Door Number Two

[merry]

Re: Door Number Two

Mish responds to this thread over here:

globaleconomicanalysis.blogspot.com/2008/02/bubble-economy-endgame.html

I tried to post a link but it would not work, for some reason.

I really must be looking for trouble today. ;)

[FRED]

Re: Door Number Two

Mish responds to this thread over here:

globaleconomicanalysis.blogspot.com/2008/02/bubble-economy-endgame.html

I tried to post a link but it would not work, for some reason.

I really must be looking for trouble today. ;)

We welcome it! EJ's writing up an entertaining (IMHO) response to both Mish and Kunstler.

[Guest]

Re: Door Number Two

Luk do U have a life?

Hey Rick you got me real worried there for a moment pal. When I got home from work today I spent fifteen minutes locked up in the bathroom trying to get a mirror properly fogged up. It worked! I've got a life! Oh boy, I just can't describe the feeling I had when I realised I had one just like everybody else.

Thanks for the heads up! It's always prudent to keep checking every once in a while to make sure one hasn't lost it!

Your pal, etc. ...

[c1ue]

Re: Door Number Two

Lukester,

Rather than hunt around the web for commentaries you support, why don't you come out and just say what you think will happen.

Prediction, time frame, extent, parties involved, etc.

Then we can all review in the future and either congratulate or point fingers.

This hiding behind what other people say is counterproductive.

[zoog]

Re: Door Number Two

We welcome it! EJ's writing up an entertaining (IMHO) response to both Mish and Kunstler.

Something of a response from Minyanville in today's Five Things (Thing # 4). Funny t-shirts, at any rate.

4. Rise of the Deflationistas

Here's the first part of it:

Having recently been labeled a "Deflationista," we want to reiterate something we believe is very important to understand in this economic cycle: inflation does not cause more inflation. This is a consumer-led recession. Consequently, all that "commodities demand" that Inflationistas point to as evidence of still more inflation ahead of us will recede with stunning swiftness once the slowdown in the velocity of money in our economy becomes truly apparent.

More fuel for the fire I guess, as if FRED isn't backing up a gasoline truck already.:p

[FRED]

Re: Door Number Two

Something of a response from Minyanville in today's Five Things (Thing # 4). Funny t-shirts, at any rate.

4. Rise of the Deflationistas

Here's the first part of it:

More fuel for the fire I guess, as if FRED isn't backing up a gasoline truck already.:p

The one picture that scares the shit out of las Deflationistas!

[akrowne]

Re: Door Number Two

It just occurred to me that there may be a much more concise way to explain all the inflation vs. deflation paradoxes:

What we're experiencing now is actually a panic, not inflation or deflation per se.

Like the bank panics in the 19th century US predating the Fed, whether these were against a backdrop of gradual inflation or deflation was irrelevant. No one thought of the panic in those terms, and they were probably right not to. The point was that some banks and/or assets were experiencing capital flight, and this capital sought safe havens.

[Note: the change in ideology from the above to the current monetarist notion of "inflate out of crises" is clearly more wrong than the panic-as-event philosophy. Why? It is precisely events of mania, malinvestment and impropriety that lead to panics, NOT some imagined "unavailability of money". Scarce money may be one resulting symptom, but it is clearly not the cause of the whole disaster.]

In the current panic, which is a capital flight from the non-prime US fixed income markets (as well as structured finance, and Wall Street finance more broadly), there has been a complex set of outcomes including rising yields in some places, falling in others, the Fed "loosening" while actually not loosening the monetary base (but definitely harming the dollar on the exchange), and of course gold rising.

All these things are interconnected, and when one views the incident as a panic set against globalized finance, the different sorts of "inflation" here and "deflation" there make perfect sense.

History is a poor comprehensive guide here because this is the first time we've had this particular setup -- with such a distinct panic emanating from a global reserve currency country, in a world of floating exchange rates (except for some important exchange rates), but with the world dominated by clones of its central banks, along with some but not total coupling of interest rate and monetary growth policy.

Look at what the panic event and the fundamentals dictate. Flight into "safe" AAA assets such as Treasuries and to some extent prime mortgage notes is to be expected, but mostly in the short term, because vast forces are pressuring the dollar down in the long term. Included in these is the breakdown of the dollar reserve currency system (relevant, which was missed by EJ, is that the Eurozone is now the largest economy in the world. When have we had a fiat reserve currency break down while at the same time another one was already available? I'm not aware of another instance). Simultaneous flight into gold is also to be expected.

But longer-term, flight out of the dollar, as dollar-denominated financing promises to lose half its bids or more. More bidding up of gold and hard/consumable assets. More inflation for the US, coming both from more expensive imports and runaway domestic spending.

There will eventually be no one for the government to borrow from (at the rate necessary) so the Fed will have to accelerate growth of the monetary base. Thus interest rates may rise (to attract lending) but not fast enough to keep up from inflation, thus effecting monetary base growth.

Watch for revenue pressure to manifest within the government. Right now, how we are to pay for things like the Iraq war and imagined "national health programs" and the like is not even mentioned. This is a collective national psychosis. This is because we've been able to borrow effortlessly for decades. Apparently people will never figure it out in advance, so you know the situation will have changed when there are budget shortfalls, cuts of essential progams, furloughs, and big tax increases.

We've already had a "deflation", if that's what you want to call the collapse of the non-AAA fixed income market (and structured finance). The stock market is now following it down as a lagging effect; then the dollar will be next. But the dollar's fall will be inflationary for it, and deflationary for other forms of money (including gold), as demand for them rises.

It all makes perfect sense; the problem is what your perspective happens to be when you use the terminology.

In sum as we transition from panic to recovery into a new global finance and trade architecture, the picture will change considerably in terms of where inflation and deflation "pop up".

By the way EJ mentions that there may be a "next bubble" in alternative energy. That may be true, but there's no reason for it to be centered in the US. I wonder if he thinks it will renew the dollar recycling imbalances, or at least allow them to continue, or take longer to correct?

[jk]

Re: Door Number Two

great, clarifying, post, aaron. [it's good to see you posting here again.]

your use of the descriptor "panic" seems just right, and captures what's happening better than the ambiguous inflation/deflation nomenclature. [e.g. argentina had an inflationary depression in its domestic currency which was also a deflationary depression in dollars or gold.]

"panic" concisely explains why tbonds and gold can rise simultaneously.

"panic" also points to the question of how long the panic can go on, and which asset classes are progressively deemed riskier than previously believed and thus sold off.

and "panic," by virtue of its connotation as a delimited episode, raises the issue of how it resolves and whether, at that juncture, one of the 2 islands of ultimate safety-- but very different sorts of safety, i.e. tbonds and gold -- sinks.

[metalman]

Re: Door Number Two

good to have you here. but... this is a most clever pile of economics-ish gobbledegook! allow me to have at it!

It just occurred to me that there may be a much more concise way to explain all the inflation vs. deflation paradoxes:

What we're experiencing now is actually a panic, not inflation or deflation per se.

panic may explain the market action in some stock and bond markets some days but that ain't related to inflation and deflation insofar as the standard definitions go.

"how do you know she is a witch?"

"she looks like one!"

"i'm not a witch!"

"but you are dressed like one."

"they dressed me up like this."

"and this isn't my nose it's a false one."

"well?"

"we did do the nose. and the hat. but she's a witch!"

"there are ways of telling whether she is a witch."



without firm definitions, all arguments are a waste of time. it's back to the dark ages we go. to me this post is not a whole lot better logically than the monte python skit.

Like the bank panics in the 19th century US predating the Fed, whether these were against a backdrop of gradual inflation or deflation was irrelevant. No one thought of the panic in those terms, and they were probably right not to. The point was that some banks and/or assets were experiencing capital flight, and this capital sought safe havens.

not irrelevant! as itulip has explained over and over and over for years the fed intends to keep real rates above the zero bound. if it fails the way the bank of japan did then do we get deflation? maybe. seems to me that the fed wrecking the dollar as #1 policy to keep real rates above the zero bound.

[Note: the change in ideology from the above to the current monetarist notion of "inflate out of crises" is clearly more wrong than the panic-as-event philosophy. Why? It is precisely events of mania, malinvestment and impropriety that lead to panics, NOT some imagined "unavailability of money". Scarce money may be one resulting symptom, but it is clearly not the cause of the whole disaster.]

panic-as-event philosophy? what the heck is that? look, it's not that complicated. the credit markets invent new money outside the banking and regulatory framework (eg securitized morgages). the new uncontrolled market created money is used in substitution for controlled government money. the new money inflates asset prices in terms of the new money AND government money. the assets implode in terms of the new money AND government money but the new money implodes more (think dot com stocks that were $300/share to $1/share or CDO $1B to $100M). as they do they do, demand for government money goes through the roof. what to do? PRINT MORE MONEY TO MEET DEMAND. but as martin mayer taught us "the money doesn't go where you want it to." other assets inflate. happened in 2002 - 2006 in housing. it will happen again.

In the current panic, which is a capital flight from the non-prime US fixed income markets (as well as structured finance, and Wall Street finance more broadly), there has been a complex set of outcomes including rising yields in some places, falling in others, the Fed "loosening" while actually not loosening the monetary base (but definitely harming the dollar on the exchange), and of course gold rising.

out of deflating new market money into government money.

All these things are interconnected, and when one views the incident as a panic set against globalized finance, the different sorts of "inflation" here and "deflation" there make perfect sense.

no, no, no! not "inflation" here and "deflation" there. gobbledegook.

deflate is a verb. it means to decrease in value. deflation is the result of the process of deflating. it results in a nominal decrease. inflation is the opposite. gold inflates against the dollar as the dollar deflates against the euro, yen and gold. cdos are deflating. home prices are deflating. not all items priced in dollars are inflating... no! items that were bid up with new, non-government money are deflating in terms of government money. liquid money (cash) not tied up in assets is free to seek lower risk assets to hold value, to not deflate. it seeks us tbonds even though these deflate against gold and euros and yen, because these assets have their own risks. cash seeks gold also as the market weighs the risks of gold in the future deflating against tbonds and says "ok, some money in gold, too." think of layers of different kinds of risk... inflation, default, etc. and cash seeks out layers and options within each. the composition of the layers change with the pricing of risk in financial markets.

History is a poor comprehensive guide here because this is the first time we've had this particular setup -- with such a distinct panic emanating from a global reserve currency country, in a world of floating exchange rates (except for some important exchange rates), but with the world dominated by clones of its central banks, along with some but not total coupling of interest rate and monetary growth policy.

it's just like argentina except substitute gold for dollars and make it less extreme. gold is the substitute reserve currency vs the dollar as the dollar was to the real in the 1990s. get it? and real (local currency) inflation as the graph shows is NOT only in dollar terms but in real terms, too.

Look at what the panic event and the fundamentals dictate. Flight into "safe" AAA assets such as Treasuries and to some extent prime mortgage notes is to be expected, but mostly in the short term, because vast forces are pressuring the dollar down in the long term. Included in these is the breakdown of the dollar reserve currency system (relevant, which was missed by EJ, is that the Eurozone is now the largest economy in the world. When have we had a fiat reserve currency break down while at the same time another one was already available? I'm not aware of another instance). Simultaneous flight into gold is also to be expected.

where do you get that? itulip has interviewed gave and galbraith and can teach you all about the euro and how the breakdown of the monetary system.

But longer-term, flight out of the dollar, as dollar-denominated financing promises to lose half its bids or more. More bidding up of gold and hard/consumable assets. More inflation for the US, coming both from more expensive imports and runaway domestic spending.

"More bidding up of gold and hard/consumable assets." that's called "inflation" among those who speak clear english.

There will eventually be no one for the government to borrow from (at the rate necessary) so the Fed will have to accelerate growth of the monetary base. Thus interest rates may rise (to attract lending) but not fast enough to keep up from inflation, thus effecting monetary base growth.

Watch for revenue pressure to manifest within the government. Right now, how we are to pay for things like the Iraq war and imagined "national health programs" and the like is not even mentioned. This is a collective national psychosis. This is because we've been able to borrow effortlessly for decades. Apparently people will never figure it out in advance, so you know the situation will have changed when there are budget shortfalls, cuts of essential progams, furloughs, and big tax increases.

pols appropriate and banks print. i'm starting to think argentina is EXACTLY the right analogy. i used to think... no! too extreme. now i'm thinking that is exactly how it's going to go, these pols are so ******* stupid.

We've already had a "deflation", if that's what you want to call the collapse of the non-AAA fixed income market (and structured finance). The stock market is now following it down as a lagging effect; then the dollar will be next. But the dollar's fall will be inflationary for it, and deflationary for other forms of money (including gold), as demand for them rises.

gobbledegook! ASSET PRICE DEFLATION not all-goods price deflation. she's a witch! she's a witch!

It all makes perfect sense; the problem is what your perspective happens to be when you use the terminology.

she's a witch! she's a witch!

[jk]

Re: Door Number Two

metalman,

it is nominal -not real - interest rates which are constrained by the zero bound. [real rates are quite negative at this time if you believe john williams' numbers to be more accurate than the bls's. and when the funds rate was 1%, real rates were negative even with official numbers. remember- we were all afraid that deflation was coming, but it never actually arrived.]

i think the concept of panic is clarifying, while the terms "inflation" and "deflation" are turning into strings of nonsense syllables. and nonsense they are unless it is made explicit every time what unit of accounting is being used.

[metalman]

Re: Door Number Two

metalman,

it is nominal -not real - interest rates which are constrained by the zero bound. [real rates are quite negative at this time if you believe john williams' numbers to be more accurate than the bls's. and when the funds rate was 1%, real rates were negative even with official numbers. remember- we were all afraid that deflation was coming, but it never actually arrived.]

i think the concept of panic is clarifying, while the terms "inflation" and "deflation" are turning into strings of nonsense syllables. and nonsense they are unless it is made explicit every time what unit of accounting is being used.

you are right! nominal not real.

the terms "inflation" and "deflation" are turning into strings of nonsense syllables.

are quite clear but are getting turned into strings of nonsense syllables by hacks trying to obfuscate their shitty calls that come out of their hack economics and psuedo-understanding of finance.

these guys aaron and mish... i mean, what if you brought your grandmother over and she needed an operation? they'd say: no! don't take her to the hospital to see a trained doctor. they're all corrupt! put 'er up on the kitchen table... we'll cut out her whatchamacallit with a doo dingy. i've seen this on the internet. i think your supposed to sterilize the doo dingy.. get the bleach! hold her down! let's do this thing!

nuff said.

[GRG55]

Re: Door Number Two

great, clarifying, post, aaron. [it's good to see you posting here again.]

your use of the descriptor "panic" seems just right, and captures what's happening better than the ambiguous inflation/deflation nomenclature. [e.g. argentina had an inflationary depression in its domestic currency which was also a deflationary depression in dollars or gold.]

"panic" concisely explains why tbonds and gold can rise simultaneously.

"panic" also points to the question of how long the panic can go on, and which asset classes are progressively deemed riskier than previously believed and thus sold off.

and "panic," by virtue of its connotation as a delimited episode, raises the issue of how it resolves and whether, at that juncture, one of the 2 islands of ultimate safety-- but very different sorts of safety, i.e. tbonds and gold -- sinks.

It may be "panic" at the moment, but don't panic episodes tend to be short-lived and concentrated events (unlike inflation and deflation trends), and don't panics almost always abate (not resolve) because of exhaustion of the participants?

[jk]

Re: Door Number Two

It may be "panic" at the moment, but don't panic episodes tend to be short-lived and concentrated events (unlike inflation and deflation trends), and don't panics almost always abate (not resolve) because of exhaustion of the participants?

it's certainly my impression, along with yours, that panics are short-lived.

here's a clip from wikipedia on the panic of 1907

"In March 1907, over-expansion and poor speculation led to a stock market crash. Money became extremely tight. A second crash occurred in October 1907.... On October 21, the National Bank of Commerce ceased to honor checks of Knickerbocker Trust, causing a run on the Knickerbocker Trust. By the end of October 22, the National Bank of North America had failed and runs were sparked on nearly every trust in New York.

To bring relief to the situation, United States Secretary of the Treasury George B. Cortelyou earmarked $35 million of Federal money to quell the storm. Complete ruin of the national economy was averted when J.P. Morgan stepped in to meet the crisis. Morgan organized a team of bank and trust executives. The team redirected money between banks, secured further international lines of credit, and bought plummeting stocks of healthy corporations. Within a few weeks the panic passed, with only minimal effects on the country."

so that was at least 7 months, which i imagine felt like quite a while to be in a state of panic: "a sudden fear which dominates or replaces thinking..."

as i tell patients about depression: it's the opposite of time flies when you're having a good time. it's a substantial period of time, and it feels even longer.

the other question is whether the authorities' attempts to prevent the problems from surfacing will prolong the agony. i suspect so. where's our generation's j.p. morgan? i'm skeptical that the pboc or china's new swf can fill the role.

[FRED]

Re: Door Number Two

it's certainly my impression, along with yours, that panics are short-lived.

here's a clip from wikipedia on the panic of 1907

"In March 1907, over-expansion and poor speculation led to a stock market crash. Money became extremely tight. A second crash occurred in October 1907.... On October 21, the National Bank of Commerce ceased to honor checks of Knickerbocker Trust, causing a run on the Knickerbocker Trust. By the end of October 22, the National Bank of North America had failed and runs were sparked on nearly every trust in New York.

To bring relief to the situation, United States Secretary of the Treasury George B. Cortelyou earmarked $35 million of Federal money to quell the storm. Complete ruin of the national economy was averted when J.P. Morgan stepped in to meet the crisis. Morgan organized a team of bank and trust executives. The team redirected money between banks, secured further international lines of credit, and bought plummeting stocks of healthy corporations. Within a few weeks the panic passed, with only minimal effects on the country."

so that was at least 7 months, which i imagine felt like quite a while to be in a state of panic: "a sudden fear which dominates or replaces thinking..."

as i tell patients about depression: it's the opposite of time flies when you're having a good time. it's a substantial period of time, and it feels even longer.

the other question is whether the authorities' attempts to prevent the problems from surfacing will prolong the agony. i suspect so. where's our generation's j.p. morgan? i'm skeptical that the pboc or china's new swf can fill the role.

A Crash is a Process not an Event

[akrowne]

Re: Door Number Two

It may be "panic" at the moment, but don't panic episodes tend to be short-lived and concentrated events (unlike inflation and deflation trends), and don't panics almost always abate (not resolve) because of exhaustion of the participants?

Yes! You got the other point I was trying to make: panic is right now. The "strange" current conditions are due to "the panic" (which in greater detail is actually a series of progressive market panics I outlined). But the corollary is that the panic will, in a relatively short period of time, transition to "recovery" -- which means a new architecture for financial markets all 'round the world, and some ongoing processes as part of unwinding the imbalances.

I think that the above improves the analytical compass.

There is still uncertainty in all this, of course, but I think it is pretty clear that :

1) the dollar will continue to fall due to its chronic deficits and being "punished" for losing reserve currency status (its prior position was privileged).
2) other western fiat currencies will weaken but not as badly. (except canada which faces an uphill battle against its own commodities wealth)
3) gold will be strong
4) consumed commodities will be strong, likely after a relatively short period of weakness (largely representing however long it takes surplus-rich exporting countries to get their new financial footing)

The above has got me thinking, think there might be more merit to Eric's "alt. energy bubble" argument than at first blush. Here's how (and I'll extend the scope of the bubble to basically any and all productive infrastructure -- manufacturing or utilities, both of which are in severe need of work).

While the US is wandering in the wilderness it is now entering, it is going to be a short matter of time until it is realized resources must be directed towards rebuilding infrastructure, and solving the energy issue. My previous thoughts had been along the lines that money printing or its equivalents would be utilized to get this done (in the form of government programs and direct give-aways). However, it occurs to me it may be possible for the government to effective "sterilize" the money creation by using the usual bag of tricks to encourage the desired sorts of investment (to boil it down, using good 'ol M3 instead of M1.)

This would be hazardous of course, and just push a great deal of reckoning further down the road, but I can see the logic behind it. It would be more productive than a housing bubble, which was not only a pure ponzi scheme, but actively averted building the sorely-needed kind of infrastructure in this country.

Anyway, if we go this route, expect to see aggressive privatization of infrastructure and tax/investment credits for building plants and developing advanced manufacturing technology, and of course clean energy technology.

The usual sheysters would of course arrive after not too long and cause a great deal of the activity to end in tears, but maybe we'd get as much or more progress out of it than we did out of the dot-com bubble.