Beware Relief Rallies - Eric Janszen

[EJ]

http://www.itulip.com/images/trees.jpgBeware Relief Rallies

We’re not out of the woods. In fact, we’re flying into them.

If the world economy is a passenger jet, its engines are economic surplus, its fuel human creativity, energy, and credit, and among its passengers investors in global stock, bond, and commodity markets.

Earlier this year, the credit fuel was mostly cut off and the engines shut down. The sound that followed is the one you never want to hear when you are an airplane passenger–of rushing wind and nothing more. The passengers noticed and sent markets down in a wave of panic selling.

The response is similar on an actual aircraft under those circumstances. I know because it happened to me on a flight during a business trip to Asia. The engines shut down briefly mid-flight, we were never told why, and then restarted.

I'll try to convey the sensation. There you are on an aircraft packed with strangers 20,000 feet over the Yamanashi forest in southern Japan when silence replaces the drone of jet engines. At first no one noticed. Then one by one the passengers looked at each other and began to ask, What is that? What is going on? There is no engine noise. Why aren’t the engines running?

The aircraft slowed and began to descend. The passengers looked out the windows and down at the lush woods below. We extrapolated our collective prospects. In an instant your body heats up, as if overtaken by fever, a flight response to danger except there is nowhere to go. As panic began to reverberate around the cabin, the engines restarted. Just as quickly as the panic set in it vanished. My fellow passengers and I returned to reading books, hammering out spreadsheets and presentations on laptops, or whatever we were doing before the terrifying event occurred.

The desire for a return to normalcy is a powerful human drive.

The rally we are seeing in the markets now is largely driven by that impulse, the overwhelming desire for normalcy, the return of the familiar roar of engines from a surge of cheap credit. The response was elicited by the election of a new president who promises change. Perhaps, the passengers think, as part of the promised change this president can get the cheap credit fuel flowing and the engines running again. He has promised massive injections of government credit fuel, and that is certainly the legacy of the political party he represents. What can a Democratic president combined with a Democratic Congress possibly mean but the passing of orders for trillions of gallons of credit fuel from the latter to the former with little chance of veto? All credit fuel orders shall be filled and injected in-flight.

This longing for normalcy is causing passengers to err in their assessment of medium term future conditions as the forest floor approaches. An economic aircraft so gravely impaired and sinking through thousands of feet of clouds and air toward the woods cannot respond so quickly to promises or even the fact of fiscal stimulus. The engines are still not providing enough thrust to slow the decent. Now the wings are clipping the tops of the trees. GM's October sales plunged 45%, Ford Motor Co. (F) recorded a 30% drop and Toyota Motor Corp. (TM) reported a 23% decline.
US Oct Auto Sales Slump; GM Sales Down 45%, CNN, October 2008

Hammered by an economy in which consumer spending is coming to a screeching halt, credit is hard to get and competition is heightening, Circuit City said Monday that it is closing 155 stores (33% nationally), 10 of them in the Bay Area. The closures could put as many as 7,300 employees out of work in what is becoming one of the worst of times.
Circuit City closing 155 stores, SFGate, October 2008

The [Baltic Dry Goods index] has dropped 89 percent this year, driving down the combined market capitalization of the 12- company Bloomberg Dry Ships Index, led by Athens-based Diana Shipping Inc., to $5.5 billion from $32 billion a year ago.
Baltic Dry Index Drops Below 1,000 for First Time in Six Years, Bloomberg, October 2008

The official Xinhua News Agency reported this week that 3,631 toy exporters -- 52.7 percent of the industry's enterprises -- went out of business in 2008.
Factory closure in China a sign of global woes, CNN, October 2008

Japan's economy has joined much of the developed world in a recession, economists polled by Reuters say, with GDP seen contracting for a second consecutive quarter as the financial crisis hits exports and capital investment.
The Economic Times, October 2008

The global financial crisis is pushing the whole European Union into recession, official forecasts said on Monday, as South Korea unveiled its own 8.5 billion dollar stimulus package against the turmoil.
AFP, October 2008
Once the din of cheers over the hopes for a quick injection of credit subsides, the passengers will turn their focus to the banging and crunching of the economy trimming the tree tops.

We’re not out of the woods yet. In fact, we’re flying into them. We see this understandable relief rally, driven by a mass craving for normalcy, as an opportunity to build cash and to calibrate for a new, post cheap credit world. If “normal” means a steady flow of credit fuel from foreign creditors and financially engineered credit products, the economy and markets will never be “normal” again. As for the government credit injections, they are coming but with the unintended consequences, a topic for another day.

iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
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[don]

Right on schedule, the first jumbo air refueling tanker has been sighted.

"This could turn out to be the most direct, long-lasting stimulus plan ever concocted. When you give all those who are over-leveraged and are defaulting on their mortgage no monthly payment for three-years, what will they do with the money? Right - they will go spend every penny pumping the sectors of the economy that were so hot during the housing bubble years. They may also use some to pay down other debt, which of course helps the banks. The government is the strongest creditor out there so the banks are sure to get their payment every month. Hey, maybe the government can pay all three years up front so the banks can book it all at once and spike their earnings report."

http://mrmortgage.ml-implode.com/2008/11/04/no-more-mortgage-payments-soon-get-ready-to-default/

[goadam1]

It strikes me that the discussion is so focused on stocks. I am interested in protecting and creating wealth, but I am more concerned with keeping my lively hood and business going. No investment has performed better than putting my capital into my business. So stocks are a concern but macroeconomics are paramount.

My desire for normalcy is enormous.

I hope the worst predictions of these forums are at least a little wrong. I have to believe that even though mistakes have been made and markets over reach, human beings have an ability to adapt and change course.

I'll keep my "go bag" packed just in case you are right... again.

[metalman]

It strikes me that the discussion is so focused on stocks. I am interested in protecting and creating wealth, but I am more concerned with keeping my lively hood and business going. No investment has performed better than putting my capital into my business. So stocks are a concern but macroeconomics are paramount.

My desire for normalcy is enormous.

I hope the worst predictions of these forums are at least a little wrong. I have to believe that even though mistakes have been made and markets over reach, human beings have an ability to adapt and change course.

I'll keep my "go bag" packed just in case you are right... again.

the message for entrepreneurs i hear is... survive.

cut expenses & assume rising costs or rising faster than unit sales prices.

assume less access to credit.

the conundrum is 'cash is king' but also 'cash depreciates'

i'd like a simple 'how to survive' manual for small businesses.

[steveaustin2006]

Interesting. Love the analogy though I am biased as an aero engineer.

Incidentally, here are Don Coxe's recently published requirements for the end of this down cycle:

"All-Clear for Bulls: Requirements

We have been discussing the special characteristics of this Mama Bear market with clients and have been outlining the conditions for the next bull market.

A Mama Bear market is a plunge approximating 50%, (or more, as in 1929), and this one qualifies because of +40% drops across the world.

To confirm that this Mama has done her worst, the signs will be:

1. A TED Spread reading of 1ess than 150 on a sustained basis.
2. A VIX reading of less than 30 on a sustained basis.
3. A pullback in the Dollar Index (DXY) to 80 or less.
4. A pullback in the yen to below par.
5. A contained rally in gold (not a leap to $1,200 or some such number).
6. A BKX reading above 50—and preferably above 60."

[goadam1]

Here is my small business rule: take in more money than you put out. I only borrow for equipment that has a lease length that matches the depreciation. I only buy when I absolutely have to. But people are expensive. I assume that I will have a period in the next year when I am paying minimum payroll and rent. I am not buying or borrowing.

[vinoveri]

thanks for this.
raising cash is great, but if nominal prices of financial assets resume their climb, because not only of a want of return to normalcy, but also due to global gov intervention, what's to make it resume the downtrend, except of course another panic (and what's to cause this)? After all, pumping $3T into the markets and promising to do more like lend to any large struggling business, take gov equity stakes directly in the finance sector, backstop everything in sight - virtually anything to support financial markets can make folks feel optimistic. As long as confidence remains (i.e., that the gov will make everyone whole - however absurd and impossible that may be), what will cause the panic into the abyss?

what I'm struggling with is that it seems that this time it does seem to be "different this time" as our "free" markets evolve into some weird gov funded and controlled casino where the message is either buy drinks or bet, just don't save. Why isn't it reasonable to expect, in a year, the DJIA to be at 15k, oil at $120, gold at $1000 and the USD index at 70?

[Charles Mackay]

Totally agree with EJ's comment. On the emotion sine wave of fear and greed (everyone's seen it by now) we are barely into fear! The feelings of desperation, panic, capitulation, and despondency are a long way away.

Many of the people who chided me for selling real estate and buying gold are now bullish on real estate again!!! I can't believe it... one of the largest panics in US history just took place and they got BULLISH. My neighbors just bought a resort property with gas station and food mart on 7 acres up in the mountains thinking we are out of the woods! Nope... they're in the woods again in more ways than one:eek::eek::eek:

[friendly_jacek]

I also agree with EJ. This time it's different because for a number of reasons:
1. baby boomers demographics (many people forget it was also Japan's problem in 1990s)
2. financial WMDs lurking everywhere in economy
3. the secular bear did not reach it's nadir yet
4. excessive credit not destroyed yet
5. resources crunch (peak oil being one) if the above factors don't shot the global economy

I'm becoming more and more pessimistic though that one cannot make or preserve wealth in this environment, short of daytrading.
There are strong deflatiotional and inflational forces. Unfortunately, the inflation will not cancel neatly the deflation. Instead, we will have multiple dips into inflation and deflation. We just had one cycle, more to come.

[CanuckinTX]

Totally agree with EJ's comment. On the emotion sine wave of fear and greed (everyone's seen it by now) we are barely into fear! The feelings of desperation, panic, capitulation, and despondency are a long way away.

Many of the people who chided me for selling real estate and buying gold are now bullish on real estate again!!! I can't believe it... one of the largest panics in US history just took place and they got BULLISH. My neighbors just bought a resort property with gas station and food mart on 7 acres up in the mountains thinking we are out of the woods! Nope... they're in the woods again in more ways than one:eek::eek::eek:

Well at least there is one happy person out there. He was trying to sell a resort property with gas station and food mart on 7 acres up in the mountains. Then one day the turnip truck pulled up with your neighbors...

[tree]

the message for entrepreneurs i hear is... survive.

cut expenses & assume rising costs or rising faster than unit sales prices.

assume less access to credit.

the conundrum is 'cash is king' but also 'cash depreciates'

i'd like a simple 'how to survive' manual for small businesses.

What would happen if some small merchants said "cash only"?

[Nicolasd]

Great post EJ

You have my curiosity meter reading 110%
What unintended consequences are there other than those previously covered on itulip and the announced POOM ?

Looking foward to read this other day topic soon

[Mega]

Again EJ, you reached me, so full specrum covered, Well Done!
Mike

[CanuckinTX]

What would happen if some small merchants said "cash only"?

To me it depends on the cost of the item and how available it is at a competitive store. If it's pricey I don't want to hear 'cash only'. I rarely use cash for anything over $20 anymore and even then I often use credit for anything over $10. (gotta earn those perk points!)

Other than giving up the processing fees to the credit card companies, aren't businesses pretty much insulated from credit card deadbeats? Maybe they stop taking Amex given their extra high fees.

[phirang]

http://www.itulip.com/images/trees.jpgBeware Relief Rallies

We’re not out of the woods. In fact, we’re flying into them.

If the world economy is a passenger jet, its engines are economic surplus, its fuel human creativity, energy, and credit, and among its passengers investors in global stock, bond, and commodity markets.

Earlier this year, the credit fuel was mostly cut off and the engines shut down. The sound that followed is the one you never want to hear when you are an airplane passenger–of rushing wind and nothing more. The passengers noticed and sent markets down in a wave of panic selling.

The response is similar on an actual aircraft under those circumstances. I know because it happened to me on a flight during a business trip to Asia. The engines shut down briefly mid-flight, we were never told why, and then restarted.

I'll try to convey the sensation. There you are on an aircraft packed with strangers 20,000 feet over the Yamanashi forest in southern Japan when silence replaces the drone of jet engines. At first no one noticed. Then one by one the passengers looked at each other and began to ask, What is that? What is going on? There is no engine noise. Why aren’t the engines running?

The aircraft slowed and began to descend. The passengers looked out the windows and down at the lush woods below. We extrapolated our collective prospects. In an instant your body heats up, as if overtaken by fever, a flight response to danger except there is nowhere to go. As panic began to reverberate around the cabin, the engines restarted. Just as quickly as the panic set in it vanished. My fellow passengers and I returned to reading books, hammering out spreadsheets and presentations on laptops, or whatever we were doing before the terrifying event occurred.

The desire for a return to normalcy is a powerful human drive.

The rally we are seeing in the markets now is largely driven by that impulse, the overwhelming desire for normalcy, the return of the familiar roar of engines from a surge of cheap credit. The response was elicited by the election of a new president who promises change. Perhaps, the passengers think, as part of the promised change this president can get the cheap credit fuel flowing and the engines running again. He has promised massive injections of government credit fuel, and that is certainly the legacy of the political party he represents. What can a Democratic president combined with a Democratic Congress possibly mean but the passing of orders for trillions of gallons of credit fuel from the latter to the former with little chance of veto? All credit fuel orders shall be filled and injected in-flight.

This longing for normalcy is causing passengers to err in their assessment of medium term future conditions as the forest floor approaches. An economic aircraft so gravely impaired and sinking through thousands of feet of clouds and air toward the woods cannot respond so quickly to promises or even the fact of fiscal stimulus. The engines are still not providing enough thrust to slow the decent. Now the wings are clipping the tops of the trees.
GM's October sales plunged 45%, Ford Motor Co. (F) recorded a 30% drop and Toyota Motor Corp. (TM) reported a 23% decline.
US Oct Auto Sales Slump; GM Sales Down 45%, CNN, October 2008

Hammered by an economy in which consumer spending is coming to a screeching halt, credit is hard to get and competition is heightening, Circuit City said Monday that it is closing 155 stores (33% nationally), 10 of them in the Bay Area. The closures could put as many as 7,300 employees out of work in what is becoming one of the worst of times.
Circuit City closing 155 stores, SFGate, October 2008

The [Baltic Dry Goods index] has dropped 89 percent this year, driving down the combined market capitalization of the 12- company Bloomberg Dry Ships Index, led by Athens-based Diana Shipping Inc., to $5.5 billion from $32 billion a year ago.
Baltic Dry Index Drops Below 1,000 for First Time in Six Years, Bloomberg, October 2008

The official Xinhua News Agency reported this week that 3,631 toy exporters -- 52.7 percent of the industry's enterprises -- went out of business in 2008.
Factory closure in China a sign of global woes, CNN, October 2008

Japan's economy has joined much of the developed world in a recession, economists polled by Reuters say, with GDP seen contracting for a second consecutive quarter as the financial crisis hits exports and capital investment.
The Economic Times, October 2008

The global financial crisis is pushing the whole European Union into recession, official forecasts said on Monday, as South Korea unveiled its own 8.5 billion dollar stimulus package against the turmoil.
AFP, October 2008
Once the din of cheers over the hopes for a quick injection of credit subsides, the passengers will turn their focus to the banging and crunching of the economy trimming the tree tops.

We’re not out of the woods yet. In fact, we’re flying into them. We see this understandable relief rally, driven by a mass craving for normalcy, as an opportunity to build cash and to calibrate for a new, post cheap credit world. If “normal” means a steady flow of credit fuel from foreign creditors and financially engineered credit products, the economy and markets will never be “normal” again. As for the government credit injections, they are coming but with the unintended consequences, a topic for another day.

iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
__________________________________________________

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Copyright © iTulip, Inc. 1998 - 2007 All Rights Reserved

All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Nothing appearing on this website should be considered a recommendation to buy or to sell any security or related financial instrument. iTulip, Inc. is not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. Full Disclaimer (http://www.itulip.com/forums/../GeneralDisclaimer.htm)


If there's a lesson to be learned, it's that the Truth is in the credit markets more than equity markets.

Credit markets are still a disaster => keep away.

LIBOR is a fraud.

[FRED]

If there's a lesson to be learned, it's that the Truth is in the credit markets more than equity markets.

Credit markets are still a disaster => keep away.

LIBOR is a fraud.

Here we call it LIE-BOR.

[SBell]

It strikes me that the discussion is so focused on stocks. I am interested in protecting and creating wealth, but I am more concerned with keeping my lively hood and business going. No investment has performed better than putting my capital into my business. So stocks are a concern but macroeconomics are paramount.

I can definitely relate to this sentiment. I've been following iTulip and others for a while and doing what I can to protect my personal wealth, but when it comes to protecting your business it's a whole other ball game.

I've got an aerospace defense business that employs 48 people. I worry that none of the employees really grasp how dire the situation is and aren't personally prepared with their finances. Luckily we've positioned the company to do well through what's coming, and hopefully can at least survive without major cuts.

The most difficult task at the moment is that we supply the major prime aircraft manufacturers and have to negotiate contracts that can stretch over 5 year periods. Trying to negotiate inflation escalation clauses in this environment is next to impossible. Unfortunately B*#ing won't buy it when I tell them that the PPI index is BS and I'm basing the the escalation on iTulip's Ka Poom theory:rolleyes:

[D-Mack]

The most difficult task at the moment is that we supply the major prime aircraft manufacturers and have to negotiate contracts that can stretch over 5 year periods. Trying to negotiate inflation escalation clauses in this environment is next to impossible. Unfortunately B*#ing won't buy it when I tell them that the PPI index is BS and I'm basing the the escalation on iTulip's Ka Poom theory:rolleyes:



The airlines shot themselves in the foot with their fuel assumptions based on Goldman's 200 $ oil prediction, I wonder if they will be able to buy new planes in the future.


Is the worst over for the airlines? (http://news.bbc.co.uk/1/hi/business/7711353.stm)

But the spike in oil prices has been the biggest problem.

The rise started in December 2006 and only stopped in June this year when a barrel of oil had topped $140.

It has now dropped like a stone to just above $60 a barrel.

That won't help many airlines just yet.

They are still paying more for their fuel under 'hedging' deals, in which they set a fixed price months into the future. United Airlines, for example, has said it is around $230m out of pocket as a result of its hedging deals.

Just this week Cathay Pacific has admitted its hedging will result in poor results by the end of this financial year.

....

http://news.bbc.co.uk/1/hi/business/7711353.stm

[cobben]

I haven't paid attention to a potential wild card, the IMF, obviously should have.
Maybe they have, or at least think they have the supertanker for inflight refueling?

They have an agenda all laid out, and apparently have a lot of support going into the G20 meeting.
And historically the have had "Volcker" tendencies.
Could get interesting in new & hitherto unimagined ways . . .

IMF may need to "print money" as crisis spreads (http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/3269669/IMF-may-need-to-print-money-as-crisis-spreads.html)
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/3269669/IMF-may-need-to-print-money-as-crisis-spreads.html

The IMF, led by Dominique Strauss-Kahn, has the power to raise money on the capital markets by issuing 'AAA' bonds under its own name. It has never resorted to this option, preferring to tap members states for deposits.

The nuclear option is to print money by issuing Special Drawing Rights, in effect acting as if it were the world's central bank. This was done briefly after the fall of the Soviet Union but has never been used as systematic tool of policy to head off a global financial crisis.

"The IMF can in theory create liquidity like a central bank," said an informed source. "There are a lot of ideas kicking around."

______________________________________________

What if the world's creditor nations, including OPEC, take control over the IMF away from the US?

British leader asks Saudis to help fund IMF (http://biz.yahoo.com/ap/081102/ml_gulf_brown.html)
http://biz.yahoo.com/ap/081102/ml_gulf_brown.html

[we_are_toast]

Here we call it LIE-BOR. Credit markets are still a disaster => keep away. Hang on here! What do you mean? I thought the credit markets were recovering? What can we use as a measure of the health of these markets?

Many of the people who chided me for selling real estate and buying gold are now bullish on real estate again!!! I can't believe it... one of the largest panics in US history just took place and they got BULLISH. My neighbors just bought a resort property with gas station and food mart on 7 acres up in the mountains thinking we are out of the woods! Nope... they're in the woods again in more ways than oneA while back there was a thread full of anecdotal stories of friends and family who refused to head the warnings of people on this forum. It would be nice to continue these stories. What are these same people doing now? It could be a good measure of where the economy is now, and it might be a good contrarian tool.

Yesterday, a bunch of people who think oil is produced by morlocks in little factories deep under the ground, all said they thought gas prices were about to go through the roof. Hmmm.

[SBell]

I should have specified that we're military aerospace and space and have very little commercial content.

I agree that the airlines shot themselves in the foot with the fuel assumptions. I also think the economic downturn is going to lead to a lot of canceled orders for commercial aircraft.

For my business we're anticipating defense spending cuts, but we're well positioned to support older aircraft if newer ones are cut. We're also positioned to do a lot of nuclear and space/satellite work.

I also believe that aircraft and military hardware are some the last things that America actually manufactures and can export for cold hard cash when things get tough.

[goadam1]

People here seem to be on as much a rush on the downside as those who want to rush to the upside. Meanwhile, everything seems to be playing out like the script.

let's enjoy the ride.

[FRED]

People here seem to be on as much a rush on the downside as those who want to rush to the upside. Meanwhile, everything seems to be playing out like the script.

let's enjoy the ride.

Indeed it is.

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

[santafe2]

Once the din of cheers over the hopes for a quick injection of credit subsides, the passengers will turn their focus to the banging and crunching of the economy trimming the tree tops.

So far, 900 pts. down in two days since this warning...do you ever get the feeling more people are lurking here than we know about?

The DOW feels like the pink sheets, or is that roulette? I've been invested in the market for a long time and this does not feel like fear, it feels like professionals fleecing amateurs.

[friendly_jacek]

The DOW feels like the pink sheets, or is that roulette? I've been invested in the market for a long time and this does not feel like fear, it feels like professionals fleecing amateurs.

This is exactly my take. Day traders sucking blood from long term holders. This is a hay day for daytraders with all that volatility, both ways actually, up and down. I have been resisting a temptation to daytrade for a while but it is probably the only way to preserve wealth.

[phirang]

In this market, you need really bullet-proof valuations and watch out for gov sponsored takeouts etc.

As much as I'd like to short GS into oblivion, I am aware that people are eyeing it...

As such, small option positions are the way to go, but have to be nimble and follow economic calendar etc.

[FRED]

So far, 900 pts. down in two days since this warning...do you ever get the feeling more people are lurking here than we know about?

The DOW feels like the pink sheets, or is that roulette? I've been invested in the market for a long time and this does not feel like fear, it feels like professionals fleecing amateurs.

http://www.itulip.com/images/beware110508-110608.gif

[grapejelly]

or the market is discounting the next Depression. Which is the simple explanation.

[friendly_jacek]

or the market is discounting the next Depression. Which is the simple explanation.

What are you talking about? There is not supposed to be depression or deflation! ;)

[metalman]

What are you talking about? There is not supposed to be depression or deflation! ;)

depression, yes. debt deflation, yes. monetary disinflation, yes. monetary deflation, no.

so far so good. housing off. stocks off. oil? what the hell is oil doing over $60 when car sales are off 45%? hmmmmm.

[friendly_jacek]

... debt deflation, yes. ... monetary deflation, no. ...

Lets see, debt=money, thus debt deflation=monetary deflation, right?
But who cares about logic?
http://www.kuwaittimes.net/upload/img_pict/ana851e10.jpg

[metalman]

Lets see, debt=money, thus debt deflation=monetary deflation, right?
But who cares about logic?


a common error among the deflationistas.

debt≠money

[Rajiv]

In a fractional reserve system, the vast percentage of money is in fact debt! See A Primer on Money (http://itulip.com/forums/showthread.php?t=2487)

See also Money and Debt - Part I Political Money and the Debt Imperative (http://itulip.com/forums/showthread.php?t=2419)
Money and Debt - Part II - Freedom and the Monetary Ideal (http://itulip.com/forums/showthread.php?t=2426)
Money and Debt - Part III - Segregated Monetary Functions (http://itulip.com/forums/showthread.php?t=2437)

See also
Fractional-reserve banking (http://en.wikipedia.org/wiki/Fractional-reserve_banking)

Money creation

The process of fractional-reserve banking has a cumulative effect of money creation by banks.<sup id="cite_ref-purpose_3-1" class="reference">[4] (http://en.wikipedia.org/wiki/Fractional-reserve_banking#cite_note-purpose-3)</sup> In short, there are two types of money in a fractional-reserve banking system:<sup id="cite_ref-bis_5-0" class="reference">[6] (http://en.wikipedia.org/wiki/Fractional-reserve_banking#cite_note-bis-5)</sup><sup id="cite_ref-ecb_6-0" class="reference">[7] (http://en.wikipedia.org/wiki/Fractional-reserve_banking#cite_note-ecb-6)</sup><sup id="cite_ref-7" class="reference">[8] (http://en.wikipedia.org/wiki/Fractional-reserve_banking#cite_note-7)</sup>


central bank money (money created by the central bank regardless of its form (banknotes, coins and electronic money loaned to commercial banks))
commercial bank money (money created through loans in the banking system) - sometimes referred to as chequebook money<sup id="cite_ref-8" class="reference">[9] (http://en.wikipedia.org/wiki/Fractional-reserve_banking#cite_note-8)</sup>

When a loan is funded with central bank money, new commercial bank money is created. As a loan is paid back, the commercial bank money disappears from existence.


Debt Deflation is in fact money disappearing from existence!

Hence Debt Deflation = Monetary Deflation!

[vdhulla]

What are you talking about? There is not supposed to be depression or deflation! ;)

Depression does not have to be deflationary, there can be inflationary depression too, no ?

[metalman]

Depression does not have to be deflationary, there can be inflationary depression too, no ?

not in f-j's world. he hasn't read The truth about deflation (http://www.itulip.com/forums/showthread.php?p=57193#post57193) or Does the New York Times confirm deflation spiral theory or signal the end of disinflation? (http://www.itulip.com/forums/showthread.php?p=58659#post58659) or Deflationista takes on iTulip to prove deflation is here! (http://www.itulip.com/forums/showthread.php?p=58022#post58022) etc, etc, etc.

[friendly_jacek]

In a fractional reserve system, the vast percentage of money is in fact debt! See A Primer on Money (http://itulip.com/forums/showthread.php?t=2487)

See also Money and Debt - Part I Political Money and the Debt Imperative (http://itulip.com/forums/showthread.php?t=2419)
Money and Debt - Part II - Freedom and the Monetary Ideal (http://itulip.com/forums/showthread.php?t=2426)
Money and Debt - Part III - Segregated Monetary Functions (http://itulip.com/forums/showthread.php?t=2437)

See also
Fractional-reserve banking (http://en.wikipedia.org/wiki/Fractional-reserve_banking)



Debt Deflation is in fact money disappearing from existence!

Hence Debt Deflation = Monetary Deflation!

Ya, this is a simple economic concept that is either unknown by big itulipers or a big taboo.

[friendly_jacek]

not in f-j's world. he hasn't read The truth about deflation (http://www.itulip.com/forums/showthread.php?p=57193#post57193) or Does the New York Times confirm deflation spiral theory or signal the end of disinflation? (http://www.itulip.com/forums/showthread.php?p=58659#post58659) or Deflationista takes on iTulip to prove deflation is here! (http://www.itulip.com/forums/showthread.php?p=58022#post58022) etc, etc, etc.

Ya, I read all those and and they are convincing by the power of browbeating and clapping of itulip vigilantists but not logic.

[metalman]

Ya, I read all those and and they are convincing by the power of browbeating and clapping of itulip vigilantists but not logic.

huh? all logic, data, and evidence. if there is a flaw, why not point it out?

[friendly_jacek]

huh? all logic, data, and evidence. if there is a flaw, why not point it out?

Huh? reread my posts above.

[metalman]

Huh? reread my posts above.

huh? all i see is some vague comment about debt = money. that false premise leads to the false conclusion that if less debt then less money.

read any of the analysis i linked to and the evidence is that this is not the case.

if it were, then how did the gov't engineer a 41% inflation in 1934?

[Rajiv]

I think there is much confusion in the minds of many people -- if we look at Fisher's Debt-Deflation Theory of Great Depressions (http://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf), and his 9 factors leading to create the mechanics of boom to bust for a Great Depression as per the London Banker (http://londonbanker.blogspot.com/2008/07/fishers-debt-deflation-theory-of-great.html) namely

Assuming, accordingly, that, at some point of time, a state of over-indebtedness exists, this will tend to lead to liquidation, through the alarm either of debtors or creditors or both. Then we may deduce the following chain of consequences in nine links:

(1) Debt liquidation leads to distress selling and to

(2) Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation. This contraction of deposits and of their velocity, precipitated by distress selling, causes

(3) A fall in the level of prices, in other words, a swelling of the dollar. Assuming, as above stated, that this fall of prices is not interfered with by reflation or otherwise, there must be

(4) A still greater fall in the net worths of business, precipitating bankruptcies and

(5) A like fall in profits, which in a “capitalistic,” that is, a private-profit society, leads the concerns which are running at a loss to make

(6) A reduction in output, in trade and in employment of labor. These losses, bankruptcies and unemployment, lead to

(7) Hoarding and slowing down still more the velocity of circulation.

The above eight changes cause

(9) Complicated disturbances in the rates of interest, in particular, a fall in the nominal, or money, rates and a rise in the real, or commodity, rates of interest.

Fisher then sums up his theory of debt, deflation and instability in one paragraph:

In summary, we find that: (1) economic changes include steady trends and unsteady occasional disturbances which act as starters for cyclical oscillations of innumerable kinds; (2) among the many occasional disturbances, are new opportunities to invest, especially because of new inventions; (3) these, with other causes, sometimes conspire to lead to a great volume of over-indebtedness; (4) this in turn, leads to attempts to liquidate; (5) these, in turn, lead (unless counteracted by reflation) to falling prices or a swelling dollar; (6) the dollar may swell faster than the number of dollars owed shrinks; (7) in that case, liquidation does not really liquidate but actually aggravates the debts, and the depression grows worse instead of better, as indicated by all nine factors; (8) the ways out are either laissez faire (bankruptcy) or scientific medication (reflation), and reflation might just as well have been applied in the first place.



I believe that the items in bold are already occurring. The main question is whether the attempts to reflate by the FED will work before a deflationary spiral sets in! The laissez faire people say no, while most of the people at Itulip think that the FED may be successful (perhaps too successful!), leading to the POOM and stagflation.

[metalman]

I think there is much confusion in the minds of many people -- if we look at Fisher's Debt-Deflation Theory of Great Depressions (http://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf), and his 9 factors leading to create the mechanics of boom to bust for a Great Depression as per the London Banker (http://londonbanker.blogspot.com/2008/07/fishers-debt-deflation-theory-of-great.html) namely



I believe that the items in bold are already occurring. The main question is whether the attempts to reflate by the FED will work before a deflationary spiral sets in! The laissez faire people say no, while most of the people at Itulip think that the FED may be successful (perhaps too successful!), leading to the POOM and stagflation.

this fed has stated emphatically since 2002 that no way, no how will it allow a deflationary spiral to set in.

the only question to debate is which lever(s) are they gonna pull and when...
1. currency devaluation
2. unsterilized debt monetization
3. both

[vinoveri]

.

if it were, then how did the gov't engineer a 41% inflation in 1934?

uh, something to do with calling in and repricing gold wasn't it?

This time its even easier ... print; the real question in my mind is how long will it take for this to feed through and unleash POOM?

[friendly_jacek]

I believe that the items in bold are already occurring. The main question is whether the attempts to reflate by the FED will work before a deflationary spiral sets in! The laissez faire people say no, while most of the people at Itulip think that the FED may be successful (perhaps too successful!), leading to the POOM and stagflation.

Good post. The events in the last couple of months clearly showed that the FED and Treasury were behind the curve on huge credit destruction (deflation). At some point they will succeed but perhaps not so much due to their actions but merely due to the fact that deflation burns out all susceptible fuel (speculative money/credit). That will suddenly leave a huge net inflationary force. This is what exactly happened 2000-2003 and 1929-1934. Yes, the scales of events are different but mechanics are the same. I don't see a reason why it would be different this time?

So, yes Ka-Poom is a valid theory, but with a caveat that there are and will be major deflationary scares interrupted by bear rallies and eventually terminating in major inflation.

[friendly_jacek]

this fed has stated emphatically since 2002 that no way, no how will it allow a deflationary spiral to set in.

the only question to debate is which lever(s) are they gonna pull and when...
1. currency devaluation
2. unsterilized debt monetization
3. both

Yes, they worked very hard since 2007 and around the clock since september 2008. Somehow, the early success in debasing dollar backfired and now dollar is back to the 2003 levels (in dollar index terms, not FDI). They cannot do miracles yet, and government intervention can only work short term on FOREX. Did you know how big FOREX trade is? FED budget is nothing compared.

[metalman]

Yes, they worked very hard since 2007 and around the clock since september 2008. Somehow, the early success in debasing dollar backfired and now dollar is back to the 2003 levels (in dollar index terms, not FDI). They cannot do miracles yet, and government intervention can only work short term on FOREX. Did you know how big FOREX trade is? FED budget is nothing compared.

many trillions per day, last i checked.

wonder how much currency values have to do with relative default risk?

[FRED]

many trillions per day, last i checked.

wonder how much currency values have to do with relative default risk?

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

Yes and no. The correlation is high for the US and Japan but not for the UK.

[touchring]

How much did it cost to insure $10,000 worth of debt to AIG for 5 years, 6 months ago? :D