Why the Fed can’t put out the fire

[Ex-SD]

Why the Fed can’t put out the fire

Even many of those who believe Fed must make another big rate cut Tuesday concede it can’t do much to calm troubled markets.

By Chris Isidore, CNNMoney.com senior writer
Last Updated: March 18, 2008: 9:32 AM EDT

NEW YORK (CNNMoney.com) — With Wall Street hit by a crisis of confidence, many are hoping the nation’s central bank can save the day.

The Federal Reserve’s main weapon: Cutting interest rates, and most economists expect a big slash of three-quarters of a percentage point on Tuesday.

But even those economists in favor of such a move concede it will do little to calm investor fears.

“It doesn’t address the fundamental problems, which is that financial markets are just scared,” said David Wyss, Standard & Poor’s chief economist. “The Fed is trying, but they don’t have a magic wand to wave and make everyone confident again.”

In the past week, investors have come to expect even more aggressive action from the Fed.

The sudden collapse of investment bank Bear Stearns sparked fears that other Wall Street banks could be at risk. Shares of Lehman Brothers (LEH, Fortune 500) plunged more than 25% in morning trading on Monday. Concerns that another institution could collapse is one reason that the Fed will probably deliver another big rate cut.

But Rich Yamarone, director of economic research at Argus Research and a critic of the Fed’s rate cuts, argues the Fed is feeding current market fears with emergency moves like Sunday night’s decision to make loans directly to Wall Street firms instead of just banks.

“Anytime you act on a Sunday night during ’60 Minutes,’ if you don’t think that will engender fear, I don’t know what does,” said Yamarone.

He added that the Fed should not be trying to prevent failures by Wall Street firms.

“It was almost naive to think this wasn’t going to happen to someone,” he said. “You don’t have a credit crisis of this magnitude and have every player sidestep calamity.”

But Lyle Gramley, a Fed governor from 1980 to 1985 and now a senior economic advisor for the Stanford Washington Research Group, said that such a failure would have far broader implications for the economy and the financial markets and the Fed has to do what it can to avoid that.

“If the Fed had sat aside and let Bear go down the tubes, the cascading effects would have been ghastly,” he said.

Still, Gramley concedes the Fed has only a limited ability to deal with market fears. And he said that makes this economic crisis the most difficult challenge for the central bank since the Great Depression.

“In all past recessions, I was always quite sure that if the Fed stomped hard on the gas pedal, the economy would turn around and start to grow,” he said. “But they’ve now stomped hard on the gas, and credit is not more available, it’s less available.”

Gramley and some other experts believe the solution to the current credit crisis will have to come from Congress, not the Fed, and that the federal government will have to take steps to bail out both Wall Street firms holding mortgage-backed securities as well as homeowners who have mortgages with balances greater than the value of their homes.

“I think the federal government is going to have to recognize taxpayer money will be involved and the sooner we get going on that, the better,” Gramley said. “The longer it takes to do that, the more expensive the bailout will be.”

The Fed took steps to assume some of that credit risk last week when it agreed to accept mortgage backed securities as collateral.

Still, Yamarone and other Fed critics argue that another round of rate cuts will do little but drive the value of the dollar lower versus the euro and the yen, which in turn will further drive up the prices of commodities such as oil and gold.

“Not one company is saying monetary policy is restrictive or that the current interest rate levels are impeding them from investing,” said Yamarone. “A (full percentage point) cut would send the dollar into a potential collapse. We’re in a free fall now, wait till you see what a collapse looks like.”

But many others think the Fed has no choice but to keep slashing rates.

“It helps, even if it doesn’t solve the problem,” said Wyss. “You need to keep the cost of borrowing down. It’s not the optimal solution, but it’s better than nothing.”

And no matter what the Fed does, market fears probably won’t go away any time soon. After all, some investors will probably take more Fed cuts as a sign that the central bank sees more trouble ahead.

“The market is going to stay worried, regardless of what the Fed does. It’s heads you lose, tails you lose,” Wyss said.

[VanMorrisonFan]

Other financial writers and commentators have written about this, and I think they are on to something.

The problem right now is not a shortage of liquidity. There is massive liquidity in the system. The problem is the lack of confidence in value indicators – i.e., no one is certain that the quoted prices for financial assets are anywhere near their real underlying value.

The “bail-out” of Bear Stearns was a necessity. Had they gone under it could have been the start of a melt-down. However, the bail-out causes problems of its own. If JP Morgan was only willing to offer $2 a share for a company that two days before many people thought was worth $30 a share (and whose HQ building on Madison Avenue is probably worth $8 per share) what does that say about valuations?

Putting more money in the system is a necessity, but it doesn’t help that much. It’s like pushing string or herding cats.

[JWM in SD]

JWM in SD

“Putting more money in the system is a necessity, but it doesn’t help that much. It’s like pushing string or herding cats.”

And that is why we are in for DEFLATION…not INFLATION. The Inflationistas will eat their words when it all said and done. Watch…..

[cr]

Our economy is well overdue for a massive Spring cleaning, but with the FED bailing out failed banks and guaranteeing tree pulp labeled MBS they’re just sweeping the $#!^ under the rug.

You can only do that for so long before the stench is overwhelming and you’re forced to clean it up, and by then it’s much worse.

It’s only a matter of time.

[cr]

Our economy is well overdue for a massive Spring cleaning, but with the FED bailing out failed banks and guaranteeing tree pulp labeled MBS they’re just sweeping the $#!^ under the rug.

You can only do that for so long before the stench is overwhelming and you’re forced to clean it up, and by then it’s much worse.

It’s only a matter of time.

[cr]

Our economy is well overdue for a massive Spring cleaning, but with the FED bailing out failed banks and guaranteeing tree pulp labeled MBS they’re just sweeping the $#!^ under the rug.

You can only do that for so long before the stench is overwhelming and you’re forced to clean it up, and by then it’s much worse.

It’s only a matter of time.

[cr]

Our economy is well overdue for a massive Spring cleaning, but with the FED bailing out failed banks and guaranteeing tree pulp labeled MBS they’re just sweeping the $#!^ under the rug.

You can only do that for so long before the stench is overwhelming and you’re forced to clean it up, and by then it’s much worse.

It’s only a matter of time.

[cr]

Our economy is well overdue for a massive Spring cleaning, but with the FED bailing out failed banks and guaranteeing tree pulp labeled MBS they’re just sweeping the $#!^ under the rug.

You can only do that for so long before the stench is overwhelming and you’re forced to clean it up, and by then it’s much worse.

It’s only a matter of time.

[sdduuuude]

JWM. I have been following your deflation comments and those of Mish and my favorite piggington poster of all time – 4plexowner.

I can’t say it is quite sinking in. Sometimes I’m slow like that because I need to understand, in detail what you are saying before I have the “aha”. It hasn’t kicked in yet.

So, if you don’t mind, could you put some detail to this deflation thing, the theory behind it. The cause and effect.

I mean, I see the Feds cutting. I see the dollar dropping. It all says “devaluing dollar” = inflation, right?

Are you saying an upcoming deflationary period will be preceeded by an inflationary period, or will we drop right into it? Will the dollar devalue AND prices come down? Are you talking Gold? Oil? Stocks? Housing? Vegetables? Milk? Assets? Commodities? all deflating?

4plexowner mentioned some theory, but I can’t find the thread to read up on it.

Thanks in advance for the education.

[barnaby33]

sdduuuude I can add some color to the commentary. Most people who are deflationists look at deflation as a monetary event. If you will accept that in our system, money and credit are fungible, two that the last seven years have seen a huge run-up in the creation of that credit and finally that much of that credit is or will be destroyed you probably are a deflationist.

Most people though by no means all who are inflationists believe we can print our way out of the current problem, we can’t for several reasons. If deflation is a monetary event, so is inflation (forget rising prices thats just a symptom of inflation at times.) The inflation has already occurred via all of the lending that has been done against the collateral available (mostly houses.) Now that the collateral is over-encumbered, much of that debt is being destroyed as the borrowers default.

The problem we have is that debt is being destroyed through default faster than the Fed can get money injected into the system. The TAF and the newer spiffier bank bailout are just mechanisms to get money into circulation to stimulate spending. Furthermore the Fed cannot make banks lend. Since most of the collateral that banks would normally lend against is over-encumbered, or not worth what is already lent against it, they are scared to lend except at ever higher rates. That is why even though the Fed keeps lowering (an inflationary tactic if the money has nowhere productive to go) mortgages and consumer credit are getting more expensive. The Fed could just print. It can in fact do that (I was wrong in thinking that it couldn’t), but that would quickly cause an exodus from the dollar, something we have already seen but which would accelerate.

Furthermore how all of the collateral became over-encumbered is through the magic of fraud. Wall street convinced itself and others that you really could slice and dice risk and make it go away. The fact that it has turned out to be a disaster is why the nobody trusts the ratings assigned to all sorts of debt and so people with money refuse to buy the debt.

So the inflation of the last few years is leading to deflation, and the whole kit and kaboodle was based on the fraudulent idea that you really can squeeze 3 nickels from a dime. All of this was all too willingly aided by the hard slacking American consumer who was too dumb to, “do the math.”

Josh

[sdduuuude]

OK, barnaby. A good start. As I said, it is slow to sink in.

You said “lowering (is) an inflationary tactic if the money has nowhere priductive to go”

Don’t you mean, lowering is an inflationary tactic if the money has SOMEWHERE to go?

So, the idea is that the money supply is shrinking, not growing because the money that was created by new debt (as opposed to actual printing) has gone bye-bye ?

And the fed is lowering but not necessarily lending because the banks don’t want to borrow from the fed to lend out.

[barnaby33]

No what I meant is that lowering interest rates encourages borrowing. If that borrowing is put to productive use, its not inflationary. Say I borrow money to build a factory which then improves productive output or fosters competition. That doesn’t tend to be inflationary.

However if I borrow money and pour ever more of it into something like housing, where the population is growing slowly or not at all, that becomes inflationary as ever more dollars chase ever fewer, or stagnant amount of resources.

Inflation isn’t an increase in prices, to me at least. Inflation is an increase in the money supply. Depending on what you do with that money prices can rise or fall. Our economy hasn’t expanded in productive capacity, at nearly the rate at which we have created credit, prices rise to compensate.

Falling prices aren’t deflation either. We happen to have deflation and rising prices (at least for now and in some areas) at the same time! I don’t have enough of an understanding to predict if this will stay so, or that deflation will actually strengthen the dollar causing prices to fall. I am pretty sure that whatever else happens deflation is accelerating and will continue to do so for the near term. The fallacy is that the Fed thinks it can stop it. The crime is that it is trying.

Josh

[JWM in SD]

JWM in SD

Josh,

Excellent, excellent, excellant!!!! I could not have done a better job myself. You are officially a Deflationista Disciple.

One point of contention though. The Fed / Bernanke doesnt really think they can stop the deflationary spiral. Yeah, I know…helicopter ben and all that non-sense. In reality all they are doing is mitigating the damage and slowing the rate of descent so that there is not a large scale systemic meltdown ala the Bear Sterns blow out.

The inflationary mindset, much like the housing price mindset, is so ingrained in the psyche of the masses that it is difficult for most of J6P to understand that rising prices do not necessarily equate with inflation. Unlike many posters I’ve seen who argue that the definition I use is too academic / abstract, I say bullshit. It is what is. It is the lack of consistency in the use of the terms that leads to massive confusion and obfuscation of the economic issues at hand disallowing for clear thinking on a complicated subject matter.

[sdduuuude]

OK, JWM. It is starting to sink in a bit.

So, when you are looking at the world as a deflationist, confident of your opinion, what actions/investments/decisions taken by the inflationary crowd look foolish and why?

Also, how does this deflationary world differ, qualitatively from the stagflation world? Instead of slowing economy and increasing money supply, we have a slowing economy and decreasing money supply ?

I can go that far, but the implications/repercussions escape me.

[sdduuuude]

OK, JWM. It is starting to sink in a bit.

So, when you are looking at the world as a deflationist, confident of your opinion, what actions/investments/decisions taken by the inflationary crowd look foolish and why?

Also, how does this deflationary world differ, qualitatively from the stagflation world? Instead of slowing economy and increasing money supply, we have a slowing economy and decreasing money supply ?

I can go that far, but the implications/repercussions escape me.

[sdduuuude]

OK, JWM. It is starting to sink in a bit.

So, when you are looking at the world as a deflationist, confident of your opinion, what actions/investments/decisions taken by the inflationary crowd look foolish and why?

Also, how does this deflationary world differ, qualitatively from the stagflation world? Instead of slowing economy and increasing money supply, we have a slowing economy and decreasing money supply ?

I can go that far, but the implications/repercussions escape me.

[sdduuuude]

OK, JWM. It is starting to sink in a bit.

So, when you are looking at the world as a deflationist, confident of your opinion, what actions/investments/decisions taken by the inflationary crowd look foolish and why?

Also, how does this deflationary world differ, qualitatively from the stagflation world? Instead of slowing economy and increasing money supply, we have a slowing economy and decreasing money supply ?

I can go that far, but the implications/repercussions escape me.

[sdduuuude]

OK, JWM. It is starting to sink in a bit.

So, when you are looking at the world as a deflationist, confident of your opinion, what actions/investments/decisions taken by the inflationary crowd look foolish and why?

Also, how does this deflationary world differ, qualitatively from the stagflation world? Instead of slowing economy and increasing money supply, we have a slowing economy and decreasing money supply ?

I can go that far, but the implications/repercussions escape me.

[JWM in SD]

JWM in SD

Josh,

Excellent, excellent, excellant!!!! I could not have done a better job myself. You are officially a Deflationista Disciple.

One point of contention though. The Fed / Bernanke doesnt really think they can stop the deflationary spiral. Yeah, I know…helicopter ben and all that non-sense. In reality all they are doing is mitigating the damage and slowing the rate of descent so that there is not a large scale systemic meltdown ala the Bear Sterns blow out.

The inflationary mindset, much like the housing price mindset, is so ingrained in the psyche of the masses that it is difficult for most of J6P to understand that rising prices do not necessarily equate with inflation. Unlike many posters I’ve seen who argue that the definition I use is too academic / abstract, I say bullshit. It is what is. It is the lack of consistency in the use of the terms that leads to massive confusion and obfuscation of the economic issues at hand disallowing for clear thinking on a complicated subject matter.

[JWM in SD]

JWM in SD

Josh,

Excellent, excellent, excellant!!!! I could not have done a better job myself. You are officially a Deflationista Disciple.

One point of contention though. The Fed / Bernanke doesnt really think they can stop the deflationary spiral. Yeah, I know…helicopter ben and all that non-sense. In reality all they are doing is mitigating the damage and slowing the rate of descent so that there is not a large scale systemic meltdown ala the Bear Sterns blow out.

The inflationary mindset, much like the housing price mindset, is so ingrained in the psyche of the masses that it is difficult for most of J6P to understand that rising prices do not necessarily equate with inflation. Unlike many posters I’ve seen who argue that the definition I use is too academic / abstract, I say bullshit. It is what is. It is the lack of consistency in the use of the terms that leads to massive confusion and obfuscation of the economic issues at hand disallowing for clear thinking on a complicated subject matter.

[JWM in SD]

JWM in SD

Josh,

Excellent, excellent, excellant!!!! I could not have done a better job myself. You are officially a Deflationista Disciple.

One point of contention though. The Fed / Bernanke doesnt really think they can stop the deflationary spiral. Yeah, I know…helicopter ben and all that non-sense. In reality all they are doing is mitigating the damage and slowing the rate of descent so that there is not a large scale systemic meltdown ala the Bear Sterns blow out.

The inflationary mindset, much like the housing price mindset, is so ingrained in the psyche of the masses that it is difficult for most of J6P to understand that rising prices do not necessarily equate with inflation. Unlike many posters I’ve seen who argue that the definition I use is too academic / abstract, I say bullshit. It is what is. It is the lack of consistency in the use of the terms that leads to massive confusion and obfuscation of the economic issues at hand disallowing for clear thinking on a complicated subject matter.

[JWM in SD]

JWM in SD

Josh,

Excellent, excellent, excellant!!!! I could not have done a better job myself. You are officially a Deflationista Disciple.

One point of contention though. The Fed / Bernanke doesnt really think they can stop the deflationary spiral. Yeah, I know…helicopter ben and all that non-sense. In reality all they are doing is mitigating the damage and slowing the rate of descent so that there is not a large scale systemic meltdown ala the Bear Sterns blow out.

The inflationary mindset, much like the housing price mindset, is so ingrained in the psyche of the masses that it is difficult for most of J6P to understand that rising prices do not necessarily equate with inflation. Unlike many posters I’ve seen who argue that the definition I use is too academic / abstract, I say bullshit. It is what is. It is the lack of consistency in the use of the terms that leads to massive confusion and obfuscation of the economic issues at hand disallowing for clear thinking on a complicated subject matter.

[sdduuuude]

The concept of money supply vs. prices is crystal clear to me. Has been for a while. I get that part.

You are saying “price increases be damned – we are in a deflationary environment.” Right ?

And this is the that starts to brings clarity on the concept: “The problem we have is that debt is being destroyed through default faster than the Fed can get money injected into the system”

Where I lose it is – how is it that debt can be destroyed, and if so, how does that actually reduce the money supply?

Thanks for the education so far …

[sdduuuude]

The concept of money supply vs. prices is crystal clear to me. Has been for a while. I get that part.

You are saying “price increases be damned – we are in a deflationary environment.” Right ?

And this is the that starts to brings clarity on the concept: “The problem we have is that debt is being destroyed through default faster than the Fed can get money injected into the system”

Where I lose it is – how is it that debt can be destroyed, and if so, how does that actually reduce the money supply?

Thanks for the education so far …

[sdduuuude]

The concept of money supply vs. prices is crystal clear to me. Has been for a while. I get that part.

You are saying “price increases be damned – we are in a deflationary environment.” Right ?

And this is the that starts to brings clarity on the concept: “The problem we have is that debt is being destroyed through default faster than the Fed can get money injected into the system”

Where I lose it is – how is it that debt can be destroyed, and if so, how does that actually reduce the money supply?

Thanks for the education so far …

[sdduuuude]

The concept of money supply vs. prices is crystal clear to me. Has been for a while. I get that part.

You are saying “price increases be damned – we are in a deflationary environment.” Right ?

And this is the that starts to brings clarity on the concept: “The problem we have is that debt is being destroyed through default faster than the Fed can get money injected into the system”

Where I lose it is – how is it that debt can be destroyed, and if so, how does that actually reduce the money supply?

Thanks for the education so far …

[sdduuuude]

The concept of money supply vs. prices is crystal clear to me. Has been for a while. I get that part.

You are saying “price increases be damned – we are in a deflationary environment.” Right ?

And this is the that starts to brings clarity on the concept: “The problem we have is that debt is being destroyed through default faster than the Fed can get money injected into the system”

Where I lose it is – how is it that debt can be destroyed, and if so, how does that actually reduce the money supply?

Thanks for the education so far …

[ltokuda]

Josh, thanks for the great explaination on your views of inflation. I’m still trying to get my head around it but your posts have been a big help. There’s one part of your post that I’m a little unclear about:

“If that borrowing is put to productive use, its not inflationary. Say I borrow money to build a factory which then improves productive output or fosters competition. That doesn’t tend to be inflationary.”

“However if I borrow money and pour ever more of it into something like housing, where the population is growing slowly or not at all, that becomes inflationary as ever more dollars chase ever fewer, or stagnant amount of resources.”

When you use the term “inflationary” above, are you actually talking about prices going up (rather than money in the system)? That seems to make sense to me. Here’s my interpretation of it:

It seems like once you borrow money, then you’ve added to the amount of money in the system. That, in itself is inflation. But if you use that money to produce products, then you’ve added another source of competition for the consumer’s money. This added competition for the consumer’s money tends to balance out the additional money supply. So that’s why this type of inflation doesn’t tend to drive up prices?

If you borrow money and buy a house with it, you’re also adding money to the system. This is also inflation. But buying a house doesn’t produce any products that consumers want. There is no additional competition for the consumer’s money. This imbalance leads to prices going up?

Do I have it right?

Regards,
ltokuda

[kewp]

The Fed doesn’t loan to you are I.

For the time being. That may change!

[kewp]

The Fed doesn’t loan to you are I.

For the time being. That may change!

[kewp]

The Fed doesn’t loan to you are I.

For the time being. That may change!

[kewp]

The Fed doesn’t loan to you are I.

For the time being. That may change!

[kewp]

The Fed doesn’t loan to you are I.

For the time being. That may change!

[barnaby33]

ltokuda, perhaps I misspoke. I’m figuring this stuff out as I go along too. Im not an economist (professional bullshitter) just a programmer who reads a lot.

You are correct, I used the term inflationary when I should have used something like, “asset price increase.” We are so used to using the word inflation to describe prices rising, even though I don’t agree, that even I do it now and again.

Borrowing money is by its nature inflationary. The lovely counterpart to that is that paying back the borrowed money is deflationary! You’ve destroyed the debt, but in a good way. For my way of thinking, under normal circumstances they cancel each other out. The question is, what are you left with?

So like most people I too concentrate on the EFFECTS of borrowing. Housing doubling in San Diego in 5 years being an obvious effect. Productivity to me is a function of deploying money borrowed or otherwise in a way which tends to pay for itself, or offer some non-monetary benefit of equal value to the borrower.

So in a housing bubble it may seem to be an effective use of borrowed money to lever up and buy a house, but watch out, if the demand isn’t pretty constant, you’ll end up with a monster house payment (debt service) and no one to take the albatross off your hands. So there is a physical artifact, the house, sitting there. If you can’t make the payment the bank takes the house from you and sells it. In the process the debt it cannot recover is destroyed.

Once enough of this “deflation” has occurred people take notice and start to hoard the money they do have. They don’t want to borrow, they want to save.

I am so done thinking for today.

Josh

[paramount]

Since last weekend and the Bear Sterns saga, the Fed began taking serious action.

We are now seeing the light at the end of the tunnel.

Well, that’s basically what Cramer said tonight.

[paramount]

Since last weekend and the Bear Sterns saga, the Fed began taking serious action.

We are now seeing the light at the end of the tunnel.

Well, that’s basically what Cramer said tonight.

[paramount]

Since last weekend and the Bear Sterns saga, the Fed began taking serious action.

We are now seeing the light at the end of the tunnel.

Well, that’s basically what Cramer said tonight.

[paramount]

Since last weekend and the Bear Sterns saga, the Fed began taking serious action.

We are now seeing the light at the end of the tunnel.

Well, that’s basically what Cramer said tonight.

[paramount]

Since last weekend and the Bear Sterns saga, the Fed began taking serious action.

We are now seeing the light at the end of the tunnel.

Well, that’s basically what Cramer said tonight.

[sdduuuude]

Lets get to the bottom of these deflation questions.

barnaby, JWM, 4plexowner – are you guys calling the top on gold at $1000 or not ?

[orthofrancis]

Since my last question wasn’t answered, or maybe I didn’t ask it the right way, let me rephrase.

Is it possible or likely in a deflationary period for 1) prices in general to drop (cost of groceries, house, cars, etc – I know that some imports may not follow the trend), and 2) and at the same time the dollar becomes less valuable vs other currencies – that it’s relative value goes down.

I’m just trying to understand that the dollar and it’s purchasing power in the USA may not be intimately linked to it’s buying power abroad.

I’m a scientist, and not an economist, and so please forgive me for not always using the correct contextual words for economists.

[JWM in SD]

JWM in SD
Orthofrancis….yes you basically have it right. However, consumables will rise in price generally for things you need to live and price will decrease for assets and luxury items…in general. The euro could dcline against $. the $ will probably decline against the Yen and swiss franc.

[barnaby33]

I don’t invest/speculate in gold or oil either. I just don’t have a good feeling for them. In general terms I think gold does well in times of immense stress, either inflationary or deflationary. If the stress or appearance of stress continues golds price will stay high. If not it will drop. I also have a general feeling that oil will come down. It always does, but the timing is impossible for me to guess at. I stay where its pretty safe, shorting financials and home builders, plus a few odds and ends.

Small plug: investing in gold/commodities is what Rich does for me.

Josh

[barnaby33]

I don’t invest/speculate in gold or oil either. I just don’t have a good feeling for them. In general terms I think gold does well in times of immense stress, either inflationary or deflationary. If the stress or appearance of stress continues golds price will stay high. If not it will drop. I also have a general feeling that oil will come down. It always does, but the timing is impossible for me to guess at. I stay where its pretty safe, shorting financials and home builders, plus a few odds and ends.

Small plug: investing in gold/commodities is what Rich does for me.

Josh

[barnaby33]

I don’t invest/speculate in gold or oil either. I just don’t have a good feeling for them. In general terms I think gold does well in times of immense stress, either inflationary or deflationary. If the stress or appearance of stress continues golds price will stay high. If not it will drop. I also have a general feeling that oil will come down. It always does, but the timing is impossible for me to guess at. I stay where its pretty safe, shorting financials and home builders, plus a few odds and ends.

Small plug: investing in gold/commodities is what Rich does for me.

Josh

[barnaby33]

I don’t invest/speculate in gold or oil either. I just don’t have a good feeling for them. In general terms I think gold does well in times of immense stress, either inflationary or deflationary. If the stress or appearance of stress continues golds price will stay high. If not it will drop. I also have a general feeling that oil will come down. It always does, but the timing is impossible for me to guess at. I stay where its pretty safe, shorting financials and home builders, plus a few odds and ends.

Small plug: investing in gold/commodities is what Rich does for me.

Josh

[barnaby33]

I don’t invest/speculate in gold or oil either. I just don’t have a good feeling for them. In general terms I think gold does well in times of immense stress, either inflationary or deflationary. If the stress or appearance of stress continues golds price will stay high. If not it will drop. I also have a general feeling that oil will come down. It always does, but the timing is impossible for me to guess at. I stay where its pretty safe, shorting financials and home builders, plus a few odds and ends.

Small plug: investing in gold/commodities is what Rich does for me.

Josh

[JWM in SD]

JWM in SD
Orthofrancis….yes you basically have it right. However, consumables will rise in price generally for things you need to live and price will decrease for assets and luxury items…in general. The euro could dcline against $. the $ will probably decline against the Yen and swiss franc.

[JWM in SD]

JWM in SD
Orthofrancis….yes you basically have it right. However, consumables will rise in price generally for things you need to live and price will decrease for assets and luxury items…in general. The euro could dcline against $. the $ will probably decline against the Yen and swiss franc.

[JWM in SD]

JWM in SD
Orthofrancis….yes you basically have it right. However, consumables will rise in price generally for things you need to live and price will decrease for assets and luxury items…in general. The euro could dcline against $. the $ will probably decline against the Yen and swiss franc.

[JWM in SD]

JWM in SD
Orthofrancis….yes you basically have it right. However, consumables will rise in price generally for things you need to live and price will decrease for assets and luxury items…in general. The euro could dcline against $. the $ will probably decline against the Yen and swiss franc.

[orthofrancis]

Since my last question wasn’t answered, or maybe I didn’t ask it the right way, let me rephrase.

Is it possible or likely in a deflationary period for 1) prices in general to drop (cost of groceries, house, cars, etc – I know that some imports may not follow the trend), and 2) and at the same time the dollar becomes less valuable vs other currencies – that it’s relative value goes down.

I’m just trying to understand that the dollar and it’s purchasing power in the USA may not be intimately linked to it’s buying power abroad.

I’m a scientist, and not an economist, and so please forgive me for not always using the correct contextual words for economists.

[orthofrancis]

Since my last question wasn’t answered, or maybe I didn’t ask it the right way, let me rephrase.

Is it possible or likely in a deflationary period for 1) prices in general to drop (cost of groceries, house, cars, etc – I know that some imports may not follow the trend), and 2) and at the same time the dollar becomes less valuable vs other currencies – that it’s relative value goes down.

I’m just trying to understand that the dollar and it’s purchasing power in the USA may not be intimately linked to it’s buying power abroad.

I’m a scientist, and not an economist, and so please forgive me for not always using the correct contextual words for economists.

[orthofrancis]

Since my last question wasn’t answered, or maybe I didn’t ask it the right way, let me rephrase.

Is it possible or likely in a deflationary period for 1) prices in general to drop (cost of groceries, house, cars, etc – I know that some imports may not follow the trend), and 2) and at the same time the dollar becomes less valuable vs other currencies – that it’s relative value goes down.

I’m just trying to understand that the dollar and it’s purchasing power in the USA may not be intimately linked to it’s buying power abroad.

I’m a scientist, and not an economist, and so please forgive me for not always using the correct contextual words for economists.

[orthofrancis]

Since my last question wasn’t answered, or maybe I didn’t ask it the right way, let me rephrase.

Is it possible or likely in a deflationary period for 1) prices in general to drop (cost of groceries, house, cars, etc – I know that some imports may not follow the trend), and 2) and at the same time the dollar becomes less valuable vs other currencies – that it’s relative value goes down.

I’m just trying to understand that the dollar and it’s purchasing power in the USA may not be intimately linked to it’s buying power abroad.

I’m a scientist, and not an economist, and so please forgive me for not always using the correct contextual words for economists.

[JWM in SD]

JWM in SD
I don’t make calls like that. Gold will probably crash with the market due to positions being unwound and start climbing again. I am not a gold buyer right now.

[JWM in SD]

JWM in SD
I don’t make calls like that. Gold will probably crash with the market due to positions being unwound and start climbing again. I am not a gold buyer right now.

[JWM in SD]

JWM in SD
I don’t make calls like that. Gold will probably crash with the market due to positions being unwound and start climbing again. I am not a gold buyer right now.

[JWM in SD]

JWM in SD
I don’t make calls like that. Gold will probably crash with the market due to positions being unwound and start climbing again. I am not a gold buyer right now.

[JWM in SD]

JWM in SD
I don’t make calls like that. Gold will probably crash with the market due to positions being unwound and start climbing again. I am not a gold buyer right now.

[JWM in SD]

JWM in SD
I don’t make calls like that. Gold will probably crash with the market due to positions being unwound and start climbing again. I am not a gold buyer right now.

[JWM in SD]

JWM in SD
I don’t make calls like that. Gold will probably crash with the market due to positions being unwound and start climbing again. I am not a gold buyer right now.

[JWM in SD]

JWM in SD
I don’t make calls like that. Gold will probably crash with the market due to positions being unwound and start climbing again. I am not a gold buyer right now.

[JWM in SD]

JWM in SD
I don’t make calls like that. Gold will probably crash with the market due to positions being unwound and start climbing again. I am not a gold buyer right now.

[JWM in SD]

JWM in SD
I don’t make calls like that. Gold will probably crash with the market due to positions being unwound and start climbing again. I am not a gold buyer right now.

[sdduuuude]

Lets get to the bottom of these deflation questions.

barnaby, JWM, 4plexowner – are you guys calling the top on gold at $1000 or not ?

[sdduuuude]

Lets get to the bottom of these deflation questions.

barnaby, JWM, 4plexowner – are you guys calling the top on gold at $1000 or not ?

[sdduuuude]

Lets get to the bottom of these deflation questions.

barnaby, JWM, 4plexowner – are you guys calling the top on gold at $1000 or not ?

[sdduuuude]

Lets get to the bottom of these deflation questions.

barnaby, JWM, 4plexowner – are you guys calling the top on gold at $1000 or not ?

[barnaby33]

ltokuda, perhaps I misspoke. I’m figuring this stuff out as I go along too. Im not an economist (professional bullshitter) just a programmer who reads a lot.

You are correct, I used the term inflationary when I should have used something like, “asset price increase.” We are so used to using the word inflation to describe prices rising, even though I don’t agree, that even I do it now and again.

Borrowing money is by its nature inflationary. The lovely counterpart to that is that paying back the borrowed money is deflationary! You’ve destroyed the debt, but in a good way. For my way of thinking, under normal circumstances they cancel each other out. The question is, what are you left with?

So like most people I too concentrate on the EFFECTS of borrowing. Housing doubling in San Diego in 5 years being an obvious effect. Productivity to me is a function of deploying money borrowed or otherwise in a way which tends to pay for itself, or offer some non-monetary benefit of equal value to the borrower.

So in a housing bubble it may seem to be an effective use of borrowed money to lever up and buy a house, but watch out, if the demand isn’t pretty constant, you’ll end up with a monster house payment (debt service) and no one to take the albatross off your hands. So there is a physical artifact, the house, sitting there. If you can’t make the payment the bank takes the house from you and sells it. In the process the debt it cannot recover is destroyed.

Once enough of this “deflation” has occurred people take notice and start to hoard the money they do have. They don’t want to borrow, they want to save.

I am so done thinking for today.

Josh

[barnaby33]

ltokuda, perhaps I misspoke. I’m figuring this stuff out as I go along too. Im not an economist (professional bullshitter) just a programmer who reads a lot.

You are correct, I used the term inflationary when I should have used something like, “asset price increase.” We are so used to using the word inflation to describe prices rising, even though I don’t agree, that even I do it now and again.

Borrowing money is by its nature inflationary. The lovely counterpart to that is that paying back the borrowed money is deflationary! You’ve destroyed the debt, but in a good way. For my way of thinking, under normal circumstances they cancel each other out. The question is, what are you left with?

So like most people I too concentrate on the EFFECTS of borrowing. Housing doubling in San Diego in 5 years being an obvious effect. Productivity to me is a function of deploying money borrowed or otherwise in a way which tends to pay for itself, or offer some non-monetary benefit of equal value to the borrower.

So in a housing bubble it may seem to be an effective use of borrowed money to lever up and buy a house, but watch out, if the demand isn’t pretty constant, you’ll end up with a monster house payment (debt service) and no one to take the albatross off your hands. So there is a physical artifact, the house, sitting there. If you can’t make the payment the bank takes the house from you and sells it. In the process the debt it cannot recover is destroyed.

Once enough of this “deflation” has occurred people take notice and start to hoard the money they do have. They don’t want to borrow, they want to save.

I am so done thinking for today.

Josh

[barnaby33]

ltokuda, perhaps I misspoke. I’m figuring this stuff out as I go along too. Im not an economist (professional bullshitter) just a programmer who reads a lot.

You are correct, I used the term inflationary when I should have used something like, “asset price increase.” We are so used to using the word inflation to describe prices rising, even though I don’t agree, that even I do it now and again.

Borrowing money is by its nature inflationary. The lovely counterpart to that is that paying back the borrowed money is deflationary! You’ve destroyed the debt, but in a good way. For my way of thinking, under normal circumstances they cancel each other out. The question is, what are you left with?

So like most people I too concentrate on the EFFECTS of borrowing. Housing doubling in San Diego in 5 years being an obvious effect. Productivity to me is a function of deploying money borrowed or otherwise in a way which tends to pay for itself, or offer some non-monetary benefit of equal value to the borrower.

So in a housing bubble it may seem to be an effective use of borrowed money to lever up and buy a house, but watch out, if the demand isn’t pretty constant, you’ll end up with a monster house payment (debt service) and no one to take the albatross off your hands. So there is a physical artifact, the house, sitting there. If you can’t make the payment the bank takes the house from you and sells it. In the process the debt it cannot recover is destroyed.

Once enough of this “deflation” has occurred people take notice and start to hoard the money they do have. They don’t want to borrow, they want to save.

I am so done thinking for today.

Josh

[barnaby33]

ltokuda, perhaps I misspoke. I’m figuring this stuff out as I go along too. Im not an economist (professional bullshitter) just a programmer who reads a lot.

You are correct, I used the term inflationary when I should have used something like, “asset price increase.” We are so used to using the word inflation to describe prices rising, even though I don’t agree, that even I do it now and again.

Borrowing money is by its nature inflationary. The lovely counterpart to that is that paying back the borrowed money is deflationary! You’ve destroyed the debt, but in a good way. For my way of thinking, under normal circumstances they cancel each other out. The question is, what are you left with?

So like most people I too concentrate on the EFFECTS of borrowing. Housing doubling in San Diego in 5 years being an obvious effect. Productivity to me is a function of deploying money borrowed or otherwise in a way which tends to pay for itself, or offer some non-monetary benefit of equal value to the borrower.

So in a housing bubble it may seem to be an effective use of borrowed money to lever up and buy a house, but watch out, if the demand isn’t pretty constant, you’ll end up with a monster house payment (debt service) and no one to take the albatross off your hands. So there is a physical artifact, the house, sitting there. If you can’t make the payment the bank takes the house from you and sells it. In the process the debt it cannot recover is destroyed.

Once enough of this “deflation” has occurred people take notice and start to hoard the money they do have. They don’t want to borrow, they want to save.

I am so done thinking for today.

Josh

[ltokuda]

Josh, thanks for the great explaination on your views of inflation. I’m still trying to get my head around it but your posts have been a big help. There’s one part of your post that I’m a little unclear about:

“If that borrowing is put to productive use, its not inflationary. Say I borrow money to build a factory which then improves productive output or fosters competition. That doesn’t tend to be inflationary.”

“However if I borrow money and pour ever more of it into something like housing, where the population is growing slowly or not at all, that becomes inflationary as ever more dollars chase ever fewer, or stagnant amount of resources.”

When you use the term “inflationary” above, are you actually talking about prices going up (rather than money in the system)? That seems to make sense to me. Here’s my interpretation of it:

It seems like once you borrow money, then you’ve added to the amount of money in the system. That, in itself is inflation. But if you use that money to produce products, then you’ve added another source of competition for the consumer’s money. This added competition for the consumer’s money tends to balance out the additional money supply. So that’s why this type of inflation doesn’t tend to drive up prices?

If you borrow money and buy a house with it, you’re also adding money to the system. This is also inflation. But buying a house doesn’t produce any products that consumers want. There is no additional competition for the consumer’s money. This imbalance leads to prices going up?

Do I have it right?

Regards,
ltokuda

[ltokuda]

Josh, thanks for the great explaination on your views of inflation. I’m still trying to get my head around it but your posts have been a big help. There’s one part of your post that I’m a little unclear about:

“If that borrowing is put to productive use, its not inflationary. Say I borrow money to build a factory which then improves productive output or fosters competition. That doesn’t tend to be inflationary.”

“However if I borrow money and pour ever more of it into something like housing, where the population is growing slowly or not at all, that becomes inflationary as ever more dollars chase ever fewer, or stagnant amount of resources.”

When you use the term “inflationary” above, are you actually talking about prices going up (rather than money in the system)? That seems to make sense to me. Here’s my interpretation of it:

It seems like once you borrow money, then you’ve added to the amount of money in the system. That, in itself is inflation. But if you use that money to produce products, then you’ve added another source of competition for the consumer’s money. This added competition for the consumer’s money tends to balance out the additional money supply. So that’s why this type of inflation doesn’t tend to drive up prices?

If you borrow money and buy a house with it, you’re also adding money to the system. This is also inflation. But buying a house doesn’t produce any products that consumers want. There is no additional competition for the consumer’s money. This imbalance leads to prices going up?

Do I have it right?

Regards,
ltokuda

[ltokuda]

Josh, thanks for the great explaination on your views of inflation. I’m still trying to get my head around it but your posts have been a big help. There’s one part of your post that I’m a little unclear about:

“If that borrowing is put to productive use, its not inflationary. Say I borrow money to build a factory which then improves productive output or fosters competition. That doesn’t tend to be inflationary.”

“However if I borrow money and pour ever more of it into something like housing, where the population is growing slowly or not at all, that becomes inflationary as ever more dollars chase ever fewer, or stagnant amount of resources.”

When you use the term “inflationary” above, are you actually talking about prices going up (rather than money in the system)? That seems to make sense to me. Here’s my interpretation of it:

It seems like once you borrow money, then you’ve added to the amount of money in the system. That, in itself is inflation. But if you use that money to produce products, then you’ve added another source of competition for the consumer’s money. This added competition for the consumer’s money tends to balance out the additional money supply. So that’s why this type of inflation doesn’t tend to drive up prices?

If you borrow money and buy a house with it, you’re also adding money to the system. This is also inflation. But buying a house doesn’t produce any products that consumers want. There is no additional competition for the consumer’s money. This imbalance leads to prices going up?

Do I have it right?

Regards,
ltokuda

[ltokuda]

Josh, thanks for the great explaination on your views of inflation. I’m still trying to get my head around it but your posts have been a big help. There’s one part of your post that I’m a little unclear about:

“If that borrowing is put to productive use, its not inflationary. Say I borrow money to build a factory which then improves productive output or fosters competition. That doesn’t tend to be inflationary.”

“However if I borrow money and pour ever more of it into something like housing, where the population is growing slowly or not at all, that becomes inflationary as ever more dollars chase ever fewer, or stagnant amount of resources.”

When you use the term “inflationary” above, are you actually talking about prices going up (rather than money in the system)? That seems to make sense to me. Here’s my interpretation of it:

It seems like once you borrow money, then you’ve added to the amount of money in the system. That, in itself is inflation. But if you use that money to produce products, then you’ve added another source of competition for the consumer’s money. This added competition for the consumer’s money tends to balance out the additional money supply. So that’s why this type of inflation doesn’t tend to drive up prices?

If you borrow money and buy a house with it, you’re also adding money to the system. This is also inflation. But buying a house doesn’t produce any products that consumers want. There is no additional competition for the consumer’s money. This imbalance leads to prices going up?

Do I have it right?

Regards,
ltokuda

[barnaby33]

No what I meant is that lowering interest rates encourages borrowing. If that borrowing is put to productive use, its not inflationary. Say I borrow money to build a factory which then improves productive output or fosters competition. That doesn’t tend to be inflationary.

However if I borrow money and pour ever more of it into something like housing, where the population is growing slowly or not at all, that becomes inflationary as ever more dollars chase ever fewer, or stagnant amount of resources.

Inflation isn’t an increase in prices, to me at least. Inflation is an increase in the money supply. Depending on what you do with that money prices can rise or fall. Our economy hasn’t expanded in productive capacity, at nearly the rate at which we have created credit, prices rise to compensate.

Falling prices aren’t deflation either. We happen to have deflation and rising prices (at least for now and in some areas) at the same time! I don’t have enough of an understanding to predict if this will stay so, or that deflation will actually strengthen the dollar causing prices to fall. I am pretty sure that whatever else happens deflation is accelerating and will continue to do so for the near term. The fallacy is that the Fed thinks it can stop it. The crime is that it is trying.

Josh

[barnaby33]

No what I meant is that lowering interest rates encourages borrowing. If that borrowing is put to productive use, its not inflationary. Say I borrow money to build a factory which then improves productive output or fosters competition. That doesn’t tend to be inflationary.

However if I borrow money and pour ever more of it into something like housing, where the population is growing slowly or not at all, that becomes inflationary as ever more dollars chase ever fewer, or stagnant amount of resources.

Inflation isn’t an increase in prices, to me at least. Inflation is an increase in the money supply. Depending on what you do with that money prices can rise or fall. Our economy hasn’t expanded in productive capacity, at nearly the rate at which we have created credit, prices rise to compensate.

Falling prices aren’t deflation either. We happen to have deflation and rising prices (at least for now and in some areas) at the same time! I don’t have enough of an understanding to predict if this will stay so, or that deflation will actually strengthen the dollar causing prices to fall. I am pretty sure that whatever else happens deflation is accelerating and will continue to do so for the near term. The fallacy is that the Fed thinks it can stop it. The crime is that it is trying.

Josh

[barnaby33]

No what I meant is that lowering interest rates encourages borrowing. If that borrowing is put to productive use, its not inflationary. Say I borrow money to build a factory which then improves productive output or fosters competition. That doesn’t tend to be inflationary.

However if I borrow money and pour ever more of it into something like housing, where the population is growing slowly or not at all, that becomes inflationary as ever more dollars chase ever fewer, or stagnant amount of resources.

Inflation isn’t an increase in prices, to me at least. Inflation is an increase in the money supply. Depending on what you do with that money prices can rise or fall. Our economy hasn’t expanded in productive capacity, at nearly the rate at which we have created credit, prices rise to compensate.

Falling prices aren’t deflation either. We happen to have deflation and rising prices (at least for now and in some areas) at the same time! I don’t have enough of an understanding to predict if this will stay so, or that deflation will actually strengthen the dollar causing prices to fall. I am pretty sure that whatever else happens deflation is accelerating and will continue to do so for the near term. The fallacy is that the Fed thinks it can stop it. The crime is that it is trying.

Josh

[barnaby33]

No what I meant is that lowering interest rates encourages borrowing. If that borrowing is put to productive use, its not inflationary. Say I borrow money to build a factory which then improves productive output or fosters competition. That doesn’t tend to be inflationary.

However if I borrow money and pour ever more of it into something like housing, where the population is growing slowly or not at all, that becomes inflationary as ever more dollars chase ever fewer, or stagnant amount of resources.

Inflation isn’t an increase in prices, to me at least. Inflation is an increase in the money supply. Depending on what you do with that money prices can rise or fall. Our economy hasn’t expanded in productive capacity, at nearly the rate at which we have created credit, prices rise to compensate.

Falling prices aren’t deflation either. We happen to have deflation and rising prices (at least for now and in some areas) at the same time! I don’t have enough of an understanding to predict if this will stay so, or that deflation will actually strengthen the dollar causing prices to fall. I am pretty sure that whatever else happens deflation is accelerating and will continue to do so for the near term. The fallacy is that the Fed thinks it can stop it. The crime is that it is trying.

Josh

[sdduuuude]

OK, barnaby. A good start. As I said, it is slow to sink in.

You said “lowering (is) an inflationary tactic if the money has nowhere priductive to go”

Don’t you mean, lowering is an inflationary tactic if the money has SOMEWHERE to go?

So, the idea is that the money supply is shrinking, not growing because the money that was created by new debt (as opposed to actual printing) has gone bye-bye ?

And the fed is lowering but not necessarily lending because the banks don’t want to borrow from the fed to lend out.

[sdduuuude]

OK, barnaby. A good start. As I said, it is slow to sink in.

You said “lowering (is) an inflationary tactic if the money has nowhere priductive to go”

Don’t you mean, lowering is an inflationary tactic if the money has SOMEWHERE to go?

So, the idea is that the money supply is shrinking, not growing because the money that was created by new debt (as opposed to actual printing) has gone bye-bye ?

And the fed is lowering but not necessarily lending because the banks don’t want to borrow from the fed to lend out.

[sdduuuude]

OK, barnaby. A good start. As I said, it is slow to sink in.

You said “lowering (is) an inflationary tactic if the money has nowhere priductive to go”

Don’t you mean, lowering is an inflationary tactic if the money has SOMEWHERE to go?

So, the idea is that the money supply is shrinking, not growing because the money that was created by new debt (as opposed to actual printing) has gone bye-bye ?

And the fed is lowering but not necessarily lending because the banks don’t want to borrow from the fed to lend out.

[sdduuuude]

OK, barnaby. A good start. As I said, it is slow to sink in.

You said “lowering (is) an inflationary tactic if the money has nowhere priductive to go”

Don’t you mean, lowering is an inflationary tactic if the money has SOMEWHERE to go?

So, the idea is that the money supply is shrinking, not growing because the money that was created by new debt (as opposed to actual printing) has gone bye-bye ?

And the fed is lowering but not necessarily lending because the banks don’t want to borrow from the fed to lend out.

[barnaby33]

sdduuuude I can add some color to the commentary. Most people who are deflationists look at deflation as a monetary event. If you will accept that in our system, money and credit are fungible, two that the last seven years have seen a huge run-up in the creation of that credit and finally that much of that credit is or will be destroyed you probably are a deflationist.

Most people though by no means all who are inflationists believe we can print our way out of the current problem, we can’t for several reasons. If deflation is a monetary event, so is inflation (forget rising prices thats just a symptom of inflation at times.) The inflation has already occurred via all of the lending that has been done against the collateral available (mostly houses.) Now that the collateral is over-encumbered, much of that debt is being destroyed as the borrowers default.

The problem we have is that debt is being destroyed through default faster than the Fed can get money injected into the system. The TAF and the newer spiffier bank bailout are just mechanisms to get money into circulation to stimulate spending. Furthermore the Fed cannot make banks lend. Since most of the collateral that banks would normally lend against is over-encumbered, or not worth what is already lent against it, they are scared to lend except at ever higher rates. That is why even though the Fed keeps lowering (an inflationary tactic if the money has nowhere productive to go) mortgages and consumer credit are getting more expensive. The Fed could just print. It can in fact do that (I was wrong in thinking that it couldn’t), but that would quickly cause an exodus from the dollar, something we have already seen but which would accelerate.

Furthermore how all of the collateral became over-encumbered is through the magic of fraud. Wall street convinced itself and others that you really could slice and dice risk and make it go away. The fact that it has turned out to be a disaster is why the nobody trusts the ratings assigned to all sorts of debt and so people with money refuse to buy the debt.

So the inflation of the last few years is leading to deflation, and the whole kit and kaboodle was based on the fraudulent idea that you really can squeeze 3 nickels from a dime. All of this was all too willingly aided by the hard slacking American consumer who was too dumb to, “do the math.”

Josh

[barnaby33]

sdduuuude I can add some color to the commentary. Most people who are deflationists look at deflation as a monetary event. If you will accept that in our system, money and credit are fungible, two that the last seven years have seen a huge run-up in the creation of that credit and finally that much of that credit is or will be destroyed you probably are a deflationist.

Most people though by no means all who are inflationists believe we can print our way out of the current problem, we can’t for several reasons. If deflation is a monetary event, so is inflation (forget rising prices thats just a symptom of inflation at times.) The inflation has already occurred via all of the lending that has been done against the collateral available (mostly houses.) Now that the collateral is over-encumbered, much of that debt is being destroyed as the borrowers default.

The problem we have is that debt is being destroyed through default faster than the Fed can get money injected into the system. The TAF and the newer spiffier bank bailout are just mechanisms to get money into circulation to stimulate spending. Furthermore the Fed cannot make banks lend. Since most of the collateral that banks would normally lend against is over-encumbered, or not worth what is already lent against it, they are scared to lend except at ever higher rates. That is why even though the Fed keeps lowering (an inflationary tactic if the money has nowhere productive to go) mortgages and consumer credit are getting more expensive. The Fed could just print. It can in fact do that (I was wrong in thinking that it couldn’t), but that would quickly cause an exodus from the dollar, something we have already seen but which would accelerate.

Furthermore how all of the collateral became over-encumbered is through the magic of fraud. Wall street convinced itself and others that you really could slice and dice risk and make it go away. The fact that it has turned out to be a disaster is why the nobody trusts the ratings assigned to all sorts of debt and so people with money refuse to buy the debt.

So the inflation of the last few years is leading to deflation, and the whole kit and kaboodle was based on the fraudulent idea that you really can squeeze 3 nickels from a dime. All of this was all too willingly aided by the hard slacking American consumer who was too dumb to, “do the math.”

Josh

[barnaby33]

sdduuuude I can add some color to the commentary. Most people who are deflationists look at deflation as a monetary event. If you will accept that in our system, money and credit are fungible, two that the last seven years have seen a huge run-up in the creation of that credit and finally that much of that credit is or will be destroyed you probably are a deflationist.

Most people though by no means all who are inflationists believe we can print our way out of the current problem, we can’t for several reasons. If deflation is a monetary event, so is inflation (forget rising prices thats just a symptom of inflation at times.) The inflation has already occurred via all of the lending that has been done against the collateral available (mostly houses.) Now that the collateral is over-encumbered, much of that debt is being destroyed as the borrowers default.

The problem we have is that debt is being destroyed through default faster than the Fed can get money injected into the system. The TAF and the newer spiffier bank bailout are just mechanisms to get money into circulation to stimulate spending. Furthermore the Fed cannot make banks lend. Since most of the collateral that banks would normally lend against is over-encumbered, or not worth what is already lent against it, they are scared to lend except at ever higher rates. That is why even though the Fed keeps lowering (an inflationary tactic if the money has nowhere productive to go) mortgages and consumer credit are getting more expensive. The Fed could just print. It can in fact do that (I was wrong in thinking that it couldn’t), but that would quickly cause an exodus from the dollar, something we have already seen but which would accelerate.

Furthermore how all of the collateral became over-encumbered is through the magic of fraud. Wall street convinced itself and others that you really could slice and dice risk and make it go away. The fact that it has turned out to be a disaster is why the nobody trusts the ratings assigned to all sorts of debt and so people with money refuse to buy the debt.

So the inflation of the last few years is leading to deflation, and the whole kit and kaboodle was based on the fraudulent idea that you really can squeeze 3 nickels from a dime. All of this was all too willingly aided by the hard slacking American consumer who was too dumb to, “do the math.”

Josh

[barnaby33]

sdduuuude I can add some color to the commentary. Most people who are deflationists look at deflation as a monetary event. If you will accept that in our system, money and credit are fungible, two that the last seven years have seen a huge run-up in the creation of that credit and finally that much of that credit is or will be destroyed you probably are a deflationist.

Most people though by no means all who are inflationists believe we can print our way out of the current problem, we can’t for several reasons. If deflation is a monetary event, so is inflation (forget rising prices thats just a symptom of inflation at times.) The inflation has already occurred via all of the lending that has been done against the collateral available (mostly houses.) Now that the collateral is over-encumbered, much of that debt is being destroyed as the borrowers default.

The problem we have is that debt is being destroyed through default faster than the Fed can get money injected into the system. The TAF and the newer spiffier bank bailout are just mechanisms to get money into circulation to stimulate spending. Furthermore the Fed cannot make banks lend. Since most of the collateral that banks would normally lend against is over-encumbered, or not worth what is already lent against it, they are scared to lend except at ever higher rates. That is why even though the Fed keeps lowering (an inflationary tactic if the money has nowhere productive to go) mortgages and consumer credit are getting more expensive. The Fed could just print. It can in fact do that (I was wrong in thinking that it couldn’t), but that would quickly cause an exodus from the dollar, something we have already seen but which would accelerate.

Furthermore how all of the collateral became over-encumbered is through the magic of fraud. Wall street convinced itself and others that you really could slice and dice risk and make it go away. The fact that it has turned out to be a disaster is why the nobody trusts the ratings assigned to all sorts of debt and so people with money refuse to buy the debt.

So the inflation of the last few years is leading to deflation, and the whole kit and kaboodle was based on the fraudulent idea that you really can squeeze 3 nickels from a dime. All of this was all too willingly aided by the hard slacking American consumer who was too dumb to, “do the math.”

Josh

[sdduuuude]

JWM. I have been following your deflation comments and those of Mish and my favorite piggington poster of all time – 4plexowner.

I can’t say it is quite sinking in. Sometimes I’m slow like that because I need to understand, in detail what you are saying before I have the “aha”. It hasn’t kicked in yet.

So, if you don’t mind, could you put some detail to this deflation thing, the theory behind it. The cause and effect.

I mean, I see the Feds cutting. I see the dollar dropping. It all says “devaluing dollar” = inflation, right?

Are you saying an upcoming deflationary period will be preceeded by an inflationary period, or will we drop right into it? Will the dollar devalue AND prices come down? Are you talking Gold? Oil? Stocks? Housing? Vegetables? Milk? Assets? Commodities? all deflating?

4plexowner mentioned some theory, but I can’t find the thread to read up on it.

Thanks in advance for the education.

[sdduuuude]

JWM. I have been following your deflation comments and those of Mish and my favorite piggington poster of all time – 4plexowner.

I can’t say it is quite sinking in. Sometimes I’m slow like that because I need to understand, in detail what you are saying before I have the “aha”. It hasn’t kicked in yet.

So, if you don’t mind, could you put some detail to this deflation thing, the theory behind it. The cause and effect.

I mean, I see the Feds cutting. I see the dollar dropping. It all says “devaluing dollar” = inflation, right?

Are you saying an upcoming deflationary period will be preceeded by an inflationary period, or will we drop right into it? Will the dollar devalue AND prices come down? Are you talking Gold? Oil? Stocks? Housing? Vegetables? Milk? Assets? Commodities? all deflating?

4plexowner mentioned some theory, but I can’t find the thread to read up on it.

Thanks in advance for the education.

[sdduuuude]

JWM. I have been following your deflation comments and those of Mish and my favorite piggington poster of all time – 4plexowner.

I can’t say it is quite sinking in. Sometimes I’m slow like that because I need to understand, in detail what you are saying before I have the “aha”. It hasn’t kicked in yet.

So, if you don’t mind, could you put some detail to this deflation thing, the theory behind it. The cause and effect.

I mean, I see the Feds cutting. I see the dollar dropping. It all says “devaluing dollar” = inflation, right?

Are you saying an upcoming deflationary period will be preceeded by an inflationary period, or will we drop right into it? Will the dollar devalue AND prices come down? Are you talking Gold? Oil? Stocks? Housing? Vegetables? Milk? Assets? Commodities? all deflating?

4plexowner mentioned some theory, but I can’t find the thread to read up on it.

Thanks in advance for the education.

[sdduuuude]

JWM. I have been following your deflation comments and those of Mish and my favorite piggington poster of all time – 4plexowner.

I can’t say it is quite sinking in. Sometimes I’m slow like that because I need to understand, in detail what you are saying before I have the “aha”. It hasn’t kicked in yet.

So, if you don’t mind, could you put some detail to this deflation thing, the theory behind it. The cause and effect.

I mean, I see the Feds cutting. I see the dollar dropping. It all says “devaluing dollar” = inflation, right?

Are you saying an upcoming deflationary period will be preceeded by an inflationary period, or will we drop right into it? Will the dollar devalue AND prices come down? Are you talking Gold? Oil? Stocks? Housing? Vegetables? Milk? Assets? Commodities? all deflating?

4plexowner mentioned some theory, but I can’t find the thread to read up on it.

Thanks in advance for the education.

[JWM in SD]

JWM in SD

“Putting more money in the system is a necessity, but it doesn’t help that much. It’s like pushing string or herding cats.”

And that is why we are in for DEFLATION…not INFLATION. The Inflationistas will eat their words when it all said and done. Watch…..

[JWM in SD]

JWM in SD

“Putting more money in the system is a necessity, but it doesn’t help that much. It’s like pushing string or herding cats.”

And that is why we are in for DEFLATION…not INFLATION. The Inflationistas will eat their words when it all said and done. Watch…..

[JWM in SD]

JWM in SD

“Putting more money in the system is a necessity, but it doesn’t help that much. It’s like pushing string or herding cats.”

And that is why we are in for DEFLATION…not INFLATION. The Inflationistas will eat their words when it all said and done. Watch…..

[JWM in SD]

JWM in SD

“Putting more money in the system is a necessity, but it doesn’t help that much. It’s like pushing string or herding cats.”

And that is why we are in for DEFLATION…not INFLATION. The Inflationistas will eat their words when it all said and done. Watch…..

[VanMorrisonFan]

Other financial writers and commentators have written about this, and I think they are on to something.

The problem right now is not a shortage of liquidity. There is massive liquidity in the system. The problem is the lack of confidence in value indicators – i.e., no one is certain that the quoted prices for financial assets are anywhere near their real underlying value.

The “bail-out” of Bear Stearns was a necessity. Had they gone under it could have been the start of a melt-down. However, the bail-out causes problems of its own. If JP Morgan was only willing to offer $2 a share for a company that two days before many people thought was worth $30 a share (and whose HQ building on Madison Avenue is probably worth $8 per share) what does that say about valuations?

Putting more money in the system is a necessity, but it doesn’t help that much. It’s like pushing string or herding cats.

[VanMorrisonFan]

Other financial writers and commentators have written about this, and I think they are on to something.

The problem right now is not a shortage of liquidity. There is massive liquidity in the system. The problem is the lack of confidence in value indicators – i.e., no one is certain that the quoted prices for financial assets are anywhere near their real underlying value.

The “bail-out” of Bear Stearns was a necessity. Had they gone under it could have been the start of a melt-down. However, the bail-out causes problems of its own. If JP Morgan was only willing to offer $2 a share for a company that two days before many people thought was worth $30 a share (and whose HQ building on Madison Avenue is probably worth $8 per share) what does that say about valuations?

Putting more money in the system is a necessity, but it doesn’t help that much. It’s like pushing string or herding cats.

[VanMorrisonFan]

Other financial writers and commentators have written about this, and I think they are on to something.

The problem right now is not a shortage of liquidity. There is massive liquidity in the system. The problem is the lack of confidence in value indicators – i.e., no one is certain that the quoted prices for financial assets are anywhere near their real underlying value.

The “bail-out” of Bear Stearns was a necessity. Had they gone under it could have been the start of a melt-down. However, the bail-out causes problems of its own. If JP Morgan was only willing to offer $2 a share for a company that two days before many people thought was worth $30 a share (and whose HQ building on Madison Avenue is probably worth $8 per share) what does that say about valuations?

Putting more money in the system is a necessity, but it doesn’t help that much. It’s like pushing string or herding cats.

[VanMorrisonFan]

Other financial writers and commentators have written about this, and I think they are on to something.

The problem right now is not a shortage of liquidity. There is massive liquidity in the system. The problem is the lack of confidence in value indicators – i.e., no one is certain that the quoted prices for financial assets are anywhere near their real underlying value.

The “bail-out” of Bear Stearns was a necessity. Had they gone under it could have been the start of a melt-down. However, the bail-out causes problems of its own. If JP Morgan was only willing to offer $2 a share for a company that two days before many people thought was worth $30 a share (and whose HQ building on Madison Avenue is probably worth $8 per share) what does that say about valuations?

Putting more money in the system is a necessity, but it doesn’t help that much. It’s like pushing string or herding cats.

[Coronita]

Maybe banks should try a new strategy unloading debt and selling stocks.

 

[img_assist|nid=6933|title=youwantfrieswiththat|desc=|link=node|align=left|width=466|height=350]

 

 

[Enorah]

LOL

[4plexowner]

LOL for me – ouch for Bear Sterns!

~

I think ‘Kondratiev Cycles’ is the theory you’re referring to

The Kondratiev Winter phase of the cycle predicts inflation in commodities and collapse of asset values

~

check out this snippet of a letter sent to George Ure, the editor of urbansurvival.com:

“George,

With the interest rate cuts Tuesday the FED has now done 5 actions in ONE week!! UNPRECEDENTED in my memory (which unfortunately is longer than I wish it was)

Tues 3/11: Helicopter drop of $200 Billion Dollars into the banking system Fri 3/14: Helicopter drop of unknown amount of $$ into Bears Stearns via Chase Bank Sun 3/16: Helicopter drop of additional $30 Billion Dollars into Bears Stearns via Chase Bank Sun 3/16: 1/4 point rate cut Tues 3/18: 3/4 point rate cut… ”

~

Anyone watching Bear Sterns stock price?
close thurs $57
close fri $30
trading range so far this week $2.84 to $8.50

I bet the Bear Sterns employees, who hold 30% of the company’s stock, could tell you something about deflation this week

[orthofrancis]

So please help me, and correct me if I’m wrong. If deflation does hit, would cash in the bank again become more valuable, and also become more valuable , say in comparison to the Euro?

[barnaby33]

orthofrancis. Ultimately you’ve jumped from an economic question to an investment question. Give me 50 dollars and I’ll tell you, my opinion.

Josh

[barnaby33]

orthofrancis. Ultimately you’ve jumped from an economic question to an investment question. Give me 50 dollars and I’ll tell you, my opinion.

Josh

[barnaby33]

orthofrancis. Ultimately you’ve jumped from an economic question to an investment question. Give me 50 dollars and I’ll tell you, my opinion.

Josh

[barnaby33]

orthofrancis. Ultimately you’ve jumped from an economic question to an investment question. Give me 50 dollars and I’ll tell you, my opinion.

Josh

[barnaby33]

orthofrancis. Ultimately you’ve jumped from an economic question to an investment question. Give me 50 dollars and I’ll tell you, my opinion.

Josh

[orthofrancis]

So please help me, and correct me if I’m wrong. If deflation does hit, would cash in the bank again become more valuable, and also become more valuable , say in comparison to the Euro?

[orthofrancis]

So please help me, and correct me if I’m wrong. If deflation does hit, would cash in the bank again become more valuable, and also become more valuable , say in comparison to the Euro?

[orthofrancis]

So please help me, and correct me if I’m wrong. If deflation does hit, would cash in the bank again become more valuable, and also become more valuable , say in comparison to the Euro?

[orthofrancis]

So please help me, and correct me if I’m wrong. If deflation does hit, would cash in the bank again become more valuable, and also become more valuable , say in comparison to the Euro?

[4plexowner]

LOL for me – ouch for Bear Sterns!

~

I think ‘Kondratiev Cycles’ is the theory you’re referring to

The Kondratiev Winter phase of the cycle predicts inflation in commodities and collapse of asset values

~

check out this snippet of a letter sent to George Ure, the editor of urbansurvival.com:

“George,

With the interest rate cuts Tuesday the FED has now done 5 actions in ONE week!! UNPRECEDENTED in my memory (which unfortunately is longer than I wish it was)

Tues 3/11: Helicopter drop of $200 Billion Dollars into the banking system Fri 3/14: Helicopter drop of unknown amount of $$ into Bears Stearns via Chase Bank Sun 3/16: Helicopter drop of additional $30 Billion Dollars into Bears Stearns via Chase Bank Sun 3/16: 1/4 point rate cut Tues 3/18: 3/4 point rate cut… ”

~

Anyone watching Bear Sterns stock price?
close thurs $57
close fri $30
trading range so far this week $2.84 to $8.50

I bet the Bear Sterns employees, who hold 30% of the company’s stock, could tell you something about deflation this week

[4plexowner]

LOL for me – ouch for Bear Sterns!

~

I think ‘Kondratiev Cycles’ is the theory you’re referring to

The Kondratiev Winter phase of the cycle predicts inflation in commodities and collapse of asset values

~

check out this snippet of a letter sent to George Ure, the editor of urbansurvival.com:

“George,

With the interest rate cuts Tuesday the FED has now done 5 actions in ONE week!! UNPRECEDENTED in my memory (which unfortunately is longer than I wish it was)

Tues 3/11: Helicopter drop of $200 Billion Dollars into the banking system Fri 3/14: Helicopter drop of unknown amount of $$ into Bears Stearns via Chase Bank Sun 3/16: Helicopter drop of additional $30 Billion Dollars into Bears Stearns via Chase Bank Sun 3/16: 1/4 point rate cut Tues 3/18: 3/4 point rate cut… ”

~

Anyone watching Bear Sterns stock price?
close thurs $57
close fri $30
trading range so far this week $2.84 to $8.50

I bet the Bear Sterns employees, who hold 30% of the company’s stock, could tell you something about deflation this week

[4plexowner]

LOL for me – ouch for Bear Sterns!

~

I think ‘Kondratiev Cycles’ is the theory you’re referring to

The Kondratiev Winter phase of the cycle predicts inflation in commodities and collapse of asset values

~

check out this snippet of a letter sent to George Ure, the editor of urbansurvival.com:

“George,

With the interest rate cuts Tuesday the FED has now done 5 actions in ONE week!! UNPRECEDENTED in my memory (which unfortunately is longer than I wish it was)

Tues 3/11: Helicopter drop of $200 Billion Dollars into the banking system Fri 3/14: Helicopter drop of unknown amount of $$ into Bears Stearns via Chase Bank Sun 3/16: Helicopter drop of additional $30 Billion Dollars into Bears Stearns via Chase Bank Sun 3/16: 1/4 point rate cut Tues 3/18: 3/4 point rate cut… ”

~

Anyone watching Bear Sterns stock price?
close thurs $57
close fri $30
trading range so far this week $2.84 to $8.50

I bet the Bear Sterns employees, who hold 30% of the company’s stock, could tell you something about deflation this week

[4plexowner]

LOL for me – ouch for Bear Sterns!

~

I think ‘Kondratiev Cycles’ is the theory you’re referring to

The Kondratiev Winter phase of the cycle predicts inflation in commodities and collapse of asset values

~

check out this snippet of a letter sent to George Ure, the editor of urbansurvival.com:

“George,

With the interest rate cuts Tuesday the FED has now done 5 actions in ONE week!! UNPRECEDENTED in my memory (which unfortunately is longer than I wish it was)

Tues 3/11: Helicopter drop of $200 Billion Dollars into the banking system Fri 3/14: Helicopter drop of unknown amount of $$ into Bears Stearns via Chase Bank Sun 3/16: Helicopter drop of additional $30 Billion Dollars into Bears Stearns via Chase Bank Sun 3/16: 1/4 point rate cut Tues 3/18: 3/4 point rate cut… ”

~

Anyone watching Bear Sterns stock price?
close thurs $57
close fri $30
trading range so far this week $2.84 to $8.50

I bet the Bear Sterns employees, who hold 30% of the company’s stock, could tell you something about deflation this week

[Enorah]

LOL

[Enorah]

LOL

[Enorah]

LOL

[Enorah]

LOL

[sdduuuude]

Holy crap, that’s funny.

That belongs right up there with the “Rich Poo Poo Head” posting.

[sdduuuude]

Holy crap, that’s funny.

That belongs right up there with the “Rich Poo Poo Head” posting.

[sdduuuude]

Holy crap, that’s funny.

That belongs right up there with the “Rich Poo Poo Head” posting.

[sdduuuude]

Holy crap, that’s funny.

That belongs right up there with the “Rich Poo Poo Head” posting.

[sdduuuude]

Holy crap, that’s funny.

That belongs right up there with the “Rich Poo Poo Head” posting.

[Coronita]

Maybe banks should try a new strategy unloading debt and selling stocks.

 

[img_assist|nid=6933|title=youwantfrieswiththat|desc=|link=node|align=left|width=466|height=350]

 

 

[Coronita]

Maybe banks should try a new strategy unloading debt and selling stocks.

 

[img_assist|nid=6933|title=youwantfrieswiththat|desc=|link=node|align=left|width=466|height=350]

 

 

[Coronita]

Maybe banks should try a new strategy unloading debt and selling stocks.

 

[img_assist|nid=6933|title=youwantfrieswiththat|desc=|link=node|align=left|width=466|height=350]

 

 

[Coronita]

Maybe banks should try a new strategy unloading debt and selling stocks.

 

[img_assist|nid=6933|title=youwantfrieswiththat|desc=|link=node|align=left|width=466|height=350]

 

 

[barnaby33]

So, when you are looking at the world as a deflationist, confident of your opinion, what actions/investments/decisions taken by the inflationary crowd look foolish and why?

Also, how does this deflationary world differ, qualitatively from the stagflation world? Instead of slowing economy and increasing money supply, we have a slowing economy and decreasing money supply ?

I can go that far, but the implications/repercussions escape me.

Good question. I don’t have all the answers. This has been the subject of some of Rich and my most heated debates, usually over some sort of charred meat.

In deflation, cash is king. Interest rates drop to zero as demand for credit dries up. So lets ask ourselves why these two axioms are so? We get deflation so rarely its hard to believe there are axioms about it. Last time it happened my 87 year old father was 8. Inflation is a much more comfortable subject as I’ve lived with it my whole life.

So we have a fiat monetary system, where the Fed threatens to constantly increase the supply of money therefor making deflation impossible. That makes us all feel like deflation isn’t possible however the world rarely works the way theory dictates. The Fed doesn’t loan to you are I. It loans to Banks, big banks, who in turn loan to smaller banks. The check on the Feds ability to print and print is that these banks want collateral for loans. So without good collateral the Fed can give away free money and you still won’t get it. This gets to the heart of demand for credit. You may want a new Lexus, but if you aren’t a good risk, or the collateral isn’t enough the bank won’t lend you the money.

Inflationistas ultimately believe that this is not a problem, that there is no liquidity trap. Another avenue and one I’ve discussed with Rich is extraordinary measures. This seems to be taking shape. The Fed using extraordinary measures to get the credit out to people who will use it via other means, like the TAF. I don’t think it will succeed, the problem isn’t liquidity its trust and solvency.

That brings us to the second point, cash is king. If you can’t get credit, your natural reaction is to stop spending as much and start saving. Another word for this is hoarding. The Fed considers this disastrous since our economy is built on all the lemmings spending spending spending. It causes debt defaults to rise, as the cost of getting money to service debt rises. This causes a cascade effect (or should) in defaults, which in turn causes more of the same.

I bought a motorcycle 2 weeks ago, used. I went to the Credit Union and they wanted 15.5% for an unsecured loan of 7k. I almost didn’t buy the bike. The days of easy access to credit are over. Prices will adjust accordingly, painfully so.

Just so people understand, I am not particularly a gold bug and I don’t believe the Fed is evil. Misguided, but not evil. All of the options on the table have high costs, some higher than others. I personally would rather see all the shit come out at once, burn down the system and be rebuilt on more honest foundations. That however IS NOT the Fed play book. They’d rather have a replay of Japan, which I don’t think is possible, but we’ll see.

On a final practical note, check out the ^IRX, the 13 week treasury. Its getting damn close to zero and yet the ^TNX is actually going up. To me that is just raw naked fear. Those numbers tell me something wicked is about to happen. I don’t know what but we should all be suitably chastened. For those of you who don’t follow bonds at all those are the short and long term ends of the treasury yield curve (13 week vs 10 year.)

Josh

[gdcox]

Guys, take a recent international look. If you want to see a deflationary economy in action, study the Japanese economy over the last ten years or so.

[gdcox]

Guys, take a recent international look. If you want to see a deflationary economy in action, study the Japanese economy over the last ten years or so.

[gdcox]

Guys, take a recent international look. If you want to see a deflationary economy in action, study the Japanese economy over the last ten years or so.

[gdcox]

Guys, take a recent international look. If you want to see a deflationary economy in action, study the Japanese economy over the last ten years or so.

[gdcox]

Guys, take a recent international look. If you want to see a deflationary economy in action, study the Japanese economy over the last ten years or so.

[barnaby33]

So, when you are looking at the world as a deflationist, confident of your opinion, what actions/investments/decisions taken by the inflationary crowd look foolish and why?

Also, how does this deflationary world differ, qualitatively from the stagflation world? Instead of slowing economy and increasing money supply, we have a slowing economy and decreasing money supply ?

I can go that far, but the implications/repercussions escape me.

Good question. I don’t have all the answers. This has been the subject of some of Rich and my most heated debates, usually over some sort of charred meat.

In deflation, cash is king. Interest rates drop to zero as demand for credit dries up. So lets ask ourselves why these two axioms are so? We get deflation so rarely its hard to believe there are axioms about it. Last time it happened my 87 year old father was 8. Inflation is a much more comfortable subject as I’ve lived with it my whole life.

So we have a fiat monetary system, where the Fed threatens to constantly increase the supply of money therefor making deflation impossible. That makes us all feel like deflation isn’t possible however the world rarely works the way theory dictates. The Fed doesn’t loan to you are I. It loans to Banks, big banks, who in turn loan to smaller banks. The check on the Feds ability to print and print is that these banks want collateral for loans. So without good collateral the Fed can give away free money and you still won’t get it. This gets to the heart of demand for credit. You may want a new Lexus, but if you aren’t a good risk, or the collateral isn’t enough the bank won’t lend you the money.

Inflationistas ultimately believe that this is not a problem, that there is no liquidity trap. Another avenue and one I’ve discussed with Rich is extraordinary measures. This seems to be taking shape. The Fed using extraordinary measures to get the credit out to people who will use it via other means, like the TAF. I don’t think it will succeed, the problem isn’t liquidity its trust and solvency.

That brings us to the second point, cash is king. If you can’t get credit, your natural reaction is to stop spending as much and start saving. Another word for this is hoarding. The Fed considers this disastrous since our economy is built on all the lemmings spending spending spending. It causes debt defaults to rise, as the cost of getting money to service debt rises. This causes a cascade effect (or should) in defaults, which in turn causes more of the same.

I bought a motorcycle 2 weeks ago, used. I went to the Credit Union and they wanted 15.5% for an unsecured loan of 7k. I almost didn’t buy the bike. The days of easy access to credit are over. Prices will adjust accordingly, painfully so.

Just so people understand, I am not particularly a gold bug and I don’t believe the Fed is evil. Misguided, but not evil. All of the options on the table have high costs, some higher than others. I personally would rather see all the shit come out at once, burn down the system and be rebuilt on more honest foundations. That however IS NOT the Fed play book. They’d rather have a replay of Japan, which I don’t think is possible, but we’ll see.

On a final practical note, check out the ^IRX, the 13 week treasury. Its getting damn close to zero and yet the ^TNX is actually going up. To me that is just raw naked fear. Those numbers tell me something wicked is about to happen. I don’t know what but we should all be suitably chastened. For those of you who don’t follow bonds at all those are the short and long term ends of the treasury yield curve (13 week vs 10 year.)

Josh

[barnaby33]

So, when you are looking at the world as a deflationist, confident of your opinion, what actions/investments/decisions taken by the inflationary crowd look foolish and why?

Also, how does this deflationary world differ, qualitatively from the stagflation world? Instead of slowing economy and increasing money supply, we have a slowing economy and decreasing money supply ?

I can go that far, but the implications/repercussions escape me.

Good question. I don’t have all the answers. This has been the subject of some of Rich and my most heated debates, usually over some sort of charred meat.

In deflation, cash is king. Interest rates drop to zero as demand for credit dries up. So lets ask ourselves why these two axioms are so? We get deflation so rarely its hard to believe there are axioms about it. Last time it happened my 87 year old father was 8. Inflation is a much more comfortable subject as I’ve lived with it my whole life.

So we have a fiat monetary system, where the Fed threatens to constantly increase the supply of money therefor making deflation impossible. That makes us all feel like deflation isn’t possible however the world rarely works the way theory dictates. The Fed doesn’t loan to you are I. It loans to Banks, big banks, who in turn loan to smaller banks. The check on the Feds ability to print and print is that these banks want collateral for loans. So without good collateral the Fed can give away free money and you still won’t get it. This gets to the heart of demand for credit. You may want a new Lexus, but if you aren’t a good risk, or the collateral isn’t enough the bank won’t lend you the money.

Inflationistas ultimately believe that this is not a problem, that there is no liquidity trap. Another avenue and one I’ve discussed with Rich is extraordinary measures. This seems to be taking shape. The Fed using extraordinary measures to get the credit out to people who will use it via other means, like the TAF. I don’t think it will succeed, the problem isn’t liquidity its trust and solvency.

That brings us to the second point, cash is king. If you can’t get credit, your natural reaction is to stop spending as much and start saving. Another word for this is hoarding. The Fed considers this disastrous since our economy is built on all the lemmings spending spending spending. It causes debt defaults to rise, as the cost of getting money to service debt rises. This causes a cascade effect (or should) in defaults, which in turn causes more of the same.

I bought a motorcycle 2 weeks ago, used. I went to the Credit Union and they wanted 15.5% for an unsecured loan of 7k. I almost didn’t buy the bike. The days of easy access to credit are over. Prices will adjust accordingly, painfully so.

Just so people understand, I am not particularly a gold bug and I don’t believe the Fed is evil. Misguided, but not evil. All of the options on the table have high costs, some higher than others. I personally would rather see all the shit come out at once, burn down the system and be rebuilt on more honest foundations. That however IS NOT the Fed play book. They’d rather have a replay of Japan, which I don’t think is possible, but we’ll see.

On a final practical note, check out the ^IRX, the 13 week treasury. Its getting damn close to zero and yet the ^TNX is actually going up. To me that is just raw naked fear. Those numbers tell me something wicked is about to happen. I don’t know what but we should all be suitably chastened. For those of you who don’t follow bonds at all those are the short and long term ends of the treasury yield curve (13 week vs 10 year.)

Josh

[barnaby33]

So, when you are looking at the world as a deflationist, confident of your opinion, what actions/investments/decisions taken by the inflationary crowd look foolish and why?

Also, how does this deflationary world differ, qualitatively from the stagflation world? Instead of slowing economy and increasing money supply, we have a slowing economy and decreasing money supply ?

I can go that far, but the implications/repercussions escape me.

Good question. I don’t have all the answers. This has been the subject of some of Rich and my most heated debates, usually over some sort of charred meat.

In deflation, cash is king. Interest rates drop to zero as demand for credit dries up. So lets ask ourselves why these two axioms are so? We get deflation so rarely its hard to believe there are axioms about it. Last time it happened my 87 year old father was 8. Inflation is a much more comfortable subject as I’ve lived with it my whole life.

So we have a fiat monetary system, where the Fed threatens to constantly increase the supply of money therefor making deflation impossible. That makes us all feel like deflation isn’t possible however the world rarely works the way theory dictates. The Fed doesn’t loan to you are I. It loans to Banks, big banks, who in turn loan to smaller banks. The check on the Feds ability to print and print is that these banks want collateral for loans. So without good collateral the Fed can give away free money and you still won’t get it. This gets to the heart of demand for credit. You may want a new Lexus, but if you aren’t a good risk, or the collateral isn’t enough the bank won’t lend you the money.

Inflationistas ultimately believe that this is not a problem, that there is no liquidity trap. Another avenue and one I’ve discussed with Rich is extraordinary measures. This seems to be taking shape. The Fed using extraordinary measures to get the credit out to people who will use it via other means, like the TAF. I don’t think it will succeed, the problem isn’t liquidity its trust and solvency.

That brings us to the second point, cash is king. If you can’t get credit, your natural reaction is to stop spending as much and start saving. Another word for this is hoarding. The Fed considers this disastrous since our economy is built on all the lemmings spending spending spending. It causes debt defaults to rise, as the cost of getting money to service debt rises. This causes a cascade effect (or should) in defaults, which in turn causes more of the same.

I bought a motorcycle 2 weeks ago, used. I went to the Credit Union and they wanted 15.5% for an unsecured loan of 7k. I almost didn’t buy the bike. The days of easy access to credit are over. Prices will adjust accordingly, painfully so.

Just so people understand, I am not particularly a gold bug and I don’t believe the Fed is evil. Misguided, but not evil. All of the options on the table have high costs, some higher than others. I personally would rather see all the shit come out at once, burn down the system and be rebuilt on more honest foundations. That however IS NOT the Fed play book. They’d rather have a replay of Japan, which I don’t think is possible, but we’ll see.

On a final practical note, check out the ^IRX, the 13 week treasury. Its getting damn close to zero and yet the ^TNX is actually going up. To me that is just raw naked fear. Those numbers tell me something wicked is about to happen. I don’t know what but we should all be suitably chastened. For those of you who don’t follow bonds at all those are the short and long term ends of the treasury yield curve (13 week vs 10 year.)

Josh

[barnaby33]

So, when you are looking at the world as a deflationist, confident of your opinion, what actions/investments/decisions taken by the inflationary crowd look foolish and why?

Also, how does this deflationary world differ, qualitatively from the stagflation world? Instead of slowing economy and increasing money supply, we have a slowing economy and decreasing money supply ?

I can go that far, but the implications/repercussions escape me.

Good question. I don’t have all the answers. This has been the subject of some of Rich and my most heated debates, usually over some sort of charred meat.

In deflation, cash is king. Interest rates drop to zero as demand for credit dries up. So lets ask ourselves why these two axioms are so? We get deflation so rarely its hard to believe there are axioms about it. Last time it happened my 87 year old father was 8. Inflation is a much more comfortable subject as I’ve lived with it my whole life.

So we have a fiat monetary system, where the Fed threatens to constantly increase the supply of money therefor making deflation impossible. That makes us all feel like deflation isn’t possible however the world rarely works the way theory dictates. The Fed doesn’t loan to you are I. It loans to Banks, big banks, who in turn loan to smaller banks. The check on the Feds ability to print and print is that these banks want collateral for loans. So without good collateral the Fed can give away free money and you still won’t get it. This gets to the heart of demand for credit. You may want a new Lexus, but if you aren’t a good risk, or the collateral isn’t enough the bank won’t lend you the money.

Inflationistas ultimately believe that this is not a problem, that there is no liquidity trap. Another avenue and one I’ve discussed with Rich is extraordinary measures. This seems to be taking shape. The Fed using extraordinary measures to get the credit out to people who will use it via other means, like the TAF. I don’t think it will succeed, the problem isn’t liquidity its trust and solvency.

That brings us to the second point, cash is king. If you can’t get credit, your natural reaction is to stop spending as much and start saving. Another word for this is hoarding. The Fed considers this disastrous since our economy is built on all the lemmings spending spending spending. It causes debt defaults to rise, as the cost of getting money to service debt rises. This causes a cascade effect (or should) in defaults, which in turn causes more of the same.

I bought a motorcycle 2 weeks ago, used. I went to the Credit Union and they wanted 15.5% for an unsecured loan of 7k. I almost didn’t buy the bike. The days of easy access to credit are over. Prices will adjust accordingly, painfully so.

Just so people understand, I am not particularly a gold bug and I don’t believe the Fed is evil. Misguided, but not evil. All of the options on the table have high costs, some higher than others. I personally would rather see all the shit come out at once, burn down the system and be rebuilt on more honest foundations. That however IS NOT the Fed play book. They’d rather have a replay of Japan, which I don’t think is possible, but we’ll see.

On a final practical note, check out the ^IRX, the 13 week treasury. Its getting damn close to zero and yet the ^TNX is actually going up. To me that is just raw naked fear. Those numbers tell me something wicked is about to happen. I don’t know what but we should all be suitably chastened. For those of you who don’t follow bonds at all those are the short and long term ends of the treasury yield curve (13 week vs 10 year.)

Josh

[Author]

Posts