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Peter Schiff Destroys The "Deflation Is An Ogre" Myth

Tyler Durden's picture




 

Submitted by Peter Schiff via Euro Pacific Capital,

Dedicated readers of The Wall Street Journal have recently been offered many dire warnings about a clear and present danger that is stalking the global economy. They are not referring to a possible looming stock or real estate bubble (which you can find more on in my latest newsletter). Nor are they talking about other usual suspects such as global warming, peak oil, the Arab Spring, sovereign defaults, the breakup of the euro, Miley Cyrus, a nuclear Iran, or Obamacare. Instead they are warning about the horror that could result from falling prices, otherwise known as deflation. Get the kids into the basement Mom... they just marked down Cheerios!

In order to justify our current monetary and fiscal policies, in which governments refuse to reign in runaway deficits while central banks furiously expand the money supply, economists must convince us that inflation, which results in rising prices, is vital for economic growth.

Simultaneously they make the case that falling prices are bad. This is a difficult proposition to make because most people have long suspected that inflation is a sign of economic distress and that high prices qualify as a problem not a solution. But the absurdity of the position has not stopped our top economists, and their acolytes in the media, from making the case.

A January 5th article in The Wall Street Journal described the economic situation in Europe by saying "Anxieties are rising in the euro zone that deflation-the phenomenon of persistent falling prices across the economy that blighted the lives of millions in the 1930s-may be starting to take root as it did in Japan in the mid-1990s." Really, blighted the lives of millions? When was the last time you were "blighted" by a store's mark down? If you own a business, are you "blighted" when your suppliers drop their prices? Read more about Europe's economy in my latest newsletter.

The Journal is advancing a classic "wet sidewalks cause rain" argument, confusing and inverting cause and effect. It suggests that falling prices caused the Great Depression and in turn the widespread consumer suffering that went along with it. But this puts the cart way in front of the horse.  The Great Depression was triggered by the bursting of a speculative bubble (resulted from too much easy money in the latter half of the 1920s). The resulting economic contraction, prolonged unnecessarily by the anti-market policies of Hoover and Roosevelt, was part of a necessary re-balancing. A bad economy encourages people to reduce current consumption and save for the future. The resulting drop in demand brings down prices.

But lower prices function as a counterweight to a contracting economy by cushioning the blow of the downturn. I would argue that those who lived through the Great Depression were grateful that they were able to buy more with what little money they had. Imagine how much worse it would have been if they had to contend with rising consumer prices as well. Consumers always want to buy, but sometimes they forego or defer purchases because they can't afford a desired good or service. Higher prices will only compound the problem. It may surprise many Nobel Prize-winning economists, but discounts often motivate consumers to buy - -try the experiment yourself the next time you walk past the sale rack.

Economists will argue that expectations for future prices are a much bigger motivation than current prices themselves. But those economists concerned with deflation expect there to be, at most, a one or two percent decrease in prices. Can consumers be expected not to buy something today because they expect it to be one percent cheaper in a year? Bear in mind that something that a consumer can buy and use today is more valuable to the purchaser than the same item that is not bought until next year. The costs of going without a desired purchase are overlooked by those warning about the danger of deflation

In another article two days later, the Journal hit readers with the same message: "Annual euro-zone inflation weakened further below the European Central Bank's target in December, rekindling fears that too little inflation or outright consumer-price declines may threaten the currency area's fragile economy." In this case, the paper adds "too little inflation" to the list of woes that needs to be avoided. Apparently, if prices don't rise briskly enough, the wheels of an economy stop turning

Neither article mentions some very important historical context. For the first 120 years of the existence of the United States (before the establishment of the Federal Reserve), general prices trended downward. According to the Department of Commerce's Statistical Abstract of the United States, the "General Price Index" declined by 19% from 1801 to 1900. This stands in contrast to the 2,280% increase of the CPI between 1913 and 2013

While the 19th century had plenty of well-documented ups and downs, people tend to forget that the country experienced tremendous economic growth during that time. Living standards for the average American at the end of the century were leaps and bounds higher than they were at the beginning. The 19th Century turned a formerly inconsequential agricultural nation into the richest, most productive, and economically dynamic nation on Earth. Immigrants could not come here fast enough. But all this happened against a backdrop of consistently falling prices.

Thomas Edison once said that his goal was to make electricity so cheap that only the rich would burn candles. He was fortunate to have no Nobel economists on his marketing team.They certainly would have advised him to raise prices to increase sales. But Edison's strategy of driving sales volume through lower prices is clearly visible today in industries all over the world. By lowering prices, companies not only grow their customer base, but they tend to increase profits as well. Most visibly, consumer electronics has seen chronic deflation for years without crimping demand or hurting profits. According to the Wall Street Journal, this should be impossible.

The truth is the media is merely helping the government to spread propaganda. It is highly indebted governments that need inflation, not consumers. But before government can lead a self-serving crusade to create inflation, they must first convince the public that higher prices is a goal worth pursuing. Since inflation also helps sustain asset bubbles and prop up banks, in this instance The Wall Street Journal and the Government seem to be perfectly aligned.

 

 

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Wed, 01/22/2014 - 18:17 | 4356868 Slave
Slave's picture

Who's ready to inflate with Yellen?

FUCK YOU YELLEN!!!!

Wed, 01/22/2014 - 18:22 | 4356881 Martial
Martial's picture

Mrs. Debtfire behind the printing press is a sickening thought.

Wed, 01/22/2014 - 18:33 | 4356911 nope-1004
nope-1004's picture

I would hate to see savers rewarded, most notably the elderly of our society.  How dare those retirees and shut ins be allowed to have purchasing power.

 

 

/s

 

Wed, 01/22/2014 - 18:51 | 4356954 Fish Gone Bad
Fish Gone Bad's picture

I stopped being a consumer a long time ago.  People will eventually figure out that if they are not careful, their possessions will possess them.

Wed, 01/22/2014 - 19:15 | 4357015 LawsofPhysics
LawsofPhysics's picture

Define "possession", I often possess and consume food.  just saying, now I am left to wonder how you sustain yourself without consuming something.

Wed, 01/22/2014 - 19:35 | 4357079 Silver Bully
Silver Bully's picture

"Define "possession", I often possess and consume food. "

Wait, food hasn't consumed your waist line along with every other American? Food has possessed our health, that's for certain. We have record numbers of people in western countries possessed by type 2 diabetes, preventable cancers, chemical imbalances, and a whole host of issues directly caused by obesity. That's what happens when food possesses you.

"People will eventually figure out that if they are not careful, their possessions will possess them."

So how has food NOT possessed the western world? Along with all the other consumer items, tv shows, and culture we 'consume' on a daily basis?

 

Wed, 01/22/2014 - 19:44 | 4357106 LawsofPhysics
LawsofPhysics's picture

Should some people eat less and make smarter dietary decisions, sure, that wasn't the question fucknut.

Still believe you don't need to consume anything?

Good luck with that.

Wed, 01/22/2014 - 20:33 | 4357252 Boris Alatovkrap
Boris Alatovkrap's picture

Deflation, carbon emission, war on terror, Ford Pinto, always is scary boogieman on horizon, no shortage of crisis to keep political class to do bidding of bankster class in shadow.

Wed, 01/22/2014 - 20:37 | 4357272 LawsofPhysics
LawsofPhysics's picture

It's after 5:00 PM boris, Piva Pashalosta.

Wed, 01/22/2014 - 23:53 | 4357893 A Nanny Moose
A Nanny Moose's picture

Who the fuck pissed in your bitch ass Cheerios? Go away till you have had an attitude adjustment, and are done trolling.

Wed, 01/22/2014 - 20:46 | 4357307 yepyep
yepyep's picture

taking it a little bit too literally mate.

Wed, 01/22/2014 - 19:16 | 4357026 Being Free
Being Free's picture

That's why I only buy sex toys anymore.

Wed, 01/22/2014 - 20:44 | 4357300 dognamedabu
dognamedabu's picture

So to avoid being fucked over you chose to go fuck yourself?

Thu, 01/23/2014 - 03:23 | 4358126 StychoKiller
StychoKiller's picture

Have sex with someone you luv the most...

Thu, 01/23/2014 - 08:52 | 4358338 obelisks
obelisks's picture

In  Japan they call it chindogu

Wed, 01/22/2014 - 19:36 | 4356966 BigJim
BigJim's picture

The people who worry about 'deflation' and see it as just consumer prices dropping are confused.

Price deflation is natural in most markets as more efficient means of prodution are found and productivity increases (these decreases are usually masked by a constantly increasing money supply, however)

Monetary deflation happens when debts are paid/written off faster than new credit is created and causes real problems in our debt-based monetary system.

Price deflation in the present circumstances is a symptom of monetary deflation.

Wed, 01/22/2014 - 20:28 | 4357229 lasvegaspersona
lasvegaspersona's picture

BJ (can I all you that?)

Your reasoning is sound but folks here just want a fight.

Deflation for debtors (gotta mortgage?) sucks. That is why the system loves slow inflation. Sure lower prices are nice but not at the expense of lower wages and harder to pay debts. All of us are both debtors and savers and spenders and producers in our lives. For the older folks with no debt and fixed income deflation is a blessing. For the younger people who just got the student loan and mortgage, it is nice to see wages rise even at the expense of higher prices for somethings. That is why a target of 2% strikes many as OK. 

just don't save in currency...or its derivatives...

 

Wed, 01/22/2014 - 20:41 | 4357276 Boris Alatovkrap
Boris Alatovkrap's picture

BJ is hit nail of the head! Deflation is describe in ambiguity by member of political and bankster class, but citizenry is equate, much to joy of political and bankster class who is take pleasure as citizenry is muddle and confuse.

Deflation of collateral back equity is problematic for underlying debt instrument and can collapse bank. Deflation of cost of good and service is natural effect of free market, or any market, simple derivative of supply and demand, is good for all market participant, all consumer, and all (re)seller, except speculator who is bet against deflation.

Wed, 01/22/2014 - 23:16 | 4357802 dark pools of soros
dark pools of soros's picture

collapse the banks and use bitcoin.  the blockchain is a public trust ledger with no thieving banksters

and for anyone saying 'what about the economy without the banks providing their god's work!!?'   yeah. sign me up for that

 

Thu, 01/23/2014 - 07:00 | 4358228 limit_less
limit_less's picture

Boris - You are exactly correct. Inflation is a completely artificial phenomenon which serves only ONE purpose. Inflation exists to enable governments to borrow. THAT IS IT. Without inflation government would be defaulting on their debts constantly because government borrowing does not fulfill any of the two conditions as to why money is borrowed. 

You have the money centre banks making their money by skimming the interest (ie labour and land) payments that the government extorts from taxpayers.

Deflation is human progress, inflation is reversing human progress

How deflation reduces the value of your life http://independence4walesdotcom.wordpress.com/2013/11/20/what-is-deflati...

Wed, 01/22/2014 - 22:09 | 4357585 I need Another Beer
I need Another Beer's picture

Mr. Vegas, what will deflation do too the price of PM ? I am wondering ur thoughts since u seem knowlegible on the subject. I heard a dude say that deflation/stagflation will bring PM down big time.

Please enlighten me.

Thx

Heineken tonight

Thu, 01/23/2014 - 06:40 | 4358222 limit_less
limit_less's picture

Las Vegas - "Deflation for debtors sucks". So does interest, what is your point? With deflation interest rates will drop as the risk will be paid for by getting back more valuable dollars than the ones you lent out. 

Thu, 01/23/2014 - 17:02 | 4360191 N2OJoe
N2OJoe's picture

So deflation sucks for debtors.

God forbid we not be a nation of debtors...

Wed, 01/22/2014 - 20:50 | 4357320 Cugel
Cugel's picture

Monetary deflation happens when debts are paid/written off faster than new credit is created and causes real problems in our debt-based monetary system.

It *fixes* real problems with our debt-based monetary system, namely the inability of the real economy to back money created through credit expansion with an equal supply of new real goods. You're mistaking what feels good for what is good.

Wed, 01/22/2014 - 21:33 | 4357453 OC Sure
OC Sure's picture

This is true. Don't forget about the moral aspect of the argument as well.

As prices come down, whether from a lessening of the increase in the credit expansion or from a "fixed" credit problem, purchasing power increases to those who hold dollars. It is the reverse of how the inflationists steal from dollar holders. Instead, dollar holders "steal" back from the original thief. Inflation favors the thief; Deflation favors the honest worker.

This is why the bureaucrats and corporate quislings squeal the most about the "evils" of deflation; their jig is up.

Wed, 01/22/2014 - 22:53 | 4357717 BigJim
BigJim's picture

 It *fixes* real problems with our debt-based monetary system, namely the inability of the real economy to back money created through credit expansion with an equal supply of new real goods. You're mistaking what feels good for what is good.

Believe me, I'm no fan of the present system. And even less of a fan of bailing out people who stand to see their assets get wiped out when their bets go wrong. But consider this - in the present system we labour under, if all debt was paid off, there would literally be no money* (at least in the sense of currencies... I expect people would start trading things other than currencies to facilitate commerce long before their respective economies' MB reached zero).

So proponents of the economic status quo are right to fear deflation (at least of the monetary variety). Given the fact deflation wipes out banks, and that all the money in our economies is derived from bank credit, and governments have decided that from now on depositors are going to be bailed-in... any real monetary deflation would lead to a cascade of bank defaults and be unbelievably disruptive. More disruptive than hyperinflation, which is ultimately the alternative? I don't know... and it's not like there's some third option now that debt has reached such insane levels... or that we'll ever find out, as our overlords will inflate rather than see monetary deflation take hold.

So bring on this 'taper' already. Let's see the markets front run the Fed by dumping treasuries, yields skyrocket, equities tank because bonds have higher returns... and Yellen announce more QE.

*yes, I know it's more accurately described as 'currency' rather than 'money', but people confuse 'currency' with physical cash... and currencies trade as money, so 'money' it is.

Wed, 01/22/2014 - 23:17 | 4357810 dark pools of soros
dark pools of soros's picture

you mean use non debt-money??  like bitcoin?

 

usury is vile.... burn the bankers

 

 

Wed, 01/22/2014 - 23:46 | 4357879 BigJim
BigJim's picture

'Usury' just means lending money at interest... and it's perfectly reasonable to expect people to be paid for i) taking on the risk of full or partial default, and ii) deferring their gratification by lending their money out for some agreed period.

Thu, 01/23/2014 - 08:32 | 4358278 foodisgood
foodisgood's picture

Money creation with usury attached is what he is speaking to you BigDumdJoom.

Usury of this sort is rooted in the root of evil death to all that is human and why we are slaves.

Thu, 01/23/2014 - 08:39 | 4358283 BigJim
BigJim's picture

I have no stake in banking.

I was answering Soros' denunciation of usury - ie, lending capital out at interest - not eulogising our current money-out-of-nothing system.

Even if the banks created money out of nothing and lent it at no interest it would still be an abomination.

So go fuck yourself... dimwit.

edit - I see you edited your post while I was writing my response to it, making mine (above) appear to be a non-sequitor.

So here's my answer to your rewritten statement: 'usury' is an ancient term that just means lending at interest, not government-imposed cartels being allowed to rent out money they counterfiet... though I can see why an ignoramus like you might conflate the two.

Thu, 01/23/2014 - 06:04 | 4358212 striped-pad
striped-pad's picture

"But consider this - in the present system we labour under, if all debt was paid off, there would literally be no money*"

It's true that if all debt is paid off, there would be no money left at that point. But it doesn't matter. As soon as someone needs some money again (i.e. they want to buy something before selling something), they can go to a bank to borrow some, and some new currency is created.

In fact, not only does it not matter, I'd say it's *essential* that "fiat" currency is destroyed as debts are paid off. If currency weren't destroyed by repayment of debt, and everyone managed to pay off their debts, lots of people would be left with pieces of paper which they received in return for actual goods and services, but nobody is under any obligation to sell them anything. Those pieces of paper are only as valuable as forged coins - people will only knowingly accept them if they believe they can pass them on to someone else in exchange for something of value. It's like musical chairs.

I put "fiat" in quotes above because while I think it's an appropriate term for a currency simply printed by government, it seems misleading for a debt-backed currency. In our system, people are trading promises: for every dollar which exists, someone has promised to sell a dollar's worth of goods and/or services. That someone is either the borrower who created the money together with the bank, or the bank itself (if the borrower defaults). The government's role is not to declare by fiat that the currency must be accepted in exchange for goods and services, but simply to enforce contracts.

This is obviously not to say that everything is fine at the moment. The systemic problem arises if defaults on loans by banks exceed the bank's capital (capital meaning, loosely speaking, the amount invested in it rather than deposited with it). This is why it is essential to quickly close down banks in danger of losing all their capital (prompt corrective action) before the losses start affecting depositors.

Thu, 01/23/2014 - 10:13 | 4358567 BigJim
BigJim's picture

 But it doesn't matter. As soon as someone needs some money again (i.e. they want to buy something before selling something), they can go to a bank to borrow some, and some new currency is created.

Why the hell should someone have to borrow money in order to buy something, just because the system uses money that represents debt, and everyone else paid their debts off? Yes, this would never happen, there would always be some debt in an economy, but the point is that the resulting elasticity of the amount of money in the system means wildly unstable prices and inflationary booms and deflationary busts following the credit cycle.

In fact, not only does it not matter, I'd say it's *essential* that "fiat" currency is destroyed as debts are paid off. If currency weren't destroyed by repayment of debt, and everyone managed to pay off their debts, lots of people would be left with pieces of paper which they received in return for actual goods and services, but nobody is under any obligation to sell them anything. Those pieces of paper are only as valuable as forged coins - people will only knowingly accept them if they believe they can pass them on to someone else in exchange for something of value. It's like musical chairs.

This is only the case if the credit is created 'out of thin air'. If the currency lent out reflects a combination of lending (ie, depositors really do 'deposit' and don't have access to their deposits for a significant length of time relative to their loan), AND a speculative position in the creditworthyness of the bank doing the lending, then a proportion of those 'pieces of paper' would still represent actual money even if all debt were paid off.

I put "fiat" in quotes above because while I think it's an appropriate term for a currency simply printed by government, it seems misleading for a debt-backed currency.... The government's role is not to declare by fiat that the currency must be accepted in exchange for goods and services, but simply to enforce contracts.

I agree 'fiat' is a bit of a misnomer because (unlike, say, tallysticks) the currency is being created by commercial entities rather than the government... but it ultimately derives its 'moneyness' by governments demanding it to extinguish tax debt, so it's fiat in the sense it wouldn't be used as money if the government backing it were to collapse.

In our system, people are trading promises: for every dollar which exists, someone has promised to sell a dollar's worth of goods and/or services. That someone is either the borrower who created the money together with the bank, or the bank itself (if the borrower defaults).

No, in a fiat system, when a bank lends currency into existence by extending you credit, no one is promising to sell that currency's amount of goods/services to you. YOU are promising to pay back that amount of currency (+ interest), that is all. Not even the government is promising you that you can use the currency to extinguish that amount of tax debt in the future; it's usually a safe assumption that they will (which, ultimately, is the chief reason people put faith in its store of value), but throughout history plenty of governments have revalued their currencies, or issued new ones. And consider scenarios with high or hyperinflation; the currency you've borrowed starts losing its value immediately. No one has promised you anything; as a borrower, you're the one who did the promising.

This is obviously not to say that everything is fine at the moment. The systemic problem arises if defaults on loans by banks exceed the bank's capital (capital meaning, loosely speaking, the amount invested in it rather than deposited with it). This is why it is essential to quickly close down banks in danger of losing all their capital (prompt corrective action) before the losses start affecting depositors.

Central baking (and government depositor insurance) encourages excess credit creation because it disconnects depositor risk and bank lending behaviour; all banks' issuance of currency has the same value, irrespective of their underlying creditworthiness. When you use the passive tense "This is why it is essential to quickly close down banks" - who should be doing this? the depositors? the market? or the government and the central banks that encouraged the systemic risks inherent in central banking in the first place?

Thu, 01/23/2014 - 07:07 | 4358236 limit_less
limit_less's picture

Jim - "But consider this - in the present system we labour under, if all debt was paid off, there would literally be no money*" 

Techincally you are correct, but for there to be no debt there would be no way to pay for things except barter.

People, business are prepared to get into a days debt, a weeks debt, a months debt in order to have money so they do not have to barter.

The fundmental difference is a true free market would be that money is backed by the labour of the person spending it and if that goes bad then whatever meterial the money printer was using to back their currency. As opposed to a fiat currency where you are screwed if the money goes bad.

Wed, 01/22/2014 - 19:08 | 4357001 Dick Buttkiss
Dick Buttkiss's picture

Actually, deflation is a reduction in the money supply. Yes, it leads to falling prices but to falling wages as well, the question being which falls faster. In the Great Depression, wages did, though Schiff is right to say that at least prices were falling as well.

Conversely, falling prices due to increased productivity — which is what Schiff is referring to with regard to consumer electronics — is an entirely different matter, as both producers and consumers benefit. I paid over $2,700 in 1986 for a 512 Macintosh that was nonetheless worth every penny and more due to the increased productivity it gave me. Look at what I can buy now, however, even inflation-adjusted, for half that dollar amount:

http://www.apple.com/mac/compare/notebooks.html

No comparison, on top of which an appreciating currency like Bitcoin will complement, rather than counteract, increased productivity, especially as computerization (including robotics and 3D printing) embeds itself further and further into our products and services.

An unprecedented revolution, in other words, and one that the state is going to be helpless to stop.

 

Wed, 01/22/2014 - 20:16 | 4357196 zaphod42
zaphod42's picture

Interesting commentary. 

How does deflation help the middle class individuals who have mortgages?  They lose their equity and their homes.

What about students who cannot escape debt by bankruptcy?  They may as well give it up!  Lower prices won't pay those student loans that will take greater and greater percentages of what little they are able to earn.

Deflation is a nightmare for the middle class; it is does not really help the poor since they will earn less and less.  The uber-rich will do fine, thank you, since if you start with 150 million and it is reduced by 90% you still have 15 mil left and you are investing at 2 cents on the dollar as the middle classes are forced to sell of their part of the markets.

I also purchased a Mac, back in 1985.  Paid $3,200, got a dot matrix printer with it, and a free year of Mac Magazine.  Doesn't help us much today, though.  As far as I am concerned, rapid inflation or deflation is bad, each for its own particular reason.  The real problem will be when the inflation follows hard on the heels of the deflation, and things really come apart.

Any way you slice it, we're pretty much screwed.  That's why the PTB are doing whatever they can to maintain status quo. 

Just delaying tactics.

Craig

Wed, 01/22/2014 - 20:32 | 4357230 LawsofPhysics
LawsofPhysics's picture

"They lose their equity and their homes."  -  Perhaps, but then again, they still possess a home or multple homes.

Moreover, given the current laws, that particular debt becomes easier to pay off.  Especially of they still have wages.  I am a landlord I know how this works (give paper-pushers enough rope and they will hang themselves).

As far as students go, they still gain knowledge (if they were good)  If one has real knowledge, they remain valuable and perhaps they are simply waiting for prices to reset.

Please, anyone worth their weight in fucking salt knows the following;

When fraud is the status quo possesssion is the law.

Wed, 01/22/2014 - 21:10 | 4357393 acetinker
acetinker's picture

Laws, if you know me at all, and there's no reason you should, you'd know I don't practice religion. HOWEVER.  If I recall the various Abrahamic canon correctly,  individuals are due a reset (jubilee) every seven years and for nations it is "seven times seven", or 49 years.

Think about that for a bit.  How much different would the financial landscape be if we actually did that shit?

Wed, 01/22/2014 - 21:17 | 4357421 LawsofPhysics
LawsofPhysics's picture

"Think about that for a bit.  How much different would the financial landscape be if we actually did that shit?" -

For one thing, people would quickly recognize their own self worth, this would make people very humble overnight.  From that perspective alone, things would be tremendously better.

Really tired of dealing with arrogant fucks on a daily basis.

Wed, 01/22/2014 - 21:41 | 4357496 acetinker
acetinker's picture

Oh, so I'm arrogant for suggesting that acquiescence to physical law and personal humility is just stupid.  Is that what you're saying, or are you just so angry that even in agreeance you seem hostile?

Pretty sure we're on the same side, breathe.

Wed, 01/22/2014 - 21:58 | 4357541 Papasmurf
Papasmurf's picture

Fuck your reset or jubilee or whatever you want to call the theft.  How about people living within their means?  However, lenders who extend credit to those they know or have reason to know can't pay, those lenders should eat the loss.  

Wed, 01/22/2014 - 22:06 | 4357574 acetinker
acetinker's picture

Uuh Pops, you contradict yourself.  It's common, I've done it myself.  THE LENDERS ABSOLUTELY KNOW THAT THERE'S NO FUCKING WAY THAT ANYONE CAN EVER BE FREE OF DEBT.  Did you hear me OK?  If so, go back and consider that all money is debt.

Start again with your fuck me from there, fuckwit.

Wed, 01/22/2014 - 22:03 | 4357564 Cugel
Cugel's picture

Then a lot of people would take out trillion-dollar loans in year 48.

Bankruptcy and default are perfectly adequate means for dealing with over-leveraging. Bad lenders and bad borrowers bear the worst of the consequences. Or would, in the absence of bales of free money.

Wed, 01/22/2014 - 22:25 | 4357634 acetinker
acetinker's picture

I get that, but I'm talkin' 'bout nations at year 48, not wealthy individuals, who, by the way would never exist in this system.

Wed, 01/22/2014 - 23:08 | 4357772 BigJim
BigJim's picture

There were plenty of wealthy individuals back in Old Testament times.

Think about what you're proposing. Lenders would crank up interest rates as time passed, as they got closer to when there would be state-sanctioned debt forgiveness. If the government capped interest rates no one would lend in the years immediately running up to the jubilee year. It would be insane.

We need to reign in the groups that create credit, however, to prevent them buying the entire world 'with a stroke of their pen'. The way to do this is for banks/firms/individuals to issue their own currencies which would float against each other, and for government to allow them to fail if/when they overextend. ie, no government 'deposit' insurance. Something very like the gold standard would arise, but it would be market determined, so governments couldn't just suddenly announce that, no, from today henceforth, your 'dollar' is only worth 1/35th of an ounce of gold, not 1/20th... People who wished to eschew risk altogether could 'deposit' their money with banks that were risk averse. People with more risk apetite would deposit their money with banks that lent money to more risky ventures. The banks' currencies would trade as money but they'd really be more like stocks.

Thu, 01/23/2014 - 00:29 | 4357953 acetinker
acetinker's picture

Yeah, Solomon and such.  Solomon was rich because he was wise, not because he was a conniving fuck like Blankfein.  He became rich at the will of those who adored him, and from what I remember, he built the mines that made it possible for his people to build great temples and prosper.

Blankfein is a wanna be Solomon, but the mines are already built and so are the temples.  He has become rich at the will of those who adored him, but he's not building anything but the servitude of his adorants.  Big difference.

I can understand that if (zoom back to the present) you're invested in the market, you'd wanna see it flourish, and you don't wanna entertain any thought that maybe it's not real.  Maybe a jubilee would wipe you out.  I don't wish that upon you.  But, if a jubilee would wipe you out, what are you, really?

Thu, 01/23/2014 - 20:15 | 4360803 BigJim
BigJim's picture

Soloman was a fucking KING. He was rich for the same reason kings have been rich throughout history - because he exacted tribute and had many slaves.

I can understand that if (zoom back to the present) you're invested in the market, you'd wanna see it flourish, and you don't wanna entertain any thought that maybe it's not real.  Maybe a jubilee would wipe you out.  I don't wish that upon you.  But, if a jubilee would wipe you out, what are you, really?

Sigh. No, I'm not invested in the market. Did you actually read my explanation of why a regular jubilee would be economically disastrous? Even if we had a sound-money system, even semi-advanced economies cannot run without credit. There are better ways to make the monetary system less of a counterfeiter's paradise than interfering with voluntary credit arrangements in a free market. (and no, that's NOT what I'm saying we have now)

Fri, 01/24/2014 - 01:48 | 4361765 acetinker
acetinker's picture

Yes BigJim, I read what you wrote.  Who, exactly would be wiped out by the jubilee, is the question I pose.

I'm thinking it's the most vocal opponents, such as yourself.

Que sera.  Whatever will be, will be.

Fri, 01/24/2014 - 21:58 | 4365252 acetinker
acetinker's picture

BTW, a jubilee is simply a reset, not the abolition of credit.  Would certainly put a muzzle on it, though.  Is this a bad thing, in your mind?

Fri, 01/24/2014 - 11:05 | 4362575 withglee
withglee's picture

The way to do this is for banks/firms/individuals to issue their own currencies which would float against each other, and for government to allow them to fail if/when they overextend. ie, no government 'deposit' insurance.

This from he who say's I don't get it? Read about finances in the USA in the 1880s ... and several like periods before and after that.

Wed, 01/22/2014 - 22:35 | 4357669 acetinker
acetinker's picture

Kegel, I'm gonna say you're my downvote, because you seem like a system sycophant.  Failing that, you're just extremely stupid.

Who would make, or extend, a loan longer loan 7 years in such a system?

C'mon, spit it out.

Thu, 01/23/2014 - 00:44 | 4357975 PT
PT's picture

Would that really be a problem?  Who decided that a 20 - 40 year loan, just to put a roof over your head, was such a great idea?  Sure it would make the world a different place.  Not so sure it would be that bad though.

Thu, 01/23/2014 - 00:57 | 4357994 acetinker
acetinker's picture

I'm not sure I know what you mean to say, but a mortgage is literally a lein on your life.

Thu, 01/23/2014 - 11:04 | 4358757 PT
PT's picture

Try a $100 000 loan at 7% interest.  Compare time to repay, weekly repayments, total repayments (principal plus interest), total % interest over the life of the loan :

 5 years .. $450 pw .. $118k total .. 17%
25 years .. $159 pw .. $207k total .. 107%
30 years .. $149 pw .. $234k total .. 133%
40 years .. $139 pw .. $290k total .. 190%

Why the fuck do we have 30 and 40 year loans?  To lower repayments from a 25 year loan by ten or twenty bucks per week?*
Yeah, the repayments are a bit harsh on the 5 year loans.  But look at the interest components. 

 

* Yeah, sorry about that.  These days a house costs $500k so the difference is $50 - $100 per week.  You save 7 - 14% per week so you can pay an extra 26 - 83% overall.

And then there are business loans for capital intensive industries.  Actually, if I remember rightly, the gold mine I worked on was planning on being debt free in 7 - 10 years.  I might have to dig those numbers up again just to check.

The question I had was why do we need loans for more than seven years, or at least at the retail level, why do we need loans for more than seven years?  To help work out the answer, I would also like to know how many man-hours of labour it takes to build a "typical" house. 

Thu, 01/23/2014 - 22:59 | 4361366 acetinker
acetinker's picture

OK, got it.  No, we should extend or accept credit for a period of about, hmmmm, errrm, 7 years max.  The reason is simple.  People evolve.  The family with four children will quickly find that the home they just "had to have" when they had little ones about is now an albatross- a yoke on their necks.  The kids are gone (if you're lucky), but the mortgage lives on.

My wife's parents raised 7 kids in a sub 2000 sq/ft home.  Still, when the Patriarch died, his widow had to sell.  She couldn't afford the taxes.

The summary is this:  There's no way any of us is getting out of this alive.  I know I changed the subject, because the little house was paid for- but just think how much more fucked the ambitious McMansion owners are.

On my mother-in-law, we all pitched in to help, but in the meantime she was diagnosed with pancreatic cancer.  She sold the house to her youngest son (real cheap) and distributed the proceeds equally amongst the other siblings.  Serendipity.  RIP, Carol Sue.

Wed, 01/22/2014 - 20:52 | 4357334 Dick Buttkiss
Dick Buttkiss's picture

 

Debt addiction results in constant depreciation (more drugs, lower highs) and ultimately death.

Conversely, in an appreciating currency environment, equity takes precedence over debt, as does saving over spending, the former benefitting from the increased interest that banks must pay in order to attract time deposits.

Savings and investment are the backbone of genuine wealth creation, after all, never mind that the status (as in statist) quo is based on the exact opposite principle and is committing democide on account of it.

Appreciating money, in other words, benefits society, while depreciating money only benefits those who (1) produce it and (2) are the first to get their hands on it once it's produced, these being central banks and commercial banks, respectively.

 

Wed, 01/22/2014 - 21:14 | 4357409 ncdirtdigger
ncdirtdigger's picture

you don't lose your home to deflation. You lose your home because you didn't save enough to be able to make it through some hard times. Maybe the low interest rates and inflation the Fed created discouraged you from saving. But it isn't deflation that is the cause.

Wed, 01/22/2014 - 21:27 | 4357410 ncdirtdigger
ncdirtdigger's picture

I hate low prices. It lets the rif raf move in next door.

Wed, 01/22/2014 - 22:04 | 4357572 Papasmurf
Papasmurf's picture

Low prices let you upscale away from the rif raf.  It's all relative. 

Wed, 01/22/2014 - 22:17 | 4357609 Cugel
Cugel's picture

Deflation helps in those two cases after the credit bubble has burst. Then the middle class doesn't have to promise 6.5 years of income to buy a home, then students don't have to lever up for their degree. Prices of middle-class goods will return to what middle-class people can afford to pay for them.

Keeping the pain of bubble prices forever is the real middle-class nightmare. Either one generation of suckers takes a hit or everyone suffers forever.

Wed, 01/22/2014 - 23:20 | 4357818 dark pools of soros
dark pools of soros's picture

who cares... own your home.. screw usury..  live in your parents home and have your grandparents in there too..  stop defending debt with bullshit

 

you're in debt you're a slave.. if you have savings and no debt you don't need to work all the time..  imagine that!

 

 

Thu, 01/23/2014 - 00:50 | 4357983 PT
PT's picture

At current rates, most of the young will never be able to own their own home without taking on shitloads of debt.  Their only hope is to learn how to enjoy living under the stars and grow their own food anywhere and everywhere, if they can.  That is the only way they can get the banksters off their backs.  Mortgage or rent, the banksters still win.  Buying from your local supermarket = super market owner paying off commercial real estate mortgage = banksters still win.

Ummmm, if you have to go homeless and starve just so that a bankster can't afford repayments on his second yacht, are you still winning? 

Thu, 01/23/2014 - 07:15 | 4358242 limit_less
limit_less's picture

Dick - Delfation is not a reduction in the money supply. Although inflation is an increase in the money supply. 

Deflation is completely seperate from the amount of money. It is a natural phenomenon. Deflation exists in a gold standard where the amount of money remains relatively consistent.

Inflation can only happen under a fiat system, or a sham gold standard

Deflation is driven by human progress, the amount of gold remains consistent. The gold simply buys more things in the future.

Thu, 01/23/2014 - 08:40 | 4358305 Urban Redneck
Urban Redneck's picture

Before critiquing a pseudo science, you should at least understand its theories and claims, and avoid tossing out such stupid and historically demonstrable falsities as- "Inflation can only happen under a fiat system, or a sham gold standard"

Fri, 01/24/2014 - 04:25 | 4361908 limit_less
limit_less's picture

Urban - "avoid tossing out such stupid and historically demonstrable falsities as- "Inflation can only happen under a fiat system, or a sham gold standard"

Your obviously sitting on a jewel of information which contradicts inflation/deflation figures under a gold standard with no central bank.

Feel free to share the historic demonstable facts you are talking about.

Fri, 01/24/2014 - 15:18 | 4363722 Urban Redneck
Urban Redneck's picture

My favorite example occurred in 1324, but perhaps you are familiar with the example created by the aftermath of James Marshall's discovery in 1848? There are also examples prior and post to those two, but I think 500 years is a long enough span, particularly considering that if one examines a long term historical gold price chart in any given market, the fluctuations in the chart during periods of a gold standard in that market reflect BOTH inflation and deflation.

Wed, 01/22/2014 - 19:12 | 4357013 Offthebeach
Offthebeach's picture

They are the Finacial Kulaks! Peoples enemy! We will find every last grain of savings they hide! It is because of them, Fellow Krugmavicks, that the prole consumerist lack faith in progress through joy... ( wrong regime ) ...um...faith..faith in the yoke of debt for a glorious future!
Crush the old gummies and their accursed thrift! Be merciless Planner Yellen and grind the old reactionary savers into dust!

Wed, 01/22/2014 - 19:01 | 4356970 Rainman
Rainman's picture

Fed and .gov and all banks are most terrified of deflation in overleveraged commercial props and housing.....period. They will go all out kamakaze to prevent the inevitable. All the rest of the scary underemployment fueled deflation shit gets in line behind these two.

Wed, 01/22/2014 - 19:50 | 4357120 disabledvet
disabledvet's picture

absolutely. and this does give value to gold (and silver) even if the price of said metals declines. (see comment below.) To say that deflation is "not bad" misses the entire point of Japan going on three decades now, the Great Depression or in my vie Europe right now. "It is to be avoided at almost any cost."

How one threads the needle between "inflation" (the 1970's) and "deflation" (the Third-Bob-Reich) is beyond me.

The USA is clearly going through a significant disinflation right now...I'd don't hear Mr. Schiff saying this but CLEARLY that is not the fault of the Fed.

Ironically I think the easiest way to cure outright deflation is with a gold standard...especially with the amount of spending the Federal Government has. The USA has ZERO deflation with a set price for gold and a massive Federal Government (post World War II).

Taper might be the answer but again I find myself trying to figure out something I don't understand again. (what's a bitcoin again?)

In any case we're not going anywhere without a big hiring boom of some sort...so should "we" (meaning say a Governor) "fear deflation"? I would say "absolutely yes." There is a point where "more money than God" and "State bankruptcy" isn't ironic anymore.

Wed, 01/22/2014 - 20:40 | 4357290 LawsofPhysics
LawsofPhysics's picture

""inflation" (the 1970's)", please, this is not the 70's (as much as I enjoyed them).  What was the outstanding debt then? What was the energy available for consumption relative to the population then?

It's almost like folks in the 70's had a big fucking orgy and gave birth to a whole bunch of stupid fucks...

Wed, 01/22/2014 - 23:24 | 4357834 dark pools of soros
dark pools of soros's picture

haahh you stuck in the 90's???   Clinton 2.0 isn't going to save everyone from this mess... this is the grand cycle decline

Thu, 01/23/2014 - 00:49 | 4357982 satoshi101
satoshi101's picture

CLINTON 2.0

"To save a village, You must Destroy a village"

"It takes a whole village to raise a child"

"Sometimes you must kill everyone in the village to save the village"

"In the dead body of every poor white american is a food stamp recipient trying to get out"

Force every american to JOIN the FSA, or KILL HIM, Your with us or against us.

HILLARIAN 2.0 New World Order

Thu, 01/23/2014 - 00:33 | 4357961 Steverino
Steverino's picture

 

 

 

"Mrs. Debtfire"

 

... brilliant!

Wed, 01/22/2014 - 18:19 | 4356878 spinone
spinone's picture

...and someday Mr. Schiff will be right.

Wed, 01/22/2014 - 18:35 | 4356917 Spitzer
Spitzer's picture

 

I know it gets harder and harder every day, but we have no choice as rational human beings but to cling to logic.

 

Wed, 01/22/2014 - 18:45 | 4356922 nope-1004
nope-1004's picture

Along with this site, and any other rational thinking person who has studied the effects of currency debauchery.  Goes to show you how much Ben is manipulating the economy and how deathly afraid the FED is of reality entering any part of the financial community.  Fraud rules the Federal Reserve.

 

 

Wed, 01/22/2014 - 18:24 | 4356883 Greenskeeper_Carl
Greenskeeper_Carl's picture

Deflation is an ogre if you are the most indebted nation in the history of the world, with a debt based currency that requires perpetual debt creation along with constant inflation to keep it from collapsing. To a normal person, those that krugman, etc claim to care about, their dollar having more purchasing power is a good thing. Sucks for the interst on all that debt though. and the 220T in unfunded liabilities arent looking too good either

Wed, 01/22/2014 - 18:28 | 4356894 The Shootist
The Shootist's picture

Bingo. Makes one want to hang criminal, lying, thieving bankers like Dimon.

Wed, 01/22/2014 - 18:31 | 4356906 LawsofPhysics
LawsofPhysics's picture

Makes one want to hang anyone who has been grossly overcompensated for their labor actually.

Wed, 01/22/2014 - 18:40 | 4356928 Rainman
Rainman's picture

I would probably cry at my brother's hanging actually

Wed, 01/22/2014 - 18:28 | 4356898 Mr Pink
Mr Pink's picture

But..but...but ..Harry Dent just told me....

Wed, 01/22/2014 - 18:51 | 4356956 q99x2
q99x2's picture

I listened to Harry Dent the other night until I fell asleep. Worked better than a turkey sandwich.

Wed, 01/22/2014 - 19:08 | 4356999 Oldwood
Oldwood's picture

Exactly. Debt drives inflation and inflation drives debt. They are linked and a death struggle. Inflation creates the notion that money spent today will be paid back with cheaper dollars tomorrow. Inflation also stimulates spending as many believe they must purchase today or the price will be too high tomorrow. But also as those prices increase with no end in sight, while people's incomes remain relatively flat, debt offers the only means to maintain the current lifestyle. Without debt we FEEL poor. With debt we ARE poor. And the dollar looks smaller and smaller in the rear view mirror.

 

Thu, 01/23/2014 - 01:15 | 4358013 satoshi101
satoshi101's picture

The USA is a PONZI, as madoff said,

The USA cannot allow deflation as the BOOKS are based on purchased value of real-estate at 2004 HIGH's.

If USA allowed real-estate to collapsed then all the derivatives would collapse, over 600 trillion in USD would be called of course it doesn't exist, could the FED print 600 T yes? Would they yes? Do they want too NO.

So for now they keep printing just enough money in the goldilocks economy to keep titantic afloat.

***

Would WE like to see the BUBBLE reset on natural terms back in 2007/2008, would the US-GOV? NO

Who do we blame? The gubmint, but then they feed at the pig trough and we don't.

Wed, 01/22/2014 - 18:23 | 4356885 becky quick and...
becky quick and her beautiful mouth's picture

anyone who has run a business for 2 seconds knows that having a lower price than your competitor results in you getting the sales and making bank. apparently that is wrong though. you should try to price your stuff HIGER than the competition. every business owner on the planet knows deflation is the name of the game.

Wed, 01/22/2014 - 18:34 | 4356916 LawsofPhysics
LawsofPhysics's picture

Unfortunately, your input costs will dictate how low you can drop any price (without a crony in government to get you bailout of course).

Wed, 01/22/2014 - 18:37 | 4356920 onewayticket2
onewayticket2's picture

better hope you dont have contractually increasing labor costs....eg union members.  oh, and dont forget the contributions to the pension fund....

 

Wed, 01/22/2014 - 19:22 | 4357040 LawsofPhysics
LawsofPhysics's picture

Well I for one see the value in a dependable tribe.

Wed, 01/22/2014 - 20:12 | 4357174 darkpool2
darkpool2's picture

"Contractually increasing labor costs".......well if you do, you are an idiot ( or just in it for a quick short term buck, then pull the plug and run) .......you shouldnt be in business if you bind yourself to cost structures that require constant revenue increases just to survive.

Wed, 01/22/2014 - 23:57 | 4357905 LocalBoy
LocalBoy's picture

These are all liabilities of a larger corporate structure.
Consider small business with low overhead, loyal labor and vested interest.

Big difference between larger nanny corps and owner ops. Fundamental economic growth is a bottom up game, if one still believes in free access / free entry

70 / 30 was the sweet spot. 70% small business v big slow and expensive.

Wed, 01/22/2014 - 19:21 | 4357038 LocalBoy
LocalBoy's picture

Name game - deflation is decreasing the money supply, not lower prices.
Competition lowers prices without changing the money supply.

The problem is not the money supply, it is the idea debt and credit can be produced without production and savings.

Our economic model shits on labor for it is not needed to create "capital". It relies on the creation of debt and credit from thin air. 

Wed, 01/22/2014 - 23:14 | 4357793 chindit13
chindit13's picture

Thanks, Jeff.  I always wondered why we should keep buying your stock at 1500x earnings.

Thu, 01/23/2014 - 00:27 | 4357948 ImReady
ImReady's picture

i'll take 100 customers @ 20% margin anyday over 200 customers @ 10% margin. The 100 don't bitch nearly as much and my overhead and manpower costs are less. Upside is I go home early and spend tons of time with my kids.

 

 

Thu, 01/23/2014 - 01:46 | 4358044 PT
PT's picture

becky quick and:  I hate to argue with you, given that my own "self employed" experience would be measured in days and counted on the fingers of one hand.  I understand that you view the world differently when your nose is to the grindstone but ...

Actually, apologies in advance.  The following might be like rubbing salt in your wounds so I apologise if this does not help you at all.

A successful boss once told me, "Find out what your customer wants and give it to them.  Then you can charge almost whatever you want."  Others have agreed with him.

A marketing man told me, "If you double your profit margin then you can afford to lose half of your customers.  Think about it.  If you have a 5% profit margin then you can put your prices up by 5% but it will double your profits or you only have to work half as hard to get the same profit at the end of the week.  (Not only that but a small profit margin means that small hiccups in your business will wipe out your profits completely for months or years on end).  Will you lose 100% of your customers if your prices go up by 5%?  ( I'm guessing "yes" for a minimum wage worker, not so sure about others )  If so, then you need to add value so customers perceive your value to be better than the competition's.  (I actually feel dirty simply saying that last sentence.  People who visit the US tell me they are the experts at customer service.  No way I should be telling you what you already know, assuming you're from the US.)

Speaking as a customer:

The other day I spent a shitload on lunch purely because I loved the way the shop was decorated and the effort that was put into providing quality food.  Sure, I can't afford to eat there every week, but I don't go to Kentucky Fried Mc Donalds every week either.  

Once you've had a "Ma & Pa" $15 hamburger, there's no way you want to go back to a big-chain $5 cardboard hamburger.

For me, the best advertisement for the $150 Sidchrome socket set was the ten dollar K-Mart socket set that taught me that I could break metal.  I've never bought tools from K-Mart since.  When I was too poor to buy entire socket sets, I bought one  quality socket at a time.  But now Sidchrome has profited from me buying three different spanner sets and various other bits and pieces.  We eventually get sick of shit and just want stuff that doesn't break.

Why would you buy a $600 drill when you can get one for $45?  Well, the expensive one charges up in half an hour, the cheap one takes 12 hours.  The expensive one has high quality batteries.  The cheap one has shit batteries.  The expensive one has enough torque to rip your arm off.  The cheap one is barely faster than working by hand.  If I remember rightly, I only bought the cheap one so the apprentice would have something (didn't see why I should be using my money for my boss's expenses) but I still regretted the decision. 

Point being, some successful people aim for the low end and high volume, other successful people know how to price themselves higher and get away with it.

"Find your niche", my ex-boss told me ( I still haven't found it ).  
"You need a Unique Selling Proposition, a Unique Buying Advantage - the reason people choose to buy from YOU and no-one else", the marketing man told me.

With capitalism, the competition keeps the prices down.  Everyone ends up working their guts out and getting fuck-all in return.  Those who succeed are those who manage to find their little niche - which is really just a small monopoly.  They should call it "monopolism" because you need a monopoly to succeed.  Competition will fuck you up big time.  Just ask a minimum wage worker.  Or a third world worker.

Thu, 01/23/2014 - 07:20 | 4358248 limit_less
limit_less's picture

becky - exactly. human nature is to constantly develop, to get the same thing for less effort/investment. Inflation sends human development backwards by making everything more expensive which is why people have a lower quality of life than their parents.

Wed, 01/22/2014 - 18:24 | 4356888 NoDebt
NoDebt's picture

In Davos, deflation means falling asset prices.  And yes, they're very afraid of that.  They could care less about CPI.

Wed, 01/22/2014 - 18:30 | 4356899 LawsofPhysics
LawsofPhysics's picture

Indeed, unfortunately for everyone, that which cannot be sustained, won't be, regardless of their assets "prices".  Besides, these same people prevent true price discovery to begin with, so it is their own fault to begin with.  Fuck em.

Wed, 01/22/2014 - 18:32 | 4356893 LawsofPhysics
LawsofPhysics's picture

Please, so long as the human population is growing and everyone is competing for a better quality of life (and all the commodities and resources that make that possible), "deflation" is impossible.  Simply put, in the history of earth no society/currency has ever collapsed/died because it's purchasing power became too strong.

 

Now, if you kill off a few billion of those people competing for those resources, without using too many resources, then you might get some honest to god deflation.  But even then, no one would complain about a better standard of living being cheaper.  Banks and those with unsustainable debt might complain, but fuck em, none of these fuckers are suffering to begin with and it's time for them to work for a living anyway.

Thu, 01/23/2014 - 01:54 | 4358050 PT
PT's picture

Back when I was renting I would have welcomed deflation.  Now I have a mortgage, not so much.  I take consolation in my debt being relatively small and so knowing that deflation will totally fuck up everyone else while it will only hurt me a "little bit".  But of the "successful" corporations out there, which ones don't have debt?  How many property magnates out there don't have debt?  Deflation will not happen because TPTB are shit-scared of letting it happen ... as far as I can see. 

Wed, 01/22/2014 - 18:29 | 4356896 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

Deflation is inevitable with so much debt. China is going to quickly find this out unless they go full retard with the printing presses.

Wed, 01/22/2014 - 18:41 | 4356934 Spitzer
Spitzer's picture

Wrong

Show me one instance in history where bankruptcies caused a rise in a countries currency. In the Asian financial crisis (440 million people involved) their currencies collapsed by 40 to 50% without any money printing at all.

Wed, 01/22/2014 - 18:49 | 4356947 nope-1004
nope-1004's picture

I think it's both.  Deflation is the result of a debt default in a credit based economy (which is why inflation is constantly needed to keep it going), however, it is the central banks reaction to the default event (real or imaginary) that leads to massive inflation.

Ya / No?  Anyone?

Wed, 01/22/2014 - 18:53 | 4356960 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

You hit it on the head nope. Deflation waves come with masses of defaults. Hyperinflation comes soon afterwards when the currency turns worthless.

Wed, 01/22/2014 - 19:04 | 4356990 dick cheneys ghost
dick cheneys ghost's picture

some guy named Tyler Durden had this to say back in 2010

.........''David obviously agrees on the deflationary theme of the collapse. Where he disagrees is on the timing the jump to hyperinflation (oddly enough he quotes Albert Edwards who, just like us, believes in hyperdeflation followed by a Weimar Republic-like loss of faith in the currency, resulting in monetary collapse or hyperinf, whatever one wants to call it). We do not have enough confidence in our ability to pick the point where the bond bubble goes from an ebb to a flow. We are 100% confident that point will come.''

http://www.zerohedge.com/article/paolo-pellegrini-follows-druckenmiller-...

Wed, 01/22/2014 - 19:38 | 4357084 Spitzer
Spitzer's picture

As with Weimar, the US is printing currency to pay for its external debts. These dollars will *eventually* flood the forex markets.It is taking this form already but all other nations are maintaining their soft and hard pegs. These nations are feeling this inflation now. When they stop maintaining their pegs, that's when the dollars will start flooding the forex markets. Nobody will want them because buying them will make their own inflation problem worse.

But even if the US didn't print one iota of money, this is not bullish for the USD. The Asian banks did the opposite of printing (they raised rates) and their currencies still fell in value by 40-50%. And I know the US has the big military (just like the Soviets) but that doesn't make it immune to logical realities.

Wed, 01/22/2014 - 20:43 | 4357301 LawsofPhysics
LawsofPhysics's picture

"The Asian banks did the opposite of printing (they raised rates) and their currencies still fell in value by 40-50%."

Thanks for finally answering my question.  FYI- the Ruble was also crushed in the 90's. I'd buy the shit out of the ruble now.

Thu, 01/23/2014 - 00:13 | 4357930 CognacAndMencken
CognacAndMencken's picture

There is absolutely NO similarity between Weimar and the US, and any suggestion that both are comparable demonstrates total ignorance of history and banking.

Answer this: what is the consequence of having debt denominated in a foreign currency versus having debt denominated in your "home" currency?

Wed, 01/22/2014 - 19:24 | 4357047 Spitzer
Spitzer's picture

The central banks in Asia printed no money after their credit based economy started to crumble.  This still caused prices of commodities on international markets to rise by 50% priced in their currency.

Wed, 01/22/2014 - 19:31 | 4357064 LawsofPhysics
LawsofPhysics's picture

indeed, now remind us what happened to the purchasing power of the asian currencies again...

Wed, 01/22/2014 - 23:19 | 4357816 chindit13
chindit13's picture

Here's one instance:  Japan 1990-2012

There's more at play than bankruptcies alone.  One cannot look at a country/currency in isolation and then proclaim absolutes.  Does the country have a current account surplus or deficit?  Do the corps and citizens of that country hold many external assets or not?  Who holds the lion's share of the country's debt?

Wed, 01/22/2014 - 18:43 | 4356941 rsnoble
rsnoble's picture

Any doubts that they won't ?

Wed, 01/22/2014 - 18:32 | 4356907 alangreedspank
alangreedspank's picture

The Fed is contradicting itself big time. On the one side of their mouth, economy's fine, strong, growing slowly but surely, no bubbles, everything's A OK.

On the other side of their mouth, dangerous deflation caused by credit defaults.

One must ask: Why would there be such deflation if the former side of their mouth said what it said and believed it and also believes we should believe it as well ?

Wed, 01/22/2014 - 18:50 | 4356949 Smartie37
Smartie37's picture

Exactly!  

So deflation in tech products is OK, but food/oil deflation is VERBOTEN 

Let's consult the experts over in Deutschland for some good advice on this

Thu, 01/23/2014 - 06:23 | 4358216 Snoopy the Economist
Snoopy the Economist's picture

The fed only talks out of its ass. What was the last truth you heard spoken by the chairsatan?

Wed, 01/22/2014 - 18:33 | 4356914 yogibear
yogibear's picture

The fed's game continues until it can't.

Impossible to determine when games over.

It was funny to see Schiff interview Harry Dent.

We all know the Fed will never allow deflation to happen. They already stated this.
More than likely the fed will force inflation and it will get out of hand. Key players can really help get inflation to run away if they play it right,

Wed, 01/22/2014 - 18:52 | 4356957 alangreedspank
alangreedspank's picture

I'm usually with Schiff, but Karl Denninger's got another take on it that I find credible as well. After almost 6 years of ZIRP has started to take its toll on some other big players in the economy (ie: people with handles on the presidency), and not the ones who still profit from ZIRP and QE (your usual WS cabal). Namely, insurers and bond funds who need to replace bonds that came to maturity with a nice yield with costlier bonds that will and are yielding less.

This is squeezing their cashflow and might completely ruin the bond fund, or that which the Fed does not control directly (non primary dealers buyers). Which is why, according to Denninger, the taper is on the way, not going away and the Fed might even let short term rates go up.

The Fed also now realizes that ZIRP/QE are the reasons why you have low money velocity (no incentive to borrow).

Wed, 01/22/2014 - 19:28 | 4357058 NoWayJose
NoWayJose's picture

Mohamed El-Erian sees this at Pimco and knows that the bond party is over - hence his decision to leave.

Wed, 01/22/2014 - 23:38 | 4357858 chindit13
chindit13's picture

ZIRP eventually kills all savings, but in a deflationary sort of way.  Traditional savers might have to dip into principal.  Japan, with its aged population, is the textbook case.  From a 17% savings rate in 1989, it has now dipped to 0%, as the elderly are forced to drawn down bank accounts, postal savings, etc., and to do this to a greater extent than current workers save.  The net result is a societal-wide negative savings rate.  Abe had to unleash his now eponymous economics, because the combination of priavte and corporate Japan could no longer fund the deficits, and Japan's cutesy sales tactics did not work internationally.  He is trying to buy time until somebody can discover the impossible.  Of course all it does is force Kyle Bass to wait a while longer.

The other form of "savings" is in the form of pensions and annuities.  As these get starved for return, they run the risk of failing to meet contractual payouts (like in Japan) or accumulate enough to meet expected obligations.  That results in decreased purchasing power for pensioners, which is deflationary.  Initially the only alternative is equities or real estate.  At some point prices become too dear, and people/funds stop chasing.  Some funds are also restricted as to their allocation limit in equities, so ZIRP is killing them simply owing to their regulated allocation model.

If there is any alternative, or rather a stopgap measure, I suspect we might see increased privatization.  Insurance companies will start buying, for example, the New Jersey Turnpike.  It won't make up for yield losses on bonds, but it's better than nothing.  Also, it helps the bloated state or Federal budget with a one time major cash injection.

We'll bleed every stone before finally admitting it can't be done.

Wed, 01/22/2014 - 18:34 | 4356915 css1971
css1971's picture

In Japan, CEO pay averages 16x that of the average worker's pay.

http://thinkprogress.org/politics/2010/07/08/106536/japanese-ceo-america...

Why? Decades of deflation. Deflation shrinks the gap between the rich and the pool. Inflation increases it.

Wed, 01/22/2014 - 18:52 | 4356925 alangreedspank
alangreedspank's picture

Deflation shrinks the gap between the rich and the pool

Yes, a pool might cost less during during deflation. :)

Wed, 01/22/2014 - 18:41 | 4356931 onewayticket2
onewayticket2's picture

...perhaps that's why the talk of DC is "income disparity".  they want to legislate "fairness" and that wouldnt be as necessary, a top concern, in your deflation scenario.  but hugely important (to liberals) in an inflationary environment.

Wed, 01/22/2014 - 18:39 | 4356929 ejmoosa
ejmoosa's picture

Until we wring out the excesses in the new economic realitiy, we are just gonna sit in neutral.

 

Let the natural economic winds run their course, then we can get back to real growth and real jobs and real prosperity.  

 

Right now we are just burning up the one commodity we all have that is limitied: TIME.

Wed, 01/22/2014 - 18:39 | 4356930 blindman
blindman's picture

too big to fail is too big to care is
totally irresponsible is the death of
everyone not in on the scam.
that is all and the point. a scam

Wed, 01/22/2014 - 18:41 | 4356933 ebworthen
ebworthen's picture

Wall Street and the Government are perfectly aligned because that is the goal of the Kleptoligarchy!

Crush individuals and househiolds while growing the soul-less gut-less crony system.

Wed, 01/22/2014 - 18:44 | 4356940 Spitzer
Spitzer's picture

No markets are priced on suupply and demand. Not even stock markets.

 

A gentleman leans over the fence and tells his neighbor that gold is going to rise in price from its current $300. As the person on the other side of the fence thinks differently, they both agree to a binding bet. In three months, we will settle up with a payment of the change in the price of one hundred ounces of gold. Whatever it rises, the "bull" collects that amount. Likewise, whatever it falls, the "bear" collects from the bull. Each puts a $1500 payment guarantee into a common shoe box and gives it to another neighbor for safekeeping.
-------

As an observer of the above, we have just witnessed the creation of a wager not unlike a comex futures contract. On each side of the fence stands a long and a short, that together create an open interest of one contract. Neither has any intention of buying gold, nor do they expect physical gold to be a part of this bet. Yet, at cocktail parties and on public internet forums, one claims to have "bought gold" and the other states that he "sold gold"

Wed, 01/22/2014 - 19:35 | 4357076 LawsofPhysics
LawsofPhysics's picture

Buying and selling paper is becoming less and less relevant with respect to many things on the "market".

Makes sense, after all, when fraud is the status quo, possession is the law.

Thu, 01/23/2014 - 00:40 | 4357964 CognacAndMencken
CognacAndMencken's picture

Given your example, you have just blamed speculators for the direction of the market. Yet it is the popular consensus of the ZH community that speculators are NOT responsible for the rise in commodities (especially oil and metals) in 2006/7.

Also, it is also the view of precious metals community that a shortage of physical gold supply will make the price of gold to go parabolic. The shortage of silver was/is suppose to make silver shoot to the moon. Your commentary suggests that supply/demand will not drive the price.

??

Wed, 01/22/2014 - 18:45 | 4356943 Al Capowned
Al Capowned's picture

Prices are dropping in Bitcoin dramatically,

Wed, 01/22/2014 - 18:46 | 4356945 LMAOLORI
LMAOLORI's picture

 

 

Contradictary Double Speak:

Cheaper prices due to globalization is GOOD - but lower prices that affect the elites bottom line and all of a sudden it's DOOMSDAY.

Wed, 01/22/2014 - 18:46 | 4356946 delivered
delivered's picture

This argument is easy to understand and comes down to one simple fact. Deflation rewards the prudent, savers, and responsible. Deflation punishes the irresponsible, spenders, and debtors. So who would be punished most by deflation, the over indebted governments and Western economies that have bet the house on credit growth to expand the economy. The governments and banks are most at risk in a deflationary environment. No wonder why they are so affraid of this beast. 

Wed, 01/22/2014 - 18:49 | 4356950 Stuck on Zero
Stuck on Zero's picture

The only argument I have ever heard against a zero inflation environment is that savers could amass huge piles of cash.  The danger in that is that they could get spooked and dump it all at once creating havoc.  For this reason many economists have argued that a small amount of inflation will keep this from happening and result in wonderful stability. 

Econ 1a.

 

 

Wed, 01/22/2014 - 19:04 | 4356986 css1971
css1971's picture

Do they know that people put money into banks? I means it's insane of course, but that's what they do.

Wed, 01/22/2014 - 19:10 | 4357005 The Wisp
The Wisp's picture

and being a saver is Bad Why?

 

Wed, 01/22/2014 - 19:55 | 4357133 LawsofPhysics
LawsofPhysics's picture

Physical cash or digital cash?  Big fucking difference.

Econ 1a.

Wed, 01/22/2014 - 18:54 | 4356963 dizzyfingers
dizzyfingers's picture

Chain retail stores in our area have been trying to put the inflation gig into practice.

Their inventories of last-season-and-beyond merchandise crowd their floor space, new season items can't be displayed or customers can't get to them or don't want to bother navigating racks of stuff that resemble thrift-store rejects.

J. C. Penney, Sears, K-Mart, and lots of higher-end stores persisted with too-high prices for low-quality merchandise until the day FOR RENT signs went up. But cockroaches, knowing that cockroaches always survive, carry on fiddling while the rest go down the drain too.

Oh well, maybe it's a kind of progress.

Wed, 01/22/2014 - 18:56 | 4356967 Au Shucks
Au Shucks's picture

When one takes into account shrinkage, and no.. not in the George Castanza way, but product size/quantity shrinkage, which is absolutely rampant now (check your chip bag product weight, your drinks, most of the shit the zombie hoards eat today), it is clear that this is simply more hidden price inflation and that soon, perhaps very soon, this shrinkage will be forced to it's logical conclusion which is substantially higher prices with a still reduced product size/quanitity.

"like a frightened turtle"

 

Wed, 01/22/2014 - 18:56 | 4356969 q99x2
q99x2's picture

How do you make money by protesting against central banking?

Buy Bitcoin.

Last:$948.47

Wed, 01/22/2014 - 21:18 | 4357370 satoshi101
satoshi101's picture

"HOW TO BURN MONEY?"

Buy BITCOIN.

Sure fire way, not since cabbage patch dolls, or beanie babys, or Tulips has there been a more sure-fire way to separate fools from their money (USD).

***

Want to burn your money? Find a BTC ATM ( one arm bandit ) near you, deposit your nasty FIAT USD $$$, and you get back BTC paper reciept, burn that paper, now you have fueled the BITCOIN Pyramid and enriched first tier bitcoin producers. How does it feel? Good, damn Good.

 

Thu, 01/23/2014 - 00:06 | 4357921 chindit13
chindit13's picture

Come on, guy, you live in the Buddha Belt, right?  Bitcoin is Buddha's money.  It encompasses the entire philosophy of the Fat and Toothsome One.  Everything is temporary, even illusory.  What could be more illusory than virtual money?

Each of us during our current Earthly iteration plays the asset game.  What is going to hold or increase its value while we are in this current state of being?  We best get on board that which will rise, and get rid of that which will decline, and have fun embracing the challenge of figuring out which is which.  Even the Biblical types know what Buddha knew. See Ecclesiastes:  a time to cast away stones, a time to gather stones together.  Those who can tell when the time is right, do best.  Only Shirley MacLaine is justified holding for the long term.

Personally, I applaud anyone who has made a killing on Bitcoin.  I even enjoy fonestar, because he represents that Buddha and Biblical reminder that everything has its day but nothing has every day.  Those who sat and watched 35-60% tumbles in the purchasing power of their two favorite "stones" hate seeing or hearing what someone like fonestar has done.  He was nimble; they were not.  Some of the "stone" gatherers were nimble, too, and knew when to 'cast away'. Sure, any second now.......but how may seconds do any of us have?  Maybe Godot shows up before the next trend rewards our wrong choice.  That's why being nimble and being open minded is good.  Make hay while the sun shines.  There's a reason all those cliches have stood the test of time.

Not being the jealous type, I'll applaud anyone who plays the game well.  It takes too much damn energy to be resentful or envious.  I'd rather laugh.

Thu, 01/23/2014 - 00:20 | 4357941 fonzannoon
fonzannoon's picture

Chindit, fonestar is having his day in the sun, and that's fine. Even I applaud him for it, despite the whole used car saleman apect of it. But he is only nimble if he takes that profit. He is to bitcoin what gold is to many on here. He has that same religious ferver when he speaks about it. Something tells me if bitcoin gets beat down tomorrow and all his gains go to shit, he will still be on here screaming about it the way the gold bugs stilll scream about gold. Maybe he will surprise us and sell before, who knows.

Thanks for your perspective on here by the way. You bring a lot to the table on this site.

Thu, 01/23/2014 - 00:45 | 4357972 chindit13
chindit13's picture

fonestar is a one-man GDP turbocharger.  If the topic is Bitcoin, he violates Einsteinian physics churning out comments and upping the click count on this website.  Since his each and every comment riles and demands responses from the offended majority, it's cacophany of the click-o-meter.  That ups the ad revenue, and undoubtedly buys Tyler a lot of beer.  Then Tyler has to take a taxi home.  Then the taxi driver bets on the Super Bowl.  See the multiplier effect?  Heck, fonestar deserves his own postage stamp.

As for perspective, here's my thinking:

One can be a bitter, angry, whiney-ass crybaby, or one can just face things as they are and deal with them.  Though I’m not the religious type, religions have said a lot of good things, like try to fix what can be fixed, accept what cannot be fixed, and try to understand the difference between the two.

Anybody who has access to this website has been dealt a hand better than 99.999% of all the people who have ever lived.  Sure, we’ve got challenges, but frankly these pale in comparison to what many face in this world today (my favorite exemplar: the rural Bangladeshi female), and what almost anyone faced before the mid 20th Century.

Those who see life as a bit of a game, and a challenge, are bound to take greater pleasure from it.  Those who expect the world to operate according to their own wishes are never going to be satisfied.  We’re all dead either way, but it seems since enjoyment of the challenge is far less taxing on the soul, it’s the better way to go.  And no, I'm not Anthony Robbins.

Thu, 01/23/2014 - 01:04 | 4358000 satoshi101
satoshi101's picture

Damn straight, anybody on this website is part of the top 5% in the USA, and certainly top 1% in the world,

Just the fact that you have computer, internet, know how to read, and use a keyboard. ...

People on this site like to bitch and complaint about the 1%, but little do they know they are the 1%.

 
Like the guy said long ago "We have seen the enemy and he is us"

Or better like 'v' in vendetta, "To see the enemy, you must only look into the mirror"

ZH is funny its amusement,... but don't take it more than that, ... and hell yes, if Tyler gets a free beer everyday GOOD, what did we see recently this site is valued at $1k/month for ad-clicks? so that's a nice bar-bill  a day,... and not much more? A couple of pints and some chips and maybe a few pull-tabs. Life is good for the Tylers.

***

My favorite metric in bangaledesh is that the CONDOM, costs more than the girl.

***

I concur nobody is wrong or right, its like the blind men an the elephant, we're all sort of right, but all totally wrong.

We're only here on this planet a short time make the best out of it, if your still in the USA, get the fuck out and find the good life like me and chindit. :)

 

Thu, 01/23/2014 - 00:44 | 4357977 satoshi101
satoshi101's picture

Gold downside maybe $800,

Upside sold $1600, but higher not for long.

Gold in both INFLATION or DEFLATION doesn't do well, we just saw the best GOLD BOOM in 30 years that lasted 10 years, ... I don't think we'll see another.

***

BTC on the other hand came from BIT-FART's it will return to BIT-FART's.

What's a bit-fart worth post-bit coin collapse? What's a beanie baby worth today? Well its a thing,... BTC will go down, ... but here's the deal.

If you can't turn your BTC into GOLD. Then what good is it? If you can only buy junk from overstock, or dirty old smelly hotels in the dead part of vegas with BTC what good is BTC?

Exchanges will not refund you real money, and the entire BTC model is take in CASH and return paper reciept.

That's now in the best of times you can't get OUT, ... thus how in the fucking hell will you get your money back in the bad times of BTC?

You will not.

Thu, 01/23/2014 - 00:53 | 4357989 chindit13
chindit13's picture

As I think you understand very well, a question one might ask is not what a Beanie Baby is worth today, but what is Ty Warner worth today.

As for digital currency, I suspect it does have a future, but its control will be wrested from privates and land in the hands of those who might want to further control the tax process and theoretically (though probably not in reality) control black market economics.

Thu, 01/23/2014 - 01:26 | 4358025 satoshi101
satoshi101's picture

It's escapes most men, and unless you have studied this for years you don't see it,

But glad you mentioned the 'black market'

The CIA only exists to manage the black-market,

Where any where on earth should you sell opium, or cocaine for anything other than USD you be droned, the USA does this to make the USD $100 ben-franklin note valuable worldwide.

If not for the black-market 'protection' that the CIA offer criminals worlwide there would be NO reserve-currency, its not the petro-dollar that makes the USD KING, its the black-market.

Yes, if the CIA could get the black-market over to BTC, or something else, then the reserve currency could all be ran from UTAH with no field agents abroad.

 

Thu, 01/23/2014 - 00:37 | 4357968 satoshi101
satoshi101's picture

chindit, your a smart man,

and there is something endearing about fonestar, ... he has a sweet-side,

Yes, I live in the buddha-belt, but there is nothing about buddha and being stupid,... if you have so much spare cash(or gold) you give it to the family members in need and certainly to your temple,.... I don't think that giving MONEY to BIT-TARDS, which is just post 2009 fancy guys in k-mart suits selling "Penny Mining Stocks", ... its all the same bunch of people.

Something sweet about 'fonestar', like he's a believer, in getting off the grid, away from the banker, going peer 2 peer, ... I have had this converation with foney too many times.

Buddha in his day was a millionaire playboy, he had it all, but we wasn't happy, and he went to live alone in the mountains and forests for say 20+ years, and there he learned that eternal bliss came from nothing.

Thus given that I know that BITCOIN is an NSA backdoor to electronic-micro purchasing aka control of the poor, of course I don't support, I don't even carry a phone for this reason.

More power to foney, ... but behind the scenes of BITCOIN is Russian mafia, and all mining controlled by one guy in UKRAINE, and all exchanges controlled by NSA/CIA in HK or silicon valley,... I hate the US Government, and they made BITCOIN, thus I just hate bitcoin because it is no pure peer-2-peer, and it orginated from ASSHOLES.

I think BUDDAH, would not embrace anything, ... he would simply would breath, and accept what is, everybody has to find buddha in their own way, and perhaps FONEY can find buddha via BTC, ... me thinks foney will not sell, BTC will collapse and foney will blame a 3rd party,.... but eventually when foney is broke he will find buddha.

***

Foney on many occasion has told us that he works for a 'chinese mining' friend, and thus I'm sure foney was given a few 1,000 BTC's and told GO proseltize the masses, not unlike 'Guy' the Apple Evangelist

I concur with YOU, if FONEY was smart he would turn his BTC's to GOLD and keep playing the game and hustle more free BTC's,... that said its NOT easy to turn BTC's too money and the POWER THAT BE (BTC) would see instantly should foney SELL his alloted btc's, so the fact is FONEY is trapped, ... if he sells then he doesn't get anymore, if he doens't sell he doesn't get shit.

I pity foney, ...

Obviously I have nothing, and thus I have everything. :)

 

 

Thu, 01/23/2014 - 05:30 | 4358198 PN7
PN7's picture

Satoshi 101:  I don't understand why you rant and rave with such bitterness abainst bitcoin.  I find this very curious since you chose the name 'Satoshi' to identify yourself surely knowing that 'Satoshi' is the same name chosen by the founder of bitcoin to identify Himself.

I sometimes enjoy betting a few dollars on a horse race or a football game.  I also put a few dollars into bitcoin.  I am having a bit of fun.  I am not risking everything and leaving nothing to my children or anything like that.  You decry bitcoin as if someone is forcing you to put your life savings into bitcoin.  I doubt that this is actually happening.

I have always enjoyed maths.  I like the bitcoin idea because of its mathematical foundation.  I have a sneaking suspicion that bitcoin miners are not only securing the blockchain; but may be unknowingly helping Satoshi resolve the greatest existing problem in math...the Riemann hypothesis.

Relax.  Life is short.  Enjoy those girls 1/3 your age.  Put a few bucks on a horse race and enjoy the race, win or lose.  And get over your obsession with bitcoin please.  I so enjoy your posts except for the weird bitcoin rants.

 

Wed, 01/22/2014 - 18:57 | 4356974 teslaberry
teslaberry's picture

peter schiff hasn't destroyed anything ever. he's not really a 'destroyer' type of guy. he's a critic. 

and his voice is annoying. 

 

Wed, 01/22/2014 - 18:58 | 4356978 Agent P
Agent P's picture

In the simplest terms possible, deflation = lower prices = lower revenues & wages = lower taxes.  Now, let's say you're the US (or any other) Government, and you owe somewhere in the neighborhood of $17 trillion...how does deflation sound to you?

Must. Not. Have. Deflation. In. Levered. Economy.

Wed, 01/22/2014 - 19:01 | 4356981 teslaberry
teslaberry's picture

deflation = creditors defaulting on debts = bankruptcies = writeoffs on balance sheets = bank closures.

Do NOT follow this link or you will be banned from the site!