Ambrose Evans-Pritchard both dangerous and insane.

[Raz]

Re: Ambrose Evans-Pritchard both dangerous and insane.

I'm of at least two minds about all of this but here's what's at issue as I see it:

- the market recognises that, as Hudson would say "debts that can't be repaid won't be"
- I think the market is right
- but I also know that the aggregate effect of that recognition being played out without any moderator is - at least in part - exactly the sort of self-sustaining death spiral that central banking is meant to forestall (a liquidity crisis) in the Bagehot sense
- I think that Harrison's point is simply that the ECB seems unable to grasp that only an open-ended threat is able to actually "backstop" the system, especially given all the leverage available to put additional pressure on the bond markets versus the shaky tax receipts of individual nations during an (frankly, "open-ended") recession. (Note that his "soft landing" is a small d depression.)
- further, I don't think that he's arguing that such a volte face from the ECB is sufficient to deal with the crisis, just necessary (The kicker here is that the Troika's incoherent prescription for Greece - shrink to solvency - would have more not less credibility in the market as the crisis unfolds if the ECB was willing to become activist.) In other words, Europe needs massive and painful adjustment from all players, but it also needs a creative central bank to give it TIME to do this.
- I don't even think that this is actually prima facie in contradiction to the role of a "hard money" philosophy. (Where were they when all this debt was run up? Or, more to the point, once you've allowed this to happen it doesn't seem contradictory to think you have to get out of your comfort zone to get out of it.)

Thank you for these posts, oddlots. I'm mostly in agreement.

If there was a way to (a) have a Central Bank that's totally immune from political pressure, and (b) only staff it with men like Bagehot, or at least William McChesney Martin, then it could be made to "work".
But it never does, does it?

The political pressure is overwhelming and "give it TIME to do this" always means "until I get re-elected". Pain taken tommorrow (or after I leave office) is always preferrable to pain today.

Any entity that can create "money" out of thin air at no cost is fundamentally dishonest and can never be made to work long-term by fallen human beings.
That's not just my opinion - it's the manifest evidence of financial history.

[oddlots]

Re: Ambrose Evans-Pritchard both dangerous and insane.

I share your pessimism... however we did once have central bankers who would describe their job as "taking away the punch bowl just as the party is getting started" (Martin I believe), a separation between investment and commercial banking (the depression era reforms), regulators who were willing to regulate (Bill Black as an example), central banks that were willing to seize banks that had become dangerous and resolve them properly (e.g., Sweden in the 90s) etc....

I'm not basing the thoughts above on a faith in the the virtuousness of central bankers or politician but on the necessity of dealing with the crisis in an effective way that, above all, convinces the markets. I suspect that the market will push events there as there is ultimately no alternative.

[Raz]

Re: Ambrose Evans-Pritchard both dangerous and insane.

I share your pessimism... however we did once have central bankers who would describe their job as "taking away the punch bowl just as the party is getting started" (Martin I believe), a separation between investment and commercial banking (the depression era reforms), regulators who were willing to regulate (Bill Black as an example), central banks that were willing to seize banks that had become dangerous and resolve them properly (e.g., Sweden in the 90s) etc....

I'm not basing the thoughts above on a faith in the the virtuousness of central bankers or politician but on the necessity of dealing with the crisis in an effective way that, above all, convinces the markets. I suspect that the market will push events there as there is ultimately no alternative.

I agree.

It's my belief that we get the kind of government we deserve.
And since our society in general has gone through a moral and ethical collapse over the past 40 to 50 years
and has embraced relativism in most areas, we are simply "eating our own cooking".

[Slimprofits]

Re: Ambrose Evans-Pritchard both dangerous and insane.

Well done with the headline.

[Bundi]

Re: Ambrose Evans-Pritchard both dangerous and insane.

a burst of inflation => honey, i shrunk the debt.

Exactly. All the moral and ethical implications are of no practical importance in so far as noting how real they are won't necessarily change the outcome. This is plan A, at least in my mind.

My continuing question is this. Can it be done?

Oil and the reserve currency of the US$ are in theory impediments to igniting a wage based inflation spiral. I get that cost push inflation causes inflation, but isn't that a different type of inflation than one including a wage based component?

We may all benefit benefit from more specific debate about whether or not money printing can ignite a sustained inflation. If so, what does it look like?

[jk]

Re: Ambrose Evans-Pritchard both dangerous and insane.

Exactly. All the moral and ethical implications are of no practical importance in so far as noting how real they are won't necessarily change the outcome. This is plan A, at least in my mind.

My continuing question is this. Can it be done?

Oil and the reserve currency of the US$ are in theory impediments to igniting a wage based inflation spiral. I get that cost push inflation causes inflation, but isn't that a different type of inflation than one including a wage based component?

We may all benefit benefit from more specific debate about whether or not money printing can ignite a sustained inflation. If so, what does it look like?

there is already a lot of wage based inflation - mostly in china, [but also for certain sought after job categories in the u.s.] think global.

[lektrode]

Re: Ambrose Evans-Pritchard both dangerous and insane.

a burst of inflation => honey, i shrunk the debt.

by stealing from savers.

now _this_ is what i call BOTTOM LINE ANALYSIS
thanks jk, mr c1ue
always appreciate the detail, but a clear/concise summary of whats really going on is what us late-to-the-party types need

[Bundi]

Re: Ambrose Evans-Pritchard both dangerous and insane.

there is already a lot of wage based inflation - mostly in china, [but also for certain sought after job categories in the u.s.] think global.

Good point. Need to resist the local bias.

I fully acknowledge that we are experiencing inflation here in the US and that inflation is more pronounced abroad, especially in emerging markets.

However, we also seem to be heading toward a global recession as well, perhaps due to fighting that inflation and because of the structural limitations of oil cost.

To get right to my uncertainty. If a global oil supply decline trend is part of the next 10 year forecast, can monetization of the debt cause a wage spiral in the US or anywhere for that matter? For the sake of argument I would say no it can't in already liquid fuels dense/ liquid fuels inneficient economies. It may though be possible in economies that get more marginal output than the marginal cost of oil.

I suppose what I am wondering is wouldn't this oil cost dynamic prohibit an "orderly inflation" that presupposes some degree of real economic growth? In other words, aren't we begging for an inflationary depression as opposed to a "burst" of inflation to offset debt levels (not sure what you meant by burst). Also, this would likely destroy the US debt market and render the US$ toxic.

I know these are the types of arguments that many on this board have heard from EJ and others that are much further along the learning curve than I am but the nature of this inflation is important to understand. I am still struggling with how it may play out given what seem to be historically unprecedented structural realities that are pushing back on perceived inflation transmission mechanisms.

People use the analogy of a crowded theatre and a fire. Early detectors get up and walk out at the first sign of smoke, then some jog, then a cry of fire goes out and the stampede begins. It seems though that in the current reality, this is half of the analogy. The other half is that outside of the burning theatre is a firing squad. So choose wisely.

Ultimately, I envision a small sub class of the population that could afford the inflated goods and services in the US and segments of the remaining population that can afford most basic essentials or some basic essentials (not all) or little if any of the basic essentials. How might this type of inflation dynamic impact the US fiscal situation versus a more familiar 70s type wage spiral? Wouldn't it be far less advantageous?

I'm barely concerned at all with the near term performance of the SP500 and gold although I pay attention of course. Seems though there is a fair amount of analysis along these lines and given the relative importance of the longer term strucutural trends, perhaps not as much as is justified on that side of things.

Sorry for rambling. Just trying to figure out how I think about these things myself.

[lektrode]

Re: Ambrose Evans-Pritchard both dangerous and insane.

Ultimately, I envision a small sub class of the population that could afford the inflated goods and services in the US and segments of the remaining population that can afford most basic essentials or some basic essentials (not all) or little if any of the basic essentials. How might this type of inflation dynamic impact the US fiscal situation versus a more familiar 70s type wage spiral? Wouldn't it be far less advantageous?

I'm barely concerned at all with the near term performance of the SP500 and gold although I pay attention of course. Seems though there is a fair amount of analysis along these lines and given the relative importance of the longer term strucutural trends, perhaps not as much as is justified on that side of things.

Sorry for rambling. Just trying to figure out how I think about these things myself.

+1
but isnt this - the 70s type wage spiral - precisely the reason why the calculation of the CPI has been changed, repeatedly, since then? meaning just as 'inflation' starts to 'poke out the balloon' after they've squeezed it into shape or 'adjusted' the metric, they just change the metric again? (thus hiding it, as mr shadowstats has pointed out)

[jk]

Re: Ambrose Evans-Pritchard both dangerous and insane.

this issue of whether we can have much inflation in the u.s. absent a u.s. wage spiral, or whether commodities inflation will produce a u.s. wage spiral, has been kicked around these boards many times over the years i've been here. as a partial answer, ej once posted a link to a fed paper that showed that wage inflation FOLLOWS general inflation. but i don't think the inflation ahead is going to look like '70s inflation. in the '70s the u.s. had strong unions that got cola's [cost of living adjustments] in their contracts, so the spiral was automated. with our new-look "hourglass economy" we'll have rising wages for a subgroup, falling living standards and ever-crappier jobs for the majority. the cost of energy [heat/cooling, transportation] and food will take larger portions of most people's incomes, just like in the 3rd world. this, btw, is the more optimistic, adiabatic-like process of slow adaptation. the more pessimistic scenario involves a sudden stop and inflationary pop.

[astonas]

Re: Ambrose Evans-Pritchard both dangerous and insane.

And unfortunately the only leverage available to extract cooperation, is the threat of with-holding support and allowing the PIGS to slip into default.

Thanks, unlucky, for highlighting the key point. If a bailout is going to be anything other than just pouring money down the drain, it has to be preceded by the long, drawn-out, painful process that is happening now in Europe. The constant volatility, the failed deals, the hope, followed by panic, the pain, the losses. All these things serve a vital and practical purpose.

They drive individual parties (banks and nations) to accept the necessary regulatory and political changes that are otherwise impossible to enact.

The political turnover we are seeing in Greece and Italy is a start, but there will have to be far greater changes still. Since politicians in a democracy need political cover to reverse long-cherished views, the EU has to play the "bad cop" and provide it for them. And since banks will lobby against transaction taxes and real regulation, they must come to believe that they WILL be wiped out if they don't accept them. This is the only available way for technocrats to work against the fundamental problem of entrenched corruption via business/government collusion.

The threat has to be real to be credible among the Italian electorate, as well as the London bankers. Throwing a few of the smaller PIIGS out of the Euro to get these players in line, while regrettable, might be best real solution still available.

It may not be as clean as Sweden's response, but that route was only ever an ideal for a politically segregated Europe.

At least it is vastly better than what happened in the U.S. and Britain: hand over the cash to the banks threatening the system, without questions, so that everyone can go through the whole thing again in a few years. (I know it hasn't really happened yet; don't worry, it will.) Stating what Europe "needs to do" to lessen the pain is counterproductive, and not from a "moral hazard" standpoint, just from a purely mechanical standpoint. Any action that lessens the pain today is a worse path.

Some may argue that the U.S. solution wasn't all that bad. I think that we just haven't seen all the repercussions play out yet in the Anglo-Saxon system. Is the corruption gone, or even worse? How about the debt?

It is also worth noting that the U.S. is the fortunate home of the world reserve currency, so whatever eventual consequences happen here will considerably under-represent what would happen in Europe if they followed our route. In video-game terms, the U.S. has one extra "life" or "power-up" that it can use up before the risk of sinking into bloodshed is really conceivable. Europe has no such benefit. The pain has to be allowed to do its work. And the more the banks (and their mouthpieces at the Telegraph) panic, the better.

The problem is not that the Eurozone is now acting tough, it is that it did not do so far sooner, and far more harshly. We can in part blame Geithner's effective lobbying for this, as well as the U.S.'s bad example that allowed banks to believe they really could get away with having governments save them, no questions asked. Ideally, Sweden should have been the role model of Europe from the beginning. Now that Merkel and Sarkozy have sent mixed messages, they need to redouble their willingness to dish out the pain for it be believed.

The real question is: are they willing to be "mean" enough to save the EU?

I'm worried that they may not be.

[Bundi]

Re: Ambrose Evans-Pritchard both dangerous and insane.

this issue of whether we can have much inflation in the u.s. absent a u.s. wage spiral, or whether commodities inflation will produce a u.s. wage spiral, has been kicked around these boards many times over the years i've been here. as a partial answer, ej once posted a link to a fed paper that showed that wage inflation FOLLOWS general inflation.

Thanks JK. I'm going to take a look at prior posts (always educational).

[Chris Coles]

Re: Ambrose Evans-Pritchard both dangerous and insane.

Thanks, unlucky, for highlighting the key point. If a bailout is going to be anything other than just pouring money down the drain, it has to be preceded by the long, drawn-out, painful process that is happening now in Europe. The constant volatility, the failed deals, the hope, followed by panic, the pain, the losses. All these things serve a vital and practical purpose.

They drive individual parties (banks and nations) to accept the necessary regulatory and political changes that are otherwise impossible to enact.

The political turnover we are seeing in Greece and Italy is a start, but there will have to be far greater changes still. Since politicians in a democracy need political cover to reverse long-cherished views, the EU has to play the "bad cop" and provide it for them. And since banks will lobby against transaction taxes and real regulation, they must come to believe that they WILL be wiped out if they don't accept them. This is the only available way for technocrats to work against the fundamental problem of entrenched corruption via business/government collusion.

The threat has to be real to be credible among the Italian electorate, as well as the London bankers. Throwing a few of the smaller PIIGS out of the Euro to get these players in line, while regrettable, might be best real solution still available.

It may not be as clean as Sweden's response, but that route was only ever an ideal for a politically segregated Europe.

At least it is vastly better than what happened in the U.S. and Britain: hand over the cash to the banks threatening the system, without questions, so that everyone can go through the whole thing again in a few years. (I know it hasn't really happened yet; don't worry, it will.) Stating what Europe "needs to do" to lessen the pain is counterproductive, and not from a "moral hazard" standpoint, just from a purely mechanical standpoint. Any action that lessens the pain today is a worse path.

Some may argue that the U.S. solution wasn't all that bad. I think that we just haven't seen all the repercussions play out yet in the Anglo-Saxon system. Is the corruption gone, or even worse? How about the debt?

It is also worth noting that the U.S. is the fortunate home of the world reserve currency, so whatever eventual consequences happen here will considerably under-represent what would happen in Europe if they followed our route. In video-game terms, the U.S. has one extra "life" or "power-up" that it can use up before the risk of sinking into bloodshed is really conceivable. Europe has no such benefit. The pain has to be allowed to do its work. And the more the banks (and their mouthpieces at the Telegraph) panic, the better.

The problem is not that the Eurozone is now acting tough, it is that it did not do so far sooner, and far more harshly. We can in part blame Geithner's effective lobbying for this, as well as the U.S.'s bad example that allowed banks to believe they really could get away with having governments save them, no questions asked. Ideally, Sweden should have been the role model of Europe from the beginning. Now that Merkel and Sarkozy have sent mixed messages, they need to redouble their willingness to dish out the pain for it be believed.

The real question is: are they willing to be "mean" enough to save the EU?

I'm worried that they may not be.

I have just posted this comment on The Times, London, Leading Article; Berlin's Choice.

I believe it is just as pertinent to this debate here.

Did anyone in Europe give any thought as to WHY some of the more industrialised European nations were able to sell so many expensive cars to the periphery? Did they give any thought as to where the extra money came from? There has been a vast increase in industrial prosperity for those nations that knuckled down to work hard and produce new products to sell. But how did the periphery pay for the luxuries?

The whole idea of accounting is that income is balanced to spending. The price one may pay; is balanced by the money available. You simply cannot spend what you do not possess. That is the most basic of economic lessons. Today, this debate is entirely centred upon the wrong target; individual governments; and not on the underlying source of all that money.

So, what went wrong?

What went wrong was that the United States Government; executive AND political; turned their collective backs to the irresponsible and arguable totally illegal actions of the principally Wall Street based investment banks; who were, and I am led to believe, still are; grossly over-leveraging their capital and deposits. Mervyn King in a recent speech alluded to leverage of fifty or more; others tell of leverage in the “Hundreds”.

As ordinary citizens; we were led to believe that only our elected governments were in a position to print new bank notes; what we all now know for certain; is that the United States government subverted that responsibility to Wall Street and let loose the gods of money creation on a scale never before recorded anywhere in the history of the planet.

Ocean floods of imaginary money flooded out into another United States creation; the shadow banking industry.

Come on; think about this; you cannot create, on a bank’s computer screen, fifty to three hundred times the money you have in the coffers; and then walk out the front door with it openly in your hands? Instead, you have to think up all sorts of dodges to “LAUNDER” that new money.

As an example, just count the number of hedge funds that have been “created” over recent years and then do the maths. The sums simply do not add up.

So; then they have to find, (what is that American word?),

oh! Yes! … SUCKERS!

The Greeks, like almost every nation up to their armpits in debt are yes; classic - suckers!

The problem of the Western economies is entirely the child of the utter irresponsibility of the United States government; who led the entire Western economies into debt with totally false; indeed, valueless money; created out of thin air. And they then have the brass cheek to suggest that it is anyone’s problem other than their own.

The vast majority of the debt is vacuous; leveraged vapourware and should be repudiated.

But who has the courage to tell Wall Street and the United States; to go jump in the lake?

The debt is junk created by people who in any other circumstances would be called crooks and thrown into jail. Repudiate it. Clear the decks and start again.

http://www.thetimes.co.uk/tto/opinio...cle3223185.ece

[unlucky]

Re: Ambrose Evans-Pritchard both dangerous and insane.

They drive individual parties (banks and nations) to accept the necessary regulatory and political changes that are otherwise impossible to enact.

Agreed - just so long as it is clear what the intended solution is. Merkel has been pushing for the banks to take their hit alongside Greece etc (and then get re-capitalized with taxpayer money of course, but oh well). But in public, her constant lecturing has focused on the sins of the Greeks and never on the greed and stupidity of the banks that lent them the money. I imagine that makes it hard for ordinary Greeks to trust her. Meanwhile everyone knows that Sarkozy wants to save the banks at any cost.

In any case, I've been thinking that Italy might change the dynamics of the situation in unexpected ways. The "threat" of pushing Italy into default doesn't have the same credibility as it did for Greece, and nor does Italy necessarily have to accept a managed default within the eurozone (a la Greece). After all the markets seem to accept that Italy is solvent, so they can potentially leave the eurozone and avoid default althogether (repaying their debts to French banks in full with de-valued lira. I'd love to see the look on Sarkozy's face ).

Germany and France may have to tone down the rhetoric for Italy, methinks.

[jiimbergin]

Re: Ambrose Evans-Pritchard both dangerous and insane.

I agree.

It's my belief that we get the kind of government we deserve.
And since our society in general has gone through a moral and ethical collapse over the past 40 to 50 years
and has embraced relativism in most areas, we are simply "eating our own cooking".

+1