Deflation fare thee well – Part I: In search of real returns in an unreal world - Eric Janszen

[Charles Mackay]

Re: Deflation fare thee well – Part I: In search of real returns in an unreal world - Eric Janszen

The $10.6t you quoted is the "market size" shown in the table as $10.40t.

Market size is not an adequate description of the economic weight of that debt, because it doesn't include interest and other factors. When a loan is first written, it has a value that's higher than the amount of the principle. That's why banks can give you the principle, sell the loan to someone else, and still make a profit.

On a much smaller scale, what would the economic weight be for you personally if you took out a $1,000 loan that you were planning to hold several years? It's more than just the principle, right?

In addition to interest, you also need to take into account how long the loans are usually held (FNCL OAD). A loan might have 30 year terms, but most are paid off well before that. The longer a loan is held, the more the bank earns.

Think of the $45t number this way: it's an estimate of the amount of money that the banks have at risk with mortgages, including potential interest income.

The reason the option pricing model comes into play is because in effect the banks have sold covered call options to borrowers. For a fixed rate loan, if rates go down, borrowers can refinance at a lower rate, and the bank loses future income (OAD goes down). But if rates go up, the borrower sits tight. One of the ideas behind ARMs, of course, is that they transfer the interest rate risk to the borrower -- who, unfortunately, is poorly equipped to handle it.

The net effect of increasing interest, though, is a higher OAD. The $45t that the FDIC has effectively underwritten today could easily balloon into $90t or more if rates spike. Not a pretty picture.

OK, thanks Sharky... I didn't see any arithmetic on how it was calculated or what the variables were. I will assume it means a 100% default rate at various interest rate levels.

[Charles Mackay]

Re: Deflation fare thee well – Part I: In search of real returns in an unreal world - Eric Janszen

Panama lacks the private debt burden of the US, but is still a victim of US monetary policy. In other words, we missed the "Ka" phase, but are getting extra helpings of "poom."

There is no housing crises, no bank crises, no consumer retrenchment...

In other words, there is nothing to off-set EJ's inflation bias arguments:
-- Supply shock, Yup
-- Weakening $, Yup
-- Money growth, Yup
-- Bankruptcies / industrial concentration, Not here
-- Inflationary institutional policy, Victim of US monetary policy

Panama has it's challenges, to be sure. In the event of $ collapse, however, it should fair better than most places. With a population of 3 million people, most of which have agrarian roots and family farms, the transition should be easier.

So we'd be jumping from the frying pan into the fire! What are your thoughts on the new Sucre currency?

[metalman]

Re: Deflation fare thee well – Part I: In search of real returns in an unreal world - Eric Janszen

see this at rick ackerman's site?

Occdude 05.19.09 at 4:46 am

Rick just wondering if you were writing this from your cabin on Eric Janzens ship the “USS deflation?” http://www.itulip.com/forums/showthr...7954#post97954
He boldly predicts rising ppi by Q3 2009 and cpi by q4 2009 to no later than q1 2010. Sounds like he’s throwing down the gauntlet Rick, no ambiguity here. The five factors to bring along this surge in prices are credit crisis, currency crisis with energy push inflation from imports, money growth inflation, institutional inflation bias and something called “bankruptcy induced industrial concentration”?huh? I don’t see people flocking to equities in the aforementioned scenarios. Nor do I see them engaging in self destructive consumption in the fiery armegeddon described. I do see these things playing out in the long run, but we’re still “awalkin”.
So what say you of that, Oh mighty purveyor of deflation? I know you and “EJ” go way back. Personally I think that fall will be more than a season after this brief period of brainsickness. We need one more period of capitulation buying by scared money sitting on the sidelines (3 trillion in the bull pen ). The market is headed to 1000 on the S and P which is definitely gut check time. If it lacerates 1000 with conviction look out bears, but the zenith is definitely nigh shortly after.
&&&&&&&&
Life’s too short to waste even a minute arguing with the likes of Janszen. Let him boldly predict whatever he wants. RA

can't attack the man's arguments, attack the man... what a loooooser.

[klepzo]

Re: Deflation fare thee well – Part I: In search of real returns in an unreal world - Eric Janszen

Nope, I believe this is wrong. I recently read a comment that convinced me, that what we face in the coming years is deflation.

The 13+? trillion dollars injected into the system is still small compared to the 60-80 trillions that evaporated in asset deflation. We are still inside this gigantic credit bubble, the deleveraging process is not finished. It will take years to finish off this process.

One crucial factor in this process is the value of the dollar. The world needs dollars to service the debt load. No one wants a higher dollar. The US home owners and those holding securities based on the mortgages have made an implicit bet against the dollar. Servicing the debt, creates a dollar demand and makes the dollar rise. So when the dollar rise it is not because it is seen as a safe haven.

Pardon my limited English.
Cheers.

[ax]

Re: Deflation fare thee well – Part I: In search of real returns in an unreal world - Eric Janszen

Nope, I believe this is wrong. I recently read a comment that convinced me, that what we face in the coming years is deflation.

The 13+? trillion dollars injected into the system is still small compared to the 60-80 trillions that evaporated in asset deflation. We are still inside this gigantic credit bubble, the deleveraging process is not finished. It will take years to finish off this process.

One crucial factor in this process is the value of the dollar. The world needs dollars to service the debt load. No one wants a higher dollar. The US home owners and those holding securities based on the mortgages have made an implicit bet against the dollar. Servicing the debt, creates a dollar demand and makes the dollar rise. So when the dollar rise it is not because it is seen as a safe haven.

Pardon my limited English.
Cheers.

Before this guy gets destroyed or pounded with 100 links to other Itulip threads, let's give him the balls of the day award for his first post on Itulip being a response to EJ, "this is wrong." Good luck klepzo, but I'm sure you'll find some friends in Lukester or JT with courage like this.

[cjppjc]

Re: Deflation fare thee well – Part I: In search of real returns in an unreal world - Eric Janszen

Before this guy gets destroyed or pounded with 100 links to other Itulip threads, let's give him the balls of the day award for his first post on Itulip being a response to EJ, "this is wrong." Good luck klepzo, but I'm sure you'll find some friends in Lukester or JT with courage like this.

Well he's been around for longer than me. More balls than me. Get him metal.

[metalman]

Re: Deflation fare thee well – Part I: In search of real returns in an unreal world - Eric Janszen

Nope, I believe this is wrong. I recently read a comment that convinced me, that what we face in the coming years is deflation.

The 13+? trillion dollars injected into the system is still small compared to the 60-80 trillions that evaporated in asset deflation. We are still inside this gigantic credit bubble, the deleveraging process is not finished. It will take years to finish off this process.

One crucial factor in this process is the value of the dollar. The world needs dollars to service the debt load. No one wants a higher dollar. The US home owners and those holding securities based on the mortgages have made an implicit bet against the dollar. Servicing the debt, creates a dollar demand and makes the dollar rise. So when the dollar rise it is not because it is seen as a safe haven.

Pardon my limited English.
Cheers.

no one's going to jump on you for this thoughtful... logical... comment. brings up an issue that ej's article does not...

' The world needs dollars to service the debt load. No one wants a higher dollar. Servicing the debt, creates a dollar demand and makes the dollar rise. So when the dollar rise it is not because it is seen as a safe haven.'

very good points!

what we jump on here is junk economics.... deflation makes gold go up... that kind of gibberish.

so... if deflation, then why is oil $66... gold $980... silver $15.6... during a rush for dollars to service debt?

[jpatter666]

Re: Deflation fare thee well – Part I: In search of real returns in an unreal world - Eric Janszen

so... if deflation, then why is oil $66... gold $980... silver $15.6... during a rush for dollars to service debt?

And are these rising prices in dollars only or have we seen a rise in terms of other currencies as well? How're they doing in Euros/Sterling/Yen?

[metalman]

Re: Deflation fare thee well – Part I: In search of real returns in an unreal world - Eric Janszen

And are these rising prices in dollars only or have we seen a rise in terms of other currencies as well? How're they doing in Euros/Sterling/Yen?

coordinated global currency hacking... 4th currency rising against major currencies...









charts at page bottom update daily...

[cjppjc]

Re: Deflation fare thee well – Part I: In search of real returns in an unreal world - Eric Janszen

I knew it:cool:

[jk]

Re: Deflation fare thee well – Part I: In search of real returns in an unreal world - Eric Janszen

so... if deflation, then why is oil $66... gold $980... silver $15.6... during a rush for dollars to service debt?

so if inflation, why haven't we already bought oil?

i think the issue here is one of timing. oil is up even though reserves are generous, storage overflowing. oil, and gold and silver are up because of people like you and me, who look down the road. but although i believe there will be an inflationary outcome, i also think the economy may well disappoint in the not-too-distant future, and we'll have a little more ka, or in other words more "deflation scare," and better [i.e. lower] prices for commodities.

[metalman]

Re: Deflation fare thee well – Part I: In search of real returns in an unreal world - Eric Janszen

No one wants a higher dollar.

clarification... everyone wants a weaker dollar to pay off debt & at the same time a weaker dollar vs their own currency to help their exprot position.

solution... deflate all currencies against oil, metals, etc. by coordinated debasement...









same as last time...

[c1ue]

Re: Deflation fare thee well – Part I: In search of real returns in an unreal world - Eric Janszen

One crucial factor in this process is the value of the dollar. The world needs dollars to service the debt load. No one wants a higher dollar. The US home owners and those holding securities based on the mortgages have made an implicit bet against the dollar. Servicing the debt, creates a dollar demand and makes the dollar rise. So when the dollar rise it is not because it is seen as a safe haven.

Because those controlling US government and Fed policy are clearly acting on behalf of the banks - the owners of the debt - as opposed to the debtors.

Secondly the debt you speak of is primarily a US/US citizen debt as opposed to debt evenly spread around the world.

This means that the creditors are not just the US bank holders of debt instruments, but also the foreign central banks and foreign holders of dollars.

Lastly the only reason this dysfunctional mechanism of too much US accumulation of dollar debt has been able to occur is the US dollar as a reserve currency. Most trade transactions are done in dollars thus lending extra inertia to a currency which otherwise would have long since been dragged into the mud.

The events of the past 2 years is showing nations and companies that using US dollars as a trade vehicle is no longer beneficial. Similarly holders of dollars are now seeing clear threats to their accumulated capital.

Don't confuse US government/Fed papering over bank bad debts with a specific policy to drive the dollar down. The fact that a hyperinflationary spiral is being risked should be enough to tell you what is going on.

[metalman]

Re: Deflation fare thee well – Part I: In search of real returns in an unreal world - Eric Janszen

so if inflation, why haven't we already bought oil?

i think the issue here is one of timing. oil is up even though reserves are generous, storage overflowing. oil, and gold and silver are up because of people like you and me, who look down the road. but although i believe there will be an inflationary outcome, i also think the economy may well disappoint in the not-too-distant future, and we'll have a little more ka, or in other words more "deflation scare," and better [i.e. lower] prices for commodities.

except for doubling down on gold from 15% to 30%, itulip was slow on the draw on inflation, i'm afraid.

[Guest]

Re: Deflation fare thee well – Part I: In search of real returns in an unreal world - Eric Janszen

Metal - well, if the prospective inflationary event is a five year run, how a few weeks difference when issuing the call going to make much difference? On a five year timescale for runaway inflation to play out according to script, a month one way or the other seems like small potatoes. Ja? Oder nicht?