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175 comments on DrumBeat: September 13, 2008

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NeverLNG on September 13, 2008 - 11:25am Permalink | Subthread | Parent | Comments top

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?

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css1971 on September 13, 2008 - 3:55pm Permalink | Subthread | Parent | Comments top

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.

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GreenMan on September 13, 2008 - 4:22pm Permalink | Subthread | Parent | Comments top

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?

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css1971 on September 13, 2008 - 4:38pm Permalink | Subthread | Parent | Comments top

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.

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Stoneleigh on September 14, 2008 - 10:00am Permalink | Subthread | Parent | Comments top

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.

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JWhitland on September 13, 2008 - 8:25pm Permalink | Subthread | Parent | Comments top

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.

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JWhitland on September 14, 2008 - 9:20am Permalink | Subthread | Parent | Comments top

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.

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notintodenial on September 13, 2008 - 9:13pm Permalink | Subthread | Parent | Comments top

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

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BrianT on September 13, 2008 - 9:14pm Permalink | Subthread | Parent | Comments top

Bill Gross (PIMCO) is calling for 1 trillion in 2009 so IMO 565 is light.

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joe costello on September 13, 2008 - 10:12pm Permalink | Subthread | Parent | Comments top

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.

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TrueKaiser on September 14, 2008 - 2:49am Permalink | Subthread | Parent | Comments top

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.

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DaveMart on September 14, 2008 - 4:46am Permalink | Subthread | Parent | Comments top

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.

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Stoneleigh on September 14, 2008 - 10:06am Permalink | Subthread | Parent | Comments top

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.

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mikeB on September 13, 2008 - 4:51pm Permalink | Subthread | Parent | Comments top

"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.

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175 comments on DrumBeat: September 13, 2008

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