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EJ
10-08-09, 04:25 PM
http://www.itulip.com/images2/queen-of-hearts-with-alice-in-wonderland250.gifThe Game - Part I: Queen of Hearts
"Alice laughed: "There's no use trying," she said; "one can't believe impossible things."
"I daresay you haven't had much practice," said the Queen. "When I was younger, I always did it for half an hour a day. Why, sometimes I've believed as many as six impossible things before breakfast." - Alice in Wonderland
For over ten years we’ve debated a dozen analysts who forecast an extended price deflation here in the U.S. They keep coming back, even though the deflation they repeatedly predict year after year never arrives.

When a new challenger joins the debate, we are Bill Murray in Groundhog Day. For them the day is new. Anything can happen. Maybe the U.S. economy will fall into a liquidity trap and deflation spiral, and goods and service prices will plummet as the purchasing power of our money surges. The idea appeals to those who want to believe impossible things.

We concluded a decade ago that governments can always make money worth less by printing it faster than we, its citizens, can increase its value by our industry. For us it’s the same day over and over again: crash after crash, yet no deflation spiral. Instead we see a slow, steady destruction of the purchasing power of our income and savings via currency depreciation--a gradual, perpetual, stealthy dollar debt default. We call this stealth default, hidden in plain sight, The Game.

Deflationists make detailed and perfectly sound arguments. Bank credit is contracting. The money supply is not growing.

But they miss the single crucial fact that some deflationists do eventually discover, most recent among them Martin Weiss.

http://www.itulip.com/images2/deflationists1.jpg





Inflation versus deflation debate: Three round bout

With a few exceptions, the caliber of the inflation versus deflation debate has improved over the years since we entered it as inflationists in 1998. So has our understanding of the political and economic processes involved. Unfortunately, the history of the debate, if it is recalled at all, is a muddle.

When we debate old timers who obsess about liquidity traps and deflation spirals we enter a world of convoluted speech and illogic, argument divorced from evidence, the product of selective amnesia. When we debate them we are no longer Bill Murray talking to Andie MacDowell. We’re Alice in Wonderland speaking to the Queen of Hearts. They want us to believe impossible things.

We can’t make progress on the debate over the future of inflation or deflation in the U.S. if we cannot even recall the outcome of recent past engagements on the topic. A brief history of previous rounds of the debate over the past decade follows.

http://www.itulip.com/images2/itulipgreenspandotcom.gifInflationists vs. Deflationists Round One: Greenspan’s stock market bubble (1999 to 2006)

In 1999, when the NASDAQ bubbled and contrarians warned of a crash as New Economy believers partied, an argument split the contrarians who were otherwise as one foreseeing an inglorious end to the credit financed bubble. One group expected an inflationary outcome and the other a deflationary outcome from an inevitable collapse. The former firmly believed that the government was willing and able to re-inflate the markets and economy after the crash and the latter not. The two camps later came to be known as inflationists and deflationists.

The deflationists argued in the late 1990s that a stock market crash will be followed by a 1930s-styled liquidity trap and a deflation spiral, with debt deflation and commodity and wage price deflation in train. The government, they claimed, is helpless to stop it.

Soup lines. Tent cities. Two-dollar dinners. They told us to prepare for an echo of The Great Depression, complete with an angry unemployed populace venting at bumbling politicians, and opportunistic dictators taking the reins. They predicted that by 2002 we’d have the 1930s economic and political catastrophe all over again, but with nuclear weapons.

http://www.itulip.com/images/cpi192801935.gif

CPI falls for 40 consecutive months from 1930 to 1933.
Deflationists expected a repeat starting in 2001





In 1999 I made an alternative case. I argued that after the stock market crash in 2000 (http://www.itulip.com/GlobeArchiveJanszen.htm)the Fed was going to re-inflate the economy with aggressive rate cuts long before a liquidity trap set in. We’d see no more than very brief period of deflation, at most one quarter long. The economy will then recover, albeit with a permanently bombed out market for stocks in technology companies; my research informed me that the locus of a any bubble does not recover for a generation. Low interest rates will provide the immediate inflationary impulse, with dollar depreciation doing the rest of the heavy lifting.

In the event, the U.S. economy experienced four months of mild deflation after the year 2000 stock market crash, and a brief recession before the housing bubble took off and created the so-called “economic recovery” of the 2002 to 2008 period.

http://www.itulip.com/images2/cpiJan2001-Dec2002.gif

CPI falls for 4 consecutive months at the end of 2001





We piled into gold in 2001 to ride the wave of currency depreciation.

Gold is not an inflation hedge. It’s a currency risk hedge. Gold does not fall when asset price deflation looms anew, it rises. Why? Gold prices forecast the future reaction of governments to asset price deflation, which is always to re-inflate. Now everyone but the stubborn deflationists is in on the trade, and it’s getting crowded.

The government’s unspoken policy of stealth dollar devaluation by controlled depreciation worked so well at halting deflation after the stock market crash that oil prices, in U.S. dollars, blew right past the $40 level dubbed a bubble in 2004 by many analysts, to unheard of new “bubble” heights over $60 in 2006.

Inflationists vs. Deflationists Round One ended in January 2002.

Inflationists: 1
Deflationists: 0

____________________________





http://www.itulip.com/images2/itulipgreenspanhousing.gifInflationists vs. Deflationists Round Two: Greenspan credit bubble (2006 to 2009)

The previous defeat did not deter the deflationists from their zeal to believe impossible things. They returned in 2006 to proclaim that a brand new set of liquidity traps had been set by egregious levels of debt and leverage that had built up in the financial system and economy since 2001, the Greenspan credit market bubble. A deflation spiral ala 1930 to 1933 awaited the U.S. economy after its collapse.

They made their liquidity trap and deflation spiral case again throughout 2007 and early 2008, even as the investment banks and hedge funds grabbed oil and every other commodity riding the weak dollar wave and rode it higher and higher using their substantial access to other people's money.

I don’t blame the deflationists for their confusion on this crucial point of government anti-deflation policy. After all, one U.S. Treasury Secretary after another restated the “strong dollar” policy from 2001 to 2008 even as the dollar lost 38% against major currencies over the period.

The Queen of Hearts would approve.

Investment banks and funds pushed oil, the input cost to nearly every important economic activity, to a crazy price of $147. Food riots erupted from Egypt to Haiti as prices exploded.

As commodity prices rose higher and higher, the deflationists protested more and more.

In 2006, the Fed’s program of baby step rate hikes that they started in 2004 kicked in and crashed the housing market. Housing collateralized the mortgages backed by securitized debt, which market crashed in 2007. Finally, in 2008, the global credit markets and banking system caved in. The U.S. economy, already in recession for a year, took a death plunge in the second half of the year, and dragged the world economy down with it.

With the great crash of Q3 2008, the deflationists got their day in the sun. Confident that the long awaited liquidity trap and deflation spiral had begun, they forecast years of contracting credit and falling prices would restore Team Deflation’s battered reputation and bury the inflationist case once and for all.

Once again, it didn’t happen. The deflationists’ respite was momentary.

Back in 2006 I argued that the Fed was once again planning to re-inflate the economy after the crashed credit bubble much as it had after the crashed stock market bubble six years previous, but using even more extreme measures: rate cuts to zero, quantitative easing, direct purchases of long bonds, and purchases of asset-backed securities or any other paper garbage that banks and financial institutions cranked out during the Greenspan credit boom. The U.S. government will run ridiculous fiscal deficits. Most importantly we’d depreciate the dollar again.

Once again, we’d have no more than a quarter or two of deflation.

Guess what happened? The dollar spiked and CPI inflation turned negative for four months between Q4 2008 and Q1 2009 before turning positive again in Q2 2009.

We didn’t need to fight our way out of a liquidity trap because we never fell into one. We escaped it in April 2009 as I explained in May 2009 in Deflation fare thee well – Part I: In search of real returns in an unreal world (http://www.itulip.com/forums/showthread.php?p=97954#post97954).




We did not have 40 months of deflation as occurred from 1930 to 1933. Instead we had four.

http://www.itulip.com/images2/cpi2000-Aug2009.gif

CPI falls for 4 consecutive months from the end of 2008 to early 2009





Inflationists vs. Deflationists Round Two ended in March 2009.

Inflationists: 2
Deflationists: 0

____________________________





http://www.itulip.com/images2/washington-dc.jpgInflationists vs. Deflationists Round Three: U.S. Government credit bubble (2009 - ???)

Only six months after the latest failed forecast the deflationists are back again, calling for a liquidity trap and a deflation spiral to emerge from a range of potential sources. The latest argument is that the banks are even bigger and shakier than before, that debt leverage was never de-leveraged, consumer credit is contracting, and the money supply is not growing. They seem to forget that they lost the argument on the same grounds not once but twice before over the past ten years. They still don’t understand why.

The Game: What deflationists don’t understand

How did I make the forecasts of bubble crashes and brief deflations that turned out to be accurate in 2001 and 2009? How did I know the Fed was going cut rates to zero, execute a program of quantitative easing, make direct purchases of long bonds, and purchase asset-backed securities or any other assets that financial firms made billions selling during the so-called boom? Do I possess great powers of prediction? Do I consult a crystal ball covered in blue velvet in the dark corner of my basement?

Of course not.

I read several dozen papers between 1998 and 2006, many written by the Fed itself, which explained the Fed’s plans.

But this part of what I learned is key.

The most important element of anti-deflation policy measures—and the most effective—is not in the Fed’s literature, although it pervades most of the academic literature on the subject.

It is the single policy tool that trumps all of the others.

It is the most difficult to detect and measure directly.

It is also the one policy that no central bank of a net debtor will ever speak of using explicitly.

It is: currency devaluation via passive depreciation.

The explicit use of currency depreciation by a debtor nation is an act of economic war. So it is conducted covertly. That's The Game.

Re-inflation via currency depreciation, then and now

How did U.S. policy makers induce a 30% inflation from minus 15% CPI to plus 15% CPI in a few months in 1933 after the money supply collapsed 40% over the previous three years? The banking system was in shambles and hardly lending. Unemployment exceeded 25%.

http://www.itulip.com/forums/../images/USdeflationNote.jpg

U.S. government currency devaluation to escape a liquidity trap in 1933
Macro conditions: GDP fell 25% since 1930
M3 money supply: off 40%
Unemployment: 24%
Banking system: Broken
Dollar devaluation against gold: 72%
Result: 30% inflation over six months (red line)





As we’ve explained to readers since 1998, in 1933 the U.S. government deflated the dollar 72% against gold to produce that surge of inflation. Below we explain the mechanics of currency depreciation, how it induces inflation, even for an economy that is experiencing credit contraction and a shrinking money supply.

The U.S. as a net creditor was able to execute this policy unilaterally and in broad daylight in the early 1930s, because as a net creditor there was no risk at any time that U.S. trade partners holding dollars might retaliate by selling off U.S. debt and dollars.

That is not the case today. Another means must be used.

Going into Round Three of the inflation versus deflation debate, you’d think the deflationists would wonder how oil prices are above $70 in 2009 when demand is lower and inventories higher than in 2001 when the economy was nominally 15% smaller and oil prices averaged $22 after a very brief recession.

The answer is dollar devaluation, but not by the same crude method used in 1933. We can’t do it that way. As a net debtor, we have to follow the rules of The Game.

Rules of The Game: Re-inflation by stealth currency devaluation

In a debt deflation crisis, also known as a “balance sheet recession,” economic policy makers have four main tools to use to keep an economy out of a liquidity trap or get out of one.
1. Expand the monetary base
2. Reduce long-term interest rates
3. Run fiscal deficits
4. Depreciate the currency
Deflationist’s do not understand that even if the all other policies fail to raise inflation expectations, for a net debtor, the fourth tool—currency depreciation—is foolproof. Paradoxically, currency depreciation is also the one tool that U.S. policy makers can never explicitly admit is being pursued.

The U.S. monetary system is not on a gold standard in 2009 as it was in 1933. Instead the U.S. and the rest of the world monetary regime employ a de-facto global oil standard.

To prevent a liqudity trap via currency depreciation, instead of depreciating against gold the U.S. government depreciates the dollar against oil.

The result? Rather than oil prices falling to $16 a barrel as in 2001 after the economic contraction that followed the 2000 stock market crash, after the credit market crash of 2008 oil prices briefly fell to $36 and were back to $66 by June 2009. Oil prices averaged $100 in 2008 despite the worst financial and economic crisis since The Great Depression.

Currency depreciation, the government’s most effective tool for setting inflation expectations, once again halted a nascent liquidity trap and deflation and spiral dead in its tracks, but before a liquidity trap occurred, versus years after as in 1933.

Today oil is back over $70 and gold is up from US$720 October 2008 lows to a new high of US$1055 today.

All of this while the U.S. claims to pursue a “strong dollar” policy.

How does currency depreciation prevent or end a liquidity trap?

It’s all well and fine to assert that currency devaluation via depreciations raises inflation expectations, but how is a currency devalued this way and how does that cause higher inflation expectations to rise? Below we quote from one of several papers that we found in 2003 or earlier that influenced our forecasts of inflation.
Even if the nominal interest rate is zero, a depreciation of the currency provides a powerful way to stimulate the economy out of the liquidity trap (for instance, Bernanke (2000); McCallum (2000); Meltzer (2001); Orphanides and Wieland (2000)). A currency depreciation will stimulate an economy directly by giving a boost to export and import-competing sectors. More importantly, as noted in Svensson (2001), a currency depreciation and a peg of the currency rate at a depreciated rate serves as a conspicuous commitment to a higher price level in the future, in line with the optimal way to escape from a liquidity trap discussed above. An exchange-rate peg can induce private-sector expectations of a higher future price level and create the desirable long-term inflation expectations that are a crucial element of the optimal way to escape from the liquidity trap.

In order to understand how manipulation of the exchange rate can affect expectations of the future price level, it is useful to first review the exchange-rate consequences of the optimal policy to escape from a liquidity trap outlined above. That policy involves a commitment to a higher future price level and consequently current expectations of a higher future price level. A higher future price level would imply a correspondingly higher future exchange rate (when the exchange rate is measured as units of domestic currency per unit foreign currency, so a rise in the exchange rate is a depreciation, a fall in the value, of the domestic currency). Thus, current expectations of a higher future price level imply current expectations of a higher future exchange rate. But those expectations of a higher future exchange rate would imply a higher current exchange rate, a current depreciation of the currency.

The reason is that, at a zero domestic interest rate, the exchange rate must be expected to fall (that is, the domestic currency must be expected to appreciate) over time approximately at the rate of the foreign interest rate. Only then is the expected nominal rate of return measured in domestic currency on an investment in foreign currency equal to the zero nominal rate of return on an investment in domestic currency; this equality is an approximate equilibrium condition in the international currency market. That is, the current exchange rate must approximately equal the expected future exchange rate plus the accumulated foreign interest (the product of the foreign interest rate times the time distance between now and the future). But then, at unchanged domestic and foreign interest rates, the current exchange rate will move approximately one to one with the expected future exchange rate. If the expected future exchange rate is higher, so is the current exchange rate. Indeed, the whole expected exchange-rate path shifts up with the expected future exchange rate. Thus, we have clarified that the optimal policy to escape from a liquidity trap, which involves expectations of a higher future price level, would result in an approximately equal current depreciation of the currency.

http://www.itulip.com/images2/pricelevelexchangerate.gif
Reflation via currency depreciation, the modern way






This has the important consequence that the current exchange rate immediately reveals whether any policy to escape from a liquidity trap has succeeded in creating expectations of a substantial increase in the future price level. If it has, this appears as a substantial current depreciation of the currency. Consequently, if the currency does not depreciate substantially, the policy has failed.

- Journal of Economic Perspectives Escaping from a Liquidity Trap and Deflation: (http://www.itulip.com/Select/liquiditytrapexits.pdf)
The Foolproof Way and Others, Lars E.O. Svensson, January 2003 (http://www.itulip.com/Select/liquiditytrapexits.pdf)
Clearly the Fed has succeeded in its bid to increase inflation expectations via currency depreciation. They did so without ever explicitly devaluing the dollar. To be explicit violates the rules of The Game.

The rules require that all U.S. trade partners tolerate ongoing dollar devaluation via depreciation because if the policy is not pursued the U.S. economy risks falling into a liquidity trap.

The Game versus the Law of Unintended Consequences

By deflating the dollar against oil, U.S. policy makers have created a new problem. We are experiencing inflation in areas of the economy that are sensitive to energy costs and deflation in areas of the economy that remain open to cheap imported labor. Food gets more expensive while clothes from China get cheaper and wages fall. China will likely take the position Japan took and allow its currency to gradually appreciate against dollars. Asset price inflation only works as long as the policy succeeds in producing low long term interest rates; if 30 year mortgage rates rise to 10%, the so-called "recovery" of the so-called housing "market" will shut down.

Bottom line, our standard of living here in the U.S. is declining as the purchasing power of our savings and income falls while our government pursues its anti-liquidity trap policy of currency depreciation. This is the opposite of the policies pursued by Japan since the early 1990s when the yen appreciated, wages inflated against goods and services, and living standards improved.


http://www.itulip.com/images2/netgovsaving1947-Oct2009.gif
Will a $1.3 trillion budget deficit help to increase the exchange rate value of the U.S. dollar? Not likely.





No deflation spiral.

No Japan-style so-called “lost decade” of stag-deflation.

Instead we will suffer a steady decline in living standards as the purchasing power of our income and savings falls.

All the while, the risk of a Sudden Stop hangs over the U.S. like a Sword of Damocles. The Game can't be played forever.

The hyperinflation case

Some fear that the dollar may crash exactly like the Argentine peso in 2001, or the Russian ruble in the late 1990s. We’ll buy bread with money-filled wheelbarrows—but not wheelbarrows made in China because we won't be able to afford imports. As the dollar crashes, prices shoot into the stratosphere in a hyperinflation that cancels out the nation’s debts and destroys its wealth.

A version of an Argentine or Russian style debt default and currency collapse is possible, an Argentina Crash with U.S. Characteristics (See : Does USA 2009 = Argentina 2001? Part I: Falling economy reaches terminal velocity (http://www.itulip.com/forums/showthread.php?p=106493#post106493)). We have since 1999 called our theory of such an event Ka-Poom Theory, noting that for net debtor nations there is a tendency for debt default, currency crisis, and high inflation to follow a brief period of severe deflation, much as we saw in the U.S. earlier this year. In line with our expectation of ongoing decline in purchasing power through currency depreciation, there is small but too big to ignore, ever-present and increasing risk of an accident that causes the global monetary system to collapse in a disorderly heap.

Ka-Poom Theory Update

For more than a decade we have warned of the possibility of a sudden stop event for the U.S. that we call Ka-Poom Theory. Since writing the Argentina (http://www.itulip.com/forums/showthread.php?p=106493#post106493) article, one reading of events is that the U.S. escaped a Ka-Poom event in 2009, at least for the time being. Another read is that a Ka-Poom event is in progress, and an acute phase may occur as soon as this year. A spiking price of gold may correspond to capital flight in the pre-flight phase explained in Headed for a Sudden Stop (http://www.itulip.com/forums/showthread.php?p=49922#post49922%5D), Sept. 2008. We explore these scenarios of The Game in Part II.

http://www.itulip.com/images2/shrinkingpie500.gifThe Game -- Part II: The Shrinking Pie Economy ($ubscription) (http://www.itulip.com/forums/showthread.php?p=127366#post127366)

If not a deflation spiral, stag-deflation, or a dollar crash, what is in store for the U.S.? In a nutshell, a new kind of stag-inflation as the dollar continues to weaken as it has since 2001. As long as the dollar weakens there will be no general price deflation in the U.S.

ND: Everyone on the contrarians economics and finance circuit has been waiting since last summer for a new deflation scare to knock stocks and commodities down in a fresh wave of deflation like the one we saw in late 2008 and early 2009. They want another chance to “buy the dip” in a secular uptrend in commodities.
EJ: U.S. stocks and commodities may correlate short-term, such as during the de-leveraging that happened during the panic last year and early this year. Investors sold anything and everything to raise cash. We rode through that so-called “deflation” in Q3 2008 to Q1 2009 on cruise control, knowing that no 1930s liquidity trap and deflation spiral repeat would follow.

Oct. 12, 2008 in Confusion reigns: A crisis-driven global rush to dollar liquidity is not deflation (http://www.itulip.com/forums/showthread.php?p=52818#post52818), we warned readers to not mistake the spiking dollar for a deflation spiral starting gun. Many analysts at the time said the crash marked the beginning of a 1930s style liquidity trap that they’d long predicted. They got it wrong, although they’ll never admit it. In The truth about deflation (http://www.itulip.com/forums/showthread.php?p=57193#post57193) and a dozen other articles since 1998, we explain that governments don’t do deflation spirals anymore, not since the end of the gold standard. And the Fed knew the that most effective way to get the U.S. economy out of a liquidity trap is to not fall into one in the first place.

ND: You don’t expect another deflation scare?
EJ: I never use the term “deflation scare.” It’s not a useful concept. Market participants expect either rising or falling future inflation. They aren’t “scared” of either. If by “deflation scare” the users of this phrase mean “a false expectation of future deflation” then the idea is tautological. It asserts that markets falsely expect deflation in a “deflation scare.” How will we know the deflation expectation was false? Because the deflation doesn’t happen.

A more logical way to think about the dynamic is that the majority of market participants are deflationists, that is, they do not understand the nature of asset price inflation and deflation in the FIRE Economy, its relationship to commodity price deflation in the Productive Economy, monetary policy with respect to each, and the impact of monetary policy. Now the question is, after the past two asset price crashes, the first in 2000 and the second in 2008, have the majority of market participants caught on? If so, we may not see any commodity price deflation at all in the next crash. We may skip the “deflation” step entirely. more... ($ubscription) (http://www.itulip.com/forums/showthread.php?p=127366#post127366)

iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
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LargoWinch
10-08-09, 08:13 PM
FRED, here we are with another great article from iTulip....why it is not on the front page???

I stumbled upon it tonight using the "search" button and given a good dose of luck.

jiimbergin
10-08-09, 08:16 PM
FRED, here we are with another great article from iTulip....why it is on the front page???

I stumbled upon it tonight using the "search" button and given a good dose of luck.

I assume you mean "not' on the front page. I have noticed this on at least the last several articles. They seem to appear by the next day.

jim

goadam1
10-08-09, 09:20 PM
http://playtesters.org/images/gamer450.jpg
I assume you mean "not' on the front page. I have noticed this on at least the last several articles. They seem to appear by the next day.

jim

Beta testing.

Spartacus
10-09-09, 03:11 AM
close to the bottom - I think there needs to be something between "the" and "Japan took"

"China will likely take the Japan took and allow its currency to gradually appreciate against dollars. "


feel free to delete this post

doom&gloom
10-09-09, 04:53 AM
i wonder if the Chinese high command is a subscriber....

vinoveri
10-09-09, 10:14 AM
Thanks for this.

Questions:
Since the ongoing continued currency depreciation is the same strategy employed after the dot com bust, for which we saw 5 years of financial asset appreciation, why won't the equities markets do a repeat performance and continue to gain in nominal terms? Why do we expect another crash in stocks? Economic Fundamentals?

Could you please explain in layman terms how exactly our government surreptitiously depreciates the currency and how it orchestrates a controlled depreciation?

Rajiv
10-09-09, 10:54 AM
I think Chris Martenson may have answered that here

The Sound of One Hand Clapping - What Deflationists May Be Missing (http://www.chrismartenson.com/blog/sound-one-hand-clapping-what-deflationists-may-be-missing/29151)


From a technical perspective, we are absolutely in one of the most powerfully deflationary periods in history, yet, besides housing prices and a few over-produced consumer goods, we find that stocks, bonds, and commodities are all well-bid at the moment.

While we can ascribe some of this to the artificial wall of liquidity (come to think of it, is there any other kind?) currently being thrown into the financial market(s) by the Fed, it leaves hanging the question of why that money is not being completely swallowed into the bottomless black hole that the deflationist camp says lies at the heart of our current financial system.

And they are right; there is a black hole at the center. If we treat the credit doubling that occurred between 2000 and 2008 (from $26 to $52 trillion) as a normal bubble that will follow the same pattern of decline as numerous historical bubbles, then we might reasonably predict that some $26 trillion of debt will somehow "go away" over the next 6 years. This is indeed a massive black hole.

Yet everything just keeps perking along. What gives?

The answer, I believe, requires us to ask a Zen-like question along the lines of, "What is the sound of one hand clapping?" That question is, "If nobody recognizes a defaulted debt on their balance sheet, does it exist?"

Suppose, for the sake of argument, that there is a world in which banks are allowed by their regulators to pretend their default losses simply do not exist. And, even more outlandishly, some of these banks are allowed to sell heavily damaged loans to their central bank at nearly their full original price.

What does "deflation" mean in such a world? Not much, as it turns out. At least from a monetary perspective, because money is not being destroyed at nearly the rate that would be expected or predicted by the size and rate of the defaults.

This is the world in which we currently live. Trillions in probable and provable losses quietly exist, out of sight, on the balance sheets of the Federal Reserve and other financial institutions. If they ever come out of hiding and onto the books, I think the deflationists will be proven correct beyond all doubt.

But let me ask this: What prevents the authorities from simply storing them out of sight forever? Or at least long enough to allow the wave of liquidity to work its inevitable magic? So far, much to my great surprise, they've managed to do exactly that, with hardly a squeak from the mainstream press (although the blogsphere is on the job, as usual). I am now wondering if they cannot keep this up indefinitely.

.
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.
.
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vinoveri
10-09-09, 11:07 AM
Yep, I saw the Martensen piece, but frankly couldn't understand it, and was somewhat taken aback that he is now thinking ...like me a novice somewhat prone to tin-foil antics (i.e., that none of the toxic assets really matter if the Fed and regulator can just make them go away). He seems to have grasped that the whole thing is a smoke and mirrors game of accounting where "toxic assets" can continually and indefinitely be shifted around in some shell game.

So do we live in a world where stock market investing is increasingly no longer about economic fundamentals, growth, profits, etc, but more about a need to offset a steady decline in purchasing power of $ as the continual creation of debt and flood of liquidity depreciates the currency. If cash is truly trash, aren't the equities markets destined to go up as nobody wants to sit on cash?

Which brings back the question, which iTulip to its great credit forecast, WHERE and WHEN will the next bubble be? We know another bubble(s) is inevitable don't we?

jk
10-09-09, 11:20 AM
the banking system has been broke before, when their latin american loans went south. the losses were hidden away while the banks repaired their balance sheets over a period of years with guaranteed profits from playing the yield curve. same thing happening now.

Rajiv
10-09-09, 11:27 AM
The "Lean Green Machine" is the bubble forecast by Itulip -- However, I would look at that with an extremely jaundiced eye as I alluded to in my thread - Could Food Shortages Bring Down Civilization? (http://www.itulip.com/forums/showthread.php?t=12385)

The green bubble should happen -- but with the provisio that "Black Swans" are much more likely -- and may throw a spanner in the works. At this juncture, I am probably more aligned with Kunstler and Heinberg, than with a smooth transition to a new bubble. "Peak Everything" can be quite a bitch! And very unpredictable to boot!

c1ue
10-09-09, 12:03 PM
Yep, I saw the Martensen piece, but frankly couldn't understand it, and was somewhat taken aback that he is now thinking

VV,

It isn't too hard - consider it this way: if all the toxic assets are bought by the Fed and 'disappeared', who benefits?

All those who bought up said toxic assets cheap and sold them less cheap.

Thus the bankers who originally made the 'securitized asset' make money (supply), and those connected vultures like Pimco also make money (supply).

What is unusual about this activity is that it restricts the 'inflation' (via disappearing deflation) to the bankers. Normal money printing works across the board and similarly is bad for banks across the board as banks borrow long and lend short.

Rising inflation is bad for this model since the long borrowings get deflated in purchased power while the short lending loses relative interest rate earnings (i.e. successive loans have higher interest, but interest rates always lag increasing inflation).

Spartacus
10-09-09, 12:56 PM
I think Chris Martenson may have answered that here

The Sound of One Hand Clapping - What Deflationists May Be Missing (http://www.chrismartenson.com/blog/sound-one-hand-clapping-what-deflationists-may-be-missing/29151)


But let me ask this: What prevents the authorities from simply storing them out of sight forever? Or at least long enough to allow the wave of liquidity to work its inevitable magic? So far, much to my great surprise, they've managed to do exactly that, with hardly a squeak from the mainstream press (although the blogsphere is on the job, as usual). I am now wondering if they cannot keep this up indefinitely.

edit: I note that JK above is making the same point I make here

This is exactly how the US handled the 80s petrodollar collapse.

People forget that without "hide the bouncing ball" a bunch of NY banks would have gone completely belly up when the price of oil collapsed in the early 80s. Without the internet it was not widely reported. `

Argentina, as one example, did (another one of their) belly-up acts, at that time on petro-debt, debt underwritten on the firm belief that petroleum prices would never drop, but none of the NY banks that were defaulted on were much affected.

ThePythonicCow
10-09-09, 01:23 PM
I think Chris Martenson may have answered that hereI'm toying with an analogy between economics and (rather mutant) human biology.

Imagine that our bodies can both manufacture and use some sort of Glucose-Steroid Compound (I will abbreviate this as 'GSC') that both transports generic energy about the body, as does glucose, as well as causes further growth of body muscle and fat tissue. Imagine further that this body tissue can generate even more GSC.

This could create a feedback loop resulting in overly developed bodies and some heavily bulked up World Wrestling Entertainment (WWE) wrestlers.

http://blogs.seattleweekly.com/buzzerbeater/578.jpg

In this mutated biological analogy, we can get a feedback loop, where more GSC causes bigger muscles and bigger muscles create more GSC.

Now imagine our big, old wrestler is wasting away. His body is breaking down. Much of his expanded muscle no longer does much useful (or even entertaining) work. He is becoming GSC intolerant, just as real people become glucose intolerant. Imagine also his bloated tissue is no longer producing as much GSC as before.

EJ's point is that the FED can inject as much synthetic GSC (print as much money) as it wants to, insuring that we don't enter a period of GSC (money) starvation like we did in the 1930's. However we (1) still have a large mass of bloated, wasting muscle and fat tissue, (2) that tissue no longer generates GSC efficiently and (3) GSC no longer energizes much of the bodies tissue or pumps up its growth as efficiently as before.

In economic terms, the usual supply and demand model does not apply. We have less debt-based new money, but at the same time money is becoming less valuable. Our GSC generators are failing, but at the same time we are becoming GSC-intolerant. We are becoming monetary diabetics.

http://seniorjournal.com/images/Symbols/ObeseMan125px.jpg

We are a long way and many life style changes away from ever becoming a slender, healthy man again.

http://www.lifehealthdiet.co.za/slender%20man%20walking.jpg

goadam1
10-09-09, 02:59 PM
Kuntsler believed in y2k. I agree with his ideas for nicer cities but he is hardly accurate and full of wishful pessimism.


The "Lean Green Machine" is the bubble forecast by Itulip -- However, I would look at that with an extremely jaundiced eye as I alluded to in my thread - Could Food Shortages Bring Down Civilization? (http://www.itulip.com/forums/showthread.php?t=12385)

The green bubble should happen -- but with the provisio that "Black Swans" are much more likely -- and may throw a spanner in the works. At this juncture, I am probably more aligned with Kunstler and Heinberg, than with a smooth transition to a new bubble. "Peak Everything" can be quite a bitch! And very unpredictable to boot!

vinoveri
10-09-09, 03:15 PM
VV,

It isn't too hard - consider it this way: if all the toxic assets are bought by the Fed and 'disappeared', who benefits?

All those who bought up said toxic assets cheap and sold them less cheap.

Thus the bankers who originally made the 'securitized asset' make money (supply), and those connected vultures like Pimco also make money (supply).

What is unusual about this activity is that it restricts the 'inflation' (via disappearing deflation) to the bankers. Normal money printing works across the board and similarly is bad for banks across the board as banks borrow long and lend short.

Rising inflation is bad for this model since the long borrowings get deflated in purchased power while the short lending loses relative interest rate earnings (i.e. successive loans have higher interest, but interest rates always lag increasing inflation).

c1ue, thanks for the explanation, but I'm obviously not bright enough to understand your last 2 paragaphs (or their implications). Are you saying that everything, with respect to the toxic debt, is solved?

OK, so the Fed buys the toxic debt, but doesn't that show up as assets on the Fed balance sheet (not that this has any meaning as far as I can tell, but at least we know those "assets" have not vanished)?

Mega
10-09-09, 04:25 PM
Thank Eric
Enjoyed that, made sense..........
Mike

charliebrown
10-09-09, 05:18 PM
really good article, makes sense, but two questions?

In Alice in Wonderlan parlance ...

Why isn't the bond market confirming this? I know the tin-foil-hatters (as opposed to the mad hatter) will tell us that there is some central bank, fed -> comercial bank propping up of treas. prices. But if dollar devaluation is the game who doesn't know it?? Look at any long term $USD chart and it's as plain as day. And who is going to hold a ten year t-bond yielding 3.2% with inflation and currency devaluation a sure thing? Also if the t-bond market is make-believe, corp bond yields are believing the myth too.

Now the fed's game has been buying up MBS. Who is selling it, the banks? If so what is the price the fed is paying? Is there a nudge-nudge wink-wink going on here, that if fed buys your crappy MBS, you are obliged use the cash to buy treasuries? I'm sure the holder of the MBS would do this trade. Is the fed peeking into the MBS to see the quality of the loans inside?? Or are they just taking the AAA rating that was bestowed upon this junk in the past? If the fed has to do open market operations to withdrawl money, selling the MBS what price will this it fetch?

Second question, if the U.S. does the currency devaluation, how long will it be before every country is doing the same thing? Does the U.S. have a competive advantage in running the printing press? so we can debase our currency faster than anyone else?

Mashuri
10-09-09, 05:27 PM
As usual, great piece EJ. I like Peter Schiff's analogy on deflationists. He said that if you actually measure the cost of all assets, products, etc, in sound money (gold) then guys like Prechter are right on. We have been experiencing long-term (price) deflation since the tech bubble pop -- in sound-money terms:

http://stockcharts.com/h-sc/ui?s=$SPX:$GOLD&p=M&b=4&g=0&id=p29412318136&a=180447066

I still believe we have at least one more deflationary event in our near future but, in the long run, the dollar is doomed to inflation.

c1ue
10-09-09, 06:09 PM
c1ue, thanks for the explanation, but I'm obviously not bright enough to understand your last 2 paragaphs (or their implications). Are you saying that everything, with respect to the toxic debt, is solved?

OK, so the Fed buys the toxic debt, but doesn't that show up as assets on the Fed balance sheet (not that this has any meaning as far as I can tell, but at least we know those "assets" have not vanished)?

The present Fed+government action is solving the problem for bankers, but is not solving the problem for anyone else.

Again referring back to iTulip theory: the P/C (production/consumption) economy has dependence on credit. As the banks were taking on monster assets (which became liabilities due to both default rates and major falls in underlying collateral value) in the form of MBS', CRE loans, etc etc, the individuals and businesses who were on the other end of this transaction were taking up liabilities (the loans themselves).

What has happened now is that the banks have been made good on the bad assets, but the individuals and businesses are still stuck with their loans with the exceptions of GM and AIG.

So the Fed's absorption of the toxic assets is great for the banks, but doesn't help the economy nor the population in any way. In fact, it makes things worse because the present policy is encouraging banks to lend even less than they might normally - normally banks lend because they need to give out loans in order to make money. Between the Fed buying crap assets for high prices and paying banks 0.25% for reserves, why risk extending loans in a bad economic environment?

The point of this is that a toxic asset isn't a single point item like say, a radioactive potato. If a person lent a potato to another person, but then both discovered the potato was radioactive, then the potato could be thrown away.

But lending creates 2 counterparties: he who extended the loan and he who accepted it. With the magic if securitization, even more counterparties were created - adding the securitized loan buyer to the mix.

The Fed and federal government have been making the loaners good (bank bailout, Fed MBS buying, etc) as well as some of the securitized buyers. But the loanees are still out of luck.

Do you think the Fed will cancel out all the mortgages packaged into the toxic MBS's which the Fed is now holding? It might write some of them down partially, but ultimately those idiots still holding onto the loans are going to be paying as much as they are able for the rest of the next generation (30 years give or take).

Those homes which are walked away from, what then will the Fed do with them? Sell them? Rent them? Pay property taxes on them? Maintain them?

I think not.

metalman
10-09-09, 06:32 PM
As usual, great piece EJ. I like Peter Schiff's analogy on deflationists. He said that if you actually measure the cost of all assets, products, etc, in sound money (gold) then guys like Prechter are right on. We have been experiencing long-term (price) deflation since the tech bubble pop -- in sound-money terms:

http://stockcharts.com/h-sc/ui?s=$SPX:$GOLD&p=M&b=4&g=0&id=p29412318136&a=180447066

I still believe we have at least one more deflationary event in our near future but, in the long run, the dollar is doomed to inflation.

do you know anyone who isn't waiting for one more crash in our near future? for a 2nd chance to buy gold at 2006 prices before a merciless rise to $2000 or $3000?

http://www.johnnyjet.com/images/PicForNewsletterVeniceJuly2005LineForChurch.JPG

2nd chance? they missed 2001, 2002, 2003, 2004...

http://www.kitco.com/LFgif/au00-pres.gif

what are they waiting for? 2008 prices? 2002 prices? how about june 2009 prices? what's the 'right' place to get in when gold prices correct? do they know?

nah... if the correction comes they'll read 'gold prices plummet! deflation!' in the wsj for the 2354th time in 8 yrs and not buy... again... same as every time gold prices corrected.

what if ej's right and the usa gov't pegged the dollar to oil... to fall at a controlled rate since 2001? the peg broke for a few months in 2008-2009... but they pulled it back fast!

then all those good folks waiting in line are out of chances to buy at 2009 prices... forget 2008.

Mashuri
10-09-09, 07:13 PM
Since gold has an almost 90% bullish sentiment, I know most people are NOT waiting for a pullback. You can't pick exact price bottom's but you can do pretty well getting in on the lower end of gold's dips. A little technical analysis (even just trend lines and/or moving averages) can really help.


do you know anyone who isn't waiting for one more crash in our near future? for a 2nd chance to buy gold at 2006 prices before a merciless rise to $2000 or $3000?

http://www.johnnyjet.com/images/PicForNewsletterVeniceJuly2005LineForChurch.JPG

2nd chance? they missed 2001, 2002, 2003, 2004...

http://www.kitco.com/LFgif/au00-pres.gif

what are they waiting for? 2008 prices? 2002 prices? how about june 2009 prices? what's the 'right' place to get in when gold prices correct? do they know?

nah... if the correction comes they'll read 'gold prices plummet! deflation!' in the wsj for the 2354th time in 8 yrs and not buy... again... same as every time gold prices corrected.

what if ej's right and the usa gov't pegged the dollar to oil... to fall at a controlled rate since 2001? the peg broke for a few months in 2008-2009... but they pulled it back fast!

then all those good folks waiting in line are out of chances to buy at 2009 prices... forget 2008.

Chris Coles
10-09-09, 07:52 PM
The reason for the new story pages seeming to arrive late is simply that, with a now major site like iTulip, it takes some time for the new pages to migrate around the world. Servers need someone to "hit" the page to upgrade the "local" page to the new version. I have known it to take six days to reach me here but this time I have been able to get it within hours.

Turning to the matter of a sneaky inflation of currency; China will be happy to allow its own currency to appreciate only so long as the US continues to buy their goods. That in turn will make a very interesting dance, the two locked together, each clasping the other's problems.

But once again, a fine article EJ. Makes very compelling reading.

Jesse
10-09-09, 09:31 PM
Brilliant in the incisiveness and compactness of argument.

Devastatingly logical.

goadam1
10-09-09, 09:45 PM
do you know anyone who isn't waiting for one more crash in our near future? for a 2nd chance to buy gold at 2006 prices before a merciless rise to $2000 or $3000?

http://www.johnnyjet.com/images/PicForNewsletterVeniceJuly2005LineForChurch.JPG

2nd chance? they missed 2001, 2002, 2003, 2004...

http://www.kitco.com/LFgif/au00-pres.gif

what are they waiting for? 2008 prices? 2002 prices? how about june 2009 prices? what's the 'right' place to get in when gold prices correct? do they know?

nah... if the correction comes they'll read 'gold prices plummet! deflation!' in the wsj for the 2354th time in 8 yrs and not buy... again... same as every time gold prices corrected.

what if ej's right and the usa gov't pegged the dollar to oil... to fall at a controlled rate since 2001? the peg broke for a few months in 2008-2009... but they pulled it back fast!

then all those good folks waiting in line are out of chances to buy at 2009 prices... forget 2008.

My friend says to me today, "but I shouldn't buy it at 1050?" I say,"You said the same thing when it went to 850 and I told you to buy it at 740."

metalman
10-09-09, 10:50 PM
My friend says to me today, "but I shouldn't buy it at 1050?" I say,"You said the same thing when it went to 850 and I told you to buy it at 740."

start in 2001...

'i dunno. gold at $300? i'm waiting for a pullback to $250'.

'i dunno. gold at $400? i'm waiting for a pullback to $350'.

'i dunno. gold at $500? i'm waiting for a pullback to $450'.

'i dunno. gold at $600? i'm waiting for a pullback to $550'.

'i dunno. gold at $700? i'm waiting for a pullback to $650'.

'i dunno. gold at $800? i'm waiting for a pullback to $750'.

'i dunno. gold at $900? i'm waiting for a pullback to $850'.

2009...

'i dunno. gold at $1000? holy shit! $1000!!??? wow! $1000!!??? :eek: i'm waiting for a pullback to $950'.

2010...

'i dunno. gold at $1100? i'm waiting for a pullback to $1050'.

'i dunno. gold at $1200? i'm waiting for a pullback to $1150'.

'i dunno. gold at $1300? i'm waiting for a pullback to $1250'.

'i dunno. gold at $1400? i'm waiting for a pullback to $1350'.

etc.

drip... drip... drip...

Iconic Hummer brand sold to Chinese manufacturer (http://us.rd.yahoo.com/finance/news/topnews/*http://biz.yahoo.com/ap/091009/us_hummer_sale.html?sec=topStories&pos=main&asset=&ccode=)<cite>- AP</cite>Hummer, the off-road vehicle that once epitomized America's love for hulking trucks, is now in the hands of a Chinese heavy equipment maker.


Latest Air-Safety Idea: Naps in the Cockpit (http://finance.yahoo.com/banking-budgeting/article/107934/latest-air-safety-idea-naps-in-the-cockpit.html)

(http://finance.yahoo.com/expert/article/moneyhappy/194647)
Is Volatile Income the New Normal? (http://finance.yahoo.com/expert/article/moneyhappy/194647)<cite>- Laura Rowley</cite>




http://imgur.com/HZNn2.gif



get over it. move on. deal with it. grow up. etc.

goadam1
10-09-09, 10:59 PM
start in 2001...

'i dunno. gold at $300? i'm waiting for a pullback to $250'.

'i dunno. gold at $400? i'm waiting for a pullback to $350'.

'i dunno. gold at $500? i'm waiting for a pullback to $450'.

'i dunno. gold at $600? i'm waiting for a pullback to $550'.

'i dunno. gold at $700? i'm waiting for a pullback to $650'.

'i dunno. gold at $800? i'm waiting for a pullback to $750'.

'i dunno. gold at $900? i'm waiting for a pullback to $850'.

2009...

'i dunno. gold at $1000? holy shit! $1000!!??? wow! $1000!!??? :eek: i'm waiting for a pullback to $950'.

2010...

'i dunno. gold at $1100? i'm waiting for a pullback to $1050'.

'i dunno. gold at $1200? i'm waiting for a pullback to $1150'.

'i dunno. gold at $1300? i'm waiting for a pullback to $1250'.

'i dunno. gold at $1400? i'm waiting for a pullback to $1350'.

etc.

drip... drip... drip...

Iconic Hummer brand sold to Chinese manufacturer (http://us.rd.yahoo.com/finance/news/topnews/*http://biz.yahoo.com/ap/091009/us_hummer_sale.html?sec=topStories&pos=main&asset=&ccode=)<cite>- AP</cite>Hummer, the off-road vehicle that once epitomized America's love for hulking trucks, is now in the hands of a Chinese heavy equipment maker.


Latest Air-Safety Idea: Naps in the Cockpit (http://finance.yahoo.com/banking-budgeting/article/107934/latest-air-safety-idea-naps-in-the-cockpit.html)

(http://finance.yahoo.com/expert/article/moneyhappy/194647)
Is Volatile Income the New Normal? (http://finance.yahoo.com/expert/article/moneyhappy/194647)<cite>- Laura Rowley</cite>




http://imgur.com/HZNn2.gif



get over it. move on. deal with it. grow up. etc.

The consequences and problems will not be pleasant. But people will adjust and the propaganda will go 24/7. So we will sound like crazy people talking about America becoming a Banana Republic.

Of course it was cool to say that stuff during Bush
http://www.boingboing.net/200810100837.jpg
b
but under Noble prize winning Obama, if you say talk about the line from GS to Rubin to Geitner. Or the Tarp Coup. Or people lining up for money in Detroit. Or how many are on food stamps. Well then, you are a racist.
http://www.thegully.com/essays/america/img_usa/banana_republic.jpg

metalman
10-09-09, 11:19 PM
one of my faves from 2007...

The United Banana Republic of Americas! (http://www.itulip.com/forums/showthread.php?p=17216)

<table valign="top" align="left" border="0"><tbody><tr><td>http://www.itulip.com/forums/../images/ubra2.png</td> </tr> </tbody></table> (http://www.itulip.com/forums/../images/ubraflagexplained.jpg)Today we roll out our United Banana Republic of America (UBRA) flag as we dig into the Labor Department's numbers to see where all these jobs came from, but the fact is that our projection yesterday (http://www.itulip.com/forums/showthread.php?p=17153#post17153) of today's payroll numbers was wrong.

The good news: unemployment is only slightly up. The bad news: the banana republicization of America is proceeding apace.
Payrolls Pick Up by 110,000 but Not Enough to Stop Jobless Rate From Rising to 4.7 Percent (http://biz.yahoo.com/ap/071005/economy.html?.v=6)

The new job market snapshot released by the Labor Department on Friday showed that employers boosted payrolls by 110,000, the most in one month since last May. In an encouraging note, the economy actually added 89,000 jobs in August. That marked an improvement from the net loss of 4,000 that the government first estimated.

To be sure, the ill effects of these problems are showing up at some companies. Construction firms cut 14,000 jobs in September, Factories slashed 18,000. Retailers got rid of just over 5,000 jobs. Financial services companies eliminated 14,000 slots.

However, gains in education and health services, professional services, leisure and hospitality, and in government work more than offset those losses, leading to a net gain in new jobs in September.
<table valign="top" align="left" border="0"> <tbody><tr> <td>http://www.itulip.com/forums/../images/milbonarnote.jpg</td> </tr> </tbody></table>The magic of a depreciating currency is working. Foreign investors are buying UBRA stocks and other assets at fire sale prices. Tourism is up as visitors from Asia, Europe, Canada and all other countries whose currencies have appreciated against the bonar (http://www.itulip.com/forums/../glossary.htm#Bonar) flock to visit the US for a cheap UBRA vacation, driving leisure and hospitality jobs within the service sector where most of the job growth occurred.

Like any banana republic that depreciates its currency to give the economy a temporary boost, as the private sector–especially the goods producing sector–of the economy shrinks the UBRA government employs more of its citizens directly and through companies that contract to the government, especially as elections approach.


http://www.itulip.com/forums/../images/totalemployment.jpg


The payroll numbers today extend a trend that started with post 2000 stock market crash re-inflation policies. Of 140 million jobs in the US economy, approximately 50 million, or 36%, are in the goods producing, construction, and manufacturing sectors. The rest are in finance, retail, services, or government. At 22 million, total government employment is now at parity with the goods producing sector. (http://www.bls.gov/news.release/empsit.t14.htm)

There is little reason to believe that the banana republicization of America will not continue. As long as it does, the UBRA may be able to avoid recession. We will look into other employment data before considering a delay in our forecast of a Q4 2007 recession.

There is one fly in the tropical rum drink. Today's labor department report also showed: "Wages, meanwhile, rose solidly."

Suppression of wage increases has been the centerpiece of monetary and government policy to manage inflation in the Production/Consumption Economy since 1980. Given the difficulty in acquiring legitimate measures of actual inflation rates in the US economy, there is no way of telling whether these wage increases translate into increased purchasing power. Given the rise of oil and other commodity prices, it seems doubtful. In fact, it looks like the UBRA is going full-bore banana republic, including wage and price inflation to maintain employment going into an election year.

metalman
10-10-09, 12:22 AM
don't know about anyone else, but one of the names listed by Svensson stands out...


Even if the nominal interest rate is zero, a depreciation of the currency provides a powerful way to stimulate the economy out of the liquidity trap (for instance, Bernanke (2000); McCallum (2000); Meltzer (2001); Orphanides and Wieland (2000)).

Down Under
10-10-09, 12:25 AM
don't know about anyone else, but one of the names listed by Svensson stands out...

Obviously, got the right man for the job

stumann
10-10-09, 12:58 AM
"...if the U.S. does the currency devaluation, how long will it be before every country is doing the same thing?...so we can debase our currency faster than anyone else?"

and because the US is the reserve currency, exactly how can this occur???

I would more likely believe the US$ has been "decoupled" from the US economy (in the vein of Doug Noland's comments) and whether or not the US domestic economy works, it really doesn't effect the US$

could be a good time to jump ship from the com$'s once the AUS hits mid90s again. sorry, still not convinced the era of real commodity appreciation has begun. the real pain must be felt first

looking at the natural gas price over the past few weeks, it's actually more proof against inflation- deregulation leading to market manipulation hardly counts as "inflation"... such market run ups are one shot events. prices crash after the hot$$$ has been made


call me a fool, but I'm still not convinced the "inflation" since 2001 will take root and grow... (and as Mr. Prechter would say, this article could well call the top of the Fed's doomed reflationary efforts).

once pushing on a string has been found to be wanting, then what????

Spartacus
10-10-09, 02:35 AM
captive bids

social security "trust fund" has to buy treasuries
foreigners
US FED
probably a bunch of other entities are required to buy t-bills come hell or high water.


really good article, makes sense, but two questions?

In Alice in Wonderlan parlance ...

Why isn't the bond market confirming this? I know the tin-foil-hatters (as opposed to the mad hatter) will tell us that there is some central bank, fed -> comercial bank propping up of treas. prices. But if dollar devaluation is the game who doesn't know it?? Look at any long term $USD chart and it's as plain as day. And who is going to hold a ten year t-bond yielding 3.2% with inflation and currency devaluation a sure thing? Also if the t-bond market is make-believe, corp bond yields are believing the myth too.

Now the fed's game has been buying up MBS. Who is selling it, the banks? If so what is the price the fed is paying? Is there a nudge-nudge wink-wink going on here, that if fed buys your crappy MBS, you are obliged use the cash to buy treasuries? I'm sure the holder of the MBS would do this trade. Is the fed peeking into the MBS to see the quality of the loans inside?? Or are they just taking the AAA rating that was bestowed upon this junk in the past? If the fed has to do open market operations to withdrawl money, selling the MBS what price will this it fetch?

Second question, if the U.S. does the currency devaluation, how long will it be before every country is doing the same thing? Does the U.S. have a competive advantage in running the printing press? so we can debase our currency faster than anyone else?

whitetower
10-10-09, 02:49 AM
Just an observation about a "Sudden Stop" and currency flight.

I live in Arizona and a few times per year our family travels to Puerto Penasco, Mexico for a long weekend at the beach. This past weekend we were stopped leaving the United States at the U.S. border going south to Mexico by U.S. Customs. This has never happened before to us. There is always a back-up coming back to the U.S. at the border -- never have I seen a back-up of Americans leaving.

We were specifically asked 1.) are we American citizens and 2.) are we travelling with over $10,000 in currency.

I asked a co-worker who owns a home in Mexico and who goes 2-3 times every month if this was something new (we hadn't been since May). She said that if had been going on for a couple of months.

Very strange and very alarming.

xela
10-10-09, 04:08 AM
what if ej's right and the usa gov't pegged the dollar to oil... to fall at a controlled rate since 2001? the peg broke for a few months in 2008-2009... but they pulled it back fast!


That would beg the question why iTulip so far still has no oil in its portfolio. Not suited as a long term holding, expecting a re-crash of oil prices, some other reason, which one.. ?

Slimprofits
10-10-09, 09:14 AM
Just an observation about a "Sudden Stop" and currency flight.

I live in Arizona and a few times per year our family travels to Puerto Penasco, Mexico for a long weekend at the beach. This past weekend we were stopped leaving the United States at the U.S. border going south to Mexico by U.S. Customs. This has never happened before to us. There is always a back-up coming back to the U.S. at the border -- never have I seen a back-up of Americans leaving.

We were specifically asked 1.) are we American citizens and 2.) are we travelling with over $10,000 in currency.

I asked a co-worker who owns a home in Mexico and who goes 2-3 times every month if this was something new (we hadn't been since May). She said that if had been going on for a couple of months.

Very strange and very alarming.

capital controls will be done under the guise of stopping money laundering and terrorism.

jk
10-10-09, 10:26 AM
That would beg the question why iTulip so far still has no oil in its portfolio. Not suited as a long term holding, expecting a re-crash of oil prices, some other reason, which one.. ?
if ej's prediction of a big break in equities WITHIN THE NEXT 2.5 MONTHS [!] comes to pass, there will be an opportunity to buy oil much more cheaply. i'm currently about 10-11% in oil or oil-related investments because i'm less than sure that such an opportunity will come to pass. if it does, i'm going to deal with some painful temporary losses on my current positions, but i'm going to be a buyer.

cobben
10-10-09, 11:10 AM
"there will be an opportunity to buy oil much more cheaply"

Perhaps not oil itself, but oil stocks, including the trusts, which generally trade more like stocks than like the commodity.

A renewed credit / liquidity crunch for example would pull the debt leveraged stocks down, not necessarily the commodity.

jk
10-10-09, 11:14 AM
"there will be an opportunity to buy oil much more cheaply"

Perhaps not oil itself, but oil stocks, including the trusts, which generally trade more like stocks than like the commodity.

A renewed credit / liquidity crunch for example would pull the debt leveraged stocks down, not necessarily the commodity.
yes. actually whether oil itself sells off will be very telling, and the answer to a question i posed somewhere or other around here, " is oil being turned into money? has it become a store of value?"

xela
10-10-09, 01:05 PM
Will be interesting for sure. Oil re-crashing below 33.. might be just the trigger to terminate the petrodollar IMO.

skyson
10-10-09, 01:41 PM
As usual, great piece EJ. I like Peter Schiff's analogy on deflationists. He said that if you actually measure the cost of all assets, products, etc, in sound money (gold) then guys like Prechter are right on. We have been experiencing long-term (price) deflation since the tech bubble pop -- in sound-money terms:

http://stockcharts.com/h-sc/ui?s=$SPX:$GOLD&p=M&b=4&g=0&id=p29412318136&a=180447066

I still believe we have at least one more deflationary event in our near future but, in the long run, the dollar is doomed to inflation.

exactly. we are going into a deflation spiral, for sure!

when you measure the size of something, you need to use a standard measurement tape, like 1 cm = 1 cm. if your measurement unit keeps changing everytime, then how could you determine something's correct size?

i found this argument of inflation/deflation not very helpful. shall we first determine what measurement unit to use? is it hopeless to determine the growth/shrinkage of economy and increase/decrease of price level with a unit($US) that subjected to manipulation of the US government?

if we use the real money(gold) to gauge the economic conditions, the "deflationist" arguments are indeed very convincing and fit the common sense of economic theory: shrinking consumer demand-->shrinking economy-->price decrease of everything.

by using a floating measurement unit($US), deflationists/inflationists are confusing a whole lot of people. shall we go back to the basics?

my last question is:if the argument of inflation/deflation is over, is the official itulip asset allocation of 30% PM/70% treasury bills a fence sitting position?

if deflation(in gold terms) is setting in, we shall see the trend line going down soon...

http://www.itulip.com/forums/attachment.php?attachmentid=2122&d=1252488903

jk
10-10-09, 01:59 PM
if we use the real money(gold) to gauge the economic conditions, the "deflationist" arguments are indeed very convincing and fit the common sense of economic theory: shrinking consumer demand-->shrinking economy-->price decrease of everything.

by using a floating measurement unit($US), deflationists/inflationists are confusing a whole lot of people. shall we go back to the basics?

my last question is:if the argument of inflation/deflation is over, is the official itulip asset allocation of 30% PM/70% treasury bills a fence sitting position?

if deflation(in gold terms) is setting in, we shall see the trend line going down soon...

http://www.itulip.com/forums/attachment.php?attachmentid=2122&d=1252488903
the problem with following this graph is that i think oil is becoming a form of money, too, i.e. it is increasingly being bought as a store of value instead of for use.

skyson
10-10-09, 02:38 PM
the problem with following this graph is that i think oil is becoming a form of money, too, i.e. it is increasingly being bought as a store of value instead of for use.

yes you are right. so what is your take on the most accurate "weather balloon(s)" to watch?

jk
10-10-09, 02:46 PM
yes you are right. so what is your take on the most accurate "weather balloon(s)" to watch?
we have no fixed frame of reference, as finster [and his avatar] points out, so we have to watch everything. earlier today i figured out my investment returns over the last 8years. over a double in dollars [2.24x], but down 40% in gold and down 38% in crude oil, up 36% in wheat and up 34% in euros. i don't usually use quite so many metrics, but every time i figure out what my portfolio is worth i also value it in gold and i multiply it by the dollar index to see what it might buy me abroad. overall, i figure i'm about even or up a little bit in terms of actually buying the things i want to buy. not so great for all the time i put in, but not too bad considering my biggest drawdown in 8 years was 15%, and my 2nd and 3rd biggest were only about 8%. we're all at sea, untethered.

skyson
10-10-09, 04:22 PM
we have no fixed frame of reference, as finster [and his avatar] points out, so we have to watch everything. earlier today i figured out my investment returns over the last 8years. over a double in dollars [2.24x], but down 40% in gold and down 38% in crude oil, up 36% in wheat and up 34% in euros. i don't usually use quite so many metrics, but every time i figure out what my portfolio is worth i also value it in gold and i multiply it by the dollar index to see what it might buy me abroad. overall, i figure i'm about even or up a little bit in terms of actually buying the things i want to buy. not so great for all the time i put in, but not too bad considering my biggest drawdown in 8 years was 15%, and my 2nd and 3rd biggest were only about 8%. we're all at sea, untethered.

thanks for sharing.

your result drive the point i raised at post #40 and a question constantly in my mind for the last few months: if we are so certain that inflation(aka deflation in gold), why it is still prudent to only allocate 30% of fund in gold, why not 70%? not to mention the huge risk of a sudden devaluation of $US and other paper currencies?

by leaving majority of fund out of gold, i assume people are trying to catch the last batch of fishes trapped between the rapid currents and swirls at the up stream of niagara falls. before they could celebrate the harvest, the boat load of fish and themselves would unexpectively fall into the bottomless abyss of the waterfall.

looking at finster's FDI index, is there any doubt where the dollar is heading? is it time to put down your anchor made of gold, steady yourself in this dangrous and rapid economic river?

cobben
10-10-09, 05:37 PM
"is there any doubt where the dollar is heading?"

In risk management you always have to take under consideration the fat-tail outliers, what if . . . Bernanke suddenly converts to Austrian economics, and precipitates the deflation spiral that EJ says "cannot" happen. It certainly can happen if TPTB go off their rocker, it's just not very likely.

Nice run up here, +8% in one week is not chicken feed, but no breakout yet. It does look like there might be one soon though, so Fed jawboning / rumour mongering should go orbital next week.

GLD:TLT
http://stockcharts.com/h-sc/ui?s=GLD:TLT&p=W&yr=3&mn=0&dy=0&id=p03442735180

charliebrown
10-11-09, 09:30 AM
social security is now cash flow negative, that net buyer of treasuries is now a net seller. I don't see this reversing as the boomers are hitting retirement next year 1945 -- 2010 = 65 years.

What about state, local govts running deficits, no net long term buyers here, pension funds will be net sellers too as boomers start drawing on their pensions.

As an increase in buying, I have heard that institutional money managers are re-thinking their asset allocation and slightly increasing bond/stock ratios in their portfolios.

jk
10-11-09, 11:44 AM
thanks for sharing.

your result drive the point i raised at post #40 and a question constantly in my mind for the last few months: if we are so certain that inflation(aka deflation in gold), why it is still prudent to only allocate 30% of fund in gold, why not 70%? not to mention the huge risk of a sudden devaluation of $US and other paper currencies?

by leaving majority of fund out of gold, i assume people are trying to catch the last batch of fishes trapped between the rapid currents and swirls at the up stream of niagara falls. before they could celebrate the harvest, the boat load of fish and themselves would unexpectively fall into the bottomless abyss of the waterfall.

looking at finster's FDI index, is there any doubt where the dollar is heading? is it time to put down your anchor made of gold, steady yourself in this dangrous and rapid economic river?
by asking this question, it is clear that you are not CERTAIN, and i'll tell you that neither am i. there is no certainty.

there is also the issue of volatility. for me, part of keeping my pm position the size it has been is to limit the daily to weekly volatility. if i put it all in gold, i think i'd have a high probability of doing well in the long term, but not certainty. and i'd have to be prepared to lose, say, 10-20% in a week. i don't think that will happen either, btw, but it could. i'm not prepared to take those outlier risks.

otoh, my sense of the odds has led me to slowly increase my commodity positions over the past few weeks. along with my current 35% in pm's, i'm now 11% in energy, 3.5% in agriculture. i have no plans to add to my pm's- i'll let the position grow if pm prices rise. if there's a big sell off in pm's, i might add a bit. i do plan to add to my other commodity positions, making 1-2% buys from time to time, as i have been. i haven't yet specified targets for my ultimate allocations, but i know those targets are higher than my current positions.

so, fwiw, that's how i handle the uncertainty.

vinoveri
10-11-09, 12:09 PM
jk, if you don't mind sharing, what are your preferred vehicles for commodities, etfs, mutual funds, individual stocks, futures? I've dabbled in DBC, DBA etc over the past couple of years, but am beginning to rethink these.

jk
10-11-09, 08:37 PM
jk, if you don't mind sharing, what are your preferred vehicles for commodities, etfs, mutual funds, individual stocks, futures? I've dabbled in DBC, DBA etc over the past couple of years, but am beginning to rethink these.
i don't mind sharing, but i don't think i have any particular wisdom about these matters. i haven't used futures [directly] for some time - i used to use gsci contracts, sometimes hedging out part of the energy exposure. so now i'm using closed end funds and etf's. my pm's are mostly in the form of cef and gtu, with some gld. my energy investments are mostly in canadian trusts and former trusts, with some dbo. agriculture mostly via dba, with a bit of moo.

hayfield
10-11-09, 08:39 PM
c1ue, thanks for the explanation, but I'm obviously not bright enough to understand your last 2 paragaphs (or their implications). Are you saying that everything, with respect to the toxic debt, is solved?

OK, so the Fed buys the toxic debt, but doesn't that show up as assets on the Fed balance sheet (not that this has any meaning as far as I can tell, but at least we know those "assets" have not vanished)?

VV, my take from CM's piece: Public companies can (and are) audited. They provide quarterly statements, although often cryptic, for investors to dissect.

The Fed offers little visibility, and even less accountability. It can collect all of the worthless securitized debt it wishes, and pay an outlandish 80 cents on the dollar. The banks clean up their balance sheets and put out a pretty quarterly statements. The Fed hides the junk securities... indefinitely.

But now I'm wondering, what do you suppose happens when a loan, pooled into one of the Fed's junk securities, defaults? Does it simply ignore the default? Or does it do something to try to maximize the value of its securities?

jk
10-11-09, 08:45 PM
VV, my take from CM's piece: Public companies can (and are) audited. They provide quarterly statements, although often cryptic, for investors to dissect.

The Fed offers little visibility, and even less accountability. It can collect all of the worthless securitized debt it wishes, and pay an outlandish 80 cents on the dollar. The banks clean up their balance sheets and put out a pretty quarterly statements. The Fed hides the junk securities... indefinitely.

But now I'm wondering, what do you suppose happens when a loan, pooled into one of the Fed's junk securities, defaults? Does it simply ignore the default? Or does it do something to try to maximize the value of its securities?
part of the banks' problems is time: when to recognize losses? with the abandonment of mark to market, things got a lot easier. one thing the banks can do to buy time is to park the junk securities with the fed. the banks get cash that can earn a riskless return as deposited reserves or in treasuries. meanwhile, the securities age in the fed's cellar. perhaps when loans go bad the fed will feed those back to the banks, but in a controlled, delayed stream, allowing the banks time to repair their balance sheets and stretch out the losses. then the banks can deal with the defaults however they usually do. i don't see the fed going into the work-out business.

cjppjc
10-11-09, 09:24 PM
by asking this question, it is clear that you are not CERTAIN, and i'll tell you that neither am i. there is no certainty.

there is also the issue of volatility. for me, part of keeping my pm position the size it has been is to limit the daily to weekly volatility. if i put it all in gold, i think i'd have a high probability of doing well in the long term, but not certainty. and i'd have to be prepared to lose, say, 10-20% in a week. i don't think that will happen either, btw, but it could. i'm not prepared to take those outlier risks.




You have no idea. I had been more than 75% in minors for long time. The swings will drive you crazy. The down days are huge. Up till 2008 I was able to live with the swings. 2008 brought no swings, just crushing relentless down days, weeks, months. I so wish I had found this site earlier.:mad:

jk
10-11-09, 09:59 PM
You have no idea. I had been more than 75% in minors for long time. The swings will drive you crazy. The down days are huge. Up till 2008 I was able to live with the swings. 2008 brought no swings, just crushing relentless down days, weeks, months. I so wish I had found this site earlier.:mad:
shoulda, woulda, coulda. it's so easy to second guess yourself. i think pain is our tuition, so we might as well get an education. as i suggested in the post you quoted, i've tried to figure out a strategy that i can live with on an emotional level. i went through an experience similar to what you describe, in the early 1990's. i had been running my investments as a balanced, long-short portfolio and had been doing well, when i hit a streak of volatility that i couldn't handle. up, down, huge percentage swings on an almost daily basis. i sold everything and went to cash so i could calm down, and ended up putting putting most of my money into a piece of land that i couldn't price on a daily basis. [sold the land in 2000.]

cjppjc
10-11-09, 10:39 PM
shoulda, woulda, coulda. it's so easy to second guess yourself. i think pain is our tuition, so we might as well get an education. as i suggested in the post you quoted, i've tried to figure out a strategy that i can live with on an emotional level. i went through an experience similar to what you describe, in the early 1990's. i had been running my investments as a balanced, long-short portfolio and had been doing well, when i hit a streak of volatility that i couldn't handle. up, down, huge percentage swings on an almost daily basis. i sold everything and went to cash so i could calm down, and ended up putting putting most of my money into a piece of land that i couldn't price on a daily basis. [sold the land in 2000.]


Well I wasn't second guessing myself. It is a waste of time and emotional energy. I just wish I had found this site sooner. I think I would have sold most as soon as TSHTF. Your selling to calm yourself is a great idea. For me I've sold some minors and put the money in CEF. To me that's a load off my mind.:cool:

metalman
10-12-09, 01:53 AM
meanwhile over in mishmash wonderland... (http://js-kit.com/api/static/pop_comments?ref=http%3A%2F%2Fglobaleconomicanalys is.blogspot.com%2F%2F&path=%2F2009%2F10%2Ffive-major-pension-problems-one-simple.html&permalink=http%3A%2F%2Fglobaleconomicanalysis.blog spot.com%2F&label=Add%20New%20Comment&ti)




black swanhttp://s.js-kit.com/images/icon10-external-url.png says:
Today, 16:00:45

“StevieMo made fun of the gold investors, and StevieMo said the US economy was becoming just like Japan's. I don't know if anyone else has noticed, but it looks like Elvis has left the building, followed by StevieMo. So, Stevie, if you're still lurking out there, explain why gold has defied your predictions, and explain this:

"Bottom line, our standard of living here in the U.S. is declining as the purchasing power of our savings and income falls while our government pursues its anti-liquidity trap policy of currency depreciation. This is the opposite of the policies pursued by Japan since the early 1990s when the yen appreciated, wages inflated against goods and services, and living standards improved."

I've been saying it for over a year, so it's nice to have a pro like Eric Janszen stating it so succinctly. Janszen also states:

"As long as the dollar weakens there will be no general price deflation in the U.S."

Mish, since you are a die hard deflationist, inquiring minds would like to see your refutation of EJ's article:

http://www.itulip.com/forums/showthread.p<wbr>hp?p=127376#post127376 (http://www.itulip.com/forums/showthread.php?p=127376#post127376)Mishhttp://s.js-kit.com/images/icon10-external-url.png says:
Today, 18:52:27

“Mish, since you are a die hard deflationist, inquiring minds would like to see your refutation of EJ's article:

http://www.itulip.com/forums/showthread.p<wbr>hp?p=127376#post127376 (http://www.itulip.com/forums/showthread.php?p=127376#post127376)

When did I say deflation was about prices

When did ANY deflationist say deflation was about prices?

Janszen is a master at setting up strawman arguments and rebutting them.

Mish
fatboyhttp://s.js-kit.com/images/icon10-external-url.png says:
Today, 17:57:59

“black swan.
that itulip article on the game of currency devaluation is dead on correct. i was fooled by the liquidity trap argument for a year, but came to my senses a few months ago. what sold me was actually reading bernanke's writings and seeing with my own eyes. the game in a fiat,debt nation is currency devaluation, slowly hopefully. totally trumps the deflation argument of money and credit creation/destruction. i have been sold, and that article re inforces it. thanks for the heads up and your keen insights. maybe mish will address the article too. do you agree the trade for an entity, individual or corp is long gold,silver, stocks on asset side and lots of debt in us dollars.(us based entity). thanks again,
fatboy

bwah ha ha!

Chris Coles
10-12-09, 02:31 AM
There is only one way to increase local community prosperity over the long term, re-invest savings as equity capital back into new business ventures.

maTTz
10-13-09, 01:33 AM
What's a good strategy for an Australian?

some notes:

*AuD rising against the USD
*Gold down in AuD since Feb '09 (ie gold isn't going up, it's USD that's going down)
*stock market reacting just to sentiment which seems bullish at moment
*property market starting to find it's feet, once again just sentiment
*interest rates at the beginning of an up cycle

I'd like to borrow money in USD and invest it into precious metals (low interest rate in USD and also a currency that is being devalued) or even buy a house with it (from a lesser of 2 evils type perspective). But I'm not sure what mechanisms exist to take out a loan within Aussieland in USD... can anyone offer insight on alternative solutions for those of us in the Great Southland? :)

Down Under
10-13-09, 02:23 AM
What's a good strategy for an Australian?

some notes:

*AuD rising against the USD
*Gold down in AuD since Feb '09 (ie gold isn't going up, it's USD that's going down)
*stock market reacting just to sentiment which seems bullish at moment
*property market starting to find it's feet, once again just sentiment
*interest rates at the beginning of an up cycle

I'd like to borrow money in USD and invest it into precious metals (low interest rate in USD and also a currency that is being devalued) or even buy a house with it (from a lesser of 2 evils type perspective). But I'm not sure what mechanisms exist to take out a loan within Aussieland in USD... can anyone offer insight on alternative solutions for those of us in the Great Southland? :)

If you think gold is something you want to own, then I'd buy it in AUD from the Perth Mint. As you correctly point out, gold is well off it's AUD high of something like 1,550; hence, it's relatively cheap in AUD terms.

If the Chinese bubble bursts, then the AUD could fall significantly. So, in a sense, you're selling the AUD whilst it's at a twelve month high. Sure, it'll probably go higher, but if I had no gold, then in AUD terms it's a good buy at this time.

Jay
10-13-09, 08:52 AM
If you think gold is something you want to own, then I'd buy it in AUD from the Perth Mint. As you correctly point out, gold is well off it's AUD high of something like 1,550; hence, it's relatively cheap in AUD terms.

If the Chinese bubble bursts, then the AUD could fall significantly. So, in a sense, you're selling the AUD whilst it's at a twelve month high. Sure, it'll probably go higher, but if I had no gold, then in AUD terms it's a good buy at this time.
If you have no gold, any time is a good time to buy some or you might get a nasty surprise at some point.

Sharky
10-13-09, 09:16 AM
What's interesting to me is that this same Game was played in the 1920s. In fact, it may have been the trigger that led to the crash of 29 and to the subsequent depression.

What happened is that the US lowered interest rates well below market rates, as a way of supporting the economy of the UK, which was having severe problems. As a result of the low rates, dollars moved from the US to the UK, where rates were higher. That's very similar to what's happening today: low rates are causing dollars to move offshore.

The other thing that happened in the 20s, though, was an unintended consequence: the weak dollar destroyed corporate earnings, and the market crashed. Then the gold-backing of the dollar made it temporarily impossible for the politicos to dig themselves out of the hole they made, so they made gold possession illegal and forcibly devalued the dollar.

The important thing here, though, is that they didn't devalue the dollar in a vacuum. They devalued it internally to the US, to match the degree to which is had already been devalued internationally as a result of the low interest rates and currency flows.

With that history, it still seems likely to me that we'll see a repeat on the stock market side. Many inflationists seem to think that inflation is good for corporate earnings. News flash: not true. Ditto a weak dollar. Domestic expenses might decline, but foreign expenses and energy costs will increase at a faster rate.

How will Americans react to a long-term decline in their standard of living? If history gives us any clues, the answer is: "not well." One of the most reliable causes of social violence has been to give people a taste of freedom and wealth, and then take it away. Those who never taste it are much less likely to protest.

c1ue
10-13-09, 01:19 PM
How will Americans react to a long-term decline in their standard of living? If history gives us any clues, the answer is: "not well." One of the most reliable causes of social violence has been to give people a taste of freedom and wealth, and then take it away. Those who never taste it are much less likely to protest.

I'm not so sure about that.

If the people in Russia and the Soviet Union didn't turn violent given the precipitous standard of living drop after the collapse of the Soviet Union - given that the USSR was created in a civil war - I'm not clear that the fat lazy stupid Americans will pull themselves away from 'Dancing with the Stars' in order to foment revolution.

Argentina also saw a tremendous fall in standards of living - at least if Bart's poverty rates timeline is any indicator - and didn't see hardly any blood.

In fact I was talking with a long time acquaintance from Georgia (Eastern Europe). I first met him when he was working as a waiter in a Russian restaurant; now he is a taxi driver.

After the collapse of the Soviet Union, apparently the natural gas pipelines to Georgia were cut (or ignored!). He told me that the entire country was going out and cutting firewood for cooking and heating; we're talking city dwellers here, not the rural communities. Apartments getting holes knocked in a wall for a smokestack. No lights when the sun set. etc etc.

If they didn't go nutter, not sure what it would take. Then again, they do have Saakashvili now...but that was after 'recovery'.

Sharky
10-14-09, 03:58 AM
I'm not so sure about that.

If the people in Russia and the Soviet Union didn't turn violent given the precipitous standard of living drop after the collapse of the Soviet Union - given that the USSR was created in a civil war - I'm not clear that the fat lazy stupid Americans will pull themselves away from 'Dancing with the Stars' in order to foment revolution.

Violence doesn't have to mean revolution.

The Soviet Union may not have had traditional revolutionary-style violence after their collapse, but they did have a massive change in government (after all, the USSR is now gone), not to mention looting on a national scale, massive growth of the black market and organized crime, etc, etc.

Also, I'm not sure the former USSR really fits the model of what I was talking about in terms of people who have had a taste of being well-off. The Soviets are and were an intensely repressed people, with very limited property and wealth compared to the West.


Argentina also saw a tremendous fall in standards of living - at least if Bart's poverty rates timeline is any indicator - and didn't see hardly any blood.

Argentina had massive riots, during which many people were killed. Today, they have an insanely high crime rate. Mobs roam the streets and take what they want from the undefended. Again, it's not traditional revolutionary-style or government-directed violence, but it is violence.

peterchristopher
10-21-09, 10:34 AM
I think I am missing something here. How does a government go about devaluing its currency in a floating exchange rate system? And specifically, how do you go about devaluing it against oil, the price of which is determined by the market?

peterchristopher
10-27-09, 12:04 AM
Any takers? This seems like pretty simple question....

Down Under
10-27-09, 12:07 AM
I think I am missing something here. How does a government go about devaluing its currency in a floating exchange rate system? And specifically, how do you go about devaluing it against oil, the price of which is determined by the market?

Print money [QE]

peterchristopher
10-27-09, 12:41 AM
OK... but how is depreciating the currency by "printing money" different from expanding the monetary base (#1 below)? And furthermore, how does depreciating the currency refute the deflationists' "detailed and perfectly sound arguments [that] bank credit is contracting [and] the money supply is not growing," as EJ himself points out?

The deflationists agree that you can expand the monetary base by printing money, but you cannot inflate the overall money supply to a significant degree without multiplying it via bank lending. I just don't see this argument being explicitly refuted.

Anyone?



Rules of The Game: Re-inflation by stealth currency devaluation

In a debt deflation crisis, also known as a “balance sheet recession,” economic policy makers have four main tools to use to keep an economy out of a liquidity trap or get out of one.
1. Expand the monetary base
2. Reduce long-term interest rates
3. Run fiscal deficits
4. Depreciate the currency

Chris Coles
10-27-09, 02:51 AM
OK... but how is depreciating the currency by "printing money" different from expanding the monetary base (#1 below)? And furthermore, how does depreciating the currency refute the deflationists' "detailed and perfectly sound arguments [that] bank credit is contracting [and] the money supply is not growing," as EJ himself points out?

The deflationists agree that you can expand the monetary base by printing money, but you cannot inflate the overall money supply to a significant degree without multiplying it via bank lending. I just don't see this argument being explicitly refuted.

Anyone?

[/indent]

The problem is the financial system set into motion another method of printing money that had not been recognised as such by the regulatory authorities; and has not been acknowledged since from fear of the potential for further disruption.

You need to do some research into the underlying story of AIG. This seems to be a good starting point: http://www.rollingstone.com/politics/story/26793903/the_big_takeover

Normally, the banking system either took in deposits from retail or corporate customers, or took in injections of funding from, in the case of the US, the Federal Reserve or the US Treasury who would do so by creating, "Printing" new money from thin air.

But take a look at recent history of the collapse and you will discover that people keep using the magic word "leverage". In a normal Main Street bank the bank would take the deposits and create new money by issuing credit up to a limit of historically eight or ten times the deposit. That was OK, understandable under the old rules. But what went wrong was the investment banks started to "leverage" their deposits by a factor of orders of magnitude more than the norm. They created new money in the form of corporate instruments of various forms; CDO's, Collateralized Debt Obligations being the best known. Then add to that, the deposits they were taking in were not from their customers as cash, but the self same toxic CDO's. What has happened is that the system started to create new money at many times the rate of creation more than the traditional source, the FED or Treasury and then circulated it, but not in the form of $US Dollar Bills, but the likes of these toxic CDO's. So suddenly you have a financial system overloaded with what seemed to be money, totals on a computer screen, that were, are, in fact; nothing of the sort. Their initial value being created by the credit agencies stating the assets were AAA, when they were anything but AAA.

What is happening today, unseen, is that all those toxic assets are being quietly washed out of the balance sheets of the banking system by new money being issued by the FED and Treasuries of every nation on the planet. So the new funding is not being lent to anyone, it is replacing toxic assets. Taking this a little further, because the system is in such an unstable situation, and the quantity of toxicity is much greater than that which has been publicly admitted; the whole process may take some years before we return to normality.

THAT is why the banks are being given money but not lending it. They cannot lend it. Hope that helps a little.

raja
10-27-09, 08:38 AM
I'm not so sure about that.

If the people in Russia and the Soviet Union didn't turn violent given the precipitous standard of living drop after the collapse of the Soviet Union - given that the USSR was created in a civil war - I'm not clear that the fat lazy stupid Americans will pull themselves away from 'Dancing with the Stars' in order to foment revolution.

Argentina also saw a tremendous fall in standards of living - at least if Bart's poverty rates timeline is any indicator - and didn't see hardly any blood.

In fact I was talking with a long time acquaintance from Georgia (Eastern Europe). I first met him when he was working as a waiter in a Russian restaurant; now he is a taxi driver.

After the collapse of the Soviet Union, apparently the natural gas pipelines to Georgia were cut (or ignored!). He told me that the entire country was going out and cutting firewood for cooking and heating; we're talking city dwellers here, not the rural communities. Apartments getting holes knocked in a wall for a smokestack. No lights when the sun set. etc etc.

If they didn't go nutter, not sure what it would take. Then again, they do have Saakashvili now...but that was after 'recovery'.
Some possible differences:

Russians are accustomed to suffering and making do; Americans aren't

Americans have guns.

The internet now provides an alternative to mainstream info, and creates excellent organizing pathways.

That being said, IMO there won't be a violent national revolution . . . but there will be numerous acts of violence.

peterchristopher
10-27-09, 10:14 AM
Thanks Chris, that helps me understand things a bit more clearly, but my original question still stands.

If right now we are simply replacing all the leveraged debt and no one is lending it, we cannot possibly be adding to the monetary supply. So while this possibly refutes the deflationist argument that we are not going to have deflation because we are printing money to maintain leverage, we cannot possible have inflation result from this either.

So I have to ask again: what is the mechanism by which we are devaluing our currency against oil?



What is happening today, unseen, is that all those toxic assets are being quietly washed out of the balance sheets of the banking system by new money being issued by the FED and Treasuries of every nation on the planet. So the new funding is not being lent to anyone, it is replacing toxic assets. Taking this a little further, because the system is in such an unstable situation, and the quantity of toxicity is much greater than that which has been publicly admitted; the whole process may take some years before we return to normality.

THAT is why the banks are being given money but not lending it. They cannot lend it. Hope that helps a little.

ThePythonicCow
10-27-09, 10:32 AM
Some possible differences:

Russians are accustomed to suffering and making do; Americans aren't

Americans have guns.

The internet now provides an alternative to mainstream info, and creates excellent organizing pathways.

That being said, IMO there won't be a violent national revolution . . . but there will be numerous acts of violence.
The presence or absence of guns is not decisive. I would feel quite safe in rural Texas towns where many men carry guns, regardless of what happens in Washington, DC. I would feel unsafe in decaying urban areas if our American economy or national government decay further. What matters is the quality of the local communities.

jk
10-27-09, 10:44 AM
I think I am missing something here. How does a government go about devaluing its currency in a floating exchange rate system? And specifically, how do you go about devaluing it against oil, the price of which is determined by the market?

i don't know if you've noticed the price of crude oil lately, but - in real life - it appears that the financial system has figured out the answer to your question. this reminds me of an old science joke: "i know it works in practice, but does it work in theory?"

ThePythonicCow
10-27-09, 11:20 AM
So I have to ask again: what is the mechanism by which we are devaluing our currency against oil?Money is ultimately a reflection of power. Oil trade is international. As the oil exporting nations respond to the declining dominance of the United States and the rising power of other nations such as China, they will more willingly accept such currency as the Yuan and less willingly accept the Dollar in trade for their oil. The Dollar price of oil will rise. The declining availability of cheap oil will further aggrevate this rise in the Dollar price of oil.

At the same time, domestic American businesses and home "ownership" dependent on easy credit will decline, starved of credit. Domestic American labor markets will shrink, with rising unemployment and weak wages.

Do not look at the world's economy as a single market, in which prices are inversely proportional to the product of the quantity and velocity of money. Rather sense the relative decline of American dominance and the more equal distribution of power with other nations.

It is quite possible in such cases that more dollars are needed (for international trade) even as fewer are available (for domestic credit.)

goadam1
10-27-09, 12:33 PM
Money is ultimately a reflection of power. Oil trade is international. As the oil exporting nations respond to the declining dominance of the United States and the rising power of other nations such as China, they will more willingly accept such currency as the Yuan and less willingly accept the Dollar in trade for their oil. The Dollar price of oil will rise. The declining availability of cheap oil will further aggrevate this rise in the Dollar price of oil.

At the same time, domestic American businesses and home "ownership" dependent on easy credit will decline, starved of credit. Domestic American labor markets will shrink, with rising unemployment and weak wages.

Do not look at the world's economy as a single market, in which prices are inversely proportional to the product of the quantity and velocity of money. Rather sense the relative decline of American dominance and the more equal distribution of power with other nations.

It is quite possible in such cases that more dollars are needed (for international trade) even as fewer are available (for domestic credit.)

I think the previous 20 or so years of globalization required a huge deficit in the US not only because of balance of trade but because the world needed more dollars to do business. The upside was America's unlimited credit card. The downside is the debt trap. But I don't think we are factoring in all the global mechanisms when we talk about the US going Argentina ala Ka-poom.
It may be experienced as a slow grinding away at wealth as the world moves away from dollars.

ThePythonicCow
10-27-09, 12:39 PM
I think the previous 20 or so years of globalization required a huge deficit in the US not only because of balance of trade but because the world needed more dollars to do business. The upside was America's unlimited credit card. The downside is the debt trap. But I don't think we are factoring in all the global mechanisms when we talk about the US going Argentina ala Ka-poom.
It may be experienced as a slow grinding away at wealth as the world moves away from dollars.Excellent points.

Verdred
10-27-09, 05:28 PM
The presence or absence of guns is not decisive. I would feel quite safe in rural Texas towns where many men carry guns, regardless of what happens in Washington, DC. I would feel unsafe in decaying urban areas if our American economy or national government decay further. What matters is the quality of the local communities.

Underlying racial tensions might also play a part. Lived next to an indian reservation in a rural area and the whites, natives, and mexicans (all substantial portions of the population) are living in three different worlds with plenty of mild-to-medium tensions between them. Take away sense of security aaaand go!

metalman
10-27-09, 05:52 PM
Underlying racial tensions might also play a part. Lived next to an indian reservation in a rural area and the whites, natives, and mexicans (all substantial portions of the population) are living in three different worlds with plenty of mild-to-medium tensions between them. Take away sense of security aaaand go!

guns are like suvs... great in the country, bad news in the city.

metalman
10-27-09, 05:57 PM
i don't know if you've noticed the price of crude oil lately, but - in real life - it appears that the financial system has figured out the answer to your question. this reminds me of an old science joke: "i know it works in practice, but does it work in theory?"

if one of us here figures out how they're doing it, we'd be stupid to tell anyone else. first we'd use the info to get rich... then... after that... 'it' won't work anymore.

ask soros. it's not like you can profit on a run on a country's currency over and over again.

goadam1
10-27-09, 06:06 PM
guns are like suvs... great in the country, bad news in the city.

Guns as topic on Itulip:

http://www.iwebcanada.ca/horriblecourse/banned.jpg

metalman
10-27-09, 06:17 PM
Guns as topic on Itulip:

http://www.iwebcanada.ca/horriblecourse/banned.jpg

wups... thx for the reminder. don't wanna see this thread shipped off to ran & rave. :eek:

Chris Coles
10-27-09, 07:30 PM
Thanks Chris, that helps me understand things a bit more clearly, but my original question still stands.

If right now we are simply replacing all the leveraged debt and no one is lending it, we cannot possibly be adding to the monetary supply. So while this possibly refutes the deflationist argument that we are not going to have deflation because we are printing money to maintain leverage, we cannot possible have inflation result from this either.

So I have to ask again: what is the mechanism by which we are devaluing our currency against oil?

W R O N G !! That is precisely why EJ has factored in the potential for a sudden stop "event". You see, they are indeed adding to the monetary supply and is why various commentators have repeatedly commented upon the perception that the numbers simply do not add up correctly.

When a business, let alone a government, let alone several governments; cooks the books to cover up whatever they wish, it can take years for the truth to come out. Or, an "Event". If you have ever worked with any form of pressurised system, and taken it to its maximum capabilities, you will know just how fast the change from apparent stability to complete failure can be.

Something stupidly simple, totally unexpected, is going to be the trigger, but do not hold your breath, it just might not happen. But that is what makes the whole debate so interesting.

raja
10-27-09, 10:20 PM
The presence or absence of guns is not decisive. I would feel quite safe in rural Texas towns where many men carry guns, regardless of what happens in Washington, DC. I would feel unsafe in decaying urban areas if our American economy or national government decay further. What matters is the quality of the local communities.
PC,

I was referring to the widespread ownership of guns as a "facilitator" of revolution in the US vs. Russia . . . not as an issue of personal safety.

ThePythonicCow
10-28-09, 12:38 AM
PC,

I was referring to ...
Ah - ok. Thanks, Raja.

peterchristopher
10-28-09, 12:59 AM
You see, they are indeed adding to the monetary supply and is why various commentators have repeatedly commented upon the perception that the numbers simply do not add up correctly.

OK I get what you are saying, but to use the language of the deflationists, are you specifically saying that inflation can and will occur based on an increase in the base money supply (M0) alone? The deflationists say that in a fiat-based, fractional reserve system inflation occurs when base money is multiplied through lending. The amount of inflation that can occur from M0 is an order of magnitude smaller because it is not multiplied by lending.

Are you saying that we are printing money on a level that is an order of magnitude greater than before to compensate for the lack of this multiplier? Or are you saying that something has replaced bank lending as the multiplier of M0?

peterchristopher
10-28-09, 01:03 AM
OK so basically you guys are saying that we know the what but not the how with respect to the mechanism of the dollar's devaluation against oil?

Pythonic Cow alluded to the end of dollar hegemony being the mechanism by which this devaluation occurs. Which would suggest that our government is backing a new reserve currency to replace the dollar (such as the IMF's SDRs). This would flood the market with dollars form foreign holders who don't want or need them anymore, and inflation (not to mention the complete destruction of the US Dollar) would indeed occur in such a scenario.

Chris Coles
10-28-09, 04:37 AM
OK I get what you are saying, but to use the language of the deflationists, are you specifically saying that inflation can and will occur based on an increase in the base money supply (M0) alone? The deflationists say that in a fiat-based, fractional reserve system inflation occurs when base money is multiplied through lending. The amount of inflation that can occur from M0 is an order of magnitude smaller because it is not multiplied by lending.

Are you saying that we are printing money on a level that is an order of magnitude greater than before to compensate for the lack of this multiplier? Or are you saying that something has replaced bank lending as the multiplier of M0?

I can only give you my personal viewpoint, which is that no one knows for certain what has happened and what will happen. Our only valid route is to debate and by that mechanism, try and figure out all the variables, so that, when events occur, you have already thought about the implications and can adjust your strategy accordingly.

Yes, I sit right at the middle of the fence, with my eyes and ears open.:)

Sharky
10-30-09, 03:44 AM
So I have to ask again: what is the mechanism by which we are devaluing our currency against oil?

The mechanism is artificially low interest rates.

Here's how it works: capital is attracted to yield (real return); when yield is low in the US, capital moves to places where it's higher (out of the US); the result is net selling of the USD, which devalues it relative to other currencies; a weaker dollar drives up the cost of imports, including oil; as import and energy costs increase, so does inflation.

That's the theory, anyway. In practice, the holders of dollars will steadily see their value decline; as they do, they will tend to act to preserve as much value as they can; unfortunately, moving hundreds of billions of dollars quickly isn't easy without further damaging the value of existing assets; one very likely solution is to spend those holdings in the US, rather than internationally: hence the steady flow of foreign companies buying US companies and associated assets (real estate, etc); however, the flow is still a trickle today; it could easily turn into a flood, which would result in a huge inflation spike; further devaluation at a minimum; hyperinflation as a worst case.

Slimprofits
10-30-09, 04:23 AM
The mechanism is artificially low interest rates.

Here's how it works: capital is attracted to yield (real return); when yield is low in the US, capital moves to places where it's higher (out of the US); the result is net selling of the USD, which devalues it relative to other currencies; a weaker dollar drives up the cost of imports, including oil; as import and energy costs increase, so does inflation.

That's the theory, anyway. In practice, the holders of dollars will steadily see their value decline; as they do, they will tend to act to preserve as much value as they can; unfortunately, moving hundreds of billions of dollars quickly isn't easy without further damaging the value of existing assets; one very likely solution is to spend those holdings in the US, rather than internationally: hence the steady flow of foreign companies buying US companies and associated assets (real estate, etc); however, the flow is still a trickle today; it could easily turn into a flood, which would result in a huge inflation spike; further devaluation at a minimum; hyperinflation as a worst case.

Thank you Sharky.

peterchristopher
10-30-09, 10:59 AM
Thank you Sharky.

100% agreed. Thank you Sharky, that is exactly the answer I was looking for.

strittmatter
10-30-09, 02:46 PM
I can only give you my personal viewpoint, which is that no one knows for certain what has happened and what will happen. Our only valid route is to debate and by that mechanism, try and figure out all the variables, so that, when events occur, you have already thought about the implications and can adjust your strategy accordingly.

Yes, I sit right at the middle of the fence, with my eyes and ears open.:)

kind of reminded me of something Armstrong stated in his latest, "Is America On The Verge Of Another Bank War..........."


One reason everyone should learn technical analysis is because most professionals use various forms. It matters not if you in fact believe in it or not, others do. So you should understand at least when this group will be doing something for you sure as hell do not want to be caught standing in a field when the cattle start to run.

http://www.martinarmstrong.org/economic_projections.htm

The first 2/3 of this writing (a little windy) Armstrong gives his historical perspective of events, causes and conditions that led to the creation of the Fed, then ends with his how's and why's for where we are today.

His views on interest rates, money flows and the psychology of it all does in fact line up with sharky's explanation here:

Originally Posted by Sharky http://www.itulip.com/forums/images/buttons/viewpost.gif (http://www.itulip.com/forums/showthread.php?p=130857#post130857)
The mechanism is artificially low interest rates.

Here's how it works: capital is attracted to yield (real return); when yield is low in the US, capital moves to places where it's higher (out of the US); the result is net selling of the USD, which devalues it relative to other currencies; a weaker dollar drives up the cost of imports, including oil; as import and energy costs increase, so does inflation.


MHO.