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View Full Version : 2010 Review and 2011 Forecast - Part I: Down the rabbit hole we go - Eric Janszen



EJ
12-22-10, 10:42 PM
http://www.itulip.com/images2/rabbithole.png

2010 Review and 2011 Forecast - Part I: Down the rabbit hole we go
Confusion is a word we have invented for an order that is not understood.
- Henry Miller (1891 - 1980)

We are taught to be ashamed of confusion, anger, fear and sadness, and to me they are of equal value as happiness excitement and inspiration.
- Alanis Morissette (1974 - )

If confusion is the first step to knowledge, I must be a genius.
- Larry Leissner
CI: Where you been?
EJ: Drilling. Dreaming. Pulling my hair out, what’s left of it.

CI: For what?
EJ: New discoveries. Quite a few dry holes, sad to say, but also a few insights, enough to keep me going. That and the warm and generous holiday cards we’ve received from so many of you. Thank you.

CI: Such as…
EJ: Mining the Treasury Department data to build a US Bond and Currency Crisis Dashboard, we find some interesting changes in the behavior of private and official foreign investors in the US securities.

CI: US Bond and Currency Crisis Dashboard?
EJ: The bond and currency crisis we have called KaPoom since 1999 is approaching, but is still perhaps several years away, or maybe not. That’s part of the confusion.

CI: Confusion?
EJ: Anyone who studies the data who does not admit to confusion is either approaching it too simply or is not admitting the fact that the data, in the traditional framework of interpretation, it makes little sense. It didn’t make any sense in 1995 either when I started the research that developed into iTulip.com three years later, but after crunching the data and reading the history of such eras, the outcome became clear by 1999: asset bubbles. Now we’re in a netherworld. Suspended animation. Waiting for the other shoe to drop. Pick your favorite turn of phrase, but “it” is not over yet. “It” has only yet begun. The question is, what is it, exactly?

CI: What’s in the Treasury data?
EJ: A shift in preference toward government debt and away from private sector debt occurred after the Housing Bust Recession and persists well into the “recovery.”

CI: You mean The Great Recession?
EJ: No, that’s the Bullhorn name for it. I’ll never call it that. You have to call a thing what it is. I think Alice will back me up on this. The recession resulted from the collapse of the private credit markets. That resulted from credit risk (http://www.itulip.com/riskpollution.htm) that accumulated during the years of the housing bubble that was financed with over-rated debt securities. The over-rating was due to regulatory capture. It’s all laid out in the article I wrote for Harper’s in 2007 that was published in early 2008. So how can I call it a Great Recession? That makes it sound like an unfortunate accident rather than the predictable disastrous outcome of reckless and unscrupulous behavior that it was. Am I to join the dreamers who can’t remember what happened? No, I cannot help but remember. The next crisis is equally predicable. It too will be portrayed as an accident, even though it will follow as logically and inexorably from its antecedents as the Housing Bust Recession followed from its own. All are episodes in a long, continuous process of cleaning accumulated errors stretching back 40 years, errors rooted in set of politically expedient economic fallacies.

If I’ve learned anything over the 15 years I’ve been at this, the crowd cannot tell if it is awake or dreaming, and so it accepts these events as curious and random as in a dream. I was interviewed by a prestigious magazine today for a story I’m to write for them, due shortly. I explained to the editor why I never use the words “green” or “clean” energy in my book. Was it really so long ago that American truckers sat idle because the cost of diesel fuel ate up their profits, and the public transportation systems of every major city groaned under the strain of millions of commuters who could not longer pay for the gasoline for their cars? That was in the spring of 2008, only two and half years ago. Did that really happen or did we dream it? If it was real and it happens again, but in a more extreme way because both oil supply and currency weakness will feed into the process, there won't be many green minded citizens around. Who will care about the environment when most can’t afford to drive to work? Peak Cheap Oil means we will rip the planet to shreds for the last drop of oil and lump of coal, I explained to the editor. Money is the green that we really care about. I thought she was going to cry. I felt bad, so I lightened it up with some gung-ho “We’re Americans, goddammit!” stuff about how we'll pull together and fix it, and she brightened.

CI: How do we come to believe these fallacies?
EJ: We humans cannot see much beyond our own perceived – usually misperceived – self-interest. We see an idea that we think benefits us as a good idea, and one that we think doesn’t benefit us as a bad idea. Since 2006 I talked about the dangers posed by government subsidies to the housing industry, but because most of us benefited from those subsidies no one wanted to hear it. In fact the use of the term “subsidy” and “housing” in the same sentence elicited not protest but confusion. Garlic before vampires. It wasn’t just that the idea that we, the American homeowners, were beneficiaries of government largess was objectionable but the crowd was blind to the very fact of these subsidies as such, the interest rate deductions and loan guarantees. The same principle applies to government price fixing of exchange rates and interest rates via sales of government securities. As long as it appears to be working, keeping the dollar from caving and interest rates from rising, and paying the federal government’s bills, these practices are not only accepted but are not seen as price fixing per se, but that’s what they are. I mean, what else can you call a monetary and trade system predicated on the uneconomical investment by foreign central banks and other official entities in trillions of dollars of government securities?

CI: Can you verify that?
EJ: In “China’s Holdings of U.S. Securities: Implications for the U.S. Economy,” a 2008 Congressional Research Office report, begins: “Given its relatively low savings rate, the U.S. economy depends heavily on foreign capital inflows from countries with high savings rates (such as China) to help promote growth and to fund the federal budget deficit.”

Where’s the mystery here? That’s “fund the federal budget deficit” not the trade deficit but a negative federal savings rate. If the United States was behaving like the United States used to, then okay, maybe, except that the lending itself encourages all kinds of bad behavior.

Put yourself in their shoes. How’d you like to fund Argentina’s federal budget deficit with your savings, or Jamaica’s or Zimbabwe’s? It’s politically unsustainable.

Here’s how Paul Volcker put it recently.

Paul Volcker warns the dollar's "exceptional role" is in danger as U.S. influence declines

Bloomberg: December 2, 2010

"This is a troubling time for America, a troubling time for the world," ex-Fed chief says
Former Federal Reserve Chairman Paul Volcker, who is chairman of President Barack Obama's Economic Recovery Advisory Board, said the U.S. dollar is in danger of losing its role as a global benchmark currency.

"The growing question is whether the exceptional role of the dollar can be maintained," Volcker told a gathering of New York civic leaders at the University Club of New York.

The decline of the U.S. economy, political gridlock at home, U.S. involvement in two wars and "festering" geopolitical issues in the Middle East and Asia have undermined the ability of the U.S. to influence global events, Volcker said.

"This is a troubling time for America, a troubling time for the world," Volcker said in remarks to Common Cause, a civic group. He said the U.S. is facing its most difficult economic crisis since World War II. "If ever there were a need for clear-headed, confident leadership, nationally and internationally, that time is now."

Even as the U.S. remains the world's pre-eminent nation by default, Volcker said, its example no longer inspires other countries to trust U.S. leadership. He said the U.S. is hobbled by lobbyists and an unwillingness to pass realistic budgets, as well as a civil service that he said has lost its ability to attract America's best and brightest to public service.

"The time is gone when the U.S. could lay claim as the putative superpower with both unchallenged economic and military might," Volcker said.

"The growing sense around much of the world is that we have lost both relative economic strength and, more importantly, we have lost a coherent successful governing model to be emulated by the rest of the world," Volcker said. "Instead, we're faced with broken financial markets, underperformance of our economy and a fractious political climate."
CI: That about sums it up. Isn’t that what he told you when you met him at the University Club last summer? Did he read your book?
EJ: Who knows. Besides trying to work out our investing future for all my friends here, I have a growing list of keynote speeches on the docket for the coming months. I love to do these things and I think the experience brings value to the iTulip community but it does take me away from the analysis and writing.

CI: Such as?
EJ: Two weeks ago I presented to a group of CEOs and managers of cable companies, and by that I mean everything from mining companies that dig the copper out of the ground that go into the cables to the companies that manufacture the shielding to the guys that stick a connector on each end. Some serve the government market, others the computer and telecom industry. What a great group of people. These are the folks who actually create jobs. They deserve all of the respect we can give them but they get very little. The current administration likes the idea of job creation but not actual job creation because if they did they have at least one person on the economic team who’d ever been responsible for making payroll. In a perfect world according to EJ, no one is allowed to run for elected office unless they have made payroll for at least three years, and in a industry not subsidized by the government.

CI: What did they want to hear from you?
EJ: Again, put yourself in their shoes. You just survived the FIRE Economy boys crashing the economy up and down. Because the Fed failed to stop the corruption that led to the excesses that produced the collapse, it then had to depreciate the dollar to prevent a deflation spiral. The good news is that you aren’t bankrupt. The bad news is that if you have a two-year-old five year fixed priced government contract you went cash flow negative this year because between liquidity, demand, and exchange rates, copper prices went crazy. That’s great if you’re in Peru where they mine the copper but not so good if copper is an input cost on your balance sheet.


http://www.itulip.com/images2/perucopperstockswtmk.png

CI: What did you advise them?
EJ: Oh, they’ve learned how to deal with it: no fixed price contracts. Those days are over. Keep inventory down to three weeks, under the billing cycle so costs can be passed on.

CI: Sounds like inflation...
EJ: You think?

CI: Where is all of this leading up to?
EJ: The short-term benefits of the government price fixing blind us to the long-term risks. Sovereign credit and currency risk builds and builds, but it takes so long – decades – that we become unaware of it, like villagers living at the base of a long dormant volcano. The private credit market volcano erupted in 2007 after it lay dormant since the 1930s, forgotten. After the bond and currency fixing measures fail eventually, as they always do, there will be much hand wringing about what happened, and reams of articles about black swans and other nonsense, as if events did not follow from antecedents but force majeure. When it happens it looks something like this.


http://www.itulip.com/images2/argentinapoomwtmk.png

CI: Can we get our leaders and the people to wake up?
EJ: No. The problem is lack of sufficiently broad exposure to the facts here in the US. We don’t have a fourth estate, a national media in the role of providing checks and balances to government and business excesses. Instead we have media that sells product. In the late 1990s it sold tech stocks, in the early 2000s the Iraq War, from 2002 until 2007 it sold houses, and in the future it will sell whatever measures are a “necessary” price for social stability, national security, or whatever phrases are used, because things are going to get dicey once this 40 year old Rube Goldberg monetary and trade contraption comes apart when it’s hit with a Peak Cheap Oil sledgehammer? I'd expect the topic to get covered on the Jon Stewart or Stephen Colbert show, but nowhere else. I mean, how healthy is the American fourth estate when all of the serious journalism here is done by comedians?

CI: The FIRE Economy is part of this?
EJ: It developed from a combination of two factors, of free market fundamentalist ideology applied to the real world and good old-fashioned corruption. In any country’s financial system, the real world, the mice play when the cats are away. In the fantasy world of free market fundamentalism the mice don’t eat the cheese off the plate on the table in middle of your nice, warm living room. They crawl and shiver in the snow covered woods and duke it out with the squirrels for nuts and berries. In the real world the good, moral and timid mice stay where they belong, but take the cats away and pretty soon the house is swarming with audacious mice, not all of who are on the up-and-up. Big surprise. Of course, on the other side of it you have the uber-regulators, the self-styled sheriffs who want to put up a checkpoint at every intersection.

CI: Such as Bill Black?
EJ: I got into a long email debate with Bill Black on how to get the unconstructive players out of the banking and financial system and he got testy with me. I get the sense that he won’t be happy until all the guys who broke the law are in prison. I argued what I think is a more practical approach, an amnesty program. It’s a difference of philosophy about objectives. For me the objective is to get the unconstructive players out of the industry so the good guys – that’s most of them – don’t have to share the industry with them.

CI: I’d like to see that.
EJ: I’ll send a note to Bill and see if he’s okay with me sharing it. I don’t see why he would not, but who knows.

http://www.itulip.com/images2/packofcards.png
2010 Review and 2011 Forecast - Part II: You’re just a pack of cards! (http://www.itulip.com/forums/showthread.php/17974-2010-Review-and-2011-Forecast-Part-II-You%C2%92re-just-a-pack-of-cards%21)

• Foreign investors develop an allergy to US corp. bonds
• Government bond auctions don't fail, bond auctioneers do
• Keep an eye on the Seignorage Laffer curve
• Ripe for a correction: inflation and stock markets are at pre-crisis levels in commodity exporting countries
• EU investors are supporting US stocks and avoiding their own stock markets, at least for now

CI: We’ve wandered far from original topic here, the change in the composition of foreign purchases of US securities.
EJ: But it’s more fun this way, isn’t it? We cover more ground. Since securities are what we export to our trade partners in exchange for goods, any major change in what private and official institutions are buying and selling on net is significant. For starters, foreign central banks remain less than enthusiastic about holding the bonds issued by our nationalized mortgage lenders Fannie Mae and Freddie Mac.


http://www.itulip.com/images2/foreignOfficialPurchUSAgencybonds1978-Oct2010wtmk.png

Evidence is that they continue to swap them for Treasury bonds. The curious thing is that private investors are net buyers of Agency debt while central banks are selling, but both are avoiding US corporates as if they were a bubble. Who knew? more... ($ubscription)
(http://www.itulip.com/forums/showthread.php/17974-2010-Review-and-2011-Forecast-Part-II-You%C2%92re-just-a-pack-of-cards%21)

iTulip Select (http://www.itulip.com/forums/showthread.php/1032-iTulip-Select-Subscription-Description?p=7837#poststop$session[sessionurl_q]): The Investment Thesis for the Next Cycle™
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For a concise, readable summary of iTulip concepts read Eric Janszen's September 2010 book The Postcatastrophe Economy: Rebuilding America and Avoiding the Next Bubble (http://www.amazon.com/gp/product/1591842638?ie=UTF8&tag=wwwitulipcom-20&link_code=as3&camp=211189&creative=373489&creativeASIN=1591842638)http://www.assoc-amazon.com/e/ir?t=wwwitulipcom-20&l=as2&o=1&a=1591842638.

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jk
12-23-10, 12:31 PM
A shift in preference toward government debt and away from private sector debt occurred after the Housing Bust Recession and persists well into the “recovery.”


gov'ts have cooperated by socializing private debt to accommodate that preference. As in ireland, where bank debt essentially became sovereign debt. but NOT as in iceland, where the people vetoed the gov’ts plan to nationalize/socialize bank debt. too bad there haven't been similar votes elsewhere, since every other country has decided by gov't fiat for gov't fiat.

Spartacus
12-23-10, 11:39 PM
> but then it had t depreciate the dollar via QE to prevent
but then it had to

> where they mine the copper but not so good copper is an input c
.................................................. .................^^
where they mine the copper but not so good if

> After the price bond and currency fixing measures fail
................^^^.....
After the bond and currency price fixing

> No, I remember. The next crisis is equally predicable, and it too will be
No, I remember. The next crisis is equally predict

Feel free to delete this post when you're done with it

shiny!
12-24-10, 02:21 PM
Thank you, EJ. If you're confused, then I don't feel quite so stupid.

I wish you and yours a prosperous, healthy and Happy New Year!

Mega
12-27-10, 06:12 PM
I think the problem is trying to read the road ahead. Even a man with VERY modest levels knowege such as myself was able to see the train wreck coming. Yes "They" had all the bulsh*t "Light at the end of the tunnel" sort of thing statments but we knew better.

The problem is we are now in a sort of "Solaris" econermy, normal time/space laws no long apply. What if the FED buys British/Euro debt.........& the British/Euro buy American debt. Is that the same as the Fed buying its own debt?..........are they money-t-ize-ing it or is this just a balance sheet exerise?

What effect will the "Bric's" have as they trade in their own debts (currency)?

At What point will the "QE" hit & we see high stagflation (Max Keiser/Mish are WRONG)?

When & will Cheap Peek oil hit?

What we have are a lot a varables & no road map............
Mike

ThePythonicCow
12-27-10, 11:38 PM
The problem is we are now in a sort of "Solaris" econermy, normal time/space laws no long apply. What if the FED buys British/Euro debt.........& the British/Euro buy American debt. Is that the same as the Fed buying its own debt?..........are they money-t-ize-ing it or is this just a balance sheet exerise?
The fundamental difference between borrowing and printing is how it comes back to bite you in the arse later.

If you can be forced to pay it back later at an inconvenient time, likely with interest, fees and penalties, then it's borrowing.

If you are the sovereign issuer of a fiat currency, and it causes an increase in the money supply, thereby risking, if carried to excess, lowering the total real value of your sovereign money in circulation, then it's "printing" (aka seiniorage.)

I would consider that the Chancellor of the Exchequer (is that what they call the UK Treasurer?), the Bank of England, the US Federal Reserve, the US Treasury, HSBC and JPMorgan are all sufficiently in cahoots with each other that none of them will force any "inconvenient" repayments on the other. So whatever shell game they are playing betweenst themselves is not really borrowing.

Whether it is seiniorage or not depends on whether it leads to an increase in the "real" money supply in circulation. By that I mean the ratio of:


the total number of currency units (dollars, pounds) traded in a time period (the same unit may get traded several times; each time adds to the count),
to the total amount of goods and services traded in that time period.

If the total quantity of liters of petrol, bushels of wheat, tons of steel, and shipping containers of plastic trinkets traded goes down in some time period, while the Gross Domestic Products (total nominal value of all domestic purchases) goes up in that same period, then the "real" money supply in circulation went up. Since the money supply in circulation is almost entirely lent into existence, the banks can modulate and certainly have been modulating that supply, independent of the high stakes shell games played by the afore mentioned dominant Anglo-American financial institutions.

There is some seigniorage going on here, no doubt. Some monies are being issued to the general populace to keep them from revolting, where that money does not come from real debt (the kind the government actually has to pay back, even if it is inconvenient to do so) nor does that money from tax collections. The rate of such seigniorage is likely increasing of late.

However I would argue that this debate over whether the funding of the major Anglo-American financial and government institutions is by means debt or seigniorage is a distraction. The dominant means of this funding is rather by way of increasing tyranny, theft, fraud, and police and military brutality, at home and abroad.

The UK, US and Israelie intelligence and military agencies are closely entwined with this evil, and have been since at least the Second World War. The world traffic in illegal drugs is one profitable business of these bastards. Many if not most of the worlds assassinations, coups and acts of "terror" are managed by these bastards, and have been for many decades. Western main stream news and entertainment media and most of what is taught in our schools and universities are compliant with the needs of these bastards. This is a world wide force, more dominant than the balance sheets of a few London or Wall Street banks would suggest.

Presently the Anglo-American power centers continue to let the debt of the less fortunate fail, while the debt of the more fortunate is bailed out by these shell games, which appear to be increases of sovereign debt and seigniorage, but are really just mechanisms of increasing theft and deception. They also continue to raise the affective tax rates, by lowering the quantity of social services provided to the general population in return for a given quantity of taxes collected, while arranging for increasing "austerity" (higher taxes, lower services) in the future.

All this risks the populace becoming less co-operative, but apparently the powers that be figure it is more profitable to steal from the masses and then keep them in check with surveillance cameras, phone taps and a few cops in Star Wars armor wielding tasers, than it is to let the masses keep most of their wealth and serve them well with a smaller portion collected in taxes.

So ... I would suggest that the apparent theft of trillions by the big Banksters in the bailouts of the last two years was neither predominantly sovereign borrowing nor sovereign seigniorage. It was rather part of the ongoing theft from and enslavement of the populace. Just as 9/11 and 7/7 punctuated the so called War on Terror, justifying an increase in Anglo-American military adventures abroad and an escalation in police state tyranny at home, so was the crash of 2008 and its aftermath justified continuing, increasing and formalizing the theft of present property and future incomes from foreign and domestic populations.

If you're the meanest son-of-a-bitch in the room, with the biggest brass gonads and the baddest guns, then you can balance any set of accounting books you want to balance. No one can tell you otherwise. This is not an accounting problem to be solved with economic papers from PhD economists at the US Federal Reserve analyzing sovereign debt and money. It is a grand morality play, testing whether these criminal bastards, or any criminal bastards so conceived and so dedicated, can long endure in their evil ways (no apologies to US President A. Lincoln for bastardizing a famous phrase from his Gettysburg address.)

jk
12-28-10, 10:06 AM
ej, i have a question about this discussion. why do we call money printing "quantitative easing" when we are discussing the avoidance of deflation, but call money printing "seignorage" when we are discussing the avoidance of hyperinflation? they are the same thing, are they not? or am i missing something here?

and if they are indeed the same thing, should we not make it clear that we are talking about fancy terms used to disguise the blunt reality of money printing? and that the basic equation is that during times of economic contraction the fed will, if necessary, print money and push it out to the banks; while during times of high inflation the fed will restrict or even reverse its money printing?

it seems to me that we have a kind of monetary keynesianism. keynes wanted the government to help regulate the economy through its FISCAL actions: to engage in deficit spending when the economy slowed or shrank, and to generate offsetting fiscal surpluses when the economy had healthy growth. since our political process is broken and incapable of sensible economic action, we defer the regulation of the economy to the unelected monetary authorities. they are insulated from the electoral process and less engaged in political posturing, and thus more able to focus on the stability of the financial system.

in a setting of debt deflation, quantitative easing replaces fiscal stimulus since the very possibility of the latter is severely restricted by the political system. in similar fashion, the restriction or reversal of seignorage replaces the generation of fiscal surpluses during periods of excessive price rises.

we have a system of monetary [as opposed to fiscal] keynesiansim.

Chris Coles
12-28-10, 01:56 PM
JK - as I understand it, the real problem is that we are not dealing with government debt, but attempts by government to cover up the loss of true value in the wider bond markets. That the vastly excessive leverage of issued bonds by the largest investment banks has now "arrived" at the desks of the corporate and banking accountants who cannot place a true fair value on the bonds being used as collateral to support their own borrowing. But then again, we will not hear the truth till some years after the whole thing has collapsed.

jk
12-28-10, 02:39 PM
in one fashion or another, every gov't around the world - with the notable exception of iCeland - has or is in the process of nationalizing/socializing the crappy debt that their banks hold. so in fact we ARE dealing with gov't debt.

FRED
12-28-10, 05:18 PM
ej, i have a question about this discussion. why do we call money printing "quantitative easing" when we are discussing the avoidance of deflation, but call money printing "seignorage" when we are discussing the avoidance of hyperinflation? they are the same thing, are they not? or am i missing something here?

EJ writes in:
So far, to keep the ideas simple, we have not distinguished seignorage (profit from currency issuance) that results in additional debt from seignorage that does not. Money printing is not seignorage, rather seignorage results from issuing currency. When the currency was either gold or paper backed by gold, seignorage was a relatively small source of government revenue compared to taxes and borrowing, the other two sources of revenue to finance government expenditure. Seignorage under a gold standard produced perhaps $5 of seignorage for every $100 of currency issued. Under a fiat money system seignorage is so close to the amount of issuance, because the costs are so low, that we tend to confuse the two, but they are not the same.

The government uses the seignorage -- "profit" it earns on money issuance -- to finance expenditure. The inflation mechanism is more direct than for government borrowing from commercial banks.

If the government borrows from commercial banks (issues bonds that banks buy) the impact is inflationary. Consider the example of the Treasury financing 1/2 of WWII by lending directly and indirectly to commercial banks.


In trying to finance the war without bringing on inflation, Treasury Secretary Morgenthau has been forced to do part of it with mirrors. These mirrors were being used again last week in the Fifth War Loan.

Maypole Dance

To avoid credit inflation, Mr. Morgenthau ruled that not a nickel of his $16-billion Fifth War Loan could be sold to commercial banks. This rule has, to a considerable extent, been circumvented. A good part of the Fifth, like 20% of the previous War Loan, which was similarly restricted, is being financed by bank credit. This is easily done to get the cash with which to buy the current loan, insurance companies, savings banks and other investors "dump" Government securities by selling them to commercial banks. With the proceeds they buy bonds of the new issue. Naturally, this has exactly the same inflationary effect as if the banks bought war bonds directly.


Despite the success of the War Loans, which has seemed to come about by many small individual purchases, the banks have actually carried almost half the load. But the full extent of bank participation has been overlooked under the flood of bond posters, brass bands and mutual congratulations. And the bonds which banks have acquired indirectly, i.e., through loans, etc., measure the extent to which Secretary Morgenthau has failed to sop up increased public purchasing power, while taking credit for doing so.

As long as the public hangs on to this cash—as it is now doing—inflationary results will not be felt. But when the public begins to spend, i.e., to prefer goods to cash, the results will show. If this occurs while the war is still on and goods scarce, the U.S. will have much to worry about. But if it occurs during a possible reconversion slump and eases the U.S. into prosperous times, he can shake hands with himself.

- TIME Magazine, June 1944 (http://www.time.com/time/magazine/article/0,9171,850610,00.html)

Good call by that TIME economics writer. Less than two years later, CPI reached 20%.


http://research.stlouisfed.org/fred2/graph/fredgraph.png?&chart_type=line&graph_id=0&category_id=&recession_bars=On&width=1000&height=600&bgcolor=%23d2d2d2&graph_bgcolor=%23ffffff&txtcolor=%23000000&ts=12&preserve_ratio=true&fo=ve&id=CPIAUCNS&transformation=pc1&scale=Left&range=Custom&cosd=1944-01-01&coed=1947-05-31&line_color=%230000FF&link_values=&mark_type=NONE&mw=4&line_style=Solid&lw=2&vintage_date=2010-12-28&revision_date=2010-12-28&mma=0&nd=&ost=&oet=&fml=a&fq=Monthly&fam=avg&fgst=lin


When the post Housing Bust Recession output gap closes the US will face a similar dilemma. But what about the use of seignorage revenue versus borrowed money during an output gap when demand-pull inflation pressures are low?


and if they are indeed the same thing, should we not make it clear that we are talking about fancy terms used to disguise the blunt reality of money printing? and that the basic equation is that during times of economic contraction the fed will, if necessary, print money and push it out to the banks; while during times of high inflation the fed will restrict or even reverse its money printing?Government earning seignorage revenue from money issuance is not the same as money issuance; the amounts are roughly the same under a fiat system but the accounting is crucial.

Orthodox economic theory that determines Fed policy holds that there are two kinds of inflation, cost-push and demand pull. After a recession when there is an output gap and depressed demand then there is no demand-pull inflationary pressure. Fiscal stimulus is designed to substitute public for private sector demand to produce sufficient demand-pull inflation to prevent debt deflation from becoming self-reinforcing. Debt deflation -- a declining rate of debt creation -- tends to reduce the money supply. Creating more money via QE both increases seignorage revenue (via demand pull inflation) and cost-push inflation via money supply growth.


it seems to me that we have a kind of monetary keynesianism. keynes wanted the government to help regulate the economy through its FISCAL actions: to engage in deficit spending when the economy slowed or shrank, and to generate offsetting fiscal surpluses when the economy had healthy growth. since our political process is broken and incapable of sensible economic action, we defer the regulation of the economy to the unelected monetary authorities. they are insulated from the electoral process and less engaged in political posturing, and thus more able to focus on the stability of the financial system. Keynes had two main ideas. One, that a debt deflation creates a sharp increase in the demand for money. If the government meets that demand, then the price level can be maintained. The theory worked for the Swedes in the early 1930s and likely would have worked for the US had the US left the gold standard temporarily as Sweden did. Two, government can use its balance sheet to stimulate the economy when the private sector is contracting, then withdraw the stimulus after recovery begins. Keynes did understand that recessions are useful for clearing out bad investments, but he believed that a recession rooted in excess private sector debt can develop into a self-reinforcing spiral. Fisher understood this, too. What Keynes did not seem to understand is that fiscal stimulus never coincides with election cycles in a way that allows the stimulus to be withdrawn. Instead. public debt ratchets upwards until it is no longer sustainable.


in a setting of debt deflation, quantitative easing replaces fiscal stimulus since the very possibility of the latter is severely restricted by the political system. in similar fashion, the restriction or reversal of seignorage replaces the generation of fiscal surpluses during periods of excessive price rises.

we have a system of monetary [as opposed to fiscal] keynesiansim.Richard Koo warned in 2007 that QE will give the US a temporary reprieve should political wrangling cut off the supply of fiscal stimulus. Here's how it went for Japan.


http://www.itulip.com/images/numura19koo.gif


Here's the US balance sheet recession (debt deflation) as of Dec. 2010:


http://www.itulip.com/images2/koorightDec2010FinalNoteswtmk.png


So far it's looking like Richard Koo was right.

If QE2 promises only temporary benefits and Congress is not approving any new stimulus, why am I not expecting deflation in the US as in Japan?

Because the US cannot deflate its debt against its export earnings as Japan can while taking on ever more public debt. The US can only deflate private sector debt against its currency, which also boosts exports and employment, but at the expense of its trade partners.

raja
12-28-10, 10:46 PM
So ... I would suggest that the apparent theft of trillions by the big Banksters in the bailouts of the last two years was neither predominantly sovereign borrowing nor sovereign seigniorage. It was rather part of the ongoing theft from and enslavement of the populace.
.
.
.

This is not an accounting problem to be solved with economic papers from PhD economists at the US Federal Reserve analyzing sovereign debt and money. It is a grand morality play, testing whether these criminal bastards, or any criminal bastards so conceived and so dedicated, can long endure in their evil ways (no apologies to US President A. Lincoln for bastardizing a famous phrase from his Gettysburg address.)
Yes !!!

It's a problem of wealth disparity . . . the People are being enslaved at the hands of the parasitical Financial Elite. All the rest is just talk about the modus operandi of how the theft is accomplished.

These parasites, and their Political Enablers, need to be removed from the system. Now!

(Gee, I'm sounding like Denninger, minus the potty and sex talk . . . . :()

metalman
12-28-10, 11:29 PM
(Gee, I'm sounding like Denninger, minus the potty and sex talk . . . . :()

also minus the morons own gold & deflation here we come talk.

Chris Coles
12-29-10, 03:30 AM
No! Richard Koo was not "Right". But no one else was either. Let me try and explain.

The real problem is that everyone seems to be fixed upon the idea that the only mechanisms available to unpick the Gordian Knot are to be, in one form or another; government inspired. Seignorage, Quantitive Easing, Money printing, selling Treasuries .......

With the very greatest of respects, I have been watching these ideas float around for as long as I can remember, but at each and every turn of the economic screw; the whole edifice falls over, flat on its proverbial face.

The simple fact is, (and I am pleased to be able to say that the good old Bank of England have been kind enough to agree), we have an ongoing problem with a grossly under-capitalised private sector. Not at the banking level, but at the grass roots of society. We are desperately short of equity capital and grossly over supplied with credit.

Everyone keeps talking about banks. Aaaaargh!!!! We need to forget all about the banks. What is missing are savings institutions dedicated to the provision of that missing equity capital that needs to be re-injected back into the grass roots. THAT is our problem and until that message sinks in, nothing will happen other than, once again, the whole edifice will fall flat on it's face, again and again and again... ad infinitum. Our children's children will be discussing the same thing in the following centuries if we do not get that message across.

lektrode
12-29-10, 09:33 AM
http://www.itulip.com/images2/rabbithole.png

If I’ve learned anything over the 15 years I’ve been at this, the crowd cannot tell if it is awake or dreaming, and so it accepts these events as curious and random as in a dream.

this statement (amongst the vast reservoir of the rest of em) is why i'm paying for itulip!

saw a movie the other night, in the "life imitating art" dept that makes it ring absolutely true:
http://leonardodicaprio.com/trailer-home.html
Inception = best thriller in years

lektrode
12-30-10, 05:56 PM
No! Richard Koo was not "Right". But no one else was either. Let me try and explain.
...
.....
Everyone keeps talking about banks. Aaaaargh!!!! We need to forget all about the banks. What is missing are savings institutions dedicated to the provision of that missing equity capital that needs to be re-injected back into the grass roots. THAT is our problem and until that message sinks in, nothing will happen other than, once again, the whole edifice will fall flat on it's face, again and again and again... ad infinitum. Our children's children will be discussing the same thing in the following centuries if we do not get that message across.

couldnt agree more!

i ROTFLMAO every time i read/hear about some small-to-bigger biz going tits up due to "not being able to borrow enuf working capital" not to expand, but just to keep the doors open?!!

when, back in the good ole daze, "working capital" was what one had _saved_ during good years, so had the money to expand when opportunity presented itself or could simply survive the biz cycle without having to go to the bank to borrow (and in the process either prove to the banker they dont need it to get it, or be turned down cuz they do...)

now it seems that most of the MBA whizkids (or other wannabe biz operators) have no idea how to run a biz when they dont have somebody elses money to blow on the latest fad and/or wonder why they either have no real profits beyond the newage fantasy of EBTDA (as if none of that stuff really matters) and when whatever credit lines or IPO money is gone? simply employ the latest MBA strategy called bankruptcy.

Alvaro Spain
01-05-11, 03:17 AM
No! Richard Koo was not "Right". But no one else was either. Let me try and explain.

The real problem is that everyone seems to be fixed upon the idea that the only mechanisms available to unpick the Gordian Knot are to be, in one form or another; government inspired. Seignorage, Quantitive Easing, Money printing, selling Treasuries .......

With the very greatest of respects, I have been watching these ideas float around for as long as I can remember, but at each and every turn of the economic screw; the whole edifice falls over, flat on its proverbial face.

The simple fact is, (and I am pleased to be able to say that the good old Bank of England have been kind enough to agree), we have an ongoing problem with a grossly under-capitalised private sector. Not at the banking level, but at the grass roots of society. We are desperately short of equity capital and grossly over supplied with credit.

Everyone keeps talking about banks. Aaaaargh!!!! We need to forget all about the banks. What is missing are savings institutions dedicated to the provision of that missing equity capital that needs to be re-injected back into the grass roots. THAT is our problem and until that message sinks in, nothing will happen other than, once again, the whole edifice will fall flat on it's face, again and again and again... ad infinitum. Our children's children will be discussing the same thing in the following centuries if we do not get that message across.

In my opinion, you are both right and wrong. Right in theory, but you are not taking into account that society is made for the enjoyment of the powerful, not of "we the people". And you can do nothing, because to change things you would need to become powerful, and if you do you will find that you like the society as it is now.

Chris Coles
01-05-11, 05:50 AM
In my opinion, you are both right and wrong. Right in theory, but you are not taking into account that society is made for the enjoyment of the powerful, not of "we the people". And you can do nothing, because to change things you would need to become powerful, and if you do you will find that you like the society as it is now.

All I can say is, let future history be the judge of my future actions.

Alvaro Spain
01-05-11, 07:56 AM
All I can say is, let future history be the judge of my future actions.

I like your answer. You are obviously an intelligent and good humoured man. Thanks.

Chris Coles
01-05-11, 08:40 AM
You cannot tell the quality of the individual from the size of their bank balance. In past times I have met with, and in some cases came to know well, people that were, are, very wealthy. Many are fine people; some are what one can only describes as first class Sh..s. It is not what they own, but how they treat with you that, in time, either leaves you holding them in high respect, or with a deep dislike of them both as individuals and businesspeople.

Time heals many wounds, but not those that come from discreditable actions by devious character.

LazyBoy
01-13-11, 10:39 AM
couldnt agree more!

i ROTFLMAO every time i read/hear about some small-to-bigger biz going tits up due to "not being able to borrow enuf working capital" not to expand, but just to keep the doors open?!!

when, back in the good ole daze, "working capital" was what one had _saved_ during good years, so had the money to expand when opportunity presented itself or could simply survive the biz cycle without having to go to the bank to borrow

...

now it seems that most of the MBA whizkids (or other wannabe biz operators) have no idea how to run a biz when they dont have somebody elses money to blow...

Agreed! And this lack of savings/responsibility became the Standard Operating Procedure at the personal, business and governmental levels.

My blue-collar, lower-middle class parents built their house with sweat equity and the money they saved for it. They never had a mortgage, let alone a car loan or credit card debt. Since then, a house you couldn't afford became a way to get the Hummer you couldn't afford – a new one every two years – and people pay interest on their groceries.

And when was the last time you heard of a municipality/school-board/state say we're going to need a new school/courthouse/whatever in a few years, so let's start saving up for it? It's easier to float a bond and let the future pay for it.

And these are the SOPs in good times! Every level of society was holding their max debt load (more than they should have been allowed) and imagining there would never be a rainy day.