Let's call the whole thing off! (Select Preview)

[FRED]

http://www.itulip.com/images/Ackerman.jpgYou say inflation, I say deflation,
You say depression, I say stagflation;
Inflation, deflation, depression, stagflation,
Let's call the whole thing off!

(With apologies to George and Ira Gershwin.)

The song "Let's Call the Whole Thing Off" was written during The Great Depression, in 1937. A fitting title and song for the debate over how the latest experiment in exponential credit growth might turn out.

Below is a six minute preview of the debate in .wav and .mp3 formats.

Which do you believe? That the world's central banks are out of ideas and a catastrophic end is in train or that a death by a 1,000 political cuts awaits us?

You be the judge.

Six minute free preview:

Ackerman/Janszen WAV (http://www.itulip.com/video/ackermanPreviewSM.wav)
Ackerman/Janszen MP3 (http://www.itulip.com/video/ackermanPreview.mp3)

To hear the complete 48min http://www.itulip.com/images/iselect.gif debate see: iTulip Select Ackerman Interview (http://www.itulip.com/forums/showthread.php?t=1170)

[grapejelly]

Thanks EJ for providing this interview.

I admire Rick and read his public website on a daily basis and enjoy his writing.

As I see it, the basics of Rick's argument is that the government can't stop deflation because doing so requires stimulating private demand for debt, and in a deflationary scenario, private demand will be insufficient to maintain money stocks which will therefore fall, catastrophically.

To take this argument seriously, we have to consider the following:

1. Mortgage borrowers default. Corporations default.

2. Lenders get scared and stop lending.

3. Borrowers get scared and stop borrowing.

4. Money supply falls.

5. Debts get harder to pay back as money becomes more valuable.

6. Assets get sold off in order to pay back debts.

7. Asset values fall quickly, increasing the pressure on debtors to liquidate assets as quickly as possible.

8. Asset prices fall, debts get harder to pay back, the result is a financial implosion.

9. Housing prices end up at 20% or 30% of their values today, for example, in nominal terms.

Investors should be in intermediate treasurys right now. They should go for very safe, low yielding securities and ride things out. Rick has "mixed feelings" about gold because in his scenario, people won't want gold. There will be so little cash around that every asset including gold will be collapsed. Who wants a krugerrand when they are hungry?


Okay, so that's the argument. I do agree with him that eventually there will be a collapse and very hard times ahead. But I disagree with how this will come about, where to invest to protect yourself, and the timeline for the collapse.

I still find quite obvious the following:

1. Financially speaking, there aren't savings around, and so all there really is is a bunch of debt.

2. Since everyone's a debtor, nobody can afford a classic deflation.

3. The argument that "the Fed is powerless to stop deflation because they can't make people borrow if they don't want to" is untrue. The Fed cannot stop the long-term depreciation of the currency because doing so would indeed cause the type of scenario Rick thinks will happen. This is obvious to the Fed. After all, the US government is probably the world's largest borrower. As Dr. Hudson has said, the US is consuming more and more of the world's surplus. The US cannot afford deflation. The Fed and congress will do everything to prevent deflation before it takes hold.

Why can't the US can replace private demand for loans with public demand? Rick says "that's not savings" and that's true, but so what? The government can borrow more money into existence and give it away to favored parties, even if private demand collapses. Indeed, the public will clambor for the government to do just that.

The US$ might collapse in this event, but probably only against hard assets and not against other currencies, because other countries will be in the same boat.

[ablevin]

Having listened only to the preview, EJ suggests two possible sectors as possible contenders for future bubbles (assuming the Fed is successful at reinflating the economy): energy and infrastructure. I like energy, and especially alternative energy, however, may I suggest another possibility: biotechnology.

From what I read/hear, that industry is on the verge of developing some seriously life-changing products & services. If you thought the Internet changed the world, wait until you see what happens when there are commercially viable ways to manipulate the genes in human fetuses. Or vaccines / cures for various types of cancer or diabetes.

Like EJ has explained, all bubbles are conceived of a real change in the underlying prospects for a certain asset class. The early runup is logical; it is only a bubble once greed carries valuations well beyond the underlying fundamentals or prospects. My personal opinion is that biotechnology is in the very early stages of a very positive and profitable future. If we were to see a substantial decline in the biotechnology index, that might provide a great opportunity to get in early.

[akrowne]

Are we sure they'll be able to blow another bubble? Exhaustion and all...

Of course, I'd say what we really have now is a bubble in the financials... but assuming the debt collapse and recession cannot be denied forever, neither should remain that bubble...

[grapejelly]

Thinking out loud...

let's remember that bubbles must have widespread public participation, right? And they must shore up asset values, right? Otherwise, what's the point?

If the government spends, say, 1 trillion dollars on infrastructure, by directly spending the money, then bonds have to be issued to finance the debt. This causes interest rates to rise, presumably. I can't see how this creates a bubble.

How is the government going to get an asset inflation of some sort going? I suppose they could "privatize" infrastructure and build a bubble that way...been done before with good result. I think EJ alluded to this in the interview in the form of a ten year government guarantee on energy investment.

Okay, now I am starting to see how this can work.