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Hartford and AIG - ghoulish results

Friday, October 31, 2008, 3:54 PM

Happy Halloween! 

One of my kids is going out dressed as the queen of hearts...only the front flips open and it says in blood red inside "Your 401k - down 50%!"

We've already decided to split any candy that spills to ground between the kids and dad.

More frightening yet are the "next shoes" that lurk in the insurance industry.  Like the now blood-red pension industry (great summary here by Mish),  the insurance industry took all the premium money and sought a slightly better return by placing it in financial exotica. 

At first, AIG said they needed, maybe, $20 billion, then $60, then they walked off with an $85 billion government bailout package.  Now?  Don't ask.

Fed Adds $21 Billion to Loans for A.I.G.
The American International Group said Thursday that it had been given access to the Federal Reserve’s new commercial paper program, allowing it to reduce its reliance on a costlier emergency loan from the Fed.

The company said it would be able to borrow up to $20.9 billion under the new program, raising its maximum available credit from the Fed to $144 billion under three different programs. The credit includes an earlier emergency loan of $85 billion from the Fed that carries a much higher interest rate.

Three different programs?  $144 billion?  It's hard not to get the impression that they are just making it up as they go along.  

Now I've read recently in a few spots, that some think that all this Fed lending will not be inflationary, but I think it will be.  The reason?  I think that AIG and several other companies are going out of business.  This means the Fed will now hold the bad paper of failed companies.  Meaning they will end up holding it forever. 

So the "trade" there was hot cash for bad debt.  The debt will forever remain the possession of the Fed, but the money will have run off somewhere to have a good time.

In a recent Martenson Report I laid out several insurers that I thought were in trouble, including Hartford Insurance Group (HIG).  Yesterday, HIG lost 50% of its stock price on one fell swoop.

Hartford Financial loses over half its market value
SAN FRANCISCO (MarketWatch) -- Hartford Financial Services Group lost more than half its market value Thursday on concern the insurer may need to raise more capital.

The company reported a big third-quarter loss late Wednesday and said that it couldn't gauge the amount of extra capital it has because of market volatility.

HIG can't "gauge the amount of extra capital it has"?  Reading between the lines, we can guess that they were not investing in safe bonds and other traditional fare that your grandfather's insurance company would recognize.

In fact, it is no stretch at all to conclude that HIG was hip deep in derivatives.

At any rate, the insurance crowd is next on my list for a government handout...a big one.  And then state and federal pension funds, which also gambled on exotica and lost.

The idea that we can get out of this without a major inflationary event at some point over the next few years is rapidly diminishing.

And one last thing....

Boo! 

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17 Comments

Art Shulenberger's picture
Art Shulenberger
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Re: Hartford and AIG - ghoulish results

Since Credit Default Swaps (CDS) are a great cause of stress to the financial community (and no longer seem to be such a good idea) and are used simply for gambling and not any type of investment that should be backed by the US or any other government, why can't the Congress outlaw CDS's (by investment banks and insurance companies)?

 

Outstanding CDS contracts would then be null and void with recision as the remedy.  The net result:

 

1) no more CDS's

2) everyone involved gets their hand slapped - hard, for gambling

3) no government money goes towards paying of CDS "winnings"

Davos's picture
Davos
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Re: Hartford and AIG - ghoulish results

Great costume - saves on toilet paper and shaving cream! Well trick wise until the homeowner craps their pants.

"money will have run off somewhere to have a good time" Spa's?

 http://www.thesmokinggun.com/archive/years/2008/1007083aig1.html 

miranda's picture
miranda
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massive inflation

Perhaps someone could weigh in regarding the conflicting inflation predictions laid out below. What is the hole in Nouriel Roubini's argument? This has been perplexing me all week.

Chris says above, "The idea that we can get out of this without a major inflationary event at some point over the next few years is rapidly diminishing."

Makes sense to me. But Nouriel Roubini (a far more seasoned forecaster than I...) believes that we likely won't get massive inflation:

"...So should we worry that this financial crisis and its fiscal costs will eventually lead to higher inflation? The answer to this complex question is: likely not.

First of all, the massive injection of liquidity in the financial system – literally trillions of dollars in the last few months – is not inflationary as it accommodating the demand for liquidity that the current financial crisis and investors’ panic has triggered. Thus, once the panic recede and this excess demand for liquidity shrink central banks can and will mop up all this excess liquidity that was created in the short run to satisfy the demand for liquidity and prevent a spike in interest rates.

Second, the fiscal costs of bailing out financial institutions would eventually lead to inflation if the increased budget deficits associated with this bailout were to be monetized as opposed to being financed with a larger stock of public debt. As long as such deficits are financed with debt – rather than by running the printing presses – such fiscal costs will not be inflationary as taxes will have to be increased over the next few decades and/or government spending reduced to service this large increase in the stock of public debt.

Third, wouldn’t central banks be tempted to monetize these fiscal costs - rather than allow a mushrooming of public debt – and thus wipe out with inflation these fiscal costs of bailing out lenders/investors and borrowers? Not likely in my view: even a relatively dovish Bernanke Fed cannot afford to let the inflation expectations genie out of the bottle via a monetization of the fiscal bailout costs; it cannot afford/be tempted to do that because if the inflation genie gets out of the bottle (with inflation rising from the low single digits to the high single digits or even into the double digits) the rise in inflation expectations will eventually force a nasty and severely recessionary Volcker-style monetary policy tightening to bring back the inflation expectation genie into the bottle. And such Volcker-style disinflation would cause an ugly recession.Indeed, central banks have spent the last 20 years trying to establish and maintain their low inflation credibility; thus destroying such credibility as a way to reduce the direct costs of the fiscal bailout would be highly corrosive and destructive of the inflation credibility that they have worked so hard to achieve and maintain."

http://www.rgemonitor.com/blog/roubini/254148/the_coming_global_stag-deflation_stagnationrecession_plus_deflation

 

Davos's picture
Davos
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Re: Hartford and AIG - ghoulish results

Hello Mirenda:

Here is a post I put up on a different thread....I'm interested in Chris's and everyone elses take, but here is my 2 cents...

 

I'm no genius but here is my 2+2 on it: 

Greenspan: "Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom... The world economies plunged into the Great Depression of the 1930's."

Roubini: "Thus, once the panic recede and this excess demand for liquidity shrink central banks can and will mop up all this excess liquidity that was created in the short run..."

Belatedly or once the panic recede[s], mop up or sop up, excess reserves or excess liquidity, 1930s or 2000s, braking the boom or short run (Fed popped or just popped):  the net is still the net - a depression.

The guy is smarter than I, but for me history is a better predictor. Not to get verbose here, but if the US has 654% more debt than earnings and its consumers (who account for 70% of GDP) are jobless and so broke they can't pay attention...then which of his 4 points matter?

I may be wrong, but college professors like this make me grateful I didn't get past high school! End up with him and Ben and one might have trouble balancing a checkbook.

 

srbarbour's picture
srbarbour
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Re: massive inflation

[quote]Perhaps someone could weigh in regarding the conflicting inflation predictions laid out below. What is the hole in Nouriel Roubini's argument? This has been perplexing me all week.[/quote]

I'd be delighted to.  To facilitate these kinds of explanations is why I wrote: Currency: An examination thereof


In the first paragraph Nouriel Roubini states that what the Fed has done is what I have termed currency expansion.   Because this expansion is met by an equal expansion of assets, it can be as easily reduced as it was expanded.  This is done by the Fed, in essence, encouraging others to buy its assets.

In the second and third paragraph he points out that Fed has made no commitment to print currency, and likely never will.   He also basically says that the Treasury's expansion of debt is not the printing of currency.  These statements are absolutely true.

Nouriel Roubini argument is solid.  He, however, forgets several things:

First, that the dollar is necessarily backed by assets.   Those assets are mostly T-bonds, and now whatever gets left over by the banks (and other entities) that die.   That is, whatever is loaned out by the Fed is backed by collateral.  That collateral however is not necessarily worth much (or anything), and if the banks go bust the Fed is presumably stuck with it.  (I'm not sure of the legalities, the Fed may get first dibs in bankruptcy.  If so, the risk is substantially lowered but not eliminated).

To put it in an Example:

If Joe the banker has 100 apples and 100 apple dollars, each apple dollar is worth 1.0 apples.

Now Sam gives Joe 20 apples for 20 dollars (still 1:1 ratio).   But Sam gets killed by a crazy Neanderthal with a sharp stick.

To make matters worse, Sam's apples turn out to all have worms inside them.  Joe has to throw those apples away, because nobody will ever want them.

There are now 100 apples, and 120 apple dollars.   Inflation?  20%.

Second,  Nouriel Roubini forgets that our dollar is backed primarily by T-bonds, even today.   Because it is backed primarily by T-bonds, if T-bonds lose value because:

1) There are more T-bonds (thus, debt to GDP rises) -- will definitely happen

2) The economy shrinks (thus, debt to GDP rises) -- will definitely happen

3) There are no buyers: China, and Japan could end up no longer being able to buy T-bonds, investors may of money because equities or may have it caught in a 'capital trap' -- unable to extract because the loses would cause them to default, or unwilling to stomach the permanent loss of extraction. -- medium chance of happening

4) UK (as of July $290 billion in US treasuries), Germany ($40 billion),  and  may other troubled nations holding T-bonds are forced to sell their reserves to raise cash... -- medium chance of happening

..etc... 

Then, by default the dollar loses value.   This is just the same as though some of Joe's apples rot away.  So:

Joe: 100 - 30 (rotted) apples / 100 notes =  0.7 apples / note = ~40% inflation

Both of these are strong reasons to fear future inflation.  It might not appear all at once, and it'll be hard to quantify for years.   But inflation is a very real possibility.

--

Steve

James Wandler's picture
James Wandler
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Re: massive inflation....and community plans!
[quote=miranda]

First of all, the massive injection of liquidity in the financial system – literally trillions of dollars in the last few months – is not inflationary as it accommodating the demand for liquidity that the current financial crisis and investors’ panic has triggered. Thus, once the panic recede and this excess demand for liquidity shrink central banks can and will mop up all this excess liquidity that was created in the short run to satisfy the demand for liquidity and prevent a spike in interest rates.

[/quote]

At the outset I'll say that Nouriel Roubini does not define inflation to be "an increase in the money supply" as Chris does from the Austrian School of Economics (the definition that I now wholeheartedly agree with).  Nouriel uses inflation to refer to a general increase in price levels as traditional economists do.  What's confusing about this is that an increase in the money supply can lead to an increase in prices (after all you have more units of money chasing the same goods so you would have a general increase in prices) but other factors cause prices to rise or fall - there isn't a one to one correlation between money supply and changes in price. 

Nouriel uses liquidity to mean that companies need dollars so the Fed buys assets from a certain (but increasingly expanded) group of companies in exchange for dollars.  He says that this won't be an issue because, as traditional economists are accustomed to do, he assumes that the reverse will happen and the Fed will buy up the excess dollars by swapping them for assets (not necessarily the same assets but with the same effect of reducing the number of dollars).

Now I had a teacher that focused on the first three letters of the word "assume" and suggested that we limit the use of the word.  I would suggest that Nouriel should provide an explanation of why the Fed would do this rather than make the assumption.  However his explanation would likely be that it would be obvious to "mop up the liquidity" otherwise it would lead to a rise in prices (from the increase in the money supply).

My view on this is that there is so much deflation (i.e. a reduction in the money supply) from a) people rushing to repay debts and b) partial default on the debts and c) complete default on the debts that the "liquidity" doesn't need to be mopped back up later because the money supply is dropping faster than the Fed is providing dollars as it buys up assets.  My distinction is that the reduction in the money supply is not currency deflation (reduction in money supply that originally came from the Fed) but credit deflation (reduction in money supply created by the banks through the fractional banking system). 

I believe that Chris' concern about the Fed creating too many dollars in exchange for assets is that, eventually, the dollars will be unleashed in full force as the USGovt meets redemption of vast portions of the $10 trillion (and growing) of Federal debt for dollars and those with the dollars will go on an massive spending spree of buying up assets.  (And if they use the dollars to buy oil...?)  But I think Chris' is concerned that once the Fed steps on the accelerator of creating dollars for debt that they might just keep their foot down and create dollars to try and kick the economy back into growth mode and then once the fractional banking system takes hold of these currency dollars then they will start creating more dollars through credit (remember the dollars look the same - but are created in two separate processes - it has taken me months to appreciate this) and we will be into hyperinflation.

Reflecting on this, I believe that the deflation (reduction in the money supply) cannot be stopped because everyone (except the Fed) is conserving cash by not lending, by reducing credit card limits, by saving, by deleveraging (paying off debt and reducing risks by closing out derivative contracts as possible), by selling assets, by selling assets in foreign currencies to get US dollars, by paying off margins, by having collateral seized to meet debt obligations, by laying off staff, by reducing inventory, by recognizing partial and complete defaults by writing off assets...in an ongoing cycle. 

This cycle can't be stopped for three reasons.  First, Alan Greenspan fought this off in 2003 by lowering interest rates to 1% and precipitating the massive housing bubble and, generally speaking, it isn't practical to start charging interest so interest rates can't now go below 0%.  This means that what was successful last time doesn't have enough power to work this time - plus the deflation raging now far exceeds 2003 because we have a, largely, worldwide housing bubble being unwound.  Oh, and look at the great assets left behind for the world after the dotcom and telecom collapse - I'm not so encouraged now for economic activity to come from these vacant houses...

Second, the structural unwinding of the US housing bubble takes place, in real time, in slow motion.  This is because each month the remaining 2006 subprime mortgages teaser rates expire, rates reset, and several months need to pass before credit card balances run out in an effort to keep the home, and eventually foreclosure sets in.  Once 2008 ends then there will still be six months of 2007 vintage subprime to have rate resets and foreclosures that will play out in 2009.  Beginning in 2009 are the Pay Option Adjustable Rate Mortgages written in 2005 and 2006 that Mr. Mortgage has identified that will have rate resets in 2009 and 2010 on a similar scale to subprime in 2007 and 2008.  So the structural unwinding stretches off in the distance. 

Third, lack of lending, layoffs and inventory drawdowns, cutting prices to boost sales, etc., means that the economic depression feeds on itself leading to more foreclosures.  Oh, and those speculators buying up the foreclosed property now thinking they are getting them on the cheap....well, these house will have to come back on the market when they are foreclosed on again.  And yet housing building still goes on...so that is another area of economic slowdown to come and until it does the glut of houses continues to fill the landscape.  ...And home prices only decline slowly because the banks put the properties on their books as REOs (owned real estate) at the value of the mortgage as they try to protect the value of this asset (the asset now being the house they now own equal to the former mortgage asset they held). 

Take home message:  GET YOUR COMMUNITY PLANS IN PLACE and keep working on them.  Rural areas beat suburbia but be creative wherever you are.  Telecommute.  For those with the financial means cut back on work for pay to get more time to deploy your efforts to making yourself able to live sustainably.  Spend your gold and silver to make yourself and your community sustainable (re: Stone Soup parable - each contribute as they can and try to figure out how to allocate the benefits but building the community benefits all).  Look at the link that Chris posted today http://www.plancconference.org/ Read these books, contact these authors, organize similar events in your communities, link up with like minded people regardless of whether they appreciate Chris' analysis or not (e.g. people concerned about the US depending on foreign oil and other people that are concerned about Global Warming will have the same motivation for the same action you do so work together), get biodiesel plants operating, make farming sustainable so that you aren't relying on inputs.  All of these actions holistically SOLVE the problems we face regardless of what comes to pass immediately in the economy.  (oh right, and your stress will go down, your health with improve, you'll have more time for relationships, life will have meaning, you'll actually engage in the behavior we want to instill in our children but which we don't exhibit as adults....like cooperation, etc.)  oh, and HAVE FUN DOING THIS!  Fear is a great motivator when it isn't paralyzing but you'll get more mileage out of everyone if you have a positive attitude, are optimistic, fun to be around, etc...

[quote=miranda]

Second, the fiscal costs of bailing out financial institutions would eventually lead to inflation if the increased budget deficits associated with this bailout were to be monetized as opposed to being financed with a larger stock of public debt. As long as such deficits are financed with debt – rather than by running the printing presses – such fiscal costs will not be inflationary as taxes will have to be increased over the next few decades and/or government spending reduced to service this large increase in the stock of public debt.

[/quote]

Oh right, we started with Nouriel Roubini and traditional economics didn't we (sigh).  OK so he's OK with piling on the US debt to help those that gambled and lost - it'll just be paid back by the taxpayer over decades (uh, hasn't this been built up at an exponential rate already?)  - as long as the debt isn't monetized.  Well, I guess I covered this above.

[quote=miranda]

Third, wouldn’t central banks be tempted to monetize these fiscal costs - rather than allow a mushrooming of public debt – and thus wipe out with inflation these fiscal costs of bailing out lenders/investors and borrowers? Not likely in my view: even a relatively dovish Bernanke Fed cannot afford to let the inflation expectations genie out of the bottle via a monetization of the fiscal bailout costs; it cannot afford/be tempted to do that because if the inflation genie gets out of the bottle (with inflation rising from the low single digits to the high single digits or even into the double digits) the rise in inflation expectations will eventually force a nasty and severely recessionary Volcker-style monetary policy tightening to bring back the inflation expectation genie into the bottle. And such Volcker-style disinflation would cause an ugly recession.Indeed, central banks have spent the last 20 years trying to establish and maintain their low inflation credibility; thus destroying such credibility as a way to reduce the direct costs of the fiscal bailout would be highly corrosive and destructive of the inflation credibility that they have worked so hard to achieve and maintain."

[/quote]

I wouldn't bet against the Fed putting its foot on the accelerator to cause hyperinflation to fight deflation.  It won't work but since we don't see real understanding of the issue why should we expect anything else? 

By contrast, what should the government do?  Nationalize the banks that fail, protect the depositors, don't pay out on derivatives, restructure loans to keep people in their homes, sell the REOs and provide financing or rent the houses, run deficits by protecting those that absolutely need social assistance but cut it off for those that don't and get everyone jobs through massive social changes such as electric car projects, solar panel and wind projects, change over agriculture to be sustainable (which can be made more labor intensive), for homes to be energy efficient.  I'm not suggesting that government actually run these projects - just the direction.  Hmmm...don't these actions sound a lot like the grassroots stuff we need to do at the community level above? 

So an interesting question is: if the solutions now needed are easy to see why isn't this being done?  It can't be that Chris alone has identified the issues? 

Perhaps we simply must take ownership of the issue at the grassroots level and, in time, this will be reflected at the government level.

All the best,

James

James Wandler's picture
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Re: massive inflation

Steve,

I respect your detailed approach and I studied your forum for the better part of yesterday evening but I haven't had a chance to comment yet.  The work you've done is fantastic and I just wonder if you can consider inflation from the perspective of the Austrian School of Economics rather than the traditional economists.  I know that this would completely turn what you've prepared on its head, and you've already done so much work already, but I would hope that it would take your work to the next level.  It will then match up with the direction Chris is taking and together you'd create something that can unify the community.

One of your arguments in reply to me may be that we should go with the definition of inflation that traditional economists use.  In advance I'll suggest that perhaps if traditional economists looked at their material differently in the first place perhaps we wouldn't be in the mess we are in now.  The best critique of traditional economists is the book The Origin of Wealth by Eric Beinhocker of McKinsey (the book is subtitled Evolution, Complexity and the Radical Remaking of Economics). 

By the way, your focus is on currency creation.  Can you also consider money supply creation from credit which is the next step that Chris has identified?

Sorry, it is easy for me to stand on the sidelines and be critical but I want to emphasize again that I've learned a lot from your post and I had no fundamental disagreements with it and with a little tweaking you've got something powerful there!

All the best,

James

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Re: massive inflation
What happens if foreign lenders finally push away from the buffet table and say "no mas." to another plateful of T-bills? I mean the gubmint is acting like nobody will ever deny it credit, but any reasoning soul has to realize at some point there can't be enough tax revenue to service the debt. With a strong recession coming on tax revenues will fall, forcing even higher deficits. There is an eventual limit to everything, and the faster we keep crankin' out the T-bills the faster we race toward the limit. Where does the money come from to fund all these bailouts? Surely other nations can't be stupid enough to lend against a limited tax base ad infinitum? What does this mean for the dollar?
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Re: Hartford and AIG - ghoulish results

"To put it in an Example:

If Joe the banker has 100 apples and 100 apple dollars, each apple dollar is worth 1.0 apples.

Now Sam gives Joe 20 apples for 20 dollars (still 1:1 ratio).   But Sam gets killed by a crazy Neanderthal with a sharp stick.

Now Joe has 120 apples and 80 apple dollars, Sam has/had? 20 apple dollars = deflation

To make matters worse, Sam's apples turn out to all have worms inside them.  Joe has to throw those apples away, because nobody will ever want them.

Now Joe has 100 apples (Joe should be more careful when he buys apples)  and 80 apple dollars, probably the crazy neanderthal has 20 apple dollars  1:1 ratio

There are now 100 apples, and 120 apple dollars.   Inflation?  20%."

Where did the extra 20 apple dollars come from? Did Joe practice fractional reserve banking? Shame on Joe. :-(

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Re: Hartford and AIG - ghoulish results

Is the inflation/deflation acedemic at this point?

http://www.financialsense.com/fsu/editorials/schiff/2008/1031a.html

I like the articel (link above) here is an excerpt that I feel pretty much sums things up. 

So while it may appear to some that things are worse abroad, that is only because the full extent of our problems has yet to be reckoned with. The main lesson our creditors will learn from this crisis is not to lend American consumers any more money. Once the lending stops, our "cart before the horse" borrow to spend economy will crumble. While the rest of the world absorbs their losses and moves on, we will be digging our way out of the rubble for years to come.

Earthquakes are caused by the fundamental shifts of tectonic plates beneath the Earth's surface. A similar move is underway in the global economy. Describing either event without a basic understanding of either geology or economics will simply result in a tale being told by an idiot.

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Re: Hartford and AIG - ghoulish results

I think it is important to question the basic assumption in the discussion which is that there will be "excess liquidity" and I for one am not so sure there will be.  Roubini has been right on the money leading up to most of this crisis so I give him some slack. However, many (well many out of the few) who had forecasted this situation had an overall story of which only part has worked out the way they expected.  I'm not sure anyone I heard or read really captured the scale of global contagion. It is a funny thing about currency as it is all relative. US dollar should be in crapper right now but it has gone up? Gold should be $2000 an ounce in this scenario but it has gone down? Of course we can explain why now but is never the point. Wall Street is full of long winded hindsight explanantions.  Whatever happens going forward I believe we have to remain open to it playing out on a different script than anyone has imagined.

 My two cents worth is this is all a little oasis at present. I don't think most people factored in such a fall in oil prices (hedge fund liquidation) and the resultant impact that would have on the dollar. This I believe is temporary.  I don't see how anyone can make a case for deflation or disinflation when we consider the competition for resources worldwide. Inflation will come and the dollar will become relatively worthless. 

 One more thought on a more positive note. If our problem in US can be simply stated that we borrow and spend too much while producing too little then there should be great optimism for the future. If we can't afford to consume and have a worthless currency then we indeed will have to start producing again to survive.  The change will be painful but not fruitless.

 Hang in there everyone.

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Re: Hartford and AIG - ghoulish results
[quote] Now Joe has 120 apples and 80 apple dollars, Sam has/had? 20 apple dollars = deflation [/quote]

It appears I missed part of the explanation.  

*Whenever Joe is given apples, he prints apple dollars from thin air and gives those.

*Whenever Joe is given apple dollars, he hands over apples.

So Bob gives Joe 100 apples, and gets 100 apple dollars.    Sam then gives  20 rotten apples for 20 apple dollars.   Sam buys some boots from Bob for 20 apple dollars.  Sam dies.   Winter comes, and Bob is hungry, so he goes to Joe and tries to get 120 apples (for 120 apple dollars).   He finds out that Joe only has 100 apples.   Bob is very angry.

 

And, yes, Joe should be more careful about what apples he accepts.   But Joe here, is just an example reflecting what the Fed is doing.  It is the Fed therefore, who should be more careful about what collatoral it accepts.

--

Steve 

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Re: Hartford and AIG - ghoulish results

EveryBobdyButMe:

Hello. I wasn't trying to say this isn't worthy or important. I was trying to say who cares which iceburg the Titanic hit - point is, it is sinking becuase of the water.

I think the link I posted had the cause of why the dollar is doing "well." I also think it has to do with the fact that the rest of the world is going to be hit with a wave of their own poor investments/bank failures.

I agree with what you said about spending more than we make and it being an oppertunity.

Personally I feel that if we all emptied our IRAs 401(k)s and moved every penny into green energy  we could create a bubble that could export more than the US could consume. This would take care of every problem we have. It would beef up the market, it would obliterate the trade deficit, it would take care of our dependance on oil, it would leave us as the bank instead of China. And, if you believe in global warming then it would take care of that as well, and if you don't it won't hurt the planet to have less polutants.

Having said that, I think Churchill was right, America will do what is right ----- after it has done eveyrthing wrong... So I think the chances of that happening are nill.

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srbarbour
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Re: massive inflation

[quote]The work you've done is fantastic and I just wonder if you can consider inflation from the perspective of the Austrian School of Economics rather than the traditional economists. [/quote]

Alas, I view certain words as striving to connect to human experiences.   I, thus, find the Austrian's use of inflation and deflation troubling, much as one might find a physics definition of 'temperature' that considered only the velocity of individual molecules within an aggregate troubling (e.g. ignoring radiative energy losses, air density, molecular mass, etc...).  

If that notion confuses you, let me say that space by such a definition, would often be 'very hot', which would make an astronaught wonder why he needs fear freezing to death. 

In other words, while the conceptions offered by the Austrian definitions are themselves useful, I regard their choice of the words: Inflation and Deflation to convey these concepts as confusing the issue. 

[quote]In advance I'll suggest that perhaps if traditional economists looked at their material differently in the first place perhaps we wouldn't be in the mess we are in now. [/quote]

Perhaps, but I have long viewed the problem as a tendency of all economists -- Austrians included -- to vastly oversimplify a very complex subject.

Macro-economics, in my view, is much like a human body.   A 'recession' is that body getting sick.  A 'depression' is that body getting deathly ill.   Unfornately, what the body could be sick with can fill entire bookshelves.   Likewise, depressions and recessions are each into themselves quite unique events that may bear no, or only superficial similarities to past events.

With this school of thought I find many claims today very troubling.   For instance, I often hear said:  "We've learned a lot since the Great Depression".

For me, I think:  "Whoa there!  How do we know any of those lessons apply to this situation?  For that matter, without the ability to compare a 'control' group to a 'test group' how can we definitively say that any of our treatments ever had any effect at all?  Good or bad?" 

So, in the end, rather than dealing with such complex high-level subjects -- whereupon I will quite likely be wrong -- I'd much rather stick with the things we can know and can be reasonably sure of and attempt to leverage those as much as possible.

That way, whatever idea is put forward, from whatever school of economics, we will at least be able to better comprehend what it is attempting to do and whether it even has a prayer of success. 

--

Steve 

James Wandler's picture
James Wandler
Status: Martenson Brigade Member (Offline)
Joined: Aug 11 2008
Posts: 219
Re: massive inflation

Steve,

I can understand the confusion created by different definitions of inflation.  I'm going to continue to extend an olive branch to you of the Austrian School of Economics inflation definition being an increase in money supply from currency and credit.  Other than agreeing with the definition, and that we will continue to have deflation unless it is overcome by massive hyperinflation from the Fed, that is currently the extent of my knowledge of that branch of economics.

Without accepting the above definition then trying to disagnose the current macroeconomic problem is impossible so I can understand why you've chosen to set this aside.  Please consider the following article which discusses alternative definitions of inflation. http://globaleconomicanalysis.blogspot.com/2006/02/inflation-what-heck-is-it.html

Having said this, I agree with your direction in focusing on wealth creation using microeconomics.  I believe that you are interested in complementary currencies, and, largely, a return to a more cash based society.  I assert this because I don't see credit being identified at the outset of your forum.  I believe that the way forward is to refocus society at lower complexity with local economics and sustainability.  The more effort put into understanding and building systems at a grassroots level will result in a much higher level of social complexity than we'll otherwise see if our transition is more abrupt.  So I hope you'll be happy to have me work side by side with you on this important initiative.

As an aside, you'll be pleased to note that the above book I referred to contrasts traditional economics against an emerging branch of economics that the author calls Complexity Economics.  I didn't refer to Complexity Economics because it is a new science so while its future development holds promise we'll have to wait for its development and take matters into our own hands in the meantime.  However this field would satisfy your intuitive understanding that economics has previously been handled too simplicistly. 

Anyways, I hope that the velocity of individual molecules within an aggregate in your part of the world is generating a pleasant environment that most of us would be happy enough to call temperature.  Having said this with gentle jest in mind, I don't doubt that humidity, wind, the strength of the ozone layer in warding off UV rays, etc., are also important factors in determining the weather.  Thus I can accept the work that you've done has considerable merit - but if you disregard "temperature" because you aren't happy because of conflicting definitions then I think you are holding yourself back.

All the best,

James

Old_Grey_Mare's picture
Old_Grey_Mare
Status: Member (Offline)
Joined: Oct 8 2008
Posts: 1
Re: Hartford and AIG - ghoulish results

[quote=everybodybutme] One more thought on a more positive note. If our problem in US can be simply stated that we borrow and spend too much while producing too little then there should be great optimism for the future. If we can't afford to consume and have a worthless currency then we indeed will have to start producing again to survive.  The change will be painful but not fruitless.[/quote]

One problem with this is that not only  did the jobs move overseas but they dismantled the factories and took them overseas too. To start over we would have to build new factories which will require lots of raw materials and energy and investment. Where will the money come from for all that? Also we have lost many of the skills that are needed to build factories.

 Mary

barrt's picture
barrt
Status: Silver Member (Offline)
Joined: Aug 25 2008
Posts: 171
Re: Hartford and AIG - ghoulish results

Hartford up 50% today!!?

jim cramer was saying recently that the markets used to stop trading if it looked like there was inside stuff going on, these days it looks like all those rules are out the window, stop trading is cramers advice and im taking it - bastards

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