Wednesday, December 10, 2008

Zeroeing-In On Deflation

The latest 3-month US Treasury bill auction resulted in 0% rate and was oversubscribed four times. How about that, for deflation and risk aversion, eh?

I am not surprised. This is the hangover following the wild easy-credit party that ultimately saw financial engineering elevated to the same position as real engineering (yes, I was offended). The same party that created the awesome stupidity of $65 trillion in credit default swaps which first allowed piling on much more debt than prudent, and which are now inhibiting the cathartic process of its quick demise.

What's next? Will free money (for the federal government, anyway) result in another Greenspanite bubble? No, no time soon. This development is not something that the government wants, you understand. It clearly underscores the fact that deflation is happening as we speak, that assets carrying even the smallest amount of risk are shunned in favor of mere capital preservation. The debt trap has become - predictably - a deflationary liquidity trap, American economists' and policy makers' greatest phantom menace since 1929.

I will, thus, say it once more: instead of allowing this deleterious process to drag out for years by attempting to preserve debt (as the Fed and Treasury are doing now), we must instead allow it to be destroyed, to be liquidated in as orderly a fashion as possible, as quickly as possible.


  1. "we must instead allow it (debt) to be destroyed, to be liquidated in as orderly a fashion as possible, as quickly as possible."

    The sheer fact that you said "we must allow it to be destroyed" in place "it will be destroyed" says it all. The US have to capability to destroy their own currency instead of letting debtors fail. Why would they avoid this great short-term comfort.

    I am now quite nervous over the next phase though. Since I believe an essential change has occured - the very nature of money has changed, not exactly for the better IMHO - I now spend my time reading old economic stuff. Just for a check.

    Call me reactionary. I do not mind.

    Currently a very interesting reading with "Jacques Rueff" writings, the economist and "haut fonctionnaire" who decided De Gaulle to say "I want my gold back" during the sixties.

    It was certainly Jacques Rueff's articulate press articles in favor of a rejuvenate Gold-based currency system that finally lead to the demise of the dollar gold-convertibility. IMHO at the root of our problems.

    As a young MBA student in the seventies, Rueff was on the fossil side of economic science with his stupid claims on "the monetary sin of the West" and other longish discussions on the inflationary consequences of the dollar print-out.

    Rueff certainly wasn't geriatric despite having a vintage footing in pre-WWII finance. I am appalled that we may discover it pretty soon.

  2. And another hello from the other french guy reading this blog.

    First I thank you, Hellasious, for your analysis that debt must be defaulted and not carried on as this will only make things worse. Some other bloggers now pray for this as well, but I have not heard anything like this from our political leaders.

    And when I read the story of the 1930's depression I find too many analogies with the events of the past 2 years, which is even more frightening: eg the first bank to fail was in july 1930, about a year after the 1929 crack, same today with Lehman.

    If only our Sarkosy, Merkel and Brown could be contacted more easily for us to explain them that it is not with more debt that a system based on too much debt can be saved!

    About Rueff, I found some of his short texts on the internet. Fascinating. And one of the more interesting of his text describes how the western countries organised the economic life of Germany just before Hitler was elected. According to him (and he was a direct player but too young to change events) Hitler's regime found a German economy shielded from the rest of the world and he only had to continue into the same path by destroying more and more of the german people's liberties.

    I never found an english translation of this text, but it is worth a reading even with the help of an automatic translator.

    Here it is:


    And here the complete english version of the book The Monetary Sin of the West in pdf format.

  3. a long but nice description of monetary policy in the USA in the 1700s. the gist of it: consistently deflate money to allow levered asset holders (who happen to be borrowers) to loot savers.

  4. "we must instead allow it to be destroyed, to be liquidated in as orderly a fashion as possible, as quickly as possible."

    When I posted similar opinion from Mish few months back after the first round of bailouts, our dear Hell called him a financial 'luddite'.

    And now it seems like our dear Hell is joining the Luddite movement !!! Can you explain, what changed your mind?

  5. "that ultimately saw financial engineering elevated to the same position as real engineering"

    Hell, your proposal of having 'alternate energy' backed currency is financial engineering as well.

    So, in effect, one group of financial engineers are planning to replace another group of the same. In comparaive terms, it is like Ayatollah Khomeini replacing Shah to rule Iran.

  6. Acceptable options to obesity:
    - liposuction
    - weight pills
    - slimming machines, etc.

    When the obvious solution is
    - a change in lifestyle

    A generation hooked on debt will not be weaned off the addiction by high sounding arguments (however logical). It takes a recession/ depression to do the trick.

  7. income streams from the financed consumer debt is going into someone's pocket and its not the middle class.
    The politically connected seemed to be locked into preferred bank shares and other me first investments, looks like a good place to find were all the money is going.

  8. Personally Iḿ having a blast in this deflation. I saved like crazy since I graduated college, and I didn´t buy much because I felt everything was crazy expensive. Now that no one else can afford anything, I don´t have to compete with them. No lines anywhere and stuff is practically 80% off everywhere I look. Iḿ sure there were people that enjoyed the great depression too.

  9. Sue, you may think this is enjoyable, but the real pain and hardship are still to come - even for those of us that didn't wrack up tons of debt and were saving this whole time.

    Just as last time we had a financial "reset" in the 1930's, GD2 will be followed by WW3. This will wipe out at least 20% of the world's population. Hope you're not among those starving, homeless, or dead during all of this. Even if you aren't, you will surely know many that are. Sounds like a real blast, huh?

  10. Jon- Amen.

    But may I ask you: "What are your definitions of lifestyle? Of consumption"?

    Since the words have very broad definitions, what is 'lifestyle' to me may be 'essential' to you (and vice versa).

    It is the devil in the Hell of those details that is where are inability to solve this tragedy of the commons lies.

    This is the double edge sword of diversity. Where it is complements our weaknesses and we cooperate it is a blessing. Where it is foreign to us and we resent it, it is a curse.

    I have no solution to this problem other that my own person views on things. If you have one I would love to hear it.

    Greenie- Hell, has always been in that Luddite camp. Didn't you read the blog's most recent subtitle...


  11. I liken the allowance of debt to be destroyed to pulling off a band-aide quick, the pain is more intense, but over quicker. Instead it looks like we are in for a slow bleeding ala Japan. I like some of the solutions presented here:

  12. They aren't listening, Hell. There will be no liquidation, at least not with the complicity of the PTB. And with that in mind, it now appears we have this possible development to contend with which I invite you to comment on.

    I'll now offer my own comment. You can't buy enough hard assets (hint: Precious metals) to make
    up for the loss of purchasing power that is coming down the dollar's pike.

    Please spare me the crap about one not being able to eat gold. One can't eat anything except food, and since we aren't by my reckoning about to become a global barter economy one better find a better asset than dollars to have ones wealth invested in.

  13. Hell: "instead of allowing this deleterious process to drag out for years by attempting to preserve debt (as the Fed and Treasury are doing now), we must instead allow it to be destroyed, to be liquidated in as orderly a fashion as possible, as quickly as possible."

    The reason this will probably not happen is because of the counterparties (bag-holders). Should we let the alphabet soup scams vaporize the Gulf States, Japanese, and Chinese (a big part of the bag-holders? and future Treasury buyers) will object. The other bag-holders (friends of Hank) have their own methods of influence.

    I think we're headed to a Japanese future recovery--long and drawn-out.

  14. "I think we're headed to a Japanese future recovery--long and drawn-out."

    I doubt it. Japanese burned their own savings. We don't have that luxury.

  15. Hell,

    since you are obviously much better versed in these numbers than the rest of us, would you agree with the accuracy of this?

  16. We have a possibility for a complete USD collapse. This is my worse fear as it portends anarchy.

    I truly hope they can find a soution to prevent this from happening because if it does it is total game over.

    Joe M.

  17. I vote with Joe.
    Because of the visceral loathing I felt when I got my last Macy's statement, you know, the computer generated one that could actually bill you for 25 cents while sending you a letter it cost more than a dollar to expedite.
    No, the whole system has become so stupid, so brainless that it will not survive.
    We have turned ourselves over to the machines, and many of us are just not thinking any more.
    So... I think that the dollar will fail.
    And I don't see anything about to replace it.
    Certainly not the Euro...
    And since the emotional motor behind everyone's reasoning seems to be 0 risk coupled with fear, and a blind desire to hang on to what remains, that rules out any real incentive for investment, which involves risk.
    I agree with others who say that life will become much much harder. Logical. Inevitable, even.

  18. Greenie, if I understand you correctly, it's your belief the administration (i.e. Fed + Congress + White House) is trying to convert this from a deflationary recession/depression (Marcus' view of how things will play out) to a stagflationary recession/depression?

    If I understand correctly, isn't this also Edwardo's and Yoyomo's view as well?

    I do agree with Dink that it is actually quite hard to pin Hell down on all this though my sense is he is closer to Marcus. And he is never going to come out and tell us all himself. The oracle at Delphi always spoke in riddles.

    And from my perspective, aren't all these a little like your (rather fractal) analogy: "Ayatollah Khomeini replacing Shah to rule Iran"- i.e. everything basically looks the same except the asset classes investors want to hold will change?

    "It's tough to make predictions, especially about the future".
    --Yogi Berra

    @Joe- don't you think those in debt want a dollar collapse? If the Fed can't print in the eyes of the world, how else do they generate inflation?

  19. Thai,
    My view (like Hel & Marcus) is that a formal debt repudiation on the scale implied by some of Hel's solutions would be considered an economic (if not military) causus beli by creditor nations (bag holders in Russ Winters' terminology, who may no longer be as susceptible as they once were to the Godfather Protection Racket) but at the same time the debt cannot be repaid at par with legitimate value. The only solution I see is debt devaluation with high (not hyper) inflation and going to FOREX bonds for fresh borrowing. To get China and Japan to delink from the $ and allow their currencies to appreciate it may be necessary to convert half of Chinese & Jap(anese) loans to yuan and yen so that the gain&pain of the revaluations are shared/shouldered by both creditor/debtor.

  20. Dink,
    A couple of links that may tickle your sci-fi funny bone:

  21. Afraid I have to disagree with a deflationary scenario. It is indeed a possibility, but given the Fed's policy of preventing deflation at all costs, I see inflation in the near future.

    Let me clarify. It is true that deflation can still occur when the money supply increases; this requires a fall in the velocity of money (i.e. how fast it's spent). Velocity has dropped, predictably, but the Fed's policy is one of preventing deflation at all costs.

    The Fed is not stupid; they know full well that velocity has dropped. I feel without a doubt the Fed will move to spike velocity, just as it has with the money supply. Deflation may seem the name of the game for the time being, but the Fed controls both the nature and quantity of money. Monetary policy can be crafted to increase velocity and inflation concurrently.

  22. Sorry Yo- since you too mention gold a fair amount I misunderstood you (though the difference between high inflation and "hyper"inflation is real but more of a nuance than I was making)- I stand corrected: you are in the recession/depression camp with less severe deflation than Greenie and Edwardo (?) fear.

    I really don't know where I stand on all this, the more I read, the more confused I get... AND you can be rest assured that if I do choose a position it will be the exact one that does not happen ;-) (By the way they were pretty cool links you sent Dink)

    Although regarding inability to pay back debt...?? (I am thinking out loud here so bear with me)... Assuming the link I left above is correct, America's debt is huge yet it is mostly to ourselves (i.e. NOT foreigners). This means that if things change then they are even more likely to remain the same here in the US...

    If this were the case, then if we defaulted thru printing, we would be mostly defaulting on ourselves (not that much causes beli there, nor really any civil unrest here).

    But I will assume we don't want to do that (unlike Britain which may have to and I can see why).

    I don't quite buy the causes beli argument, these other countries have bee manipulating their own currencies for years and Russia itself defaulted only, what, 10 years ago? They would have a hard time complaining that we are now doing the same things they did.

    To me Keynes seems the biggest wild card.

    If the US government started spending so much money that it both crowded out private sector activity AND started scaring Americans with money into believing the US could no longer afford all its spending, then Americans with assets would start shifting their US dollar assets into non-US dollar assets? (every time I read Krugman, he keeps talking about how important it is for the program to be VERY big- Hell will get his toaster communications)

    In this case the combination of the two would seem to be to probably cause inflation as people (oddly enough mostly Americans) started shifting their money to places outside the US dollar's reach?

    Then wouldn't this inflation allow monetary policy to work again? i.e the Fed wouldn't need to print to get out of the deflationary trap it is in right now (where traditional monetary policy no longer works) forestalling the need to either print or default... Does this seem correct? (again,I am thinking out loud).

    Again, assuming that link is correct, then isn't it really Britain and the Euro zone, with France and Italy in particular (after the UK) that are in the biggest trouble?

    Germany would want to maintain the strength of the Euro while France and Italy would want it to collapse, one could imagine real friction developing between the neighbors, just like friction might develop between states in the US if the debt itself is unequally distributed within America.

    Am I getting this right?

    If so then here would be my predictions (which of course again makes them very likely wrong):

    There will be BIG government spending in the US (good for health care- "Pompous fart" and I should be fine), the US dollar will fall, there will not be hyperinflation but mild inflation (so I am like you here?), the British pound will fall and there might be a break up of the euro zone or a French and Italian and British default might come to pass due to their high external liabilities (unless Britain's liabilities are in pounds, in which case the B of E will print... do you know what their debt is denominated in?) I bet London Banker does. I will ask him.

    All of these scenarios however do seem to be VERY good for gold (unless the US government does not try big spending projects and that just flies against everything I am reading in the papers).

    Frugal Scotsman, either way, I think your precious metal predictions (which I know Yo and Edwardo are also fond of) on your blog are likely to be correct.

    Dink, did you buy any Gold after all?

  23. Deflation is the only option.

    America currently suffers from overproduction -- too many houses, too many cars, too much food (farmers are actually paid to produce LESS), too much clothing...all the while prices for these goods are kept artificially high just so the (over)producing capitalists can turn a profit.

    People cannot but any more stuff because they are either too deep in debt, their wages are stagnant and they are only buying necessities, and/or they don't need anymore stuff.

    If you want to continue to prop up the hyperconsumerist culture of America the price of necessities like housing, food, transportation, clothing and so forth needs to drop by at least 25-33%..this will free up income for people to keep buying plastic Asian widgets and electronics at the malls and big box stores.

  24. That we need less stuff is not a problem as we need more doctors, nurses, physical therapists, geologists, scientists, etc... there are plenty of jobs out there- people just require retraining. The tougher issue is the people who can't ever make it in the new economy.

    So I don't have any problem if we don't "make stuff"- as far as I am concerned, the Chinese do it. And once they have all those jobs, they can compete with the (say) Africans when their labor gets too expensive.

    The people who make stuff still need to sell it to someone.

    And couldn't you chose a better name than anon (even anon 10 million?)

  25. No Thai, not mild inflation; 10-20% assuming the US can work out a deal with China/Japan to swap half their loans into yuan/yen and allow their currencies to appreciate. Since the US is shopped out and won't be buying much imports, C/J would have no reason to peg to the $ if they can avoid the loss on their $ holdings.

    A half&half swap would compensate C/J for the loss on their $T-bonds with the gain they would get on their new y/y T-bonds and the US would benefit by C/J becoming bigger consumers with their appreciated y/y and the US a bigger producer/exported with a lower $. If the US and C/J can't agree on rebalancing their debts/currencies/economies then I think the situation will remain precariously balanced in stalemate until it collapses or war breaks out.

    I don't have exact figures but I think the Russian default was in the vicinity of $40-60B and that was after their country was sacked and looted by the IMF/Jeffery Sachs-directed restructuring/privatization mossadia; net external US debt is on the order of $6-8T (we don't owe it all to ourselves), roughly 100-200 times as much and the looting was done right here on WallSt by true-blue, red-blooded All-Americans (no foreign scape-goats, at least none that can be mentioned in public) so yes a default on that scale would be casus belli.

    I'm assuming you meant inflation rather than deflation in the following:

    I stand corrected: you are in the recession/depression camp with less severe deflation than Greenie and Edwardo (?) fear.

    WRT UK sovereign debt, I'm pretty sure it's in sterling, for the time being at least.

    WRT the Euro breaking up, no opinion, I don't know but Ambrose Evans Pritchard has been proclaiming its demise incessantly for some time and Michael Panzner is in the same camp and recently Martin Feldstien has begun to worry about it.

    WRT Americans fleeing the $, that would not relieve the pressure on the Fed to print, it would cause a total collapse and currency controls would be put in place long beforehand if the govt ever got a whiff of an incipient panic and probably declare martial law and seize control of vital sectors, real MadMax territory.

  26. Since when does the U.S. debt involve mostly American investors ?

    I thought that the Chinese were propping up our currency by buying dollars (and selling us much (but not all...) worthless trash). What are we producing these days ? I don't see very much.

    I am keeping close tabs on what is going on in Greece these days : the riots instigated by young people (of all classes, incidentally, not just the rich).
    What's at stake in this incident in Greece is at stake in France, and in many other European countries at this point, and constitutes a crowning touch of what Denis Duclos (my French readers will know who he is, probably) characterizes as the anthropophagic nature of capitalism : eating itself up until there is nothing, and nobody left.
    Europe's young are left holding the bag in a context where there is less and less work to be had, the governments are abandoning any investment in education and training. The young are tired of endlessly financing the baby boomer generation. They already scent the catastrophy of financing baby boomer debt for the rest of their lives.
    They are rioting.
    French youth have the same bleak future profiled.
    When will they start rioting ?
    Sorry to be so dismally off topic on this post, but I thought you all might be interested. : )

  27. Re yoyomo
    To get China and Japan to delink from the $ and allow their currencies to appreciate it may be necessary to convert half of Chinese & Jap(anese) loans to yuan and yen so that the gain&pain of the revaluations are shared/shouldered by both creditor/debtor.
    I think you are raising a very interesting point, all the more so in view of the alternatives- default as financial casus belli versus Keynesian wild card. These ideas should be discussed in the olymps of international decision-making. How to beam them into the brains of people who have the means to put those ideas into action?

  28. Debra- its the difference between who owns what % of the TOTAL US debt, and who own what % of a smaller portion of that debt like US government debt or US agency debt (i.e Freddie and Fannie).

    China and Japan own a large % of government/agency debt but Americans still own most of the total debt- again IF that link is correct.

    Yo- help me out. Why would the government not want some flight from the dollar? Wouldn't that create the inflation they want without resorting to printing? And 20% in my opinion is definitely hyper inflation.

  29. Darth Toll: although the 1929 Depression preceded WWII, and the 1893 Depression preceded WWI, it is reductionary to say war always follows a depression. It is possible another war may follow the end of the 2007 Depression, but do to peaked oil I don't think this will be a viable option. War is energy intensive, and since energy availability is now forever shrinking, war will be vastly more expensive in the future.

    François: indeed, the very nature of money has changed. Unfortunately, a gold-backed currency got us (i.e. the world) into this mess in the first place. Bretton Woods was a horrible idea, and put in place the tools which allowed the United States to basically rape the world for fun and profit.

    For reading, may I suggest "The Curse of Paper Money and Banking." Here's the hyperlink (with apologies for the length)

    Marcus: sadly, I don't think recovery is in the cards for the United States. Certainly not in any of out lifetimes. Too much has been done to destroy the industrial and agricultural bases which made this country powerful in the first place.

    Thai: yes, 20% is textbook basement-level hyperinflation. Personally, I believe we're going to see much higher hyperinflation, with some serious currency devaluation along the way. Rumour has it that Congress is quietly mulling over a depreciation of the dollar, similar to what Franklin Roosevelt ordered during the 1929 Depression.

    This time, however, I hear a 10x depreciation is being looked at. If it comes about, the dollar coins of today will be the dimes of tomorrow, the dimes will be pennies, and so forth. It's a classic technique of fiat currencies when encountering adversity, so there's no reason why the Fed and Congress won't try it.

    Unfortunately, it never works for very long. Even the best case scenarios are painful: Mexico's peso eventually went down about 1000x in around 30 years. The peso of the early 1900's became the mil of today. France is similar, with the franc devalued about 800x.

    The worst, of course, is Weimar Germany and Zimbabwe, among others. I feel we'll see closer to these countries than the more 'stable' fiat currencies of pre-euro Europe.

  30. TFS (i.e The Frugal Scotsman)- what about Hell and Yo's concern of causus beli? Last time I checked, war between countries with nuclear weapons wasn't a good thing. And I still think you fail to consider how much productivity can be accomplished thru cooperation to dig ourselves out of this mess. It would dramatically shorten then 'economic winter' you foresee

    Hell- would you pretty please answer this question: what do you think will happen to the dollar?

    FYI- to be an annoying "told you so"- here is yet one more piece of evidence that in our massive 3D societal Tragedy of the Commons- Yertle the Turtle is every bit as important as those rotting fish heads.

    Yo- So you are saying the US government could do it on their own simply by issuing new debt in foreign currencies instead of selling (say) US T-bills in US dollars?

    To be exact- US T-bills would be written to pay par on (say) Yuan or Yen (or even a basket of other countries' currencies... I guess as long as the currencies are freely exchanged on world currency markets).

    Whew!... Boy, in that case America would look just like Argentina...

    And slowly China/Japan would make new loans to America and the rest of the world in their own currencies until their Yuan(Yen)/Euro(dollar) portfolio ratios got to a point where their lose on euro-dollar denominated debt was big but 'except-able' and all new debt would be safe (from their point of view) as it would be denominated in their own currency.

    Very interesting idea, I have to really give you credit on that one.

    Hell- thoughts?

    Greenie- what does your pessimistic lens say?

  31. "people just require retraining"

    Thai, all the jobs you listed require hard work. Go tell a suited guy working in hedge fund industry that he will not be allowed to shuffle other people's money, but have to relearn to create something of his own - at a salary of $30-40K/year for a doctorate or post-doc in science, and see how excited he gets :).

    Think about the system without any reference to money and you will understand the problem. The economic system got imbalanced on several fronts due to government meddling. There is oversupply of a certain group of people (realtors, hedge fund managers, bloggers, social network programmers) and undersupply of other groups. In another sign of imbalance, Americans take more and more debt to buy things, while China keeps manufactures everything in the world, but uses nothing.

    In a natural economic system without government meddling, the system has a tendency to correct, because speculators see imbalance and bet their money accordingly to create the necessary correct. However, every time the system wants to correct, government meddles more with our money (rate cut, TAF, bailout with tax money, etc.). The problem is government meddling can only make the imbalances bigger and bigger, because if it were in the interests of government to fix the imbalances, they wouldn't have had to meddle and let nature work.

    So, if you want to believe that ultimately government will win over nature, bet on inflation. In that case, you can also believe that government will be able to legislate eternal spring in Texas and cold north, because the winters and summers are so hard to bear.

    Hell understands the imbalances, but he does not understand the cause. His knowledge of economics is poor. That is why his solutions require more government messing.

  32. "Hell- would you pretty please answer this question: what do you think will happen to the dollar?"

    Thai, you have to ask the question in more specific way, because dollar's value is relative, not absolute to other quantities. Are you asking what will happen to dollar w.r.t. gold, or euro or Japanese yen, or Mexican peso or Zimbabwean dollar?

    BTW, you would like this link:

    Their central bank recently congratulated US and UK for following its lead :)

  33. 1893 depression had nothing to do with WW I? Only intellectually lazy people think depressions are always followed by world wars. A quick check of the history of 1800-1900 proves otherwise.

  34. @Yoyomo-
    Great links :) Two sci-fi precedents come to mind:
    1)Kim Stanley Robinson's Red Mars (and sequels Blue Mars & Green Mars). It won Hugo and Nebula if I recall correctly. 50 males & 50 females, all PhDs between 40 & 60 to set up the 1st mars habitation. The author is smart, smart, smart. Also lots of lust, but lacking in "historical detail" ;)
    The new Martians quickly tire of Earth's authority once they become self-sufficient. Human nature, no?
    2)A TV series called Firefly that later became a movie called Serenity. Space colonization much like homesteading and the wild, wild west (backwater towns, weird sects, scavenging for parts). A lot messier than Star Trek which by default made it seem more realistic.

    I truly appreciate that you think out loud and admit to not always forecasting the right answer. I'm in the same boat as you trying to figure my way out of the fog. I listen to the other "sailors" confidently say they have the answer and are setting course full-steam ahead, but at least half are going to wind up smashed into the cliffs.

    Haven't bought any yet, but I have a link to a Canadian seller here in WA that seems reputable. I check the price every day online. Its slowly driving me insane. One day the price will be $2000/oz and Edwardo (and god forbid Greenie) will post "told you so". NO! One day the price will be $300 and I'll have dodged a bullet. NO! The Oracle of Sudden Debt is agnostic about PMs so they should be ignored. %@$&^ing fog!!!

  35. Thai,

    Yo- help me out. Why would the government not want some flight from the dollar? Wouldn't that create the inflation they want without resorting to printing? And 20% in my opinion is definitely hyper inflation.

    The Fed needs to print not primarily to inflate but first to cover the bad debts of the banks which will result in inflation eventually. If the $ collapses from outflows before the Fed has printed what it needs to bail out the banks the banks will collapse and then the only avenue left would be wholesale nationalization of the entire financial system as their would no longer be left enough of a banking infrastructure to function, the network would be spread too thin and would rip apart.

    The Fed needs our savings to siphon off the value it needs to settle with creditors otherwise they would consider payment in Monopoly money as a form of default.

    As for casus belli, China will not attack the US but it can move on Tiawan, give the Afghans & Iraqis stinger missiles like Reagan did and agree with Russia to provide Iran with offensive capabilities to threaten US bases in Qatar & Bahrain, etc. There's a lot a hostile superpower can do short of direct confrontation to damage an adversary the way the US and the USSR did in the Cold War. Don't underestimate the sanctity of debt in Eastern culture, to this day people in the Far East sell/indenture their children to pay their debts. Most Americans have no idea how hostile China is prepared to be if the US tries to renege on its debts to them.

    Washington, D.C.
    Tuesday, April 15, 2008
    Nonresident Senior Fellow
    The Brookings Institution
    Senior Fellow, John L. Thornton China Center
    The Brookings Institution

    Interesting paper in context to thought in policy to date. I see the asian currency market swaps are "hopefully" leveling solutions instead of demanding so called Western Fiat currency calls and there leveling of contracts will enable stabilization to there trading partners tendacies to demand interests. In context to debt issues I will try to pass there firewall and discuss there current bent of mind to there extended currency policy to contact in earnest.
    My expierence with there culture has been positive as we discussed tools of reason to free market looking to solutions. We started out watching our children grow and discussion on Hayek, Mises, and what we trended to classical economic misnomers to ignore the common man. Fiat as we know as "let it be". We reasoned shoes on people feet and roof's over people feet with minimal interference from the state was a good start and when to protect capital in malinvestment periods to normalizations and jurisdictioanl interferences to waste. Wisdom is never given but must be passed to each other. I enjoy this format here and as we all know capitalism does need a leash to assist ordianary solutions infrastuture needs. Indeed there are imbalances and 44% of my capital is to the next predicated cycle. As to the IMHO survey to date: History will show this as a failure of Socialism and Socialists. We have not seen the top or the end of this house of cards. Eventually the cards have to collapse like the Soviet Union except this will be a worldwide collapse an a lot more people will suffer. What is needed to prevent any further credit expansion is to place the banking business under the general rules of commercial and civil laws compelling every individual and firm to fulfill all obligations in full compliance with the terms of the contract.
    A society that chooses between capitalism and socialism does not choose between two social systems; it chooses between social cooperation and the disintegration of society. Socialism: is not an alternative to capitalism; it is an alternative to any system under which men can live as human beings. If some among you fear taking a stand because you are afraid of reprisals from customers, clients, or even government, recognize that you are just feeding the crocodile hoping he'll eat you last.
    Thank you all for the food for thought.

  37. Greenie- you are correct, part of the difficulty in discussing value and assets classes (like a country's fiat currency or gold, or any other investment) is the lack of a "fixed" fundamental currency benchmark- Hell is saying the same with his Greenback proposal, the only problem is the Greenback still has the same 'human analysis' wild-card/corruption element our current Federal Reserve-fiat currency system has... And 'yes', the desire to live off the 'sugar daddy' labor of others has been amply expressed by a several of commenters on this blog- It is a human trait not unique to only Wall Street.

    Yo- I think I understanding my confusion and it centers around your statement- "If the $ collapses from outflows before the Fed has printed what it needs to bail out the banks the banks will collapse..."

    My question to you is "Can't a collapsing dollar act exactly the same way as the Fed turning on the printing presses?"

    What percentage of all dollars in the world are really outside the US? How big is the dollar FOREX market? If my memory serves me correctly, I think it is enormous... A quick google search says it's about $30 Trillion/year, i.e many times the size of the US economy (about $14 Trillion).

    So a repatriation of even a small % of those FOREX bills back to US boarders would represent a massive increase in the supply of dollars within US boarders would it not? And isn't this the very definition of inflation? (i.e. an increase in the money supply?)

    So if the money supply in the US doubled from FOREX repatriations, all debt in the US to others in the US would be worth 1/2 as much as it is today- that would go a long way towards solving the issue internally. That would go a long way towards helping debtors in the US with NO WAY that the Chinese could say we didn't pay them back.

    Is this logic correct?

  38. Thai, How about thinking each currency as the stock certificate of the country? In that case, all your inflow-outflow arguments will only be a small part of the big picture, such as assuming that every stock investor is rational and buys stocks based on the profitability, balance sheet and PE of the company.

    What I want to say is that there is a large component of emotions involved and that emotion drives the relative values of currencies more than money flow. You need to predict emotions (try it with your girlfriend/SO first :) ).

  39. Greenie, I can tell that we are not on the same wavelength, but, sigh ! ... I'm afraid that my attempts to convince you otherwise will be ignored/belittled.
    But, just because I can't resist provocation...

    Since when was there anything "natural" about man ? Man hasn't been natural since he started congregating in the cities, in the hope of blotting out any conscience of his dependance on nature.

    Just how, pray tell, does one envisage an economic system WITHOUT TAKING MONEY INTO ACCOUNT ?
    A little bit like taking a drive without the car, perhaps ?
    My lovely Bernard Maris book calls money "le nerf de la guerre" : the nervous system of our collective combat, certainly the most important means of alienation that we have come up with for millenia.

    Lastly, my friends, I don't want to sound like a prissy schoolmistress, or, God forbid, one of those preppy Ivy League types that turn so many Americans off these days (I swear to God, I didn't go to an Ivy League school, promise...), BUT...

    Could we all make a little more effort with our spelling /composition/syntax on this blog ? It's getting a little difficult to read the posts (and I'm not talking about those evidently written by foreigners, for whom I am willing to make concessions.)

    Thank you and good night. : )

  40. Deb, my apologies for the all the spelling/composition/grammar/syntax errors. Okie has also asked the same of me on several occasions. I truly am the world's worst student of english grammar- I literally just don't see my errors until long after they have been posted. I do promise to keep trying to improve- no promises on results however.

    As for your man 'not natural' argument- nonsense.

    Are beaver damns 'not natural'?
    How about bee hives?
    Or ant colonies?

    The idea of the superorganism is pretty firmly established in biology today to the point it is almost considered 'fact' in some academic circles.

    Remember, evolution is pushing us to cooperate every bit as hard as it is pushing us to compete.

  41. Thai: sorry to be a bit late in replying.

    Given the United States' new policy of preemptive assault on sovereign nations, nuclear war is not completely out of the picture. In fact, I would posit that any future resource grabs made by this country will become more and more automated (armed drones, smarter weapons, etc.). ICBMs aren't exactly subtle, but tactical ('bunker buster') nukes are possibilities; artillery-fired nukes were experimented with, so it's not like it can't be done.

    However, Russia has as big of a stick as the United States (perhaps bigger), so it would take some serious effort to keep Russia from feeding the US some nuclear medicine, if the US should go nuclear.

    I really don't think a nuclear winter is something that Russia wants. If they can maintain a level of energy leverage, especially as the United States becomes poorer and relatively more deindustralised (due to increased energy scarcity), Russia can probably convince the United States that it really doesn't want to become radioactive. But, this is all speculation... nuclear war isn't out the window until the ability to wage it is gone.

    Regarding currency devaluation: the physical amount of US Dollars is actually relatively insignificant; M0 and M1 are tiny compared to M2 and M3.

    Also, one's debt would not be halved in 'painfulness' unless one's income doubles; the amount of money in the economy doesn't do anything to values unless it has velocity. If enough money starts slopping around that one sees a nominal doubling of one's wages, then at that point one's debt load has been effectively halved.

    Regarding cooperation: there is a possibility that Americans will wake up on Monday and want to actually work for an honest living... but I really don't see that coming for quite some time. People have, quite frankly, gotten used to the gravy train: fiat money. The day that the country forswears paper currencies and accepts classic hard money is the day that honest productivity will return.

    This isn't very popular, of course. Hard money will reveal to the country what it doesn't want to hear: we are a very poor people. If you take money out of the picture, I agree with Greenie's observation: unnecessary meddling with the economy has destabilised the system (and thereby distorted markets and impaired their function).

    Finally, a general comment on China. I realise it seems that China will be a big player on the world scene in the coming years, but I posit that the country will fall apart long before then. The why is several fold:

    1) Communism has always failed
    2) No common law tradition
    3) A socially destructive male/female ratio imbalance (thereby guaranteeing demographic collapse)
    4) Unsustainable energy requirements, I don't just like to hear myself talking... :-P

  42. LOL!!!

    I am not so quick to rule the Chinese out; I have been hearing 'breakup' stories for years (ever since Russia collpased).

    From my perspective, China still has perhaps the greatest resources any country needs going for it:

    1. They trust each other.

    2. They are very intelligent.

    It is hard for me to see how a very bright people who play well together cannot accomplish amazing things. And the more China throws the shackles of communism off, I think the better they will do- yet the still cooperate on areas that matter, such as fertility.

    FYI- for these same reasons, the Chinese do not scare me either.

  43. Thai,

    My question to you is "Can't a collapsing dollar act exactly the same way as the Fed turning on the printing presses?"

    For the purpose of creating price inflation, yes it will have the same effect but that would be tantamount to default. The govt can't afford a $ collapse before working out a repayment agreement with its creditors; its hegemony is no longer so total that it can dick its creditors/trading partners with impunity.

    Someone has to take the loss on all that bad debt and foreign creditors want it to be the Americans who incurred it. If Americans flee the $, it will collapse and foreign creditors will be stuck with worthless IOU's. Its the same reason Argentina froze the savings accounts of its population when they had their crisis, so the peso would retain some value on the FOREX market and enable the govt to buy $ to cover essential imports. To do that it had to prevent its citizens from flooding the FOREX markets with pesos and the US would be expected to do the same.

    WRT expat$ coming home, if that dam breaks it would lead to hyperinflation and the govt would be hard pressed to prevent foreigners from using their $ to buy assets that they are currently prohibited from buying. It's not a workable plan for solving the debt overhang. You can't claim reserve currency status and screw around with exchange rates to that extent.

  44. Thai, I'm not sure that CONSCIENCE (whatever that is...) is natural.
    But, our evolutive course is taking us further and further away from being embodied (just like in that Star Trek episode I keep harping about), and I see a relation between disembodiment and technological rapine and spoliation. It is not a constructive relation, I fear.
    I don't really think that I am a Rousseauist, Thai.
    But I definitely reject mechanistic "explanations" of human behavior.
    They are soulless, and I want to be a person with a soul (an animal with a soul, not necessarily immortal), not a complex, mathmatical machine.
    Actually, I see no reason why animals can't have souls, too. All living things. (See Pullman, the Dark Matters Trilogy).

  45. Debra,conscience, i.e. the ability to distinguish 'right' from 'wrong'- I thought you were the psychologist?

    "Math" has very definitley moved into the realm of descibing just how natural conscience is.

  46. Debra, I do not recall knowingly mocking you. Only thing I mock here is Hell's posts that start with criticizing government's control of money and economic system, and ends with yet another idea for manipulation (energy-backed currency), or increasing funding for alternative-energy research, as if society is unable to do that without government meddling.

    Regarding whether human action is natural, I do see continuity between all organisms every time I sit with the genomes. However, what I meant by natural action here is to reduce the amount of government meddling we see lately. Why does government have to bailout a small group of bankers with money from all of us? Why does government want to support zombie car companies, whose products are rejected by people? Where does it end?

    If Bernanke and Paulson claim that they could not see it coming, why not let the central bank being run by those who could see it, or even better shut down the central bank?

    I do not understand what you mean, when you say that you are not on the same wavelength. Are you for failure to be supported and success/prudence to be rejected, as I see in every stage of US economy?

    If you do not see that as a good way to run the country, there are two alternatives - (a) government needs to support success and reject failure, or (b) government needs to stay out of propping any kind of business. When I say human nature should work, I am for (b). Hell is for (a), but in my opinion, capitalistic system can already do it. Why do we need government to meddle at all?

  47. Regarding gold, this article will explain why I prefer gold.

    I do not want to be looted, and my option is either to park my money in another foreign currency or gold. Given that all governments are following US's lead to rob savers to support failed bankers, gold is the best currency to survive the theft.

  48. Life After ZIRP?

    What might be the unintended consequences if ZIRP goes negative and the following were put into effect?

    The Gov. uses 'force' on mortgage and debt holders to decrement debt by -10% (of the original amount) for each -1% in CPI(the ShadowStats version)?

    Cancel all credit cards and rely on debit cards instead.

    Brian P

  49. Just a Bit Late but:
    Hurrah for Sue "Personally Iḿ having a blast in this deflation. I saved like crazy since I graduated college, and I didn´t buy much..."(Dec 10th). I have lived on a boat for 12 years and am driving a 10 year old car into the ground while knocking down 6 figures- DO NOT SPEND ANYTHING!
    And Kudos to Anon for recognizing what I have been harping about, that our overconsumption cannot be fuelled by more liquidity - if we are to survive.
    p.s. I am hard pressed enough to comprehend everything here without having to worry about grammer.

  50. Oops, Thai, bilingualism got to me.
    The word that interests me is not CONSCIENCE.
    It is consciousness. That is in a different league.
    Jacques Lacan attempted to reduce human psychology to mathemes.
    Whatever way you look at it, it is still reductionist thinking. For me, it doesn't work, and is a major part of our collective problem.

    Greenie, I didn't want to imply that you had willingly belittled me in the past. Far from it.
    But I definitely do not believe that free market capitalism is what is going to save us.
    I hate big government too, or at least a big government which is constantly legislating on nitpicking things, and not working on the essentiels: example, Bruxelles has recently decided to take cold water out of all public baths (reminds me of the piss warm water coming out of all those shower faucets in U.S. youth hostels this summer ; must be the same reasoning). Because we might get hydrocution (cardiac arrest from shock due to cold water). At the same time Bruxelles has also raised the minimum levels authorized for pesticides in our food (the level is up 20% in the past 5 years).. Bruxelles makes me foam at the mouth.
    But trusting the markets to make things right is naïve in my book. Free market capitalism is anthropophagic : it eats up anything and everything, like those angry African ants. And it is self-destructive.

  51. Thai:

    Interesting you should say that the Chinese trust each other. A friend of mine has a Chinese girlfriend (born, raised, and still a citizen of the country). He is an American, and is presently living with her in China.

    His comment, and she agrees, is that China is more like 1984 than a country throwing off communism. One must be very careful of what one says, for fear of being reported. Also, one cannot expect personal property to be respected. At the same time, he reports there is no feeling of a need for change, or that there is anything 'wrong' or dysfunctional with the society. This may be an American bias, true, but it is collaborated by a Chinese person.

    Whether or not the Chinese people change the system, one way or the other I don't think China as we know it will survive this depression.


    I find your hypothesis of inflation-by-dollar-repatriation very interesting. Do you see any real-world moves in that direction?

    One of the 'problems' with causing inflation is, of course, velocity of money. How do you see the repatriated dollars flowing into the greater economy, rather than simply languishing on a marked-to-make-believe balance sheet somewhere?


    I read London Banker's post, and I confess that I found his argument for deflation irrational at best. Even if deflation were in the works (which I will argue it isn't), it would seem to me that cash (or equivalent) would be a better holding than gold in such an environment.

    Gold is only a good investment, really, when inflation is burning through purchasing power. Another issue with gold is government confiscation. It happened in the 1929 Depression, so there is no reason it won't happen in the 2007 Depression. But, again, confiscation is a concern brought on by inflation, not deflation.

  52. TFS,
    Many foreigners want to get rid of their $ but everyone is afraid of triggering a stampede and the US govt will not allow the orderly purchase of assets. China tried to buy an oil company and Dubai tried to buy the ports operator and congress blocked both deals.

    Foreign $ holders are being held hostage, either hold on to your $ or get scalped in the FOREX market but no asset sales will be allowed. Foreign investors often are stripped of voting rights when buying equity in US banks. The pressure will continue to grow; either asset sales must be allowed or eventually someone will trigger a panic by trying to be the first to dump their $ in the FOREX mkts. Fewer and fewer people believe anymore that US debts can be repaid.

  53. TFS,
    This article by Michael Hudson does a good job of explaining the instablity of the current imbalances in the $ reserve system:

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