this economy. Or in almost any investment.
TAXES are going up next year! Would I start a company with Obamacare, taxes and these clowns ruining our country at .gov? No way.
One fine way to beat some of the tax hikes is for everyone (me included) to SPEND LESS. You will not be taxed on any money SAVED my spending less. Spending less has consequences for the economy though. But, it weakens .gov, which is OK with me.
Gold and similar hard assets are all that is out there that I see worth buying.
on Sat, 06/26/2010 - 03:48
#435011
Which money supply? The following is from Doug Noland.
M2 (narrow) "money" supply declined $37.5bn to $8.564 TN (week of 6/14). Narrow "money" has increased $52bn y-t-d. Over the past year, M2 grew 1.4%. For the week, Currency added $0.2bn, while Demand & Checkable Deposits fell $24.5bn. Savings Deposits declined $4.0bn, and Small Denominated Deposits dropped $4.0bn. Retail Money Fund assets decreased $5.1bn.
Total Money Market Fund assets (from Invest Co Inst) rose $12bn to $2.818 TN. In the first 25 weeks of the year, money fund assets sank $476bn, with a one-year decline of $891bn, or 24.0%.
Total Commercial Paper outstanding jumped $15.4bn last week to $1.099 TN. CP has declined $71bn, or 12.7% annualized, year-to-date, and was down $56bn from a year ago (4.8%).
http://www.prudentbear.com/index.php/creditbubblebulletinview?art_id=10394
I have been preaching the Keen/Mish game for several years. First of all, all the cash that the Fed loaned the banks save maybe $50 billion has left the banking system and most is in countries as savings where they don't trust their banks or their government. There haven't been reserves in the US banking system for years.
Second, a bank can't lend what it can't pay. The crunch and the Fed stuff is about banks having dollars to pay each other, not to make loans. All the money the Fed put out was already created in the banking system, but not liquid. There are more dollar liabilities than could be satisfied if the Fed liquidated the entire Federal debt and half the GSE debt with it. The difference would be the Fed would hold the liabilities instead of the banks. The banks would merely have liabilities on their books that they owed all the cash to settle and no interest coming in. Most likely the Fed would go broke, as there is more debt already than can be paid and the only people interested in getting into debt are for the most part already broke or speculators. Banks are trying to hold onto their asses except where they are gaming the economy. Those charts bear no resemblence to anything I have seen over the past several years.
on Sat, 06/26/2010 - 04:24
#435067
We are in a deflationary environement because private demand for credit is decreasing. This necessary deleveraging of households and businesses will not end no matter what central banks or governments do until the level of private debt has reached a sustainable level, this is exactly what happened in the 1930/40s. The amount of excess private debts is approximately $60 trillion for the US, Europe and Japan.
If one were to assume that such deleveraging were to take place over a period of 10 years this would mean reducing private expenditures by $8 to $10 trillion per year or about 10% of world GDP today. That means a deflationary depression.
Central banks and governments are trying to counter these huge deflationary forces by printing and spending what the private is cutting back. The net effect of this is to slow down or even freeze the deleveraging process of the private because sovereign debts can only be paid back by households and businesses in the future so they are of course "owned" by households and businesses. To any sane person this is of course silly, but let's be clear that our politicians' only objective is to kick the can as far as possible so that the painful effects of this deflationary depression are only really felt by the majority of the population while they are not in office anymore.
As far as inflation is concerned, it all depends on how much central banks are willing to print in the future, and at what rythm. If they print too little, too slowly there will be no significant inflation overall, which doesn't mean that certain categories of assets and goods won't see fast rising prices but that others will see fast decreasing prices as a result.
If it prints too much too fast, savers will loose confidence in Fiat currencies and once a certain threshold is reached will cause a run on all Fiat currencies and an extremely rapid hyperinflationary global death spiral. Let's be clear that we won't see a gradual rise in inflation but a very sudden collapse once such threshold is reached. Also, nobody knows what this threshold is because this depends on each and every individual saver's psychological profile and level of information. Some have already lost confidence today after seeing that central banks were willing to more than double the monetary base in the last 16 months but most savers haven't yet reacted and converted their paper assets in hard assets. Would the threshold be reached if central banks doubled again in the next 16 months ? Nobody knows, an "experiment" of this magnitude has never been done in the past and there are no reliable mathematical models of human psychology.
My conlusion is that we are going to remain in a deflationary depression for at least a decade, which could be prolonged to two decades if governments continue to be silly and that there is a major risk that this one could end subrepticely with a run on all Fiat currencies if central banks continue to be silly.
on Sat, 06/26/2010 - 04:33
#435069
Well put Chrisina. Makes you wonder how many Fed officials and Bank officers have taken out mortgages on properties they've aquired this past year... if any.
on Sat, 06/26/2010 - 04:38
#435072
That's exactly the point I was trying to make in relation to yesterday's post.....
on Sat, 06/26/2010 - 06:19
#435110
"what the Fed might do"
Well we DO know what Bernanke said a long time ago to earn his nickname.
on Sat, 06/26/2010 - 07:47
#435166
So where does the money go once it enters the economy?
The short answer is that it can go two places. If it primarily goes into the hands of consumers, then it will cause CPI and/or PPI inflation. If it goes primarily into assets, it will cause asset bubbles. For example, if you received an extra buck from the fed and used it as a down payment for a house. Or if you were a bank and decided to sink that money into purchasing subprime mortgages. Then you wouldn't see increasing CPI and might be tempted to hold rates artificially low as Alan Greenspan did.
That is exactly what happened. Money supply increases are almost always very closely related to GDP growth rate. On the chart below, when the two diverge, CPI inflation pops up as you can see in the late 70's and early 80's on two occasions. Money supply increase is almost always followed by inflation (the light green line).
There are only two periods circled that it is not followed by inflation. One was from 2000, to 2003 when Alan Greenspan kept the monetary policy loose for too long. That pumped a lot of money into the system with the Fed Funds rate at 1% for an extended period of time even when growth was returning. The second period starts in 2005, and it is clear what is happening with this money. It is getting placed into housing and mortgages.
on Sat, 06/26/2010 - 07:53
#435174
Inflation takes two years of monetary expansion of M2 before it translates into the real economy.
http://www.economypolitics.com/2010/02/what-is-inflation-hint-its-not-cpi.html
on Sat, 06/26/2010 - 08:58
#435222
Are we STILL having this discussion?
OK.
It's time to face what is CAUSING the phenomenon then reason from there. What has occurred is that growth in aggregate "GDP" as measured by actual economic activity has peaked as a result of the peaking of its energy inputs.
So...from this it should be easy to see that life has entered backwardation. Something now is worth more than a promise of something plus more in the future, because the future tends to hold contraction.
Therefore, DEBT must be discounted. That is what money is. A promise in the future, credit. So, "assets" backed by the necessity of borrowing growth and future production growth, and debts themselves, must decrease in real value.
REAL things that exist independent of credit, rise in real value, especially if they are in existence right now.
There may or may not be a growth in credit, but this is irrelevant at this particular epoch. That is what deflationists DO NOT GET. We are not in Kansas anymore. This is not a business cycle issue. It is an absolute energy supply peak. It is necessary to reason from a systemic assumption of contraction instead of growth and study the dynamics of credit and interest in that case. All deflationists I've seen so far *will not* accept the possibility that the growth system has inflected. They simply cannot bring themselves to accept it.
Credit is what we use for money. And the ability to repay today's credit is dependent upon someone in the future taking out even more credit. If the future is one of aggregate contraction, this will not occur. Therefore, what that creditmoney buys in terms of real things NOW should be discounted reflecting the apparent present default risk. Any "asset" presupposing its value on the bigger idiot or the future performance of the ponzi (like housing) and especially any *manufacturable* commodity, something that can be conjured, should see its price decline.
There will not BE borrowers in the future willing or able to borrow more credit to buy your house from you for a higher price. Debt as a fundamental premise or institution, MUST BE discounted in the face of what the future holds.
So, a future of contraction...what does that mean? It means less gold, less oil, less of most things will be produced, insofar as those things have high capital bars to production *growth*. Gold is not freely conjurable in a manufacturing plant - houses are. So, gold with respect to other things rises as a *supply and demand* issue. Very basic stuff.
It should not be hard to see that production *growth* from a factory of iPods is relatively easy assuming that the factory is not operating flat-out. Production growth from an oil well? No.
If you want to know what will "go up" or "go down," this is ALL you need to know. In a climate of CONTRACTION, which things can have their own unit production be raised at will. It is all about *slack capacity*. And real things in existence now command a premium over a promise to supply them in the future.
Reason as someone examining debt NPV in the face of an asteroid strike. That is a contractionary event and a simplistic example of what we're facing.
on Sat, 06/26/2010 - 10:01
#435279
trav, thank you. i think there is a lot of utility in looking at the picture the way you do. i do see some glitches though, because it does not accurately reflect what happened in deflation part 1 (2008). commodities, including pms, were hit. now pms were not hit as bad as other assets classes, but they still decreased. this dynamic is a "margin call" effect... a sudden demand shock for a good that has a verticle supply curve, in other words.
on Sat, 06/26/2010 - 10:33
#435334
i just flagged my own post as junk. i give up. this is how i am playing it... i am short the equity market and am slowly buying pms. i expect another deflationary shock that will affect all asset classes... as soon as qe2 is announced, i take the short position off and will go 100% into pms.
on Sat, 06/26/2010 - 12:23
#435452
Mc- before you go all in anything, JPM & MS are IPOing GM
soon, the word is they will prop market for it. It's also end of quarter, Monday can still be windowdressing. Commercial traders are big net SHORT gold, watch out.
When everyone is in gold, it's time to sit, or sell part.
I've been buying corporates, closed end funds of gov't paper, MLPs, all paying around 7% average, $100K or so, the rest in cash. I short using TWM, SRS, SDS, but will only rarely hold overnight. fyi. good luck.
on Sat, 06/26/2010 - 14:32
#435304
Are we STILL having this discussion?
OMG; amen, brother. This whole thing just amazes me. The pulling forward of future demand, called debt, is the problem. Obama borrows and spends 10% of GDP and calls it "economic growth" then worries about "policy" not "sustaining" this "growth". The solution to debt is always more debt.
Another thing: all these assertions about unwillingness to borrow are irrelevant, and have been clearly demonstrated to be irrelevant. The government will borrow in our names if we will not; the government will then point a gun at our heads and demand we "pay our debts", called taxes. This is called the "social contract"; it is in fact a contract on my life.
Therefore, DEBT must be discounted. That is what money is. A promise in the future, credit. So, "assets" backed by the necessity of borrowing growth and future production growth, and debts themselves, must decrease in real value.
REAL things that exist independent of credit, rise in real value, especially if they are in existence right now.
+ 1,000,000,000,000. Debt must be written down, along with anything that is supported by it (this includes energy demand). The fiat "price" of gold is subject to this to the extent that it is being bought on leverage. We do not know the extent of this. Much of any such leverage that might exist in the gold price is surely offset by the leverage that is being used against gold (Jeff Christian's 100:1 paper to physical).
I disagree with you on your assertions about energy being the problem. Energy supply is a technical problem that can and will be solved. It has not been solved thus far because of politics, not because of technology.
Someone, anyone, explain to me how the sovereign debt is resolved. ECB's solution to Greece, for example, raises their debt-to-GDP. Is it their hope that the debt is resolved by a massive collective global indifference? Enforcement has already been co-opted. Ratings have already been co-opted. Accounting methods have already been co-opted.
Someone, anyone, explain to me how the sovereign debt is resolved. I know that central bankers consider debt to be something that just grows and grows and isn't a problem as long as debt service as a percent of GDP is below some magic number. The only way this is possible is for the CBs to constantly lower rates. Rates are at zero; now what? Print money.
The debt must either be paid or defaulted. In a persistent deflation, debt service rises as a percent of GDP. Rates are alrerady at zero. We've had this discussion here already so many times. Printing money is default.
Someone, anyone, explain to me how the sovereign debt is resolved. "It goes on forever" is not a solution, and is demonstrably one that the markets are no longer willing to accept.
on Sun, 06/27/2010 - 05:01
#436216
you have articulated the issue well. unfortunately the problem we have is one of logistics not politics. there is a limited amount of real assets to go round and these will not be created in size with the current financial markets system.
Sovereign debt escalation is, as you describe it, a contract entered into by our government based on our future living standards being reduced.
The solution to the sovereign debt issue is default, rescheduling and the amendment of central bank management so that fiat money cannot be printed. It is also the acknowledgement that past political promises were in fact undeliverable and that levels of government spending need to be "rightsized". It is false to describe this as "austerity measures" or "draconian cuts in public spending", since these levels of spending were "profligate" and "incredible splurges in public spending" in the first place.
on Sat, 06/26/2010 - 09:31
#435250
Rolling the hands of time back.
Global Governance
http://www.youtube.com/watch?v=bmH-i8JDKPw
Fed Copies Weimar Hyperinflation -- Not a fan of this indivdual. However, the model seems to be true
http://www.youtube.com/watch?v=AMY3aJwhfqg
on Sat, 06/26/2010 - 09:56
#435269
Let's make this simpler...
Total value at the top was 100/100....
This includes all asset valuations and credit totals...
Asset valuations and credit have declined to 60/100....
..........................
Thus in order to get back to 100/100...the governments think that by increasing taxation and by further dilution of paper...that this will help secure a path back to 100/100....
The government's position is flawed...
..............................
The question becomes what truly adds to credit and asset valuations ?
One core source are increases in business revenues....which in turn increase tax revenues....which add to possible increases in prices and credit from private hands....
The government cannot help source increases in private asset valuations and revenues by insisting that government must get larger as a percentage of the total economy ....in that in order for government to get bigger ....the private side must gain more than the government increases....
..............................................
The government keeps stealing from the private side....at the moment from "savers" in particular....Savers make capital formation possible.....and thus increases in both credit and asset valuations....
The incentive to save in most of the developed world is close to $0....
......................................................
Perhaps one of the most efficient means of producing more assets is through common stock....which leverages valuations made possible by cash "savers"...
However...the common stock exchange needs to improve its recent reputation....
It can do this by becoming more "retail" focused....
This means...
Complete exchange defragmentation
First come first served
Same transaction costs for all
Same information for all
No off exchange matching of any kind
No minimum size accounts
Margin the same for all...4:1
No short sale rule....size limited...and shares limited by electronic tag...not locates...limited to shares outstanding...
BATS model....fully electronic direct access....free quotes....
Regulation....electronic surveillance by a non SEC entity....
Information...fact based wiki format....
...................................................
There is no mechanism more efficient than a retail driven world wide common stock exchange that is properly structured....with regards to getting the needed 100/100 fraction....
The INTERNET is what makes COMMON STOCK far more accessible to the many....than any other type of asset....and this is what is different this time around....
The worldwide granted liquidity and efficient transaction costs far exceed those of any other type of asset....
Efficiency and effectiveness are key to the 100/100 comeback...
on Sat, 06/26/2010 - 10:02
#435280
"I believe that as the economy goes into a double-dip recession, the Fed will create ways to inflate that will be effective."
Bingo!!
So far, the money printing has gone to purchase bad assets from Banks. The money printing that facilitated the mortgage purchases directly inflated common stock, junk bond and gold prices.
If the Fed begins to print money to purchase T-notes so that treasury can mail more and bigger checks to average citizens, then CPI inflation will begin. All the Fed need do is begin printing money to finance the expansion by Treasury of welfare and extended unemployment flows to the non-productive sectors of our economy - its favored voting blocks.
What most analysts miss is the fact that inflation will continue to be selective and sector specific.
on Sat, 06/26/2010 - 10:07
#435285
I'm in the Martin Armstrong camp. Confidence in the currency and who issues the currency is the key. The combined polices of the the congress, the administration and the Fed are whittling away at public and international confidence in the US and by extension the currency it issues (the dollar). Eventually the tipping point will be reached and the value of the dollar will accelerate either up or down. IMO, the "flash crash" showed how quickly such a move can be executed and confidence lost. My bet is on a sudden drop down in dollar value, which will cause a rush for the door by the holders of dollars. They will then disgorge their holdings as quickly as possible and that will be the cause of rapid inflation, if not hyperinflation.
To conclude the ruinous policies currently emanating from the central authorities, in combination with their blatant corruption, will give the holders of dollars greater confidence in their holdings and the backer of those holdings, seems to be insanity to me.
on Sat, 06/26/2010 - 13:18
#435494
Wonderful summation of the situation, GMarx!
This is in fact my argument why we will NOT see real deflation, but inflation or hyperinflation in the end.
on Sat, 06/26/2010 - 23:56
#436063
Bingo!!
Inflation/Deflation are economic "processes"
Hyperinflation is a psycological "event"
on Sun, 06/27/2010 - 11:55
#436582
It all comes down to whether demand for money will go up or down relative to other goods. Fed policy does not inspire confidence so that, even in an environment where banks quit lending entirely, people will not want to hold onto paper and dump it for goods ASAP. In fact, that happened in Zimbabwe.
on Sat, 06/26/2010 - 10:21
#435314
by New_Meat
on Sat, 06/26/2010 - 05:33
#435121
I second kudos for Econophile.
What happened to the banks when "assets" on balance sheet (all the derivative trash) just ... vanished? Deflation, me-thinks (in the near term at least).
****************************
I think this is what most miss-in their analysis-
If the toxic derivatives that are all hiding in level 3-were marked to market and at some point-they will have to reckoned with-unless of course we have a miraculous RE rebound-
IMO--There is no way around this-they can print as much as they want-but the debt overhang cannot be overcome by printing-
Eventually-their hand will be forced and a world default is likely-
Until that happens-I believe-deflation will prevail-
on Sat, 06/26/2010 - 10:26
#435319
Actually the Fed has done all it can. It cannot tweak interest rates at will. We should all know that by now. But let's say they do. Banks are still in no position to relax their lending standards to pre-crisis levels. Credit worthy borrowers cannot be forced to borrow.
What we have to remember is that we are trapped in history's largest financial bubble. Bubbles are inherently over priced assets values which must deflate back to historic trend lines (with some overshoot) and in doing so, destroying more capital in the form of credit. We are not there yet so expect more deflation.
on Sat, 06/26/2010 - 11:47
#435417
I like the John Hussman approach because of its simplicity: the price level is the marginal utility of goods and services (gs) divided by the marginal utility of money, where he defines money as government liabilities (gl), Treasuries and currency, or base money. In turn, the marginal utility of both gs and gl depend on their supply and demand.
Supply of gl and base money has increased dramatically over the last few years, but due to credit concerns, safe-haven demand for default-free gl has increased as well. The result of that elevated demand for gl is lower monetary velocity and reduced demand for gs.
So there are offsetting forces, increased supply of money (gl or base money), but increased demand for money, and decreased demand for gs. He's expecting no inflation over the next few years, and deflation fears, but then a doubling of the price level over the next decade.
If you look at the CPI, so far deflation has been miniscule. And if you use the Shadow Stats pre-Clinton era CPI, there hasn't been any. If you include housing prices into a more broadly based CPI, then we'd have deflation provided you give housing a big enough weight. But if you're going to do that, then you should include other assets like stocks, which are higher than their level of a year ago.
So overall it's a mixed picture, but imo if the Federal Reserve and Federal government want to stop deflation they can, the only question is whether or not they want to. That's a different discussion however.
on Sat, 06/26/2010 - 11:50
#435420
So, I have to assume that all of those CPI charts have been adjusted to compensate for the MASSIVE tweaking of the formula used to calculate it since 1980? If not can someone please tell me how you can possibly draw any valid conclusions at all from a chart with an inconstant function driving it; one that has been incessantly changing on the whims of those who's job it has been make inflation appear non-existent?
Regards
on Sat, 06/26/2010 - 12:09
#435439
If you measure with real money-it's plain to see we've been fighting deflation since 2000 and losing all the way--
http://home.earthlink.net/~intelligentbear/dj-au-ratio-mt.gif
on Sat, 06/26/2010 - 13:29
#435510
Bernanke is just itching to unleash an avalanche of cash into the system to reflate the bubble; Obama is itching to borrow another trillion for his constituents. The senate could'nt muster the sixty votes on a small stimulus / unemployment extension, leaving Bernanke. I'm kinda with Mish on this one; I don't see a Gov't takeover of banks, but so long as Bernanke has the Big Green "Print" Button on his desk, he'll try nearly every avenue available to him, including Lehman era business lending facilities as well as open market ops.. in the short term I can see him dipping into the Muni Market as a way to help Obama as well as provide liquidity.
At the end of the day, this battle will continue ad nauseum whilst the rest of us slowly and surely slide into a Depression. The people don't have the income to support both their current debt levels and retail companies. Banks, knowing that an avalanche of foreclosures and commercial r/e losses are comin, won't loan to anyone anytime soon. Tax hikes will throw a wrench into the economic machinery. After November, political gridlock is assured.. no additional tax hikes, no spending cuts.. only more and more debt.
on Sat, 06/26/2010 - 13:36
#435517
Thanks Trav and SW. Even though this has been discussed many times, the situation becomes clearer with each thought provoking post. Bottom line on sovereign debt is that too many pigs are slopping at the public trough. People are so entangled in government hand outs that they don't realize that they are the problem. My neighbor is a retired cop and retired military man. His wife is retired military and they both draw SS. Every penny of their income is from tax payers. They may live another 25 years. Teachers, law enforcement, firemen, social workers etc. all need to be fired and allow these important services to exist only in the private sector. Government is incapable of running a business efficiently and profitably. Obama, Ben, Tim have never owned their own business. I just don't see how anyone is qualified to make financial decisions for us if they don't have the experience of running at least some kind of business profitably. If I use more man power than my customer is able to pay for to complete a job, then I have to make up the difference out of my own pocket. This is what is happening with teachers. law enforcement etc. The govenment is reaching into our pockets to pay for these hoards of inefficient, unprofitable people. In other words, if my business does not function within it's means it goes under. That is what is happening on a national level. I think it's the one and only problem. If we lived within our means we could handle peak oil, have less wars, rid ourselves of the squid. We must wean our countrymen from the public trough. That's half of us.
on Sat, 06/26/2010 - 13:43
#435522
Too many factors to consider, and some of the measuring sticks are moving targets.
I'll wait to see the end of the movie, pass the popcorn please...
Gotta go inventory the gold and silver. I'm too lazy to take any other path. You guys finish up and turn out the lights on the way out. Thanks!
on Sat, 06/26/2010 - 19:55
#435789
I'm with you, Rock.
I personally don't have what it takes to run with the big gods or swim with the snarks. Every time some loose $ come my way, I buy something round, flat and shiny.
I wonder if pop caps are going to make a comeback?
on Sat, 06/26/2010 - 14:45
#435575
Inflation is the increase in money supply, not the increase in prices. If we print trillions of dollars to and give them only to bankers, the price of flat screen TVs is not going to immediately shoot through the roof. The first price rises will be in the things that banks buy. Banks are not consumers of consumer goods, they are consumers of financial goods. Once the banks consume all the raw materials traded on the exchanges, costs will then flow down to consumers. But because consumers and businesses never got any free money, hyper stagflation is the result.
on Sat, 06/26/2010 - 15:45
#435632
What hasn't been mentioned on the inflation/deflation debate is the key point of wage inflation. Without wage inflation, in the face of contracting credit growth, inflation of consumer items and necessities will be shortlived. Imagine if oil was $100 in this economy? It's not just a matter of producers raising prices - consumers can't pay. In the era of expanding credit people could pay by taking on more debt or borrowing against debt-inflated assets, but if credit is contracting, there isn't enough money in the system to support higher prices.
Businesses that try to offset reduced business by raising prices will find out this strategy will fail. With 16% real unemployment, there is zero chance of wage inflation.
I suspect that because most of us have only experienced inflation, there is a predisposition to believe it to be an inevitable outcome. But until the credit contraction gets to the point where balance sheets are repaired enough, all the QE, money printing and smooth talking by the Fed will do nothing. From the individual level to the governmental level we have borrowed against the future too much. It's time to settle up.
on Sat, 06/26/2010 - 15:53
#435644
Without wage inflation, in the face of contracting credit growth, inflation of consumer items and necessities will be shortlived.
But until the credit contraction gets to the point where balance sheets are repaired enough, all the QE, money printing and smooth talking by the Fed will do nothing.
Like so many billions of ZH posters before you, and still to come, you are unable to distinguish between inflation and currency crisis.
Tell me how U.S. sovereign debt is resolved; lay out your scenario please.
on Sat, 06/26/2010 - 23:46
#436054
By the time a resolution comes around, a fiscal conservative says tough luck to our lenders, and defaults. M3 is destroyed, deflation runs rampant.
on Sat, 06/26/2010 - 15:55
#435648
So we cannot see inflation, much less hyperinflation, because the American consumer cannot afford it?
Can you then tell me how the people of Zimbabwe and Weimar Germany, not to mention Russia, Yugoslavia, and almost every Latin American nation, managed to afford it?
on Sat, 06/26/2010 - 17:27
#435705
Pretty much. Price of gas goes up, go and try asking your boss for a raise. With 15 people lined up to take your job, good luck. Although all the liquidity the Fed is pumping into the system is finding it's way into the commodity markets, these liquidity injected peaks don't last. Look at the price of lumber lately.
IF we begin to see signs of wage inflation, I'll change my view but right now there is no evidence of inflation or hyperinflation.
In all the hyperinflationary scenarios you mentioned there WAS wage inflation. People were being paid with increasingly larger amounts of worthless dollars.
Right now, the US dollar is not becoming increasingly worthless, rather the opposite. The USD is on the verge of a major breakout.
on Sat, 06/26/2010 - 18:59
#435722
Sorry, not in my universe it isn't. Overall prices may be rising more slowly, but they are still rising. And for the 14,239th time, the collapse of an asset bubble does NOT equate to deflation!
As for an appreciating dollar, you are asking us to believe that for the first time in human history, we will see a fiat currency GAINING purchasing power? Now that would be "This time it is different", on steroids! Sorry, not going to be holding my breath waiting for that unicorn to ride in with a leprechaun on its back.
And while you may very well believe in the chimerical possibility of a meaningful or sustained deflation under a fiat currency regime, do you realize that such a proposition nicely coincides with the public propaganda that a regime intent on the devaluation of its currency would work to espouse prior to such a devaluation? Frankly, I wonder how much of all the "deflation" noise we keep reading and hearing is not just an intentional trap being set by the political and financial elite for those ignorant enough or gullible enough to fall for yet another financial fleecing.
on Sat, 06/26/2010 - 19:21
#435752
For the 15,000th time i need to remind you that a collapse in asset bubbles are a destruction of capital which is intrinsically deflationary. Simple example: You finance a home for $100,000. You sell it after the bubble pops for 10 cents. You still owe almost $100,000 that was destroyed (so long as you're not a dead beat, no real deflation yet). But you decide to default. Now it's really deflationary since the credit that was extended to you (inflation) has now vanished.
Now let's imagine that this scenario is happening all around you. What do you think happens to the value of the remaining dollars? Repeat after me, purchasing power of those dollars increases (not for the first time BTW).
Please accept it for now and allow us deflationists to make love to our scarce FRN's in peace.
on Sat, 06/26/2010 - 19:27
#435756
In other words, "Ignorance is bliss."
Good luck in you chosen strategy, for as long as you can maintain that ignorance in the face of a ongoing dollar devaluation reality.
on Sat, 06/26/2010 - 19:31
#435761
And please explain to me how devaluation is performed. Devaluate against what? I have asked economists the same question as they raise their cape and vanish in a puff of smoke.
on Sat, 06/26/2010 - 19:44
#435771
What is with this absurd question, "devalue against what?"? Devalue against REAL GOODS!
What part of "purchasing power" do you not understand?
As for how it is performed, there are any number of ways. But the fact of the ongoing devaluation of fiat currencies is beyond dispute --- except for among the "useful idiots" who support the political and financial elite's pro-establishment deflationary propaganda.
on Sat, 06/26/2010 - 19:57
#435791
You have in no way answered my question. How would they devalue it? I know they have done it in the past but "things are different this time". Literally.
on Sat, 06/26/2010 - 20:01
#435797
.
So are you denying that the dollar has been undergoing devaluation since the abandonment of the gold standard in the early 1930s? Or has the 25+ times rise in prices since then all been an illusion?
on Sat, 06/26/2010 - 20:07
#435805
The dollar has been floating since it was severed from gold in the 70's. Like all Fiat's, it floats but my question was how would they devalue it? What instruments would they use? You make it sound like it can be performed with a swift stroke of a pen or keyboard.
on Sat, 06/26/2010 - 20:24
#435814
.
Oh, I think I understand your point now --- you mean like how Roosevelt summarily devalued the dollar in 1934 by raising the price of gold from $20.67 to $35.00 an ounce by executive decree?
Yes, in that sense there is little room for a de jure devaluation of the dollar. In practice, however, there are a great many ways in which the dollar can be devalued --- as witnessed by the last 80 years of monetary history. My point is that the dollar can and most likely will be devalued by simply "more of the same".
on Sun, 06/27/2010 - 14:02
#436830
ozzii, akak
It does not really matter which of you is more right than the other. No one knows what is going to happen.
One SOLUTION for us is to own gold and enough FRNs to last you 6 months (a year maybe?). With enough of those FRNs, they could also be deployed if there is a major deflationary event: to buy farmland, a world class vacation spot, more gold, etc.
Diverisification is another way to win, relatively speaking.
on Sat, 06/26/2010 - 20:05
#435803
And please explain to me how devaluation is performed. Devaluate against what? I have asked economists the same question as they raise their cape and vanish in a puff of smoke.
What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm
on Sat, 06/26/2010 - 20:12
#435811
Sure it can threaten to but the Fed knows the consequences and so it does not and has not either. Just like the US Military has the capability to obliterate any major city in the world. But it does not.
And enough of the printing press junk. So sick of hearing that threat. You do understand that the so called printing press has a fuse called the Bond market, yeh??
on Sat, 06/26/2010 - 21:04
#435842
Sure it can threaten to [devalue] but the Fed knows the consequences and so it does not and has not either.
Plot the price inflation rate on the Y axis and the amt of Fed money printing on the X axis. Most functions go through zero before going from a negative number (deflation) to a very large number (hyperinflation).
Since you apparently think we're experiencing price deflation now, the Federal Reserve can simply create out of nothing more and more money until the inflation rate goes from a negative number (deflation) to zero, and then stop, and even possibly reverse some of its money printing if necessary. I don't see why a zero inflation rate would be cataclysmic.
Hussman has some counter arguments to a few of the points you made in your earlier posts:
Inflation Myth and Reality
on Sat, 06/26/2010 - 21:49
#435897
It's not that I apparently think it, but actually see it. Over the past few years, Oil $147-$77, DOW-40%, RE-30% and so on. Please don't mention gold b/c that's another phenomena altogether.
But what happened to all that printing?? Well it's securitized or parked at the Fed earning interest. Not in your hands. But more importantly, where's the hyperinflation we were promised? And BTW, this printing thingy can be reversed through OMO. Again securitized through government backed UST's.
Now from your link, Hussman mentions it's the government liabilities that are expanding, not private.
And back to the subject of consequences, the governments deficit spending, financed through Fed UST swaps, has limits determined by voters. So far it has not impacted the dollar's value as reflected in UST yields. So if this is what devaluation means, then it hasn't worked and I suspect it will be short stopped if the public has any say in it.
Wake me up when real inflation finally arrives. Maybe by then I'll have half a chance selling my house.
on Sun, 06/27/2010 - 13:07
#436687
Hussman is talking about the price inflation/deflation outlook from current (or as of several months ago) prices, not from peak prices a few or several years ago. There's no point debating what's obvious from just looking at a chart.
We know there are "excess reserves" parked at the Fed earning interest, but I suspect a lot of it has been lent to the Federal government to fund the deficit. Once it's spent by the gov, it ends up back in the banking system, where 90% of the amt lent would show up as excess reserves again, assuming a 10% reserve ratio.
Hussman is not in the hyperinflation camp, and doesn't see much if any inflation for the next 4 or so years, so I'm not sure you two even disagree that much about outcomes. He doesn't see deflation in the interim however.
At least around here, coastal real estate prices are still declining at a slow rate. I know since I'm in the market for another rental property. Prices are still overvalued compared to prior troughs like 1997 however. Good luck with selling your house.
on Sat, 06/26/2010 - 21:41
#435886
I understand no such thing. The Fed measures the consequences of printing against the consequences of not printing. When the consequences of not printing exceed the consequences of printing, they will print, as they already have.
At the height of the past credit crunch, the Fed had lent, spent or guaranteed $23 Trillion. The bond market held its breath, but otherwise did nothing because they believed the alternative was the total repudiation of paper. Open your eyes.
on Sat, 06/26/2010 - 22:08
#435921
That's $23T worth of things and not thin air like it apparently came from. Again the Bond market did not react negatively towards the dollar as you'd expect. WOW, almost 2x GDP out of thin air and the dollar actually gains value. Bond holders do expect nominal (dollar denominated) returns don't they? What's even more confusing is that they are willing to accept less worthless paper returns.
With sarcasm aside, the government debt market is bigger than the US government and the Fed. If anyone is going to bring the dollar down, it's them and the Fed knows that and hence, consequences.
PS. UST yields are low for the same reason the USD and gold are simultaneously up.
on Sun, 06/27/2010 - 14:40
#436259
It takes time to break paradigms. Years, in fact, but the fiat paradigm is breaking. There remains a shrinking but still critical mass of adherents to the following B School memes: the "money velocity" meme; the "printing money to replace destroyed credit" meme; the "Fed's got our backs" meme; the "new money in excess reserves isn't inflationary" meme. That critical mass is disintegrating, albeit susprisingly slowly. We've recently seen more and more finance-types, to date mostly old timers (who haven't gotten their entire experience since 1981), come out and cite currency destruction trends. It seems that B School indoctrination was part of the fiat maintenance plan.
Note if you will how quickly the ECB's EuroTARP was met with capital flight into gold; it was almost instantaneous. The Germans especially have recent cultural memory of an experience with currency debasement; they know exactly what it looks like, the conditions that foster it, and what it means. Americans, on the other hand, are still stuck in 2 generations of economic exceptionalism and a full 30 years of "the Fed's got our backs, the system works." Our recent economic disaster, as far as we know, is deflation. No one here, no one at all, is taught that that deflation was met by a deliberate and brutal currency debasement by the very President that so many admire as a saviour: FDR.
And so it was, and so it shall be. Persistent deflations are met by currency debasement. Your above argument about "with respect to what" is meaningless. Anywhere but here in the U.S., the mere existence of a big pile of "new" money, whether or not it is "held" in bank reserves, would be met by flight from that currency. Many of you are still trapped by either B School monetarist indoctrination or by an emotional attachment to the status quo. It's cracking around you; can't you see it?
Creating new money out of thin air and declaring it to have the same value as currently-existing money, even if it just to replace lost "credit", destroys the store of value function of money. That is an obvious fact. And if the money isn't a store of value, then what is it? Nothing more than a token of arbitrary value. The German know this. Americans don't seem to.
Edit: above I said "Creating new money out of thin air and declaring it to have the same value as currently-existing money, even if it just to replace lost "credit", destroys the store of value function of money." That is not stating it correctly. In fact, creating new money out of thin air and declaring it to have the same value as currently-existing money repudiates the money itself. The fact that the new money is held in some reserve account doesn't matter as long as it exists. What's really shocking is that Bernanke himself believes this to be true; http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm
"By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services"
Europeans, Germans especially, are reacting exactly the way Bernanke predicted; the ECB declares its intentions to start sovereign bailouts, and capital flees...immediately. It's possible he is amazed by how stupid the American public really is about money. The Chinese balked at American printing, but not the masses in America.
on Sat, 06/26/2010 - 22:45
#435960
Ahh, I see it know. So 'deflation' for mainstreet US, but 'inflation' (resulting in a devalued USD) for the rest of the world.
IE Nobody has any USD in the US, excepting those standing by to accept money at less than 0% interest from the printing presses they paid to control, while the rest of the world is awash in USD because the foreign debtors who are calling in their debts are spending it on hard assets as fast as they can? So in the US, food/fuel all continue to increase in price, but nobody has any cash to buy anything because of nationwide deflation...
Ewww, that sounds nasty for the US.
Regards
on Sun, 06/27/2010 - 00:02
#436067
Price rises for such goods are the result of scarcity (out bid by foreigners), rather than inflation, a word that is better reserved for monetary abundance. Inflation is the underlying tide, raising the price of everything. Scarcity is a local wave or storm surge, affecting an isolated beach, harbor, or product/asset.
on Sun, 06/27/2010 - 10:19
#436486
I'm just looking at a long term monthly chart of the USD. If we consolidate and break the 89-92 on the USD index, look out. I'm not married to the deflation view but it's hard to argue against the fact that the USD has rallied pretty hard since last winter.
Currency is like any other commodity. It rises and falls with supply and demand. At this point the demand for USD is increasing faster than the supply. When people get nervous, they demand USD and gold. Since Walmart isn't accepting gold as tender right now, the demand for dollars is not going away anytime soon, especially if predictions a double dip realize.
You seem very convinced that the government can create inflation on demand. They can't. Remember that the creation on money requires two parties, the lender and the borrower. Without the borrower the money creation stalls. For those the argue that governments can "borrow" in place of private sector contraction, they can to a certain extent, but the amount of money they need to borrow to offset the contraction is insufficient. Are they going to replace all the credit being destroyed by the housing market contraction? Not even close. Not to mention the political opposition to increasing debt loads right now.
The problem is this: the amount of debt servicing that has built up in the economy has reached a point where it has become unserviceable. With interest rates at almost zero, people still are unwilling to take on more debt. Where is the Fed going to go?
The hurdle is that people and companies have become so accustomed to inflation that there is the assumption that rising prices can be absorbed. Maybe in the distant future again, but certainly not now. Watch for it. Every time a non pm commodity spikes in price, watch it come down shortly.
on Sun, 06/27/2010 - 10:20
#436487
I'm just looking at a long term monthly chart of the USD. If we consolidate and break the 89-92 on the USD index, look out. I'm not married to the deflation view but it's hard to argue against the fact that the USD has rallied pretty hard since last winter.
Currency is like any other commodity. It rises and falls with supply and demand. At this point the demand for USD is increasing faster than the supply. When people get nervous, they demand USD and gold. Since Walmart isn't accepting gold as tender right now, the demand for dollars is not going away anytime soon, especially if predictions a double dip realize.
You seem very convinced that the government can create inflation on demand. They can't. Remember that the creation on money requires two parties, the lender and the borrower. Without the borrower the money creation stalls. For those the argue that governments can "borrow" in place of private sector contraction, they can to a certain extent, but the amount of money they need to borrow to offset the contraction is insufficient. Are they going to replace all the credit being destroyed by the housing market contraction? Not even close. Not to mention the political opposition to increasing debt loads right now.
The problem is this: the amount of debt servicing that has built up in the economy has reached a point where it has become unserviceable. With interest rates at almost zero, people still are unwilling to take on more debt. Where is the Fed going to go?
The hurdle is that people and companies have become so accustomed to inflation that there is the assumption that rising prices can be absorbed. Maybe in the distant future again, but certainly not now. Watch for it. Every time a non pm commodity spikes in price, watch it come down shortly.
on Sat, 06/26/2010 - 19:59
#435794
Yeah, rub some zit cream on it and it'll be okay.
Eventually.
on Sat, 06/26/2010 - 19:34
#435766
Even in complete agreement with your post, take in to consideratoin the highest level macro view of credit, that is the aggregate WORLD demand for credit.
There are more workers and their families with access to credit now, than in 2000, by a multiple of 2 to 2.3, first generation workers with access to credit will binge buy, the hundreds of millions of workers in Asia, BRIC, etc will cause inflation by increasing their demands for better quality goods, from food to transportation, to household appliances, etc.
Which brings in calssical views of trade flows, manufacturers will divert goods to these new markets, leaving US and European consumers with less supply, less pricing power both absolute (less earning as you mentioned, and less purchasing power by exhange rate, PPI) and relative to the emergent consumers of the developing world.
Look at the exponential increases in the cost of high quality Russian Caspian caviar in the prior decades, the same cost curve will begin to apply to down market foodstuffs, consumer goods, and sundries of various kinds where supply is limited and potential growth in supply is limited.
It's not Malthusian to suggest that the quality of life will fall for much of the 1st world, and during this period while the standard of living falls, it will cause inflation in these products.
However, Americans will always be able to buy grains, especially corn. Americans will be able to buy cotton products, etc. However, whiskey, tequila, rare earths, hardwoods, pulp woods, etc will become exceedingly expensive. The toal number of humans with access to these goods will increase, the total number of Americans who can afford these goods will decrease.
on Sat, 06/26/2010 - 16:41
#435675
U.S. Sovereighn debt will be resolved the way all debt is resolved. Some of it will be paid and some of it will be defaulted on. The part that will be paid is self explanatory. The part that will be defaulted on will be defaulted in different ways. Benefits will be reduced, more jobs will be lost, the dollar will be devalued etc. Kind of like having fun tapping out our credit cards, then living within our means only because we have spent and borrowed to our full limit. We will have a more Spartan lifestyle as we fall back and regroup.
on Sat, 06/26/2010 - 17:37
#435706
Oh, my.
First, let me commend you for making the effort. While I do not agree with all you write, you do the work necessary to write anything, and I consider that worthy of praise.
Second, I refer to your sixth (6th) chart, CPIFLENS, where you interpret a fall in the rate of year-over-year increase as evidence of "declining prices". This interpretation is, unfortunately, completely wrong. Consider:
You are driving a car at 100 km/h. At the end of the first hour, you have experienced 5% "inflation", or rate of increase of speed. You are now travelling at 105 km/h. The next hour, your rate of increase drops to 2.5%. Your speed is now 105 * 102.5 = 107.3 km/h. Even though your rate of increase has dropped by 50%, your speed has still gone up.
In CPI terms, even though the Y-O-Y rate drops, so long as it remains positive, to suggest that prices are declining is either disingenuous or evidence of an astonishing lack of arithmetic ability.
Finally, your analysis remains incomplete without a look at the velocity of money. As an undergrad, I studied both engineering and economics. I remember suggesting to my eco prof (a decided non-Marxist, BTW) that a consideration of both the money supply and its velocity might be interesting as analogues to physics' study of mass, velocity, momentum, and potential and kinetic energy. He thought the idea was interesting (this was the early 1970's), but told me that since monetary velocity was constant, this wouldn't be fruitful, and that I should concentrate on money supply instead.
However, since then, we've seen that V is not constant, and a brief scan of the comments belies this. "If you lend it, they will borrow" may seem seductive to Ben Bukkake, but, in the event, he's not finding a stream of headlights pointed towards his cornfield. The old adage "Pushing on a string" is an inexact, if apt, encapsulation of this effect. Despite the availability of credit, credit worthy people don't want to borrow. Of course deadbeats do, but the best borrowers are intent on shoring up their own balance sheets, preparing for the second part of the double dip any sentient being knows is imminent.
Again, I appreciate your efforts, but there are some basic errors or vacancies in your thesis.
on Sat, 06/26/2010 - 19:06
#435734
Yep. The difference in MPG's between an empty bus and a fully loaded one is nil if it remains stationary.
on Sat, 06/26/2010 - 19:09
#435740
Or if it's pushed off a cliff.
on Sat, 06/26/2010 - 19:27
#435759
No, now you MPG's approach infinity.
on Sun, 06/27/2010 - 00:09
#436073
damn, i fell off my seat...again.
on Mon, 06/28/2010 - 00:21
#437822
I think I was referring to the CPI YoY in reference to what the deflationists would point to to support their argument. I agree that a slowing of price increases in an upward trend is still and upward trend. Velocity doesn't change the money supply nor affect prices.
Thanks for the comment.
on Sat, 06/26/2010 - 19:08
#435739
KB of course you are right. Confusing the change in the rate of increase or decrease with total positive or negative movement is more common than not. Especially by reporters.
on Sat, 06/26/2010 - 19:18
#435748
I have to think this question, asked ad nauseam, needs to be rephrased to concentrate the audience and the actors responsible for the remaining levers of the macro economy.
So the question becomes, which synthesis of current problems will result in the greatest concentration of wealth and power by the fewest number of oligarchs and kleptocrats?
Too often on ZH and other forums with similar worldviews, the bloggers and participants take on a academic concept of the "greater good", both in posing questions and providing possible solutions.
So ask yourself, how close to total deprivation can the oligarchy leave the inhabitants of North America, Europe, Australia, NZ, and other 1st world nations without causing widespread riots and revolutionary zeal. How far can the golden goose of this slave class be squeezed to prvide the absolutely most inverted wealth pyramid possible?
The first answer is somewhere between the newly striking workers at Honda's China plants with their new higher wages and benefits, and the $12.50/hr with almost no benefits GM employees working at the new Grand Cherokee plant in Detroit. Factor in the Remnimbi/USD exchange rate in your calculations.
Wage deflation in 1st world, wage inflation in 3rd world.
We now are returning to the historical Case Shiller avg pricing for housing, with a deflating income denominator. Question how the banks will buy the politicians to provide maximum control. The fight in California legislature is the frontline this week.
Housing deflation.
BUt, the price of food in 1st world will get relatively more expensive as the limited nominal supply of high value foods is spread further between the 1st and 3rd world working classes as wages converge.
1st world food inflation, 3rd world expanding upmarket availability of foodstuffs.
Same goes for any product of limited quantity, be it chocolate, coffee, or rare earth materials needed to build electronics such as cell phones.
on Sat, 06/26/2010 - 19:35
#435768
isn't this more of less the opposite that has happened the last few decades? housing inflation, goods deflation
on Sat, 06/26/2010 - 20:01
#435798
In the strict sense of the term and in adherence to this article, inflation only applies to the money supply. Everything else is an effect (if it is even affected due to many other factors controlling price appreciation/depreciation)
on Sun, 06/27/2010 - 00:16
#436076
Your not going to take away American Idol, are you?
I can see your discussion is dominated by issues of scarcity, rather than inprecise references to inflation/deflation. Bravo.
on Sun, 06/27/2010 - 05:14
#436222
so the answere is simply to convince the current oligarchs that it is in their interest to grow the cake before the rest of us starve and they will be better off as well! come back marie antoinette all is forgiven!
on Sun, 06/27/2010 - 06:27
#436264
So the question becomes, which synthesis of current problems will result in the greatest concentration of wealth and power by the fewest number of oligarchs and kleptocrats?
I agree that is the goal, and I agree with your description of the future of wages and the lifestyles that go along with them. Remember, it is one thing to achieve wealth, and another thing to hang on to it through crises.
on Sat, 06/26/2010 - 19:27
#435758
Lit, thanks for the dose of reality. Your greater good comment throws a monkey wrench in my train of thought.
on Sun, 06/27/2010 - 02:03
#436147
"The deflationists have a different take on the data. They point to theories by economist Steve Keen which states that first banks make loans, and then the Fed increases money supply to meet demand. According to Keen and Mish, money supply is created first by banks making loans, then by the Fed supplying the money, because you can’t increase money supply without getting it into the economy. If there is no lending the money supply remains unchanged. Thus it is a rise in credit that leads to money supply growth."
Keen is right about the central banks supplying the money but seems to ignore the fact that the national currencies themselves are just loans from the central banks and so the bad paper on the balance sheet of the central banks can default and deflate just as commercial bank 'assets' can, which is deflationary, but inflationary at the same time.
So "is our future to be inflation or deflation?"; it'll be both at the same time because they are the same thing.