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Deflationista takes on iTulip to prove deflation is here!

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  • #31
    Re: Deflationista takes on iTulip to prove deflation is here!

    Originally posted by labasta View Post
    So, it isn't interbank lending then, it's all about derivatives of mass destruction. This has brought down the banks, has it? Makes sense.

    But, if interbank lending is still going on, or is even higher, then the banks must trust each other. Why are their share prices in the toilet? Why are they being nationailzed? Why did I read in the Irish Independent that the Irish government had to give the blanket guarantee to save Anglo-Irish and several very large companies connected to it from disappearing?

    Help me make sense of this.

    Maybe it's not about current debt being issued, but the ability of expontential new debt which must be issued for the system to survive, now cannot be. Derivatives may have saved their 2004 asses, but maybe now it's come to its end.

    Maybe it's the expontential system which is at its end.

    You got it on derivatives - they've been the main issue and problem all along. The "credit crisis" and interbank lending are both relative diversions in my opinion away from the facts that the major banks are basically insolvent when using real and honest accounting.

    Their shares are way down due to their very poor balance sheets, and they're being nationalized to "save the system" and also to shore up confidence in the underlying currencies (which are also one key measure of the underlying governments themselves). Other factors like crony capitalism enter into the explanation too.

    If you listen to the 1st portion of the Richard Koo presentation ( http://www.csis.org/component/option...,view/id,1828/ ), you'll hear him relate some of his experiences when he was with the NY Fed during a major banking crisis in the early 1980s and how they hid the facts so as not to affect the entire system. Its much worse now than then, as witness among other things the huge injections by central banks and governments virtually world wide.

    One other very broad definition of "money" being an "idea backed by confidence" may also help you put it into perspective.
    http://www.NowAndTheFuture.com

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    • #32
      Re: Deflationista takes on iTulip to prove deflation is here!

      Originally posted by metalman View Post
      tell you what cranky_jacek, if the numbers for sept. turn out to be in fact inflation vs deflation will you quit your whining?

      ...

      big, fat inflation numbers for june and july. some deflation in aug., less in sept.

      place your bets, gents, on oct.

      let me guess... if it's down it's 'deflation' if it's up it's 'that bls data is shit'

      you, phrang and symbols ought to petition fred to start a trolls forum.
      Hey, metalman, is it safe to assume you're in the inflation camp...

      Good post, gave me a chuckle or two.

      Comment


      • #33
        Re: Deflationista takes on iTulip to prove deflation is here!

        Originally posted by pfife View Post
        Hey, metalman, is it safe to assume you're in the inflation camp...

        Good post, gave me a chuckle or two.
        been here since the dot com bubble, before the last deflation scare, before that term was invented. itulip calls it 'ka' here out of kapoom theory. refers to post bubble disinflation before the government steps in to wreck our currency and... as it turns out... our entire friggin economy with this goddamn housing bubble. what a pack of assholes.

        anyone who thinks the gov't can't create inflation is flat out stupid. that's like saying the sun can't make heat. shit, that's all if can do, that's what it's designed to do, by degrees more high heat or less high heat but always heat.

        i bet there is not one single person on earth with background in accounting that believes in deflation. if you understand double entry bookkeeping you understand why deflation cannot happen. there is no limit to the size of the 'assets' number the fed can add to its balance sheet. none. just look at what they've done this year!!! 80% of the actions by the fed and treasury that the deflationists said years ago was 'impossible' and then some, like printing money to inject capital directly into banks, have already happened. why not the other 20%? why should i listen to guys who have been wrong, wrong, wrong, wrong, wrong, wrong?

        then there are those with a least a little understanding of economics... devalue your currency... the foolproof way out of deflation if all else fails.

        Comment


        • #34
          Re: Deflationista takes on iTulip to prove deflation is here!

          Actually Tips yields going up is a sign of deflation. The lower yields go the more demand from the market for protection from inflation. The tips market is currently pricing deflation out to the 8 year part of the curve. The current market expected inflation over the next 10 years as implied by the Tips market is .84% inflation.

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          • #35
            Re: Deflationista takes on iTulip to prove deflation is here!

            Originally posted by huntg View Post
            Actually Tips yields going up is a sign of deflation. The lower yields go the more demand from the market for protection from inflation. The tips market is currently pricing deflation out to the 8 year part of the curve. The current market expected inflation over the next 10 years as implied by the Tips market is .84% inflation.
            if deflation then 10 yr bond yields would be falling, too. but they are rising. you can't argue it both ways... tips prices are falling due to future deflation while bond prices are falling due to what? future deflation? makes no sense. here's a better explanation...

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            • #36
              Re: Deflationista takes on iTulip to prove deflation is here!

              What I find so incredibly amusing is that the real catalyst for reflation is totally overlooked by the analysis presented.

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              • #37
                Re: Deflationista takes on iTulip to prove deflation is here!

                Originally posted by metalman View Post
                if deflation then 10 yr bond yields would be falling, too. but they are rising. you can't argue it both ways... tips prices are falling due to future deflation while bond prices are falling due to what? future deflation? makes no sense. here's a better explanation...
                t-notes suck, yet t-bills are doing super-well.

                inflation is not part of the trade here: this is pure fear.

                Comment


                • #38
                  Re: Deflationista takes on iTulip to prove deflation is here!

                  Actually treasury yields are in a range. The 10 year has essentially been in a range of 3.4-4% this year and all yields remain lower YTD. Can easily have the case where yields rise due to increased supply without concern that inflation is eroding value. Also, lots of essentially government guaranteed products can crowd out treasury notes (Agency debt, debt of too big to fail banks, FDIC paper etc.) and lead to higher yields.

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                  • #39
                    Re: Deflationista takes on iTulip to prove deflation is here!

                    Originally posted by bart View Post
                    You got it on derivatives - they've been the main issue and problem all along. The "credit crisis" and interbank lending are both relative diversions in my opinion away from the facts that the major banks are basically insolvent when using real and honest accounting.
                    That would totally make sense. Derivatives were the WMD that exploded sept and oct and all the gov and fed could do was to squirt their inflation water as fast as they could pump on the atomic deflation blast. Now, as the big chunk of global economy is turned into ashes and smoldering, sure they can extingish some of the flames for a time being, but look out for an aftershock in several months.

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                    • #40
                      Re: Deflationista takes on iTulip to prove deflation is here!

                      Thanks Bart,


                      I had suspected that the European and US banks were insolvent due to dodgy Enron style accounting. I wasn't sure what had caused the losses to be covered up by the dodgy accounting. I emailed a friend last week saying that I thought the US was one giant Enron waiting to happen. Well it has happened in a way, but they just managed to cover their asses, but what about next year? What about the coming year?

                      A lot of derivative insurance must have been called in at the end of September to cause such a shit storm. Oh well, bye bye banks. Thanks for the party (which I didn't participate in).

                      Why don't they just annul the derivative contracts completely? What would be the consequences?

                      Comment


                      • #41
                        Re: Deflationista takes on iTulip to prove deflation is here!

                        Originally posted by labasta View Post
                        Thanks Bart,


                        I had suspected that the European and US banks were insolvent due to dodgy Enron style accounting. I wasn't sure what had caused the losses to be covered up by the dodgy accounting. I emailed a friend last week saying that I thought the US was one giant Enron waiting to happen. Well it has happened in a way, but they just managed to cover their asses, but what about next year? What about the coming year?

                        A lot of derivative insurance must have been called in at the end of September to cause such a shit storm. Oh well, bye bye banks. Thanks for the party (which I didn't participate in).

                        Why don't they just annul the derivative contracts completely? What would be the consequences?
                        I do urge some caution on your conclusion. Banks have been insolvent many many times over the decades and most have pulled through, as Koo noted about the problems in the early 1980s in that video.

                        Lots will go under this time around too, much like the S&L crisis and other periods too. Lots have also been wrongly rescued too, especially recently. Who knows when or if we'll truly have a massive SHTF or TEOTWAWKI situation too... and the only answer I have is to cover your keister as best you can and only use banks that have reasonably clean balance sheets and are well managed by reasonably ethical folk, etc.

                        As far as annulling the contracts, much has already been done - something like $20+ trillion of CDSs have disappeared recently via the two parties getting together and willingly cancelling them.

                        I do have opinions on what would happen if they were all annulled but prefer to avoid the area for now, partially because my data is incomplete.

                        I can offer one perhaps helpful illustration though - let's say that you were long a gold futures contract (which is a derivative) or even a bunch of GLD (which is a derivative) as part of your long term planning & CYA actions... and they were annulled?
                        http://www.NowAndTheFuture.com

                        Comment


                        • #42
                          Re: Deflationista takes on iTulip to prove deflation is here!

                          Originally posted by ASH View Post
                          Hi BDS4. I think inflation vs. deflation scenarios have been more ably analyzed than I could by others -- ad nauseam -- in previous iTulip threads (there are links to several such threads in this post). You and I are in mortal danger of being tersely directed to take it elsewhere by exasperated senior iTulipers who have seen this topic hashed over repeatedly already (although we may be granted some leniency, since FRED started the thread). That said, I'm happy to talk about it, because I haven't personally attempted an expository summary of the issue before. Here's my summary of what I've read.

                          So, the question is -- what will happen if Americans start saving and stop spending? I'm going to ignore the behavioral aspect of this issue (whether American culture really would switch from consumption to saving, if offered "free money" to continue spending) and take that as a stipulation. Absent effective government intervention, and absent global markets, there would indeed be a deflationary recession. It would be deflationary because of reduced demand from private consumers (less money chasing goods, services, and assets), and it would be a recession because reduced demand begets reduced economic activity (which could reduce demand further, as jobs are lost... and so on). However, there is government intervention, and there is a global market.

                          Government intervention can take several forms. The government can mail citizens tax rebate checks, or bump up unemployment benefits, or find other ways to put public funds in the hands of consumers. The government can also create money in the banking system and reduce the cost of credit to encourage banks to increase lending. Either of these measures will create some demand indirectly, although if the American people have truly given up excessive consumption cold turkey, then these measures will only serve to replace some of the consumer demand for necessities that is lost as a result of personal insolvency. Cheaper credit can also fuel borrowing for investment, but there is no guarantee that the investment will be domestic. You could get another asset bubble going, but it might be overseas. Japan's mild but lengthy recession is the poster child for "pushing on a string" -- a case in which domestic demand from a nation of savers did not rise much in response to cheaper lending, and the investment which was engendered was mainly overseas (the yen carry trade). This is more likely to be a problem once deflationary expectations (the belief that saved dollars will be worth more tomorrow than today) become entrenched, which is one reason the government will try like the dickens to reflate.

                          Faced with a population of savers, the government can also directly create demand, serving as the consumer of last resort, through increased public spending. The government can also institute capital controls (e.g. taxes on foreign investment) and tax preferences to discourage a carry trade from developing. Finally, the government can intentionally devalue its currency in a bid to increase export activity and reduce foreign competition with domestic industries. (Protectionist policies of this type are not generally productive, as they tend to reduce both the volume of trade and economic efficiency -- but that's not to say the protectionist policies aren't tried.) In extremity (deflationary expectations have set in, despite the government's best efforts to reflate), the government can intentionally create inflation by outright debasement of the currency (e.g. through monetization of the government's own debts). This means that the government would pay its bills by creating money directly, rather than collecting taxes or borrowing from the public. This would be the ultimate catalyst to get people to spend rather than save, because this would massively devalue the dollar, creating inflation and the expectation of future inflation. Expectations of inflation mean that savers expect the purchasing power of their savings to drop over time, which gives them an incentive to spend today rather than save for tomorrow. (Note, however, that monetization of the debt is basically currency suicide, so it would only be used as a last resort, in the face of a Great Depression type scenario or actual federal insolvency. The other types of government policy I outlined are also inflationary, and would be tried first because the government has a better chance of staying in control of the situation.)

                          Aside from the potential for a carry trade and the possibility of trade wars, the existence of global markets also entails the large-scale movement of capital in to and out of the American economy. In the midst of a global financial crisis, you would expect international capital to seek a safe haven. If dollar-denominated American assets look more likely to hold their value than various alternatives -- judged in the currency of foreign investors -- then you would expect foreign capital to flock here. That would entail the exchange of foreign currency for dollars to buy the assets, creating higher demand for the US dollar, which would have a deflationary impact on the economy. Conversely, if dollar-denominated assets look like a worse risk to potential foreign investors -- for instance, because of suspicions that the US will be unable to honor its debts without devaluing its currency, or because the growth prospects for the US economy are judged to be worse than foreign alternatives, or because of suspicions that the US will intentionally devalue its currency to get people to spend rather than save -- then you would expect capital flight. This would result in a flood of dollars, as dollar-denominated assets are sold and the dollars are exchanged for other currencies. I believe this dynamic is the main reason why iTulip says deflation is unlikely to result from this crisis. As a net debtor with a large current account deficit, flatlined savings rate, and skyrocketing public debt, the United States makes a poor destination for flight capital. Although the short-term need for dollar funding has caused a spike in the dollar's exchange rate, iTulip expects significant capital flight to result from this crisis in the long run.

                          So, returning to the original question of what happens if Americans stop consuming and start saving, here's what I think. The government tries to get Americans to resume consuming by giving them money directly and by increasing the supply of credit. Separately, the government replaces some of the private demand with public spending. If Americans persist in trying to save rather than spend -- and if the government stimulus doesn't itself lead to inflation -- then as a last resort the government can choose to create inflation to get savers to spend. As I recently summarized here, the inflationist view is that the government reflation policies themselves are likely to overshoot, creating inflation directly through expansion of the money supply, and are also likely to promote capital flight because the deficit spending makes eventual monetization of the federal debt more likely. In the same post, I point out that the reflation policies need not necessarily overshoot, as the government does technically have the means to sterilize the loans it makes to increase access to credit, and it can also reduce the money supply later. I also point out that although the trend was away from the dollar prior to this crisis, it does not necessarily follow that the trend will continue post-crisis. (Some who post to iTulip take the view that the Fed will manage the money supply in such a way as to avoid significant inflation, and that by demonstrating how export-based economies seize up when the system is starved of dollars, this crisis will increase the importance of the dollar, rather than resulting in capital flight from the dollar.) Although I think significant inflation and a weaker dollar are likely, I am not a true-believer myself, and I'm watching to see who is actually right about the outcome. As for the deflationists... I have nothing to add to the criticisms in the posts linked above. I think the most basic issue is that if there's a policy choice to be made between a deflationary depression and inflation, then the government will choose inflation -- and the government can always create inflation if it needs to.
                          Ash, thanks again for a very informative response. It makes a lot of sense.

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