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| User Info | Debt defation vs ...... crack up boom in forum [General] | |||
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Jbr999 Posts: 177 Incept: 2007-07-05 
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I'm strongly in the debt deflation spiral camp (as brilliantly articulated by Karen, my fav deflationist). Still, I do find it interesting to read and reconcile alternative views. Here's an excerpt from a recent article (about a month old) on ...... regarding the Inflation vs Deflation debate written shortly after the recent 50 bp FF cut: http://.......com/forums/showthread.php?.... They are drawing a distinction between the financial-insurance-real estate economy (FIRE) and the production-consumption economy (PC). "Our Red Pill conclusion is that to keep the FIRE Economy running until the Next Bubbles get going, the Fed is willing to risk inflation in the P/C Economy, thus the 50 basis point cut while inflation is at multi-year highs and the dollar at multi-year lows. A bit of extra heat from the 1/10th HP heater is a necessary cost of preserving the 400 HP engine; once the FIRE Economy is firing on all cylinders again, P/C Economy inflation can be brought back under control. And in the unlikely case that the FIRE Economy fails, expect massive capital outflows, a collapsing dollar and inflation as Mexico experienced in the late 1980s." You should read the whole article to try to understand how they get to this conclusion. Still, after reading the article, I don't see how they get to this conclusion! As far as I can reason, once net debt originations begins contracting in excess of net production (due to: defaults -> fear of default -> creditor pullback -> higher rates -> debtor pullback etc), the dynamic would effect ALL aspects of the economy, both FIRE and PC. I mean, in the PC economy, producers have to borrow money to produce and consumers have to borrow money to consume (at this point in the cycle where everyone is already extended so without debt there is no net production or consumption). Maybe someone here can explain to me what I am missing - what IS their argument? Their last point links to an additional article regarding Mexico's peso devaluation and inflationary spiral crisis: http://.......com/forums/showthread.php?.... "And in the unlikely case that the FIRE Economy fails, expect massive capital outflows, a collapsing dollar and inflation as Mexico experienced in the late 1980s." They seem to be concluding that the ONLY outcome is inflation, whether the FIRE economy fails or not. It seems to me they are missing the point that this problem is gloabl, whereas Mexicos peso devaluation was not, and also that at least for now, we're dealing with a reserve currency while Mexico was not. Do they really think the current growth in the rest of the world is fundamentally sound and not based on the VERY SAME debt/liquidity excesses that created our "boom"? Do they really think that if those problems caused our economy to fail it won't effect other economies similarly? Do they really expect if the US economy fails that the lack of US consumption and the disruption to the global financial system won't effect the rest of the world? Do they think there is less debt, less leverage, fewer derivatives, less bad debt, less corruption, better underwriting, more sound insurance, and better oversight and regulation in the rest of the world than here? I'm sure these are smart people, it just seems they DON'T GET IT - what am I missing? Karen, have you seen these articles, what are your thoughts? Last modified:
2007-11-07 22:36:22 by jbr999
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Euphoria96 Posts: 1172 Incept: 2007-09-19 
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Long term there is only one way to rid the US federal debt. Hyperinflation. The US gov can always print off money, in the form of spending more than it takes in by taxes. We might have $400B in losses from this MBS mess, but the US gov spends $400B more than it takes in from taxes. In the past this excess has been absorbed by selling US treasuries. This is changing and the excess cash is festering in the US leading to inflation. Too complex to predict but we could see an inflationary depression. This is the worst because not only are people out of jobs, but things get more expensive for them. 2007-11-07 22:55:24
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Stanley Posts: 208 Incept: 2007-09-01
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Deflationary Recession causes just plain downbeat attitudes and bleak outlooks. Inflationary Recession causes regime change. 2007-11-07 22:58:13
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Nothing Posts: 4382 Incept: 2007-09-13 
Russian River Appellation Banned
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Jbr They're missing the point...but I've got to hand it to them, they definitely do a good job justifying being on that side of the trade...myopic as it is. You're missing nothing...they're missing everything...  I can't add anything to your analysis, except to say...Bankers hold the debt, that those folks are so certain is going to be devalued...never happened in history, ain't gonna happen this time. ---------- One creates from nothing. If you try to create from something, you're just changing something. So in order to create something, you first have to be able to create nothing. Last modified:
2007-11-07 23:49:44 by nothing
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Koolaid Posts: 3022 Incept: 2007-07-23
Atlanta
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Jbr, the main ...... thesis is ka-poom theory, which in short is basically a sharp deflationary period followed by massive reinflation. They are leaning towards the post-deflation bubble being in basic infrastructure and/or large alt-energy projects. So, I guess it's fair to say that they don't ignore the credit-crunch and the deflation that follows...they've actually been all over that as far as I can tell. It's the longer term predictions that are different from what you see here from NoThing and other deflationists. I admit that I have no idea. I'm hoping that if we get too far down either the deflation or inflation path, that we can convince the world to call a "do over" and reset the system back to a clean slate starting point. Wishful thinking probably. 2007-11-07 23:06:27
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Nothing Posts: 4382 Incept: 2007-09-13
Russian River Appellation Banned
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and the "fire" economy is failing...and that is about massive defaults, defaults destroy money in circulation and makes existing money that much more valuable. Especially when the P/C economy is debt saturated and not originating debt. ---------- One creates from nothing. If you try to create from something, you're just changing something. So in order to create something, you first have to be able to create nothing. Last modified:
2007-11-07 23:09:02 by nothing
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Nothing Posts: 4382 Incept: 2007-09-13
Russian River Appellation Banned
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Kool I understand how scary an unstoppable deflationary spiral is...and I imagine that is why folks on that side of the trade want to see another bubble somewhere, somehow...unemployment is not a pleasant situation to anticipate. ---------- One creates from nothing. If you try to create from something, you're just changing something. So in order to create something, you first have to be able to create nothing. 2007-11-07 23:12:19
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Koolaid Posts: 3022 Incept: 2007-07-23
Atlanta
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NT - it's hard to get your head around *this* deflation spiral because it logically leads to the destruction of society if you carry it to conclusion.
2007-11-07 23:16:39
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Jbr999 Posts: 177 Incept: 2007-07-05
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Thanks, Karen. Sorry, I didn't quite follow what you meant by "...never happened in history, ain't gonna happen this time." - what's never happened in history that's not going to happen this time? I think that what they don't get is that you need a functioning financial system to allow reinflation to occur. In the past, when we had bubbles in equities, RE, etc the financial intermediaries and banks were fine so the conduit allowing reflation remained intact. This time it's the debt bubble that has bursted, that takes down the financial system with it, there's nothing left to provide a conduit to reinflate with. It's like needing to deploy your inflatable life jacket and after realizing the autoinflate mechanism didn't work you realize the manual inflation tube you are supposed to blow through has disintegrated leaving a big gaping hole in the life jacket... 2007-11-07 23:19:37
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Jbr999 Posts: 177 Incept: 2007-07-05
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Karen, What do you think society will be like after this? I think the best we can hope for is something like the Great Depression with extensive job loss and hardship. As horrible as that is, it's survivable. Alternatively, if it was much worse than that society could deteriorate to total lawlessness including struggles for food and shelter involving mahem and murder - do you think things are likely to get that bad? Do you think there would be any sanctuaries anywhere in the US or abroad? 2007-11-07 23:25:43
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Nothing Posts: 4382 Incept: 2007-09-13
Russian River Appellation Banned
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Kool Unfortunately, Yes, it does, and it is denial about that fact, that is going to catch most folks unprepared for what is coming. Almost every one of those folks, who are hoping for an even bigger liquidity expansion "inflation" than we just had, are either servicing a huge amount of debt or they are involved in the, moving money around, service economy. The moving money around business and the folks who are connected to it, in one way or another, writers etc., are the folks who are going to bear the brunt of this debacle...and deep down they know it ---------- One creates from nothing. If you try to create from something, you're just changing something. So in order to create something, you first have to be able to create nothing. 2007-11-07 23:26:41
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Sellnrun Posts: 422 Incept: 2007-06-26
Murrieta, CA
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This type of thing has happened before. Nixon devalued the dollar to force the group of 10 nations to remove their dollar pegs in 1971. Did deflation then ensue? We are doing something similar with China and the OPEC nations. We need repatriation of their dollar holdings to jump start inflation and avoid a deflationary spiral. Are we seeing asset price deflation in housing? Sure. But that's about the extent of it. Weak dollar=import inflation, rampant dollar creation/repatriation=inflation. Everything equals inflation. Hard to have deflation in any real measure when the rest of the world is holding TRILLIONS of US dollars that they will want to liquidate because they are rapidly devaluing. ---------- "Study the past, if you would divine the future."-Confucius "Blest paper credit. Last and best supply To lend corruption lighter wings to fly..."-Pope 2007-11-07 23:31:49
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Nothing Posts: 4382 Incept: 2007-09-13
Russian River Appellation Banned
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Jbr You answered the "never happened" question in your next paragraph...once years and years of debt accumulation reaches these levels...the unwinding does not stop, because, short of giving debt free money to everbody for debt redemption, the reverse of the process that created the debt is just as powerful, and unstoppable. ---------- One creates from nothing. If you try to create from something, you're just changing something. So in order to create something, you first have to be able to create nothing. Last modified:
2007-11-07 23:45:19 by nothing
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Jbr999 Posts: 177 Incept: 2007-07-05
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Karen, Now I'm with you - when you said "never happened in history, ain't gonna happen this time" you were referring to their argument; when I first read it I thought it was someting you were saying - in which case it didn't seem to make sense ;) Yea, it does not occur to some people just because something has never happened before it cannot happen some day. Further, that certain structures mathematically define an environment where the ultimate resolution is preordained even if the exact route and timing is subject to randomness, ie, I can't predict where a tornado will drop a tree branch but I can predict with 100% certainty that it will drop it somewhere... Last modified:
2007-11-07 23:43:24 by jbr999
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Nothing Posts: 4382 Incept: 2007-09-13
Russian River Appellation Banned
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Denial is the hardest stage to get out of...anger is the most dangerous. and there are going to be a bunch of folks, who are up to their eyeballs in debt, who were sold the, "inflation for ever and ever", "you will pay that debt off with cheaper money", line, who are going to be really ****ed off, when they get out of denial, and have to deal with the anger stage. ---------- One creates from nothing. If you try to create from something, you're just changing something. So in order to create something, you first have to be able to create nothing. Last modified:
2007-11-08 01:54:04 by nothing
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Jbr999 Posts: 177 Incept: 2007-07-05
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Karen, I understand those most leveraged to the current scheme will be hurt the most. What I'm trying to understand is what do you think will happen to those who saw this coming and avoided all debt and maintained significant liquid reserves as T Bills? Will there be a government left to honor even it's T Bill debts to it's citizens? Will there be ANY financial institutions left to handle the redemptions of those T Bills? If someone had no debt and had savings, would they be unsafe in their own home? Is there anywehre people could go to be safe? How are YOU going to survive this horrible future? Last modified:
2007-11-07 23:52:56 by jbr999
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Stockfarmer Posts: 383 Incept: 2007-08-10
Fly over country
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If inflation does not get into wages soon all the import inflation and repatriation inflation will be met with a consumer too broke to buy anything. If it doesn't come from wages, home, stock market or credit cards where is it going to come from?
---------- "Republics are created by the virtue, public spirit, and intelligence of the citizens. They fall, when the wise are banished from the public councils, because they dare to be honest, and the profligate are rewarded, because they flatter the people, in order to betray them." - Justice Joseph Story (1779-1845) US Sup 2007-11-07 23:57:34
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Nothing Posts: 4382 Incept: 2007-09-13
Russian River Appellation Banned
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Jbr Back to "never happened"...what really has never happened in history...is the Bankers allowing the debt, they hold or expect to originate, to be devalued by non-debt based money creation, ala the Weimar Republic. Bankers create money...and to believe they will allow "copter boy" to print up and drop bales of non-debt based money all over the US is a complete delusion. ---------- One creates from nothing. If you try to create from something, you're just changing something. So in order to create something, you first have to be able to create nothing. Last modified:
2007-11-08 00:01:18 by nothing
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Bw8472 Posts: 6446 Incept: 2007-06-28
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The problem is last time we had something like this people were by and large civil. This time, photoguy isn't far off the mark. Having money may be a problem this time, the crime statistics track economic statistics in lock step and it's never really been anywhere near this bad. Shorting the market is one way to clear debts, it's tricky as all get out but I'm on that plan. Truth is, shorting the market should give you your answer, it's impossible in an inflationary spiral, the market will go to the moon, however that's not happened yet nor has it even begun to happen, the market may go up from here, it probably will but it's been locked into a pattern that's actually getting killed in real terms with the respective $ drop. The answer to me is obvious, you can't replace insane leverage with real $'s, that's impossible, they can't print that much. The debt servicing is killing people, the inflation now will subside and those without debt will begin to find some air soon, those on fixed incomes should do nicely in about a year or two if they can survive that long. Most of the $'s in circulation were created by debt, once the debt dies backing it, the pool of $'s will shrink and if you hold a real one it's value will go up. BB can't realistically monetize the debt, won't happen, cause that will shred the bankers as sure as the deflation will, no escape for them. ---------- At what point then is the approach of danger to be expected? I answer, if it ever reach us, it must spring up amongst us. It cannot come from abroad. If destruction be our lot, we must ourselves be its author and finisher. As a nation of freemen, we must live through all time, or die by suicide. ~Abraham Lincoln 2007-11-08 00:01:27
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Jbr999 Posts: 177 Incept: 2007-07-05
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Karen, Now I'm with you, thanks. So even though I'm firmly in your camp, let me play devils advocate for a minute ;o Assuming that is the case, the banks will fail anyway, right? So the original debt would be discharged via default. And as the baks fail, one would expect the government to nationalize them or just create a new national government owned bank instead. Then the new national bank would issue free money to kickstart the seized economy. I should run for president! OK, what's wrong with my scenario? 2007-11-08 00:10:35
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Bw8472 Posts: 6446 Incept: 2007-06-28
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BTW this housing thing they keep pooh poohing is really ticking me off. It's contained to housing, oh really? Yeah that's brilliant, if only what 55% or more of Americans balance sheets are getting lit on fire that's not so bad right? Truth is if you achieve inflation, housing will re-ignite, has to, housing is a cost, lumber costs, nails cost, everything costs, but it's not re-igniting and it won't which totally invalidates any crack up boom nonsense. Wages aren't inflating people without wage inflation you do not have real inflation, it's the cost variety and wages are NOT FOLLOWING ALONG and show no indication of doing so. Without wage growth, you've got no real inflation, you've got higher prices for goods countered by a factor of 2 with your asset deflation. What needs to happen to fix this is simply time, in time people will be forcibly removed from their homes, they will be resold dirt cheap, loans will be imploded, banks will implode, money's velocity will dangle near zero and then the losses will abate, and finally the bottom will be in, the landscape will be burnt black but it'll be possible to grow again, let's just not make the same mistake for a hundred more years or so ok? ---------- At what point then is the approach of danger to be expected? I answer, if it ever reach us, it must spring up amongst us. It cannot come from abroad. If destruction be our lot, we must ourselves be its author and finisher. As a nation of freemen, we must live through all time, or die by suicide. ~Abraham Lincoln 2007-11-08 00:12:18
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Nothing Posts: 4382 Incept: 2007-09-13
Russian River Appellation Banned
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Bw I agree Please use "price increases" instead of "inflation"...that is the error so folks are making, thinking rising prices are "inflation"... prices are rising for so many other reasons, ie, energy and commodity speculation, than debt/currency devaluation, this a leveraged debt liquidity expansion rooted in uncontrolled .gov deficit spending. ---------- One creates from nothing. If you try to create from something, you're just changing something. So in order to create something, you first have to be able to create nothing. 2007-11-08 00:18:32
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Moneyfornothin Posts: 361 Incept: 2007-11-06
Inside Pirquitas Suspended
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Nothing, This seems to me to be very uncharted territory imo. Can you not see a stagflationary type environment occurring? Also you allude to dollars being destroyed by defaults? What happened to all the dollars on the other end of those deals that got paid for the asset that was purchased with debt? They are still in circulation are they not? I agree with your earlier pontifications about the velocity of the money but still confused about this part??? 2007-11-08 00:21:58
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Mo Posts: 5043 Incept: 2007-06-26
Florida
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That was brilliant BW8472. Nothing more needs to be said. 2007-11-08 00:23:05
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Nothing Posts: 4382 Incept: 2007-09-13
Russian River Appellation Banned
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Jbr RE: What to do The time will come when even .gov debt will not be honored...it wouldn't take much of an infrastructure collapse to bring each of our "economies" back to the local level. when that happens .gov paper will be hanging in out house. That will be another trade where exit timing is critical. As far as survival goes...look around locally...you'll see what you will have to deal with and who will have your six. ---------- One creates from nothing. If you try to create from something, you're just changing something. So in order to create something, you first have to be able to create nothing. Last modified:
2007-11-08 00:36:22 by nothing
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