screwflation

[sishya]

Re: screwflation

Banks provide 2 types of loans
1) Pass through loans : Bond Holders lend to Home owners via Banks.(MBS/CMBS etc)
(2) Banks lend their own credit using fractional reserve lending.

In the case of former (1) default, the counter party to the collateral will suffer. No deflationary spiral, the Paper MBS/China will suffer and then will not lend anymore. US Govt steps
in after nationalizing banks.

In the case of latter (2), Bank reserve ratio goes down and their balance sheet is impaired and they cannot lend anymore unless they raise capital (by selling to FED ?), which cause deflationary spiral since no more new credit money.

Solution to prevent it : Nationalize the banks, default on the MBS/Foreigners, issue a new currency, then lower taxes for Middle/lower class, eliminate SS and it's Tax(to create family cohesion) ? Tricky but doable. Maybe I am sounding like a idiot. But I think that is a way.

[Milton Kuo]

Re: screwflation

Can you give us your plan that will not result in a deflationary spiral?

Quantitative easing's principal goal is to save the bacon of the various financial institutions who got involved in the creation, buying, and selling of fraudulent paper during the housing bubble. The buying of MBS and Treasuries is designed to drive mortgage rates lower and thus, Bernanke hopes, house prices higher. The various actions the Federal Reserve took after the collapse of Lehman Brothers stopped a deflationary spiral.

If Bernanke were competent and serious about helping the U.S. economy recover, he should force an immediate accounting of all assets at the TBTF banks; Bernanke should also put back to the original sellers, at par value, all the junk paper that currently litters the Federal Reserve's balance sheet. All assets must be marked to market and any institutions that are insolvent are immediately put into receivership. This means it's entirely possible that institutions such as Bank of America, Citigroup, and Wells Fargo go under. Shareholders get wiped out and bondholders take haircuts as they should have in 2008 and 2009.

Secondly, the real estate shadow inventory should be put on the market at whatever price gets the real estate sold. A correction in real estate prices will occur but it will stabilize the prices without relying on ultra-low mortgage rates. After real estate prices fall and reach a steady-state, homeowners who are underwater can be granted principal reduction or strategic default.

By lowering the cost of housing and freeing people from onerous mortgage debt, more cash is freed up for consumption, which will actually give a boost to the production economy. To the best of my knowledge, taking the insolvent banks into receivership and allowing debt-that-cannot-be-paid to not be paid will not result in a deflationary spiral; I seriously doubt oil and food are going to fall in price after such an event.

Using quantitative easing to improve employment is a lie. Quantitative easing as it currently stands only potentially improves the employment scenario through a side-effect of making it less expensive to hire Americans through a cheaper dollar. This alone is not going to create jobs in the U.S. as the usual mercantilist suspects will do everything in their power to counter this. The Federal Reserve has already done its job of creating liquidity through monetary policy; the employment issue is something that really only Congress and the President can resolve through fiscal policy.

[Kadriana]

Re: screwflation

What will they be able to afford if 30% of them lose their jobs - the depression alternative at trillions of OTC derivatives come tumbling down?

The 'right thing to do' is now too little and far too late.

The trick with this inflation push will be to bring on wage inflation. At one point, EJ said he is no longer worried about the Fed's ability to do that. I'm not so sure. That will be pulling a rabbit out of a hat in a stagflationary environment.

On affordability - surely it's horrible. Then again, how many people do you know that act like our parents did all their lives and lived below their means so they could save. Maybe 10% of my educated generation (gen X) thinks that way today. Perhaps some personal responsibility is in order, also. Many people have never had to cut expenses to save, but became reliant on credit. Yes, this is devastating for the middle class - it will be cool to be thrifty and that is when everyone will change quickly.

I live in a small farming community and a lot of people don't have much they can cut back on. These aren't women going out shopping every weekend and buying coach purses. A lot of people I know don't even have cable tv. One friend even raised her own pigs this last year to save money. I'm trading eggs and chicken meat for some of her pork. I kind of live between two world's where my husband and I are doing well financially but are surrounded by people who are really struggling.

[karim0028]

Re: screwflation

Quantitative easing's principal goal is to save the bacon of the various financial institutions who got involved in the creation, buying, and selling of fraudulent paper during the housing bubble. The buying of MBS and Treasuries is designed to drive mortgage rates lower and thus, Bernanke hopes, house prices higher. The various actions the Federal Reserve took after the collapse of Lehman Brothers stopped a deflationary spiral.

If Bernanke were competent and serious about helping the U.S. economy recover, he should force an immediate accounting of all assets at the TBTF banks; Bernanke should also put back to the original sellers, at par value, all the junk paper that currently litters the Federal Reserve's balance sheet. All assets must be marked to market and any institutions that are insolvent are immediately put into receivership. This means it's entirely possible that institutions such as Bank of America, Citigroup, and Wells Fargo go under. Shareholders get wiped out and bondholders take haircuts as they should have in 2008 and 2009.

Secondly, the real estate shadow inventory should be put on the market at whatever price gets the real estate sold. A correction in real estate prices will occur but it will stabilize the prices without relying on ultra-low mortgage rates. After real estate prices fall and reach a steady-state, homeowners who are underwater can be granted principal reduction or strategic default.

By lowering the cost of housing and freeing people from onerous mortgage debt, more cash is freed up for consumption, which will actually give a boost to the production economy. To the best of my knowledge, taking the insolvent banks into receivership and allowing debt-that-cannot-be-paid to not be paid will not result in a deflationary spiral; I seriously doubt oil and food are going to fall in price after such an event.

Using quantitative easing to improve employment is a lie. Quantitative easing as it currently stands only potentially improves the employment scenario through a side-effect of making it less expensive to hire Americans through a cheaper dollar. This alone is not going to create jobs in the U.S. as the usual mercantilist suspects will do everything in their power to counter this. The Federal Reserve has already done its job of creating liquidity through monetary policy; the employment issue is something that really only Congress and the President can resolve through fiscal policy.

Sounds good to me! Folks seem to treat deflation as if its a bad thing... The best thing is to not blow bubbles... Aside from that, if you blow them they will collapse.

[LorenS]

Re: screwflation

Folks in farming communities would understand the concept of eating your seed corn.

People in urban environments basically think of everything as related to money.

You can't regain lost capital by printing money. We had a huge opportunity to build useful stuff over the last 30 years. We could have built nuclear plants, we could have built net zero energy houses, we could have built more efficient cars.

WE didn't. We built energy hog houses, big cars and HDTVs. Printing more money doesn't change that. The folks that think that QE1 and QE2 will "save" us are nuts.

What we need to do is admit our mistakes. Until we get that far we're hopeless.

[karim0028]

Re: screwflation

Folks in farming communities would understand the concept of eating your seed corn.

People in urban environments basically think of everything as related to money.

You can't regain lost capital by printing money. We had a huge opportunity to build useful stuff over the last 30 years. We could have built nuclear plants, we could have built net zero energy houses, we could have built more efficient cars.

WE didn't. We built energy hog houses, big cars and HDTVs. Printing more money doesn't change that. The folks that think that QE1 and QE2 will "save" us are nuts.

What we need to do is admit our mistakes. Until we get that far we're hopeless.

Loren, while i agree with your premise, you have one technicality in the statement above... We didn't build shit We borrowed money and bought shit that China made.... Other than that, pretty spot on ;)

[flintlock]

Re: screwflation

Loren, while i agree with your premise, you have one technicality in the statement above... We didn't build shit We borrowed money and bought shit that China made.... Other than that, pretty spot on ;)

Beat me to it! We consumed a lot of shit, that's what we did!

[don]

Re: screwflation

Hudson would be proud. And, yes, the deeper systemic issue, outsourcing, has to be addressed to 'solve' the problems at hand. I am not, sadly, optimistic.

[flintlock]

Re: screwflation

I've been talking about this for many years but everyone knows I'm crazy.

Outsourcing, globalism, call it what you will. It doesn't work. At least not in it's current form. And it is THE problem.

[thunderdownunder]

Re: screwflation

I've been talking about this for many years but everyone knows I'm crazy.

Outsourcing, globalism, call it what you will. It doesn't work. At least not in it's current form. And it is THE problem.

Yes a race to the bottom and I agree fully. It's what destroyed Ireland. This move to QEII is making my skin Crawl - Was it really necessary. The US Economy by all measures is still operating at a higher level than 2008 (Exc Unemployment which is stagnant) I see no urgency to debase the Reserve currency causing all assets brought and sold in it to inflate. This is exporting inflation to the World. How would you as an external country like to be holding a promissory note (Bond) that is earning in $USD, Not only are you getting Near zero for it but you are going to effectively lose money when it is cashed back. I hold US currency equivalents and over 6months I have lost a small fortune on QEI and expect, if I don't act, will lose 20% more in the next year even as my home currency inflates.(I pity China)
MY Fear is that there is something we are not being told. Monetary Levers of Mass Destruction are pulled in advance of converging calamitous events. OR to put it in laymans terms, you change gear and hit the gas prior the Steep grade to avoid deceleration/ stalling. What does Bernanke know that would be so destructive that he is willing to gamble the Reserve currency a second time (knowing that the first effort was a lost bet). My skin Crawls as I see a thousand bubbles growing to NO useful purpose except a "wealth effect" and now we get to pump it bigger. God help us all to find a shelter before it hits because your Fed just hit the N20 button - and it won't be a laughing matter. Call me Crazy - I don't listen to what they say only what they do.

[ThePythonicCow]

Re: screwflation

MY Fear is that there is something we are not being told.

Rest assured, downunder, rest assured. There is much we are not being told.

[GRG55]

Re: screwflation

Nobody KNOWS how this is going to turn out, not even Uncle Ben and his global Central Bank colleagues. The USA isn't Zimbabwe, or Japan. Although there may be much to learn from those episodes, and similar others["Bernanke is an expert on Japan, on the Great Depression, on deflation, blah, blah"], the strict adherents to those analogues will probably find that things won't transpire in such quite perfect patterns for them. Not least because this is not a country specific event this time.

The USA financial sector, the Greenspan/Bernanke Fed and successive governments in D.C. may have been among the primary instigators, but they had plenty of international help. The allegedly "hawkish" ECB and European governments cannot absolve themselves of some considerable responsibility for the debacles in Greece, Ireland and Spain. The Bank of England, the FSA and Gordon Brown cannot pretend that they had no hand in the persistent property inflation and consequent "building society" bank failures starting with the run on Northern Rock four summers ago [my, how time flies]! The governments of the Arab states in the Persian Gulf, and the Chinese, who persist with their "hard" currency pegs to the US Dollar and therefore allow their monetary policy to be made in Washington, D.C., cannot claim to be surprised with the ferocity of the food and other inflation that is again beginning to manifest itself...they had a clear foreshadowing of this in 2007 and only the onset of the acute phase of the financial crisis saved them that time. And the self-congratulatory governments [and many citizens?] of Australia and Canada, who have, thus far at least, avoided much of the mayhem solely due to the unique commodity and energy-export characteristic of their economies - commodities being the prime beneficiaries [other than the TBTFs] of the reflationary outcomes to date - might wish to temper their enthusiasm a tad by running a sliderule over their own bloated, overlevered and now vulnerable urban real estate and related banking sectors.

What has imploded [is still in the process of imploding, judging by what I observed first hand in Germany, the Middle East, Hong Kong and Australia in my travels and meetings in recent weeks] is the first truly global asset and credit bubble in history. And this has, quite naturally, resulted in the biggest global reflation effort ever attempted - a fiscal and monetary experiment on a scale that it appears has never before been attempted. Given all of this, I don't really understand how anybody can say with any confidence how this will play out exactly...nor precisely what the alternate outcomes might have been had other courses of action been followed by the authorities in recent [post-bubble] months and years.

[GRG55]

Re: screwflation

Yes a race to the bottom and I agree fully. It's what destroyed Ireland. This move to QEII is making my skin Crawl - Was it really necessary. The US Economy by all measures is still operating at a higher level than 2008 (Exc Unemployment which is stagnant) I see no urgency to debase the Reserve currency causing all assets brought and sold in it to inflate. This is exporting inflation to the World. How would you as an external country like to be holding a promissory note (Bond) that is earning in $USD, Not only are you getting Near zero for it but you are going to effectively lose money when it is cashed back. I hold US currency equivalents and over 6months I have lost a small fortune on QEI and expect, if I don't act, will lose 20% more in the next year even as my home currency inflates.(I pity China)
MY Fear is that there is something we are not being told. Monetary Levers of Mass Destruction are pulled in advance of converging calamitous events. OR to put it in laymans terms, you change gear and hit the gas prior the Steep grade to avoid deceleration/ stalling. What does Bernanke know that would be so destructive that he is willing to gamble the Reserve currency a second time (knowing that the first effort was a lost bet). My skin Crawls as I see a thousand bubbles growing to NO useful purpose except a "wealth effect" and now we get to pump it bigger. God help us all to find a shelter before it hits because your Fed just hit the N20 button - and it won't be a laughing matter. Call me Crazy - I don't listen to what they say only what they do.

I really wonder if it is useful to think of this reflation episode as a separate effort [as it is being portrayed, including the nomenclature - QE2]. I also no longer believe that the successive disinflation-reflation [Ka-poom] pairings over the past couple of decades were separate cycles. "Cycles" [to me] implies some sort of recurring stable pattern, like a sinusoid, that ultimately completely "corrects" and compensates for the previous excursion off the mean, either up or down.

Instead, QE2 appears, to me, to be merely the latest "alarm point" in a continuum, over that rough time frame. The ever greater amplitude of the peaks in economic volatility, and their increasing frequency, contribute to that view. It's like an airplane with insufficient dihedral - it'll fly, but it's not naturally stable about the roll axis - as fatigue sets in from hours of trying to hand fly it, the excursions from the wings-level attitude become larger and more frequent.


For reflationary policy prescriptions to result in long-term stable economic outcomes, they would have to more or less completely restore the status quo that existed at the onset of the immediately prior dis-inflationary perturbation. In every case the reflation efforts were unable to do that:

• Each and every reflation has required successively higher levels of monetary stimulus [including ever lower policy interest rates at the trough] and credit expansion;
• In each instance the reflation left us with successively higher levels of private and public sector debt;
• In every instance the reflation resulted in only the temporary arresting of the contraction by creating "economic growth" concentrated only in one or two narrow, increasingly financialized sectors of the broad economy;
• Ever greater levels of monetary and credit stimulus is resulting in ever greater levels of economic volatility and instability - the authorities do not seem to have demonstrated an ability to promote stable growth [that will take redesigning the airplane to add more dihedral, and rebuilding it];
• None of this is unique to the USA - these same policies are being pursued everywhere...currency debauchery seemingly has universal appeal.

If you can't get back to "wings level" before the next bit of turbulence violently rocks the airplane, it makes it damn difficult to keep it aloft.

Some have suggested that we are now in the "end game"...the "No next bubble" according to iTulip, Fleck and some others. I still think the jury is out on that. Certainly the world's Central Bankers - all of them - want to prove that wrong. And, led by Bernanke, they seem to be ready to do exactly that...or die trying.

[c1ue]

Re: screwflation

What has imploded [is still in the process of imploding, judging by what I observed first hand in Germany, the Middle East, Hong Kong and Australia in my travels and meetings in recent weeks] is the first truly global asset and credit bubble in history. And this has, quite naturally, resulted in the biggest global reflation effort ever attempted - a fiscal and monetary experiment on a scale that it appears has never before been attempted. Given all of this, I don't really understand how anybody can say with any confidence how this will play out exactly...nor precisely what the alternate outcomes might have been had other courses of action been followed by the authorities in recent [post-bubble] months and years.

This is quite true, but note that the consequences of a failed US dollar reserve currency will be dramatically different for the US vs. Europe vs. the BRICs.

For one thing, the reserve currency dollars flooding back home combined with their relative loss in purchasing power will have interesting (and bad) connotations for the American standard of living. Combine this with the relatively poor safety net and you get a recipe for very bad things.

Europe in contrast - with range from the good (Germany) to the relatively bad (PIIGS), but in reality most of the PIIGS will resume their former ways of 20+ years ago: massive underground economies, decaying infrastructure, etc etc.

The BRICs will continue to grow - albeit slower than their former frenetic pace.

[GRG55]

Re: screwflation

...Instead, QE2 appears, to me, to be merely the latest "alarm point" in a continuum, over that rough time frame. The ever greater amplitude of the peaks in economic volatility, and their increasing frequency, contribute to that view. It's like an airplane with insufficient dihedral - it'll fly, but it's not naturally stable about the roll axis - as fatigue sets in from hours of trying to hand fly it, the excursions from the wings-level attitude become larger and more frequent...

...If you can't get back to "wings level" before the next bit of turbulence violently rocks the airplane, it makes it damn difficult to keep it aloft...

The pilots out there will recognize that there is another way to deal with an airplane designed with inadequate dihedral...the installation of a computerized roll-axis autopilot [a wing leveller].

I would suggest that the economic equivalent of that is called "Financial Industry Regulatory Reform". Like an autopilot, FinReg might be enough. But if either ever stops working...well, look out below [Eastern Airlines Flight 401]