PDA

View Full Version : Anatomy of a credit crunch induced bankruptcy - Eric Janszen



EJ
01-23-09, 06:12 PM
Anatomy of a credit crunch induced bankruptcy in debt deflation

You know things are bad when wholesale liquidators -- companies that sell goods for companies that are going out of business -- are themselves going out of business

When we first started to outline the dimensions of this economic depression back in 2006, we did not foresee the extraordinary rate of economic decline we are experiencing today. Processes we expected to take months to transpire are happening in a matter of weeks. Nor did we imagine the range of businesses that are now getting caught up in this disaster. Usually a retail sales collapse starts at the luxury end of the market and slowly works its way down. Not this time. A document sent to us (hat tip to Sapiens (http://itulip.com/forums/member.php?find=lastposter&f=49)) is indicative, a recent bankruptcy court filing by a wholesale liquidator. That's right, a company that sells goods for companies that are going out of business is filing for bankruptcy protection.

Below are excepts of the filing by the company, identified here only as Debtor, with comments.


http://www.itulip.com/images/BAE1.jpg


The Debtor has many subsidiaries.


http://www.itulip.com/images/BAE2.jpg


The Debtor is not a neophyte that has not gone through a downturn before. Debtor was founded 25 years ago at the start of the post 1980s recessions, and survived the early 1990s and 2001 recessions.


http://www.itulip.com/images/BAE3.jpg


Debtor does business with established vendors. Going over the whole document, it appears that Debtor is and has always been a well run company. If there is a weakness in Debtor's business strategy in the current environment, beside the taking on of excessive debt, it is that the Debtor did not focus on the well healed but rather those who can only afford goods at below standard retail prices, even when times are good. That said, you'd think a few hundred thousand laid off FIRE Economy workers might improve the company's prospects as they join the ranks of Debtor's "lower and lower/middle income" target customer base. Apparently there are not as many newly minted poor joining from the upper rungs of the income ladder as there are customers falling the bottom rungs into abject poverty.


http://www.itulip.com/images/BAE4.jpg


Debtor has some very big stores. If they do not emerge from bankruptcy, the goods supply will no doubt be missed.


http://www.itulip.com/images/BAE5.jpg


Debtor employs a lot of people, nearly 2,000 total. If they do not emerge from bankruptcy those jobs are gone.


http://www.itulip.com/images/BAE6.jpg


Alas, the Debtor could not resist the siren song of the private equity boom, and early in the game; they took PE money in 1998.


http://www.itulip.com/images/BAE7.jpg


Debtor enjoyed sustained profitability until the post credit bubble economy pulled the rug out from under Debtor's customers. Whipsawed by energy inflation then falling incomes due to rising unemployment, the discount clearance wholesaler's goods became unaffordable to its customers.


http://www.itulip.com/images/BAE8.jpg


Unfortunately for the Debtor, the 60% the PE boys own is a majority stake, so even though the company has been profitable for its entire 25 year life, when the economy turned down the boys still wanted to get their piece of the cash flow first.


http://www.itulip.com/images/BAE9.jpg


The Debtor has many creditors, and just as the economy took away its customers its creditors tightened up on it lending terms, forcing a reduction of inventory in demand, reducing the supply of goods wanted by the remaining customers, further lowering sales below capacity, and feeding a vicious circle.

Debt Deflation versus Goods Price Deflation

This is where the business rubber meets the debt deflation road, and why it's important to distinguish between debt deflation and all-goods price deflation, because what happens next is that as supply falls, goods prices will rise (see F.I.R.E. sales and Fire sales (http://www.itulip.com/forums/showthread.php?p=66592#post66592)).

But don't take our word for it, again. Consider this report today by Richard M. Ebeling at the American Institute for Economic Research (AIER).
False Fears of Deflation in Dangerous Inflationary Waters (http://www.aier.org/research/commentaries/1028-false-fears-of-deflation-in-dangerous-inflationary-waters)

The Consumer Price Index (CPI) data for December has made many commentators raise the fear of a coming deflation. There is only one problem with these concerns: There are no deflationary forces at work. If anything, a huge inflationary process has been undertaken by the Federal Reserve over the last several months.

The Department of Labor reported January 16 that the CPI for all urban consumers (seasonally adjusted) decreased by 0.7 percent for December and was a mere 0.1 percent higher than a year earlier. Prices have not declined significantly, and the trend certainly has not been deflationary.

Since the time of Adam Smith, economists generally have defined inflation or deflation as a rise or fall in the money supply (broadly defined). Whether or not such a monetary change brings about a rise or fall in the general level of prices will depend on people’s demand to hold money relative to the increase in the supply of money.

At a time of economic crisis and uncertainty such as the present, individuals may choose to hold money balances larger than usual as they try to hedge against a more unpredictable future and restore their financial balance.

But normally the crisis atmosphere passes after a period of adjustment during which the write-downs are made and markets rebalance, with the likely future being less cloudy. At that point demands to hold a larger than usual amount of money tends to diminish.

The Federal Reserve is fearful that the collapse in housing and assets prices coupled with individuals and financial institutions shoring up their cash positions will put significant downward pressure on prices in general. So over the last several months, the Fed has undertaken a massive increase in the supply of money and credit.

As shown in the chart below, the Monetary Base (dollar cash held by the public and bank reserves held at the Fed) increased from $871 billion in September 2008 to nearly $1.7 trillion in December 2008. This amounts to a 95 percent increase in only four months. M-1 (Cash and demand deposits) increased by 40.2 percent and M-2 (M-1 plus and variety of forms of demand and savings deposits) grew by 17.4 percent at annualized rates of increase over this period.

http://www.itulip.com/images/monetary_aggregates.png


By any definition, there has been no monetary deflation that would have decreased the amount of money and credit in the economy. The current monetary expansion comes before any reestablishment of a non-crisis demand for money by consumers, producers, and financial institutions. And its magnitude warns of a serious danger of significantly rising prices in the future if the Federal Reserve fails to reverse the expansion.

The threat facing the economy as a whole in 2009 will be the consequences from this vast inflationary increase in the monetary aggregates.
In case you are not familiar with the AEIR, they have been at this economic analysis and forecasting game a lot longer than we have. We recommend this AEIR article from Nov. 1934 (PDF) (http://www.itulip.com/Select/AEIR1934.pdf). You will find it eerily familiar (hat tip to Paul and Wes for passing it on).

Today the gold market once again frustrated the impatient deflationistas who have been calling for gold to fall to under $450 since at least mid 2008. Settling just below $900, market participants confirmed what the AEIR and others who understand how the economy and monetary system operate already know, that on the other side of all of this money pumping by the Fed is a tide of inflation that will be expressed as rising goods prices, no matter that prices of assets inflated by CDOs and another financial magic -- such as houses and retail commercial real estate -- are down for the count.

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

To receive the iTulip Newsletter or iTulip Alerts, Join our FREE Email Mailing List (http://ui.constantcontact.com/d.jsp?m=1101238839116&p=oi)

Copyright iTulip, Inc. 1998 - 2009 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/GeneralDisclaimer.htm)

BadJuju
01-23-09, 06:17 PM
How vast of an inflationary force are we talking here? And when do you guys think it is set to ignite? Do you think inflation will be really bad in 2009 or will it slowly creep its way up over the year and into 2010?

Thanks for the good post, by the way.

rabot10
01-23-09, 06:43 PM
I thought that Gold would go down as i had gotten in big time. Go figure.

rick

Spartacus
01-23-09, 07:11 PM
maybe in this one market segment the bankruptcies have more to do with ebay & ebay's industrial counterparts than with the credit crunch?

hoodoo
01-23-09, 07:15 PM
This commentary really makes me wonder...

What percentage of major companies out there don't have private equity or hedge fund sepsis?

Any?

Hoo

FRED
01-23-09, 07:16 PM
maybe in this one market segment the bankruptcies have more to do with ebay & ebay's industrial counterparts than with the credit crunch?

We thought about that. eBay has been going down along with all of the other retailers.


http://ichart.finance.yahoo.com/z?s=EBAY&t=my&q=l&l=on&z=l&p=s&a=v&p=s


eBay tried to turn itself into competition for retail stores versus staying in its niche as an auction site.

Guaranteed most of Debtor's customers do not buy from eBay stores or auction on eBay.

Mega
01-23-09, 07:25 PM
Thank you EJ, I understood that no problem.

Rick i bought Gold @ these prices, but the was $2.08 at the time..............Oh how things have changed ;)
Mike

Spartacus
01-23-09, 07:33 PM
Very thorough ... your response reminded me of some numbers I saw about a week ago that US post, UPS and Fedex traffic is declining.



We thought about that. eBay has been going down along with all of the other retailers.


eBay tried to turn itself into competition for retail stores versus staying in its niche as an auction site.

Guaranteed most of Debtor's customers do not buy from eBay stores or auction on eBay.

labasta
01-23-09, 08:18 PM
After Itulip posted the Waterford crystal bankruptcy, it seems like the companies that are most likely to crash and burn are those heavily in debt.

I think if anyone is thinking in investing in a company during this recession/depression, the first criteria would be for the company to be debt free and, even better, if its competitors were to have excessive debt. It's more likely to be the one left standing perhaps.


Just a thought.

LargoWinch
01-23-09, 08:44 PM
I know who the "wholesaler" is: does not change my life or EJ's article however...

GRG55
01-23-09, 10:08 PM
...Today the gold market once again frustrated the impatient deflationistas who have been calling for gold to fall to under $450 since at least mid 2008. Settling just below $900, market participants confirmed what the AEIR and others who understand how the economy and monetary system operate already know, that on the other side of all of this money pumping by the Fed is a tide of inflation that will be expressed as rising goods prices, no matter that prices of assets inflated by CDOs and another financial magic -- such as houses and retail commercial real estate -- are down for the count...

Where the currencies have already been inflated [debased] compared to the reserve currency, the inflation is already underway. Canada's latest stats out today:



Food prices eat in to household incomes (http://www.financialpost.com/news/story.html?id=1211121)

Alia McMullen, Financial Post
Published: Friday, January 23, 2009


Car-driving Canadians continued to receive a welcome reprieve from lower gasoline prices in December. But for those that like to eat, which is likely most, food prices have persistently escalated and are predicted to remain costlier in the coming months...

...The cost of food rose 7.3% in 2008, inching up 0.3% in December for a fourteenth straight month of increase, Statistics Canada figures showed Friday. Marking the sharpest increase was the cost of fresh vegetables, which were 26.9% higher than in December last year. Other notable increases included a 18.9% rise in fruit prices, a 12.4% increase in bakery product prices, a 6% rise in the cost of dairy products and a 5.5% increase in meat prices...
[Starving Steve must live in a different Canada from the one I live in :) ]

Now the obligatory deflation scare paragraph:



...While it might not be reflected in the grocery receipts and mortgage costs, the overall cost of living is falling. Consumer prices fell a seasonally adjusted 0.4% in December to take the annual rate of price change down to 1.2% -- the lowest reading since Jan. 2007. The inflation rate has fallen sharply from its recent peak of 3.5% in August, causing some economists to speculate that Canada is crawling dangerously close to deflation, an economically damaging spiral of price decreases that comes hand in hand with production cuts and job losses...

Followed by this little deal closer:



...Core inflation, which is the preferred measure of the central bank, was unchanged at an annual pace of 2.4% in December. The Bank of Canada predicted this rate to bottom at 1.1% in the fourth quarter, below its 2% target, but safely above deflationary territory.

So if it wasn't for falling energy prices there would be no "deflation" in Canada...

santafe2
01-24-09, 12:45 AM
Where the currencies have already been inflated [debased] compared to the reserve currency, the inflation is already underway. Canada's latest stats out today:

Canada should be seeing general inflation over the last year or so based on the decline of the Canadian dollar. It's down in relative value over 25% since the peak in late 2007. While it's not a 1:1 correlation, a falling currency will tend to raise commodity prices. Gold tends to have a much more direct correlation than lettuce, but lettuce growers do need to make money.

984

As I was writing this I started to wonder if the "deflation" we're sensing in the US isn't partly related to the rise in the relative value of the US$. The US$ is up about 20% over the last 6 months. It may simply be coincident circumstance and a too large inventory overhang but suppliers in our industry are discounting with abandon. Is this a short term issue? As I read it, EJ's post posits a whipsaw price deflation leading to product shortages and commodity price inflation. I don't see how we have inflation in 2009 but I'd like to understand the inflation argument more clearly.

Chris Coles
01-24-09, 04:45 AM
The most worrying aspect is the action of the PE boys (as EJ likes to call them). We have to assume that they in turn have their own creditors who in turn have turned the screw.

The most useful lesson for the long term is to relate the overall philosophy of the PE boys. What were they doing? If the answer is they were setting out to improve the balance sheets of the companies they were buying into, why did they use borrowings instead of equity capital? Yes, you are all correct; this is my pet hobby horse, but this example makes for an excellent illustration of what I am working to get across.

In fact, the PE boys were not in the business of creating a long term stable business environment for the companies they bought into. No! They were simply in the business of selling debt for as much money as they could make in the short term.

Why could they do that?

The short answer is that there was nowhere for a long term stable business, trading well within their normal parameters, to find equity capital. The only thing on offer was debt.

Borrowings are not capital.

This is a classic "house made from playing cards". Pull one from the building and the whole thing collapses. So in fact, what we have is the end result of our central banking and regulatory institutions turned their backs on the idea of the leading financial institutions taking a paternalistic attitude to their responsibilities towards the economy and collectively setting FIRE (please excuse the pun) to the foundations of any form of good old fashioned capital based, stable, economy.

Someone threw down the proverbial handful of silver and from that moment onwards, they have scrabbled around on the ground looking, increasingly desperately, for more of the same.

They created a world of Debt Junkies in the form of PE Boys in a Feudal Mercantile economy.

FRED
01-24-09, 10:20 AM
As I was writing this I started to wonder if the "deflation" we're sensing in the US isn't partly related to the rise in the relative value of the US$.

See Confusion reigns: A crisis-driven global rush to dollar liquidity is not deflation (http://www.itulip.com/forums/showthread.php?p=52818#post52818)

Boerg
01-24-09, 10:34 AM
But don't take our word for it, again. Consider this report today by Richard M. Ebeling at the American Institute for Economic Research (AIER).
False Fears of Deflation in Dangerous Inflationary Waters (http://www.aier.org/research/commentaries/1028-false-fears-of-deflation-in-dangerous-inflationary-waters)

The Consumer Price Index (CPI) data for December has made many commentators raise the fear of a coming deflation. There is only one problem with these concerns: There are no deflationary forces at work. If anything, a huge inflationary process has been undertaken by the Federal Reserve over the last several months.



I am skeptical there are "no deflationary forces." What about the de-leveraging taking place for foreign entities paying back their loans to US banks that they took out during the credit bubble of recent? They buy dollars to pay back loans, causing the dollar to rise and making imports cheaper from an exchange perspective. That seems like a deflationary force.

I can't think of many more examples, if any, but I'm not sure that "no deflationary forces" is a true statement. (There may be one or two roads that don't lead to inflation.) But I guess this article wasn't posted because EJ agreed, but because the article agrees with ITulip's perspective of inflation rather than deflation.

I'm not convinced that this currently climate won't last longer than many expect. High inflation may take more than a few months, though it is a near guarantee.

FRED
01-24-09, 11:26 AM
I am skeptical there are "no deflationary forces." What about the de-leveraging taking place for foreign entities paying back their loans to US banks that they took out during the credit bubble of recent? They buy dollars to pay back loans, causing the dollar to rise and making imports cheaper from an exchange perspective. That seems like a deflationary force.

I can't think of many more examples, if any, but I'm not sure that "no deflationary forces" is a true statement. (There may be one or two roads that don't lead to inflation.) But I guess this article wasn't posted because EJ agreed, but because the article agrees with ITulip's perspective of inflation rather than deflation.

I'm not convinced that this currently climate won't last longer than many expect. High inflation may take more than a few months, though it is a near guarantee.

EJ writes in:

This is a fair point. We previously noted in Interview with Dr. Steven Keen: the Future of Debt Deflation (http://www.itulip.com/forums/showthread.php?p=31714#post31714) the mechanism of inflation caused by the weak dollar during the 2004 and 2008 period.


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



This produced one of two forces of demand destruction that tipped the US into recession in Q4 2007, as we forecast in Oct. 2006.



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


If a weak dollar, sustained over four years, started to produce inflation in oil prices, which then began to feed into other goods prices, how long after the dollar strengthens will it take for that process to reverse?

More than half the dollar's decline against a broad index of currencies over four years until Q4 2008 has retraced in a few months, and the PPI nearly simultaneously.


http://www.itulip.com/images/dollarvsppi1995-2009.gif


The assertion "no deflationary forces" may border on hyperbole but is not entirely off base. Clearly a deflationary force of falling import prices exists, not to mention collapsing demand generally. That said, the impact of a stronger dollar on import prices, especially oil, takes years to work its way into the price structure in the economy beyond producer prices, and the dollar has only recently strengthened due to de-leveraging. We estimated that process to end within six months of the start of Q4 2008, which means soon, if it hasn't already; clearly the dollar spike is faltering, and may soon reverse, all before a strong dollar can exert a sustained deflationary force on prices in the US economy. As evidence, witness oil prices still over $40, a price referred to as a "bubble" level by oil price analysts back in 2004.

On the inflationary side of the equation, as the article states and consistent with our Ka-Poom Theory going back to 1999, is a heroic increase in money by the Fed to reflate the economy, and consistent with our 2009 forecast from last year, rampant supply destruction across the supply chain.

Before the end of the 2009, money over-production meets supply destruction meets dollar devaluation for an inflationary 1-2-3 punch not seen since 1975. Gold scratching $900 during a supposed "deflation" is in my opinion telling us everything we need to know about where inflation is going.

grapejelly
01-24-09, 12:04 PM
There are virtually no deflationary forces today.

There is a collapse in the number of borrowers who are qualified through cash flow and collateral value to borrow money.

Is this deflationary?

The money already borrowed has been spent and is floating around the economy.

The diminished ability for new borrowers to create new money through the banking system is DIS inflationary.

However, there are enormous forces that are IN flationary, so the deflation fear is a red herring.

BadJuju
01-24-09, 12:26 PM
However, there are enormous forces that are IN flationary, so the deflation fear is a red herring.

Ben Bernanke: Yes. Yes, I did it. I killed deflation. I hated it, so much... it-it- the f - it -flam - flames. Flames, on the side of my face, breathing-breathl- heaving breaths. Heaving breath...

bpr
01-24-09, 12:52 PM
I know who the "wholesaler" is: does not change my life or EJ's article however...

I just wasted forty seconds on a Google search for no good reason. Not sure why the omissions, though, the full document is available:
http://delawarebankruptcy.foxrothschild.com/uploads/file/NWL%20Declaration(2).pdf


EJ writes in:
The assertion "no deflationary forces" may border on hyperbole but is not entirely off base. Clearly a deflationary force of falling import prices exists, not to mention collapsing demand generally. That said, the impact of a stronger dollar on import prices, especially oil, takes years to work its way into the price structure in the economy beyond producer prices, and the dollar has only recently strengthened due to de-leveraging. We estimated that process to end within six months of the start of Q4 2008, which means soon, if it hasn't already; clearly the dollar spike is faltering, and may soon reverse, all before a strong dollar can exert a sustained deflationary force on prices in the US economy.As evidence, witness oil prices still over $40, a price referred to as a "bubble" level by oil price analysts back in 2004.

On the inflationary side of the equation, as the article states and consistent with our Ka-Poom Theory going back to 1999, is a heroic increase in money by the Fed to reflate the economy, and consistent with our 2009 forecast from last year, rampant supply destruction across the supply chain.

Before the end of the 2009, money over-production meets supply destruction meets dollar devaluation for an inflationary 1-2-3 punch not seen since 1975. Gold scratching $900 during a supposed "deflation" is in my opinion telling us everything we need to know about where inflation is going.


Thanks for the clarification. Being in the used car market nine months after my last purchase has opened my eyes to the deflation-like situation that abounds: used cars are cheap right now, and if I could I'd wait because they ain't going up.

From a consumer/saver's perspective, it's a good time to have cash, but there will be a better time to have cash in the not so distant future.

I'm really interested in this part:

That said, the impact of a stronger dollar on import prices, especially oil, takes years to work its way into the price structure in the economy beyond producer prices, and the dollar has only recently strengthened due to de-leveraging.
Is this because retailers, suppliers, shippers, and everyone else in the chain is reluctant to accept the fact of lower demand and thus lower prices? Wouldn't the best survival strategy for such businesses to lower prices, or at least adjust for demand? I understand that this is not an option for the overly debt-laden players out there and bankruptcy will be the only solution for them, but surely someone has a balance sheet that is sound and is nimble enough to adjust prices as demand ebbs and flows?

Spartacus
01-24-09, 01:35 PM
There is a collapse in the number of borrowers who are qualified through cash flow and collateral value to borrow money.

the status quo 2006 was constant credit expansion.

The world came to accept that as "no inflation" ... IOW a "reset of the baseline" or "tare -ing of the scale"

IMHO there's deflation relative to THAT status quo

I don't know if there is current deflation in absolute terms

rchdenton
01-24-09, 05:16 PM
http://www.itulip.com/images/monetary_aggregates.png




Can I just clarify something. Is this your preferred measure of money supply and credit in the economy?

I follow (I think) the idea that inflation is an increase in the money supply and credit in the economy. This leads to increases in such measures of the decrease in purchasing power of each unit of money as the consumer price index.

My problem is, there are so many measures of money supply and credit that I am left rather bewildered.

rchdenton
01-24-09, 05:27 PM
The short answer is that there was nowhere for a long term stable business, trading well within their normal parameters, to find equity capital. The only thing on offer was debt.

Borrowings are not capital.



I like where you are going with this Chris, as to me part of the problem is the dis-functionality of stock markets on some level.

http://www.stuff.co.nz/4828007a13.html

Tougher access to credit will encourage more Kiwi companies to list, says stock exchange operator NZX, with the focus firmly on raising equity and not debt.

Most kiwi businessmen hate the stock market, as alluded to in the article (only 10% or so of those big enough to do so are actually listed).

The disdain for listing is widespread, from Bob Jones in the press to many highly competent businessman I know personally. Something is deeply wrong here.

santafe2
01-24-09, 05:48 PM
See Confusion reigns: A crisis-driven global rush to dollar liquidity is not deflation (http://www.itulip.com/forums/showthread.php?p=52818#post52818)

Thanks Fred, I remember reading this article. Let me see if I can restate the iTulip position.


Debt deflation will be a swift process and will be old news before the end of Q2.
The US$ has been the beneficiary of this world wide deleveraging process, moving up in value relative to other currencies.
The dollar will soon begin again to move down in value, (see attached chart for reference).
The Fed/Treasury infusion of trillions of dollars into the economy will be the main force driving down the relative value of the US$.
Inflation similar to the 1970s will follow.

985

If this is a fair representation of the position, I don't disagree with the outline but I do question the time line with regard to the re-appearance of inflation. Inflation will be counter to everything the US government is trying to accomplish in 2009 to restart the economy. Should it reappear quickly, the consequences will be devastating.

A few examples of how high inflation will work at cross currents with our recovery plan:


Home sales in the worst hit areas of the country have picked up significantly now that prices are roughly 50% the 2006 high. YOY sales in Las Vegas are up over 150%. One of the main reasons sales have picked up is that mortgage interest rates are at historic lows. If these rates move up 2,3,4%, sales will come to a halt and housing will again resume its decline.
Auto dealers can't give a new car away. If the commodities that go into making a car and the borrowing costs both move up before the end of this year, we'll have no auto industry in the US.
Higher unemployment will continue to be a problem in the US throughout 2009. Inflation will only serve to exacerbate and elongate unemployment and our general economic problems. The grocer will be competing against back yard gardens and home grown chickens. Overall caloric intake will shrink. For example, a head of lettuce may move up in cost but people will no longer buy washed and bagged lettuce leaves.

It will be difficult for inflation to take hold while the participants in the US economy continue to spend less money. Printing trillions of dollars will make inflation possible in the short run and probable further out, but that currency has to be paired with a reasonable velocity and I don't see how that will happen this year.

Contemptuous
01-24-09, 06:53 PM
That's a pretty bold and specific set of predictions from iTulip for the near term. If the USD is soon to begin to move down again in value and the rest of the inflationary forecast eventuates, then presumably we can't see this USD rise much above it's recent highs at 88, right? Rising up higher than it's recent peak here would describe a perfect example of one of those (technical mumbo jumbo) double-tops" being negated (specious mumbo jumbo technicianspeak which gets Metalman foaming at the mouth)? So if we see the USD rise up past 88-90 on the index in the next six months we've just witnessed the entire thesis described below be invalidated?

Gold is about to tank. The confirmatory signals referred to here as hinting at resurgent inflation are a dud. The USD IMO is gearing up to blast right up past the 88 on the chart posted, invalidating this entire thesis. If we see the USD break out up beyond that 88, all bets on a declining US B0nar are off the table for a while.



Let me see if I can restate the iTulip position:


The dollar will soon begin again to move down in value, (see attached chart for reference).
986

ggirod
01-24-09, 07:15 PM
The disdain for listing is widespread, from Bob Jones in the press to many highly competent businessman I know personally. Something is deeply wrong here. http://itulip.com/forums/images/buttons/quote.gif (http://itulip.com/forums/newreply.php?do=newreply&p=72306)I wonder if this is not simply reflecting the advantages of keeping a corporation in private hands:

1. Less information is revealed about the finances of a private corporation so competitive advantages are easier to maintain.

2. Should a private corporation accumulate the kind of operating funds that might see it through a downturn and [God Forbid!] a credit crunch the shareholders won't be vulnerable to a buyout that will seize the cash and dispose of the remaining husk suitably burdened with unconscionable debt.

3. Should the private shareholders be more intelligent than average they might actually plan for a period longer than the one quarter typical of public corporations. Probabilities of such long term strategies is pretty much zero in publicly traded corporations.

In that case, the Kiwis might just have something there.

rchdenton
01-24-09, 07:58 PM
I wonder if this is not simply reflecting the advantages of keeping a corporation in private hands:

1. Less information is revealed about the finances of a private corporation so competitive advantages are easier to maintain.

2. Should a private corporation accumulate the kind of operating funds that might see it through a downturn and [God Forbid!] a credit crunch the shareholders won't be vulnerable to a buyout that will seize the cash and dispose of the remaining husk suitably burdened with unconscionable debt.

3. Should the private shareholders be more intelligent than average they might actually plan for a period longer than the one quarter typical of public corporations. Probabilities of such long term strategies is pretty much zero in publicly traded corporations.

In that case, the Kiwis might just have something there.

Not to mention directors getting personally sued for negligence and /or imprisoned for technical infringements. The public wants a scapegoat when things go wrong and an experienced person knows they do sometimes get things wrong. In a privately owned situation there is potentially more focus on where next rather than whose fault, this is because the owners have more personal experience and involvement.

santafe2
01-24-09, 08:01 PM
The USD IMO is gearing up to blast right up past the 88 on the chart posted, invalidating this entire thesis. If we see the USD break out up beyond that 88, all bets on a declining US B0nar are off the table for a while.

I agree with your reading of the US$. If it moves up past resistance for more than a few days, especially if it holds above there for a period of time, and then moves up, the iTulip thesis is likely flawed. I don't have an opinion as to whether this is likely to happen but if it does, I'll be even less inclined to think we'll see inflation in the next 12 months.

aps1087
01-24-09, 10:15 PM
So what if the USD breaks 88-90. Does that automatically mean that gold declines? IMO, if the USD breaks 90, that means the Euro and the Pound are getting decimated, and Europeans will continue buying gold just like they have been recently.

There is no reason why both the USD and Gold cannot strengthen RELATIVE to other currencies.

GRG55
01-24-09, 10:25 PM
I like where you are going with this Chris, as to me part of the problem is the dis-functionality of stock markets on some level.

http://www.stuff.co.nz/4828007a13.html

Tougher access to credit will encourage more Kiwi companies to list, says stock exchange operator NZX, with the focus firmly on raising equity and not debt.

Most kiwi businessmen hate the stock market, as alluded to in the article (only 10% or so of those big enough to do so are actually listed).

The disdain for listing is widespread, from Bob Jones in the press to many highly competent businessman I know personally. Something is deeply wrong here.


One question and one observation:

Does New Zealand corporate tax legislation favour debt over equity such that debt becomes a "cheaper" source of capital?
I have been an officer or Board member of public companies listed in Canada, the USA and Australia. I have also been the co-founder and CEO of a private company that I helped build from scratch. I do not know how New Zealand compares with Australia [I suspect there are at least a few similarities] but I can say without hesitation that the Aussie regulatory environment is unneccesarily onerous, and the burden it places on companies does nothing practical to improve the protection of shareholders. Given a choice I would keep a company private before I ever listed anywhere, and most particularly in Australia.

GRG55
01-24-09, 10:49 PM
Thanks Fred, I remember reading this article. Let me see if I can restate the iTulip position.


Debt deflation will be a swift process and will be old news before the end of Q2.
The US$ has been the beneficiary of this world wide deleveraging process, moving up in value relative to other currencies.
The dollar will soon begin again to move down in value, (see attached chart for reference).
The Fed/Treasury infusion of trillions of dollars into the economy will be the main force driving down the relative value of the US$.
Inflation similar to the 1970s will follow.
985

If this is a fair representation of the position, I don't disagree with the outline but I do question the time line with regard to the re-appearance of inflation. Inflation will be counter to everything the US government is trying to accomplish in 2009 to restart the economy. Should it reappear quickly, the consequences will be devastating.

A few examples of how high inflation will work at cross currents with our recovery plan:


Home sales in the worst hit areas of the country have picked up significantly now that prices are roughly 50% the 2006 high. YOY sales in Las Vegas are up over 150%. One of the main reasons sales have picked up is that mortgage interest rates are at historic lows. If these rates move up 2,3,4%, sales will come to a halt and housing will again resume its decline.
Auto dealers can't give a new car away. If the commodities that go into making a car and the borrowing costs both move up before the end of this year, we'll have no auto industry in the US.
Higher unemployment will continue to be a problem in the US throughout 2009. Inflation will only serve to exacerbate and elongate unemployment and our general economic problems. The grocer will be competing against back yard gardens and home grown chickens. Overall caloric intake will shrink. For example, a head of lettuce may move up in cost but people will no longer buy washed and bagged lettuce leaves.
It will be difficult for inflation to take hold while the participants in the US economy continue to spend less money. Printing trillions of dollars will make inflation possible in the short run and probable further out, but that currency has to be paired with a reasonable velocity and I don't see how that will happen this year.

When EJ first laid this out last year he was clear that it was impossible to predict the timing of the decline in US $, only that it was "when-not-if" and, at that time, iTulip's best guess was starting sometime in mid-2009 [iirc].

I'm not sure it much matters what the US $ index does, given it's mostly an indicator of the $/Euro cross. The declines of the Euro and Pound [and Swissie] suggest a growing loss of confidence in those currencies...a path the US$ has already travelled. So a rising US $ index would not suggest to me some newfound improvement in confidence in the bonar.

I have no difficulty imagining an outcome where the US $ does relatively well compared to currencies that are equally abused by their respective Central Bankers, but do not enjoy reserve currency status [in a world where there exists no obvious replacement]. I also don't have any difficulty imagining every one, including the US $, continuing to lose real purchasing power.

Contemptuous
01-24-09, 11:07 PM
Agreed. Gold can easily be the least affected of all assets vs. the USD rise. Does not mean it's embarking on a blistering bull market rise vs. the USD though. It can of course continue to be a quite good investment in any number of other currencies though. The USD breaking up past 88 on the above index has another significance though, at least to this reader. The big first event was the USD breaking down through 80 on that index in mid 2007. That was a once in 25 years event and it broke to the downside very decisively. That probably gives the preliminary hint as to what will work out over the next decade (i.e. USD is most definitely headed down below that in a big way).

The huge anomaly however has been it's breaking right back up through that 80 level in 2008. After the USD's first blistering run up last year, it broke and had this violent decline, leading many to conclude it was a false breakout and that the smart money must remain positioned for an imminent USD collapse. The 80 level still lies below and it's a very big floor or ceiling, depending on which side of it the USD winds up on after these recent gyrations. So in relation to that, if the USD now runs up past 88 (the recent high) and so indicates it's heading on north from there, actually this is a very large indicator that it's break back up over 80 on the index was decisive, and it would at very least suggest that the intermediate run is going to be up rather than down.

Some people will pooh pooh this entire glance at that 80 USD index as "even meaning anything" but there are competent currency tacticians out there who insist that whichever side of 80 the USD accelerates away from gives the macro direction that's likely good for at least a couple of years if not more. In other words and in brief, what the USD is going to do now relative to it's recent high at 88 is actually quite telling. An "inevitably collapsing USD" is going to be a thesis under a bit of strain if we see the dollar move up past 88, and we could see how that particular juncture works out within just a month or two. And BTW, this is not technical chart navel gazing - it is merely watching what the USD is **actually doing**.


So what if the USD breaks 88-90. Does that automatically mean that gold declines? IMO, if the USD breaks 90, that means the Euro and the Pound are getting decimated, and Europeans will continue buying gold just like they have been recently.

There is no reason why both the USD and Gold cannot strengthen RELATIVE to other currencies.

santafe2
01-25-09, 12:10 AM
When EJ first laid this out last year he was clear that it was impossible to predict the timing of the decline in US $, only that it was "when-not-if" and, at that time, iTulip's best guess was starting sometime in mid-2009 [iirc].

As you point out below, the US$ is mostly a Euro mirror, (almost 60%). I would just as soon predict where the Euro will be at the end of 2009 by flipping a coin. That said, I'll be surprised if the US$ retreats significantly from it's basket buddies.


I'm not sure it much matters what the US $ index does, given it's mostly an indicator of the $/Euro cross. The declines of the Euro and Pound [and Swissie] suggest a growing loss of confidence in those currencies...a path the US$ has already travelled. So a rising US $ index would not suggest to me some newfound improvement in confidence in the bonar.

I have no difficulty imagining an outcome where the US $ does relatively well compared to currencies that are equally abused by their respective Central Bankers, but do not enjoy reserve currency status [in a world where there exists no obvious replacement]. I also don't have any difficulty imagining every one, including the US $, continuing to lose real purchasing power.You're saying the sea of currency values is evaporating. And, that the value of the US$ may be currently evaporating less fast than other currencies does not mean it's rising. EJ wrote something similar in his reference to $900 gold. Even more impressive when measured against the loonie where gold is at an all time high.

As I review the somewhat abstract notions above I have to compare it to my recent experience in the US. There is no price inflation, there is price deflation. It's everywhere. "Stuff" is not going up in price it's sitting on a shelf or parking lot. I understand the economic definition of deflation and the difference between that and the price of stuff deflation. But if the price of stuff keeps going down one can put all the money one can print back into our system and there will be so little velocity, we'll continue to see price deflation.

GRG55
01-25-09, 01:17 AM
As you point out below, the US$ is mostly a Euro mirror, (almost 60%). I would just as soon predict where the Euro will be at the end of 2009 by flipping a coin. That said, I'll be surprised if the US$ retreats significantly from it's basket buddies.

You're saying the sea of currency values is evaporating. And, that the value of the US$ may be currently evaporating less fast than other currencies does not mean it's rising. EJ wrote something similar in his reference to $900 gold. Even more impressive when measured against the loonie where gold is at an all time high.

As I review the somewhat abstract notions above I have to compare it to my recent experience in the US. There is no price inflation, there is price deflation. It's everywhere. "Stuff" is not going up in price it's sitting on a shelf or parking lot. I understand the economic definition of deflation and the difference between that and the price of stuff deflation. But if the price of stuff keeps going down one can put all the money one can print back into our system and there will be so little velocity, we'll continue to see price deflation.

We [in Canada] have been seeing "price deflation" for "stuff" also [as I've noted in some posts on other threads]. And my wife has been taking advantage of that by stockpiling various appliances and other manufactures she intends to install in the bunker.

But I also note that, with the notable exception of petroleum energy, the price deflation here is restricted to the sort of stuff that sits on department and big-box store shelves; the sort of stuff that is nice-to-have. Slightly used toys like snowmobiles, ATVs, waterski boats, and other recreational discretionaries are still falling as truly distressed sellers drag everyone down the price curve.

The need-to-have stuff, like food, rent, haircuts, and so forth isn't following that price deflation pattern. Whether that is entirely due to a depreciated relative currency, or something else, is unclear to me.

santafe2
01-25-09, 01:55 AM
The need-to-have stuff, like food, rent, haircuts, and so forth isn't following that price deflation pattern. Whether that is entirely due to a depreciated relative currency, or something else, is unclear to me.

In the US "rent" has moved down in cost for many. For some, it's the walk-away and buy next door for 1/2 the cost. For others it's buying a house at 1/2 the cost it sold for in 2006 and securing a 5% mortgage. And still for others it's foreclosure and renting at 1/2 the cost or less.

You might be right about the haircut but I still get mine for $12 so I'm not complaining.

metalman
01-25-09, 01:56 AM
As you point out below, the US$ is mostly a Euro mirror, (almost 60%). I would just as soon predict where the Euro will be at the end of 2009 by flipping a coin. That said, I'll be surprised if the US$ retreats significantly from it's basket buddies.

You're saying the sea of currency values is evaporating. And, that the value of the US$ may be currently evaporating less fast than other currencies does not mean it's rising. EJ wrote something similar in his reference to $900 gold. Even more impressive when measured against the loonie where gold is at an all time high.

As I review the somewhat abstract notions above I have to compare it to my recent experience in the US. There is no price inflation, there is price deflation. It's everywhere. "Stuff" is not going up in price it's sitting on a shelf or parking lot. I understand the economic definition of deflation and the difference between that and the price of stuff deflation. But if the price of stuff keeps going down one can put all the money one can print back into our system and there will be so little velocity, we'll continue to see price deflation.

so far so good, forecast wise. worth a re-read...

Fed cuts dollar, Fire sales vs FIRE sales, Duh-flation, and Bezzle shrinks again (http://www.itulip.com/forums/showthread.php?p=66592#post66592)

Sharky
01-25-09, 01:56 AM
I am skeptical there are "no deflationary forces." What about the de-leveraging taking place for foreign entities paying back their loans to US banks that they took out during the credit bubble of recent? They buy dollars to pay back loans, causing the dollar to rise and making imports cheaper from an exchange perspective. That seems like a deflationary force.

I can't think of many more examples, if any, but I'm not sure that "no deflationary forces" is a true statement.

Another large source of deflationary forces would seem to me to be defaults on mortgages and other loans. Whenever a loan defaults (or gets paid back), the money behind it is destroyed.

As far as data goes, what about M3? Its rate of increase has dramatically declined over the last year. In fact, the recent turn up, combined with the extremely rapid increase in M1, could very well be indications of inflation's return in the near-term.

The flip-side of the argument is that loan defaults could easily be much higher this year than last, particularly with the upcoming prime and Alt-A resets.


http://www.shadowstats.com/imgs/sgs-m3.gif?hl=ad

metalman
01-25-09, 02:04 AM
Can I just clarify something. Is this your preferred measure of money supply and credit in the economy?

I follow (I think) the idea that inflation is an increase in the money supply and credit in the economy. This leads to increases in such measures of the decrease in purchasing power of each unit of money as the consumer price index.

My problem is, there are so many measures of money supply and credit that I am left rather bewildered.

one of our members wrote in once from argentina... said that with inflation in double digits there and interest rates at 20% for anyone with GOOD credit, never mind everyone else, most business is done in cash... ain't no credit there to speak of. wish that guy'd come back and clear up this confusion.

The Outback Oracle
01-25-09, 08:55 AM
Thanks Santafe!
Inflation is no bloody solution. It just causes more misallocation of scarce resources...particularly cash! Why does everyone think we are in this crisis?????
Due to FIRE ECONOMY resulting from inflation and negative interest rates, we have a gross misallocation of resources which has lead to the current collapse! So the solution is - we inflate even more grossly and deliberately... yeah right!

grapejelly
01-25-09, 09:40 AM
Another large source of deflationary forces would seem to me to be defaults on mortgages and other loans. Whenever a loan defaults (or gets paid back), the money behind it is destroyed.



No it isn't destroyed. Only when money is PAID BACK is it destroyed. Which isn't a bad thing, but anyways...defaults do not result in money being destroyed. Completely different.

Only PAYING BACK LOANS removes money from the money supply. Defaults do not remove ANY MONEY from the money supply.

metalman
01-25-09, 10:51 AM
No it isn't destroyed. Only when money is PAID BACK is it destroyed. Which isn't a bad thing, but anyways...defaults do not result in money being destroyed. Completely different.

Only PAYING BACK LOANS removes money from the money supply. Defaults do not remove ANY MONEY from the money supply.

itulip ought to offer a primer on this fact. no one seems to get it. money is lent into existence... it can only be paid back out of existence.

the thing is to think of money as flows not as levels. a new loan adds to the amount of money flowing through the economy.

santafe2
01-25-09, 01:10 PM
itulip ought to offer a primer on this fact. no one seems to get it. money is lent into existence... it can only be paid back out of existence.

the thing is to think of money as flows not as levels. a new loan adds to the amount of money flowing through the economy.

Chris Martenson's Crash Course has been posted on iTulip several times before but may be worth a repost. Chapter 7 is useful with regard to this issue.

http://www.chrismartenson.com/crashcourse

Sharky
01-25-09, 05:09 PM
No it isn't destroyed. Only when money is PAID BACK is it destroyed. Which isn't a bad thing, but anyways...defaults do not result in money being destroyed. Completely different.

Only PAYING BACK LOANS removes money from the money supply. Defaults do not remove ANY MONEY from the money supply.

When a loan defaults, the bank doesn't just throw up their hands and say "oh, well!" The defaulted loan must (eventually) be written-off against bank profits. Bank profits are also reserves (they are not credit money). So the result of a default is the destruction of reserves -- which is worse (in a deflationary sense) than the destruction of credit money that results when a loan is paid off, because it can impair the bank's future ability to lend. With enough defaults, a bank will fall below its reserve requirements, and will be closed by the FDIC, or forced to merge with another bank that can shore-up its reserves.

This is one of the reasons the Fed has been flooding the system with new reserves -- it's an attempt to offset the losses from defaults.

grapejelly
01-25-09, 05:37 PM
When a loan defaults, the bank doesn't just throw up their hands and say "oh, well!" The defaulted loan must (eventually) be written-off against bank profits. Bank profits are also reserves (they are not credit money). So the result of a default is the destruction of reserves -- which is worse (in a deflationary sense) than the destruction of credit money that results when a loan is paid off, because it can impair the bank's future ability to lend. With enough defaults, a bank will fall below its reserve requirements, and will be closed by the FDIC, or forced to merge with another bank that can shore-up its reserves.

This is one of the reasons the Fed has been flooding the system with new reserves -- it's an attempt to offset the losses from defaults.

You are over complicating matters. If the loan defaults, the bank has a writeoff. But only the future ability to make loans is impaired. Even if the bank is closed down, every dime of money that was borrowed into existence by outside borrowers was presumably spent in the economy. The money isn't being returned, so there is no money deflation.

No money is removed from the economic system. It is removed, however, upon repayment.

Repayment of loans is deflationary, just as creation of the loans was inflationary.

metalman
01-25-09, 05:39 PM
When a loan defaults, the bank doesn't just throw up their hands and say "oh, well!" The defaulted loan must (eventually) be written-off against bank profits. Bank profits are also reserves (they are not credit money). So the result of a default is the destruction of reserves -- which is worse (in a deflationary sense) than the destruction of credit money that results when a loan is paid off, because it can impair the bank's future ability to lend. With enough defaults, a bank will fall below its reserve requirements, and will be closed by the FDIC, or forced to merge with another bank that can shore-up its reserves.

This is one of the reasons the Fed has been flooding the system with new reserves -- it's an attempt to offset the losses from defaults.

thank you! that is very clear.

still, that does not 'destroy' money but does impair the bank's ability to issue new loans and create new money.

bart
01-25-09, 06:17 PM
If the loan defaults, the bank has a writeoff.

Which in my opinion is actual destruction of money, aka part of debt deflation.

Sharky
01-25-09, 07:01 PM
You are over complicating matters. If the loan defaults, the bank has a writeoff. But only the future ability to make loans is impaired. Even if the bank is closed down, every dime of money that was borrowed into existence by outside borrowers was presumably spent in the economy. The money isn't being returned, so there is no money deflation.

The original credit money created by the loan and spent by the borrower is of course not returned to the bank upon default; it remains in the economy.

However, when a bank takes a write-off against a defaulted loan, the amount of money in the banking system as a whole will decline. The bank's "bank balance" will go down, just as the borrower's bank balance would have gone down had they paid off the loan. In effect, the loan is paid off, it's just that the source of funds is the bank's profits rather than the borrower. There is no free lunch for the banks in that respect (at least in theory); money is still removed from the economy.

Even if the bank can sell the loan's collateral, the proceeds they receive will still retire the loan -- the money received from the buyer will basically pay off the loan and destroy the associated money.

grapejelly
01-25-09, 08:12 PM
The original credit money created by the loan and spent by the borrower is of course not returned to the bank upon default; it remains in the economy.

However, when a bank takes a write-off against a defaulted loan, the amount of money in the banking system as a whole will decline. The bank's "bank balance" will go down, just as the borrower's bank balance would have gone down had they paid off the loan.

No it won't. The bank has already disbursed money to the borrower and that money is in the economy. The bank's balance remains the same regardless of default.



In effect, the loan is paid off, it's just that the source of funds is the bank's profits rather than the borrower. There is no free lunch for the banks in that respect (at least in theory); money is still removed from the economy.

No it is not.



Even if the bank can sell the loan's collateral, the proceeds they receive will still retire the loan -- the money received from the buyer will basically pay off the loan and destroy the associated money.

If the bank sells a loan's collateral, it removes money from the economy and that is potentially deflationary.

grapejelly
01-25-09, 08:14 PM
Which in my opinion is actual destruction of money, aka part of debt deflation.

this is not monetary deflation and there is of course a big difference. The money supply is not an iota smaller if someone defaults. The money supply can only shrink of people pay back the loan or otherwise return money to the bank.

Defaults don't return money to the bank.

Debt deflation is not monetary deflation. Debt deflation impairs the future ability of banks to lend, and the future ability of borrowers (newly insolvent) to borrow. But debt deflation does NOTHING to deflate the current money supply.

The only reason for this confusion is that we all confused money and credit because in a fractional reserve fiat regime they seem the same. But they are not. If the bank lends me $100, I pay the baker and the butcher that $100. Now, if I default, the baker and butcher still have the $100.

The bank charges off the $100. So when the baker goes to borrow money, the bank says "No." And the baker can't afford to finance his flour. And the baker's income falls, so the baker can't buy meat from the butcher.

This makes everyone poorer, but note that the stock of money has not changed. If the central bank comes around and gives the bank another $100 to lend, then the first $100 is still in the economy (it never left), and the second $100 is now contributing to currency depreciation (inflation) but at no time did my default affect the stock of money in the economy.

metalman
01-25-09, 08:21 PM
Debt deflation impairs the future ability of banks to lend, and the future ability of borrowers (newly insolvent) to borrow. But debt deflation does NOTHING to deflate the current money supply.

you have captured all of this Saving, Asset-Price Inflation, and Debt-Induced Deflation (http://www.itulip.com/forums/showthread.php?p=6738#post6738) in 30 words. well done!

grapejelly
01-25-09, 08:34 PM
you have captured all of this Saving, Asset-Price Inflation, and Debt-Induced Deflation (http://www.itulip.com/forums/showthread.php?p=6738#post6738) in 30 words. well done!

thank you.

I owe a lot of my understanding (or lack therein) to Steve Saville, who's Speculative Investor is in my opinion terrific.

bart
01-25-09, 08:34 PM
this is not monetary deflation and there is of course a big difference. The money supply is not an iota smaller if someone defaults. The money supply can only shrink of people pay back the loan or otherwise return money to the bank.

Defaults don't return money to the bank.

Debt deflation is not monetary deflation. Debt deflation impairs the future ability of banks to lend, and the future ability of borrowers (newly insolvent) to borrow. But debt deflation does NOTHING to deflate the current money supply.


I submit that the difference between debt deflation and actual monetary deflation is both academic and minuscule.

I also continue to believe that when a bank writes something off, it not only does show up on their balance sheet if they're using standard accounting practices but also impacts their income statement and ability to loan. Another name for a write off is a loss.

In my opinion, the only way is does not affect money supply is if one considers that credit isn't money.
By definition, when there's a debt deflation then existing credit instruments lose value - one needs to take the next step after recognizing that the bank has had a loss from the write off.
Under normal conditions, it doesn't show up in total money supply since the write offs are small and buried.

And of course the original x$ are still there when a loan goes bad, but that's only part of the overall or total picture. Its like saying that no one has had a loss when their stocks lose value, unless they sell... which in my opinion isn't a wise way to operate.

grapejelly
01-25-09, 08:37 PM
I submit that the difference between debt deflation and actual monetary deflation is both academic and minuscule.

I also continue to believe that when a bank writes something off, it not only does show up on their balance sheet if they're using standard accounting practices but also impacts their income statement and ability to loan. Another name for a write off is a loss.

In my opinion, the only way is does not affect money supply is if one considers that credit isn't money.
By definition, when there's a debt deflation then existing credit instruments lose value - one needs to take the next step after recognizing that the bank has had a loss from the write off.
Under normal conditions, it doesn't show up in total money supply since the write offs are small and buried.

And of course the original x$ are still there when a loan goes bad, but that's only part of the overall or total picture. Its like saying that no one has had a loss when their stocks lose value, unless they sell... which in my opinion isn't a wise way to operate.

it makes a huge difference, Bart. It isn't miniscule.

Becuase if you believe the garbage about defaults being deflationary, you will believe that the CBs should increase the money supply to counteract it.

If you understand the truth that defaults are NOT deflationary, you know that we are in the midst of setting up terrifically bad inflation under the cover of a complete lie, the red herring of "deflation."

All we are talking about is the impairment of banks for future lending. To me, that isn't a bad thing. They SHOULD be impaired.

metalman
01-25-09, 08:47 PM
If you understand the truth that defaults are NOT deflationary, you know that we are in the midst of setting up terrifically bad inflation under the cover of a complete lie, the red herring of "deflation."


the most shocking thing is... second time it's happen in less than 10 yrs (http://itulip.com/forums/Future%20inflation%20fears%20topple%20TIPS) and everyone has already forgotten. :mad:

bart
01-25-09, 08:55 PM
it makes a huge difference, Bart. It isn't miniscule.

Becuase if you believe the garbage about defaults being deflationary, you will believe that the CBs should increase the money supply to counteract it.

If you understand the truth that defaults are NOT deflationary, you know that we are in the midst of setting up terrifically bad inflation under the cover of a complete lie, the red herring of "deflation."

All we are talking about is the impairment of banks for future lending. To me, that isn't a bad thing. They SHOULD be impaired.


Our opinions differ... and for you to call all defaults of any size as not deflationary and also characterize the view as garbage (as well as heinously imply that I'm in favor of CBs doing huge counter actions), I submit that you have given up on real debate - at best. Fair warning... I don't tolerate accusations like that very well.

I also submit that lending and future lending is and has been greatly impaired, both per the facts from the Fed's lending survey and in actual reality per total credit stats.

I also submit that there is little wrong with real lending that is based on good ideas or plans from trustworthy non liars with a good track history, etc. Extreme fractional reserve and vested interest based lending is a very different story though, as is the track record of the Fed and scummy banksters etc.

We do agree about inflation and the set up though. And just because we have real deflation now in no way means we can't have screaming inflation soon. The evidence is clearly there.

grapejelly
01-25-09, 10:41 PM
Our opinions differ... and for you to call all defaults of any size as not deflationary and also characterize the view as garbage (as well as heinously imply that I'm in favor of CBs doing huge counter actions), I submit that you have given up on real debate - at best. Fair warning... I don't tolerate accusations like that very well.



my apologies, Bart.

bart
01-25-09, 11:25 PM
my apologies, Bart.

Cool. We're fine now, and I was almost certain your comments were inadvertent... and our expectations are quite similar too.
And agreeing to disagree about credit and money destruction won't be the first time for either of us.

charliebrown
01-26-09, 01:58 AM
OK, I'm really confused. If banks are losing their reserves and cant make loans, how does that effect prices when all those who relied on credit to make purchases are out of the picture?

If new money is created by banks loaning money into existence, which makes sense, if banks stop loaning money, does the money supply plateau? As loans are paid back and no others made does money supply decrease?

Chris Coles
01-26-09, 05:00 AM
There is a parallel debate here, a what if, what if they issued new equity capital to sound business borrowers rather than more borrowings? Surely in that case the debt would be more secure and the balance sheets of the banks also?

wkwillis
01-26-09, 05:39 AM
After Itulip posted the Waterford crystal bankruptcy, it seems like the companies that are most likely to crash and burn are those heavily in debt.

I think if anyone is thinking in investing in a company during this recession/depression, the first criteria would be for the company to be debt free and, even better, if its competitors were to have excessive debt. It's more likely to be the one left standing perhaps.


Just a thought.
As the airlines have shown, the most dangerous competitor is one that has just gone through bankruptcy and now has less debt than you have...

Sharky
01-26-09, 08:38 AM
Debt deflation impairs the future ability of banks to lend, and the future ability of borrowers (newly insolvent) to borrow. But debt deflation does NOTHING to deflate the current money supply.

What is the mechanism by which debt deflation impairs the bank's future ability to lend?

Do banks experience a loss when a borrower defaults? If so, then how that can happen without money being destroyed? Where does the lost money go?


If the bank lends me $100, I pay the baker and the butcher that $100. Now, if I default, the baker and butcher still have the $100.

Of course.


The bank charges off the $100.

What does it mean to you for the bank to "charge off the $100"? What is it charged off against? What happens on the other side of the ledger?

Sharky
01-26-09, 09:09 AM
Becuase if you believe the garbage about defaults being deflationary, you will believe that the CBs should increase the money supply to counteract it.

Please don't put me in that camp.

The CBs can't solve this kind of deflationary problem with the kind of inflation they can create.

The way the Fed normally injects money into the economy is through the FOMC, by buying Treasuries. But that's a broad, economy-wide approach. The problem today is that specific banks are running massively short of reserves (due to losses, as per my previous posts...). So the Fed had to come up with programs like TAF that allowed them to help specific banks avoid the destruction of their reserves by temporarily taking loss-inducing loans off their books.

But TAF and programs like it aren't a solution; they are a short-term band-aid. Loans will continue to default, and losses will continue to mount. Since TAF is all borrowed from the Fed; in theory it has to be repaid at some point. But the banks have lost so much through defaults that it probably can't ever be repaid. Inflation in the form of more money in the general economy doesn't come close to solving that problem.

No, there are only two solutions. One is to let the banks go bust. But in that scenario, money in their depositor's accounts would be destroyed, and in their already-impaired state, the ripple effect would take out most of the US banking system. The FDIC could, with the Fed's backing, theoretically replace people's savings, but it would be a giant scare and a nightmare that isn't close to being politically acceptable.

The only other option is for the bad debt to be permanently purchased by the government in some way -- whether that will be through bank nationalization or something else isn't yet clear of course. Although it involves the creation of lots of new money, it's actually not inflationary in the usual sense, because the new money would offset existing losses and therefore wouldn't increase the money supply.

metalman
01-26-09, 10:37 AM
meanwhile, back in the usa...

Leading indicators rise on increased money supply (http://finance.yahoo.com/news/Leading-indicators-rise-on-apf-14153042.html)

Increase in money supply sends December's leading indicators unexpectedly higher

Monday January 26, 2009, 10:01 am EST
NEW YORK (AP) -- A private research group says its monthly forecast of economic activity rose unexpectedly in December, mostly because the flood of federal bailouts increased the money supply.

The New York-based Conference Board's monthly forecast of economic activity increased 0.3 percent in December. Economists surveyed by Thomson Reuters had expected a 0.3 percent decline.
The group's index of leading economic indicators had fallen 0.4 percent in November and a revised 1.0 percent in October.

With nearly every component but the money supply in decline, the Conference Board said unemployment could rise to 9 percent from 7.2 percent as the country remains in an intense recession through spring.

gold 'unexpectedly higher' too...

http://www.kitco.com/images/live/gold.gif

quigleydoor
01-26-09, 01:57 PM
In fact, the PE boys were not in the business of creating a long term stable business environment for the companies they bought into. No! They were simply in the business of selling debt for as much money as they could make in the short term.

To echo hoodoo,


What percentage of major companies out there don't have private equity or hedge fund sepsis?

Not sure about major companies, but I know of a few pico-cap software companies which are privately held, self-financed, and have very good cash flow. My employer is a good example.

I wonder if there is any data available encompassing these types of companies. What portion of the economy do they represent?

metalman
01-26-09, 02:09 PM
To echo hoodoo,



Not sure about major companies, but I know of a few pico-cap software companies which are privately held, self-financed, and have very good cash flow. My employer is a good example.

I wonder if there is any data available encompassing these types of companies. What portion of the economy do they represent?

very good question. wonder if a program can be written to scrape the d&b data to come up with a list. call it the sans-fire list.

Roughneck
01-26-09, 08:28 PM
I do agree with this theory. However, the amount of losses facing the banking industry are huge. A lot of this money put into the system is and will be retained by the banks to satisfy their reserve requirements. So how much of this money that will eventually wind up in the economy is debatable. Plus, the Fed will(hopefully) start selling treasuries and pulling money out of the economy once(if) things turn around. The big danger I see coming is trying to finance the levels of debt we are running when there are few buyers.

metalman
01-26-09, 09:20 PM
The big danger I see coming is trying to finance the levels of debt we are running when there are few buyers.

amen! that's the reagan/bush/clinton/bush gift to the obama admin.

LazyBoy
01-27-09, 12:19 PM
...the impairment of banks for future lending. To me, that isn't a bad thing. They SHOULD be impaired.
YES! The root cause of this whole mess is easy credit.

Credit should be hard to get.
Use of credit should be exceptional not everyday.
Credit is not capital.

Easy credit has not only led to people/businesses/industries/economies/governments living beyond their means, it's lead to businesses/industries/economies that depend on people living beyond their means.

OMG! People can't borrow money to buy a GM car! We're not talking about people put afoot here. We're talking about people driving their cars 5 years instead of 4. That's a fundamentally good thing! But our businesses/industries/economies depend on us going into debt to buy more, more, more!

The government should be encouraging people to save not borrow.

The US won't make any production-economy money on that $3000 TV, but it can make some finance-economy money when you borrow to buy it.

Credit is the problem, not the solution.

I could continue with some ranting on "Growth" and "Confidence", but I'll leave that for the Rant forum someday.

Roughneck
01-27-09, 04:23 PM
How can you possibly expect to have an economy based on consumption and spending when you don't have a REAL economy that provides the jobs necessary to support consumption beyond the basic needs of food and shelter etc. That is why we have resorted to FIRE and the "bubble" economy. Until they build a real economy based on producing and selling goods then all this stimulus and bailing out is just delaying the inevitable.At our present debt levels how long can the government keep replacing consumtion in the private sector?

santafe2
01-30-09, 01:11 AM
How can you possibly expect to have an economy based on consumption and spending when you don't have a REAL economy that provides the jobs necessary to support consumption beyond the basic needs of food and shelter etc. That is why we have resorted to FIRE and the "bubble" economy. Until they build a real economy based on producing and selling goods then all this stimulus and bailing out is just delaying the inevitable.At our present debt levels how long can the government keep replacing consumtion in the private sector?

The US economy is built on the rest of the word trusting our leadership. As was pointed out on another thread, we've not done a great job during the RBCB years. I would expand that to the NCRBCB years. There is no inevitable, none. I would strike that word from our language. Americans have a system that, thanks to our founders, can turn on a dime with the right leadership and a hard push by its citizens. It's time to quit fighting, quit complaining and start pushing.

metalman
01-30-09, 02:31 AM
The US economy is built on the rest of the word trusting our leadership. As was pointed out on another thread, we've not done a great job during the RBCB years. I would expand that to the NCRBCB years. There is no inevitable, none. I would strike that word from our language. Americans have a system that, thanks to our founders, can turn on a dime with the right leadership and a hard push by its citizens. It's time to quit fighting, quit complaining and start pushing.

thank you! all these whiny doomers are driving me nuts.

Chris Coles
01-30-09, 05:21 AM
The US economy is built on the rest of the word trusting our leadership. As was pointed out on another thread, we've not done a great job during the RBCB years. I would expand that to the NCRBCB years. There is no inevitable, none. I would strike that word from our language. Americans have a system that, thanks to our founders, can turn on a dime with the right leadership and a hard push by its citizens. It's time to quit fighting, quit complaining and start pushing.

I absolutely agree. Do not come to me with your problems, bring me solutions to those problems should be written upon the wall behind everyone with the power to make change happen.

we_are_toast
01-30-09, 09:25 AM
I absolutely agree. Do not come to me with your problems, bring me solutions to those problems should be written upon the wall behind everyone with the power to make change happen.

Thats right! All we have to do is roll up our sleeves, quit fighting, start pushing, and offer solutions!

What's that you say? We should recapitalize the banks? No, no, no, that won't work. We should build roads and bridges! Tax cuts?! Haven't we had enough tax cuts for the rich? We need to tax those who haven't been paying their fair share so those in need can spend and boost the economy! You're all wrong! We shouldn't do anything! The market will take care of us. ...

Sorry Pollyanna's :) there are plenty of people offering plenty of solutions and each one of them thinks they're right. And the people making the decisions only hear solutions from contributors and lobbyists.

Our founding fathers would be shocked at what we've done to what they started. We've got systematic problems. We need to break the foundation of the wall that surrounds the deciders. But no one wants to dig at foundations, it's much more glamorous to kick and shout during the crises, then go back to watching American Idol until the next crises hits.

Chris Coles
01-30-09, 09:36 AM
Thats right! All we have to do is roll up our sleeves, quit fighting, start pushing, and offer solutions!

What's that you say? We should recapitalize the banks? No, no, no, that won't work. We should build roads and bridges! Tax cuts?! Haven't we had enough tax cuts for the rich? We need to tax those who haven't been paying their fair share so those in need can spend and boost the economy! You're all wrong! We shouldn't do anything! The market will take care of us. ...

Sorry Pollyanna's :) there are plenty of people offering plenty of solutions and each one of them thinks they're right. And the people making the decisions only hear solutions from contributors and lobbyists.

Our founding fathers would be shocked at what we've done to what they started. We've got systematic problems. We need to break the foundation of the wall that surrounds the deciders. But no one wants to dig at foundations, it's much more glamorous to kick and shout during the crises, then go back to watching American Idol until the next crises hits.

Toast, you have been breaking too many rocks down there in Colorado.:D

we_are_toast
01-30-09, 11:27 AM
Toast, you have been breaking too many rocks down there in Colorado.:D
Yes, but it's the altitude that'll get ya! ;)