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

[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.

[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.

[ASH]

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

Isn’t it true that those derivatives did cause asset price inflation?

Thanks for the response and discussion. I started out highly concerned about the deflationary potential of all those derivatives, and have become less so over time. It's nice to have others with whom to hash this over.

The derivatives must have caused asset price inflation, but not $600T worth. On the one hand, people marvel at the notional face value of all those derivatives contracts, noting that it dwarfs the total capitalization of all asset classes combined (the quickest reference I could find quotes the Economist as estimating the value of all property, equities, and bonds in developed countries to be $115T as of 2002). On the other hand, if the face value of those contracts dwarf the valuation of all other assets, then obviously writing and trading $600T of derivatives contracts hasn't impacted asset and consumer prices the same way that a $600T bump to M3+credit would. That's why I think the $600T face value doesn't correctly capture the order of magnitude of the problem. No one has to print $600T to prevent a deflationary spiral. At worst, the Fed only has to print enough to cover the deposits held by -- and credit lines issued by -- institutions which go under as the result of bad derivatives bets. More likely, the Fed only has to print enough to stop default on the various loans upon which the inverted derivatives pyramid balances. As far as I can tell, the asset class that was most inflated by derivatives is derivatives.

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?

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 do get the impression that some combination of mark-to-myth and back room accommodation among the big financial institutions are the reason why bad derivatives bets haven't wiped out more banks, and that this did curb some of the deflationary impact. That said, I don't think the destructive potential of those derivatives is measured by their notional face value, for the reasons stated above. (And I fully expect the financial institutions and government to continue colluding to avoid a day of reckoning, because it seems to me that all parties who have control over the trading and valuation of derivatives have a common interest in avoiding a blow-up. Why would they stop? Why would they have to stop?)

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 had assumed that these contracts have expiration dates, but I could be misinformed. A recovery might not be necessary to unburden those who hold bad positions.

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?

As far as I know, the only portion of this problem which relates to recovery is the underlying loans. That notional $600T is teetering on top of a much smaller value of mortgage loans and the like. I agree that a lot more loans will default, and that those who have written insurance against default (or against default on the default insurance) could be in a tough spot. But, again, I return to the point that this isn't a $600T problem. There is no need to monetize the $600T face value of the derivatives -- only the $10T (wild-ass guess) of actual mortgage contracts and whatnot that everything is leveraged off of. That's highly doable, and doesn't require a recovery that allows debtors to pay their loans out of income.

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.

I agree. Perhaps I should have clearly said "not a part of the money supply which, dollar for dollar, affects consumer and asset prices with as much weight as M1 or even bank credit."

[ASH]

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?

Tacito, for what it's worth, I'd recommend a functional approach to decide what it makes sense to include in the money supply. I'd say that if you can pay for something by drawing upon credit, then the supply of credit clearly affects pricing.

[bart]

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

The derivatives must have caused asset price inflation, but not $600T worth. On the one hand, people marvel at the notional face value of all those derivatives contracts, noting that it dwarfs the total capitalization of all asset classes combined (the quickest reference I could find quotes the Economist as estimating the value of all property, equities, and bonds in developed countries to be $115T as of 2002).
...

The most current BIS world derivatives total is $592T, having peaked at $684T in 2H 2008.

I wasn't able to find a world total bond + stock + real estate value, so put a best guess together a while back. For what its worth, I'm unaware of anyone else having anything even vaguely similar that's publicly & freely available.
The most recent data as of 2/2009 shows a best guess value total of $177T, so the real "leverage" is less than 5:1 - allowing for "Kentucky windage".

I do get the impression that some combination of mark-to-myth and back room accommodation among the big financial institutions are the reason why bad derivatives bets haven't wiped out more banks, and that this did curb some of the deflationary impact. That said, I don't think the destructive potential of those derivatives is measured by their notional face value, for the reasons stated above. (And I fully expect the financial institutions and government to continue colluding to avoid a day of reckoning, because it seems to me that all parties who have control over the trading and valuation of derivatives have a common interest in avoiding a blow-up. Why would they stop? Why would they have to stop?)

I agree that's its dicey at best to judge monetary destruction or deflationary impact only from the face or nominal value, since real profits & losses are based on the value that includes the leverage... which currently averages about 18:1, with a peak in 2H 2007 of over 46:1.

As far as why they would stop or have to stop, your point is good... except for black swans or us living more & more in "Extreme-istan" or "WTF-istan"... and also a panoply of historical quotes I could insert about both negative and positive surprises.

I had assumed that these contracts have expiration dates, but I could be misinformed. A recovery might not be necessary to unburden those who hold bad positions.

Most do have expiration dates... and thereby much of the mess in L2 or L3 derivatives.
Plus, about 70% of the grand total are interest rate based derivatives - not CDSs which are "only" about 10% of the total (and classified as interest rate derivatives).

I agree. Perhaps I should have clearly said "not a part of the money supply which, dollar for dollar, affects consumer and asset prices with as much weight as M1 or even bank credit."

We're cool. I was 99% sure that you understand and was more urging that caution for newbies or less well educated & informed folk.

[LargoWinch]

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

is it possible, you are an idiot??
Another 1 for me?

I keep re-reading this sentence, but for some reason I do not see any counter-argument.

It is essentially, just a pointless and unecessary personal attack demonstrating the lack of intellect of the author.

Question: Have you met Bouncer yet?

[ASH]

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

The most current BIS world derivatives total is $592T, having peaked at $684T in 2H 2008.

I wasn't able to find a world total bond + stock + real estate value, so put a best guess together a while back. For what its worth, I'm unaware of anyone else having anything even vaguely similar that's publicly & freely available.

Dang, I wish I was as useful as you. Thanks, as always, for the numbers.

[bart]

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

Dang, I wish I was as useful as you. Thanks, as always, for the numbers.

Thanks Ash, your sentiments are much appreciated - my pleasure.

And I frankly believe that you're more useful to most than I am. Try as I might, I don't have the "touch" like you & Finster and a few others have to make the stuff much more easily understandable - although my chart design ability & chart clarity sure have improved over the years, thanks to others including Fred.



By the way, here's stock & bond market values:

[0tr]

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

.... Still wanting to learn, so if you have a link to material to read, I'd would apreciate.

Check out Michael Hudson's website. iTulip has interview with, and is v. good

And Fred Harrison's Renegade Economist. videos

Also, aside, somewhere above was a question about types of inflation.

I've heard of monetary inflation, wage inflation, price inflation, profit inflation, and a few others. Along these lines great confusion mushrooms. Including, from Sherman Maisel, a governor at the Fed, who said in his book, 'Managing the Dollar' that increased interest rates result in cost push inflation, in rents, a component of CPI, I believe. Context always needs to be clarified. Lag times vary.

[0tr]

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

....
shoppers, blissfully unaware of the economic calamity that awaits them, will wish they’d understood the perversely low prices as a warning of economic trouble ahead and saved their money for later.

The holiday retailer strategy: those left with the least inventory after Christmas live to fight another day.

The first half of 2009 goes like this:

1. After Christmas sales: 20% to 50% off
2. Liquidation sales: 50% to 80% off
3. Then 30% to 40% of retailers go out of business

Advice to readers: take advantage of the early 2009 Great American Fire Sale and go out and buy all the generators, chain saws, washing machines, fine linens, cars, and other durable goods you’re going to need for the next few years because by the end of 2009 most of the inventory may be sold through, many retailers will be shut down, and replenishment of stocks of the survivors will likely be meager; our models say that the goods import supply will decline more precipitously than the supply of money available to pay for them. That spells severe stagflation.[/COLOR]
[/INDENT]How well has this forecast held up? Sadly, all too well.

Promise me you'll not pay mark-up. I mean it. You have to get it without markup or you're not really getting it.

[GRG55]

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

...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.

Excellent point & example!
Thanks for the clarification.

[Slimprofits]

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

EJ make deflationistas angry...

As for the inflation-phobes, gold demand hit a six-year low in 2Q, according to the World Gold Council (-8.6% YoY)...

[..]

We have said often that just as society couldn't spell ‘inflation’ in 1937, it has no clue what causes deflation now. That's beginning to change in the aftermath of the housing and credit collapse, but try to explain the deflationary forces contained in debt liquidation or global manufacturing over capacity or a socio-economic trend towards savings, and the notion of ‘deflation’ gets fuzzy for most thinkers (even Warren Buffet). That doesn't change the fact that the deflationary forces are enormous (and current) and the policy-induced reflationary forces are a partial antidote.

[..]

To be sure, if the government fails to mop it up once the private sector debt liquidation ends, it does mean that an inflationary mistake lurks down the road. But as we have seen in other post-bubble credit collapse episodes, the initial period of deflation can last for years, during which the fundamental trend in bond yields will likely remain in one direction and that is down, to the surprise and dismay of the litany of bond bears that currently populate the capital market. The fact that a year ago, when the inflation rate was over 5% but core inflation was less than half that pace, the market mantra was that we should be focused on headline only — that the core would follow the headline. There was a plethora of Street research published on the topic; we recall that all too well. Today, the year-over-year headline price trend is running at a 60-year low of -2.0%, and now we are being told by the economics community to focus on “core” (which, by the way, has slowed to 1½%) because this is all an “energy story”.

So you see, most strategists and economists and market pundits claim that they are concerned about inflation, but in reality, everyone seems to want to see it. As long as we have a lack of pricing pressure, we will see bond yields trend lower, and as long as that happens, there will be a continued lack of confirmation over the growth rate in the economy that is embedded in equity market valuation. Energy prices may, for a short time, give a kick to the headline CPI numbers but rents are almost four times more important and comprise 30% of the index (and 40% of the core). To repeat — three variables: rents, wages and credit — will ultimately determine the trend in inflation. Down, in other words.

Breakfast with Dave, August 20, 2009

[ST]

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

EJ make deflationistas angry...
Breakfast with Dave, August 20, 2009

Rosenberg exhibits symptoms of a condition Jim Rogers has often remarked to the wealthy "Well, you don't do your own shopping - your housekeeper does it"

In effect, I do believe a lot of wealthy pundits take little notice when for instance:
- food sellers reduce volume sold and increase package size to try to off set perception or generally are
- or their own healthcare costs rise
- or any array of things we notice daily

He and many are simply ... insulated from the everyday experience of most Americans.

[cjppjc]

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

I had held my tongue regarding this retail and food inflation talk. I see no pricing power at retailers. They are slashing prices like crazy. I had no trouble at the supermarket either. Today however, Dr. Browns Black Cherry soda went from .99 to $1.19, a pound of coffee is now being sold in a 10.5 ounce can. Ouch. If you're shopping for yourself, you can always find cheaper alternatives. But I have to have my Dr. Browns and off course lots of coffee.

[Kadriana]

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

Are there two parts to the Poom? One where you have stagflation and energy prices are going up but where things like restaurants and furniture stores are still going out of business. The second part where inventories are so low that furniture stores and restaurants get to start naming their price where they're the only ones still in business and stagflation ends and inflation begins.