Steve Keen talk at Google

[Jay]

Re: Steve Keen talk at Google

The only remaining way to devalue the Dollar would be to suspend exchanging them for Treasuries. That is, the U.S. would have to default on Treasuries.

And why can they not continue with QE?

[ThePythonicCow]

Re: Steve Keen talk at Google

Cow, I understand what Keen is saying, and what role credit plays in the process. My point is that the balance between printing and credit destruction is less important than the magnitude of both which is enormous. That overwhelming process is going to continue without a recovery, which isn't likely to come. Yes, the balance may help decide what the dollar will look like down the road, but the process will inevitably lead to a burnt middle class and increasing government control either way. That is what I was trying to get across. The middle class is cooked and the government is going to be forced to protect itself. Another aspect of my point is that for each process the real economy is also decaying, and decaying amidst an environment of increasing energy costs. This will lead to real inflation in tangible goods no matter what happens. It will also continue to put enormous stresses on our monetary system.

Ok - I misunderstood then. When you wrote earlier:

the government will be unwilling to print that much. I say, hah!

I thought you were referring to a specific way of toasting our money system, that being the pure fiat money printing such as culiminates in we have seen in the Wiemar Republic or Zimbabwe.

I agree the government is toasting it, one way or the other, and that the middle class is being cooked.

My intuition (not very well thought out yet) however is that it will make a difference how they cook us. I'm thinking that [A] classic money printing hyperinflation would cause the price of everything to rise dramatically, whereas [B] a debt bubble collapse in a debt (or credit) based monetary system would cause more of a shift in pricing, raising the prices of essential non-durables (food, taxes, imports) while causing increasing volatility in many other prices and falling asset (real estate, savings, pension funds, ...) prices.

So far we're seeing [B]. One big difference between [A] and [B] will be whether stock market (nominal dollar) prices rise dramatically or stumble around. Again, so far, it's been [B]. Yes, the market is up these last ten months, but it's still nothing like a moonshot to all time highs.

EJ and Keen, as I understand it, have disagreed on the notorious "inflation" versus "deflation" debate. I suggest that this is due to a more basic disagreement on how money is created. Fiat money printing can lead to severe broad spectrum price inflation whereas the collapse of a credit bubble in a credit money based system results in more mixed goods price increases and asset price declines. Presently I find Keen's position more persuasive in these matters.

[ThePythonicCow]

Re: Steve Keen talk at Google

And why can they not continue with QE?

They can, and under cover of darkness likely will, in some other form and by some other name.

However, what is QE? It's presented as being classic fiat money printing, but I suspect on closer examination would be found to be rearranging the debt chairs on the deck of the Good Ship Dollar Indebtedness.

[Jay]

Re: Steve Keen talk at Google

Ok - I misunderstood then. When you wrote earlier:
I thought you were referring to a specific way of toasting our money system, that being the pure fiat money printing such as culiminates in we have seen in the Wiemar Republic or Zimbabwe.

I agree the government is toasting it, one way or the other, and that the middle class is being cooked.

My intuition (not very well thought out yet) however is that it will make a difference how they cook us. I'm thinking that [A] classic money printing hyperinflation would cause the price of everything to rise dramatically, whereas [b] a debt bubble collapse in a debt (or credit) based monetary system would cause more of a shift in pricing, raising the prices of essential non-durables (food, taxes, imports) while causing increasing volatility in many other prices and falling asset (real estate, savings, pension funds, ...) prices.

So far we're seeing [b]. One big difference between [A] and [b] will be whether stock market (nominal dollar) prices rise dramatically or stumble around. Again, so far, it's been [b]. Yes, the market is up these last ten months, but it's still nothing like a moonshot to all time highs.

EJ and Keen, as I understand it, have disagreed on the notorious "inflation" versus "deflation" debate. I suggest that this is due to a more basic disagreement on how money is created. Fiat money printing can lead to severe broad spectrum price inflation whereas the collapse of a credit bubble in a credit money based system results in more mixed goods price increases and asset price declines. Presently I find Keen's position more persuasive in these matters.

I think we are seeing both A and B at the same time, the key is that they are not at all mutually exclusive. That may be our difference. I also think we will see a lot more of each in the future among other things I have already mentioned.

On the inflationary side of things, you get government credit taking the place of private credit (possibly the preponderant process presently, depending on your measure and viewpoint), printing, and increasing energy costs. In addition, we may also be looking at the beginnings of the end of globalization in the form of carbon type tariffs disguised as saving the world from the great flood.

[ThePythonicCow]

Re: Steve Keen talk at Google

Above I wrote:

So I say the U.S. is at the end of that road. We've already devalued dollars against Treasuries as far as we can go.

On re-reading this, I realize it doesn't mean quite what I meant.

The following would be closer to what I had in mind:

So I say the U.S. is nearly at the end of that road. We've already devalued dollars against Treasuries almost as far as we can go. There may be some more weakening of the dollar against other currencies, but only as part of continuing volatility in FOREX markets, not as the result of some sudden major devaluation, for the dollar is not valued like most other currencies, against some commodity or reserve currency basis. If there is a dramatic event, it will have to be a Treasury default of some form.

[ThePythonicCow]

Re: Steve Keen talk at Google

I think we are seeing both A and B at the same time, the key is that they are not at all mutually exclusive.

No doubt, and likely all parties (EJ, Keen, ...) have said as much.

The question is whether either of A or B dominates. I am saying B dominates and I think I find support in Keen's work for this view. Keen as I recall described our monetary system is predominantly a credit-based money creation system, with a significantly smaller fiat printing press on the side.

[ThePythonicCow]

Re: Steve Keen talk at Google

On the inflationary side of things, you get government credit taking the place of private credit (possibly the preponderant process presently, depending on your measure and viewpoint), printing, and increasing energy costs. In addition, we may also be looking at the beginnings of the end of globalization in the form of carbon type tariffs disguised as saving the world from the great flood.

Yes, we have nominal dollar prices rising for some things. That's not in dispute.

And yes, there are clouds on the horizon of dramatic global monetary system changes. Again, not in dispute.

[Jay]

Re: Steve Keen talk at Google

No doubt, and likely all parties (EJ, Keen, ...) have said as much.

The question is whether either of A or B dominates. I am saying B dominates and I think I find support in Keen's work for this view. Keen as I recall described our monetary system is predominantly a credit-based money creation system, with a significantly smaller fiat printing press on the side.

And I'm saying what is more important than the balance of what dominates is the fact that both will be happening at the same time in orders of magnitude higher than ever before. Eventually the act breaks down with both spinning out of control. That means, regardless of the balance, faith in the current currency regime dwindles and gold wins as long as uncle sam doesn't get too angry. So keep some FRN's because you need to pay your bills and next to gold they will have some value as we move down Exeter's pyramid. How much they are worth depends on the balance, but they will likely lose value against gold and real goods.

[orion]

Re: Steve Keen talk at Google

... EJ and Keen, as I understand it, have disagreed on the notorious "inflation" versus "deflation" debate. I suggest that this is due to a more basic disagreement on how money is created. Fiat money printing can lead to severe broad spectrum price inflation whereas the collapse of a credit bubble in a credit money based system results in more mixed goods price increases and asset price declines. Presently I find Keen's position more persuasive in these matters.

TPC, I am also thinking like you and I try to keep up equally with EJ and Keen but I seem to favor Keen. I think the Great Depression showed all these strategies (inflation vs deflation) and deflation seemed to win till AFTER WWII when we were in the very unique position to rebuild a destroyed world. It will be very interesting to watch Japan trying to escape from deflation and whether hyperinflation is the only way to break deflation spiral as moderate inflation which should possibly break it but is not strong enough (maybe it's a psychological thing).

[ThePythonicCow]

Re: Steve Keen talk at Google

And I'm saying what is more important than the balance of what dominates is the fact that both will be happening at the same time in orders of magnitude higher than ever before.

When plain old fiat money printing spins out of control, they call it hyperinflation.

That I do not expect. There we apparently disagree.

It is physically possible that they actually load up the helicopters and start dropping bundles of $100 bills from sea to shining sea, followed by newly issued $1000 notes a month later, and so on. But I don't expect they will.

I expect the continued collapse of debt markets and debt-generated money to dominate substantially, to the point of being the determinant force, at least until such time as the U.S. defaults (in some limited way) on its Treasuries.

And while, in general terms, they both suck big time for the former and once great American middle class, they suck in different ways.

In other words, I am not only saying "B dominates", I am saying B dominates sufficiently strongly that it does matter.

[Jay]

Re: Steve Keen talk at Google

When plain old fiat money printing spins out of control, they call it hyperinflation.

That I do not expect. There we apparently disagree.

It is physically possible that they actually load up the helicopters and start dropping bundles of $100 bills from sea to shining sea, followed by newly issued $1000 notes a month later, and so on. But I don't expect they will.

I expect the continued collapse of debt markets and debt-generated money to dominate substantially, to the point of being the determinant force, at least until such time as the U.S. defaults (in some limited way) on its Treasuries.

And while, in general terms, they both suck big time for the former and once great American middle class, they suck in different ways.

In other words, I am not only saying "B dominates", I am saying B dominates sufficiently strongly that it does matter.

Got it. I think printing does matter and even if it doesn't keep pace with the deflationary forces on assets, in real terms it hastens the increase in the cost of real tangible things. I would add that I see a new currency regime before hyperinflation. We will see a step wise fashion of both processes in which the government prints and loans oodles of money to try and keep up with massive deflationary forces. Because we have the worlds reserve currency, this process takes years. The middle class is ratcheted out of existence in the meantime. The needed stimulus will grow with each wave.

In the end you think the dollar will buy more than it does now. I do not, especially in tangible goods.

[ThePythonicCow]

Re: Steve Keen talk at Google

In the end you think the dollar will buy more than it does now. I do not, especially in tangible goods.

Well, no, I don't think that the dollar will buy more on average. To quote an earlier post of mine above, I'm expecting B:

a debt bubble collapse in a debt (or credit) based monetary system would cause more of a shift in pricing, raising the prices of essential non-durables (food, taxes, imports) while causing increasing volatility in many other prices and falling asset (real estate, savings, pension funds, ...) prices.

Essential tangibles would become erratically higher, non-essentials increasingly volatile, and longer term asset classes (real estate, stocks) will become erratically, sometimes violently, lower. People will spend more on food and energy and less on the other stuff.

If price levels were ocean levels on this planet, we'd see monster tides, tsunami's and tidal waves, immense sucking whirlpools for many asset prices and a Al Gore like long term overall modest (given the size of the oceans) rising sea level. Those who get hit with a tidal wave or who live in "underwater" real estate near the beach or who lose a ship to a whirlpool will not be happy campers. The good news is that the oceans never boil over.

But other than that, it sounds like we agree on what we agree, and that we both hope we're both wrong and some "miracle" occurs .

[Jay]

Re: Steve Keen talk at Google

Well, no, I don't think that the dollar will buy more on average. To quote an earlier post of mine above, I'm expecting B:
Essential tangibles would become erratically higher, non-essentials increasingly volatile, and longer term asset classes (real estate, stocks) will become erratically, sometimes violently, lower. People will spend more on food and energy and less on the other stuff.

If price levels were ocean levels on this planet, we'd see monster tides, tsunami's and tidal waves, immense sucking whirlpools for many asset prices and a Al Gore like long term overall modest (given the size of the oceans) rising sea level. Those who get hit with a tidal wave or who live in "underwater" real estate near the beach or who lose a ship to a whirlpool will not be happy campers. The good news is that the oceans never boil over.

But other than that, it sounds like we agree on what we agree, and that we both hope we're both wrong and some "miracle" occurs .

So let's see, you think the dollar will be worth less, yet you think debt deflation deleveraging will be the predominant factor "by far." You must think the loss of purchasing power of the dollar will be all due to a collapse in global trade and increasing energy costs. I happen to think it will also be due to massive government credit and printing. The debt-deleveraging primarily destroys the value of assets (so dollar up against real estate, at least in the beginning), the offsetting printing and inefficient government credit will increase the value of tangible things (dollar down against the things you need). Energy costs and an end to globalization will be additive.

Debt-deleverage huge. Government intervention huge. The balance of the two not as important as the size. Their effects are focused in different areas. Dollar down against tangibles. You and me squeezed.

[ThePythonicCow]

Re: Steve Keen talk at Google

You and me squeezed.

That's for sure.

[bart]

Re: Steve Keen talk at Google

Keen can reference equally compelling (at least to a naive cow) data to the contrary. See for example his post of a year ago Steve Keen’s DebtWatch No 31 February 2009: “The Roving Cavaliers of Credit in which he explains this theory of money creation. There he provides various supporting evidence for his theory that debt precedes money, including evidence that M2 leads M1 and that debt is always larger than the money supply, not smaller.

The Data versus the Money Multiplier Model

Two hypotheses about the nature of money can be derived from the money multiplier model:

1. The creation of credit money should happen after the creation of government money. In the model, the banking system can’t create credit until it receives new deposits from the public (that in turn originate from the government) and therefore finds itself with excess reserves that it can lend out. Since the lending, depositing and relending process takes time, there should be a substantial time lag between an injection of new government-created money and the growth of credit money.

2. The amount of money in the economy should exceed the amount of debt, with the difference representing the government’s initial creation of money. In the example above, the total of all bank deposits tapers towards $10,000, the total of loans converges to $9,000, and the difference is $1,000, which is the amount of initial government money injected into the system. Therefore the ratio of Debt to Money should be less than one, and close to (1-Reserve Ratio): in the example above, D/M=0.9, which is 1 minus the reserve ratio of 10% or 0.1.

Both these hypotheses are strongly contradicted by the data.

Testing the first hypothesis takes some sophisticated data analysis, which was done by two leading neoclassical economists in 1990.[3] If the hypothesis were true, changes in M0 should precede changes in M2. The time pattern of the data should look like the graph below: an initial injection of government “fiat” money, followed by a gradual creation of a much larger amount of credit money:


Their empirical conclusion was just the opposite: rather than fiat money being created first and credit money following with a lag, the sequence was reversed: credit money was created first, and fiat money was then created about a year later:

“There is no evidence that either the monetary base or M1 leads the cycle, although some economists still believe this monetary myth. Both the monetary base and M1 series are generally procyclical and, if anything, the monetary base lags the cycle slightly. (p. 11)

The difference in the behavior of M1 and M2 suggests that the difference of these aggregates (M2 minus M1) should be considered… The difference of M2 – M1 leads the cycle by even more than M2, with the lead being about three quarters.” (p. 12)

Thus rather than credit money being created with a lag after government money, the data shows that credit money is created first, up to a year before there are changes in base money. This contradicts the money multiplier model of how credit and debt are created: rather than fiat money being needed to “seed” the credit creation process, credit is created first and then after that, base money changes.

It doesn’t take sophisticated statistics to show that the second prediction is wrong—all you have to do is look at the ratio of private debt to money. The theoretical prediction has never been right—rather than the money stock exceeding debt, debt has always exceeded the money supply—and the degree of divergence has grown over time.(there are attenuating factors that might affect the prediction—the public hoarding cash should make the ratio less than shown here, while non-banks would make it larger—but the gap between prediction and reality is just too large for the theory to be taken seriously).




If I were smarter, perhaps I would have a unifying explanation for this apparent contradiction.

Try as I might, I don't see his data as being compelling - and even his words include the word "hypothesis".

Note too that I'm not questioning the M1, M2 & M2 - M1 issues.

But I am questioning both the debt leads credit and the money multiplier areas. To comment as he does on the money multiplier area is quite odd to me - all it really boils down to is that the velocity of money changes, and affects "total money". I wish he would have used a different term and headline.

As far as debt leads credit, not only did my prior chart show that base + deposits leads credit:






... but also that debt hasn't lead credit since the mid '80s:






All I'm really saying is that when I look at the raw data and do an annual change rate boogie, debt does not lead credit reliably.