bobbyw24
06-15-2009, 06:45 AM
http://seekingalpha.com/article/143210-on-deleveraging-deflation-and-debt
On Deleveraging, Deflation and Debt
Very long week at work, so I am a little burned out. Some quick hits and then the usual Friday festivities.
Audit the FED Bill Set to Pass
I have to say that when the Ron Paul bill that will set an audit for the FED first started to circulate I figured it was just another waste of time trying to get something done. All across the blogosphere the bill was given free press and it seems enough people actually made calls, signed petitions, and made enough noise that the House felt it in their best interests to get on board! I am pleasantly surprised indeed:
Audit the Fed Bill Reaches Crucial Benchmark
Washington, D.C. - Congressman Ron Paul's Federal Reserve Transparency Act, HR 1207, has reached and surpassed the level of 218 cosponsors in the House of Representatives, which means it is now cosponsored by a majority of the members.
The 218th cosponsor was Dennis Kucinich (OH-10), and the bill has since received its 222nd cosponsor.
“The tremendous grass-roots and bipartisan support in Congress for HR 1207 is an indicator of how mainstream America is fed up with Fed secrecy,” said Congressman Paul. “I look forward to this issue receiving greater public exposure.”
Hearings on Federal Reserve transparency are expected within the next month, as part of the Financial Services Committee's series of hearings on regulatory reform.
Now this of course is no guarantee the Senate will pass this version without making it toothless, or if president Obama would ever sign such a bill. For now, it is enough this thing is going ahead and I thank all that helped to make that so.
Deleveraging: It's Not Just for Breakfast Anymore
In this corner from the inflation (or even hyperinflation) camp we have an essay from Bill Bonner, a very sharp market observer known for his bearishness and also running The Daily Reckoning site. In this article Mr. Bonner presents a compelling reason for inflation to run high going forward (excerpts):
Two Ways to Deleverage an Economy
The dumb money is fairly easy to spot. It’s the money that always shows up late to the party, wearing yesterday’s fashions. It watches TV and thinks the reality shows show reality…it thinks Ben Bernanke is a great economist…that the SEC protects investors from fraud and misrepresentation…and that Tim Geithner makes sure the economy keeps running smoothly.
It’s the dumb money that thinks you can correct a generation-long period of credit growth in 24 months…with less than 10% unemployment…
Stocks have now been in a rally for three months. The longer this goes on, of course, the dumber money gets. People come to think the bounce is a permanent bull market...
House prices are still going down – but not as fast. Still, big resets, defaults and foreclosures are still on the way – in prime and Alt-A mortgages.
Meanwhile, when companies don’t sell…they don’t ship either.
The trucking industry says traffic is off 13% from a year before – the biggest drop in 13 years.
Airplanes are carrying 21% less cargo. And the commercial airline industry says it is losing $9 billion this year.
As for shipping…well, don’t even bring it up. Shipping has been in a catastrophic slump since last year – with cargo rates down 90%.
Obvious conclusion:
“Every smart trader I know is massively short the stock market,” says Jeff Clark...
All that takes time. And betting against deleveraging is probably not a smart thing to do. Not until it’s over…which is not until the leverage built up in the bubble era has been removed. And with total debt levels at 370% of GDP…and the government adding even more debt…we’re a long way from there.
But what do you do, dear reader? Buy Treasuries in anticipation of another crash in stocks? Or mortgage your house, long-term fixed-rate, in anticipation of fed-caused inflation?
Ah, there’s the tough question. We know where the dumb money is…but where’s the smart money? Jeff Clark says it’s short stocks. But there’s some very smart money that is betting that the government will turn this around. They’re putting their money on inflation…or even hyperinflation. Our old friend, Marc Faber, for example, says he is sure the United States is headed for hyperinflation. If so, shorting stocks may not be such a shrewd move. Stocks could soar too – as investors try to buy anything and everything that didn’t have dollar signs on it.
You see, there are two ways to deleverage an economy.
The obvious way is the traditional, honest way – in which people actually try to pay their debts. This causes the problems we see as falling asset prices, bankruptcies, joblessness and the other hallmarks of a Great Depression.
But the feds have their hearts set on preventing a depression. And they’re doing it the only way they can…by the old “hair of the dog” technique. The economy suffers from too much debt – so they’re going to give it more! Much more. The whole pooch! The whole kennel! Then, they round up every stray mongrel in town. What happens when they run out of dogs? Well…that’s a discussion for another day.
We have had many laughs following the feds and their war against capitalism. They’re gambling an amount nearly equal to the entire U.S. GDP to try to prevent people from getting what they have coming. In the process, they’re almost certain to make a mess of things.
The smart money is betting that they fail to stop deleveraging. But the very smart money is betting that they create a new, worse problem – inflation, maybe hyperinflation. Inflation reduces the real value of debt…but in a perverse and unpredictable way. Debtors don’t pay their bills; savers pay them. Inflation – like bailouts – rewards the least responsible players…those who have gotten themselves heavily in debt…and punishes those who have done the “right” thing. As Germany saw in the ’20s, it de-stabilizes the whole society…leading to extremely unwelcome outcomes.
Mr. Bonner shares my reasons for thinking inflation is on the way, specifically the FED has made it abundantly clear that is preferred to deflation. One can argue that the FED really cannot stop deflation, and I certainly find that quite possible, but I think they will succeed.
Mr. Practical at His Best
Minyanville writer Mr. Practical is about the best there is when it comes to macro writing. As I wrote above that I lean towards the inflation scenario, Mr. practical takes the opposite view. His entire article it tonight's (or over the weekend) must read, and I encourage you to read it all. I will try to present the key points below, but the entire piece should be read: Velocity of Money Comes to a Standstill
...Some are buying stocks because they fear inflation. Inflation is a falling dollar. When the dollar falls it tends to drive prices up. But we can see that prices of necessities are going up while prices of discretionary things are going down. This is natural as disposable income falls and the savings rate rises...
Additionally, I think they don't quite understand how "inflation" is created. To "inflate" or devalue the dollar precipitously, you need a fractional banking system to lend money and consumers to borrow it. Without that you have no multiplier effect.
With mortgage rates up 100 basis points in 2 weeks (as a result of trying desperately to print enough money to reflate), and with a now required 20% down, few people can afford a mortgage given their negative equity and high debt. The money "supply" is egregious (the government bailing out banks and stuffing them with cash), but the velocity of money has come to a standstill (people aren't in any shape to borrow it)...
I heard a Fed official say that a jobless recovery is possible. I suppose it is, but I will tell you it can only occur if productivity is rising. So while not lying, he isn't telling the truth, or he doesn’t understand it. Berries call productivity higher when it is driven by leverage.
The US economy has a serious problem, one which I've talked about many times: too much debt. The government is merely trying to shift financial debt (forget consumer debt) to public debt. They're merely shifting the costs from us to our children. Today’s politician seeks short-term solutions at the expense of the long term.
Again, very persuasive for the deflation camp.
I do not think that the inflation vs. deflation debate need be a Jedi vs. Sith kind of death match. It is far from clear which will win out, and I have no doubt most observers are very interested in the future of the country.
If pressed, here is my objection to the deflation thesis:
-Right now the velocity of money is almost stopped. Right now. I am thinking of the millions of recently foreclosed on homeowners that are going to get armed to the teeth with new credit by an inflationary government and what I see is a huge number of them ready to "get back" to where they were. Deflation assumes people will have learned the debt lesson, but I have no such illusions.
-Last night I presented a great piece that covered the last 4 "reserve currencies" and their ultimate ends. In every case there came a point that the reserve country went too far, and things fell apart relatively quickly. Think along those lines as we see deficits in the trillions and the number one priority for this government is another 1 trillion dollar health care program. Priorities anyone? Creditors are seeing this too.
-The debt load the US is carrying is just to big. At some point creditors are going to pull out the calculator and see they will not get paid back for around 300 years and they will wake up. Not today, not next week, and maybe not next year but they will. At the point of recognition the only resort for the US will be devaluation and paying debt with cheaper dollars.
Feel free to make your arguments in the comments. This debate is not going away anytime soon!
On Deleveraging, Deflation and Debt
Very long week at work, so I am a little burned out. Some quick hits and then the usual Friday festivities.
Audit the FED Bill Set to Pass
I have to say that when the Ron Paul bill that will set an audit for the FED first started to circulate I figured it was just another waste of time trying to get something done. All across the blogosphere the bill was given free press and it seems enough people actually made calls, signed petitions, and made enough noise that the House felt it in their best interests to get on board! I am pleasantly surprised indeed:
Audit the Fed Bill Reaches Crucial Benchmark
Washington, D.C. - Congressman Ron Paul's Federal Reserve Transparency Act, HR 1207, has reached and surpassed the level of 218 cosponsors in the House of Representatives, which means it is now cosponsored by a majority of the members.
The 218th cosponsor was Dennis Kucinich (OH-10), and the bill has since received its 222nd cosponsor.
“The tremendous grass-roots and bipartisan support in Congress for HR 1207 is an indicator of how mainstream America is fed up with Fed secrecy,” said Congressman Paul. “I look forward to this issue receiving greater public exposure.”
Hearings on Federal Reserve transparency are expected within the next month, as part of the Financial Services Committee's series of hearings on regulatory reform.
Now this of course is no guarantee the Senate will pass this version without making it toothless, or if president Obama would ever sign such a bill. For now, it is enough this thing is going ahead and I thank all that helped to make that so.
Deleveraging: It's Not Just for Breakfast Anymore
In this corner from the inflation (or even hyperinflation) camp we have an essay from Bill Bonner, a very sharp market observer known for his bearishness and also running The Daily Reckoning site. In this article Mr. Bonner presents a compelling reason for inflation to run high going forward (excerpts):
Two Ways to Deleverage an Economy
The dumb money is fairly easy to spot. It’s the money that always shows up late to the party, wearing yesterday’s fashions. It watches TV and thinks the reality shows show reality…it thinks Ben Bernanke is a great economist…that the SEC protects investors from fraud and misrepresentation…and that Tim Geithner makes sure the economy keeps running smoothly.
It’s the dumb money that thinks you can correct a generation-long period of credit growth in 24 months…with less than 10% unemployment…
Stocks have now been in a rally for three months. The longer this goes on, of course, the dumber money gets. People come to think the bounce is a permanent bull market...
House prices are still going down – but not as fast. Still, big resets, defaults and foreclosures are still on the way – in prime and Alt-A mortgages.
Meanwhile, when companies don’t sell…they don’t ship either.
The trucking industry says traffic is off 13% from a year before – the biggest drop in 13 years.
Airplanes are carrying 21% less cargo. And the commercial airline industry says it is losing $9 billion this year.
As for shipping…well, don’t even bring it up. Shipping has been in a catastrophic slump since last year – with cargo rates down 90%.
Obvious conclusion:
“Every smart trader I know is massively short the stock market,” says Jeff Clark...
All that takes time. And betting against deleveraging is probably not a smart thing to do. Not until it’s over…which is not until the leverage built up in the bubble era has been removed. And with total debt levels at 370% of GDP…and the government adding even more debt…we’re a long way from there.
But what do you do, dear reader? Buy Treasuries in anticipation of another crash in stocks? Or mortgage your house, long-term fixed-rate, in anticipation of fed-caused inflation?
Ah, there’s the tough question. We know where the dumb money is…but where’s the smart money? Jeff Clark says it’s short stocks. But there’s some very smart money that is betting that the government will turn this around. They’re putting their money on inflation…or even hyperinflation. Our old friend, Marc Faber, for example, says he is sure the United States is headed for hyperinflation. If so, shorting stocks may not be such a shrewd move. Stocks could soar too – as investors try to buy anything and everything that didn’t have dollar signs on it.
You see, there are two ways to deleverage an economy.
The obvious way is the traditional, honest way – in which people actually try to pay their debts. This causes the problems we see as falling asset prices, bankruptcies, joblessness and the other hallmarks of a Great Depression.
But the feds have their hearts set on preventing a depression. And they’re doing it the only way they can…by the old “hair of the dog” technique. The economy suffers from too much debt – so they’re going to give it more! Much more. The whole pooch! The whole kennel! Then, they round up every stray mongrel in town. What happens when they run out of dogs? Well…that’s a discussion for another day.
We have had many laughs following the feds and their war against capitalism. They’re gambling an amount nearly equal to the entire U.S. GDP to try to prevent people from getting what they have coming. In the process, they’re almost certain to make a mess of things.
The smart money is betting that they fail to stop deleveraging. But the very smart money is betting that they create a new, worse problem – inflation, maybe hyperinflation. Inflation reduces the real value of debt…but in a perverse and unpredictable way. Debtors don’t pay their bills; savers pay them. Inflation – like bailouts – rewards the least responsible players…those who have gotten themselves heavily in debt…and punishes those who have done the “right” thing. As Germany saw in the ’20s, it de-stabilizes the whole society…leading to extremely unwelcome outcomes.
Mr. Bonner shares my reasons for thinking inflation is on the way, specifically the FED has made it abundantly clear that is preferred to deflation. One can argue that the FED really cannot stop deflation, and I certainly find that quite possible, but I think they will succeed.
Mr. Practical at His Best
Minyanville writer Mr. Practical is about the best there is when it comes to macro writing. As I wrote above that I lean towards the inflation scenario, Mr. practical takes the opposite view. His entire article it tonight's (or over the weekend) must read, and I encourage you to read it all. I will try to present the key points below, but the entire piece should be read: Velocity of Money Comes to a Standstill
...Some are buying stocks because they fear inflation. Inflation is a falling dollar. When the dollar falls it tends to drive prices up. But we can see that prices of necessities are going up while prices of discretionary things are going down. This is natural as disposable income falls and the savings rate rises...
Additionally, I think they don't quite understand how "inflation" is created. To "inflate" or devalue the dollar precipitously, you need a fractional banking system to lend money and consumers to borrow it. Without that you have no multiplier effect.
With mortgage rates up 100 basis points in 2 weeks (as a result of trying desperately to print enough money to reflate), and with a now required 20% down, few people can afford a mortgage given their negative equity and high debt. The money "supply" is egregious (the government bailing out banks and stuffing them with cash), but the velocity of money has come to a standstill (people aren't in any shape to borrow it)...
I heard a Fed official say that a jobless recovery is possible. I suppose it is, but I will tell you it can only occur if productivity is rising. So while not lying, he isn't telling the truth, or he doesn’t understand it. Berries call productivity higher when it is driven by leverage.
The US economy has a serious problem, one which I've talked about many times: too much debt. The government is merely trying to shift financial debt (forget consumer debt) to public debt. They're merely shifting the costs from us to our children. Today’s politician seeks short-term solutions at the expense of the long term.
Again, very persuasive for the deflation camp.
I do not think that the inflation vs. deflation debate need be a Jedi vs. Sith kind of death match. It is far from clear which will win out, and I have no doubt most observers are very interested in the future of the country.
If pressed, here is my objection to the deflation thesis:
-Right now the velocity of money is almost stopped. Right now. I am thinking of the millions of recently foreclosed on homeowners that are going to get armed to the teeth with new credit by an inflationary government and what I see is a huge number of them ready to "get back" to where they were. Deflation assumes people will have learned the debt lesson, but I have no such illusions.
-Last night I presented a great piece that covered the last 4 "reserve currencies" and their ultimate ends. In every case there came a point that the reserve country went too far, and things fell apart relatively quickly. Think along those lines as we see deficits in the trillions and the number one priority for this government is another 1 trillion dollar health care program. Priorities anyone? Creditors are seeing this too.
-The debt load the US is carrying is just to big. At some point creditors are going to pull out the calculator and see they will not get paid back for around 300 years and they will wake up. Not today, not next week, and maybe not next year but they will. At the point of recognition the only resort for the US will be devaluation and paying debt with cheaper dollars.
Feel free to make your arguments in the comments. This debate is not going away anytime soon!