Deflation: Making Sure "It" Doesn't Happen Here

[WDCRob]

Re: Deflation: Making Sure "It" Doesn't Happen Here

http://www.itulip.com/forums/profile.php?do=ignorelist

[ldgirod]

Re: Deflation: Making Sure "It" Doesn't Happen Here

Bernanke has just ended the careers of thousands of amateur analysts. EJ also fell for Bernanke's "helicopter" statement. Would Bernanke be that stupid as to actually annihilate the dollar? Why hasn't he done it already? What's the event horizon?

The Fed ONLY focuses on manipulating sentiment and expectations: OMO are only one means!

Phirang --

EJ hasn't really been wrong about this, in fact what he predicted is precisely what appears to be happening -- deflation (referred as disinflation to distinguish it from a deflationary spiral), presumably to be followed by re-flation to break out of the spiral. Whether this can be done as precisely as the Fed would like -- and whether the ROW will continue to tolerate it -- is unclear to me, and these practical issues could easily result in an overshoot of inflation.

This is also not inconsistent with Bernanke's "helicopter policy": that is, we will use helicopters if that is what it takes to pull out of a deflationary spiral.

One thing that I found interesting was the recent thread on the 1890's depression. To me the take-away from that thread was that periods of deflation are great opportunities for the upper tier to consolidate their holdings -- flush out the leverage and advantage to real money. This is precisely what is happening now, when the chosen few banks get free credit lines to buy out their competitors. So, a little bit of deflation helps our our well-heeled friends buy real assets at fire sale prices and screws the ROW via the mad rush to dollars.

But my take on the overall itulip thesis is that

1. ultimately a deflationary spiral is very unpopular and inefficient, although the wealthy tend to suffer less
2. it is quite easy for a populist government to avoid this in a fiat currency regime by monetizing debt and handing out cash
3. with the US's resources (military, natural, human) they are in as good a position as any to minimize the real consequences of a default.

Therefore, if the voter has anything to say about it, inflation is ultimately quite likely.

So wouldn't it make sense for people with cash to start buying real assets using dollars?

Maybe you are arguing about the precise timing of when to get in on the fire sale, but for those who aren't privy to insider information, seems like better safe than sorry would be the wisest course of action -- starting to pick up bargains as they appear?

Or, if you are saying that the Fed has the capability to precisely modulate the economy to avoid overshoot -- what is that mechanism and how does it work?

etf

[Down Under]

Re: Deflation: Making Sure "It" Doesn't Happen Here

Phirang,

You're still at it: Repeat a statement without evidence, or even an elucidated theory, endlessly. People will eventually think it means something.

Galbraith called this 'encantation'.

From my own experience, the political players also use this: repeat a vague statement to make it seem like you have some idea on what is happening.

Vagueness is important because god forbid you say something that can be proven.

Well put clue; 90% of the time, it's random noise that comes out of phirang's mouth. Makes it very hard to follow a thread with all the bullshit this guy posts.

[pksubs]

Re: Deflation: Making Sure "It" Doesn't Happen Here

I want to understand something that Phirang said

It's fashionable to say inflation has to happen because defaulted debt is being "swept under the rug", but if you lose 100T of wealth and swap in 10T to keep the game running, is that still inflationary?

Some of the inflation theories are borne out by the money supply graphs. I know pretty much zip about this stuff, though I'm trying to learn. I've seen it said in itulip and other forums that the government tries to obscure what the monetary base actually is. Therefore given the fact that we have this large 'shadow banking' system running amok, is money supply as represented by the MZM graph still representative? Or is there some crazy overhang of 'dark matter' money/liquidity whatever which needs to be taken into account ? Where does the lost 100T figure in all this?

Again, I'm asking since I don't know, and something more than the zen master one liner response would be much appreciated - those leave me in a sadly familiar state =>> :confused::confused::confused:

[c1ue]

Re: Deflation: Making Sure "It" Doesn't Happen Here

PK,

The problem with phirang is that he clearly takes a very short term view.

Somehow the fact that $10T in retirement account wealth being wiped out is somehow divorced from the $10T+ that was gained due to the past 20+ years of Fed induced money supply growth feeding into asset price increases.

Or put as another example: you can talk all you want about the $5T lost in American housing value, but what about the $11T gained in the 5 years before the bubble burst?

The $100T is not real - it is something pulled out of phirang's imagination.

There was a shadow banking system - the exact value will likely never be accurately known but it was clearly as big as, if not bigger, than the actual banking system due to the power of leverage. The actual 'physical' dollars, however, as much as this term can be applied in this context, were much smaller.

It is because of this - specifically that the supporting base of cash under the shadow banking system being so much smaller than the leverage - that the collapse of the pyramid is leading to massive losses everywhere both due to the deleveraging process in all securities/assets and due to the 2nd order effects of insufficient collateral --> i.e. counterparty failures, cascade failures, etc etc.

[friendly_jacek]

Re: Deflation: Making Sure "It" Doesn't Happen Here

The $100T is not real - it is something pulled out of phirang's imagination.

I don't know where phirang got his number, but he is likely to be correct +/- 20-30T of so.

Look at this global stock capitalization chart from the peak in 2007 (for some reason itulip refuses to let me embed outside pictures):
http://mjperry.blogspot.com/2007/10/...tion-sets.html

At least 50-70% of that is wiped out. We are talking about 30-40 T loss in global equities only. On top of that, look at derivatives, real estate, etc. Someone should add it up just for fun.

I will say it again, the couple of T of the government stimulus is going to do a little dent in this huge deflation.

[c1ue]

Re: Deflation: Making Sure "It" Doesn't Happen Here

Plus minus 20 or 30 trillion dollars? And that is what passes for acceptable data/precision?

How about this:

http://www.metrics2.com/blog/2007/01...llion_3_1.html

$130T total world financial assets in January 2007.

Stock market may have lost half or so = $30T. Real estate - 20% = $10T worldwide. Miscellaneous other crap = $2T. These are likely high numbers. Nowhere even close to $100T.

More importantly - your link notes $40T of stock market capitalization was gained in the 5 years from 9/2002 to 9/2007 - why is giving some of it back so unreasonable?

[friendly_jacek]

Re: Deflation: Making Sure "It" Doesn't Happen Here

More importantly - your link notes $40T of stock market capitalization was gained in the 5 years from 9/2002 to 9/2007 - why is giving some of it back so unreasonable?

This is not the point. The point is that sucking away all these T away in in a short time span is a respectful deflation. As you pointed out, it took for the all central banks and credit economies to produce all that inflation in 5 years and it was deflated in a short year.

This is a tsunami that the feds or treasury can do nothing about with their measly couple of T.

BTW, you forgot to calculate credit default swaps and other illiquid investments. Your number will suddenly will go up. A lot.

C'mon, it is not that difficult to understand or add together.

Edit: global derivatives were valued at near 500 Trillion EURO in 2007 (I know because I just Googled). How much it is valued today? I have no idea, but suspect that no one knows for sure as many of those are illiquid and are worth zero.

[metalman]

Re: Deflation: Making Sure "It" Doesn't Happen Here

This is not the point. The point is that sucking away all these T away in in a short time span is a respectful deflation. As you pointed out, it took for the all central banks and credit economies to produce all that inflation in 5 years and it was deflated in a short year.

This is a tsunami that the feds or treasury can do nothing about with their measly couple of T.

BTW, you forgot to calculate credit default swaps and other illiquid investments. Your number will suddenly will go up. A lot.

C'mon, it is not that difficult to understand or add together.

what you deflationists don't get is that the foundation of the entire system is based on the belief that the unit of currency has intrinsic value. it has value as long as everyone believes it does. the instant they don't, it doesn't. the thing that starts to cause them not to? The unthinkable

Before World War I Germany was a prosperous country, with a gold-backed currency, expanding industry, and world leadership in optics, chemicals, and machinery. The German Mark, the British shilling, the French franc, and the Italian lira all had about equal value, and all were exchanged four or five to the dollar. That was in 1914. In 1923, at the most fevered moment of the German hyperinflation, the exchange rate between the dollar and the Mark was one trillion Marks to one dollar, and a wheelbarrow full of money would not even buy a newspaper. Most Germans were taken by surprise by the financial tornado.

"My father was a lawyer," says Walter Levy, an internationally known German-born oil consultant in New York, "and he had taken out an insurance policy in 1903, and every month he had made the payments faithfully. It was a 20-year policy, and when it came due, he cashed it in and bought a single loaf of bread." The Berlin publisher Leopold Ullstein wrote that an American visitor tipped their cook one dollar. The family convened, and it was decided that a trust fund should be set up in a Berlin bank with the cook as beneficiary, the bank to administer and invest the dollar.

In retrospect, you can trace the steps to hyperinflation, but some of the reasons remain cloudy. Germany abandoned the gold backing of its currency in 1914. The war was expected to be short, so it was financed by government borrowing, not by savings and taxation. In Germany prices doubled between 1914 and 1919.

After four disastrous years Germany had lost the war. Under the Treaty of Versailles it was forced to make a reparations payment in gold-backed Marks, and it was due to lose part of the production of the Ruhr and of the province of Upper Silesia. The Weimar Republic was politically fragile.

But the bourgeois habits were very strong. Ordinary citizens worked at their jobs, sent their children to school and worried about their grades, maneuvered for promotions and rejoiced when they got them, and generally expected things to get better. But the prices that had doubled from 1914 to 1919 doubled again during just five months in 1922. Milk went from 7 Marks per liter to 16; beer from 5.6 to 18. There were complaints about the high cost of living. Professors and civil servants complained of getting squeezed. Factory workers pressed for wage increases. An underground economy developed, aided by a desire to beat the tax collector.

On June 24, 1922, right-wing fanatics assassinated Walter Rathenau, the moderate, able foreign minister. Rathenau was a charismatic figure, and the idea that a popular, wealthy, and glamorous government minister could be shot in a law-abiding society shattered the faith of the Germans, who wanted to believe that things were going to be all right. Rathenau's state funeral was a national trauma. The nervous citizens of the Ruhr were already getting their money out of the currency and into real goods -- diamonds, works of art, safe real estate. Now ordinary Germans began to get out of Marks and into real goods.

Pianos, wrote the British historian Adam Fergusson, were bought even by unmusical families. Sellers held back because the Mark was worth less every day. As prices went up, the amounts of currency demanded were greater, and the German Central Bank responded to the demands. Yet the ruling authorities did not see anything wrong. A leading financial newspaper said that the amounts of money in circulation were not excessively high. Dr. Rudolf Havenstein, the president of the Reichsbank (equivalent to the Federal Reserve) told an economics professor that he needed a new suit but wasn't going to buy one until prices came down.

Why did the German government not act to halt the inflation? It was a shaky, fragile government, especially after the assassination. The vengeful French sent their army into the Ruhr to enforce their demands for reparations, and the Germans were powerless to resist. More than inflation, the Germans feared unemployment. In 1919 Communists had tried to take over, and severe unemployment might give the Communists another chance. The great German industrial combines -- Krupp, Thyssen, Farben, Stinnes -- condoned the inflation and survived it well. A cheaper Mark, they reasoned, would make German goods cheap and easy to export, and they needed the export earnings to buy raw materials abroad. Inflation kept everyone working.

So the printing presses ran, and once they began to run, they were hard to stop. The price increases began to be dizzying. Menus in cafes could not be revised quickly enough. A student at Freiburg University ordered a cup of coffee at a cafe. The price on the menu was 5,000 Marks. He had two cups. When the bill came, it was for 14,000 Marks. "If you want to save money," he was told, "and you want two cups of coffee, you should order them both at the same time."

The presses of the Reichsbank could not keep up though they ran through the night. Individual cities and states began to issue their own money. Dr. Havenstein, the president of the Reichsbank, did not get his new suit. A factory worker described payday, which was every day at 11:00 a.m.: "At 11:00 in the morning a siren sounded, and everybody gathered in the factory forecourt, where a five-ton lorry was drawn up loaded brimful with paper money. The chief cashier and his assistants climbed up on top. They read out names and just threw out bundles of notes. As soon as you had caught one you made a dash for the nearest shop and bought just anything that was going." Teachers, paid at 10:00 a.m., brought their money to the playground, where relatives took the bundles and hurried off with them. Banks closed at 11:00 a.m.; the harried clerks went on strike.

The flight from currency that had begun with the buying of diamonds, gold, country houses, and antiques now extended to minor and almost useless items -- bric-a-brac, soap, hairpins. The law-abiding country crumbled into petty thievery. Copper pipes and brass armatures weren't safe. Gasoline was siphoned from cars. People bought things they didn't need and used them to barter -- a pair of shoes for a shirt, some crockery for coffee. Berlin had a "witches' Sabbath" atmosphere. Prostitutes of both sexes roamed the streets. Cocaine was the fashionable drug. In the cabarets the newly rich and their foreign friends could dance and spend money. Other reports noted that not all the young people had a bad time. Their parents had taught them to work and save, and that was clearly wrong, so they could spend money, enjoy themselves, and flout the old.

The publisher Leopold Ullstein wrote: "People just didn't understand what was happening. All the economic theory they had been taught didn't provide for the phenomenon. There was a feeling of utter dependence on anonymous powers -- almost as a primitive people believed in magic -- that somebody must be in the know, and that this small group of 'somebodies' must be a conspiracy."

When the 1,000-billion Mark note came out, few bothered to collect the change when they spent it. By November 1923, with one dollar equal to one trillion Marks, the breakdown was complete. The currency had lost meaning.

What happened immediately afterward is as fascinating as the Great Inflation itself. The tornado of the Mark inflation was succeeded by the "miracle of the Rentenmark." A new president took over the Reichsbank, Horace Greeley Hjalmar Schacht, who came by his first two names because of his father's admiration for an editor of the New York Tribune. The Rentenmark was not Schacht's idea, but he executed it, and as the Reichsbank president, he got the credit for it. For decades afterward he was able to maintain a reputation for financial wizardry. He became the architect of the financial prosperity brought by the Nazi party.

Obviously, though the currency was worthless, Germany was still a rich country -- with mines, farms, factories, forests. The backing for the Rentenmark was mortgages on the land and bonds on the factories, but that backing was a fiction; the factories and land couldn't be turned into cash or used abroad. Nine zeros were struck from the currency; that is, one Rentenmark was equal to one billion old Marks. The Germans wanted desperately to believe in the Rentenmark, and so they did. "I remember," said one Frau Barten of East Prussia, "the feeling of having just one Rentenmark to spend. I bought a small tin bread bin. Just to buy something that had a price tag for one Mark was so exciting."

All money is a matter of belief. Credit derives from Latin, credere, "to believe." Belief was there, the factories functioned, the farmers delivered their produce. The Central Bank kept the belief alive when it would not let even the government borrow further.

But although the country functioned again, the savings were never restored, nor were the values of hard work and decency that had accompanied the savings. There was a different temper in the country, a temper that Hitler would later exploit with diabolical talent. Thomas Mann wrote: "The market woman who without batting an eyelash demanded 100 million for an egg lost the capacity for surprise. And nothing that has happened since has been insane or cruel enough to surprise her."

With the currency went many of the lifetime plans of average citizens. It was the custom for the bride to bring some money to a marriage; many marriages were called off. Widows dependent on insurance found themselves destitute. People who had worked a lifetime found that their pensions would not buy one cup of coffee.

Pearl Buck, the American writer who became famous for her novels of China, was in Germany in 1923. She wrote later: "The cities were still there, the houses not yet bombed and in ruins, but the victims were millions of people. They had lost their fortunes, their savings; they were dazed and inflation-shocked and did not understand how it had happened to them and who the foe was who had defeated them. Yet they had lost their self-assurance, their feeling that they themselves could be the masters of their own lives if only they worked hard enough; and lost, too, were the old values of morals, of ethics, of decency."

The fledgling Nazi party, whose attempted coup had failed in 1923, won 32 seats legally in the next election. The right-wing Nationalist party won 106 seats, having promised 100 percent compensation to the victims of inflation and vengeance on the conspirators who had brought it.

http://www.pbs.org/wgbh/commandinghe...inflation.html

[c1ue]

Re: Deflation: Making Sure "It" Doesn't Happen Here

This is not the point. The point is that sucking away all these T away in in a short time span is a respectful deflation. As you pointed out, it took for the all central banks and credit economies to produce all that inflation in 5 years and it was deflated in a short year.

F_J,

One difficulty you are experiencing - no doubt at least in part to reading Mish and phirang - is the conflation of price drops with deflation. I don't know firsthand, but I would speculate that one reason iTulip has such a precise definition of deflation is exactly to prevent this.

The point is that the increase in stock market capitalization and the ensuing drop are not self-reinforcing spirals. They are short term consequences to specific actions.

This is a tsunami that the feds or treasury can do nothing about with their measly couple of T.

Correct in the short term. Completely incorrect in the medium and long term. The Fed and government can do an immense amount of damage if one or both choose to. Please refer to Weimar Germany, Zimbabwe, Japan as examples.

BTW, you forgot to calculate credit default swaps and other illiquid investments. Your number will suddenly will go up. A lot.

C'mon, it is not that difficult to understand or add together.

Edit: global derivatives were valued at near 500 Trillion EURO in 2007 (I know because I just Googled). How much it is valued today? I have no idea, but suspect that no one knows for sure as many of those are illiquid and are worth zero.

F_J,

Again you confuse notional numbers with value. What you are failing to understand is that a derivative has ZERO intrinsic value, and is based equally on ZERO net money. It is exactly like the effect of a loan made by a bank: where before was nothing except a reserve requirement, now there is $1000 of credit to be spent and a $1000 loan acting as an asset to the bank.

Another way these CDS's and other similar types of derivatives (with some exceptions like ETF/ETN shares) are different is that they only have value in 2 ways: 1) if an exercise condition is met; 2) the cash paid for them

Since the cash paid for them is very small relatively, and generally spent right away - i.e. very little relationship between fee paid and monetary accounting effect of said derivative - the intrinsic value is zero until said condition is met - if ever.

You will note that in the bank loan example, the exercise condition is already met: the $1000 must be repaid. This doesn't hold true for CDS type derivatives.

If I choose to create a $100T derivative that McCain suddenly becomes president due to a systematic voting counting error, that $100T derivative has zero value.

If someone chooses to pay me $10000 dollars for it, I've gained $10K but the derivative still has zero value unless the event actually occurs.

You may have noticed by now the similarities between a Ponzi scheme and the net system effect of CDS's and its derivative relatives.

Where one derivative which is unlikely to be exercised is a novelty which helps the bottom line; thousands of derivatives edging closer to reality, with interlocking counterparties and 'risk offsets' is merely a Herba-Life pyramid scheme which comes crashing down once some perturbation enters the system (i.e. an actual event).

[metalman]

Re: Deflation: Making Sure "It" Doesn't Happen Here

F_J,

One difficulty you are experiencing - no doubt at least in part to reading Mish and phirang - is the conflation of price drops with deflation. I don't know firsthand, but I would speculate that one reason iTulip has such a precise definition of deflation is exactly to prevent this.

The point is that the increase in stock market capitalization and the ensuing drop are not self-reinforcing spirals. They are short term consequences to specific actions.



Correct in the short term. Completely incorrect in the medium and long term. The Fed and government can do an immense amount of damage if one or both choose to. Please refer to Weimar Germany, Zimbabwe, Japan as examples.



F_J,

Again you confuse notional numbers with value. What you are failing to understand is that a derivative has ZERO intrinsic value, and is based equally on ZERO net money. It is exactly like the effect of a loan made by a bank: where before was nothing except a reserve requirement, now there is $1000 of credit to be spent and a $1000 loan acting as an asset to the bank.

Another way these CDS's and other similar types of derivatives (with some exceptions like ETF/ETN shares) are different is that they only have value in 2 ways: 1) if an exercise condition is met; 2) the cash paid for them

Since the cash paid for them is very small relatively, and generally spent right away - i.e. very little relationship between fee paid and monetary accounting effect of said derivative - the intrinsic value is zero until said condition is met - if ever.

You will note that in the bank loan example, the exercise condition is already met: the $1000 must be repaid. This doesn't hold true for CDS type derivatives.

If I choose to create a $100T derivative that McCain suddenly becomes president due to a systematic voting counting error, that $100T derivative has zero value.

If someone chooses to pay me $10000 dollars for it, I've gained $10K but the derivative still has zero value unless the event actually occurs.

You may have noticed by now the similarities between a Ponzi scheme and the net system effect of CDS's and its derivative relatives.

Where one derivative which is unlikely to be exercised is a novelty which helps the bottom line; thousands of derivatives edging closer to reality, with interlocking counterparties and 'risk offsets' is merely a Herba-Life pyramid scheme which comes crashing down once some perturbation enters the system (i.e. an actual event).

good stuff, c1ue. i've learned a ton from you. thx!

[Thailandnotes]

Re: Deflation: Making Sure "It" Doesn't Happen Here

good stuff, c1ue. i've learned a ton from you. thx!

And us from you...thanks for the link

http://www.pbs.org/wgbh/commandinghe...inflation.html

or to start at the beginning

http://www.pbs.org/wgbh/commandingheights/hi/index.html

What a website!

[friendly_jacek]

Re: Deflation: Making Sure "It" Doesn't Happen Here

Plus minus 20 or 30 trillion dollars? And that is what passes for acceptable data/precision?

How about this:

http://www.metrics2.com/blog/2007/01...llion_3_1.html

$130T total world financial assets in January 2007.

Stock market may have lost half or so = $30T. Real estate - 20% = $10T worldwide. Miscellaneous other crap = $2T. These are likely high numbers. Nowhere even close to $100T.

More importantly - your link notes $40T of stock market capitalization was gained in the 5 years from 9/2002 to 9/2007 - why is giving some of it back so unreasonable?

Clue,
Listen to the recent Marc Faber's interview, He stated asset losses 60-100T:
http://www.cnbc.com/id/15840232/?video=935450306&play=1
I tend to believe him.
The point is not who is right, but the huge extend of deflation. The poom will not start until the reflation exceeds deflation. Now, if the markets rebound quickly and significantly, yes, there is a chance of a quick inflation spike, but deleveraging is not done at this point. IMHO, the future holds rapid deflationary and inflationary shocks.

[friendly_jacek]

Re: Deflation: Making Sure "It" Doesn't Happen Here

F_J,
One difficulty you are experiencing - no doubt at least in part to reading Mish and phirang - is the conflation of price drops with deflation. I don't know firsthand, but I would speculate that one reason iTulip has such a precise definition of deflation is exactly to prevent this.

Here is the iTulip's "precise definition of deflation" from http://www.itulip.com/glossary.htm#D

"deflation : n. negative rate of inflation, e.g., "CPI inflation averaged -1.3% in 2007."

According to that definition, we DO have deflation as documented by the most recent CPI report.

What I find humorous on iTulip, that people refuse to think and just accept the dogma that we have disinflation but not deflation. I understand that EJ invested a lot in ridiculing deflation lately, but there is nothing wrong with admitting mistakes and moving on.

The point is that the increase in stock market capitalization and the ensuing drop are not self-reinforcing spirals. They are short term consequences to specific actions.

Sorry, but most people would disagree. This is why we have irrational bubbles (as well as irrational selling).

Again you confuse notional numbers with value. What you are failing to understand is that a derivative has ZERO intrinsic value, and is based equally on ZERO net money.

As for the derivatives being the zero game, don't know, as I'm not an expert on this. I took Buffet's word for it when he called them WMD.

[GRG55]

Re: Deflation: Making Sure "It" Doesn't Happen Here

... IMHO, the future holds rapid deflationary and inflationary shocks.

Isn't this pretty much what EJ has been saying?

Seems some people around here are mystified as to why we are not seeing rising gold [a clear inflation indicator] or why the US$ keeps on heading up.

All in due course. As you pointed out f_j, the inflationary Poom won't come until the disinflationary [deflationary, if one prefers] Ka runs its course. Without the latter why would we ever have the former? Ever?