The Modern Depression

[BK]

Jeffolie,

How you can favor one out come or another frightens me. Extremes sometimes an unpredictable out come.
I hope you have just an once of empathy for your fellow Americans for what ever the future might bring. If you are right don't forget about all the foreign aid that Americans provide and donations we send abroad when ever there is a crisis in the World.

Good Night.

[coli]

Hi, is there any link/reference to the wealthy during the great depression? I'd like to find out more, I thought they all suffered...

[EJ]

For the literalists out there, the bull market in luxury cars died along with the stock market bubble in 1929. The only bull market in the 1930s was a bull market in cash. The market for luxury cars did not die along with the collapse of 1990s stock market bubble in 2000 but the buyers changed. Rather than dot com millionaires purchasing BMW M5s, high end cars are now purchased by private equity and real estate. But the very rarified high end of the luxury car market, the custom or semi-custom multi-million dollar super cars, is being driven by the top 1% who are now earning nearly 60% of all capital income. The point is that bubbles create wealth disparities, bubble reflations make them even worse. What comes next is bad for everyone. No one will celebrate it when it happens.

[Larry]

Thanks for the clarification--and unfortunately I'm in complete agreement. By postponing the inevitable the Fed and our administration have built a house of cards that I'm afraid will make the 30's look like an enjoyable time. Let's hope that our new "global economy" can significantly soften the blow.

[jeffolie]

I favor the probability of a deflationary outcome because the US has had 4 deflations already. Inflationary depressions favor those with fixed long term debt. Most recent mortgages have been ARMs. A deflationary outcome will bring down those rates and give some a chance to keep their houses if they have jobs. Those in the best situation in a deflation would be current renters who could buy houses dirt cheap with unbelieveably low rates at the bottom of the housing bust 5 or more years from now.

[Jim Nickerson]

I favor the probability of a deflationary outcome because the US has had 4 deflations already. Inflationary depressions favor those with fixed long term debt. Most recent mortgages have been ARMs. A deflationary outcome will bring down those rates and give some a chance to keep their houses if they have jobs. Those in the best situation in a deflation would be current renters who could buy houses dirt cheap with unbelieveably low rates at the bottom of the housing bust 5 or more years from now.

One might ask: Who has the most fixed long-term debt? The US government or everyone in hock for home purchases.

Because the government creates the money supply, I would bet the government is more interested in itself than it is in individuals and thus will continue to inflate. Who is going to continue to loan the US money if it cannot print enough to pay back all that is presently owed?

Jim

[EJ]

We're not pedantic and until we see a compelling counter argument are sticking to our guns:

"Of course, the U.S.A. is not going to go bankrupt. The point of this piece is to make the inevitable alternative obvious. The U.S. will repay its debts, backed with the full credit of the government. Debts will be paid in full... with itty, bitty little dollars."

http://www.itulip.com/bankrupt.htm

[jeffolie]

Who has the most debt - those holding over $400 TRILLION in derivatives. Most of our MBSs, CDOs and derivatives are held by overseas buyers. 5 large US banks hold 98% of the derivatives held in the US. The single bank with the most is J P Morgan.

[jk]

If we define inflation as [too] rapid expansion of the money supply, the fed will do its best to inflate in a crisis. Bernanke's famous helicopter speech made clear that the fed will purchase not just tbills but tbonds, equities, real estate, you name it, IF NECESSARY, to put cash into circulation.

I am trying to understand, however, whether enough defaults and bankruptcies could produce deflation by dramatically slowing monetary velocity, seizing up the circulation of money on which the economy depends. The fed can buy various assets, if directly from the federal government then the government can spend it myriad ways, if from private institutions then those institutions get the cash. But the fed can't directly control velocity.

The posts here have an implicit assumption that "inflation" or "deflation", apparently defined by changes in the general level of prices, will characterize our future. But if we look at price levels, WE HAVE BOTH inflation and deflation: certain sectors, notably commodities, have soaring prices, other sectors, notably manufactured consumer goods, have plunging prices.

Picture a surface having fountains and drains: in some areas there is a plethora of water, in others there is very little. Why are we assuming that a world economy as complicated as we have will have anything as simple as "inflation" or "deflation"?

[jeffolie]

Derivatives are deflationary. Derivatives have special exempt status to avoid the 'automatic stay' in bankruptcy. Derivatives come ahead of bond owners who must wait for the bankruptcy court to act. Derivative owners can seize the collateral immediately and sell it thus driving down the prices and depriving the bondholders of any return of their investment.

Derivatives destroying bonds means a contraction in credit on a world wide scale. There are over $500 Trillion in derivatives. That makes our national debt look small.

Derivatives collapsing because of the housing bubble bust or GM or major bank may overwhelm the Fed's ability to create credit. Most of the derivatives are held overseas.

Derivatives will lead to a deflationary depression.

[jk]

i don't think we're going to sort out the inflation/deflation debate. the conclusion i draw, though, is that we all agree that the system is unstable, with some significant probability of extreme outcomes.

on the other hand, here it is rocking along, rickety and groaning perhaps, but going. john mauldin seems to be a pretty smart and knowledgeable guy, and perhaps his "muddle through" scenario -- a couple of significant but not earth shattering recessions in the next ten years -- will come true. but that's the most optimistic scenario i can credit.

getting back to the question that started this thread: "how will the government level the playing field?" -- i'm not sure anyone will try. certainly the trend has been in the other direction, with increasing disparities of income and even more extreme disparities of wealth. globalization, with its international labor arbitrage, pulled the rug out from under blue collar labor and now is threatening ever higher in the value chain. the developing world is getting richer en masse but also shows extreme wealth disparities. living standards in the u.s. are closer and closer to the global standards - partly by the latter rising, partly by u.s. standards not progressing. at the same time, the u.s. is looking more and more like a developing country in terms of its distribution of wealth.

the europeans have chosen a flatter society, and are paying for it in slow growth and high unemployement. perhaps, on the other hand, it is a more pleasant way to live. [though class and ethnic tensions are more and more prominant in europe, so there may be no escape from an increasingly disparate society.]

[Jim Nickerson]

Today Marc Faber's comments may shed some light on this issue inflation vs. deflation.

[url] http://www.safehaven.com/article-5149.htm [url]

Jim