Friday, January 2, 2009

Easing Into The New Year

Nothing is more customary and expected in finance than New Year's predictions about market performance in the year ahead. However, this being a confirmed contrarian site, yours truly shall abstain from delphic blather. Instead, let's talk about easing; specifically, the hot new topic of quantitative easing.

Well, what does this techno-babble expression mean, anyway? It means that the Fed has brought the cost of money (interest rates) to zero - and as any micro-economics professor will tell you, when the price of anything is zero demand goes to infinity (in theory, anyway).

As I am fond of saying: "Money for nothing, chicks for free". The Fed is in Dire Straits, indeed.

Two thoughts:
  • The Fed is desperately trying to arrest what it sees as a runaway train of deflation from smashing into the entire economy. But which economy is it trying to protect? Obviously, the Permagrowth economy which - in my opinion, at least - is completely past due its expiration date. It would be far more constructive to re-think the entire concept and come up with a radically different economic paradigm: the Sustainable Economy. In such a case, quantitative easing is completely and unequivocally the wrong thing to do.
  • Even if the Fed is determined to keep going as it is, we must seriously think of the consequences down the road. The Fed's presumed plan is to prevent future hyperinflation by soaking up the excess liquidity immediately once deflation is reversed. Easier said than done; it's like taking a shower with water of only two possible temperatures: scalding hot or frezing cold. Good luck with that...
Oh, allright... I'll succumb to the usual temptation and risk a prediction, after all: The Fed will keep on its present course until financial markets finally cheer up and signal a recovery, even if such signal ultimately proves short-lived and false. Mr. Bernanke has no choice, really; his entire career has revolved around the study of monetary policy during the Great Depression and ways to combat it using squadrons of moneycopters. In this way he is, very unfortunately, the very definition of the anti-Protean Chairman (*).

May the year ahead prove eventful - or, even better, historic. That's pretty much a curse, I'm afraid...
___________________________________________________

(*) Protean: versatile, flexible, adaptable.


17 comments:

Adam Smith said...

Quantitative Easing Won't Work

In a Liquidity Trap although Saving (S) is abnormally high investment (I) is next to 0.

Hence, the Keynesian paradigm I = S is not verified.

The purpose of Quantitative Easing being to lower the yield on long-term savings doesn't create $1 of investment.

It does diminish the yield on long-term Treasury Bonds but lowers marginally, if at all, the asked yield on savings.

This and other issues are explored in my tract:

A Specific Application of Employment, Interest and Money
Plea for a New World Economic Order



Abstract:

This tract makes a critical analysis of credit based, free market economy, Capitalism, and proves that its dysfunctions are the result of the existence of credit.

It shows that income / wealth disparity, cause and consequence of credit and of the level of long-term interest-rates, is the first order hidden variable, possibly the only one, of economic development.

It solves most of the puzzles of macro economy: among which Business Cycles, Stagflation, Greenspan Conundrum, Deflation and Keynes' Liquidity Trap...

It shows that no fiscal or monetary policy, including the barbaric Quantitative Easing will get us out of depression.


A Credit Free, Free Market Economy will correct all of those dysfunctions.


The alternative would be, on the long run, to wait for the physical destruction (through war or rust) of most of our productive assets. It will be at a cost none of us can afford to pay.

A Specific Application of Employment, Interest and Money
http://www.17-76.net/interest.html

Shalom P. Hamou
Tel: +972 54 441-7640
Email: shalom.p.hamou@17-76.net

Gary said...

"The Fed's presumed plan is to prevent future hyperinflation by soaking up the excess liquidity immediately once deflation is reversed."

Does anyone really believe that they will have either the stones or the brains to do this when it is needed? I don't.

Tiago said...

Dear Hel,

I miss the time you were a heavy blogger. There is no one that has been as insightful and prescient as you. I know that things are unraveling precisely the way you forecasted (and there is not much more than you need say) but your macroeconomic analysis is severely missed. I will leave 2 questions, if I am lucky maybe you will address them ;)

1. Do you expect the current "quantitative easing" to convert the deflation scenario to an hyperinflation one?

2. What do you think about the "keynesian" approach being followed by almost everyone (Germany seems to be the single possible exception). It seems to me that "keynesianism" means transfering the debt from the private to the public sphere (being the state the debtor of last resort) and investing with permagrowth restoration in mind (with some exceptions on renewables)... I mean, this kind of "keynesianism" is mainly another step into the debt abyss.

Marcus said...

Shalom P. Hamou:

"The alternative would be, on the long run, to wait for the physical destruction (through war or rust) of most of our productive assets. It will be at a cost none of us can afford to pay."

As long as Americans can be fooled into thinking they are "fighting for the Homeland" against all evidence to the contrary, by invading and occupying countries that pose no real threat, war will persist. We should look forward to the clarity of "rational" old fashioned decisions for was--like resources.

Speaking of the Homeland:

Why doesn't the Fed guarantee all future loans, in specific sectors (green energy?), until further notice, that'll get the economy percolating again. I think the rating agencies will give those loans AAA status. Let's spread that easy-Hank Paulson-money around. We gotta get inflation working for us again.

Inflation, the great debt destroyer, worked for the German Homeland didn't it? You didn't hear France bitchin' about their war reparations anymore in the 1930's.

wkwillis said...

France was complaining about the war reparations not coming. But the French army was far more concerned with the Russian army than the German army, and didn't want to discourage the Germans from rearming by demanding reparations.
Which is why the French army told the French government to get stuffed when the Germans marched into the Rhineland and the French government told the French army to chase them back.

Hellasious said...

Dear Tiago,

Thank you for your kind words.

I shall address your questions tomorrow in a full post.

Regards,

H.

Anonymous said...

Agreed with Tiago
Very much appreciate your analysis before. would like to see more thoughts.

it's gonna be really tough to be right on the hyperinflation and deflation, timeline and magnitude..

as an EE engineer before, I know a macro system as complicated as the economy is way too complex. it's system response time, order of the system are purely known and all input/output are tangled together...

but one thing for sure, even if for a 2nd order control system, it's easy you could overshoot, or worse, if you miss interpelate the timming, the correction force could turn into a enfocing force...

yeah, i am sure Ben and Co. figured out the system well enough...

i am just afraid to see the outcome and the lesson all the 'economists' gonna learn

Brian Woods said...

Happy New Year Hel.

Just the Sustainable bit. I presume you mean an economy with a -.00xx annual decline. You have to discount the +entropy (Georgescu-Roegen). Need to retire our energy consumption at rate slightly in excess of nett availability since our most used sources are finite.

Best wishes to all.

Brian P

Anonymous said...

Its a game of will's. Wealth is defined as a quote in daily market exchange in the West. Factor this with me to what the 3 are doing i.e china, Korea and Japan to what would call value. And our urging Canada, Mexico and The States to adapt a better risk management assement for the group think capital.
Attempts to reduce the deficit, balance the budget or pay off the national debt are futile. The deficit and the national debt represent the subsidy the government has paid in its attempt to keep growth and unemployment at the level of social tolerance.
The steady state economy into which we are being inexorably forced implies an interest rate of zero. An interest rate of zero (as Hubbert explains) means the end of the money system. We are being forced to completely rethink our cultural ideas about how to organize our economy and distribute purchasing power.
Increasingly desperate means will be used by those who think we can continue to have business as usual. Hubbard was direct if you like it or not, and assimilated by the BOJ for social stability. I guess it yes or no here guys and maybe it our 10 year turn to stew since we see what that FED has still sort scdo ect... er misnomers
In the essay Keynes identifies "the Classical doctrine" with the idea that
there are "deep undercurrents" - "natural forces," an "invisible" hand - working to bring about balance of payments adjustment by making the US into a "high-living, high-cost country."

I take it you don't interpret "The Balance of Payments of the US" as
advocating domestic price and wage deflation as part of a reasonable
solution to the balance of payments problems of debtor countries.
"well we know better than that!"

We see that so yes I need hellasios to discern to me why the west assumes what they do in reference to what the east has done?
Truly capital goes where best treated and thats what our company does. Either a black cat or white is fine if it catches a mouse. http://www.theatlantic.com/doc/200812/fallows-chinese-banker/2
well toss in that so much has been pirated what is a balanced ledger.

Punish the prudent and the frugal for how long is on whos mind?
Both sides are facing social acrimony so give them a quarter to grind it in.

Greenie said...

My new year's gift to Hell:

http://news.yahoo.com/s/ap/20090102/ap_on_re_us/mileage_tax

"Oregon looks at taxing mileage instead of gasoline"

Sweet !! They are going to tax those Prius buyers to subsidize us, the inefficient :)

And BTW Oregon is the closest to a model state that Hell describe. They protect environment, hug trees, use cooking oil to drive cars and ban it for frying chips :)

Are you happy Hell?

Thai said...

Greenie, since Dink is not here, I'll take up his role today: why do you have to be such a putz? Do you speak for everyone with whom you may have some political agreement regardless of whatever they do?

Hell, I have what may be yet another stupid question: are there any other types of credit crunches besides deflationary credit crunches and inflationary credit crunches?

Edwardo said...

I know what I think, but Here's a question for anyone who cares to answer it, whose banks are in worse condition, the U.S. or Europe's?

dink said...

Tales of So Cal (its the weekend so forgive the non-finance raving)

*Its amazing how fast the mind recalibrates. Family descended on my parents-in-law's house. All conversations had to be at the appropriate level for roaming 2-6 year olds. After their bedtimes my brother's-in law would trash talk my Nintendo Wii failures, but that was as rough as it got for days on end. The phrase "fat, dumb, and happy" comes to mind. But on the last day my father-in-law and I are talking alone. He gets a glint in his eye and decides say that its the Democrat's fault that the CA budget is in trouble and that Arnie would fix everything if they'd let him. And Dink was awakened. (<1/2 overheard some of it and later said that I was obnoxious, but justice was needed, no?). I was not so offended by the Dem attack as I was by the idea that the CA economy could be "fixed". It is in no way sustainable.

It provoked me to start writing down my exact views on the matter. Hopefully someday soon I'll clean it up and annoy you all with it;)

But in the mean time I have caught up on backlogged Sudden Debt!

Thai- I am intrigued by Hari Krishna tortilla chips, but have never come across any. I will keep a look out next time. I am intrigued by Strange Loop and have much better odds of coming across it than Krishna chips. Do you find that the more evolutionary psych you read, the more pathetic you find the human mind? Our perception of reality seems very flexible and easily manipulated.

Greenie- You are an ill-tempered, ego-malformed, sociopathic putz. Why couldn't you post your article noting that it was somewhat ironic for the Prius drivers (who probably make up >5% of Oregon's mileage)instead of intentionally trying to irritate our host? Make a 2009 resolution to de-putz.

Yoyomo- Sorry your A froze off in PA. I needed something to read on the plane so I rooted out my old copy of Lucifer's Hammer (survivalist sci-fi). Its dated, but sure to make you reconsider what elevation your house/ice-caves are at.

Edwardo- Gold contrarian thoughts: If the gold isn't actually used as currency, then isn't the currency that is backed by the gold still fiat and subject to being distorted by the treasury? And if it is currency, can't clever metallurgists counterfit some alloy? Its seems every argument against fiat currency can also be made against gold. In short, you have to have public "buy-in" either way.

Thai said...

Dink- I am not sure I would chose the word 'pathetic', my own choice might be closer to 'nihilistic'.

Greenie said...

"Greenie- You are an ill-tempered, ego-malformed, sociopathic putz."

Are you still short gold? :) :)

Edwardo said...

Edwardo- Gold contrarian thoughts: If the gold isn't actually used as currency, then isn't the currency that is backed by the gold still fiat and subject to being distorted by the treasury?

No, not if there are certificates issued for gold and/or the ability to acquire physical gold at the bank's window. And also, if their are proper audits of the gold holdings then there can be no effective distortions by whatever authority is in custody of the gold hoard. As with everything, Dink, the price of liberty is vigilance.

And if it is currency, can't clever metallurgists counterfit some alloy? Its seems every argument against fiat currency can also be made against gold. In short, you have to have public "buy-in" either way.

My last sentence applies here as well. My motto for the year (one of them anyway) is "You can't own enough gold."

Anonymous said...

And Dink was awakened. (<1/2 overheard some of it and later said that I was obnoxious, but justice was needed, no?)

For your release of your inner beast let us have it whole.
I promise never to red circle anything since sacred is a blog to sanity. Even jesus whipped money changers sorry butts and all he got was nailed to a tree for our sorry condition and a new covenant. Ah, the truth what a missing element in our daily life.