August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

[bart]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

So, what's the definition of the money supply that you think is better? I've been trying to educate myself on those matters for a few months, and I think that most of what I've assimilated comes from Austrian economists (and I'm not sure that I've got right everything). Still wanting to learn, so if you have a link to material to read, I'd would apreciate.

Basically, M3 (or equivalent) plus all credit plus all gov't debt - and I don't have a problem with adding in the face value of most derivatives.

As far as Austrians, most folk who study or are aware of them ignore this (and similar quotes):

"There can be no doubt that besides the regular types of the circulating medium, such as coin, notes and bank deposits, which are generally recognised to be money or currency, and the quantity of which is regulated by some central authority or can at least be imagined to be so regulated, there exist still other forms of media of exchange which occasionally or permanently do the service of money. Now while for certain practical purposes we are accustomed to distinguish these forms of media of exchange from money proper as being mere substitutes for money, it is clear that, other things equal, any increase or decrease of these money substitutes will have exactly the same effects as an increase or decrease of the quantity of money proper, and should therefore, for the purposes of theoretical analysis, be counted as money".
-- Friedrich Hayek, Prices and Production, 1935, p. 96

As far as reading material, EJ's work is quite good and you can also check out Bart's Comments here, and also familiarize yourself with Finster's FDI - it's unique and quite useful in how it helps move one's focus away from judging success in fiat currencies or making the error of judging it in gold etc. too. I'm also somewhat biased about my own web site but can recommend my own glossary to help orientation.

[Fiat Currency]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

[and if you are Canadian like Largo and Fiat Currency, it's "inflation, eh".]

Funny one.

Personally - I tell everybody to call it devaluation, eh. Afterall, that's what it really is. :rolleyes: xxFLATION is a ruse.

[tacito]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

Fair enough, and I'm not sure that I consider myself an expert either.

As it seems that you gathered from my comment, its my strong belief that not treating credit as actual money (per the medium of exchange definition and others) is a large part of the problem with truly understanding what's going on today and what will be happening. The raw basics and truths are more important today than at any other previous period in the last 50+ years.

Even stocks themselves have a small component of money, since they're occasionally used in buyouts, etc. - just as another example.

So, what's the definition of the money supply that you think is better? I've been trying to educate myself on those matters for a few months, and I think that most of what I've assimilated comes from Austrian economists (and I'm not sure that I've got right everything). Still wanting to learn, so if you have a link to material to read, I'd would apreciate.

[ThePythonicCow]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

Makes sense, except that I cannot understand why there would be an increase in the demand for essential goods in a recession [or depression].

There is not an increase in demand for such essentials, but rather such price increases (or the decreases in quality and quantity noted by EJ) are forced as the seller otherwise would go bankrupt.

For example a grocery store might have been making much of its profit in earlier times on the sales of more frivolous products, while being more price competitive on things such as bread and milk. Now the frivolous sales are way down, and they have no good choice but to take the profits where they can, on what is still selling.

The buyers don't like this,needless to say, but have little choice but to pay the higher grocery store bill for essential foodstuffs, and skip some other less essential purchase instead.

[ThePythonicCow]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

And maybe we can call that other form of inflation...the "non-self-limiting" variety...um...hyperinflation?

My impression is that we call this form, the one caused by excess money printing (or debt extension, actually), inflation in the case it's just a modest excess of printing, and hyperinflation if it's a horrible excess of printing.

This results in the word inflation having two uses, one for the concentration of limited funds on more essential goods in a challenged economy, and one for the general rise of prices caused by a modest increase in the circulating money.

[bart]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

Well, that is how I understand this:

The bank credit is an asset for the bank that is a claim on some money. It's not the money itself, so I don't consider it part of the money supply. In that case the bank loses that money, and someone, in some place earns it. It's not money destruction but a money transfer.

But I understand that there are different definitions of the money supply, and I'm not an expert.

Fair enough, and I'm not sure that I consider myself an expert either.

As it seems that you gathered from my comment, its my strong belief that not treating credit as actual money (per the medium of exchange definition and others) is a large part of the problem with truly understanding what's going on today and what will be happening. The raw basics and truths are more important today than at any other previous period in the last 50+ years.

Even stocks themselves have a small component of money, since they're occasionally used in buyouts, etc. - just as another example.

[tacito]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

Unfortunately, there's a significant logic error here.

The bank is the loser, and the only way that the "logic" works is if one does not consider banks or credit/debt balances as part of the economy or total money supply... or of course if one does not consider that credit is money - per one valid definition of money being a medium of exchange (credit cards being a specific example).

Money is actually "destroyed".

Well, that is how I understand this:

The bank credit is an asset for the bank that is a claim on some money. It's not the money itself, so I don't consider it part of the money supply. In that case the bank loses that money, and someone, in some place earns it. It's not money destruction but a money transfer.

But I understand that there are different definitions of the money supply, and I'm not an expert.

[gwynedd1]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

I guess I still see the current trend to be monetary deflation. That is not the same thing as price deflation. This article does reflect what that really means. In many cases the cut in supply and loss of scale will cause prices to stay quite high. Some people will really get pinched because if you were already buying beans and spam a sharp rise in demand for those goods will cause prices to rise. In any quick shift in demand it causes a shortage in capital for what people actually want. Some capital goes dormant while the other is overworked.




However on the flip side housing and transportation are big expenses. Those with a job and buying a house taking say a 100k off the mortgage will certainly show a gain from this when correctly considering housing is an expense, not an investment. The biggest expense just got cheaper. However not everything will. Those industries that can react quickly by cutting supply will be among them.

[bart]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

Funny think that so many people think that money gets destroyed when a credit is not payed. As I understand it, it's just the opposite:

Normal case (no default):
1) Bank gives credit to liar, creating new money.
2) Liar spends money buying an 80 inch plasma TV.
3) Money circulates: from mall to distributor, from distributor to manufacturer (in China), exchanged for yuan with chineses gov., from chinese gov. buying short term treasuries to american gov., from american gov. to GM, etc.
4) Liar earns back money plus interest from the economy.
5) Liar pays bank. Money gets destroyed. The bank should lend again, or the money supply will shrink.

New normal (default):
1) Bank gives credit to liar, creating new money.
2) Liar spends money buying an 80 inch plasma TV.
3) Money circulates: from mall to distributor, from distributor to manufacturer (in China), exchanged for yuan with chineses gov., from chinese gov. buying short term treasuries to american gov., from american gov. to GM, etc.
4) Liar fails to earn back money and defaults.
5) Bank loses money, that remains still in the economy. No deflation here.
6) Fed creates money to bailout bank. No inflation until the bank lends the money. It will try not to, but if it has enough defaults, it will have to...

Unfortunately, there's a significant logic error here.

The bank is the loser, and the only way that the "logic" works is if one does not consider banks or credit/debt balances as part of the economy or total money supply... or of course if one does not consider that credit is money - per one valid definition of money being a medium of exchange (credit cards being a specific example).

Money is actually "destroyed".

[touhy]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

Soooo.......in light of EJ's analysis, what should one do to protect/grow assets?

Step 1: Buy useful durable goods now.

Step 2: (oops, I just done ran out of steps. What says the itulip community? I'm too concrete a thinker. Lets have steps 2 through five. Commodities?,.... be a technical trader for the next 10 years?,...move to Singapore?)

Step 3 ?

Step 4 ??

Step 5 ??

[Give 'um lead boys!]

[GRG55]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

In some other reply earlier today, I rather crypically labeled this "weak" inflation. This is distinct from the classic monetarist inflation of simply flooding the general economy with excess money as in Zimbabwe or the Wiemar Republic.

EJ is careful to distinguish (1) a temporary decline of prices in the early bubble bursting phase of a debt based monetary system from (2) a chronic spiraling decline seen in earlier gold based systems such as the early 1930's. He applies the term "disinflation" to the temporary variety we just encountered, reserving the more common term "deflation" to refer to the potentially chronically spiraling variety (to the occassional confusion of iTulip newbies.)

Perhaps we should be as careful to distinguish two kinds of inflation, just as we do deflation.

Just as "disinflation" is self-limiting, I suspect that the above "sources of inflation" are self-limiting...

Why don't we call the "self-limiting" form of inflation...ah...inflation.

And maybe we can call that other form of inflation...the "non-self-limiting" variety...um...hyperinflation?

[and if you are Canadian like Largo and Fiat Currency, it's "inflation, eh".]

The general cause of these sources is not that more money is flowing, nor that it is flowing "faster", but rather than existing money flows are being more concentrated on essential goods and surviving providers, to the detriment of other failing economic parties and the markets for more frivolous goods...

Makes sense, except that I cannot understand why there would be an increase in the demand for essential goods in a recession [or depression]. Demand for essential goods may not fall, or may not fall as much as demand for frivolous goods, but surely there has not been some magical increase in absolute aggregate demand for food, energy, shelter, etc. at the onset of recession. If these goods are experiencing the effects of inflation would that not be because the recession/depression has reduced the number of suppliers and quantity of supply, while demand has not fallen, or fallen as much? Money might be more concentrated on purchases of essentials, but I can't get my mind around the idea that there's more absolute money going into purchases of essentials.

Just as classic "deflation" downward spirals can be more persistent, lasting until some force majeure such as major war or general collapse interrupts them, so can classic monetary "inflation" be more persistent, leading to disasters such as we see in Zimbabwe now, again lasting until some force majeure such as war or general collapse interrupts them...

The persistence of inflation in North America seems to be a "genetically ingrained" reaction within the population and political system to avoid a repeat of the 1930s experience...no matter what. We've become extraordinarily tolerant of persistent [albeit, low level] inflation, while Germany, having experienced a severe hyperinflationary episode in its past, abhors inflation.

[bart]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

Some questions for you: How fast did the $600T global hedge fund market develop, and was this increase in the notional value of the derivatives contracts in question reflected in general price levels? I think the answer is that the use of these derivatives contracts ballooned over a relatively short span of time, yet they didn't have much of an impact upon general price levels because they aren't actually part of the spendable money supply. A second question is, if derivatives armageddon hasn't been triggered by the stresses on the financial system by now, why not -- and why should I expect the problem to crop up in the future? Common sense says that if the derivatives didn't inflate things on the way up (or had an impact very much less than implied by their face value), then their face value probably isn't a good measure of the deflationary danger they represent on the way down. Do I have this wrong?

In my opinion, this gets back to the overall accounting area, FASB, etc. If mark to market were enforced consistently and were not "politically enhanced", it's my belief that the deflationary danger and other dangerous elements would be much clearer and larger.

I also submit that the FASB decision on August 13th to consider expanding mark to market again was almost date coincident with recent stock market peaks. And then there's the various banking index peaks in mid 2007 when mark to market initially came in, and the trillions of Level II and Level II toxic crud that are still alive & well on many balance sheets.

Lastly, I urge caution on not considering derivatives in general as part of the spendable money supply. One valid definition of money is a medium of exchange, and the instruments themselves are exchanged in large volume every day - just not by most folk.

[bart]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

I'm not being critical about you or itulip's accuracy in predictions or in trying to give a more truthful view of things. You and they both do great jobs. I rely on this site to give me a clear view of the economy. I'm saying I am confused on those two issues because there seem to be different terms being used at different times. So either there is some issue of clarity or I am dumb. I won't answer that one.

Here is the conversation from my viewpoint.

I think unemployment will peak around 20%

Wow. 20%. Do you mean u3, u6 or some other more realistic measure of the economic measure of the economic and social impact of unemployment in this depression?

Yes.

Cool - no worries.

I thought they were clear on it being U3 in subsequent posts but could be mistaken. I still think we have not set the real high yet.
And for the helluvit, here's my own most recent take, which shows I may have blown it in timing the current peak... we'll see.

[we_are_toast]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

To be precise, the statistic is 24% worse than the worst previous recession, of the 1980s.

Thanks for the clarification FRED! I think this measure of unemployment will be much more meaningful and realistic than a U3 or U6 measure where the calculation is highly questionable.

goadam1
I'm not being critical about you or itulip's accuracy in predictions or in trying to give a more truthful view of things.

Yes, it's perfectly acceptable to promote your successes and downplay your mistakes, but to deny or reinterpret a forecast that isn't working would be a terrible mistake for such a respected site as iTulip. I'm confident and hopeful we'll never see an attempt to mislead the readers on iTulip. And I agree with Bart, forecasting the economy is kind of like baseball, if you win 60% of the time you're doing terrific!

I believe the most startling part of the article is the fact that EJ actually shops at Target.

:p:p:p

[goadam1]

Re: August 2009 FIRE Economy Depression update – Part I: Snowball in Summer - Eric Janszen

traders, like gamblers, talk about their wins but never their losses. As long as they have more to stake (liquidity) the game is one. It's like having a central bank that gives out no questions asked 0% loans on the casino floor.

after losing 80%, gaining 40%, losing 20%, gaining 12%, losing 50%, etc, etc.

ah, the life of a gambler... er, trader.


advertising & showbiz.

if i were him... was a hack that cnbc puts on the air to make bears look stupid and sleezy... who goes on the air to wow the morons who fall for any asshole in a suit on tv with a good line of shit... then i'd go home and collect the money from a dolts who watched the show... pitch them my elliot wave bullshit.

here's circus act that won't lose you money...