Daily Digest

Daily Digest 8/10 - Fed Deflation Concerns, RIP Matt Simmons, Clean Energy

Tuesday, August 10, 2010, 10:55 AM
  • Fed Will Meet With Concerns on Deflation Rising
  • Merrill’s Risk Disclosure Dodges Are Unearthed
  • Why the Official Antipathy to Gold and Silver? The Second Oldest Profession
  • Battle lines being drawn in Washington over Bush-era tax cuts set to expire this year
  • When Will Financial Armageddon Begin?
  • Matthew Simmons, Noted Energy Banker, Dies at 67
  • Land Surveyor Proves Simmons Right
  • Economic Pessimists Gain Cachet
  • Portugal Gives Itself a Clean-Energy Makeover

Crash Course DVDThe 3-disc Special Edition DVD, now $24.99 in our store (NTSC or PAL)

Economy

Fed Will Meet With Concerns on Deflation Rising (jdargis)

Economists, including former Fed officials, say the central bank’s interest rate policy committee is likely, at the least, to acknowledge the slowdown in the recovery, and to discuss steps like reinvesting the proceeds from its huge mortgage-bond portfolio, which could help the economy by keeping more money in circulation.

Merrill’s Risk Disclosure Dodges Are Unearthed (jdargis)

Only after the housing bubble began to deflate did Merrill and other banks begin to clearly divulge the many billions of dollars of troubled securities that were linked to them, often through opaque vehicles like Pyxis.

In the third quarter of 2007, for instance, Merrill reported that its potential exposure to certain subprime investments was $15.2 billion. Three months later, it said that exposure was actually $46 billion.

    Crash Course DVDThe 3-disc Special Edition DVD, now $24.99 in our store (NTSC or PAL)

Why the Official Antipathy to Gold and Silver? The Second Oldest Profession (Ken C.)

The motive therefore involves aspects from an 'official' monetary perspective. It will often include a reference to Gibson's Paradox, a paper by Larry Summers involving the price of gold and its perceptual relationship with the long end of the curve. It might include Volcker's and Greenspan's comments about the price of gold casting a negative light on the stability of the currency if it rises too high or too quickly. I may even get into the Second Bank of the United States, and Andrew Jackson's populist role in exposing its frauds, and refusing to renew its Charter in favor of constitutional money.

Battle lines being drawn in Washington over Bush-era tax cuts set to expire this year (Robert C.)

On Wednesday, Treasury Secretary Timothy F. Geithner hammered on the projected costs of continuing the tax cuts for top earners as the administration ramped up for a bruising fight.

"Borrowing to finance tax cuts for the top 2% would be a $700-billion fiscal mistake," Geithner said in a Washington speech. "It's not the prescription the economy needs right now, and the country can't afford it."

When Will Financial Armageddon Begin? (Robert C.)

Last week, the government revealed a record 40.8 million Americans are now on food stamps. More budget woes can be seen at the state level. Congress just passed an emergency aid package worth $26 billion to save teachers’ jobs around the country. States are facing $200 billion in shortfalls in the coming months. California is one of the worst, with a $19 billion budget hole to fill and a $500 billion in underfunded pensions . Commercial and residential real estate is still losing value, and set to take another plunge.

Economic Pessimists Gain Cachet (jdargis)

With the shocking financial crisis of 2008 still fresh in people’s minds, and gloom-spinning economists like Nouriel Roubini having achieved pop culture status, even longstanding pessimists like Mr. Edwards — who has been forecasting a Japanese-style stock market slump in the United States since 1997 — are being treated with newfound respect.

Energy

Matthew Simmons, Noted Energy Banker, Dies at 67 (Tomadkins, Bill S.)

Mr. Simmons died of a heart attack on Sunday at his summer home in North Haven, Me., according to The Bangor Daily News. Mr. Simmons, who once advised President George W. Bush on energy issues, was most recently the chairman and president of the Ocean Energy Institute, a research group and venture capital fund that he founded in Maine that specializes in offshore renewable energy.

Land Surveyor Proves Simmons Right (Tomadkins)

According to the public documents, not only are there the two wells Matt Simmons has insisted exist. The documents also reveal that the plan since the beginning of the operation has been to abandon both wells.

Simmons stated in July, "There is no way BP would not know they were misleading everyone," and, "They would have to be deaf, dumb, and blind and they're not. These are smart guys."

Portugal Gives Itself a Clean-Energy Makeover (jdargis)

Land-based wind power — this year deemed “potentially competitive” with fossil fuels by the International Energy Agency in Paris — has expanded sevenfold in that time. And Portugal expects in 2011 to become the first country to inaugurate a national network of charging stations for electric cars.

Article suggestions for the Daily Digest can be sent to [email protected]. All suggestions are filtered by the Daily Digest team and preference is given to those that are in alignment with the message of the Crash Course and the "3 Es."

33 Comments

saxplayer00o1's picture
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Re: Daily Digest 8/10 - Fed Deflation Concerns, RIP Matt ...

"Aug. 10 (Bloomberg) -- A Chinese general said U.S. plans to send a nuclear-powered aircraft carrier to the Yellow Sea may lead to retaliation from China, the biggest foreign holder of Treasuries.

"Imagine what the consequence will be if China’s biggest debtor nation challenges its creditor nation," Major General Luo Yuan, deputy secretary general of the People’s Liberation Army Academy of Military Sciences, wrote in an editorial today in the state-controlled English-language Global Times."

"Personal incomes fell across the U.S. last year except in areas with a high concentration of federal government and military jobs, the Commerce Department said Monday. They declined most in places with a lot of housing and finance jobs.

Among the 52 metro areas with populations of more than one million, in only three did both net earnings and the broader measure of personal income both rise.

All three had strong ties to the federal government: the Washington, D.C., area and two areas with a large military presence, San Antonio and Virginia Beach, Va. In all three, the biggest gains were among workers in the federal government and the military; private sector compensation fell.

The same picture was reflected nationally, as private employers froze and in many cases reduced workers' pay and hours."

"The outstanding balance of the central government's debt reached a record high ¥904.08 trillion at the end of June amid massive bond issuances and declining tax revenue, Finance Ministry data showed Tuesday.

It is the first time the debt balance, including government bonds and financing bills, has topped ¥900 trillion.

Per capita debt came to around ¥7.10 million based on Japan's estimated population of about 127.42 million as of July 1.

The debt is equivalent to almost 1.9 times the nominal gross domestic product in fiscal 2009, which totaled ¥476 trillion."

"During the past two decades, such blackouts have increased 124 percent -- up from 41 blackouts between 1991 and 1995, to 92 between 2001 and 2005, according to research at the University of Minnesota."

"More than 30 years later, the United States is still "operating the most advanced economy in the world with 1960s and 70s technology," said Amin. Failing to modernize the grid, he said, will threaten the U.S. position as an economic super power."

"Aug. 10 (Bloomberg) -- The productivity of U.S. workers unexpectedly fell in the second quarter, indicating companies may redouble efforts to contain costs as the recovery unfolds.

The measure of employee output per hour decreased at a 0.9 percent annual rate, the first drop since the end of 2008, Labor Department figures showed today in Washington. The median forecast of economists surveyed by Bloomberg News projected a 0.1 percent gain. Labor costs rose at a 0.2 percent pace, less than estimated.

The figures show the world’s largest economy lost momentum heading into the second year of the recovery, one reason why companies are holding the line on employment and pay. Flagging growth and a slow jobs recovery have fueled investor expectations that Federal Reserve policy makers will announce efforts to spur the economy after meeting today. "

.........................5A) Productivity drops 0.9 percent in spring, first fall since 2008; labor costs edge higher

"Aug. 10 (Bloomberg) -- Warren Buffett shortened the duration of bonds held by his Berkshire Hathaway Inc. after warning that deficit spending could force inflation higher.

Twenty-one percent of holdings including Treasuries, municipal debt, foreign-government securities and corporate bonds were due in one year or less as of June 30, Omaha, Nebraska-based Berkshire said in a filing Aug. 6. That compares with 18 percent on March 31, and 16 percent at the end of last year’s second quarter."

"CHICAGO: There is a "significant" chance the US economy will slip back into recession in the next two years although a reversal is unlikely in the

next few months, researchers at the San Francisco Federal Reserve Bank said on Monday.

The probability of another recession over the next 18 to 24 months is higher than that of expansion, researchers said in the latest issue of the regional Fed bank's Economic Letter."

"For the first time since 1995 Chicago Public Schools must empty its reserve fund to balance its proposed 2011 budget of $6.4 billion, CPS officials said.

Ron Huberman, chief executive officer for the nation’s third largest school district -- 409,000 students and 675 schools -- recently met with the media to discuss his proposed budget. "

  • Other news and headlines:

Copper Demand May Exceed Supply Next Year, Kamoo Says

China's Widening Trade Surplus Puts Wen Under Yuan Pressure

NG debt tops P4.55 trillion at end-May (Philippines)

US Two-Year Yields Near Record Low as Fed May Signal Additional Stimulus

$12 billion spent to avoid 'breaking the buck,' Moody's says

EU approves 10 bln euro state aid to Anglo Irish Bank

Judge temporarily bars California from imposing new furloughs

Sovereign Debt Swaps Rise to Two-Week High on Recession Concern

Virginia Puts A Stop To Funding Stop Signs

Calif. lawmakers pull $11B water bond from ballot

Survey: 80 percent of districts will have fewer teachers this fall (New Jersey)

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Re: Daily Digest 8/10 - Fed Deflation Concerns, RIP Matt ...

Marc Faber: Protect Your Property with High Voltage Fences, Barbed Wire, Booby Traps, Military Weapons and Dobermans

Heres the full article

 http://vinceseconomicblog.wordpress.com/2010/08/10/marc-faber-protect-your-property-with-high-voltage-fences-barbed-wire-booby-traps-military-weapons-and-dobermans/

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Re: Daily Digest 8/10 - Fed Deflation Concerns, RIP Matt ...

 When Will Financial Armageddon Begin?  

Any opinions on a time frame? Do you think the 6 month to 1 year time frames from this article is realistic?

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Re: Daily Digest 8/10 - Best forecast I have ever seen

http://theautomaticearth.blogspot.com/2010/08/august-8-2010-stoneleigh-t...

I love Stoneleigh from the Automatic Earth.  I love the stats that John Williams produces, but not his predictions.  So, this article was great (I guess great in this case meaning I really agree with it!  haha) in that Stoneleigh takes William's stats, agrees with them, and shows why his forecast is off.

I continue to believe she gets it more than any other person out there.  The bond market will not allow for too much printing, and that really is the core peice of information in the deflation debate.

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Re: Daily Digest 8/10 - Fed Deflation Concerns, RIP Matt ...

Denninger nails it: http://market-ticker.org/archives/2568-Here-It-Comes!-And-No,-It-Is-Not-QE2.html

It's all about the debt.

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Re: Daily Digest 8/10 - Fed Deflation Concerns, RIP Matt ...

I hate to give you an evasive answer, but a gentleman I know well who is very intelligent and very well connected says it is impossible to forecast.  He believes it will start with a "triggering event" that no one really has anticipated, and that balloons out of control.  It could even be a small country defaulting, or a conflict springing up out of nowhere.  If Israel bombs Iran (or if we do) it could be a trigger.  I am continually impressed with the ability of the Powers That Be to keep this thing afloat.  My personal opinion is that it should have collapsed years ago, but  somehow didn't.

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In Crackdown on Energy Use, China to Shut 2,000 Factories

In Crackdown on Energy Use, China to Shut 2,000 Factories
http://www.nytimes.com/2010/08/10/business/energy-environment/10yuan.htm...

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Re: Daily Digest 8/10 - Fed Deflation Concerns, RIP Matt ...

... this article was great ... in that Stoneleigh takes William's stats, agrees with them, and shows why his forecast is off.

 Ricketts, I agree, this was another thought provoking article by Stoneleigh.  It helped to clarify for me, that different pundits may hold different views about inflation and deflation, at least in part due to their different in definition.  

 For instance, Stoneleigh says:

 One major distinction between TAE's view and that of many inflationists is the definition of inflation. It is clear from the interview that Mr. Williams' definition is increasing prices. Readers of TAE will know that our definition is a monetary one - an increase in the supply of money, credit and velocity thereof relative to available goods and services. We have consistently pointed out that using a price definition of inflation removes all the explanatory and predictive value from the concept. Prices changes are lagging indicators of changes in the money supply, complicated by other factors, both globally and locally. For instance, global wage arbitrage has been a major factor driving prices down in recent years, despite a tremendous credit expansion. 

 Indeed, here is Williams in a recent interview on Financial Sense, confirming that his definition of inflation is "price inflation," that is, the cost of consumer goods and services.  http://www.financialsense.com/financial-sense-newshour/big-picture/2010/07/31/03/john-doody-patrick-heller-john-williams/gold-new-reporting-rules-gdp

 At about 43 minutes into the interview, Puplava asked Williams: what would you tell the deflations, the private sector is contracting  and credit is not expanding, but is growing in the public sector, but overall debt in the economy has grown.  What would you say to the deflationists that argue that you can't have inflation with weak economic growth and no expansion of private sector credit?

 William replied: "you can have inflation, and let me define what I'm talking about is prices for consumer goods and services, I'm not talking about asset deflation.  You could still have a crash in the stock market and still have and inflation in goods and services. "

 Stoneleigh's article goes on:

 Prices do not tell a story by themselves. It is necessary to assess price drivers in order to understand what is unfolding. It is then necessary to adjust prices for changes in the money supply in order to see what is happening to prices in real terms, as opposed to merely nominal terms. Prices in real terms show what is happening to affordability, as it is not price by itself that matters, but price relative to how much money one has in one's pocket.

 Additionally, in the comment section, there were two salient questions that Stoneleigh responded to:

 idoc,

you've said a number of times that the bond mkt will punish the Fed if they start to print. well, they have been printing over the past 2 yrs, approx. 1.5T on their balance sheet and probably much more hidden. but interest rates have done nothing but go down.

The fed is not printing physical currency. It is trying to stuff more credit into a system that is already choking on it. Monetizing debt is not having an inflationary effect because it is not increasing money circulating in the economy.

The Fed's role throughout its existence has been to midwife credit, but its ability to do so depends on the willingness of borrowers and lenders to participate in credit creation. The banks that the Fed has been propping up are not willing to lend, and borrowers are increasingly maxed out. The engine of credit expansion is broken, which means that the Ponzi scheme has reached its maximum extent.

The bond market would punish any government actually printing currency. Weimar Germany and modern Zimbabwe are not examples of credit expansions, but of actually currency printing. Neither hah/has access to international credit, so printing was/is their only option.

We too may face a currency hyperinflation once the period of deleveraging is over and the international debt financing model is broken. That is a longer term issue however, and people need to navigate the deflationary deleveraging period first. The bond market will still retain its power for a number of years I would think.

davefairtex,

We have a few examples in the modern era of debt monetization: Japan, England 09, and US 09. Did the bond market restrain their actions? It didn't seem like it. Likewise, in Weimar Germany, did the bond market stop the central bank at that time?

The distinction is between the printing of phycial currency and the monetization of debt, and it makes a critical difference whether a country had access to international debt financing as an option.

Without access to international financing, governments have no choice but to print. The debt-pushers have no power within a country they do not lend to, and therefore control, just as drug-pushers have no control over those who are not addicts.

Debt monetization (as in the Japan, UK and US examples you cite) does not increase the effective money supply in a deflation. Credit destruction proceeds faster, and the lesser amount of credit created does not end up circulating in the economy. Banks are sitting on it.

The velocity of money is decreasing, aggravating the contraction of credit. The money supply is falling, and of what remains, less is circulating. This is a vicious circle - a spiral of positive feedback to the downside. The scarcer money is, the more it will be hoarded by those who still have some, as is perfectly logical from their perspective. Being cautious about spending when future earning ability is looking increasingly precarious makes perfect sense, but that which individuals and companies must do dooms the larger system that much more quickly.

 

My take on this is that, at least in part,  because of differing definitions of inflation and deflation, we can have different camps of deflationist and inflationist talking past each other. 

Williams' view is that there is inflation (or hyperinflation) if the price of consumer goods and service goes up.  This would appear be independent of whether the money supply (money, credit, and velocity) is increasing or decreasing, although William thinks that QE2 will be a major driver of inflation, as he defines it.  

Stoneleigh's view is that inflation and deflation are monetary terms: "the supply of money, credit and velocity thereof relative to available goods and services."  Price changes can be a lagging indicator of changes in the money supply, but not always.  Moreover, it is affordability, or prices in real terms, that's important, not nominal prices.  Real prices are controlled by the goods and services available versus the amount of money (including credit) that one has available to spend.  Stoneleigh does not think QE2 will increase the money supply because credit destruction will out pace it, resulting is less circulating credit and further deflation.  Moreover, if the Fed tried to actually print physical currency, the bond market would stop this by increasing interest rates.

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Re: Daily Digest 8/10 - Fed Deflation Concerns, RIP Matt ...

The fed is not printing physical currency. It is trying to stuff more credit into a system that is already choking on it. Monetizing debt is not having an inflationary effect because it is not increasing money circulating in the economy.

As I have written before, this is just not the case, monetization does increase the money supply in an economy.  Perhaps there's some hair-splitting to do around the concept of "circulating?"

By way of example, consider a simple case centered on a single MBS.

Step 1: People secure mortgages and banks issue both the debt (mortgage) and the money.  This money goes into the seller's bank account assuming, for the sake of simplicity, that the seller owned the property free and clear.

Step 2: These mortgages are bundled up into an MBS which is swapped for money from some other entity "A"  thereby freeing up the bank/mortgage company to repeat step one and two.

Step 3:  The Fed creates enough money out of thin air to buy the MBS from entity "A" which then receives cash (money) for the MBS.

Note that money was created in step 1 and step 3.  One unit of debt becomes two units of money.

This is why some people fret over the practice of monetizing debt.  It has the capability of producing 2x money per 1x unit of debt.  This is also why the Fed has targeted the very deep market of MBS...it's huge, liquid, and the act of creating mortgages is money positive. 

The only reason that this has not proven inflationary (so far) is that the recipients of this money have not seen anything compelling to do with it and they have largely parked it in "excess reserves" back at the Fed itself, and into Treasurys, for the most part.

In order to really appreciate the inflation deflation argument we need to go even further than prices or monetary quantities...we have to include preferences (demand) for money and money-like things.  This, I think, is where the true difference between TAE and JW lies...it's not that one is tracking prices and the other the monetary quantieis, it's that JW thinks that someday people will lose their preference (demand) for holding US dollar obligations (which include Treasury's, by the way) and when they do, massive inflation will result. 

I, for one, cannot completely discount that as a possibility.  Probability?  Timing?  Those are separate questions...

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Re: Daily Digest 8/10 - Fed Deflation Concerns, RIP Matt ...

US Federal Reserve Says Will Buy Treasurys with Maturing Mortgage Debt (Story Developing)

 

WASHINGTON (AP) -- Worried about the economy, the Federal Reserve is taking a small step to bolster the sputtering recovery.

At the end of its meeting Tuesday, the Fed said it will use money from its investments in mortgage securities to buy government debt on a small scale. That could help nudge down long term rates on mortgages and corporate debt but wouldn't have a dramatic impact.

The Fed says economic growth will be "more modest" than it had thought just seven weeks ago.

Economists doubt the Fed can turn around the economy on its own. Some believe additional help from Congress is needed. Others are skeptical that easier credit or even more government aid will persuade Americans to shop more and hire more.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.

WASHINGTON (AP) -- Federal Reserve policymakers are pondering ways to jump-start the economic recovery. The trick: making sure whatever they do or say doesn't rattle Wall Street.

Early Tuesday, stock futures retreated, following overseas markets lower after China's economy showed some signs of slowing down.

The market is certain to react to the Fed's statement later in the day. U.S. stocks closed higher Monday as investors anticipated reassuring words or action Tuesday by Fed Chairman Ben Bernanke and his colleagues on the Federal Open Market Committee.

"There was some anticipation the Fed could announce additional liquidity measures like the purchase of bonds," Craig Peckham, market strategist at Jefferies & Co. "It's a little premature for the Fed to expand. We don't think there will be any meaningful change in policy."

A disappointing jobs report on Friday intensified pressure on Fed policymakers to consider new action aimed at stimulating economic growth. That report showed the unemployment rate stuck at 9.5 percent in July and a third straight month of anemic hiring from the private sector.

Researchers at the Federal Reserve Bank of San Francisco, in a paper Monday, said there's a "significant" chance the economy will tip back into recession in the next two years. However, such a backslide is unlikely to happen in the next few months, the researchers said.

Economists say Fed officials, who started their meeting Tuesday morning, have a handful of options at their disposal to help prevent that from happening, but would likely consider from two options:

-- Clarify that the Fed will keep short-term interest rates at record lows for as long as it takes to encourage more use of credit.

-- Use the proceeds from the Fed's investments in mortgage securities to buy government debt on a small scale. That could help drive down long-term interest rates.

Both steps would signal to markets that money could be borrowed cheaply for a longer period of time, giving businesses and individuals more confidence to finance major purchases. Still, economists doubt how much impact they would have. Interest rates are already at historic lows and that hasn't generated more buying activity.

"Fed policymakers could consider token moves like this, but I don't think are they ready to do a lot more," said James O'Sullivan, global chief economist at MF Global.

A bolder step would be to restart programs undertaken during the financial crisis that involved large-scale purchasing of mortgage-backed securities and government debt.

But it could spook investors about the health of the economy. And a sell-off on Wall Street could prompt businesses and consumers to retreat further.

In 2009 and early 2010, the Fed bought $1.25 trillion in mortgage securities, $175 billion in mortgage debt from Fannie Mae and Freddie Mac, and $300 billion in government debt as part of two crisis-era programs.

At Tuesday's meeting, the Fed is all but certain to leave its key bank lending rate between zero and 0.25 percent, where it has been since December 2008.

There's a chance the Fed could build on its pledge to hold this rate at record lows for an "extended period."

That means rates on certain credit cards, home equity loans, some adjustable rate mortgages and other consumer loans will stay low. Commercial banks' prime lending rate would stay at about 3.25 percent, the lowest point in decades.

The Fed's focus again on energizing the recovery is a shift from earlier this year, when it was starting to lay out its "exit strategy" for eventually boosting interest rates.

 

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Re: Daily Digest 8/10 - Fed Deflation Concerns, RIP Matt ...

Chris - regarding your comment that 1 unit of debt becomes 2 units of money.  I am missing something - I dont see it that way?

As I understand it, the buyer of the home gets credit, and therefore credit in the system is expanded.  However, the other transactions dont create any new "net assets in circulation" do they?  When the seller of the home sells, he exchanges a home for cash.  When the bank sells the mortgage they offset an asset with an asset (sell a loan backed by something real in exchange for cash).  When XYZ wall st firm sels the MBS to the FED they offset an asset for an asset (a loan/mbs with cash).  The only thing to change here is the new credit in the system that the buyer has - - all other exchanges have matching balance sheet. 

I think its real important to realize that much of our debt (AIG, FRE, FNM) is backed by tangible assets.  I am not saying they wont/cant go down in value, but there are actual assets there.  Therefore, they are not just printing money out of the blue and throwing it away - they are buying actual things.  When people say the US is hosed because we have 50 trillion in debt, they usually fail to mention the asset side of the balance sheet.  Now, that asset side is in serious jepordy yes, but it must be accounted for.  If the US grows its debt by buying things, that debt is backs by things, and therefore we must account for the asset side too.

When the FED prints money to buy assets, they take risk for sure, but its far from 100%.  And, the money they put into the system might come back someday if they let the principle repayments/interest payments come in without buying more.  In this way, the FED kicks the can down the road...perhaps a 30 year road...but they buy lots of time.  The risk is clearly if the assets backing the trillions fall by a ton (whatever...50% say). 

Point being is I dont understand where the 2x comes from.  I know money is created out of thin air from banks or the fed in a balance sheet expansion....but I dont see it as 2 units of money to 1 unit of debt.  I see it as 1 to 1 (without considering interest).  If the US expands its debt by 4 trillion by buying mortgages, its assets grow by 4 trillion (assuming they bought at current market prices).  Now, of course the risk is much higher, but I dont know that it sends us over the edge like it might if we were just giving the money to....say....medicare (no assets backing that spending).

Thanks for your insights.

 

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Re: Daily Digest 8/10 - Fed Deflation Concerns, RIP Matt ...

Let's try this again, maybe I missed something.  When the fed monetizes debt, until and unless it unwinds that transaction it is the same thing as any other POMO  - it adds to the monetary base.  This is how the Fed expands the base money supply.

I'm not following your distinction as to why an MBS purchase should not be money additive as compared to when the Fed buys  a Treasury from a bank during a POMO or TOMO transaction.

If we agree that money is created when a bank makes a loan and we agree that the Fed expands money by purchasing debts from banks, then we hopefully agree that a 1x loan can become 2x of money.

Of course, during the unwind, assuming that ever happens, then this works 2x in reverse.

This process is my way of understandin the mechanism by which the base money chart you can find at the St Louis Fed went near vertical during the MBS purchase phase of QE I.

That's how I see it.

 

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Re: Daily Digest 8/10 - Fed Deflation Concerns, RIP Matt ...

I’m nowhere near as competent as Stoneleigh, JW and CM when it comes to commenting on inflation/deflation, but as a lay observer I’d like to point out a couple of oft overlooked yet incredibly important points.

In a nutshell, Williams is making the case for hyperinflation (not inflation, mind you) based upon geopolitical considerations. And this observation is in-line with historian Nialls Ferguson who considers hyperinflation to be a political phenomenon and not an economic/monetary one.

So the real difference for me -- since even Stoneleigh agrees with much of Williams’ observational foundations -- is that Stoneleigh has what I would characterize as faith in the fact that the world still considers the sinking ship of the US to be a “safe haven.” Very conventional thinking, by the way. Whereas Williams thinks the game’s up now.

Second, quick point: Stoneleigh emphasizes in many of her talks that if one is concerned with consumer prices (and this is what most regular folks are concerned with when it comes to this debate) what one should really be concerned with is purchasing power -- a more nuanced synonym for consumer prices. She goes on to say that purchasing power during deflation is usually more compromised than during inflation (not hyperinflation) even though price points may be lower.

Oddly, for me, most of her big advocates never bring this point up. So I’m constantly talking to people who think deflation will be a good thing because “prices” will be lower. So, in a way, many of the villains of the deflationists like Schiff, Paul, Faber, etc. are essentially right because the result is the same: You can’t afford things anymore. And that’s the bottom line.

In summation, Williams’ is predicting hyperinflation caused by a currency crisis triggered by geopolitical maneuverings. Stoneleigh, as far as I can tell, doesn’t consider this angle seriously or her consideration of it is more or less baked in through a quick dismissal of it in the past.

I obviously don’t know who is right, but I’m unnerved by the amount of hope and faith that must be conjured when considering the geopolitical fall of the dollar and the perpetuation of the status quo.

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Re: Daily Digest 8/10 - Fed Deflation Concerns, RIP Matt ...

Either way arent the preperations for little guys like me the same?

1. Hold no debt

2. Be able to provide water, food and energy for yourself.

3. Hold half of your savings in cash and half in PMs

I dont have the liquidity to pay off my mortgage or business debt. I have a plan for paying it off in the next 5 years, all things being the same, which we knwo they wont be. I have put away an ounce of silver for every $1000 in debt, hoping the hyperinflationary scenario will allow me to cash it in for my deed etc.

Cash is limited so I put away as much as I can, and keep a tight budget. Not much wiggle room for deflationary scenario, except self sufficiency.

Nothing left for investments or diversification other than updating family passports.

Am I missing something here?

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Re: Daily Digest 8/10 - Fed Deflation Concerns, RIP Matt ...
Quote:

The Fed's focus again on energizing the recovery is a shift from earlier this year, when it was starting to lay out its "exit strategy" for eventually boosting interest rates.

This is seriously like Japan all over. Aging demographics, increase social services burden, declining tax revenues, increased quantitative easing and borrowing. The Fed is stuck where people warned that it will be stuck just like Japan was after its real estate bust.

Poet

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Re: Daily Digest 8/10 - Fed Deflation Concerns, RIP Matt ...

Chris,

Would that mean that in the event that foreign countries were to dump the USD, the Fed could unwind its MBS positions therefore taking back lots of the USD it lent at the beginnig of the transaction and thus limit inflation?

John

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Re: Daily Digest 8/10 - Fed Deflation Concerns, RIP Matt ...

The fed is not printing physical currency. It is trying to stuff more credit into a system that is already choking on it. Monetizing debt is not having an inflationary effect because it is not increasing money circulating in the economy.

As I have written before, this is just not the case, monetization does increase the money supply in an economy.  Perhaps there's some hair-splitting to do around the concept of "circulating?"

 Just to try and put Stoneleigh's response into context, her article quoted portions of Williams' statements and then commented on it:

 JW: "If you strangle liquidity you always contract an economy and deliberately or not, liquidity is being strangled, resulting in sharp declines in consumer credit, commercial and industrial loans..... "

".....We're still seeing contractions in liquidity, and that's adjusted for inflation. In real terms, M3 money supply is down almost 8% year-over-year."

Williams also points out that the actions of the FED so far are not having an inflationary effect:

"The banks are not lending. The money the Fed put into the system in terms of buying mortgage-backed securities from the banks and trying to help bank liquidity ended up back with the Fed as excess reserves. We have well over $1 trillion there; had the banks loaned that money in the normal stream of commerce, it would have added more than $10 trillion to the broad money supply, which otherwise is up around $14 trillion. That certainly would have had some inflationary impact if not in terms of actual business activity. You can't always get the economy to grow by pushing money into it. Sometimes it's like pushing on a string.

It is indeed pushing on a string. Trying to stuff more credit into a system that is already choking on it will do nothing to increase the money supply in circulation. It cannot -even possibly- be inflationary. We are already in monetary contraction, as Williams has noted, and the contraction of credit makes the situation considerably worse than it appears from traditional money supply measures. Contraction is being aggravated by a fall in the velocity of money, as people, companies and banks hang on to what cash they have.

I interpret what Stoneleigh was saying here, in agreement with Williams, is that QE1 didn't do much in the way of stimulating the economy, because the banks just pumped the money back into the Fed or bought treasuries, instead of making loans into the private sector.    That is, it didn't increase the money circulating in the economy.  That is, the velocity of the credit created in QE1 was effectively zero.  

 In the mean time in the private sector, credit continues to contract, unemployment is still high, and companies and individuals either can't, or are afraid to, go further into debt.  The mid-term elections are coming up in the fall, the next round of alt-A and prime mortgage resets will peak in 2011, and the election campaigns for the 2012 election will also kick into gear by mid-2011.  

The pressure on the Fed to engage in QE2 will be very strong indeed. 

 But, if they try to do the same thing as last time, why would it work any better than the first time?   That would be like "pushing on a string," as Williams said.

 What else can the Fed or government come up with that would actually simulate, or, at least give the appearance of simulating, the economy in such a short time frame?  

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Re: Daily Digest 8/10 - Fed Deflation Concerns, RIP Matt ...
mainecooncat wrote:

In a nutshell, Williams is making the case for hyperinflation (not inflation, mind you) based upon geopolitical considerations. And this observation is in-line with historian Nialls Ferguson who considers hyperinflation to be a political phenomenon and not an economic/monetary one.

Yes, its what I think of as a crisis of confidence and not necessarily Machiavellian. I think CM hits the nail on the head, again, with the comment I've highlighted in bold.

cmartenson wrote:

In order to really appreciate the inflation deflation argument we need to go even further than prices or monetary quantities...we have to include preferences (demand) for money and money-like things.  This, I think, is where the true difference between TAE and JW lies...it's not that one is tracking prices and the other the monetary quantieis, it's that JW thinks that someday people will lose their preference (demand) for holding US dollar obligations (which include Treasury's, by the way) and when they do, massive inflation will result. 

I, for one, cannot completely discount that as a possibility.  Probability?  Timing?  Those are separate questions...

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Re: Daily Digest 8/10 - Fed Deflation Concerns, RIP Matt ...

Interesting debate.

In the past 84 years "our" dollar has been debased by 95%. Took Rome 300 years to do this.

We can NOT pay our debt right now. We take in less than we owe, we can't borrow the difference. Our roll overs are increasing with each dollar we owe, adding to the deficit.

I don't know if I should say interesting debate, or interesting that there is even a debate?

You tell me (please): Given the massive debasement and our inability to act as a surplus nation and our necessity to act as a debtor nation - How can there be anything but hyperinflation vis-a-vis a currency crisis/collapse?

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Re: Daily Digest 8/10 - Fed Deflation Concerns, RIP Matt ...

This all reminds me of a great song quote

"There's more than one answer to these questions pointing me in a crooked line"

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Re: Daily Digest 8/10 - Fed Deflation Concerns, RIP Matt ...

Chris - thanks for taking the time to respond.  I definitely think that every dollar created can expand into 2x...or way more.  But, I think all money creation happens as a result of credit creation - not of the fed buying mbs/treasuries.  When the fed does this, the market is flooded with money .  This flooda the banks with cash and when the economy is ok (not now) they can loan more.  When they loan many times more than the reserves they have, thats the 2x+ I think youre talking about.  So, its the fractional reserve lending from the banks - not the printing of money that has the multiple I think you are talking about?  I think the difference I am getting at is that event is not happening right now (the use of reserves to loan money into existance from the banks)  In any event....I think we are on the same page and likely just getting caught up in a single narrow scenario/definition issue.  I think I am splitting hairs and saying the same thing you are...I just wanted to be sure I wasnt missing something.  I dont think the fed printing money has the leveraged impact once it hits the banks at it has historically right now.  Anyone - please fire away if I am missing something...thx.

maincooncat - thanks for the thoughts.  I agree that Stoneliegh is saying that deflation will make it harder for people to afford things.  The point I think though is what to do now with extra cash if you have it after getting as self sufficient as possible.  Stoneleigh thinks longer term hyperinflation is possible and not entirely unlikely - - but clearly says it might happen after a big wave of deflation.  Bottom line I guess is do you want to buy stuff like gold/solar/etc now or wait - when if her opinion is correct gold might go down huge relative to the dollar.  I seem to lean with her instinctually, and therefore hold cash much more substantially than gold.  While I am getting more self sufficient, my lean is that buying stuff like more solar panels will be far cheaper in the near future as everyone is doing anything to make a buck (shortage of money).  Just a guess...and I am certainly not too sure.

Davos - we should probably not be able to discuss this anymore :)   But, the short answer is that there is a gigantic asset side to the balance sheet.  A dumbed down analogy:  An unemployed guy with no income wants a loan from a bank.  Should he get it?  Well, its not just about cash flow, its about assets he has.  If he is sitting on a mountain of assets then its perhaps not a bad loan.  Further, if he has a bunch of money he owes his wife, do you consider that?  Maybe, but maybe not. 

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Re: Daily Digest 8/10 - Fed Deflation Concerns, RIP Matt ...
rickets wrote:

The point I think though is what to do now with extra cash if you have it after getting as self sufficient as possible.  Stoneleigh thinks longer term hyperinflation is possible and not entirely unlikely - - but clearly says it might happen after a big wave of deflation.  Bottom line I guess is do you want to buy stuff like gold/solar/etc now or wait - when if her opinion is correct gold might go down huge relative to the dollar.

One thing that Stoneleigh strongly points out in most of her presentations, I'm sure Dr. Martenson would agree, is to buy yourself a learning curve. If you're thinking of installing solar/wind etc, it takes a fair amount of time to research your current and projected needs. If you can affortd the time to invest in learning things like permaculture courses, carpentry and general reskilling by all means do so.

A lot of people around here seem more concerned about their bank accounts than truly becoming self sufficient or buidling real (not just virtual) communities. Don't hedge your bets on thinking you can survive by buying your way out of any particular crisis. Maybe it's just easy for me to say because I don't have much money  ;)
For now I'm 50($)/30(Au)/20(Ag) with what very little I can hold. I consider the PMs to be long term savings (Retirement pipe dreams) and the cash to be emergency funds. That's all I can afford to put aside at this time.

A lot of this inflation/deflation makes most people's heads spin and it doesn't really matter because many of us agree it all will boil down to loosing purchasing power. I do think it's still important to understand it all so we know what might be coming and also helps explain our situation to others.

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Re: Daily Digest 8/10 - Fed Deflation Concerns, RIP Matt ...

Social instability aside, deflation can be good for individuals who are out of debt and have enough whealth to not need a job.  Right now those individuals are very few and include the retired fat cat bankers and finance cheifs.  That the country is at risk tells you that the average Joe would find both inflation and deflation very difficult to live through.  For those well prepared it sets up the asset grab to further increase whealth.

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Re: Daily Digest 8/10 - Fed Deflation Concerns, RIP Matt ...
rickets wrote:

Davos - we should probably not be able to discuss this anymore :)   But, the short answer is that there is a gigantic asset side to the balance sheet.  A dumbed down analogy:  An unemployed guy with no income wants a loan from a bank.  Should he get it?  Well, its not just about cash flow, its about assets he has.  If he is sitting on a mountain of assets then its perhaps not a bad loan.  Further, if he has a bunch of money he owes his wife, do you consider that?  Maybe, but maybe not. 

Well, I myself see more liabilities than assets. But let's run with this. Bank loans them money, guy does nothing different, bank winds up holding the bag. Or, guy gets his fiscal house in order, and finds a way to reorganize. 

You know, if I saw scenario #2 I'd be able to hope for the best. It is NOT what I'm seeing though. I'm seeing them extend and pretend. It'll kill the dollar. I'm not stupid.

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Re: Daily Digest 8/10 - Fed Deflation Concerns, RIP Matt ...

These will also be under my usual "comment #1 (If I post it fast enough) a little later. Since the first one is about 30 minutes, this should give enough time to listen before today's DD is up:

Securing Stability: $1 Trillion at a Time (McAlvany audio)

"Waves of More Foreclosures" = More Bank Failures + Big Trouble for the FDIC, Suttmeier Says (Tech Ticker video)

"All of this housing trouble creates a vicious cycle for the economy, jobs and the fragile banking system, Suttmeier tells Aaron in this clip, predicing another 30% drop in home prices by 2014, as measured by the Case-Shiller Index."

 

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Re: Daily Digest 8/10 - Fed Deflation Concerns, RIP Matt ...

Depositor puts $1 in bank ( cash or savings ) say 1% interest on savings.

Bank A can loan that money out at higher interest to stay in business, say 2% . ( double your money Mr. Banker.)

Most people understand the law of 72 and where that leads to - on doubling your money. When Interest rates of more than 10% were made legal is a good example.

Now, the Fed enters the picture and tells All Banks it is OK to loan $10 for every $1 deposited.

This works fine for Bank A until the Loan goes bad. The credit “Asset” on their balance sheet just became a “Debt”.

 As the Pawn Shop does not want you stuff, just the INTEREST on the Loan they made on your stuff, neither does the Bankster.

We have had 109 Bank As go under, this year alone, because of this. Bank B gets their cash deposits and their GOOD loans. The taxpayer (those who earn money to deposit in Bank A) gets the toxic waste from Bank A's BAD Loans.

OR

Bank A sells the Loan to Bank B. Bank B then sells it to the FED. The FED creates the money to pay for this loan out of thin Air.

Neither Bank is now holding the Loan so they have the $1 back to create $10 in new loans.

The Taxpayer is holding the loan. Will it be paid off or will it go bad?

Now the question remains – How many times has the taxpayer been taken to the cleaners by this network of immoral but legal Banksters. Will the circle be unbroken?

Davos, please reply if I have missed something.

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Re: Daily Digest 8/10 - Fed Deflation Concerns, RIP Matt ...

Re Chris' point on liquidity entering the system.  Don't forget that when the Fed buys treasuries the Government spends those dollars into the economy, most often on non productive endeavors.  Cash is entering the system and the bad loans have still not been written down.  Infact credit is expanding on the general publics back v.v. Fanniie and Freddie and the increased balance sheet at the fed.

 

 

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Re: Daily Digest 8/10 - Fed Deflation Concerns, RIP Matt ...

Interesting debate.

In the past 84 years "our" dollar has been debased by 95%. Took Rome 300 years to do this.

We can NOT pay our debt right now. We take in less than we owe, we can't borrow the difference. Our roll overs are increasing with each dollar we owe, adding to the deficit.

I don't know if I should say interesting debate, or interesting that there is even a debate?

You tell me (please): Given the massive debasement and our inability to act as a surplus nation and our necessity to act as a debtor nation - How can there be anything but hyperinflation vis-a-vis a currency crisis/collapse?

Debate?  Not really, just a friendly exchange of ideas.  

If the debate, in your view, is whether or not goods and services will eventually become less affordable in USDs, and therefore there is price inflation/hyperinflation, then there is no debate; Stoneleigh expects this as well, ultimately.  Is not that the fate of all fiat currencies?

What continues to interest and be of importance to me though, is the timing and preparation for such events.  

Some, like Williams, believe that the USD is about to collapse and price hyperinflation is imminent—six months to a years time I believe he said in the interview article.  He suggests holding PMs and certain foreign currencies, which he believes will hold their purchasing power better than the USD.  Even Williams advocated building up a store of supplies.

Others, like Stoneleigh, believe that, despite FED/government efforts to stimulate the economy, monetary deflation (debt default, lack of money and credit) will continue for several years.  She suggests that, in response, the value of the dollar will increase over the next few years, and, she is not particularly keen on holding PMs over the short-term:

We have argued that people need to hold liquidity during the period of deleveraging, as the risks to cash will be lower than most other wealth preservation strategies. At the point when they can afford to do so without debt, which will depend on how much money they have to begin with, they need to move into hard goods. In doing so, they will prepare for an eventual bottom, at which point inflation should be a genuine threat. People need to be fully liquid at tops and fully invested (in hard goods in this case) at bottoms. In doing so they will be doing the exact opposite of the larger human herd, which is always the best prescription for success.

.......

While (physical) precious metals have been money for thousands of years, and can be expected to hold their value over the long term, they are not ideal for those who are not exceptionally wealthy, i.e. those who can sit on them for perhaps 20 years without having to rely on the value they represent.

Those who would be forced to sell - into the ultimate buyers market of the coming years of deleveraging - would have been better off holding the cash that most will be seeking in the not too distant future.

Governments are very likely to seek to control assets as valuable as precious metals, as they did during the depression. Ownership could be banned and precious metals could be confiscated. It can be as challenging being too close to a source of great value as it is being too close to the centre of power in difficult times. It can mean constantly having to watch your back and never being able to trust anyone. Our view at TAE is that there are many things you could own which will serve you much better than precious metals.

To some extent, I suppose, it may depend on your personal circumstances.  If you are completely self-sufficient and are certain that you will have no need to exchange your PMs for USDs for some years, e.g., to purchase goods or services, or to pay taxes and government fees, then I suppose that you are good-to-go.   

That's not my circumstance, however (is it anyone's?).

However, what if the government imposes very high taxes on the sale of PMs or makes their ownership illegal?  The government could do the same with respect to foreign currency holdings, if they wanted to.  The reporting requirements are already in place to implement these kinds of measures. By the way, Jim Puplava has been on about this on his show for the past few weeks.

Or, what if you lose your job, or pension, or, the government decides to apply some form of means-testing to social security/medicare, such that you won't get anything unless/until you are indigent (see e.g., Rob Arnott's interview here: http://kingworldnews.com/kingworldnews/Broadcast/Entries/2010/7/29_Rob_Arnott.html)  

These all seem to be plausible risks, in my opinion.  And, to help deal with any of these, it would be a good idea to have cash on hand, as Stoneleigh has suggested.   I believe that this is in keeping with one of this site's general themes of increasing ones resilience to help mitigate risks. 

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Re: Daily Digest 8/10 - Fed Deflation Concerns, RIP Matt ...
crash_watcher wrote:

Others, like Stoneleigh, believe that, despite FED/government efforts to stimulate the economy, monetary deflation (debt default, lack of money and credit) will continue for several years.  She suggests that, in response, the value of the dollar will increase over the next few years, and, she is not particularly keen on holding PMs over the short-term:

  1. We take in less than we owe out.
  2. We can not borrow the difference between what comes in as taxes/revenue and what is owed out.
  3. The government is expanding, not contracting, which will exacerbate this situation, as will the roll overs in our debt since we are borrowing more and the curve is getting shorter.
  4. If the government contracted it would raise the Shadow Statistics unemployment north of 22% - significantly.
  5. We are not negotiating with our creditors. 
  6. I'm not seeing deflation. I'm seeing asset price destruction in sectors that bubbles popped. The CPI is a joke, a farse. Gas and food are clobbering people.

The bottom line is they will QE until they go from 95% to 100%. Stoneleigh may have some super points. Telling me the dollar will get stronger I myself won't consider one of her attributes.

 

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Re: Daily Digest 8/10 - Fed Deflation Concerns, RIP Matt ...
Davos wrote:

The bottom line is they will QE until they go from 95% to 100%. Stoneleigh may have some super points. Telling me the dollar will get stronger I myself won't consider one of her attributes.

the dollar keeps it's strongth (and will hold for a while yet) because it is a global mess and nobody knows where else to go. they flee to the dollar and then eventually off a cliff.

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Re: Daily Digest 8/10 - Fed Deflation Concerns, RIP Matt ...
Ruhh wrote:

 

the dollar keeps it's strongth (and will hold for a while yet) because it is a global mess and nobody knows where else to go. they flee to the dollar and then eventually off a cliff.

And when they flee it'll be too late to get into gold or silver. These things, if you look back at history, are slow motion train wrecks (like we have now) followed by a blind bend and the proverbial train going over the cliff.  

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Stoneleigh of Automatic Earth in Ottawa - Aug 18 and Sept 2

for those interested in attending one of Stoneleigh's great presentations she will be in Ottawa, Canada August 18th and September 2nd.

http://transitionottawa.ning.com/events/understanding-deflation-the

This is a free event and hope to see some of you there. PM me if you're interested in attending. It will be interesting to meet some CM'ers in the flesh :)

 

PS to moderators: is there a better place to put up community announcements for something like this?

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Re: Stoneleigh of Automatic Earth in Ottawa - Aug 18 and ...

PS to moderators: is there a better place to put up community announcements for something like this?

Ruhh, I don’t know if anyone responded to this question, but I suggest that you make a post in the general comment and discussion forum so that this get better exposure.  

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