Thursday, March 5, 2009

Thirty Cents On The Dollar

I know I am beating the deflation drum a bit too much, but it's important to record and understand what is happening, as it happens. Because, unlike those who still expect inflation to appear, I see it as being here already.

Unfortunately many people - too many - think deflation is just about consumer prices, i.e. lower prices at supermarkets and malls. They are making a fundamental mistake because they do not understand the direct link between debt, asset prices and our fiat money regime.


It's springtime in America and the flowers of deflation are blooming everywhere, from real estate and finance to industry. The latest example is yesterday's offer from Ford Motor Company to pay 30 cents on the dollar in order to retire $10 billion of its debt. That's debt destruction, but it is also money destruction since fiat money is nothing but debt.

As longtime readers know, I am an ardent advocate of exactly such actions, which I see as the only way to effectively reduce the pile of debt we have amassed over the past twenty plus years. The trick, however, is to do it without damaging earned income, i.e. wages for working people. With unemployment rising fast during a recession that's not an easy trick.

Of course, it's not like such deflationary events have not happened before; most recently we were threatened with one during the dotcom bubble burst in 2000-01. Followed by the 9/11 events, it caused serious panic in policy circles and precipitated the Late Great Real Estate Heave-Ho. Instead of grasping the opportunity to put the US economy in a sound footing Bush, Greenspan and Co. decided to just pump up another debt/asset bubble and prayed (literally) to Heaven.

We got Hell, instead. (Yes, yes, pun intended).

It is imperative that we do not repeat the same mistake. We are still trying to keep the clinically dead debt/asset economy alive by massive injections of new government debt, i.e. providing bailouts for banks and insurance companies. That's just replacing the private debt with public debt; but, in the end, it's the same old US economy that will have to bear it and service it. Can't be done, dammit!

Let's say it once more: let the debt die and focus instead on increasing earned income.

And that's precisely why we need a radically new fiscal/industrial policy, instead of more and more of the old monetary "fixes". We have to create new good, high-paying jobs to counterbalance the withering of the FIRE economy and to minimize - as much as possible - the pain from debt destruction.

Add to this mixture the negative factors of geopolitical dependency on crude oil and gas, plus resource depletion and environmental/climate degradation and the route forward is strikingly, even incredibly clear. Changing our energy regime from black to green in a massive and concerted way will quickly generate millions of new jobs and absorb trillions in new investment.

Net-net we may stand still or even retrench in classical GDP arithmetic - but that's old hat economics, isn't it? Here's just one way our current accounting is providing the wrong picture: where is the cost, the negative growth which results from massive habitat degradation? Economists hide behind the term "external cost", but that's plainly nonsense in a world of 7 billion souls ultimately aspiring to American-style living standards.

What if instead we subtracted from each nation's annual GDP growth $50 per metric ton of CO2 it emitted to the atmosphere? This is actually not a price I picked out of the hat. It is close to the top market price for European CO2 emission permits last year. Prices have since come down with lower economic activity but, if anything, I believe $50/ton underestimates the total negative impact (just think of health effects).

Here's a list for the top ten CO2 emitters, unfortunately dated back to 2004 (latest data available). It has changed significantly since then, mostly because of the growth in Asia.

That's a trillion dollars per year, right here.

So... where should our trillion dollar bailout money go, instead, eh?


  1. Hellasious,
    you are suggesting debt reduction. since most debt is held by pension plans you are suggesting reneging pension liabilities, hence you are suggesting ripping contractual obligations, hence you are suggesting wage and bond yield increases to cover the higher risk of uncertainty, hence you are suggesting an inflationary spiral. but you are saying we will not get any inflation!
    please explain how everyone can demand and receive higher yield and we will not get inflation? are you suggesting that somehow the earnings will be sterilized or vaporized?

  2. That's just replacing the private debt with public debt; but, in the end, it's the same old US economy that will have to bear it and service it. Can't be done, dammit!

    And therefore that is not The Plan:

    The Plan is to replace ALL private debt with public debt, sell the public debt to foreigners, then default on it!

    The uncertainty is whether default is via printing USD or simply flipping a bird to the bondholders at an appropriate time.

    @bb: Blowing pensioners up is intended; they are liabilities, not economically useful anymore, what they produced is in the past and what are they going to do about it anyway? Vote for "Change"??

  3. One of our greatest mental liabilities is assuming that there IS a plan, and that there is SOMEONE behind all this that we can pin responsibility on.
    I do not believe this for one minute.
    What I do believe is that we are not really thinking about the consequences of our actions or of our symbolic systems. No more than we ever did, but with machines around, we have good excuses not to think because we seem to be assuming that the machines think better than we do. (Wrong thinking, but it's still an assumption.)
    Another major ideological assumption which is fallacious is that numbers, or statistics = objective facts. This is patently untrue. Sorry to dispel so many hard held illusions.
    Hell, you still have not addressed the MAJOR IDEOLOGICAL ASSUMPTION that when things go wrong, throwing money, in ANY form, at them, will solve the problem.
    As long as we are so entrenched in this monetary ideology, we will not be able to see clearly to solve our momentous problems.
    With or without inflation, or deflation.

  4. Debra said:

    "Hell, you still have not addressed the MAJOR IDEOLOGICAL ASSUMPTION that when things go wrong, throwing money, in ANY form, at them, will solve the problem."

    That's precisely what I am addressing and I am suggesting the exact OPPOSITE: stop throwing money at problems. That's what debt destruction accomplishes, among other things...


    PS Seems to me that you are still not grasping the full meaning of debt = money. It's a very simple concept, but 99% of the people have a hard time with it. Probably because its full ramifications are so scary, ultimately..

  5. we have good excuses not to think because we seem to be assuming that the machines think better than we do.

    Heh: The very instance someone creates a real thinking machine, a "strong AI", the Game is Over. Humans are, IMO, precisely as (maybe even more) malleable and condition-able as dogs are.

    All will be servants of the machine-god (who will make them rich).

    OTOH, Maybe that's what lurks inside the basement of the FED building (or JPM) cloaking itself in "National Security" concerns.

  6. Ok, I am one of those who had a different understanding of deflation and thus am benefiting from these explanations and associated comments.

    BUT I am starting think that a lower standard of living is being looked at as a catastrophe.

    I still hold true though that deflation, in some regards, is not bad as it forces people to become more humble in personality and lower their consumption (along with their associated carbon foot print).

  7. @fajensen

    personally i think that reducing pension commitments NOW is the most sensible thing rather than to continue the ponzi scheme a.k.a. pension plan. let's face it: productivity brings progress, but it makes pension plans unworkable as fewer and fewer people work, and not all income is taxed. and on top of that, i am perfectly aware that 70% of voters are retirees. this option is a no-go.

    on the other hand, bond haircuts across the board discourage investment and ultimately lead to higher borrowing costs. i personally would not give my savings to banks that pay <5% interest or companies whose bond yields are <5%. better to hold gold when yields come close to the inflation rate. expecting people to assume risks for returns next to nothing is laughable. at present, funds for more lending can ONLY come from investment managers who commit other people's capital, private or government. and we all see that the government props such fails so they stay in business and milk the agent/principal hazard cow.
    we only need return to sound money policy (includes no bailouts, no FDIC guarantees, strong capital reserve requirements, no naked CDS), nothing more, to make people invest again and not fear that they will lose their money.

  8. fajensen,
    That is what alot of people would like to see, as though those damn furriners are the ones responsible for the financial predicament the US has backed itself into but it will not be remotely as painless as many might think. It will mean the collapse of US foreign policy as hi-tech weapons start finding their way into the hands of every rebel group fighting US forces. Roadside bombs will be the least of US soldiers' worries and getting oil tankers safely across the ocean in the numbers required will no longer be taken for granted.

    The US is going to have to tip-toe through the heavily-mined tulips in how it tries to resolve its debt crisis, casually screwing its creditors on the scale you suggest will create its own blowback. See the Market-Ticker's take on the financial meltdown he forsees resulting from a strike by the capital markets:

    Cool quote from Soros (via of2minds blog):

    "Economic history is a never-ending series of episodes based on falsehoods and lies, not truths. It represents the path to big money. The object is to recognize the trend whose premise is false, ride that trend, and step off before it is discredited." (George Soros)

  9. I apologize, then Hell, for being so thick.
    We agree about the necessity of not throwing more money at the problems, then. I should have realized that I knew that before.
    What remains a big question mark in my mind is the fact that we have discredited money in our own books with all of this.
    I am not sure that a perverted symbolic system can be rescued, that's all.
    I don't know what to offer as an alternative.

  10. Hel(l),

    Thoughtful comments - as usual. There is this chap over on who has a rather chilling explanation: masses of additional workers, [Lw], have been SUPPLIED into the world labour market- hence world wages [Pw] must decrease. He is talking in global terms.

    In the 1929 - 1938 time period neither India nor China had the technological know-how they have today.

    Our modern transport and comms systems respond quickly - so we might just consider this huge increase in potential, and actual, workers' as being almost in the same state as ourselves. They have been doing the making, we the buying. This is not sustainable.

    The relationship between Wages [Pw]and Labour [Lw] seems to be an inverse rectangular hyperpola - with a min at the limit >0.

    Imagine two containers of fluid, connected together, and the fluid allowed to equilibrate!

    I have a very bad feeling about what might happen - like those Levees in New Orleans! The water went underneath, not over the top!

    Brian P

  11. Seems the government is trying to revive the old-time music and dance--more debt.

    Also seems like they are trying to play the foreign investors like they play us, "You better buy our bonds or the whole system will collapse."

    If I understand you correctly Hell you think controlled collapse of the system is exactly what is needed?

  12. Controlled collapse ?
    Isn't that an oxymoron ?
    I love oxymorons. Their breathlessly beautiful irrationality is what we need to keep in mind these days.

  13. @ bb, yoyomo

    The US will have to default; Assuming TARP e.t.c. is being used to make foreigners whole.

    Every time the "Dr. Evil SWF" takes a hit in the USD Casino, the FED comes running with more money to make it all better. Afterwards, "Dr. Evil" puts it all back on the craps table knowing that since he is "protected" he will eventually win with probability 1.

    The problem for everyone is that when "Dr Evil" finally *does* win he will break the bank, the Casino cannot possibly give him his money and then trouble starts.