Re-inflation Rally Part I: Falsehoods, fantasies, fabrications, and fake-outs - Eric Janszen

[Adeptus]

Re: Re-inflation Rally Part I: Falsehoods, fantasies, fabrications, and fake-outs - Eric Janszen

"Global Keynesian stimulus as an alternative to debt cancellation is a triumph of ideology over evidence that will end in inflationary tears." -EJ

Love it! Best economic quote of the year to date!

Looking forward to reading part 2 tomorrow.

Adeptus

[tombat1913]

Re: Re-inflation Rally Part I: Falsehoods, fantasies, fabrications, and fake-outs - Eric Janszen

Fantastic! Poetic. Damn good commentary!

[cjppjc]

Re: Re-inflation Rally Part I: Falsehoods, fantasies, fabrications, and fake-outs - Eric Janszen

Great Article. Thanks.

[cjppjc]

Re: Re-inflation Rally Part I: Falsehoods, fantasies, fabrications, and fake-outs - Eric Janszen

In 2005 I saw a fox business show telling people to take out a second mortgage and put the money into stocks. I thought, "Oh, lord this is criminal." They were right at the time, though.

I remember that. I thought it was awfull. No shame. No thought of the consequences if it turned out wrong for the viewer.

[stockman]

Re: Re-inflation Rally Part I: Falsehoods, fantasies, fabrications, and fake-outs - Eric Janszen

FWIW- Rosenberg's comments-

Deflation realities …

don’t ignore them

rosenberg---deflation-and-treasuries April 2009.pdf

[jk]

Re: Re-inflation Rally Part I: Falsehoods, fantasies, fabrications, and fake-outs - Eric Janszen

global Keynesian stimulus as an alternative to debt cancellation is a triumph of ideology over evidence

stimulus means the politicos get to spend a lot of money. wheee!
debt cancellation means the politicos get to apportion pain.
which would YOU rather spend your time doing?

which brings us to

“Do we never learn?”

the answer depends on the time frame. for the short term: absolutely! for the medium term: sort of. for the long term: nah!

[Jim Nickerson]

Re: Re-inflation Rally Part I: Falsehoods, fantasies, fabrications, and fake-outs - Eric Janszen

FWIW- Rosenberg's comments-

Deflation realities …

don’t ignore themTTACH]1448H]

Thanks for putting up the Rosenberg pdf.

[nme]

Re: Re-inflation Rally Part I: Falsehoods, fantasies, fabrications, and fake-outs - Eric Janszen

A 2009 reflection on the economy by Herman Melville - I like it!

[Ann]

Re: Re-inflation Rally Part I: Falsehoods, fantasies, fabrications, and fake-outs - Eric Janszen

A 2009 reflection on the economy by Herman Melville - I like it!

Hah! Had the same thought. Melville as economist with a pinch of PJ O'Rourke.

[FRED]

Re: Re-inflation Rally Part I: Falsehoods, fantasies, fabrications, and fake-outs - Eric Janszen

Thanks for putting up the Rosenberg pdf.

EJ writes in:

Re-read the Fed's "Debt Deflation Playbook."

The deflationists laughed in 2006 when we told them the Fed will print money and buy mortgage securities "That's not legal under their charter," they said.

The deflationists laughed again in 2007 when we told them the Fed will print money and buy 10 Year Treasury bonds. "That's never been done since WWII," they said.

Both have happened.

"When deflation hits, oil will fall to $10 and gold to $200," the deflationists warned. They were wrong. Gold is holding above $800 and oil above $40. Why?

When will the deflationists stop being wrong and when will we stop to be right?

The question preoccupies us; it is the worry that keeps us vigilant.

The Fed will:

Print money and buy not only MBS but mortgages directly, and gold will rise.

Print money and buy corporate bonds directly, and gold will rise.

Print money and buy stocks directly, and gold will rise.

The Fed is only getting warmed up in its execution of desperate anti-deflation measures.

We have read everything the Fed has ever written about deflation starting in 2002. One thing we can say for certain is that the misguided concepts in their heads as they express them in their reports have been 100% confounded by unfolding events.

There are not a lot of elegant ways for a central bank to fight deflation, as debt deflation causes the collapse of the FIRE Economy to spill over into the Production economy, without producing a raft of unintended consequences that are much worse than deflation itself. The Fed has so far followed all of the promised "solutions" to deflation proposed in the "Deflation Playbook" that we brought to iTulip readers' attention back in 2003. What is the chance that they will abandon the desperate inflation path and not execute on the other measures outlined in 2003, plus many more that were not, such as TARP?

The Fed will print money to buy corporate bonds, stocks, mortgages, and so on, all as promised. From the 2003 Playbook:

On unintended consequences of buying the long end of the yield curve

"First of all: No one, we believe, has a good quantitative sense of the mechanics of this strategy–that is, what size operations are needed to secure a given stimulus? While the Fed has managed longer-term yields at various times in the 1940s, ‘50 and ‘60s, the last time such a strategy was implemented was nearly 40 years ago."

On wrecking the Fed's balance sheet

"Second, if the short riskless rate is zero, but other rates are positive, those rates must be positive for reasons–to compensate the holders of those assets for some form of illiquidity or risk. Under this strategy, the Fed takes those risks onto its balance sheet."

On two bad outcomes

"This leads us to a third point: the Fed is almost guaranteed to take a capital loss on its portfolio. If the strategy works, the economy picks up, interest rates go up, bond prices go down, and the value of the Fed’s holdings of longer-term Treasuries falls."

That means we are locked into a world where the economy cannot recover without also causing long rates to rise, killing the recovery of the FIRE Economy. That's the trap, not liquidity.

"Finally, narrowing the yield spread between assets of long and short maturity can stress institutions, such as banks, that profit from that spread. On the other hand, it must be noted, a wave of deflation-induced loan defaults would no doubt also be stressful for banks."

A true, self-sustained recovery, when it happens, will kill the zombie banks, too.

-Eric

[Chomsky]

Re: Re-inflation Rally Part I: Falsehoods, fantasies, fabrications, and fake-outs - Eric Janszen

EJ writes in:

Re-read the Fed's "Debt Deflation Playbook."

The deflationists laughed on 2006 when we told them the Fed will print money and buy mortgage securities "That's not legal under their charter," they said.

The deflationists laughed in 2007 when we told them the Fed will print money and buy 10 Year Treasury bonds. "That's never been done since WWII," they said.

When deflation hits, oil will fall to $10 and gold to $200, the deflationists warned.

Yet what has the Fed not yet done as promised since then? Why is oil still at $50 and gold above $600? When will the deflationists stop being wrong and when will we start to be wrong?

The Fed will:

Print money and buy not only MBS but mortgages, and gold will rise.

Print money and buy corporate bonds, and gold will rise.

Print money and buy stocks, and gold will rise.

The Fed is only getting warmed up.

We have read everything the Fed has ever written about deflation starting in 2002. One thing we can say for certain is that the misguided concepts in their heads as they express them in their reports have been 100% confounded by unfolding events.

There are not a lot of elegant ways for a central bank to fight deflation without producing a raft of unintended consequences that are even worse than deflation. The Fed has so far followed all of the promised "solutions" to deflation proposed in the "Deflation Playbook" that we brought to iTulip readers' attention back in 2003. Why not the others?

The Fed will print money to buy corporate bonds, stocks, mortgages, and so on, all as promised. From the 2003 Playbook.

On unintended consequences of buying the long end of the yield curve:

"First of all: No one, we believe, has a good quantitative sense of the mechanics of this strategy–that is, what size operations are needed to secure a given stimulus? While the Fed has managed longer-term yields at various times in the 1940s, ‘50 and ‘60s, the last time such a strategy was implemented was nearly 40 years ago."

On wrecking the Fed's balance sheet:

"Second, if the short riskless rate is zero, but other rates are positive, those rates must be positive for reasons–to compensate the holders of those assets for some form of illiquidity or risk. Under this strategy, the Fed takes those risks onto its balance sheet."

On two bad outcomes:

"This leads us to a third point: the Fed is almost guaranteed to take a capital loss on its portfolio. If the strategy works, the economy picks up, interest rates go up, bond prices go down, and the value of the Fed’s holdings of longer-term Treasuries falls."

That means we are locked into a world where the economy cannot recover without also causing long rates to rise, killing the recovery. That's the trap, not liquidity.

"Finally, narrowing the yield spread between assets of long and short maturity can stress institutions, such as banks, that profit from that spread. On the other hand, it must be noted, a wave of deflation-induced loan defaults would no doubt also be stressful for banks."

A true, self-sustained recovery, when it happens, will kill the zombie banks, too.

-Eric

Thanks so much for the succinct post: the post of the year, so far.

[jk]

Re: Re-inflation Rally Part I: Falsehoods, fantasies, fabrications, and fake-outs - Eric Janszen

The Fed will:

Print money and buy not only MBS but mortgages, and gold will rise.

Print money and buy corporate bonds, and gold will rise.

Print money and buy stocks, and gold will rise.

The Fed is only getting warmed up.

the treasury injects money into gm, likely to be converted to equity. the fed buys tbonds. so maybe the fed only buys equity indirectly. maybe it already has.

On unintended consequences of buying the long end of the yield curve:

"First of all: No one, we believe, has a good quantitative sense of the mechanics of this strategy–that is, what size operations are needed to secure a given stimulus? While the Fed has managed longer-term yields at various times in the 1940s, ‘50 and ‘60s, the last time such a strategy was implemented was nearly 40 years ago."

On wrecking the Fed's balance sheet:

"Second, if the short riskless rate is zero, but other rates are positive, those rates must be positive for reasons–to compensate the holders of those assets for some form of illiquidity or risk. Under this strategy, the Fed takes those risks onto its balance sheet."

On two bad outcomes:

"This leads us to a third point: the Fed is almost guaranteed to take a capital loss on its portfolio. If the strategy works, the economy picks up, interest rates go up, bond prices go down, and the value of the Fed’s holdings of longer-term Treasuries falls."

if anyone can afford to take a loss, it's an entity that can print money.

That means we are locked into a world where the economy cannot recover without also causing long rates to rise, killing the recovery. That's the trap, not liquidity.

every period of growth is accompanied by rising rates. the issue is one of speed and timing. gradually rising rates has never choked off anything.

"Finally, narrowing the yield spread between assets of long and short maturity can stress institutions, such as banks, that profit from that spread. On the other hand, it must be noted, a wave of deflation-induced loan defaults would no doubt also be stressful for banks."

A true, self-sustained recovery, when it happens, will kill the zombie banks, too.

it seems to me that the length of time until we get a true recovery is an important variable. the longer that interval, the more banks can coin money by borrowing at zero and buying positive yielding tbonds provided the yield curve has any slope at all. also the longer the time til recovery, the more time for inflation to work its magic on fixed rate liabilities. perhaps the dead can walk again, if only they molder long enough.

[Jim Nickerson]

Re: Re-inflation Rally Part I: Falsehoods, fantasies, fabrications, and fake-outs - Eric Janszen

FWIW- Rosenberg's comments-

Deflation realities …

don’t ignore them

[ATTACH]1448[/ATTACH]

Some more from Rosenberg, via Zero Hedge from 4/17/09 http://zerohedge.blogspot.com/2009/0...ervations.html

Too much spare capacity to be concerned about inflation There seems to be a lot of market chatter about how the dramatic fiscal and monetary stimulus is going to reignite inflation. Let’s look at the bigger picture. We have a real unemployment rate of nearly 16% and a capacity utilization rate that looks about to decline to 65%. We think there is simply too much spare capacity to absorb to be concerned about what the government is going to do except prevent an outright deflationary environment from taking hold. The inflation trade is totally an overplayed card, in our view. The reality is that it is not economists or market pundits on television who determine the pricing of goods and services that go into the CPI and the PPI. As the latest NFIB small business survey shows, the net share of companies intending to raise prices has plunged for eight months in a row to now stand at ZERO. Nada. For the first time ever, the net share of small businesses that are planning price increases over the next six months has totally vanished. NFIB intentions regarding wage increases have also collapsed to zero – again for the very first time. Based on this data, we would have to conclude that even with all the gobs of government intervention, deflation risks continue to trump inflation risks. That the equity market has enjoyed a very sharp and snappy short-covering rally over the past month has not dissuaded us from this viewpoint.

The piece on Zero Hedge is short and might be worth some readers' time.

[cjppjc]

Re: Re-inflation Rally Part I: Falsehoods, fantasies, fabrications, and fake-outs - Eric Janszen

These are great arguments. The only credence I give to the deflation camp is MY belief in the inflation arguement.

[xela]

Re: Re-inflation Rally Part I: Falsehoods, fantasies, fabrications, and fake-outs - Eric Janszen

Thanks so much for the succinct post: the post of the year, so far.

Ditto.

The Fed is only getting warmed up.

I remember them trowing a 10 trillion number out not so long ago for a target of their balance sheet.

So not less then that is my uninformed reading.