Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

[jabberwocky]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

I am less impressed with the concept of "precision" in language. As I understand it, the output gap is revealed in recession, but is developed in the preceding boom. When the tide goes out, we see who was swimming naked.
For US treasuries to have been sold to foreigners after 2001 buyers were required, not just salesmen. Foreign CB's largely Japan, and China, after it's accession to the WTO in 2001, accomplished this, a mercantilist act to maintain export market penetration to the gluttonous American "consumer", sad Frankenstein creation that we have become.
Bankers (and other malefactors}, having "bought " congress, executive branch, and some parts of the judiciary, saw the opportunity to perpetrate massive fraud, and get away with it. "The big lie" concept. Academia supplied the narrative justification.
Once the inevitable collapse started, the Bank's best friend, tne Fed, bailed them out, preventing, the cleansing (Just like Japan, inc.), and precluding any possibility of productive recovery.
With respect, EJ, what you measure and describe as recovery, is, to other eyes, no recovery at all, but rather, sound and fury, signifying nothing.
Back to the issue of the treasury market, or any market at all. What is to stop the Fed from buying all the market? Nothing. It will fail, but it has already failed to my tired and ignorant eyes.

[EJ]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

EJ, 2 questions for you:
1. Have you sold every last one of your Treasury's yet?
2. If not, why not, given your forecast of a bond market crisis?

Thanks

New allocation noted at the end of Part II, coming soon.

[EJ]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

I am less impressed with the concept of "precision" in language. As I understand it, the output gap is revealed in recession, but is developed in the preceding boom. When the tide goes out, we see who was swimming naked.

That is an ideological construct. It does not help us 1) understand what the Fed and policy makers are thinking and 2) prepare for they are likely to do.

Economics is about human behavior. The credit structure of the economy is built on certain growth rate expectations of producers and consumers. Real potential output estimates what the expected future growth rate is. It is as real as the income, inflation, and other expectations of every person who runs a company or buys goods at the store. If those expectations are not met, producers and consumers change their behavior.

Looking back at the history of output gaps and output surpluses since the 1920s we can clearly see that inflation was low or negative during output gaps and positive or high during periods of output surplus. The potential output concept is useful.

The U.S. economy has experienced only three extended output gaps since the 1920s: During The Great Depression, during the
1981 - 1983 recessions manufactured by the Fed to halt the price-wage spiral, and since 2009.

The current episode is unlike any other in history. My bet is that there is only one way for this to end: With a reversal of pro-finance, low inflation economic policy of the FIRE Economy since 1980. There is only one way out of the Output Gap Trap: nominal growth in excess of 6% of GDP and real growth of 4% of GDP.

For US treasuries to have been sold to foreigners after 2001 buyers were required, not just salesmen. Foreign CB's largely Japan, and China, after it's accession to the WTO in 2001, accomplished this, a mercantilist act to maintain export market penetration to the gluttonous American "consumer", sad Frankenstein creation that we have become.

There was more to it than that. The U.S. cut more than trade deals with China and Japan in exchange for the bailout of the U.S. economy since 2001. Let's hope the Clinton then Bush then Obama administrations didn't make promises to both that are at odds with China's and Japan's interests with respect to each other.

Bankers (and other malefactors}, having "bought " congress, executive branch, and some parts of the judiciary, saw the opportunity to perpetrate massive fraud, and get away with it. "The big lie" concept. Academia supplied the narrative justification.

No argument.

Once the inevitable collapse started, the Bank's best friend, tne Fed, bailed them out, preventing, the cleansing (Just like Japan, inc.), and precluding any possibility of productive recovery.
With respect, EJ, what you measure and describe as recovery, is, to other eyes, no recovery at all, but rather, sound and fury, signifying nothing.

I use the term "recovery" to mean a return of 80% to 90% or more of PCE, retail sales, and other measures of consumption to pre-crisis levels. However, as we see in Part II the gap between PCE today after the AFC and PCE today if we had not gone through the AFC is still a $1 trillion a year shortfall. This is what makes this recovery not feel like any previous recovery. We could say that the economy is now back where it's supposed to be if it had not been artificially inflated with excessive credit creation but the trouble with that conception goes back to expectations. The cleansing approach was taken in the U.S. from 1930 to 1933. Didn't work. This is also an "as if" ideological concept. The cold turkey approach cannot work in a post credit bubble economy because all of the debt that built up over the credit bubble period creates a self-reinforcing mechanism of wealth and demand destruction. As the U.S. discovered in 1933 the process has no magical self-limiting feature. Demand falls, prices fall, incomes fall, debts are defaulted on, banks go under, businesses fail, demand falls, prices fall, incomes fall, debts are defaulted on, banks go under, and on and on. An over-leveraged economy in a recession is as a capsizing ship; past a certain point the more it tips the more it tips. I wish it were not so indebted but it is, and I wish that the result of unmanaged debt deflation was not a self-reinforcing, runaway economic crash, but it is. This is our predicament. It is no use to pretend otherwise.

Back to the issue of the treasury market, or any market at all. What is to stop the Fed from buying all the market? Nothing. It will fail, but it has already failed to my tired and ignorant eyes.

Despite what Greenspan said in 2005 in that quote I use about the Fed's balance sheet being infinite, it isn't, or at least it isn't infinite forever. There is both a level and a time component that limits the Fed. In Part II look at the Fed's balance sheet since the last time we looked in March 2010 and it appears that the Fed is trying to hold the line under $3 trillion.

Thank you for your comments and questions.

I'm going to go offline until Part II is completed.

[c1ue]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

Economics is about human behavior.

...

The current episode is unlike any other in history. My bet is that there is only one way for this to end: With a reversal of pro-finance, low inflation economic policy of the FIRE Economy since 1980. There is only one way out of the Output Gap Trap: nominal growth in excess of 6% of GDP and real growth of 4% of GDP.

I don't dispute any of what you note above.

What I will add is that the framework by which I disagree on some of your conclusions is that those in power, with the money, will not act to hurt themselves without strong leadership and/or an overwhelming public mandate.

Those who make their living via pro-FIRE policies as well as those bought into power by said pro-FIRE individuals and industries are not going to quietly go into the night.

Equally the prospect of the majority of homeowners in the US choosing to undertake asset deflation - I think this is highly unrealistic.

Of course the alternative is dollar devaluation/inflation - but equally this is anathema to FIRE.

Any or all of these can be overcome by a transcendant leader, but I see no one with either the charisma, position, or ideology anywhere in sight.

Thus IMO the most likely path is a penny wise, pound foolish re-hashing of the same old pro-FIRE prescriptions until a breaking point is achieved - at which point anything can happen, and most of which are bad.

[Southernguy]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

"Thus IMO the most likely path is a penny wise, pound foolish re-hashing of the same old pro-FIRE prescriptions until a breaking point is achieved - at which point anything can happen, and most of which are bad."

That, I think is the marrow of the "Janszen scenario". Only two "little" details are missing: when and how it will unfold.
Hope some light comes out from part II.
Meantime, bite our nails

[patrikkorda]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

My bet is that there is only one way for this to end: With a reversal of pro-finance, low inflation economic policy of the FIRE Economy since 1980.

I don't want to sound like a FIRE cheerleader. However, an anti-finance, high inflation economic policy just doesn't seem to roll off the tongue too well. I certainly think we are heading in the direction of a banana republic, but that doesn't mean it should somehow be welcomed.

[jk]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

as the mainstream financial world moves toward more real assets [e.g. buffett buys burlington northern not more insurance companies, gross and dalio endorse gold], they are positioning themselves for the burning out of fire. the more prepared they are with real assets, the more likely they will by happy to dance around the embers. the only "solution" to all the debt is a lot of inflation. i don't think we can get from here to 6% nominal and 4% real gdp without passing through a phase in which the nominal/real spread is much wider. some of the inflation can be denied to make it officially more palatable.

[runlikehe11]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

I will repeat what I said before... Faber has it right... 25 pct in gold, 25 in cash, 25 in good equities, and 25 in corporate bonds. This game is becoming to difficult to navigate.

Sounds like Faber is leaning towards Harry Browne's Permanent Portfolio.

[Polish_Silver]

Bugs are the enemy, not Gold!

My prediction has been and remains that there will be no vilification of gold, no confiscation of gold and no unavoidable punitive taxation when the gold window opening is imminent and US GOV has decided that gold is the new money. Remember, right now gold is still the enemy, and even if it is acknowledged by TPTB that gold will become the new money eventually, the fiction that it will always be the enemy must be maintained.

I think History is against you, Rogermexico. As of 1932, the enemy was not "gold", but "speculators" , ie, private parties holding gold. Sure, Roosevelt wanted to get as much gold as possible, so the fed's forced people to sell at a fixed price, then devalued the dollar. There is a lot less respect for private property now than then.

Just like our profound energy policy debates. The bad people are "oil companies". People who drive huge cars and commute 30 miles to work are never mentioned as the problem.

Another reason that they do not want gold in private hands because it makes possible a payment and saving system independent of the banks and government issued currency. Gresham to the max!

After the gold window is opened, won't they keep reducing the backing ratio gradually, or inflating the dollar/oz ratio?

[rogermexico]

Re: Bugs are the enemy, not Gold!

I think History is against you, Rogermexico. As of 1932, the enemy was not "gold", but "speculators" , ie, private parties holding gold. Sure, Roosevelt wanted to get as much gold as possible, so the fed's forced people to sell at a fixed price, then devalued the dollar. There is a lot less respect for private property now than then.

A currency crisis in the the world's reserve currency is not your father's great depression where, crucially, we started with gold backing the dollar. That is why there has been no deflationary spiral to date. We are talking about going from pure fiat back to some kind of gold backing, which will be done not out of a sense of propriety, but in order to stop a currency from crashing completely. Put yourself in the shoes of the Fed/UST. You need physical gold bullion and there is enough in private hands that it is useful to your purposes. We stipulate that it was not taken by force the last time, and it would be physically impossible to actually confiscate the gold even they wanted to and had no compunction against it. "Respect" for private property is therefore totally irrelevant. The government may be thieves, but to propose they will try to STEAL or forcibly take gold, when it would work better to buy it assumes that they are VANDALS. Vandals who are not greedy, but nihilistically amoral and not even interested in what's best for themselves. Into chaos and pain for its own sake - like the Joker... That is 9/11 truther tin foil hat gold bug reasoning.

Just like our profound energy policy debates. The bad people are "oil companies". People who drive huge cars and commute 30 miles to work are never mentioned as the problem.

Agree with you on the 30 mile commutes. Look at passenger miles driven since 1970 and imagine if we all drove as much as we did back then.

Another reason that they do not want gold in private hands because it makes possible a payment and saving system independent of the banks and government issued currency. Gresham to the max!

Not sure I agree they will not want it in private hands. They will be indifferent to it being in private hands other than taxing it higher if you turn down their tender offer. Legal tender laws will likely stay unchanged and if it is illegal to make contracts with gold as tender, then gold will stay as store of value as long as the international dollar is backed by it, whether there is a separate "payment" system or not.

After the gold window is opened, won't they keep reducing the backing ratio gradually, or inflating the dollar/oz ratio?

Induction of domestic inflation for political or other purposes will still be possible with the gold window opened at a fixed rate. That is kind of a separate problem from the issue of backing the dollar to balance trade under a new IMS, but if that were done it would be at cross purposes to the reason we open the gold window - printing more dollars is adding to the world supply of dollars which will ceteris paribus increase demand for our now limited stores of gold! This would be a repeat of the 1960s and would simply bring us full circle to 1971 again, with more and more dollars chasing the same amount of gold at a fixed rate. If this is your fear, then you are now incentivized to hold on to some of your gold as insurance, I guess.

My arguments are independent from and not derived from this site and he has a different scenario, but here is a good explanation of some of the reasons it makes sense that there will not be punitive taxation or confiscation - at least not for long...

http://fofoa.blogspot.com/2012/01/gold-must-flow.html

[radon]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

Sounds like Faber is leaning towards Harry Browne's Permanent Portfolio.

I would think that the same reasoning that forced a person to sell treasuries would preclude the purchasing of dollar denominated corporate bonds or US equities etc. You shouldn't even be holding dollars.

[radon]

Re: Bugs are the enemy, not Gold!

I think History is against you, Rogermexico. As of 1932, the enemy was not "gold", but "speculators" , ie, private parties holding gold. Sure, Roosevelt wanted to get as much gold as possible, so the fed's forced people to sell at a fixed price, then devalued the dollar. There is a lot less respect for private property now than then.

Just like our profound energy policy debates. The bad people are "oil companies". People who drive huge cars and commute 30 miles to work are never mentioned as the problem.

Another reason that they do not want gold in private hands because it makes possible a payment and saving system independent of the banks and government issued currency. Gresham to the max!

After the gold window is opened, won't they keep reducing the backing ratio gradually, or inflating the dollar/oz ratio?

But gold isn't in the same position as it was in the 1930s. Roosevelt desperately needed to induce inflation but couldn't so long as the dollar was domestically redeemable. The situation is different today. While speculators/"evil white bankers" are still viewed as the enemy it isn't gold they are viewed as hoarding. And confiscation is unnecessary if the use of gold is to arrest a currency crisis. The most likely scenario in my mind is that the gold window will be used in a transitory fashion, both to stop the run on the bank and to set up the replacement of the current IMS.

Also, people are not as trusting in the government as they were in the 30's. They won't like the idea of confiscating gold to give to the speculators in order to restart the banking system. The government is also likely aware of the potential backlash. So, not only is it unnecessary, it will be unpopular politically.

[vinoveri]

Re: Bugs are the enemy, not Gold!

Also, people are not as trusting in the government as they were in the 30's. They won't like the idea of confiscating gold to give to the speculators in order to restart the banking system. The government is also likely aware of the potential backlash. So, not only is it unnecessary, it will be unpopular politically.

People were overwhellming against TARP but it did not stop the authorities.
Only if +10% of the population owned a meaningful amount of gold individually would there potentially be a critical mass for political backlash.

[c1ue]

Re: Bugs are the enemy, not Gold!

That, I think is the marrow of the "Janszen scenario". Only two "little" details are missing: when and how it will unfold.

Yes and no.

For one thing, I've been operating under the 'penny wise, pound foolish' for over a decade now. EJ/iTulip has been generally much more optimistic, though no longer.

Secondly, as I understand it, iTulip views a war with China - proxy or otherwise - as the excuse needed to kick the can/reorient the US economy (depending on your viewpoint). I do think there are elements of the US government and dependent sectors which are for this, but I also think that this type of action would be enough to precipitate a crystallization of the non-aligned. An equally strong factor is the huge economic influence China can (and does) bring to bear; while the China lobby is nowhere as effective as say AIPAC, on the other hand they are learning.

Thus in my view the descent is far more likely to be internalized rather than a new trajectory achieved via a 'war economy' or some dramatic political turnaround.

[jk]

Re: Bugs are the enemy, not Gold!

the more people like gross and dalio buy gold, the less likely it will be seized.