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

[dbarberic]

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

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

[goadam1]

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

I am in no way, shape or form saying that 9.5% U3 is the same as 16%+ U6, but rather expressed an opinion about U1-U6 being "crap". I only watch U6 & my own U7, but also note U3 since Wall St spins & spews about it and it affects markets - whether I like it or agree with it or not.

What we have here is a rock and a hard place, as Fred sort of noted. U6 is not well known at all and U3 is full of holes... and both shadowstats.com and my U7 reconstruction don't exactly have huge following either.

And then we have the whole issue of EJ or iTulip or whomever getting zapped or raked over the coals when they're not 100% perfect and correct, and what a crock that is. I'm a successful trader, and only get 60%+ right.
I don't mean this to be a personal attack on you at all, but think about what it takes to put your butt on the line and make forecasts going out many months or years, and knowing that sometimes you'll be wrong. The real key to me is how honest someone in the forecast business is, and much more - do they learn from those inadvertent goofs. And do their overall calls and views stand the test of time... and iTulip does *way* better than most.

The whole area of economics and finance has been injected with so much outright wrong data and vested interest based spin & crud etc. that its so far beyond ridiculous that I can't even put it into words. And I don't want my blood pressure even higher than it is already.

Whether its intentional or inadvertent or some combination of the two isn't even all that important - the main point is that its well beyond a minefield, and trying to punch through all the crud and bad data that the average person has is extremely difficult.
As just one small example - I started posting about Fed OMOs and POMOs almost 4 years ago, and damn near no one believed what I was saying - and with raw facts directly from the Fed! Its part of the reason I use a tinfoil fat avatar - the real truth about what's really going on is literally alien to most people.


Then in my opinion we have the issue of if iTulip only talked about U6 for example, some/many folk would have hissy fits about why they're avoiding U3. I was confused myself at whether their 20% forecast was U3 or U6, but it was clarified many times as being U3 and a search will confirm that.

I even wrote a post a week or so ago with a best guess that we'll have a "double dip" or worse and that 20% is still not out of line for U3... but its so hugely political that redefinition will cause it to never happen. After all, on a best guess basis per my research, today's shadowstats.com numbers or my U7 reconstruction actually are roughly equivalent to U3 prior to 1970 or so. And that research, as well as the reconstruction, took many dozens of hours to plow through all the BLS BS... and I'm still a bit uncertain on my conclusions.




edit/add:
As far as nominal vs. "real Dow", its another damned if you do and damned if you don't. Some want one and some want the other, and so they do both - much as I do on many of my charts.

People are different and want/need different views, and given that roughly 80% of the Dow or Dow+dividends gain since 1900 are inflation only (per shadowstats.com adjustments with some changes by me), things like "real Dow" go a long way towards exposing that awful truth.

I also don't expect iTulip to use either my or shadowstats numbers on anything either. They're their own folk with their own opinions. I'm happy that they have used some of my charts, since that's one of the main reasons I spend so much time on them - so that raw facts can get wider exposure - but mostly they go their own way. I'm here precisely because I don't always agree and also because they do frequently come up with some quite good and unique work which is head & shoulders above most, while being far from perfect.

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.

[mimbulus]

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?

Isn’t it true that those derivatives did cause asset price inflation? Isn’t it also true that we didn’t experience derivatives armageddon (e.g. financial meltdown, bank failures, massive social disruption) because the policy approach was to leave the financial mail unopened, shove it in a desk drawer, lock the drawer and hum loudly?

Those 600T derivatives are still there, the general idea appears to be that the world will stabilise, there will be a recovery and so at some point in the future it will be safe to ‘open the mail’.

I think (could be way off base here) that Stumann’s question is where does that ‘reflation’ come from? It aligns with the question of how does price inflation which is not matched by wage inflation create an inflationary recovery (or to put it another way facilitate debt destruction)? If we are looking at stagflation, where those able to increase their income do so but others are left unemployed or with falling wages, will stability alone be sufficient to unwind the derivatives position, aka debt bubble, safely?

I think from reading the subscription only part of iTulip’s analysis the answer is a big fat no.

In the short term the reflation comes from public debt, a position which is unsustainable. This failure is where Stumann appears to anticipate global deflation.

I have to constantly remind myself that ka POOM pertains to the USA and the almighty dollar and not the rest of the world. The reserve currency status seems to imply that it will be different in the States.

After that it all becomes political and not simply a matter of macro economics. So colour me clueless!

Regards
mimbulus

[cobben]

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

"Such a demise would be a wondrous terrifying event."

be careful what you wish for . . .

(from Armstrong's latest)

"

Once the Investment Banks crossed that
line into the "big" market, mortgages, they
created a time bomb that could undo the very
structure of western civilization. They had
as usual assumed that this was a riskless
trade for the government would back up the
debt just as the IMF was backing up the
Russian bonds back in 1998 that went bust
creating the Long-Term Capital Management
collapse and contagion.

Because debt involves every aspect of
society unlike commodities or stocks when they
manipulate those markets, they put at risk the
entire way of life. The day may come when
Goldman is sitting there in their vaults with
tears in their eyes while counting their billion;
and lamenting that a 3 min telephone call may-

$1,000 and their war chest is really worthless."

[ThePythonicCow]

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

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?

Good questions.

One possibility is that this humongous pile of derivatives has allowed the balance sheets of a few big banks to become terribly out of whack, in a manner resembling the misallocation of resources away from productive capacity that the Austrians over at Mises.org bemoan regularly.

If that be the case, it may further be that this misallocation has not yet been corrected. Correcting it might require the demise of JPMorgan, Goldman, BofA, Citi, WF, HSBC, Deutsche, and a few other "too big to fail" banks, give or take a few.

Such a demise would be a wondrous terrifying event.

[ASH]

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

but reflation is impossible in reviving the $600 Trillion global hedge fund market

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?

[ThePythonicCow]

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

The sources of inflation are: 1) high import costs, with energy costs exerting the greatest upward force on the prices of goods, 2) reduced quantity of goods and services, 3) industrial concentration.

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. 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. 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.

Perhaps to be more consistent, more complete (and more confusing to newbies ;)), we should call the inflation EJ warns of, due to the above sources, "disdeflation" ??

Now it may come to pass that all the debt assumption and monetization of the Fed and its colleagues leaks massively into the general economy leading to a classic spiraling monetarist inflation. I am not denying that possibility in this post (though in other posts I predict such will not happen.) However the good evidence that EJ presents so far for inflation is not for that kind of inflation. Rather EJ is providing evidence for the above sources which I would term here disdeflation.

[ASH]

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

Defaults on existing debt avoid the reductions in circulating money that would have come from debt payback, correct.

But what's killing us here is not a sudden collapse in existing circulating money. What's killing us here is the sharp reduction in new debt issuance (outside of the rather unproductive new debt issued by the government, of course.)

We now have debts being paid off (some debts are not in default yet) faster than new debts are issued. The government touts this as an increased "savings" rate. In a debt-based monetary system such as ours, paying down debt faster than new debt is issued is depressing.

I agree entirely with your point about the problem being the rate of increase.

I thought I'd add that defaults on existing debt eat into reserves... which is, after all, why banks are failing. Credit with a bank that fails ceases to be part of the money supply if the bank becomes insolvent.

Also, fractional reserve lending works in reverse, too -- meaning that if you wipe out $X of reserves, you also wipe out the possibility of issuing F*$X credit.

[ASH]

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

I fully appreciate his arguments for Depression, but runaway inflation in a Depression? I need to see more arguments for that. His citing of of a little blip upwards in CPI as a new trend towards runaway inflation is unconvincing. Very un-EJ. He usually criticizes others (rightfully) when they mistake a couple of data points for a trend.

Hi talaicito. I'm just relaying my own understanding of the material posted by EJ on iTulip, but for what it's worth, I believe that iTulip talks about inflation in at least three separate contexts.

Previously, EJ has analyzed the risk of a true hyperinflation, but that has never been his baseline scenario. True hyperinflation would result from a series of policy choices, and the mechanism is rooted in money supply directly. First, the Federal Reserve has to monetize a large enough portion of the federal budget to reduce the purchasing power of the revenue thus provided. Second, in order for hyperinflation to result, the Federal Reserve and government would have to close a positive feedback loop by monetizing even more to cover the drop in purchasing power, as opposed to cutting expenditures. Unless large enough sums are monetized to affect purchasing power, and unless the response to the drop in purchasing power is to print even more money, true hyperinflation won't result. Economic activity does usually fall in a hyperinflation because money ceases to perform its role in the economy efficiently, but EJ clearly isn't talking about hyperinflation and depression in this article.

The second, long-running inflation theme at iTulip has been EJ's KA-POOM theory. He has described it as a "sudden stop" currency event, and related it to capital flight. My understanding is that the inflationary mechanisms include cost-push inflation from dearer imports and also the impact of repatriated dollars upon the money supply. I think the POOM mechanism itself isn't a positive feedback loop (unlike either monetary hyperinflation or a traditional wage-price spiral), so one would expect a large step in prices rather than a continuous "runaway" inflation process. Also, it appears to me that POOM can operate in an economic depression -- especially the cost-push component -- because of our heavy reliance upon imported energy and manufactured goods. However, EJ isn't talking about POOM in this article, either.

The third inflationary theme I've noticed iTulip talk about has to do with the dynamic of supply contracting faster than demand, during this recession/depression. EJ has cited more nimble modern supply chains as a reason why a condition of over-supply won't persist very long in the face of contracting demand. He has also pointed out that as businesses fail in an economic contraction, competition among retailers thins out, ultimately leading to less price competition. This is the category of price inflation discussed in this article. It isn't "runaway", either. Most of EJ's discussion about this type of inflationary pressure has to do with why it would operate in a period of economic contraction.

The classic wage-price spiral is a fourth type of inflationary mechanism which iTulip does not spend much time talking about. I think most would agree that a wage-price spiral is unlikely to occur in a depressed and largely unregulated labor market, with weak unions.

In any case, I didn't read EJ predicting "runaway" inflation coincident with economic depression in this article. I read him predicting stagflation, which is consistent with a weakening dollar for foreign exchange, cost-push inflation, and a faster contraction of supply than demand.

I can see your point about a limited number of data points not proving his case. If you prefer, perhaps you should interpret EJ's citation of the last few CPI readings as a prediction that the trend won't reverse, rather than a critical piece of evidence; there is an awful lot more behind his analysis than those recent CPI data points.

On one hand he critisizes people who compare current situation to Great Depression, saying this happened only once. But Depression and Inflation together NEVER happened in this country! Comparing other countries to US is much harder due to history and currency considerations, so citing 17 other countries with that experience is hardly an typical EJ good argument.

EJ has made very detailed arguments about mechanism elsewhere -- both why a deflationary spiral is unlikely to occur and why an inflationary depression is possible. Theory alone is not very helpful; the only available data is historical. I sympathize that you don't find the available historical evidence applicable, but under the circumstances, what more can EJ do? He has already spelled out the argument elsewhere, and pointing out that the available empirical data lines up with his theory seems valid. My general reaction is that EJ has made as good an argument as is possible, and perhaps the state of our knowledge is unequal to your standards of proof, given what is available in the historical record.

Is it possible EJ getting dogmatic about his Ka-Poom theory?

He could still be right, but I thought his arguments this time were weaker than his usual stuff.

What do you think?

I think that EJ is very sure of his interpretation, and that it is reasonable for him to interpret recent events within the framework of what he expects to happen. I also think that this article had very little if anything to do with KA-POOM theory. Lastly, I didn't interpret the parts of the article which you found to be weak as critical arguments, per se. Rather, I think that EJ has laid out his arguments in detail over many essays and many years, and those core arguments have held up very well. I think the stuff you found weak in this article are a combination of (a) EJ recognizing early signs of what he is expecting, and (b) secondary arguments. I can see why they would be found lacking if viewed in isolation as the entirety of his case, but I think they are reasonable in the context of his body of work, and where we are in the process he predicted.

[ThePythonicCow]

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:

Defaults on existing debt avoid the reductions in circulating money that would have come from debt payback, correct.

But what's killing us here is not a sudden collapse in existing circulating money. What's killing us here is the sharp reduction in new debt issuance (outside of the rather unproductive new debt issued by the government, of course.)

We now have debts being paid off (some debts are not in default yet) faster than new debts are issued. The government touts this as an increased "savings" rate. In a debt-based monetary system such as ours, paying down debt faster than new debt is issued is depressing.

[metalman]

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

I was referring to his winning Trader's Championship sometime in the 80s. Where did you get such accurate record of his trading? Were you a referee at that Championship??

nah... was making it up, just like he does. repeat a lie 23748 times on tv and in the papers... viola... it true!

[talaicito]

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

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

I was referring to his winning Trader's Championship sometime in the 80s. Where did you get such accurate record of his trading? Were you a referee at that Championship??

[jtabeb]

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

I tend to agree, that's why Bank of England is continuing its QE.
I am just wondering where did you get the 600 trillion figure?

I think he meant Derivatives. (1.1 Quadrillion to 600 Trillion, seems to be the best guess on the size)

[metalman]

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

I heard he made 400% in 4 months trading, are you sure this is about money??

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

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

If I were him (and i'm all about money) i'd be just sitting and trading instead of wasting my time arguing with dumbasses on CNBC or anywhere else.

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...

[talaicito]

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

no... not an idiot... tho i never discount that chance that i'm behaving like an idiot at times.

i do require evidence. got any?

can you refute my evidence that you are a troll?

on your first post you serve up 6 criticisms that any idiot without an agenda can see are bogus.

Its just funny that you score 1 if i put a question mark in the end of a sentence and 0 if I don't. Should I put question marks in the end of each sentence? How about this as evidence????????? (how many do i have now?)

Actually I read many of your posts and find that you have some common sense. However, you have got your face so far up EJs ass that you sometimes lose your common sense sometimes, and those times are the ones you are acting like an idiot, as you admit. Does he pay you for it? If he does, i withdraw my idiot remark.

EJ is a smart dude, no question about it. But even smart guys can get overconfident and too much into their theories, especially when they have some success, like EJ undoubtfully have had. Many sites like this have their own 'guy' that they think is a genius and everyone just extolls them and create a cult of personality. What happened to critical thinking and making your own judgements?

As for an agenda, I am just trying to figure out what I should prepare for and looking everywhere for good information. I can't do too much research since I have a job (still) but I can still critically evaluate EJs arguments, can't I? Is it still a free country???? Or will you shut me down, idiot metalman??