Confusion reigns: A crisis-driven global rush to dollar liquidity is not deflation

[jtabeb]

Excellent FRED, thanks.

[don]

We believe the Fed will succeed in producing enough liquidity to prevent asset price inflation from spilling over into the commodity prices. Unfortunately, we also expect the effort will further undermine the dollar, producing inflation in goods and services that are sensitive to energy prices.

Fred, shouldn't that be deflation?

Great stuff, very accessible.

[babbittd]

Two to six months. So we're moving towards the endgame. I am vastly more prepared thanks to EJ, Fred(s?) and the entire Itulip community. A huge thank you to everyone. Don't know about you all, but I've been stressing out for the past month and hadn't slept. Thanks to Dr. Sarno I finally did last night and am re-charged, ready again to tackle the consequences of what is about to go down.

[mercerbear]

Great piece. I'm in a situation where my mom took her financial advisor's advice over mine last winter when I told her it was time to liquidate the mutual funds in her IRA. Now she's down huge and wants to know what she should do next. Ordinarily, I would balk at suggesting she sell into so much weakness but I can see this thing getting so much worse that I told her she should get into cash right now. I feel much better knowing that you agree.

[sunskyfan]

Nice work as usual .

[Chris]

would someone mind explaining to an economics bumpkin how credit is created in the endogenous credit markets? What is the mechanism? How does that created credit then shrink in the debt deflation part of this cycle? Or doesn't it shrink?

Thanks.

[ASH]

would someone mind explaining to an economics bumpkin how credit is created in the endogenous credit markets? What is the mechanism? How does that created credit then shrink in the debt deflation part of this cycle? Or doesn't it shrink?

Thanks.

I believe this refers to fractional reserve banking.

The Federal Reserve initially creates some money by buying US bonds and paying for the bonds by creating reserve deposits for the seller's bank.

"Endogenous credit creation" happens when the bank loans money to consumers and other businesses based upon this reserve deposit. They can issue credit on the initial deposit created by the Federal Reserve up to the reserve fraction limit. This amplifies the money created by the Federal Reserve... e.g. 10 times.

When the credit created by the bank is "spent" it often gets deposited at a different bank, which can then use the money as a new deposit against which even more loans can be issued, up to the reserve fraction limit.

And so on, and so on.

Thus, vastly more credit is issued than the underlying deposit created by the Federal Reserve.

BTW: Bart has a much more complete writeup on his website, in his FAQ, that addresses credit contraction in a debt deflation. My simplistic take on credit contraction in a debt deflation is that credit gets wiped out when banks fail, and credit contracts when banks allow loans to be paid off without issuing new loans (something they might do to prevent failure). Oh yeah -- and if the bank has a lot of debt-based assets like mortgage-backed securities on its books, whose loss of value affects the bank's capital position (i.e. its basis for issuing credit) -- then that will also force it to pull its horns in. To the extent that they are a basis for deposits, outright default on debt-based instruments sucks credit out of the system.

[dbarberic]

Hmmm.... I'm still holding my gold (PM & mining companies), energy, and natural resources stocks, and a hard currency fund. I've never had luck trying to time EJ's calls over the years, so I stuck with a buy and hold strategy after several failed attempts at market timing based on EJ's commentaries. Gold is my only saving grace at this time, but based on the above forecast, I think it will make the right long term call to hold on to the other plays that should benefit from rising inflation. At this point, those stocks are down so much, I might as well not sell. At least most of them are dividend paying.

It is gut-wrenching though. Ugh.

[grapejelly]

Hmmm.... I'm still holding my gold (PM & mining companies), energy, and natural resources stocks, and a hard currency fund. I've never had luck trying to time EJ's calls over the years, so I stuck with a buy and hold strategy after several failed attempts at market timing based on EJ's commentaries. Gold is my only saving grace at this time, but based on the above forecast, I think it will make the right long term call to hold on to the other plays that should benefit from rising inflation. At this point, those stocks are down so much, I might as well not sell. At least most of them are dividend paying.

It is gut-wrenching though. Ugh.

I'm with you on that one. 55% drawdowns...otoh, the bullion has held up and I am confident that this panic will pass and that virulent inflation will take hold...and a flight into tangibles. I knew that we'd have extraordinariy volatility but this took even me by surprise becuase knowing something is one thing, but having it become real is another :eek:

[metalman]

Hmmm.... I'm still holding my gold (PM & mining companies), energy, and natural resources stocks, and a hard currency fund. I've never had luck trying to time EJ's calls over the years, so I stuck with a buy and hold strategy after several failed attempts at market timing based on EJ's commentaries.

huh? ej says 'sell dot com crap' in march 2000 go to cash, 'buy gold' 2001, 'sell real estate' 2005, 'dump stocks' dec 2007.

how the hell have you lost money? oh, i see...

M & mining companies), energy, and natural resources stocks

ej has said over and over since day 1: don't buy mining stocks. you must have mixed up itulip with some other site's advice. get out of the stock market dec. 2007. that's THE WHOLE STOCK MARKET not excepting some sweet corner of it where the stocks of mining companies where the genius mining co. ceos live.

Gold is my only saving grace at this time, but based on the above forecast, I think it will make the right long term call to hold on to the other plays that should benefit from rising inflation. At this point, those stocks are down so much, I might as well not sell. At least most of them are dividend paying.

physical gold is the only advice from here you appear to have listened to, near as i can tell. :eek:

It is gut-wrenching though. Ugh.

no shit. these are the times that try men's souls... more trials coming.

[raja]

ej has said over and over since day 1: don't buy mining stocks. you must have mixed up itulip with some other site's advice. get out of the stock market dec. 2007. that's THE WHOLE STOCK MARKET not excepting some sweet corner of it where the stocks of mining companies where the genius mining co. ceos live.

Does that include GLD, SLV, CEF and GTU?

[BrianL]

I bought into VGENX just before discovering itulip last month. That was a mistake. I'm still holding it - clinging to the idea that long term energy will go up long term. This is looking more and more depressing.

(Not as bad as the large cap fund I have in my 401k - thats now down 45% for the year. At least I only had ~6k there)

[metalman]

I bought into VGENX just before discovering itulip last month. That was a mistake. I'm still holding it - clinging to the idea that long term energy will go up long term. This is looking more and more depressing.

(Not as bad as the large cap fund I have in my 401k - thats now down 45% for the year. At least I only had ~6k there)

what??? he says..."go to cash, buy alt energy AFTER THE CRASH"

listening skills, people...

[ASH]

I bought into VGENX just before discovering itulip last month. That was a mistake. I'm still holding it - clinging to the idea that long term energy will go up long term. This is looking more and more depressing.

(Not as bad as the large cap fund I have in my 401k - thats now down 45% for the year. At least I only had ~6k there)

That's rough. Don't mind metalman's razzing, he's an... enthusiastic... proponent of most things iTulip (or, specifically, official iTulip sourced from Eric Janszen, as opposed to member commentary -- which covers a wide range of viewpoints).

If you just discovered iTulip last month, there's not a lot you could have done. Even if you read the right posts, a month isn't long enough to decide to commit your life's savings to the macro theories of a website. Any duly diligent investor would require quite some time to weigh the arguments, pass them through the "smell" test (assuming you have an accurate nose for who is trustworthy and who is full of rat droppings and sawdust), and perhaps to verify that events were proceeding according to prediction. By that time -- BAM!

I'm no great trader, but for what it's worth, I believe that the energy sector represented by VGENX stands a better chance of recovery, and sooner, than sectors more closely tied to credit and discretionary consumption. I am personally about 20% cash and 80% precious metals. Energy is one of the first things I will buy back into, once I see the foundations of a recovery.

I would not discount the possibility that the markets will fall much further, nor that the dollar will implode (both predicted by iTulip). You may want to familiarize yourself with the arguments for these scenarios, appraise their likelihood, and hedge accordingly -- even if it means realizing large losses.

[metalman]

That's rough. Don't mind metalman's razzing, he's an... enthusiastic... proponent of most things iTulip (or, specifically, official iTulip sourced from Eric Janszen, as opposed to member commentary -- which covers a wide range of viewpoints).

If you just discovered iTulip last month, there's not a lot you could have done. Even if you read the right posts, a month isn't long enough to decide to commit your life's savings to the macro theories of a website. Any duly diligent investor would require quite some time to weigh the arguments, pass them through the "smell" test (assuming you have an accurate nose for who is trustworthy and who is full of rat droppings and sawdust), and perhaps to verify that events were proceeding according to prediction. By that time -- BAM!

I'm no great trader, but for what it's worth, I believe that the energy sector represented by VGENX stands a better chance of recovery, and sooner, than sectors more closely tied to credit and discretionary consumption. I am personally about 20% cash and 80% precious metals. Energy is one of the first things I will buy back into, once I see the foundations of a recovery.

I would not discount the possibility that the markets will fall much further, nor that the dollar will implode (both predicted by iTulip). You may want to familiarize yourself with the arguments for these scenarios, appraise their likelihood, and hedge accordingly -- even if it means realizing large losses.

you are one smart and diplomatic SOB! glad to have you here. my humility deficiency is well known. i'm not good enough to be humble.

[ASH]

you are one smart and diplomatic SOB! glad to have you here. my humility deficiency is well known. i'm not good enough to be humble.

Ah, we acolytes spread the Good Word in our own ways. Since BrianL is new to the forum, he may not yet know and love your style. Honestly, I'm likely as enthusiastic about iTulip as you... but I don't want to drive those who arrived late to iTulip away with undue triumphalism, because there is a good possibility that if they stick around, they might still benefit.

Rather, those who were out of the stock markets, and thus far insulated from the widespread losses (or even profitted therefrom) should reserve our taunting for family members, co-workers, and in-laws who said we were nuts. That's sure to improve our popularity!

[metalman]

Ah, we acolytes spread the Good Word in our own ways. Since BrianL is new to the forum, he may not yet know and love your style. Honestly, I'm likely as enthusiastic about iTulip as you... but I don't want to drive those who arrived late to iTulip away with undue triumphalism, because there is a good possibility that if they stick around, they might still benefit.

Rather, those who were out of the stock markets, and thus far insulated from the widespread losses (or even profitted therefrom) should reserve our taunting for family members, co-workers, and in-laws who said we were nuts. That's sure to improve our popularity!

was going to ask a question about how to handle the family, friends, and neighbors, who didn't listen... but that's a new thread.

[phirang]

was going to ask a question about how to handle the family, friends, and neighbors, who didn't listen... but that's a new thread.

What's the point in panicking? The money IS THERE: it just hasn't been spent yet!

Jeez... the Fed and Treasury will unclog this mess, but on their terms, eh?

[LargoWinch]

Ok the US bonar looks like it is toast while you guys are replacing that pretty debt clock and all.

...but what if all CBs in the world have their own private parties and decide to support the value of the dollar? We get global inflation, but the US dollar stays.

[phirang]

Ok the US bonar looks like it is toast while you guys are replacing that pretty debt clock and all.

...but what if all CBs in the world have their own private parties and decide to support the value of the dollar? We get global inflation, but the US dollar stays.

The "G20" HAS to bailout the US banking system. This stuff about letting the US fail is crap. What IS changing are the terms of the bailout.

All the politicans and various factions are using the misery of their own people to compel someone else to fold first... first, BRICOPEC was on the ropes, now the US and Europe are... I fully expect a happy, inflationary medium with much more nominal "state" ownership acting on behalf of foreign dollar-reserved stakeholders(whoops, is that Bob Zoellick?).

The terms will be hashed out over the weekend w/the IMF orchestrating the meeting.

This weekend is the key determinant for how we move forward.