Announcement

Collapse
No announcement yet.

Deflationista takes on iTulip to prove deflation is here!

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • Deflationista takes on iTulip to prove deflation is here!

    Deflationista takes on iTulip to prove deflation is here!

    by Roger J. Deflationista (iTulip) October 31, 2008


    The Fed faces an impossible task. In the face of recession and the worst credit crunch since the 1930s the Fed's crash program to boost the money supply and raise inflation expectations is a failure. I prove it using the most up-to-date inflation, money supply, and bond rate data issued by the Fed today.

    If the Fed has succeeded in boosting the money supply surely the key money supply measure M2 is up. Fat chance! Let's take a look at the carnage!



    Looks like M2 is up for the year and up for the period ending Oct. 31, 2008. Must be an anomaly–something wrong with the data.

    What about MZM? Surely that declined, what will all of the deflation we've been having.

    What is MZM and why it's the best measure of the money supply?
    A measure of the liquid money supply within an economy. MZM represents all money in M2 less the time deposits, plus all money market funds. - Answers.com

    MZM has become one of the preferred measures of money supply because it better represents money readily available within the economy for spending and consumption. This measurement derives its name from its mixture of all the liquid and zero maturity money found within the three "M's." - Investopedia

    Here's the collapse of MZM, then.



    Well that's disappointing. MZM is up strongly for the year with a sharp spike in the current reporting period ending Oct. 31, 2008.

    Fine. But we all known that the banks are sucking wind. Bank credit must be way off, what with all of the stress in the banking system. Bank credit has crashed, right?



    Oops! Bank credit is through the roof. Huh.

    Well, so what? That doesn't prove anything. All that money sitting in bank and money market accounts making up M2 and MZM and all that bank credit created by the Fed doesn't mean squat.

    The Fed can't make consumers borrow it! The Fed can't make banks lend it! If that were the case then the CPI wouldn't be falling. That's the measure of all that money chasing goods and raising prices, not languishing in bank accounts. Here's where we'll find our deflation. All the Fed's printing is for naught.



    Well whaddaya know. The CPI after falling for a couple of months is up again.

    But that's temporary, a lagging indicator. That's inflation from before the recession set in when demand was still high. That's the last we'll see of inflation! And to prove it, we'll look at inflation expectations priced in to inflation-indexed Treasury bonds (TIPS). You can't fool the bond markets! That's thousands of savvy fixed income investors voting pro or con on future inflation. No doubt TIPS interest rates are way, way down, pricing in deflation that will go on for years and years. Why I'd bet dollars to donuts TIPS rates are below 2% now.



    No, no! That can't be! TIPS interest rates going from 2016 all the way out to 2032 are spiking? iTulip warned me about this back in early September in Future inflation fears topple TIPS but I didn't believe it. Now PIMCO is piling into them.

    Suckers! Don't they know deflation is in the cards? What does that stupid bond market and PIMPCO know, anyway?

    Just look at 30 year mortgage rates. They are falling through the floor signalling that deflation is ripping through the US economy.
    Bankrate: Mortgage rates surge to three-month high
    Oct. 30, 2008

    NEW YORK (MarketWatch) -- Mortgage rates bounded higher this week, with the average 30-year fixed mortgage rate soaring from 6.32% to 6.77%, according to a Bankrate.com weekly national survey. The average 30-year fixed mortgage had an average of 0.39 discount and origination points, it said. The average 15-year fixed rate mortgage jumped to 6.46%, while the average jumbo 30-year fixed rate climbed to 7.95%. Adjustable mortgage rates were mixed, with the average one-year ARM dipping to 6.09%, and the average 5/1 ARM increasing to 6.67%.

    Oh, I give up. No signs of deflation anywhere, just a short term spike in the dollar from panicky holders of euros, rubles, reals, pesos, and rupee piling into T-Bills to get into dollars but still avoid US banks like the plague. Everything else points to rising inflation.

    Oh, well. Back to the drawing board!

    - Roger J. Deflationista

    See also: The truth about deflation

    Happy Halloween from the iTulip crew!



    iTulip Select: The Investment Thesis for the Next Cycle™
    __________________________________________________

    To receive the iTulip Newsletter or iTulip Alerts, Join our FREE Email Mailing List

    Copyright iTulip, Inc. 1998 - 2007 All Rights Reserved

    All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Nothing appearing on this website should be considered a recommendation to buy or to sell any security or related financial instrument. iTulip, Inc. is not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. Full Disclaimer
    Last edited by FRED; 11-02-08, 02:03 PM.
    Ed.

  • #2
    Re: Deflationista takes on iTulip to prove deflation is here!

    Cute. Thanks for the laugh.

    Comment


    • #3
      Re: Deflationista takes on iTulip to prove deflation is here!

      Terrific stuff. I am glad that "Deflation" has become a popular theme - that means Im on the other side of the market. If everyone was convinced that Inflation was going to be the problem, gold would be selling at $3,000 instead of $720. As someone who just bought another large chunk of gold, Im perfectly satisfied with everyone being convinced that deflation is on the horizon.

      The more people there are worrying about deflation the better - the more money the Feds and all the other CBs will pump.

      Comment


      • #4
        Re: Deflationista takes on iTulip to prove deflation is here!

        Thanks for the timely data. It's always better to know what is happening than to speculate about what could happen.

        Comment


        • #5
          Re: Deflationista takes on iTulip to prove deflation is here!

          so whadaya think, are we headed for INflation or DEflation?

          Comment


          • #6
            Re: Deflationista takes on iTulip to prove deflation is here!

            I'm wondering why MISH is so convinced that inflation is not possible? I think his position is that interest on the growing national debt will just consume any new money being pumped into the system. FRED, I'm new here so I apologize if this has been answered and I just haven't found the post yet....

            Comment


            • #7
              Re: Deflationista takes on iTulip to prove deflation is here!

              M3 is also clearly "deflating" (and even started before MZM, since its more sensitive to direct Fed actions ;) ).










              And the alternate M3 (adding in TAF etc, as repos) is showing similar and even stronger effects.








              Bank credit, comm'l/industrial credit, real estate credit and total credit are significantly up lately.








              Interbank loans have not crashed.










              Commercial paper sucks, but the Fed's new Commercial Paper Funding Facility just added about $145 billion "support" this week and a turnaround may have occurred.






              Velocity has tanked and the concept of monetary lags ( Money supply, lags, velocity ) does apply though.
              http://www.NowAndTheFuture.com

              Comment


              • #8
                Re: Deflationista takes on iTulip to prove deflation is here!

                Originally posted by BDS4 View Post
                I'm wondering why MISH is so convinced that inflation is not possible? I think his position is that interest on the growing national debt will just consume any new money being pumped into the system. FRED, I'm new here so I apologize if this has been answered and I just haven't found the post yet....
                I can't speak for MISH, but interest on the national debt isn't going to "consume" the money pumped into the system because when the government pays interest on the debt, the money it pays isn't destroyed. Government interest payments are a budget issue (and eventually a solvency issue) for the government, but they are not really a money supply issue. If you hold a government bond and receive an interest payment from the government, then you can go out and spend that interest payment -- the money does not disappear from the money supply, and your ability to spend the money will continue to support prices. In fact, when the interest payments become too large -- and the government is facing insolvency -- you should expect inflation as the government monetizes its debt.

                For future reference, you can estimate the numbers surrounding interest payments on the debt from figures in the FY2009 federal budget published by OMB here. In table S-7, it says that net interest payments totaled $237 billion in FY2007. However, this doesn't include interest payments that the government "pays itself" for the portion of the national debt held by government agencies (according to table S-13, about 44% of the debt in FY2007). I don't have an exact reference for the interest the government "pays itself", but I can estimate it from other data. For instance, the Trustees of the Social Security and Medicare Trust Funds report that they held $2.6 trillion worth of government account series bonds at the end of 2007, from which they received $129 billion in interest -- real close to 5%. Returning to table S-13, in FY2007 the government owed itself $3.9 trillion total, so if I use the 5% interest rate estimated for the Social Security and Medicare Trust Funds for the entire $3.9 trillion, I get about $195 billion to add to the $237 billion of net interest, or a total of $432 billion in interest payments.

                Comment


                • #9
                  Re: Deflationista takes on iTulip to prove deflation is here!

                  Inflation exptations AT the moment are very low (Chart falling). But it can change. 30 yr Mtg is at 6.46% on 1/11/2008, as Treasury bill selling by govt will be huge in coming months, so rates up on supply, not so much on inflation concerns.
                  InflationExpectations.jpg
                  Attached Files

                  Comment


                  • #10
                    Re: Deflationista takes on iTulip to prove deflation is here!

                    Originally posted by ASH View Post
                    I can't speak for MISH, but interest on the national debt isn't going to "consume" the money pumped into the system because when the government pays interest on the debt, the money it pays isn't destroyed. Government interest payments are a budget issue (and eventually a solvency issue) for the government, but they are not really a money supply issue. If you hold a government bond and receive an interest payment from the government, then you can go out and spend that interest payment -- the money does not disappear from the money supply, and your ability to spend the money will continue to support prices. In fact, when the interest payments become too large -- and the government is facing insolvency -- you should expect inflation as the government monetizes its debt.

                    For future reference, you can estimate the numbers surrounding interest payments on the debt from figures in the FY2009 federal budget published by OMB here. In table S-7, it says that net interest payments totaled $237 billion in FY2007. However, this doesn't include interest payments that the government "pays itself" for the portion of the national debt held by government agencies (according to table S-13, about 44% of the debt in FY2007). I don't have an exact reference for the interest the government "pays itself", but I can estimate it from other data. For instance, the Trustees of the Social Security and Medicare Trust Funds report that they held $2.6 trillion worth of government account series bonds at the end of 2007, from which they received $129 billion in interest -- real close to 5%. Returning to table S-13, in FY2007 the government owed itself $3.9 trillion total, so if I use the 5% interest rate estimated for the Social Security and Medicare Trust Funds for the entire $3.9 trillion, I get about $195 billion to add to the $237 billion of net interest, or a total of $432 billion in interest payments.
                    mish can make it about nine words into one of your erudite and precise posts before dismissing it as 'keynesian claptrap' as he does when he encounters something he cannot comprehend.

                    i prefer to listen to prof. ash.

                    $432 bil in interest is only 3% of gdp.

                    Comment


                    • #11
                      Re: Deflationista takes on iTulip to prove deflation is here!

                      Great writeup, but dont expect any deflationistas to actually believe it. It seems like the deflation camp is populated by die hard believers who will not be swayed by any amount of actual facts.

                      Comment


                      • #12
                        Re: Deflationista takes on iTulip to prove deflation is here!

                        Originally posted by nathanhulick View Post
                        Great writeup, but dont expect any deflationistas to actually believe it. It seems like the deflation camp is populated by die hard believers who will not be swayed by any amount of actual facts.
                        yeh, mzm, m2, bank credit, inflation, bond prices... all lies made up by the gov't to keep you from getting rich when deflation takes your gold to $100!

                        never did follow the logic over there at the mish zone.

                        Comment


                        • #13
                          Re: Deflationista takes on iTulip to prove deflation is here!

                          Bart,

                          ..."Interbank loans have not crashed."...

                          isnt the Fed to Private bank rescue funds in this number.

                          I dont believe that interbank trend, as the price (spread) of interbank loans as gone up, so the volume would drop.

                          Comment


                          • #14
                            Re: Deflationista takes on iTulip to prove deflation is here!

                            You could regard swaps and derivatives as forms of private credit though.
                            It's Economics vs Thermodynamics. Thermodynamics wins.

                            Comment


                            • #15
                              Re: Deflationista takes on iTulip to prove deflation is here!

                              Originally posted by icm63 View Post
                              Bart,

                              ..."Interbank loans have not crashed."...

                              isnt the Fed to Private bank rescue funds in this number.

                              I dont believe that interbank trend, as the price (spread) of interbank loans as gone up, so the volume would drop.
                              To the best of my knowledge, that figure does not include Fed to private bank loan data. Although the rates and spread did go up substantially (and are coming back down), the data does show that it did not substantially affect interbank loans.

                              In my opinion, other factors like confidence (one definition of money being an idea backed by confidence) play and played a larger role in the current financial crisis.
                              http://www.NowAndTheFuture.com

                              Comment

                              Working...
                              X