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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.
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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
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
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.
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 - 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-
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.
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.
Bingo!!
Inflation/Deflation are economic "processes"
Hyperinflation is a psycological "event"
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.
"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.
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...
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
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.
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.
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.
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.
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.
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.
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
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.
"what the Fed might do"
Well we DO know what Bernanke said a long time ago to earn his nickname.
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.
That's exactly the point I was trying to make in relation to yesterday's post.....
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.
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.
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.
+ $
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.
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.
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.
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.
+ 9 mm SWR.
Your comments are always very good.
So many brilliant minds here at ZH...
"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!
whilst i agree with your forecasts, i think that the conspiracy is one of ignorance rather than planning. :) have a beer!
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.
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.
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.
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!
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.
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.
bank- You are describing stagflation, that looks like US scenario to me, absent total
loss of Dollar confidence, and the 10-yr rate spiking.
So this will play out like Japan? Where's the hyperinflation that destroys their fiat? Two, three lost decades?
Great points--the lightbulb just turned on: Consumer Staples are "Defensive Stocks" vs. going into treasuries. - Ned
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.
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".
Mish has a formula for this monstrousity so I say he wins:
http://globaleconomicanalysis.blogspot.com/2009/02/fiat-world-mathematic...
says page not found...
http://globaleconomicanalysis.blogspot.com/2009/02/fiat-world-mathematical-model.html
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%!
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.
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.