Eric Janszen’s (itulip) take down of Mish’s deflation construct…
…and the notion that our currency is fiat.
Fairly heavy reading and I’m not qualified to comment on the merits, but would like to hear from those who are.
That read like several unpleasant threads we have had around here. I am curious to see how Mish responds.
…and the notion that our currency is fiat.
Fairly heavy reading and I’m not qualified to comment on the merits, but would like to hear from those who are.
No time to read this now, but I can’t wait to get to it.
I can point out that the idea that Mish thinks we have a fiat money based system is completely false. Our system is based primarily on credit money, with a little fiat thrown in to allow for stimimuls. Mish knows this and it is a major reason why he expects debt deflation.
More thoughts coming this afternoon after I get a chance to read Janzen.
Great piece from Janszen.
I’ve always liked his Ka-Poom theory of markets / economics, but I had no idea he was such a heavy investor in 10-year Treasuries over the last decade. Such a large allocation seems a bit strange given that his name has been synomonous with the inflation camp over the last decade.
Some points regarding the debate:
- I don’t recall Mish ever calling out Janszen by name (or any of the inflationists) in his article, but maybe he revised it before I read it.
- I never bought the "gold as money" argument that Mish uses to justify investing in gold, but gold miner shares (the only available play on gold at the time) did really well during the later half of the great depression. But theoretically, investing in gold doesn’t fit with the defaltion argument, so I would have to agree with Janszen on this.
- As long as I have been reading Mish, since 2008, he has always maintained that U.S. was headed for a fate similar to Japan’s experience, namely an economic and market decline that is elongated by QE and punctuated by deflationary episodes every 3-5 years. I have never read where Mish expected an all-out deflationary spiral like that expected by Pretcher and others. I don’t see where Janszen got this impression.
- Much of Janszen’s argument deals with money supply, but because the money supply actually circulating in the economy cannot be measured directly, I think his conclusions might be suspect. Monetary inflation is created by the banking system. The Fed can generate cheap credit for the banks, but if all they do with it is neutralize bad loans or exchange it for other finacial assets, it doesn’t add to the money supply in the economy.
All in all, I really don’t see significant differences in Janszen’s or Mish’s arguments, but I would have to give the edge in the debate to Janszen. I just wish he would clean up his website. I can’t make heads or tails out of it. Don’t make it so hard for me to give you my money Janszen.
who can’t figure out Janzen’s website – i’ve been also fighting hard to give him money to get the subscription material! Quite a battle!
But is is a great article – though like you mention seems more aimed at shooting down the Prechter type of deflation viewpoint – but I also urge others to read. Janzen’s book ("the Postcatastrophe Economy…") is also one I VERY strongly recommend folks to read. It is one of the few thing’s i’ve read that faces the problems and poses a path forward to move to something better from a macro/govt policy perspecitve rather than just leaving it at "this is going to suck" and not posing a solution. Would be much harder to pull off than he indicates i think, but gives a place where USA policymakers can point in a coherent plan that would indeed help, even if it’s partially too late to fully implement as he outlines.
My oh my! Quite a convincing article by Janszen.
I’ll be very interested in seeing Mish’s rebuttal.
I can already see one hole in Janszen’s argument, and that is that he completely pretends Japan does not exist. I don’t think the name "Japan" even appears in the entire article and Japan is, well, THE case of deflation ocurring in a non-gold standard econom. If he wants his argument to hold up, he really needs to address it.
On the other hand, Mish has some ‘splainin’ to do.
Time to stock up on pop corn.
[quote=JAG]. I just wish he would clean up his website. I can’t make heads or tails out of it. Don’t make it so hard for me to give you my money Janszen. [/quote]
[quote=dgilmart]who can’t figure out Janzen’s website – i’ve been also fighting hard to give him money to get the subscription material! Quite a battle!
No kidding! That website is a disaster. Adam – is the good Doc willing to "rent you" out? Maybe a good way to make some easy revenues for CM. I bet you could clean that mess up in 1 night!
The gist of the disagreement is very simple. MIsh doesn’t consider price inflation to be inflation. Only increases/decreases of circulating currency plus credit count.
These squabbles over deflation versus inflation are becoming tedious arguments revolving around definitions. I find it incredible that intelligent people should be still arguing over the definition of fiat money. Whether it is issued electronically, as a credit entry, or by printing into currency , its issuance is without any form of physical backing and it is declared a legal tender by the government. Whether that is fiat or not has little to do with its ability to be subject to inflation or deflation. Studying what people are doing will tell you more about the likelihood of an inflationary or deflationary spell.
On the one hand you have the inflationists who can perfectly reasonably point out that many goods and services are getting more expensive. In particular, as a consumer I notice the rising cost of government associated services such as health and education and my grocery bills are not getting lighter. On the other hand the deflationists can point out that, despite the cost of credit being less, the price of housing has been pressured downwards relentlessly since 2006. In addition, stockmarkets were savaged for 18 scary months, recovered over 2 years in an extraordinary 80% rise only to have their hopes dashed somewhat in a 3 week fall that, at its worst, took back near 35%. Deflation is certainly a rare beast compared to inflation which is why it is so hard to predict the precise timing of it.
Despite Janszen’s arguments against deflation, the first chart he presented showing the history of inflation in the US showed a clearly declining trend in inflation with each of the 3 major peaks after the pre 1920 peak being lower than the prior one. Despite the support that chart may give me as a believer in the deflation scenario, I cannot really take that chart seriously at all. It shows a rapid decline from 1980 until just past the mid 80s, followed by a kick up to the early 90s recession, a downslope to early 2000s, a rise until the start of the GFC and then a collapse into the 2009 market bottom. I do not know how the St Louis Feds assemble their data but it bears no relationship to the period covered by the best part of my working life. In that time, with a few exceptions mostly in the “made in China” and electronics areas, I have seen nothing but massive inflation of the truly important things, except food and fibre, over my working life. That is land and housing, education and healthcare. Building tradesmen’s wages in Australia doubled twice from the mid 80s and property multiplied by 6 in the same time in North Queensland, where I live. For a long time we were spared rising food and fibre prices because grain output per acre has multiplied between 2 and 4 times since the early 60s due to better seed and more fertilizer input. My farming friends tell me that the limit in output per acre is being reached now. In that same period the world population slightly more than doubled despite the growth rate peaking in 1962/63. Falling interest rates and rapid growth of money supply, while fostering the inflation of asset prices, on the whole allowed farmers to keep on doing what they do. The inputs are huge in terms of machinery and fertilizer. Each succeeding generation of farmers can only survive if they inherit the farm – they cannot buy, equip and stock. Mostly they have had to get bigger to survive.
You would think that this was a great argument to dismiss the case for deflation. However, during the great depression, agricultural land prices fell and many farmers left the land. The point is that debt had to be written off, assets declined in value and passed from weak hands to strong ones. The latter being those with little or no debt.
Janszen is just plain wrong in his assertion that there has been no sustained deflation anywhere “on earth” since 1933. As others have pointed out, Japan has had 20 years of deflation. If a stockmarket at 25% of the 1989 level and zero interest rates after 20 years is not evidence of “sustained and deep deflation”, then we are just splitting hairs.
Discussions of Keynsian/Austrian economics and diversions into gravity and weight add none of the latter to the argument. Neither do the endless graphs – except to damage his case. Percentage change in debt levels show only government debt growth. The next graph, Household debt deflation 2007-11, shows consumer credit outstanding falling almost equally matched by the growth in Federal government owned loans (note the different scales left and right). The following chart tells the same story but with a longer time frame. The only dip in credit growth in 70 years. About 7.5% in a very short period of time.
That is the canary in the mine. The problem with Janszen and most economists is that they see the economy in such abstract terms as presented by charts and figures. They delude themselves into thinking that there are a set of controls to which humans will respond. Increase the money supply by lowering interest rates and snare another generation of mortgage slaves. Of course it appears to work for long periods. Unbundling credit creation from the barbarous relic was a fabulous boost. It was even thought to usher in a new economic paradigm – for a while. The problem is the “for a while” bit. It makes fools of all of us. We are coming off a period of nearly three decades in which there was a rising ebullience which carried us through the crash of 1987, the LTCM debacle of 1998 and the market top two years later. Despite the 38% fall in stockmarkets to the bottom in early 2002, the period was continuously optimistic with sentiment readings showing bulls outnumbering bears over the whole period until well into the GFC. The gloom did not last for long though. Cash held by fund managers until very recently was still at historically low levels indicating an enormous desire to be fully invested in equities or a greater fear of not being invested. This, despite the best investment over the last decade being Treasuries and Gold. Despite the best efforts of Paulsen and Bernanke, markets fell through the entire period of that intervention. The market stopped falling because the mood shifted from panic mode and the herd turned. It appears now that, despite another $600 billion, the herd has turned again.
This does not lead me to conclude that Bernanke is able to stop deflation or that deflation is impossible – as suggested by Janszen. As Mish points out, Bernanke is trying to prop up bank balance sheets of $35 trillion with QE so far of a bit over $2 trillion. Will he have the balls to keep going. I doubt it because he is subject to the same herd mentality as everyone else. He is a banker and he is beholden to his cohorts – not to the American consumer. Banks are hoarding cash and consumers don’t want to borrow. Consumers are trying to pay off debt as fast as they can or else walk away from it. The Fed has a huge excess of reserves. Excess reserves are part of base money, along with vault cash and circulating currency. There is no way this is going to escape. Everyone is hanging onto their “cash” – most of it is electronic ledger entry. The S&P 500 is sitting on record amounts – same electronic cash. How much simply disappeared in the recent market plunge. I read that $7 trillion was lost worldwide, Ben has some catching up to do. Of course, we have not quite gone past the point (in charting technical analysis terms) of no return where I would dismiss the chance of a new high for several years. As I write (Dow 11000) I would put that at the late June 2010 low or about 1150 lower. On this site in the discussions on gold, many seem to have accepted that the US dollar will collapse. It will only collapse if the other major currencies collapse at the same time. That may well happen if there is a widespread collapse of the banking sector. At that point, the majority will be reduced to barter. I don’t think gold will be much use to anyone at that point either. Food supplies, fuel, clothing, labour will be far more useful and tradeable than gold. Personally, I would rather have useful things like a means of producing food and energy and belong to a community of friends. That would be my one quibble with Dr M – despite much brilliant advice and a very good understanding of the problems facing humanity, he does seem a little obsessed with financial assets – the tertiary ones rather than the primary ones. The last 30 years seems to have brought us to the point where we know the price of everything and the value of nothing.
If, as I expect, that equity markets follow the deflationary path already worn by real estate, then the purchasing power of currencies will naturally increase. I would expect the US dollar to increase in value against other currencies too because there are far more of them (electronic credit dollars) to be destroyed by asset deflation than any other currency. Most commodities are priced in dollars too: which will add to the dollar destruction (in numbers not in value) as commodity prices deflate. The media like to talk about the world “deleveraging” but really we are talking about deflation. Deflation may seem a disaster to many but, in fact, it will only be a disaster to those who are heavily leveraged. Governments are the most leveraged of all because, for no good reason, they have allowed their central banks to buy worthless “assets” off financial institutions that should have been allowed to collapse earlier rather than later. That means that we are all, as taxpayers, on the hook too. At some point, governments may well forcibly take back much of the wealth that has been plundered to ease the burden on those who have been plundered.
Looking at the very big picture, I believe that we are witnessing the end of a way of an economic paradigm that has been running at least since banking became highly organized and international in scale – at least since the invention of modern banking by the Dutch and particularly the British in the 18th century. Fractional reserve banking cannot exist without growth because without growth, the interest component could never be paid back. The simple problem of growth is the exponential effect and it does not take that long to be unsustainable. Even 3.5% growth over 3000 years (think of the Egyptian dynasty) would produce a number that has more than 50 noughts after it (a similar number to the number of stars thought to be in the universe!) . With 7 billion people, fertile land limits, water limits and energy limited by the energy cost to extract energy – we are most definitely constrained. The energy return on a barrel of oil is about 10 to 1 now, down from 70 to 1 less than a hundred years ago. Ultimately we will have to stop thinking in terms of $100 or $50 dollar a barrel oil because it is meaningless. The same goes for every mineral we dig up and everything that we grow. It will be about energy in and energy out. The whole carbon debate should really be about the energy equation rather than this endless red herring of anthropomorphic climate change.
Fantastic post timeandtide.
I can really appreciate your point of view, though I can’t say that the majority here will agree. It wasn’t too long ago that I was ridiculed in this community for claiming that deflation had occured in our lifetime. It’s hard to see much point in debating it anymore after that.
Thanks for taking the time to share it…Jeff