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

[goadam1]

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

I think frog in a pot is exactly the right phrase. People were scared in September-March (when the heat was on high), but they're short memories.

Recessions have at worst only lasted 18 months or so, as long as [nearly] anyone can remember.

Deficits? People have been crying about the deficit since Reagan. Nothing ever came of it.

Jobs, housing? The recession is coming to an end -- don't you read Newsweek?

People feel that something bad is in the air, but they can't put a finger on it. Things seem OK for the moment -- not as if there are soup lines everywhere. If this is a depression, it's not *that* bad they think (unless you're in Detroit). Several people I talk to have taken some measures, but nothing drastic. If things get much worse, they'll be no more in trouble, so might as well enjoy things while they can.

We've become a nation of grasshoppers.

If and when we get our Argentina moment, it will stun the sheeple. How many will say: "I didn't see that coming"

But in a macro level how could it not be an age of anxiety. Here are some reasons I can come up with:

More people alive than all of history up until now.

Mass extinction of chunks of the biosphere.

An aging western population with some cultures below replacement rate.

A technological earthquake equivalent to the creation of the printing press or the steam engine displacing nearly all forms of work.

A society that consumes more than it makes. Mostly forgot how to make stuff. But all the while suffocated with social cues to consume more than it needs.

A system based on the impossibility of infinite growth.

Fiat everything you own but your health and hugs.

[ST]

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

so... where are we all going? surely we can't be the only ones thinking this way.

to beat a dead horse...Canada - paper assets decline, hard assets increase in value, commodity currency benefits even if devalued somewhat by gov't, still relatively strong, best fiscal shape of the G-7

but, then I guess I have the benefit of 3 different citizenships between my spouse and I

still, easy for an American to go north if you have an education - the main problem I find is a general stagnation of thinking in Americans - like they are stuck here no matter what

I don't consider being in gold and US treasuries safe if you live in the US - you know the dollar devalues - there goes your treasuries, you know chances of a balance of payments crisis increase - then what? currency controls and maybe a 90% tax on gold? you're stuck - how is that protection if the worst case develops which it always seem to with iTulip forecasts?

you aren't protected at all. You are much more protected if you sit in Canadian t-bills and gold up there and Canadian commodity currency cash

[goadam1]

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

And yet, my future industry is still keeping it together:
Woot.

Why is this kind of inflation confusing to people? It's an economy of scale issue. It takes x amount of input costs at y units to break even. Once you break even you can make each unit cheaper. Hand made wicker chairs get more expensive, dvd players get cheaper and cheaper.

[metalman]

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

Why is this kind of inflation confusing to people? It's an economy of scale issue. It takes x amount of input costs at y units to break even. Once you break even you can make each unit cheaper. Hand made wicker chairs get more expensive, dvd players get cheaper and cheaper.

trick question? i''l bite... because they're stupid? ;)

ok,ok.. that's note fair.

because they're lawyers or academics who have no understanding of business whatsoever.

[goadam1]

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

trick question? i''l bite... because they're stupid? ;)

ok,ok.. that's note fair.

because they're lawyers or academics who have no understanding of business whatsoever.

bingo. I've been running my business for 12 years and all I have is an English lit degree. I was taught how to run a business from no nonsense accountants. I often try to explain simple ideas like economy of scale, distributed labor and cash flow to people. It's like I am explaining calculus in Greek. Should we wonder why people can't tell when they are getting richer or poorer?

Anyone who gets at least a 12th grade education should read, "Wealth of Nations" But what am I talking about? They used to teach kids how to balance a check book in Home Ec. I'm not sure you need to sign your name t get a credit card.I don't think most people have even a vague notion of the waters in which they swim.

[LargoWinch]

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

to beat a dead horse...Canada - paper assets decline, hard assets increase in value, commodity currency benefits even if devalued somewhat by gov't, still relatively strong, best fiscal shape of the G-7

Thank you Steve, big virtual Canadian Largo-style hug for you.


That out of the way, I am not so certain that Canada is such a fool-proof safe haven as you are picturing.

I have made the case for this here (look at post #7 and below) and here.


Now, I do agree that diversification of assets and the geographical location of such assets should certainly be considered. I do agree (no bias - again see above), that Canada should figure on near the top of the list however given what you said.

[ST]

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

Thank you Steve, big virtual Canadian Largo-style hug for you.


That out of the way, I am not so certain that Canada is such a fool-proof safe haven as you are picturing.

I have made the case for this here (look at post #7 and below) and here.


Now, I do agree that diversification of assets and the geographical location of such assets should certainly be considered. I do agree (no bias - again see above), that Canada should figure on near the top of the list however given what you said.

I am sure you are right that they will try to devalue as it strengthens, but they will hit a wall when the risk of domestic inflation outweighs a strong currency. They were already at 1.08 + ($1.10 I think was an intra-day move) That much above par and the printing hadn't even begun yet.

I think we will see at least $1.20 on loonie over the next few years. At a certain point the gov't will be powerless to keeping a lid on it -very different story when you are not the reserve currency.

In the short term I'm look for the loonie to weaken as the dollar strengthens greatly - pile back into the loonie and maybe some gold explorers which have treated me well, then the stimulus/printing really begins - spring.

[LargoWinch]

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

I am sure you are right that they will try to devalue as it strengthens, but they will hit a wall when the risk of domestic inflation outweighs a strong currency. They were already at 1.08 + ($1.10 I think was an intra-day move) That much above par and the printing hadn't even begun yet.

I think we will see at least $1.20 on loonie over the next few years. At a certain point the gov't will be powerless to keeping a lid on it -very different story when you are not the reserve currency.

In the short term I'm look for the loonie to weaken as the dollar strengthens greatly - pile back into the loonie and maybe some gold explorers which have treated me well, then the stimulus/printing really begins - spring.

Steve, you are looking at the exchange rate between the USD and $CAD the wrong way.

As of the time of this post:

$1CAD = 0.9163 USD
or
$1USD = 1.0913 CAD

In other words, one loonie is less than one bonar.

[Sharky]

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...

In your "new normal" case, what happens at step #5 is that the money lost by the bank is written off against its capital. The loaned money stays in the economy, but other offsetting money is still destroyed. From a regulatory perspective, banks are not allowed to lend money indefinitely into the economy without paying it back. When bank capital is destroyed, it does indeed pull money from the economy. Banks can create money to loan, but they can't create their own profits; if a bank makes enough bad loans, its capital will vanish, and it will go out of business.

In step #6, when the Fed provides bailout money, it is lent into existence. The Fed cannot provide new bank capital; it can only provide a loan against existing collateral. New money can be created by the Fed, but only when the Treasury gets involved, or through special programs like TARP. In the normal case, the bank would have to put up some collateral to get a loan (for example, at the Discount Window): no new money is created; it's just an exchange of collateral for cash.

The bottom line is that bad loans *are* deflationary -- both because they destroy bank capital and because they impair a bank's ability to make future loans (which would have created money, and would therefore have been inflationary).

In fact, this issue is at the core of the current financial crisis. Because banks are so heavily leveraged, relatively small losses can destroy all of their capital.

[jimmygu3]

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

Bingo! I make commercials.

It's not lost on me that no structural, legal, moral, or any other meaningful change has happened. Stagflation? Triple dip recession? Frog in a pot? I could come up with three or four scenarios. But I live in the now and prepare for a couple of futures. Right now business isn't terrible. Right now I will do a tech upgrade I swore in 2007 I would put on hold until the first storm passed. Right now credit is flowing and stuff is happening.

Hey I thought I was the only TV production guy on iTulip. It appears there are at least 3 of us (including Steve's wife).

I just ran into a friend today who started a post production house here in Atlanta in August '07. I knew when she opened it that the economy was on the brink of a meltdown, but who was I to stop her? Well, business is booming and they just purchased and built out a 13,000 sf loft space because they need more room to grow.

Glad I didn't try to talk her out of starting the business!

Jimmy

[flintlock]

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

doubt any of them thought about it any longer than a used car salesman wonders about the last asshhole he sold a car to.

Exactly, they don't give a shit.

[bcassill]

Zombie Manufacturers

Reuters Aug 25, 2009

"Zombie Suppliers" Haunt Manufacturing Sector...

Seems that the FIRE economy is not the only sector in real trouble. In the past years of the outsourcing craze, many manufacturers will be left holding the bag as many of their smaller suppliers go belly up. Part of the article reads:

Call them zombie suppliers. Analysts say the speed with which major manufacturers cut output in this recession put unprecedented strain on thousands of small manufacturers that supply the industry with critical parts.

That has left the supply chain with an unknown number of suppliers who are dead but do not know it -- companies so undercapitalized and overleveraged they will never raise the money they need to get their idle plants running again.

Oops. And this leads to (drum roll, please)...

And that, of course, would be a horror show for the publicly traded manufacturers that rely on these suppliers. It could leave them scrambling to secure components once the recovery starts -- and missing some of the rebound's benefits.

While outsourcing looks good on paper, I wonder the about the number of companies that actually do true due diligence and risk assessments in making these decisions. (Answer: I'll bet that the answer is somewhere between zero and none). The real fun is going to begin when geopolitical disruptions start throwing the ole monkey wrench into the global supply chain. I guess that decision to outsource/offshore operations to Chindia doesn't look so good now does it?

I have only one question. And your back up plan is?

[jk]

Re: Zombie Manufacturers

this is a form of supply destruction in the manufactured goods arena: another source of inflation to come.

[tacito]

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

Thanks Sharky and Bart for the explanations. I think that I'm understanding it better. To summarize: Loan defaults do not create nor destroy money, but reduce bank reserves that are the basis for credit. And credit should be counted as money when we talk about betting on prices. So that is the deflationary component of the problem, the inflationary one being ABS and Treasuries monetization by the Fed.

[mjg0]

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

Re. still see disinflation everywhere

This is from Prechter's August EWT (edited slightly by me):

Financial markets don’t believe the vocal hyperinflationists’ runaway inflation scenario, at least not yet. Taken together, real estate, stocks and commodities have fallen 50 percent from their respective highs. I believe that these markets reflect a hidden revaluation of the entire stock of dollar-denominated IOUs. Even though the authorities are using force and other people’s money to keep certain debts marked to face value rather than to market, the shadow market for debt—as represented by the prices of investments—has decreed that the entire debt stock is in fact worth half what it used to be worth, regardless of what bonds say on their face.

Let’s look at it another way: A dollar can buy twice as much property, commodities and stock as it could at the times of the most extreme stock, property and commodity prices during 2005-2007. In other words, every dollar is twice as valuable as it was just 2-4 years ago. If debt values have not imploded and all their face values are valid, then all the outstanding IOUs are twice as valuable as they were two years ago! Do you believe this to be true? If it is true, then the $50t. of dollar-denominated debt now has $100t. worth of purchasing power in terms of 2005-2008 prices for investments. But values don’t come for free. There must be something wrong with this picture; and there is: Overall, they have lost half their dollar value, just as stocks and property have. Evidence of this fact is in the inability of some IOU-holders to sell their holdings at face value. Investors are too skittish to trust their value, and for good reason.

Unfortunately, no one knows exactly which IOUs are worth less or by how much. The Treasury and the Fed have been giving privileged holders of ruined debt stunning, unearned boons. On the backs of current savers and future taxpayers, they have, for example, bailed out European banks that held AIG’s debt-insurance contracts as well as domestic and foreign investors, including the Chinese government, who held debt backed by Fannie Mae and Freddie Mac’s overvalued mortgages. Political rules constantly change, so no one today can be sure whose IOUs the authorities will protect next. Thus, although the value of outstanding dollar-denominated IOUs has fallen by half, no one is quite sure which debtors and creditors in fact are going to be held responsible for the damage. There is no free market to tell us. Investors are hoping and praying that the IOUs they own will be made good. Hoping and praying is not a good investment strategy, but in cases where there is no market for your holdings, it is all the strategy you have left.