Anatomy of a credit crunch induced bankruptcy - Eric Janszen

[FRED]

Re: Anatomy of a credit crunch induced bankruptcy - Eric Janszen

I am skeptical there are "no deflationary forces." What about the de-leveraging taking place for foreign entities paying back their loans to US banks that they took out during the credit bubble of recent? They buy dollars to pay back loans, causing the dollar to rise and making imports cheaper from an exchange perspective. That seems like a deflationary force.

I can't think of many more examples, if any, but I'm not sure that "no deflationary forces" is a true statement. (There may be one or two roads that don't lead to inflation.) But I guess this article wasn't posted because EJ agreed, but because the article agrees with ITulip's perspective of inflation rather than deflation.

I'm not convinced that this currently climate won't last longer than many expect. High inflation may take more than a few months, though it is a near guarantee.

EJ writes in:

This is a fair point. We previously noted in Interview with Dr. Steven Keen: the Future of Debt Deflation the mechanism of inflation caused by the weak dollar during the 2004 and 2008 period.

This produced one of two forces of demand destruction that tipped the US into recession in Q4 2007, as we forecast in Oct. 2006.

If a weak dollar, sustained over four years, started to produce inflation in oil prices, which then began to feed into other goods prices, how long after the dollar strengthens will it take for that process to reverse?

More than half the dollar's decline against a broad index of currencies over four years until Q4 2008 has retraced in a few months, and the PPI nearly simultaneously.

The assertion "no deflationary forces" may border on hyperbole but is not entirely off base. Clearly a deflationary force of falling import prices exists, not to mention collapsing demand generally. That said, the impact of a stronger dollar on import prices, especially oil, takes years to work its way into the price structure in the economy beyond producer prices, and the dollar has only recently strengthened due to de-leveraging. We estimated that process to end within six months of the start of Q4 2008, which means soon, if it hasn't already; clearly the dollar spike is faltering, and may soon reverse, all before a strong dollar can exert a sustained deflationary force on prices in the US economy. As evidence, witness oil prices still over $40, a price referred to as a "bubble" level by oil price analysts back in 2004.

On the inflationary side of the equation, as the article states and consistent with our Ka-Poom Theory going back to 1999, is a heroic increase in money by the Fed to reflate the economy, and consistent with our 2009 forecast from last year, rampant supply destruction across the supply chain.

Before the end of the 2009, money over-production meets supply destruction meets dollar devaluation for an inflationary 1-2-3 punch not seen since 1975. Gold scratching $900 during a supposed "deflation" is in my opinion telling us everything we need to know about where inflation is going.

[grapejelly]

Re: Anatomy of a credit crunch induced bankruptcy - Eric Janszen

There are virtually no deflationary forces today.

There is a collapse in the number of borrowers who are qualified through cash flow and collateral value to borrow money.

Is this deflationary?

The money already borrowed has been spent and is floating around the economy.

The diminished ability for new borrowers to create new money through the banking system is DIS inflationary.

However, there are enormous forces that are IN flationary, so the deflation fear is a red herring.

[BadJuju]

Re: Anatomy of a credit crunch induced bankruptcy - Eric Janszen

However, there are enormous forces that are IN flationary, so the deflation fear is a red herring.

Ben Bernanke: Yes. Yes, I did it. I killed deflation. I hated it, so much... it-it- the f - it -flam - flames. Flames, on the side of my face, breathing-breathl- heaving breaths. Heaving breath...

[bpr]

Re: Anatomy of a credit crunch induced bankruptcy - Eric Janszen

I know who the "wholesaler" is: does not change my life or EJ's article however...

I just wasted forty seconds on a Google search for no good reason. Not sure why the omissions, though, the full document is available:
http://delawarebankruptcy.foxrothsch...aration(2).pdf

EJ writes in:
The assertion "no deflationary forces" may border on hyperbole but is not entirely off base. Clearly a deflationary force of falling import prices exists, not to mention collapsing demand generally. That said, the impact of a stronger dollar on import prices, especially oil, takes years to work its way into the price structure in the economy beyond producer prices, and the dollar has only recently strengthened due to de-leveraging. We estimated that process to end within six months of the start of Q4 2008, which means soon, if it hasn't already; clearly the dollar spike is faltering, and may soon reverse, all before a strong dollar can exert a sustained deflationary force on prices in the US economy.As evidence, witness oil prices still over $40, a price referred to as a "bubble" level by oil price analysts back in 2004.

On the inflationary side of the equation, as the article states and consistent with our Ka-Poom Theory going back to 1999, is a heroic increase in money by the Fed to reflate the economy, and consistent with our 2009 forecast from last year, rampant supply destruction across the supply chain.

Before the end of the 2009, money over-production meets supply destruction meets dollar devaluation for an inflationary 1-2-3 punch not seen since 1975. Gold scratching $900 during a supposed "deflation" is in my opinion telling us everything we need to know about where inflation is going.

Thanks for the clarification. Being in the used car market nine months after my last purchase has opened my eyes to the deflation-like situation that abounds: used cars are cheap right now, and if I could I'd wait because they ain't going up.

From a consumer/saver's perspective, it's a good time to have cash, but there will be a better time to have cash in the not so distant future.

I'm really interested in this part:

That said, the impact of a stronger dollar on import prices, especially oil, takes years to work its way into the price structure in the economy beyond producer prices, and the dollar has only recently strengthened due to de-leveraging.

Is this because retailers, suppliers, shippers, and everyone else in the chain is reluctant to accept the fact of lower demand and thus lower prices? Wouldn't the best survival strategy for such businesses to lower prices, or at least adjust for demand? I understand that this is not an option for the overly debt-laden players out there and bankruptcy will be the only solution for them, but surely someone has a balance sheet that is sound and is nimble enough to adjust prices as demand ebbs and flows?

[Spartacus]

Re: Anatomy of a credit crunch induced bankruptcy - Eric Janszen

There is a collapse in the number of borrowers who are qualified through cash flow and collateral value to borrow money.

the status quo 2006 was constant credit expansion.

The world came to accept that as "no inflation" ... IOW a "reset of the baseline" or "tare -ing of the scale"

IMHO there's deflation relative to THAT status quo

I don't know if there is current deflation in absolute terms

[rchdenton]

Re: Anatomy of a credit crunch induced bankruptcy - Eric Janszen

Can I just clarify something. Is this your preferred measure of money supply and credit in the economy?

I follow (I think) the idea that inflation is an increase in the money supply and credit in the economy. This leads to increases in such measures of the decrease in purchasing power of each unit of money as the consumer price index.

My problem is, there are so many measures of money supply and credit that I am left rather bewildered.

[rchdenton]

Re: Anatomy of a credit crunch induced bankruptcy - Eric Janszen

The short answer is that there was nowhere for a long term stable business, trading well within their normal parameters, to find equity capital. The only thing on offer was debt.

Borrowings are not capital.

I like where you are going with this Chris, as to me part of the problem is the dis-functionality of stock markets on some level.

http://www.stuff.co.nz/4828007a13.html

Tougher access to credit will encourage more Kiwi companies to list, says stock exchange operator NZX, with the focus firmly on raising equity and not debt.

Most kiwi businessmen hate the stock market, as alluded to in the article (only 10% or so of those big enough to do so are actually listed).

The disdain for listing is widespread, from Bob Jones in the press to many highly competent businessman I know personally. Something is deeply wrong here.

[santafe2]

Re: Anatomy of a credit crunch induced bankruptcy - Eric Janszen

See Confusion reigns: A crisis-driven global rush to dollar liquidity is not deflation

Thanks Fred, I remember reading this article. Let me see if I can restate the iTulip position.

• Debt deflation will be a swift process and will be old news before the end of Q2.
• The US$ has been the beneficiary of this world wide deleveraging process, moving up in value relative to other currencies.
• The dollar will soon begin again to move down in value, (see attached chart for reference).
• The Fed/Treasury infusion of trillions of dollars into the economy will be the main force driving down the relative value of the US$.
• Inflation similar to the 1970s will follow.

USDollar2.jpg

If this is a fair representation of the position, I don't disagree with the outline but I do question the time line with regard to the re-appearance of inflation. Inflation will be counter to everything the US government is trying to accomplish in 2009 to restart the economy. Should it reappear quickly, the consequences will be devastating.

A few examples of how high inflation will work at cross currents with our recovery plan:

• Home sales in the worst hit areas of the country have picked up significantly now that prices are roughly 50% the 2006 high. YOY sales in Las Vegas are up over 150%. One of the main reasons sales have picked up is that mortgage interest rates are at historic lows. If these rates move up 2,3,4%, sales will come to a halt and housing will again resume its decline.
• Auto dealers can't give a new car away. If the commodities that go into making a car and the borrowing costs both move up before the end of this year, we'll have no auto industry in the US.
• Higher unemployment will continue to be a problem in the US throughout 2009. Inflation will only serve to exacerbate and elongate unemployment and our general economic problems. The grocer will be competing against back yard gardens and home grown chickens. Overall caloric intake will shrink. For example, a head of lettuce may move up in cost but people will no longer buy washed and bagged lettuce leaves.

It will be difficult for inflation to take hold while the participants in the US economy continue to spend less money. Printing trillions of dollars will make inflation possible in the short run and probable further out, but that currency has to be paired with a reasonable velocity and I don't see how that will happen this year.

[Guest]

Re: Anatomy of a credit crunch induced bankruptcy - Eric Janszen

That's a pretty bold and specific set of predictions from iTulip for the near term. If the USD is soon to begin to move down again in value and the rest of the inflationary forecast eventuates, then presumably we can't see this USD rise much above it's recent highs at 88, right? Rising up higher than it's recent peak here would describe a perfect example of one of those (technical mumbo jumbo) double-tops" being negated (specious mumbo jumbo technicianspeak which gets Metalman foaming at the mouth)? So if we see the USD rise up past 88-90 on the index in the next six months we've just witnessed the entire thesis described below be invalidated?

Gold is about to tank. The confirmatory signals referred to here as hinting at resurgent inflation are a dud. The USD IMO is gearing up to blast right up past the 88 on the chart posted, invalidating this entire thesis. If we see the USD break out up beyond that 88, all bets on a declining US B0nar are off the table for a while.

Let me see if I can restate the iTulip position:

• The dollar will soon begin again to move down in value, (see attached chart for reference).

[ATTACH]986[/ATTACH]

[ggirod]

Re: Anatomy of a credit crunch induced bankruptcy - Eric Janszen

The disdain for listing is widespread, from Bob Jones in the press to many highly competent businessman I know personally. Something is deeply wrong here.

I wonder if this is not simply reflecting the advantages of keeping a corporation in private hands:

1. Less information is revealed about the finances of a private corporation so competitive advantages are easier to maintain.

2. Should a private corporation accumulate the kind of operating funds that might see it through a downturn and [God Forbid!] a credit crunch the shareholders won't be vulnerable to a buyout that will seize the cash and dispose of the remaining husk suitably burdened with unconscionable debt.

3. Should the private shareholders be more intelligent than average they might actually plan for a period longer than the one quarter typical of public corporations. Probabilities of such long term strategies is pretty much zero in publicly traded corporations.

In that case, the Kiwis might just have something there.

[rchdenton]

Re: Anatomy of a credit crunch induced bankruptcy - Eric Janszen

I wonder if this is not simply reflecting the advantages of keeping a corporation in private hands:

1. Less information is revealed about the finances of a private corporation so competitive advantages are easier to maintain.

2. Should a private corporation accumulate the kind of operating funds that might see it through a downturn and [God Forbid!] a credit crunch the shareholders won't be vulnerable to a buyout that will seize the cash and dispose of the remaining husk suitably burdened with unconscionable debt.

3. Should the private shareholders be more intelligent than average they might actually plan for a period longer than the one quarter typical of public corporations. Probabilities of such long term strategies is pretty much zero in publicly traded corporations.

In that case, the Kiwis might just have something there.

Not to mention directors getting personally sued for negligence and /or imprisoned for technical infringements. The public wants a scapegoat when things go wrong and an experienced person knows they do sometimes get things wrong. In a privately owned situation there is potentially more focus on where next rather than whose fault, this is because the owners have more personal experience and involvement.

[santafe2]

Re: Anatomy of a credit crunch induced bankruptcy - Eric Janszen

The USD IMO is gearing up to blast right up past the 88 on the chart posted, invalidating this entire thesis. If we see the USD break out up beyond that 88, all bets on a declining US B0nar are off the table for a while.

I agree with your reading of the US$. If it moves up past resistance for more than a few days, especially if it holds above there for a period of time, and then moves up, the iTulip thesis is likely flawed. I don't have an opinion as to whether this is likely to happen but if it does, I'll be even less inclined to think we'll see inflation in the next 12 months.

[aps1087]

Re: Anatomy of a credit crunch induced bankruptcy - Eric Janszen

So what if the USD breaks 88-90. Does that automatically mean that gold declines? IMO, if the USD breaks 90, that means the Euro and the Pound are getting decimated, and Europeans will continue buying gold just like they have been recently.

There is no reason why both the USD and Gold cannot strengthen RELATIVE to other currencies.

[GRG55]

Re: Anatomy of a credit crunch induced bankruptcy - Eric Janszen

I like where you are going with this Chris, as to me part of the problem is the dis-functionality of stock markets on some level.

http://www.stuff.co.nz/4828007a13.html

Tougher access to credit will encourage more Kiwi companies to list, says stock exchange operator NZX, with the focus firmly on raising equity and not debt.

Most kiwi businessmen hate the stock market, as alluded to in the article (only 10% or so of those big enough to do so are actually listed).

The disdain for listing is widespread, from Bob Jones in the press to many highly competent businessman I know personally. Something is deeply wrong here.

One question and one observation:

• Does New Zealand corporate tax legislation favour debt over equity such that debt becomes a "cheaper" source of capital?
• I have been an officer or Board member of public companies listed in Canada, the USA and Australia. I have also been the co-founder and CEO of a private company that I helped build from scratch. I do not know how New Zealand compares with Australia [I suspect there are at least a few similarities] but I can say without hesitation that the Aussie regulatory environment is unneccesarily onerous, and the burden it places on companies does nothing practical to improve the protection of shareholders. Given a choice I would keep a company private before I ever listed anywhere, and most particularly in Australia.

[GRG55]

Re: Anatomy of a credit crunch induced bankruptcy - Eric Janszen

Thanks Fred, I remember reading this article. Let me see if I can restate the iTulip position.

• Debt deflation will be a swift process and will be old news before the end of Q2.
• The US$ has been the beneficiary of this world wide deleveraging process, moving up in value relative to other currencies.
• The dollar will soon begin again to move down in value, (see attached chart for reference).
• The Fed/Treasury infusion of trillions of dollars into the economy will be the main force driving down the relative value of the US$.
• Inflation similar to the 1970s will follow.

[ATTACH]985[/ATTACH]

If this is a fair representation of the position, I don't disagree with the outline but I do question the time line with regard to the re-appearance of inflation. Inflation will be counter to everything the US government is trying to accomplish in 2009 to restart the economy. Should it reappear quickly, the consequences will be devastating.

A few examples of how high inflation will work at cross currents with our recovery plan:

• Home sales in the worst hit areas of the country have picked up significantly now that prices are roughly 50% the 2006 high. YOY sales in Las Vegas are up over 150%. One of the main reasons sales have picked up is that mortgage interest rates are at historic lows. If these rates move up 2,3,4%, sales will come to a halt and housing will again resume its decline.
• Auto dealers can't give a new car away. If the commodities that go into making a car and the borrowing costs both move up before the end of this year, we'll have no auto industry in the US.
• Higher unemployment will continue to be a problem in the US throughout 2009. Inflation will only serve to exacerbate and elongate unemployment and our general economic problems. The grocer will be competing against back yard gardens and home grown chickens. Overall caloric intake will shrink. For example, a head of lettuce may move up in cost but people will no longer buy washed and bagged lettuce leaves.

It will be difficult for inflation to take hold while the participants in the US economy continue to spend less money. Printing trillions of dollars will make inflation possible in the short run and probable further out, but that currency has to be paired with a reasonable velocity and I don't see how that will happen this year.

When EJ first laid this out last year he was clear that it was impossible to predict the timing of the decline in US $, only that it was "when-not-if" and, at that time, iTulip's best guess was starting sometime in mid-2009 [iirc].

I'm not sure it much matters what the US $ index does, given it's mostly an indicator of the $/Euro cross. The declines of the Euro and Pound [and Swissie] suggest a growing loss of confidence in those currencies...a path the US$ has already travelled. So a rising US $ index would not suggest to me some newfound improvement in confidence in the bonar.

I have no difficulty imagining an outcome where the US $ does relatively well compared to currencies that are equally abused by their respective Central Bankers, but do not enjoy reserve currency status [in a world where there exists no obvious replacement]. I also don't have any difficulty imagining every one, including the US $, continuing to lose real purchasing power.