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    Default Stoneleigh takes on John Williams: Deflation it is

    Stoneleigh of The Automatic Earth has a delightfully clear comparison of his deflationary (for a while longer now) depression view versus John Williams' (of Shadowstats.com fame) Fed money printing and commodity price inflation sooner view. The article can be found at Stoneleigh takes on John Williams: Deflation it is.

    Stoneleigh presents both his and Williams' positions with sympathetic clarity, and illuminates what he (Stoneleigh) considers to be the fundamental reasons the two of them come to different conclusions.

    Stoneleigh concludes this article with:
    Williams does not appear to accord sufficient significance to the role of credit and the effect of its evaporation during a Ponzi implosion. He also, in our view, chronically over-estimates the power of governments to control the way that events unfold. Outcomes are possible, indeed probable, that no one would choose. We simply do not have that choice to make. We will be at the mercy of the underlying logic of the system we have built during the expansion years, and that logic leads directly to a deflationary depression.
    When I combine Stoneleigh's comments with the "Modern Money Theory" (MMT) (discussed last week in several posts on the CBO: Federal Debt and the Risk of a Fiscal Crisis thread), it seems to me that we do not have a crisis of default risk in all debt, rather just in debt that is not issued by sovereign governments in their own floating exchange rate currencies. Let me use the terms "Sovereign Debt" and "Other Debt" to distinguish these here (leaving out for the sake of brevity the essential conditions on currency.)

    Then in those terms, Other Debt risks default, and until a substantial portion of it has defaulted, we are still in the debt collapse portion of this major cycle. The collapse of Other Debt actually strengthens Sovereign Debt and strengthens the dominant currency, the Dollar. Individuals, corporations and lessor governments (anyone issuing debt in or convertible to someone else's currency) become desperate for cash, whether
    • to pay some debt off and maintain title to the corresponding collateral or
    • on the other side to fund some gapping hole in their balance sheet devastated by debt default or collapsing asset prices or
    • to fund another sort of gapping hole in their cash flow caused by declining wages (for the laid off worker), rents, or taxes.


    This last year we've been taking a breather from this debt collapse, but we're no where near done.

    Stoneleigh quotes and agrees with Williams' metaphor for this:
    "I expect an accelerating pace of downturn in the next couple of months. The numbers will turn sharply worse....

    ....By then we'll find the consensus pretty much in the camp that we're in a double-dip recession. The popular press will describe it as a double dip, but we never had a recovery. Actually, this is just a very protracted, very deep downturn that has had a pattern of falling off a cliff, bottoming out, having a little bit of bump due to stimulus and then turning down again. Sort of shaped like the path of a novice skier going down a jump for the first time. Speeding sharply down the hill, he goes up in the air and starts spinning wildly as he tries to figure out which end is up with his skis. Then he takes a pretty bad tumble. We're beginning to spin in the air.
    "
    As Stoneleigh points out, he and Williams are using different definitions of inflation and deflation. Williams definition seems to me to be rather like the official iTulip definition: price increases and decreases. Stoneleigh's definition is an increase or decrease of the money supply.

    I agree with Stoneleigh's critique of the "price increases and decreases" definitions of inflation and deflation:
    We have consistently pointed out that using a price definition of inflation removes all the explanatory and predictive value from the concept.
    We may continue to see mixed price increases, mostly in imported goods. This will not be just because of the price of oil (which price might actually decline due to less demand, as Stoneleigh predicts,) but also because:
    1. long supply chains depend on a healthy global debit and credit system, which system is now failing us, and
    2. businesses tuned for higher sales volumes have to raise prices to remain solvent at lower volumes.


    The Fed and Treasury can increase their balance sheets pretty much as they will without fear of forced default, but (to quote Stoneleigh quoting Williams) it's "pushing on a string" to get individuals, corporations and lessor governments to continue to increase their debt load. In a debt-based monetary system, you can't increase the money supply in circulation if you can't get the participants in the economy to borrow more.
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    Default Re: Stoneleigh takes on John Williams: Deflation it is

    This article had already been posted on a thread I read earlier today. Now I can't find it.

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    Default Re: Stoneleigh takes on John Williams: Deflation it is

    Quote Originally Posted by dummass View Post
    This article had already been posted on a thread I read earlier today. Now I can't find it.
    I had the same recollection and spent 10 or 20 minutes trying to find that post. I too failed.
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    Default Re: Stoneleigh takes on John Williams: Deflation it is

    Quote Originally Posted by ThePythonicCow View Post
    I had the same recollection and spent 10 or 20 minutes trying to find that post. I too failed.
    It was deleted by iTulip at the direct request of Ilargi. I asked about that on the relevant TAE thread (joelandsonia) and the response was that because the posting was behind a paywall they had issues with it.

    I believe (and hope) that since this forum posting is public access there will not be a problem. Given TAE's stated purpose to try and get the facts out to as many people as possible, I'd expect them to encourage linking.

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    Default Re: Stoneleigh takes on John Williams: Deflation it is

    Thanks for explaining what happened, jpatter666.
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    Default Re: Stoneleigh takes on John Williams: Deflation it is

    Stoneleigh is a female, Nicole Foss. There is another good thread about her theory at

    http://www.itulip.com/forums/showthr...ght=stoneleigh

    jim

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    Default Re: Stoneleigh takes on John Williams: Deflation it is

    Quote Originally Posted by jiimbergin View Post
    Stoneleigh is a female, Nicole Foss. There is another good thread about her theory at

    http://www.itulip.com/forums/showthr...ght=stoneleigh

    jim
    Ah yes - I knew that . Thanks for that link; it brought me back to several posts I had made on her analysis.

    Back on this latest post of Stoneleigh's, in one of her replies on their blog, Stoneleigh makes the reasons quite clear for her basic forecast (serious deflationary depression for now, perhaps followed years later by serious even hyper-inflation).

    The key is whether a nation's monetary system is independent or not. If a nation's monetary system is independent (weakly coupled) then that nation's central bank can hyper-inflate or hyper-deflate, as it will. If a nations monetary system is tightly coupled, they are locked out of one alternative. This is an extension of the "Modern Money Theory" (MMT) idea I mention above. MMT looks at just one form of coupling -- whether the national currency is sovereign and floating. By that metric, the Dollar is independent.

    Stoneleigh finds that the United States currency and debt have a coupling that will keep us from seriously inflating the money supply, for now at least. The coupling is not a fixed exchange rate, which would preclude seriously deflating the national currency. Rather the coupling is the trillions of Treasury debt sitting in foreign central banks, which precludes seriously inflating the national currency. If the Fed/Treasury lose control of the interest rates required to keep that Treasury debt extended, then the U.S. monetary position would spiral out of control rapidly, as the increasing costs of sustaining the debt required ever more debt, in the very face of snowballing redemptions.

    These foreign Treasury debt holdings constrain the Dollar just as would a fixed exchange rate with a foreign currency or with gold (except that the constraint is the opposite way, encouraging Dollar deflation rather than inflation, as the reserves are held by the other party.)

    Only when that foreign held Treasury debt has lost most of its value will the U.S. monetary system be sufficiently decoupled from the rest of the world to allow hyperinflation.

    Hopefully I've conveyed Stoneleigh's view correctly.
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    Default Re: Stoneleigh takes on John Williams: Deflation it is

    Quote Originally Posted by ThePythonicCow
    Rather the coupling is the trillions of Treasury debt sitting in foreign central banks, which precludes seriously inflating the national currency. If the Fed/Treasury lose control of the interest rates required to keep that Treasury debt extended, then the U.S. monetary position would spiral out of control rapidly, as the increasing costs of sustaining the debt required ever more debt, in the very face of snowballing redemptions
    .Continuing my long tradition of moo'ing out of both sides of my mouth:
    The above exposes perhaps the key difference between Stoneleigh and Modern Money Theory (MMT).

    Stoneleigh is saying that the Bond market is bigger than any government.

    The MMT folks would say, sure, fine, China, if you wish to exchange your Trillion $$$ in U.S. Treasuries for a Trillion $$$ credited to your Dollar denominated checking account, we can do that, too easy. As I can imagine Bill Clinton saying: "Stroke of the pen. Money of the land. Kinda cool" (*), except that the Fed probably would use a computer keyboard to record this transaction rather than an old fashioned pen.

    The MMT folks do warn of the possibilities for excessively inflating or deflating the money supply, but a sovereign nation can increase taxes to soak up any such excess currency credits in circulation.

    So, in short, the key question here is thus: does the Bond market dominate (Stoneleigh) or the Sovereign currency dominate (MMT)?

    At this point, I don't know which.
    (*) The original Clinton quote said "Law", not "Money."
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    Default Re: Stoneleigh takes on John Williams: Deflation it is

    Quote Originally Posted by ThePythonicCow View Post
    Stoneleigh is saying that the Bond market is bigger than any government.

    The MMT folks would say, sure, fine, China, if you wish to exchange your Trillion $$$ in U.S. Treasuries for a Trillion $$$ credited to your Dollar denominated checking account, we can do that, too easy. As I can imagine Bill Clinton saying: "Stroke of the pen. Money of the land. Kinda cool" (*), except that the Fed probably would use a computer keyboard to record this transaction rather than an old fashioned pen.
    Both Stoneleigh and MMT folk are correct.

    MMT people are pointing out the logical implications of "How money is actually created."

    Stoneleigh is saying that historically the FED has let the bond market take the lead.

    The MMT people would say that it is a political decision, and not one constrained by how the money system works.

    The US government always has the option of targeted taxation -- that is one way to prevent coveted assets from transferring to foreign bond holders.

    India already has this sort of policy in place non Indian citizens and corporations cannot buy or sell agricultural land. Further there are limits on how much agricultural or urban land an individual or entity can hold.

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    Default Re: Stoneleigh takes on John Williams: Deflation it is

    Quote Originally Posted by Rajiv View Post
    Both Stoneleigh and MMT folk are correct.
    Hmm... that's not how I read it. See my next comments.

    Quote Originally Posted by Rajiv View Post
    MMT people are pointing out the logical implications of "How money is actually created."
    I agree that far.

    Quote Originally Posted by Rajiv View Post
    Stoneleigh is saying that historically the FED has let the bond market take the lead.
    I read Stoneleigh as saying not that the FED "has let", as if they had any choice in the matter, but rather that the FED has, within some tolerance, no choice. The bond market is stronger and will per force dominate in the end.

    This is an essential disagreement with MMT, by my reading.

    Quote Originally Posted by Rajiv View Post
    The MMT people would say that it is a political decision, and not one constrained by how the money system works.
    Agreed, again.

    Quote Originally Posted by Rajiv View Post
    The US government always has the option of targeted taxation -- that is one way to prevent coveted assets from transferring to foreign bond holders.
    I was unaware that "targeted taxation" mattered here. I thought that MMT was saying that too much money printing could cause inflation (meaning here a general rise in the money supply, tending to cause a general rise in prices), which could be counteracted with taxes, of whatever sort, such as will sop up the excess money in circulation.
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    Default Re: Stoneleigh takes on John Williams: Deflation it is

    TPC, your post shows a lot of diligence and work to get it done. The discussion so far sucks [edit: written before your comment immediately above}. I don't know Stoneleigh (Foss) never heard of her before now, never have seen anyone reference her, so to me the probability is she is a light-weight hoping to make it big someway, some day. None of my assessment says she could not be 100% correct about any and all things that comprise her beliefs/positions.

    David Rosenberg asked today in his note that "Deflation Now a Mainstream View?" He also noted "As contrarians, we much preferred it when the crowd was still crowing about inflation and there was dearth of deflation talk. Now it has become commonplace and that indeed has us concerned that much of the deflation view is priced in to the market (consider that the Fed funds futures contract has pushed out the date of the expected first Fed tightening to August of next year)."

    "We are not yet prepared to abandon our long-standing deflation views but we are nervous that this is now becoming a mainstream forecast and let’s face it, yields across the Treasury curve have rallied to levels that virtually nobody saw coming this year."

    I think John Williams so far has been very wrong with his inflation/hyperinflation projections. Perhaps tomorrow he will be proven correct.

    Edit: Further if you are someone or some country that needs to borrow money, then it seems that deflation is good in allowing one to borrow at lower rates and hopefully close out previous loans that carried higher rates.
    Last edited by Jim Nickerson; 08-09-10 at 09:00 PM.
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    Default Re: Stoneleigh takes on John Williams: Deflation it is

    Further if you are someone or some country that needs to borrow money, then it seems that deflation is good in allowing one to borrow at lower rates and hopefully close out previous loans that carried higher rates.
    Either currency deflation or declining Treasury yields.

    I suppose that major holders of Treasuries don't want to lose money (purchasing power) too rapidly, at least compared to any alternative. Fortunately for the U.S. there are not too many other places to stash a Trillion dollars in a fairly liquid investment.

    Holders of Treasuries can maintain value if either (1) Dollars get stronger - deflation, or (2) Treasuries get stronger - declining yields. So, yes, the declining Treasury yields of the last 30 years have been good, both lowering the cost of rolling over U.S. debt and preserving the value of existing Treasury holdings even in the face of modest Dollar inflation.

    If the Dollar started losing value in international markets at the same time that U.S. Treasuries also started losing value (rising yields), then it's Katy Bar the Door, or at least it's time for the U.S. to reach into its bag of tricks, such as an oil price spike to put a bid under the Dollar, or Yet Another Damn War (YADW).
    Last edited by ThePythonicCow; 08-09-10 at 11:39 PM.
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    Default Re: Stoneleigh takes on John Williams: Deflation it is

    We are not yet prepared to abandon our long-standing deflation views but we are nervous that this is now becoming a mainstream forecast
    Yes ... 'Tis the season to be nervous, Fah-la-la-la-lah, la-lah-lah-lah
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    Default Re: Stoneleigh takes on John Williams: Deflation it is

    Once again the battle rages. All sides seem correct to me. I wish I could know the future.

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    Default Re: Stoneleigh takes on John Williams: Deflation it is

    Quote Originally Posted by cjppjc View Post
    Once again the battle rages. All sides seem correct to me. I wish I could know the future.
    Jesse's Café Américain considers this inflation versus deflation debate to be a distraction, in a fine little post The Inflation and Deflation Debate Deconstructed, which concludes:
    Consider that these [inflation vs. deflation] debates are merely diversions, to distract people away from the most significant factors in their troubles, which are exploitation and fraud, and a military-industrial complex that is largely unproductive in terms of organic growth, and is quite simply no longer sustainable.
    Jesse's right, if this topic is treated as mostly just a debate to which each side marshals such evidence as it can find.

    I see more here however than just the debate, or even than just each of us trying to play the economic hand dealt us as best we can.

    There is an immense amount of exploitation and fraud going on. The "solution" to each crisis seems to be but more exploitation and fraud. Not until the rest of us understand what is going on well enough to call the Banksters and other Powers That Be on this, and to have in hand healthier proposals in response to a crisis, do we have much chance of dismantling this exploitation and fraud.
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    Default Re: Stoneleigh takes on John Williams: Deflation it is

    Quote Originally Posted by ThePythonicCow View Post
    Jesse's Café Américain considers this inflation versus deflation debate to be a distraction, in a fine little post The Inflation and Deflation Debate Deconstructed, which concludes:


    Jesse's right, if this topic is treated as mostly just a debate to which each side marshals such evidence as it can find.

    I see more here however than just the debate, or even than just each of us trying to play the economic hand dealt us as best we can.

    There is an immense amount of exploitation and fraud going on. The "solution" to each crisis seems to be but more exploitation and fraud. Not until the rest of us understand what is going on well enough to call the Banksters and other Powers That Be on this, and to have in hand healthier proposals in response to a crisis, do we have much chance of dismantling this exploitation and fraud.
    do you think that in the 1930's people debated whether they were experiencing deflation?

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    Default Re: Stoneleigh takes on John Williams: Deflation it is

    Quote Originally Posted by jk View Post
    do you think that in the 1930's people debated whether they were experiencing deflation?
    I don't know that. I am rather sure they debated what would be the best government fiscal and monetary policies, and at this corresponding point in the Great Depression (about 1930 or 1931), they debated whether the crash of 1929 had bottomed out already or not.
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    Default Re: Stoneleigh takes on John Williams: Deflation it is

    Quote Originally Posted by Jim Nickerson View Post
    I don't know Stoneleigh (Foss) never heard of her before now
    Nicole Foss

    Nicole M. Foss ......... is co-editor of The Automatic Earth, where she writes under the name Stoneleigh. She and her writing partner have been chronicling and interpreting the ongoing credit crunch as the most pressing aspect of our current multifaceted predicament. The Automatic Earth website integrates finance, energy, environment, psychology, population and real politik in order to explain why we find ourselves in a state of crisis and what we can do about it. Prior to the establishment of TAE, she was editor of The Oil Drum Canada, where she wrote on peak oil and finance.

    Foss runs the Agri-Energy Producers’ Association of Ontario, where she has focused on farm-based biogas projects and grid connections for renewable energy. While living in the UK she was a Research Fellow at the Oxford Institute for Energy Studies, where she specialized in nuclear safety in Eastern Europe and the Former Soviet Union, and conducted research into electricity policy at the EU level.

    Her academic qualifications include a BSc in biology from Carleton University in Canada (where she focused primarily on neuroscience and psychology), a post-graduate diploma in air and water pollution control, an LLM in international law in development from the University of Warwick in the UK. She was granted the University Medal for the top science graduate in 1988 and the law school prize for the top law school graduate in 1997.
    I personally think that her analysis is reasonable - but of course nobody has the complete picture, and one has to do a lot of leg work to get a reasonable world view. But any world view picture changes from person to person as they view and try to understand events from where they stand.

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    Default Re: Stoneleigh takes on John Williams: Deflation it is

    Nicole M. Foss ......... is
    Aha - you beat me to it by a few minutes, Rajiv. I just came back to this thread now to post that very same biographical summary, from that same site.

    Yes, I also think her analysis is reasonable ... barring someone kicking the card table over and starting a serious war.
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    Default Re: Stoneleigh takes on John Williams: Deflation it is

    I don't know Stoneleigh (Foss) never heard of her before
    As noted above, Stoneleigh was the editor of the The Oil Drum Canada. She left The Oil Drum to start TheAutomaticEarth in January 2008. As you can see from her August 2007 Oil Drum post at The Resurgence of Risk – A Primer on the Developing Credit Crunch, her views on our economic situation were already well formed by then. I recall reading sometime ago that a major reason she left The Oil Drum was because her interest and focus was shifting from the primary focus of The Oil Drum - energy.
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