Uncertainty, deflation and interest rates question

[Polish_Silver]

Re: Welfare states and immigration

The welfare state in Europe cannot survive without immigration. Germany's birth rate is inadequate to produce enough new entrants into the work force to pay for all those that will be retiring.

).

It's questionable whether Europe's immigrants are helping with the demographic problems of an aging population. Spain has a very high youth unemployment rate. So it's hard to see why they need immigrants from outside the EU.

In many respects, I would say the US is getting "better" immigrants than Europe, including even the illegal ones. (Many of the US immigrants come from Asia and Latin America, and seem to adapt fairly well to the US. I don't see them trying to make the US like the country they came from, which seems to be goal of the protests in Europe.)

You go to Austria and the guys cleaning the hotel tables are from the middle east.

But are they going to be net tax payers over their life time? Maybe their children will be. But the "breakeven" point is 30-40 years away.

Neither the US nor Europe has the low skill agricultural or industrial jobs that were occupied by immigrants in the past, who could do these jobs with minimal english.

[EJ]

Re: Gold vs deflation

I think the dollar vs gold devaluation (1933?) did play a part in reversing the deflation. It just took a while. If larger fiscal stimulus had been applied, the deflation might have lifted earlier. I think the CB can always devalue the currency.

A deflation spiral can be stopped as it was in the U.S. in 1933 but the measures that need to be taken once the deflation process is that deep are dramatic.

Here's what it took to end the 1930 to 1933 deflation, in the Fed's research historian's words:

The Roosevelt administration’s policies regarding gold responded to this crisis. The policies unfolded through three phases.

During the first phase, in the spring and summer of 1933, the Roosevelt administration suspended the gold standard.

In March 1933, the Emergency Banking Act gave the president the power to control international and domestic gold movements. It also gave the secretary of the treasury the power to compel surrender of gold coins and certificates. The administration waited before employing these powers, in hope that the situation would correct itself, but gold outflows continued.

On April 20, President Roosevelt issued a proclamation that formally suspended the gold standard. The proclamation prohibited exports of gold and prohibited the Treasury and financial institutions from converting currency and deposits into gold coins and ingots. The actions halted gold outflows.

In May 1933, the administration once again weakened links to gold. The Thomas amendment to the Agricultural Relief Act gave to the president the power to reduce the gold content of the dollar by as much as 50 percent. The president also received the power to back the dollar with silver, rather than gold, or with both silver and gold, at silver prices determined by the administration.

On June 5, a congressional resolution abrogated gold clauses in all contracts, both government and private. Gold clauses guaranteed that contracts would be repaid in gold or in gold’s monetary equivalent, at the value set in 1900. A series of cases in the United States Supreme Court upheld the constitutionality of these actions.

Together, these measures weakened the dollar’s link to gold. The dollar nominally retained its value, but the Department of the Treasury would not exchange dollars for gold and forbade the Federal Reserve from doing so. The administration could, at any time, change the dollar’s value or begin backing the dollar with silver. In the future, the government might (or might not) allow the conversion of paper dollars into gold (or silver or both) at some price that the government would announce at some point in the future. To ordinary men and women, in other words, the dollar’s value in terms of gold (and other goods) was uncertain.

The second phase of the Roosevelt administration’s gold policy began in October 1933 with the inauguration of the gold purchase plan.

This phase involved the deliberate devaluation of the dollar. The government did this by authorizing the Reconstruction Finance Corporation to buy gold at increasing prices. These purchases raised gold’s value in terms of dollars, conversely lowering the dollar’s value in terms of gold and in terms of foreign currencies, whose value in gold remained pegged at old prices.

The goal of these programs was to raise American prices of commodities like wheat and cotton, returning them to the level of 1926, before the beginning of the contraction. This reflation would counteract the deflation that had dragged the economy into the abyss. The reflation would relieve debtors, resuscitate banks, and revive businesses. The reflation would lower prices of American goods abroad, encouraging exports, and raise prices of foreign goods in the US, discouraging imports.

The impact of these measures in parallel with deficit spending can be seen in the data.

Deflation ends, money supply rises, unemployment falls.
A year into The Great Depression the budget was in surplus by $382 million, by the start of 1934
the budget was -$740M in deficit.
The discount rate is never less than 1.5%.

Catch the process early as the U.S. did in 2009 and such drastic steps are not necessary. Japan is finally getting around to using a one-two punch of currency depreciation and money supply expansion to get inflation to rise. Time will tell if this will be effective of if even more drastic measures are needed.

[GRG55]

Re: Welfare states and immigration

It's questionable whether Europe's immigrants are helping with the demographic problems of an aging population. Spain has a very high youth unemployment rate. So it's hard to see why they need immigrants from outside the EU.

...

How so?? Spain has a young population. It is migrating OUT. And to the degree that there is opportunity elsewhere in the EU for young Spaniards willing to take the risk of relocating themselves, Europe benefits. People willing to migrate are the risk takers. The ones that stay home and moan about what the government should do for them are not. That is one reason the receiving country benefits.

If you have the opportunity you should spend some time in Central London and observe what is going on there. You might change your mind about how "questionable" the benefits are...and you might also change your mind about how many semi-skilled jobs there still are in our modern economies.

[astonas]

Re: Uncertainty, deflation and interest rates question

I'd be curious to understand how you reconcile these two statements in your post? On the one hand it would appear that Britain has economically outperformed the average. On the other hand you suggest that other member states, including Germany, would encourage Britain to exit by "showing them the door"?

I am having great difficulty believing that the EU is going to let, much less encourage, one of its richest members to leave. What do the Germans intend to do if that actually happens? Singlehandedly try to improve the Greek economy by turning the Parthenon into a beer hall?

... The first thing to remember is that this was never a "surprise" to Britain at all. They had long ago agreed to a well-known formula that obviously increases the bill for nations that outperform the average...


...While I don't consider him to be particularly brilliant, I'd guess he does know enough about politics that he's probably already worked out the final deal in private before he chose to feign outrage. If he wasn't even bright enough to do that, my opinion of his common sense will erode further still. It would mean that he really is too dim-witted to be doing political diplomacy at all, and that he really should get credit for Britain being shown the door.

I don't think it is at all hard to reconcile, though I may well have explained it poorly, and thus muddled the issue. Sorry if that was the case.

The criteria for success are simply different within continental Europe than those which an Anglo-Saxon might (incorrectly) assume to be universally held. Cameron's failing appears to be that he doesn't fully credit this simple fact. Perhaps he thinks because his nation is rich, it is obvious that everyone else would want theirs to be just like it?

They don't.

The goal of the other two major blocks in Europe (mediterranean and germanic) is (1) to have a system that works like their own does (thus preserving their "way of life") and (2) to have a system with a high growth rate. In that order. Anglo-Saxons traditionally measure success in the reverse order. They have historically prioritized aggregate growth, even when that comes at the cost of maintaining the lifestyle of their median citizen. This does make for a much more dynamic economy, but it can also come at a high social cost.

So if by getting rid of one of its richest members, Europe looks more like a state they'd personally want to live in, many European voters would happily accept the tradeoff of a less "rich" European state.

And while I haven't run the numbers myself, they may not even be numerically wrong to do so. "Richer," (on average) doesn't necessarily mean a higher median standard of living. The Anglo-Saxon monetary philosophy is all about measuring and optimizing for the average (which dramatically over-represents the wealthy, when wealth is highly concentrated), even if this reduces the well-being for the median voter.

The Social Market economic systems that dominate continental Europe (not just Germany, but almost all of the continent) simply place improving the lot of the richest further down on the priority list than the Anglo-Saxon Free-Market system does. France has been a particularly strong example of this. Their voters have historically paid far less heed to the metrics that dominate the U.S.'s and Commonwealth's attention, such as GDP. And it goes down to the grass roots, too. When they go on strike it ISN'T for more pay. Instead, they phrase their demands in terms of the hours in a work week, vacation time, and protection for traditional professions. So the entire social philosophy is different, and this is reflected in the values of the voters.

(I also don't think it is a coincidence that Picketty is from France.)

And unless they are in the 1% of their nation, there are rational arguments to support those values. It doesn't help the average factory worker to know that their CEO can now demand a vastly higher salary than before, even though that fact does raise the average national income. (There is little dispute that the 1% would benefit more if the Anglo-Saxon system were to dominate throughout Europe.)

[DRumsfeld2000]

Re: Gold vs deflation

EJ wrote ''Japan is finally getting around to using a one-two punch of currency depreciation and money supply expansion to get inflation to rise."

What do you think will happen in Europe? Will the USA really allow the Dollar to also rise significantly against the Euro? I also wonder if the USA will allow this European devaluation if Europe does not play ball over the Russia/Ukraine crisis. It seems to me that Europe is between a rock and a hard place and it appears to be unlikely that this can be easily resolved and this can only have dire consequences for the world economy.

[GRG55]

Re: Gold vs deflation

EJ wrote ''Japan is finally getting around to using a one-two punch of currency depreciation and money supply expansion to get inflation to rise."

What do you think will happen in Europe? Will the USA really allow the Dollar to also rise significantly against the Euro? I also wonder if the USA will allow this European devaluation if Europe does not play ball over the Russia/Ukraine crisis. It seems to me that Europe is between a rock and a hard place and it appears to be unlikely that this can be easily resolved and this can only have dire consequences for the world economy.

The Euro has fallen against the US$ already, and it would be no surprise if it had somewhat further to go in a continued and concerted effort by global central bankers to arrest the deflationary recession now enveloping that continent.

The "dire consequences for the world economy" seem more the result of policies pursued in the past. Having allowed, and even promoted, the bubbles in the first place the efforts now appear to be attempts to minimize the consequent (inevitable?) damage.

Japan led the way down the bubble path in the 1980s; the USA took up the baton in the 1990s (after Japan popped starting in 1989) ending with the tech/telecom sector scandals and related NASDAQ bust.

Europe had it's turn at the trough in the first decade of this century with fast and loose money the order of the day to offset the negative (deflationary) economic effects of German reunification at a botched exchange rate. The result? Astronomical housing bubbles and an overlevered private sector/banking system in such unlikely places as Ireland, Spain, Greece and numerous Eastern European countries (where ultimately unaffordable Swiss franc denominated mortgages at ultra-low interest rates became de rigueur for a while).

Although there is much talk of "currency wars", is there any real evidence that Central Bankers have abandoned their cooperative and coordinated efforts? As EJ has posted a number of times, in the aftermath of the Wall Street sourced financial crisis it was the USA's "turn" to aggressively reflate its currency for the "greater good of the global economy". The US$ was managed down against the Yen, Yuan, Euro, AUS, CAN, and most other currencies.

While mini-versions of the same "cheap and abundant capital" occurred in other more obscure places such as Dubai and Mumbai, hard on the heels of Europe is SE Asia, led by China, which despite its much vaunted "economic growth miracle" has pursued similar policies with a similar outcome - a real estate bubble of such magnificent proportions that disbelief manifests as denial that such a state of affairs actually exists; after all "China is different".

Under Abe it has been "Japan's turn" and it would appear that Europe is lined up next in the reflation queue, waiting only for the Germans to capitulate (again) as its economy sinks into a self-induced recession.

If I was a betting man I would make a wager that China will be right behind. Having done its part in the aftermath of the financial crisis, might China soon be "rewarded" with a coordinated agreement among Central Bankers to sink the yuan to offset the effects of the bursting of its breathtaking property bubble?

As for a rising US$, when one looks at the chart EJ posted here:

http://www.itulip.com/forums/showthr...628#post288628

it seems quite difficult to believe that the US$ is anywhere near "overvalued", yet.

[Fiat Currency]

Re: Gold vs deflation

Although there is much talk of "currency wars", is there any real evidence that Central Bankers have abandoned their cooperative and coordinated efforts?

BINGO!

"Ring around the Rosie" until the people Go Gresham, or Go Postal.

Cat Chasing Tail.gif

[GRG55]

Re: Gold vs deflation

BINGO!

"Ring around the Rosie" until the people Go Gresham, or Go Postal.

[ATTACH=CONFIG]5480[/ATTACH]

60 cent Loonie anyone?

[Polish_Silver]

price levels vs Forex

It did, and the yen appreciation was a successful currency play for me at the time.

I had a strategy prior to the financial crisis to hold a lot of cash and divided it into holding one currency in each of the Americas, Europe and Asia. At that time it was Loonies, Swissie and the yen. When I sold the yen I moved it to Sing $ and also swapped the Loonies for US$. Typical holding periods were 2-3 years so this is not a trading strategy.

Wasn't the play successful because the Yen appreciated relative to some other currency?

I was thinking about the yen price of eggs and peanut butter in Japan.

This data shows the CPI in japan monotonically increasing, right through the
alleged deflation: (1984-1996)

http://www.tradingeconomics.com/japa...rice-index-cpi

Aren't the forex rates sensitive to the interest rate differentials, in addition to the consumer price levels?

[Fiat Currency]

Re: Gold vs deflation

60 cent Loonie anyone?

60 cent Loonie, $60 oil, $6 silver ...

Where she stops nobody knows ...

Trampoline Up and Down.gif

[GRG55]

Re: Gold vs deflation

60 cent Loonie, $60 oil, $6 silver ...

Just another 666 moment (with a few naughts thrown in).

Keeping warm I trust?

[Fiat Currency]

Re: Gold vs deflation

Just another 666 moment (with a few naughts thrown in).

FIRE Devils everywhere one looks ….

Skull Burning.jpg

Keeping warm I trust?

Coldest Remembrance Day ceremony I can ever recall. Took Mrs. Fiat to see Interstellar in IMAX afterwards … just the right temperature for traversing wormholes, and dodging black holes.

Milky Way.gif

[aaron]

Re: Welfare states and immigration

The welfare state in Europe cannot survive without immigration. Germany's birth rate is inadequate to produce enough new entrants into the work force to pay for all those that will be retiring.

If one worker with current technology can do the work of 10 previous workers, what does a low birth rate have to do with supporting retiring people?

[santafe2]

Re: Gold vs deflation

60 cent Loonie anyone?

We can only hope. We've got our eye on a nice little place but if we get it I may have to learn to eat more than a bite or two of poutine.

[Thailandnotes]

Re: Gold vs deflation

Always thought Dylan should have used that in...

He’s eatin’ bagels
He’s eatin’ pizza
He’s eatin’ chitlins...

He's eatin poutine