 | Hurricane Ike, Energy Infrastructure, Refineries and Damage Models Thread #4 (Updated 9/12 23:00 EDT) | The Oil Drum | Peak Oil Update - August 2008: Production Forecasts and EIA Oil Production Numbers |  |
175 comments on DrumBeat: September 13, 2008
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175 comments on DrumBeat: September 13, 2008
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The vast majority of the effective money supply is composed of credit, which only functions as a money substitute during the expansion phase. Unlike a currency hyperinflation that divides the underlying real wealth pie into ever smaller and less valuable pieces, a credit hyper-expansion, such as we have recently lived through, creates multiple and mutually exclusive claims to the same pieces of pie through leverage. It is the extinguishing of these excess claims, as expansion morphs into contraction, that crashes the money supply.
In the long term, fiat currencies all go the same way, but that doesn't mean there can't be a tremendous deflation in the meantime. The collapse of the credit bubble guarantees it. Attempts at 'printing' (monetizing debt) will be useless, as liquidity injections cannot keep pace with credit destruction, and liquidity will in any case be hoarded by anyone in a position to do so (as is already happening). 'Printing' will also be counter-productive, as it will result in much higher interest rates in the bond market. We are headed squarely into the liquidity trap, where scarce cash will be king and real interest rates will go through the roof.
For daily coverage of the unfolding crisis, click on the link on my profile page.
The treasury can borrow directly from the FED rather than through the auction system. Auctions have the potential of being fixed (there are only a few parties bidding on that debt) and therefor rates say high in a deflationary environment.
Money supply is shrinking fast. Will the FED act?????
Stoneleigh--
I am almost pathologically drawn to your column. I sit on tenterhooks every morning until you post. But why? There seems to be little to be gained from knowing about the storm that can not be avoided. Seems like only Jesus can bail us out of this one -- but he seems to be visiting a different planetary system at the moment.
I am not an economist; my brief fling with Wall Street was a complete disaster when I got taken for a ride by a broker who was described as a "fine Christian family man" and I decided never to re-enter that particular casino.
My question is, why all the talk of "inflation"?
Your argument seems so airtight, and your predictions have almost entirely been accurate. And yet the various "gurus" babble on incessantly about the danger of inflation, as though they never heard of credit collapse.
What are they trying to sell?
What Stoneleigh is forgetting is "Helicopter Ben". The head of the FED. He will simply not allow deflation to happen, and can create essentially infinite credit at the press of a button. There isn't going to be real deflation. Rather the reverse...
Have a look at this inflationdata chart.
http://inflationdata.com/inflation/images/charts/M3%20Money%20Supply/M3_...
The M3 money supply peaked at an estimated 18% or so growth per year. While the growth rate is declining, it's a long way from being negative.
See the M1 figure at the bottom, bouncing around zero for the last year or so. See the peak late in 2008? That's Ben & Co. You'll start to feel it in about 6 months, nothing like a good old hit of inflation to get the economy juiced and running.
The general objection to that point is that while the Fed can make credit available, it cannot force people to borrow. Individuals and businesses need to be willing and able to take on and service additional debt, and they (we) are pretty much tapped out. The metaphor is "pushing on a string".
My counter to that is that there is a "borrower of last resort" : the US government. They can borrow and simply send checks to everyone. Only one loan needs to be written to get a vast amount of additional credit/money into circulation. A tax cut has a similar effect, but distributes the largess differently. Of course, it doesn't need to be the Fed writing the loan, it can be selling regular bonds, but the point is that the US Government can act as a borrower of last resort while the Fed acts as a lender of last resort. One weekend in a smoke-filled room.
Can we really doubt that when faced with significant deflation that this option will not be exercised?
Really? 1% base rate? 0% base rate? Happened in Japan.
The people want it, the banks want it, the government want it and it's the natural end point of fractional reserve banking. The whole population indebted to the banks to the maximum possible level. Exponential functions, there's always a limit.
I think there's a whole lot of consumption left in the USA yet.
Even 0% is not low enough, as Japan discovered. The nominal rate is not important - it is the real rate that matters. Under deflationary conditions, when the loss of credit reduced the effective money supply, the real rate is the nominal rate minus negative inflation. Real rates can be high even at very low nominal rates.
The simplest way to increase available money would be to reduce taxes to zero/low and at least partially monetize the debt (pay it off in paper). The currency would quickly re-inflate, as it became worth much less. This would have nasty effects on people who value money (ie, retirees, pensioners etc), but would probably be a good thing for those of us who are still young, and might want to live in a house some day.
Hmm, my comment is at -1. Well, it is a bit of a troll. Society as a whole needs to decide how to allocate resources; if they all go to the old, there's less for the young. If it all goes to the young, there's less for the old. Deflation is really bad for poor / young people -- its usually linked to recession, and there's no incentive to put capital to work. Inflation is really bad for the old -- they can't increase income easily, because all they have is money, not good jobs.
Mike Shedlock [sp?] thinks that deflation is inevitable; that you can't force people to borrow. But you don't need to force people to borrow--all you need to do is ensure that they have more money, and decreases in taxes can also have that effect. No "pushing on a string" here. I think "helicopter ben" is right so far as inflation is concerned. He's just not trying hard enough.
GreenMan,
This article explains why there are unpleasant consequences to using the Treasury as the lender of last resort (expanding the federal deficit):
http://www.financialsense.com/Market/pretti/2008/0912.html
Goldman Saks (the most connected of the 'shadow banks') estimates the federal deficit to go from $160 billion in FY 2007 to $565 billion (!) in FY 2009. This will not be without consequence.
Errol in Miami
Bill Gross (PIMCO) is calling for 1 trillion in 2009 so IMO 565 is light.
It looks increasingly likely deflation is the growing problem. There's massive deleveraging of the financial system, meltdown in home prices, equities down, wages stagnant, and the global economy is slowing, resulting in dropping commodity and oil prices.
If you want a nice bit of history take a look at this:
Marriner Eccles
Eccles was a Mormon, Republican, businessman, who basically laid out the foundation of the New Deal before the Senate, two months before Roosevelt came in. Roosevelt then made him head of the Fed. What's interesting is how standard this all seems, but it was quite innovative thinking at the time.
There's a lot of problems with these solutions today including: 1)The US is 10 trillion in debt, and relying on China, Russia, and Gulf states to lend us money. 2)Any resulting new boom, will quickly be slowed by rising oil prices.
We need a new Eccles or two.
the big problem today is with the bailout of fannie mae and fredie mac, our debts have exceed our value. though the economists when asked will spew double speak about this. they will claim that the gdp for the united states does not equal it's value, while in the next sentence point out the opposite but for a different country.
Though by doing this they have turned a very likely possibility of a complete collapse of the united states economy into a certainty.
I would agree with your basic point, but it should be noted that as one of the Pitt's noted there is an awful lot of ruin in a country.
Japan, for instance, has a national debt of 188% of GDP, against around 60% for the US, not including the F & F fiasco.
They also have a population which is rapidly ageing and will soon be in decline. However, they are net savers.
Internal debt via too generous mandated spending can also always be halted or repudiated, it is the external debt which is trickier.
So you are correct, but there may be some time to go before the pigeons flap their way to roost.
I am not forgetting Helicopter Ben. He's already been round circling overhead, but he dropped 'free debt', not free money. See The Resurgence of Risk - A Primer on the Developing Credit Crunch, my take on this as written as a TOD post in August 2007.
Money supply measures reflect a flight to safety, not inflation, and they do not reveal the on-going destruction of credit.
In addition, you cannot ignite a wage/price spiral when unemployment is about to skyrocket. Workers will have no bargaining power at all.
"I am almost pathologically drawn to your column. I sit on tenterhooks every morning until you post. But why?"
Perhaps it's because there's value in just knowing itself. I know that's true for me.
Same with peak oil. Can't get enough information, not a damn thing I can do about it.
It's the difference between those who want to die in their sleep, versus those of us who want to do it with eyes open.
Stoneleigh: Is the value of the US dollar currently being propped up by foreign central banks for political and/or short term economic reasons? What % of US T-bills are being held for these reasons? You state "cash" will be king-how do you calculate the actual market value of the US dollar in the current economic environment? Do you actually think China purchased 400 billion dollars of FanFred bonds because they are retarded? Seriously? The USA is being supported currently and it appears that you feel this support is permanent-why exactly? What is so inherently special about the US dollar that makes you feel is will be "king"-it can't be the fiscal situation, or the current account situation-what is it?
With regard to the dollar, I think you confuse the domestic and international situations. When I say 'cash is king' I mean that the value of cash (in any deflating economy, not just the US) will rise in comparison with the value of goods and services domestically. I do not mean that the US dollar will be king in relation to other currencies internationally. However, I do expect the dollar to continue to rise relative to other currencies temporarily on a flight to safety. (As improbable as that sounds, investors are likely to panic as deflation picks up speed and revert to a previous safe haven - in this case the long-standing reserve currency.) The dollar has been rallying since March and I would expect it to continue to do so for perhaps several months (with minor interruptions from time to time). Beyond that the future of the dollar is not rosy.
Relative values of currencies will depend on which currency is deflating most quickly. The only ones I would hazard a prediction on are the US dollar (a temporary rise, possibly quite sharp), the Canadian dollar (a fall as the Albertan energy economy falls flat on its face), the yen (a sharp and sustained rise as the carry trade unwinds), antipodean currencies (a fall as the yen carry trade that supported them unwinds) and the euro (a substantial fall as economic disparities in Europe wreak havoc with European unity).
Supporting currencies through the central banking system is a recipe for losing vast sums of money at times of great upheaval, when the power of the collective demonstrates how little power central bankers actually have to stand against forces of nature.I don't expect any attempted intervention to make any practical difference, except perhaps to make matters worse by wasting scarce resources by throwing good money after bad.
Stoneleigh: Yes, the US dollar is the "long-standing reserve currency". This is because at one time the USA was by far the most powerful economy and the largest creditor nation. Today the USA is by far the largest debtor nation and dependent upon foreign support for the continued fuctioning of the present economy. Re temporary deflation-you never know-maybe I am wrong on this one, but it is difficult to sustain given the Argentina-like qualities of the current USA economy IMO.
Just to be clear, I don't regard deflation as a short term event. Deflation supports economic depression and economic depression supports deflation in a spiral of positive feedback. I would be very surprised if such an event was shorter in duration than the Great Depression, which would imply at least 10 years. I don't expect the dollar to hold up for that long, but I do expect cash to be king domestically for that long.
Argentina suffered a systemic banking collapse that beggared the middle class (see And The Money Kept Rolling in - And Out by Paul Blustein for more on the background). Many of the erstwhile middle class now live in Villas Miserias (slums, or Hoovervilles) surrounding Buenos Aires. It would have been worse had their difficulties not been relatively isolated, so that recovery has been possible (for some).
We will not be so lucky. We face the same systemic banking crisis, and the same fate for the middle class - the loss of savings, investments, incomes, entitlements, benefits and homes - but we face it at the same time as many, if not most, other countries. The potential for serious international consequences is therefore significant.
Stoneleigh: I would surprised if you are not aware of the major economic differences between the USA of the 30s Depression and the USA of 2008, but you are talking as if the differences are minor. The USA had a structurally sound currency in the 30s-today it is based on hope and little else. You should explain how you envision a long lasting deflation without the dollar holding up.
Just forget about DEFLATION, there won't be any.
I am repeating what I have said earlier:
1. The world is no longer on a gold standard. And central bankers are free to print money whenever they want.
2. the global economy is not slowing as much as many would like to think. That's in large part due to continuing growth in India, China and the rest of south Asia.
Never forget, that's nearly 3 BILLION people, almost half the world's population. Their actions — with their new found freedoms — are far more powerful than those of the 300 million in America and the 491 million in Europe, which combined represent only 11.4% of the world's population.
You must have missed the MSM headlines-China (dependent on the USA) is collapsing- retail sales are only up 24% YOY
Ahh. The fateful words "Chinese consumer" are nearly upon us. Listen for their dread sound in newscasts, with trepidation.
24%, doubling period of 2 years 9 months. Takes us to 2011... Didn't the Mayan calendar stop in 2012?
The U$S is backed by 6000 nuclear weapons.
Let resource warfare begin.
Actually, one of the reasons I'm here at all is that the US dollar is actually backed by Saudi oil. Yon Americans get to export their inflation over the whole oil consuming world. Nice eh.
So the weapons back the oil and the oil backs the $. Same difference.
This really isn't a US issue. I don't think the dollar will be the only currency in trouble by any means. I expect huge swings in both relative currency values and interest rates, which will also cause mayhem in the derivatives market.
I think we are facing global deflation as a result of global credit excesses such as the staggering growth of derivatives - from essentially nothing 30 years ago to their current level of perhaps $750 trillion. Now that is inflation - a huge increase in the effective money supply (money and credit) relative to available goods and services created as a result of leverage. Unfortunately it's value is 'faith-based' - entirely dependent on rapidly waning confidence. It amounts to little more than a pile of IOUs with huge associated counter-party risk.
As for the differences between the 1930s and now, we are now in worse financial shape and far less prepared than we were then to face a liquidity crunch. We are far more indebted, have vastly higher expectations, are already maxed out in terms of both time and money (usually credit), have very few truly useful skills, are completely dependent on expensive and creaking centralized life-support systems, have a dependency mentality, do not produce or control any of the essentials of our own existence etc etc. We will be in very deep trouble in the not too distant future. Is it difficult to see how this could lead to prolonged depression?
Stoneleigh:
Glad to see you back on TOD.
Given the scenario you map out of the collapse of notional fiscal realities based on faith would you agree that the global economy will return to a reality based on real inputs to life?
These would appear to be energy and food and the skills associated with their production. It also seems likely that both these sectors will avoid deflation and will experience price inflation as consumers shift money out of foibles into the purchase of real necessities.
This also argues for a global realignment of state relations. The Gulf states, Russia, Brazil, Venezuela will prosper due to the fact they have inexpensive energy. A group of agricultural states (Canada, US, Russia, China?) may also do well as surplus food stocks will have value to the petro states.
Apart from maintaining internal domestic order I do not see the future value of a military. The example of Iraq shows that the use of force destroys the very resources you wish to seize, and also that any sheepherder with a semtex stuffed sheep can make life miserable for an occupier.
Basically, I just trying to model your thoughts forward and gauge how the relationship between the notional fiscal and the rock hard physical will play out. Marx said it was going to be miserable; I guess we get to find out if he was correct.
I agree about the return to a reality based on real inputs to life, but the way you frame your point about certain sectors avoiding deflation confuses the nature of deflation. Inflation and deflation are monetary phenomena, not increases or decreases in prices. When deflation occurs, nothing avoids feeling its effects. Assets prices will drop across the board, probably very rapidly once we reach 'critical mass'. Consumer prices will fall as well, although prices will be simultaneously lower and less affordable, as purchasing power will be falling faster than price.
I agree that energy and food will increase in relative value in comparison with most other things, but this is likely to mean that they fall less far in price than other things, not that they do not fall at all. They should become less affordable more quickly than other things as a much larger percentage of a much smaller money supply chases them preferentially.
Over the longer term, I expect extreme economic upheaval to have as devastating an effect on supply as lack of purchasing power will have on demand in the shorter term. In a capital constrained world of (temporarily) lower oil prices, many projects will not be viable. Both the financial and physical risks may be too high for the private sector, suggesting that state involvement in the energy industries is likely to increase. It may be difficult, however, to revive projects abandoned during the bust.
I think we'll see oil tied up in bilateral contracts, and otherwise removed from the global market - resource grabs, sabotage, piracy etc. Great powers know that oil supply is finite and that global production is peaking. They also know that oil is strategically vital as it sustains hegemonic power. As the free market era comes to an end with the implosion of the global credit bubble, and oil ceases to be fungible, great price volatility should ensue, along with substantial local variation in availability.
Hi Stoneleigh,
always fascinated to hear hese economic digresses to the Energy issue as it seems to me that it will be in this realm that the issues surround energy 'peaking' will be crystalized.
I was wondering what your view on commodities was if you have one. You talk about deflation -which I guess would mean commodity price reduction- but energy peaking would seem to suggest commodity prices increasing (scarcity due to reduced abilty to mine...)
The best summary I have heard is that any discretionary item will reduce in price while any non-discretionary item will tend to increase. (I know about the two 'models/views' of inflation btw. (price/money supply)).
I would be particularly interested in your views on Gold as it seems to intersect many issues...
Nick.
Deflation should bring down all commodity prices, at least temporarily, as demand falls first, while the effect of upheaval on supply takes longer to manifest. I think gold is heading for about $650 per ounce, and could go further, although I think in the long term it should go through the roof. If you can afford to own it for the long term, it's a good insurance policy. It should be much cheaper in a few months to a year from now though, so that may well be a better time to buy.
The fall in oil should be temporary as well, for the same reason - deflation drops demand and then the resulting disruption hits supply. Disruption would include all manner of above-ground factors such as lack of parts, lack of money to conduct business, sabotage, resource wars, terrorism etc. Ultimately, oil will be so expensive that ordinary people will be completely priced out of the market. However, it's the price in real terms that matters, not the nominal price. The nominal price could be lower, but oil could still be much more expensive in real terms. Eventually it should be higher in nominal terms as well, which against a backdrop of a collapsing money supply means prices reaching for the sky in real terms.
Good to see you back, Stoneleigh! In which year do you think the US money supply will collapse? What are the metrics of that collapse? MZM growth rate<5%/yr?
US M3 & MZM have been growing at over 10%/yr since mid 2007. However the growth rate has fallen back to 12%/yr. The bailouts of Fannie and Freddie and perhaps other industries would require an increase in money supply.
http://www.nowandfutures.com/images/m3b_mzm.png
Shadowstats has M3 growth rate falling to 14%/yr.
http://www.shadowstats.com/imgs/sgs-m3.gif
"Deflation should bring down all commodity prices"
My view is that investors will sell their US dollars and US government debt which will bring down the value of the US dollar.
The US$ Index has increased recently but will soon fall back towards 70, probably just after the US November election. This will cause prices of precious metals and energy to increase, when measured in US dollars.
http://quotes.ino.com/chart/?s=NYBOT_DX
Currently, holders of US treasuries are getting a real interest rate of about negative 5%. This is not sustainable. The US Fed/Treasury probably intervened to bring down the prices of precious metals and energy recently. Perhaps they thought commodity prices could form another asset bubble. However, there is now an even more dangerouse asset bubble in US treasuries and dollars.
I agree with Peter Schiff's comments below from
Last Gasp of a Doomed Currency
http://www.financialsense.com/fsu/editorials/schiff/2008/0912.html
In the blog you link he indicates that Lehman would be bailed.
At the moment it does not seem as though it is.
Presumably this is a significant difference, and may indicate that the very loose treatment of companies leading to the unsustainable debt hypothesised and rapid inflation may not occur.
It also seems invalid to simply add the guaranteed mortgages to the National debt as after all there is a real asset, the houses, to at least partially cover them.
Given the assumption that inflation will be a problem, it is unclear why losses should be incurred on the mortgages, as the debt would be inflated away, and so the losses would still fall on foreign creditors.
It is worth noting that Japan's debt is around 188% of GDP, on a population which is ageing and will be falling.
The American official debt of around 60% of GDP is comparatively modest, although low savings mean that the US is more exposed to foreign creditors.
It is also not valid to argue that bankruptcy will ensue due to increased mandated spending.
This is more easily repudiated or inflated away than debt held by foreign creditors if the money is not available.
"The American official debt of around 60% of GDP is comparatively modest, although low savings mean that the US is more exposed to foreign creditors."
American unfunded liabilities are about 700% of GDP. Does that matter?
Storms on the Horizon
May 28, 2008
Richard W. Fisher, President/CEO Federal Reserve Bank of Dallas
http://dallasfed.org/news/speeches/fisher/2008/fs080528.cfm
http://intelstrike.com/?p=263
Inflation has been occuring for a long time in the US, with a few deflationary blips along the way.
http://www.longwavecycles.com/part5/
I am not trying to deny that US finances are in a mess, just trying to see whether they are in fact in more of a mess than everyone else, which if that is not the case will have implications for the exchange rates of the dollar against other currencies on the way to all our bankruptcies.
Unfunded liabilities in the US are obviously vast, and aren't going to be paid.
I've no idea how that compares to unfunded liabilities elsewhere - many of the southern European countries, for instance, have such murky accounts that it is difficult to determine what they are, but what is clear is that the official public debt is far larger than in the US relative to GDP.
Not being a financial dude I have no way of assessing it, but the mess that most other countries are in looks to be just as bad as the US.
This is an important point. Much of Europe has been in a far worse housing bubble than the US, and its implosion will rip the heart out of many European economies. The UK, Ireland, Spain and the Netherlands in western Europe are poised to suffer the most, and much of eastern Europe is also in serious trouble. Iceland, which had turned itself from a country into a giant hedge fund, will suffer greatly.
The US will probably be better off than quite a few other places, as improbable as that sounds to those who know how bad things are in the US. Banking is global, hence bad paper issued by one jurisdiction can easily ruin others. The US has been a huge source of bad paper of course, but Europe has also played the securitization and leverage game. There is bad paper everywhere, hence the loss of trust between banks that is leading to cash hoarding (one reason why you can't increase liquidity during deflation).
We seem to be in a house with very poor plumbing, but trying to work out which part of the weak piping will explode first is difficult.
In Europe, a huge variety of languages and National accounts which have differing standards make comparative assessment difficult even if you were a top-notch financial guy.
Some areas like Italy made hiding the true situation behind opaque accounts an art form long before the Statistics offices of the US and UK discovered the joy of fudged figures and were genuinely attempting to draw an accurate picture.
This is about the best site I have found to give some idea:
http://frencheconomy.blogspot.com/
See the bloglist on the right.
A surprise contender for the first to crash may be Iceland, who leveraged to put the US and UK to shame, but OTOH they may well be supported by the other Scandinavian countries.
Greece may be the likeliest to win in the race for the bottom, as tourism tanks.
Thanks.
Yes, I was moving back and forth between the conventional meaning of inflation and the Austrian definiton.
Cheers!
There is another angle to the strengthening of the dollar.
In case of international banking failure the recovery is much higher where the good assets are. The delays and stick saves may very well be about repatriating the better assets.
http://londonbanker.blogspot.com/2008/09/ring-fences-rustlers-and-global...
The dollar is "king" because, if anything, our massive debt to other countries, especially Japan, China, and OPEC countries.
These countries know if they try to diversify their foreign exchange reserves away from the dollar, or even pretend to, the value of the dollar would collapse, meaning their existing dollar foreign exchange reserves would become worthless. It's a catch 22 that's worked very well in our favor.
"the Canadian dollar (a fall as the Albertan energy economy falls flat on its face),"
No sign so far of falling flat on the face in Calgary. House prices have leveled off because of over-building but Canada doesn't have a sub-prime crisis with hundreds of thousands of foreclosures. 7-Eleven in Calgary is still begging for workers at $11/hr plus benefits plus retention bonus. I lived through the last oil boom collapse in the early 1980s, when Calgary's economy had a heart attack and fell dead to the ground after Trudeau initiated his National Energy Policy (= steal the oil money from Alberta and give it to southern Ontario and Quebec, where the votes are). (See also http://en.wikipedia.org/wiki/National_Energy_Policy)
Alberta's conventional oil production fell off a cliff a few years ago after peaking in the 1970s, and then wobbled on a plateau while secondary recovery methods used super-straws to get the last drop. Today we have three times as many wells producing one-third of peak. (Data at www.capp.ca) The Seven Sisters and the nationals have too many billions invested in the oilsands to let a brief fluctuation make them hesitate.
Also, the Alberta oil economy began booming when oil passed $35, so even if it goes back down to $80 or so, everything will keep moving along. The Seven Sisters are desperate to book additional reserves on their balance sheets, not from some generalissimo-run kleptocracy but a stable country like Canada which is seldom in the news. (How many non-Canadians even know we are having a federal election on October 14?)
Every time you open a newspaper, Alberta looks better and better.
I work for an oil company in Alberta and I haven't a clue what you are talking about.
you do know that Georgia attacked the break away republic first, which was populated by Russian citizens(all be it in a underhanded way by Russia)?
the whole Russia attacked innocent ol Georgia thing is a distortion of the American press.
Conventional energy in Alberta is heavily depleted. Tar sands are marginal economically, hugely destructive environmentally and are driving water shortages in an arid area. Economically, many projects will not be viable in an era of demand destruction due to crashing purchasing power (where demand is not what you want, but what you are ready, willing and able to pay for) and therefore prices. Extraction costs have increased enormously in recent years, while oil prices have already fallen substantially and have further to go. So far we have really only seen the effect of speculation shifted into reverse, but demand destruction is also looming.
This is not to deny the obvious reality of peak oil, and its inevitable long term effect on oil prices, but in the shorter term we are in for a bust. Alberta is in for a world of hurt, especially in the over-valued property market.
stoneleigh
"a credit hyper-expansion, such as we have recently lived through, creates multiple and mutually exclusive claims to the same pieces of pie through leverage. It is the extinguishing of these excess claims, as expansion morphs into contraction, that crashes the money supply."
thanks for laying out details of the difference in money & credit.
brian t.
thanks to u too for u'r thoughts re inflation/deflation.
i am amazed at how such brilliant minds are on opposite sides re this debate. above + largi, puplava , mish, etc.
on tod leanan has said deflation, wnc observer- hyperinflation to deflation,don sailorman-inflation [memmel recently saying so for don has been right].
it seems to me that no one has had a clear measure or marker to even know if they are starting to be accurate; much less putting some comparative numbers on the reason one process or the other [inflation/deflation] will be the likely path. puplava gives deflation a 5% chance of being primary; but no marker as far as i know.
i tend to think hyperinflation; but i see the point that debt/credit is a coming tsunami that might overtake any measures.
when i used wiki for liquidity trap the way out is fed discount window, dropping funds rate etc. & the stimulus checks in our accounts. we sure are consumers & that check can go out quickly; already being talked about by obama for another one.
anyway i guess this matters to me mostly for investments as i have placed my bets i am ok to lose mostly with hyperinflation as central[preps are good either scenario imo], but i sure would change some of them if i saw deflation taking hold.i know we have had at least a whiff of deflation recently & actually oil price is a primary measure -as pointed out by nate ,darwinian & others.
economics also is new to me & fascinating to live on the cusp of the big movements i see unfolding- even if they are sometimes scary.
Thanks!
... as when the value of every house in America declines. Liquidity injections do nothing but cover banks and investment houses' bad debts.
I would like to borrow $100,000 from my bank. I cannot borrow from the Fed, but my bank can. They borrow the $100,000 but do not lend it to me, even though I can turn that $100,000 into $200,000. My bank uses that money instead to cover losses they made in mortgage securities. Since the collateral for those securities is has diminished and since I cannot borrow the $100,000 I will not receive the $100,000 in profits that I hoped to earn from my borrowing; the bank will not earn anything on their $100,000, either ... even the Fed gets nothing because the securities they received from my bank as collateral is worthless. It is as if the Fed throws $100,000 into a fire!
This process, multiplied (with variations) in the entire country is what is happening; this is deflation @ work. The economy is made up of borrowing for investment with returns over time. Without borrowing or lending there is no economy. Since currencies are instruments of borrowing and lending, if there is little or no borrowing or lending, it doesn't matter how the currencies are denominated.
Borrowing and lending - credit activities - are the measure of inflation (and deflation) not so much prices.
A good inflation indicator is 30yr Treasuries! The government borrows money and repays over 30 years; if the buyers of these bonds thought there would be inflation in that period, they would add an 'inflation premium' to the discount.
Prices have to do with relative values of goods and services as they are measured against each other. Fuels, water and waste- carrying capacity are becoming higher- valued relative to financial services and residential real estate. This revaluation is embedded within the culture and is unreachable by monetary policy.
Said a wag in 1929; "Don't tell my mother I work on Wall Street, she thinks I'm a piano player in a whorehouse!"
The revaluation is reflected in volatility ... but, deflation rules. Since large sectores of the US economy are losing value and liquidity cannot effect these values ... the overall trend is deflationary, regardless of what the Treasury or the Fed do.
Trouble with the deflationary argument is.
Name one country that has fallen which hasn't then had run away inflation. In all the country's which I looked at they print money to try and buy there way out of trouble... Zimbabwe is a prime example. Time after time its inflation that's the problem.