Great Depression 2009?

[Krazy P]

Thought I would post a thread that might get people's attention.

We have a situation developing tonight that is very serious - most people have no clue.

On Sept 18, there was a global "run" that was stopped by the announcement that Treasury and the Fed were working on something.

Tomorrow, if we don't get some action, it could get very nasty.

I assume that Congress is working all night - I hope so.

Would you like 10% unemployment and 15% inflation for a few years?

[Mozzes]

Thought I would post a thread that might get people's attention.

We have a situation developing tonight that is very serious - most people have no clue.

On Sept 18, there was a global "run" that was stopped by the announcement that Treasury and the Fed were working on something.

Tomorrow, if we don't get some action, it could get very nasty.

I assume that Congress is working all night - I hope so.

Would you like 10% unemployment and 15% inflation for a few years?

I wonder if there's any salvaging Bush's presidential legacy. Admittedly the economy isn't completely his fault but all of this will probably be tied to him and combined with his adventures in foreign policy I can't see him keeping his head above water.

I've been reading about a proposed $700B federal bailout from Bush. I wonder if the people who caused this fiasco are going to be the ones footing the bill? Probably not.

[konacoffee1]

A Great Depression type of situation again would really stink, especially after so many decades of being mostly prosperous. I think without a bailout the entire economy will collapse, maybe not as bad as the 1930s, but close to it. Only because the economy is supposedly global now we should be somewhat insulated from a total collapse. Now if the economy does totally collapse how global is it?

On the other hand, would prices, salaries, etc. finally even out if this were to happen?

Back to contemplating and reading up on this...

[redbaren]

Dang I am class of 2011 and my country has all ready screwed up my future, If we go into another depression I am going to be cursing at the Bush administration even more than I do now.

[Henry]

Thought I would post a thread that might get people's attention.

We have a situation developing tonight that is very serious - most people have no clue.

On Sept 18, there was a global "run" that was stopped by the announcement that Treasury and the Fed were working on something.

Tomorrow, if we don't get some action, it could get very nasty.

I assume that Congress is working all night - I hope so.

Would you like 10% unemployment and 15% inflation for a few years?

You don't know what you are talking about. Credit seizures do not produce inflation, in a large economy they are deflationary and create unemployment. And if there was a genuine seizure, you'd see massive unemployment of 20% or more in a period of a few months.

The treasury and the fed have been bailing us out of similar crises since the 1940s. The depression got so bad because there was no appropriate response to that particular panic. We had a similarly serious crises in the late 1990s with the overnight collapse of LTCM, and we had a similar crisis in the late 1980s with the S&L drama. Complex, highly leveraged financial instruments that most regulators don't even understand do not make for highly stable markets.

Take your mood stabilizers, turn off the histrionic media, and let the collected people in the Fed and Berkshire - not dipshit George Bush or Jim "I praddle on and on all day and don't come close to an S&P index" Kramer - fix this problem.

A Great Depression type of situation again would really stink, especially after so many decades of being mostly prosperous. I think without a bailout the entire economy will collapse, maybe not as bad as the 1930s, but close to it. Only because the economy is supposedly global now we should be somewhat insulated from a total collapse. Now if the economy does totally collapse how global is it?

On the other hand, would prices, salaries, etc. finally even out if this were to happen?

There is a "real economy" - the physical things that we produce, consume, save, invest, or spend on bombs, and the "financial economy" which is money supply, interest rates.

Most economists care little about the financial economy as a thing in itself, its the real economy that they're concerned with, and only pay attention to the financial economy insofar as it impacts the real economy. To date, those impacts from this so-called "crisis" have been very moderate.

In the long term, there will not be major structural problems. John Maynard Keynes fixed this problem a long, long time ago, and very few people dispute his key theses - that Money*Velocity=Price*Real Output, and that prices are sticky-up, to increase output when at less than full capacity, increase the money supply. Even Friedman, politically the complete opposite of Keynes, agrees with Keynes that the fundamental problem in the 1930s was the feds lack of response to the decline in the money supply.

Short term, we're going to have another Bush power grab and more bills to the grandkids. Long term, its just a histrionic blip. Don't believe me? Buffet just bet the farm on what was allegedly the least stable portion of this economy, and he's pretty sensible.

I wonder if there's any salvaging Bush's presidential legacy. Admittedly the economy isn't completely his fault but all of this will probably be tied to him and combined with his adventures in foreign policy I can't see him keeping his head above water.

I've been reading about a proposed $700B federal bailout from Bush. I wonder if the people who caused this fiasco are going to be the ones footing the bill? Probably not.

Well the ones who "caused" this are Robert Kioysaki, all the epic retards who bought his books, the mexicans who bought 500k houses on 9/ hr jobs, the inforgiveably-stupid bankers who made these ninja loans, and, most importantly, a thoroughly panic-stricken media who call a 2% change in valuation a "free fall" or "collapse" and a 1% gain a "huge rebound" and a "massive bull run" who cause 150 million idiots to think the world is coming to an end.

edit: and a fucking retard of a president who says panicky shit like "our entire economy is in danger" - which is both epicly stupid (i can assure you that people will, no matter what, demand medical care) and is likely to exacerbate an already serious problem.

[DrEast]

A Great Depression type of situation again would really stink, especially after so many decades of being mostly prosperous.

I think you don't realize the link here. In a debt based economy such as ours, "prosperity" is always ultimately created by mortgaging the future. At first, the future is mortgaged for a quick start, and then paid back over time; after a while, however, mortgaging the future is considered more reasonable than any other means of wealth "creation," and investing of credit becomes the ultimate in easy money. However, when everyone's doing it it becomes a massive Ponzi scheme, with no actual new income being generated, and the returns from the investment of credit are just other people's credit. Credit always has to be paid back, remember, so when every dollar in the system is credit you don't actually have any stability.

The future that was so heavily mortgaged is now, just like it was in the 30's. The Ponzi scheme is collapsing. It's what happens when banks run banks, when money is entirely IOUs. Contraction is inevitable.

[ScurvyRose]

When Krazy P posts, people listen!

[Tablelamp]

Dang I am class of 2011 and my country has all ready screwed up my future, If we go into another depression I am going to be cursing at the Bush administration even more than I do now.

Ha! You and everyone else in the US. The rest of the world already hates him.

As far as debt goes, I have a great metaphore:
The US economy is like a bathtub with the plug pulled.
The government borrows a bucket of water from a friend and pours it into the bath. The water level raises, but the problem isn't solved.

Now of course, if you take the metaphore literally, then the bath is already anti-wet. We already owe the japanese 4 trillion dollars. With interest, of course. I don't see how taking taxes from people and putting it into banks is going to work: banks make interest, but with money gone from the people, all they are doing is owing te banks more money.
It is all just like a massive college credit-card scam, you know, those guys who hang around, looking for the obviously broke teen fresh from highschool and offer him a nice card with no upfront fees, a high limit.... and 20% interest.
What does that make? Debt. Where does that make us now?
Japanese, I guess. :laugh:

[Krazy P]

You don't know what you are talking about. Credit seizures do not produce inflation, in a large economy they are deflationary and create unemployment. And if there was a genuine seizure, you'd see massive unemployment of 20% or more in a period of a few months.

The treasury and the fed have been bailing us out of similar crises since the 1940s. The depression got so bad because there was no appropriate response to that particular panic. We had a similarly serious crises in the late 1990s with the overnight collapse of LTCM, and we had a similar crisis in the late 1980s with the S&L drama. Complex, highly leveraged financial instruments that most regulators don't even understand do not make for highly stable markets.

Take your mood stabilizers, turn off the histrionic media, and let the collected people in the Fed and Berkshire - not dipshit George Bush or Jim "I praddle on and on all day and don't come close to an S&P index" Kramer - fix this problem.



There is a "real economy" - the physical things that we produce, consume, save, invest, or spend on bombs, and the "financial economy" which is money supply, interest rates.

Most economists care little about the financial economy as a thing in itself, its the real economy that they're concerned with, and only pay attention to the financial economy insofar as it impacts the real economy. To date, those impacts from this so-called "crisis" have been very moderate.

In the long term, there will not be major structural problems. John Maynard Keynes fixed this problem a long, long time ago, and very few people dispute his key theses - that Money*Velocity=Price*Real Output, and that prices are sticky-up, to increase output when at less than full capacity, increase the money supply. Even Friedman, politically the complete opposite of Keynes, agrees with Keynes that the fundamental problem in the 1930s was the feds lack of response to the decline in the money supply.

Short term, we're going to have another Bush power grab and more bills to the grandkids. Long term, its just a histrionic blip. Don't believe me? Buffet just bet the farm on what was allegedly the least stable portion of this economy, and he's pretty sensible.



Well the ones who "caused" this are Robert Kioysaki, all the epic retards who bought his books, the mexicans who bought 500k houses on 9/ hr jobs, the inforgiveably-stupid bankers who made these ninja loans, and, most importantly, a thoroughly panic-stricken media who call a 2% change in valuation a "free fall" or "collapse" and a 1% gain a "huge rebound" and a "massive bull run" who cause 150 million idiots to think the world is coming to an end.

edit: and a fucking retard of a president who says panicky shit like "our entire economy is in danger" - which is both epicly stupid (i can assure you that people will, no matter what, demand medical care) and is likely to exacerbate an already serious problem.

I don't know what I am talking about? Hmmm.

I am getting calls from all my colleagues across the U.S., major developers and others. Payrolls might not be met, construction projects might stop in mid-stream. There are bank runs in Belgium and in Asia.

``The prospects of loose fiscal and monetary conditions in an economy that's slowing rapidly is hitting the dollar,'' said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. in London. The bailout package ``may restore confidence in a lot of things, but it won't restore confidence in the dollar."

I guess he doesn't know anything either.

"US banks and money managers borrowed a record amount from the Federal Reserve in the latest week, nearly $188 billion a day on average, showing the central bank went to extremes to keep the banking system afloat amid the biggest financial crisis since the Great Depression."

"The Fed designed the loan facility to help money market funds meet huge demands for redemptions from fearful investors over the past week after one U.S. money market mutual fund's value fell below $1 a share, and to foster liquidity in the asset-backed commercial paper markets."

"Norwegian banks are weighing the merits of abandoning their dollar-based interbank money market due to chronic shortages of short-term U.S. currency funds in Europe over past weeks, bankers said on Thursday."

"Major companies finance their day-to-day business, including salaries and rent, by borrowing for two or three months in the $1.7 trillion commercial paper market. Many of those debts come due Sept. 30.

But since the credit crisis intensified with the Lehman Brothers' bankruptcy last week, buyers have been shying away from the market and it has been rapidly shrinking - falling by $61 billion in the week ending Wednesday, the Federal Reserve reported Thursday."

"The purge is broad and is impacting issuers with far more predictable cash flows - regular run-of-the-mill companies in need of working capital," said Tony Crescenzi, bond strategist with Miller Tabak & Co.

"The increasing stress in money markets shows that credit is significantly declining in availability and rising in cost. This will quickly start to hit borrowers who are refinancing and cause rising defaults if left unchecked," said Paul Niven, investment manager at F&C Investments.

"The market is beginning to crush the lifeblood of the economy," he said. "Good news from Washington is desperately needed to prevent further turbulence."

Money-market rates around the world soared on mounting concern the U.S. Treasury's $700 billion bailout plan will be diluted as it makes its way through Congress, causing financial institutions to hoard cash.

The three-month London interbank offered rate, or Libor, that banks charge each other for dollar loans jumped today by the most since 1999 and the euro rate rose to the highest level since November 2000. Rates in Hong Kong and Singapore climbed as Bank of East Asia faced a run Wednesday on deposits. The difference between the three-month dollar rate and the overnight indexed swap rate, the Libor-OIS spread, widened to the most on record.

"Liquidity in the money markets in maturities over a week is desperately scarce," said Tim Bond, head of global asset allocation at Barclays Capital in London. "A near-term solution to the crisis is urgent. Unchecked, the current crisis would turn into a self-reinforcing vortex of defaults, bank capital contraction and deep recession within a matter of weeks. "The message coming from our money-market traders is that nothing's working," said Padhraic Garvey, the Amsterdam-based head of investment-grade debt strategy at ING Bank. "Banks are not dealing with one another and the situation has gotten worse. The real market is probably about 10 to 20 basis points above where Libor fixings are."

I guess none of these folks has any idea what is going on either.

I am glad you do!

[Henry]

I don't know what I am talking about? Hmmm.

I am getting calls from all my colleagues across the U.S., major developers and others. Payrolls might not be met, construction projects might stop in mid-stream. There are bank runs in Belgium and in Asia.

``The prospects of loose fiscal and monetary conditions in an economy that's slowing rapidly is hitting the dollar,'' said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. in London. The bailout package ``may restore confidence in a lot of things, but it won't restore confidence in the dollar."

I guess he doesn't know anything either.

"US banks and money managers borrowed a record amount from the Federal Reserve in the latest week, nearly $188 billion a day on average, showing the central bank went to extremes to keep the banking system afloat amid the biggest financial crisis since the Great Depression."

"The Fed designed the loan facility to help money market funds meet huge demands for redemptions from fearful investors over the past week after one U.S. money market mutual fund's value fell below $1 a share, and to foster liquidity in the asset-backed commercial paper markets."

"Norwegian banks are weighing the merits of abandoning their dollar-based interbank money market due to chronic shortages of short-term U.S. currency funds in Europe over past weeks, bankers said on Thursday."

"Major companies finance their day-to-day business, including salaries and rent, by borrowing for two or three months in the $1.7 trillion commercial paper market. Many of those debts come due Sept. 30.

But since the credit crisis intensified with the Lehman Brothers' bankruptcy last week, buyers have been shying away from the market and it has been rapidly shrinking - falling by $61 billion in the week ending Wednesday, the Federal Reserve reported Thursday."

"The purge is broad and is impacting issuers with far more predictable cash flows - regular run-of-the-mill companies in need of working capital," said Tony Crescenzi, bond strategist with Miller Tabak & Co.

"The increasing stress in money markets shows that credit is significantly declining in availability and rising in cost. This will quickly start to hit borrowers who are refinancing and cause rising defaults if left unchecked," said Paul Niven, investment manager at F&C Investments.

"The market is beginning to crush the lifeblood of the economy," he said. "Good news from Washington is desperately needed to prevent further turbulence."

Money-market rates around the world soared on mounting concern the U.S. Treasury's $700 billion bailout plan will be diluted as it makes its way through Congress, causing financial institutions to hoard cash.

The three-month London interbank offered rate, or Libor, that banks charge each other for dollar loans jumped today by the most since 1999 and the euro rate rose to the highest level since November 2000. Rates in Hong Kong and Singapore climbed as Bank of East Asia faced a run Wednesday on deposits. The difference between the three-month dollar rate and the overnight indexed swap rate, the Libor-OIS spread, widened to the most on record.

"Liquidity in the money markets in maturities over a week is desperately scarce," said Tim Bond, head of global asset allocation at Barclays Capital in London. "A near-term solution to the crisis is urgent. Unchecked, the current crisis would turn into a self-reinforcing vortex of defaults, bank capital contraction and deep recession within a matter of weeks. "The message coming from our money-market traders is that nothing's working," said Padhraic Garvey, the Amsterdam-based head of investment-grade debt strategy at ING Bank. "Banks are not dealing with one another and the situation has gotten worse. The real market is probably about 10 to 20 basis points above where Libor fixings are."

I guess none of these folks has any idea what is going on either.

I am glad you do!


Titles mean nothing. Talking heads get attention when they monger fear with unqualified statements. The fact that you take either seriously concerns me.

The media is a fear machine, nothing more, nothing less. No other reason to watch.

[Krazy P]

Henry.

What titles are you talking about?

I am talking about facts.

Wamu had a run that just closed it down. I live in Washington State. I saw the run start last week. There were lines out the doors.

The libor rate is a fact. The libor rate is actually meaningless right now because no-one will lend anyone else anything. I don't think you understand what that means.

Believe me, I hope this is all media hype. I really do hope so.

But the data is very, very troubling. Both the data from the banking system which is not available to outsiders and the data I am received from business leaders from across the U.S.

I really, really hope I am wrong - that would be a great outcome.

[thod]

The Fed as saviour is exactly what they want you to believe and exactly wrong, the Fed is the cause.

Prices only went so high because the Fed lends money at silly low interest rates in order to spur that thing they call growth. Yet growth through cheap money simply means mis allocation of capital. True growth is only achieved via increased productivity. So now the cheap money has pushed up priced and the Fed cannot lower interest rates below zero. Thus there is little left they can do that way and the only way to inflate and thus get the growth is handing out cash for free. It wont work. They will just push the problem further into the future. If prices are too high then we must accept them coming down or have high inflation.

The problem is the Fed setting interest rates in the first place. The market would be self governing. As the demand for capital grows, the market interest rate rises to shut it off. Thus you do not get boom and bust cycles. This steady state is obviously opposed by politicians that want a boom on their watch and a bust on the other guys in order to keep power. The inflation effect is a grab of the nations savings allowing them to spend more on their chosen programs.

All this alarmist talk of 20% unemployment etc is simply not the case. The companies cannot get new loans but they can continue to operate as they are. They will simply have to pay market rates for new money and not fed rates. Market rates are what the savers will lend it to them at.

[bladeserver]

Thought I would post a thread that might get people's attention.

We have a situation developing tonight that is very serious - most people have no clue.

On Sept 18, there was a global "run" that was stopped by the announcement that Treasury and the Fed were working on something.

Tomorrow, if we don't get some action, it could get very nasty.

I assume that Congress is working all night - I hope so.

Would you like 10% unemployment and 15% inflation for a few years?
I am reading from this post that you like the administration proposal (or some version thereof) and believe that it will help to put an end to the current chaos and, thereby, save us from serious economic consequences.
I agree that there are serious dislocations, as we speak, in many of the key financial markets but then I wondered why 100+ economic academics have signed a letter to congress begging them to reconsider and, essentially, saying the present situation is serious but not fatal i.e. less haste and more thought and, perhaps, let free market forces do their work (with enough Government intervention to stave off the direst of consequences).
What say you?

[Sliderule]

Perhaps my understanding is limited, but the bail out appears to be a temporary fix, nothing more. Isn't the real problem the simple fact that the consumers in our consumer based economy simply have no more money left to spend? Between increasing energy costs, health insurance (for those that have it), debt from medical bills, stagnate wages, etc etc the list goes on. Obviously, people unable to meet these expenses shouldn't be given loans on their homes worth hundreds of thousands of dollars, but for each person that should never have been given alone there is someone else who at the time was able to afford that loan, but do to circumstance currently is not.

I remember watching a documentary, in high school several years ago, that said that as of ~1995, wages had only increased ~50% since 1960 while the cost of living has increased nearly ~400%. Please don't start lambasting me for poor recollection of exact figures, I'm merely using these to illustrate a point. How can a middle class standard of living be maintained when wages fail to rise alongside costs of living? And when the middle class is gone what is going to immediately grind to halt?

[Dave C C]

Every economy needs a good shake up every once in a while, it helps to expose all the useless cockroaches that have infested our systems.

[curiousjane]

How can a middle class standard of living be maintained when wages fail to rise alongside costs of living? And when the middle class is gone what is going to immediately grind to halt?

Middle class is a joke right now. My father has been in the work force for over 30 years. What he made straight out of college is only $20,000 less than what he is making now. Take into account inflation, and though I cannot tell exact numbers, that figure is probably the same. Even sadder is the fact that, in 1986, he made MORE than he makes now (by 80's rates alone. This does NOT include inflationary representations of "today's dollars").

I don't expect things to improve. Anyone in their 20s or 30s is going to have to grow up fast and take responsibility for their own actions and not rely on just barely making the minimum payment to survive. I'm no economist, but even I know that living on borrowed money is living on borrowed time. (I speak from experience. I have debt, too. And I HATE it.)

America's out of balance. And in denial.

But the answer isn't a run on banks due to media frenzy any more than it was in the 30's. Did you hear about the gas runs in Tennessee after Gustav and Ike? Nashville and Knoxville ran out of gas because of panic, while the rest of the country just chilled. (Not to bash the Tennesseans, but that was stupid.)

[Sliderule]

Middle class is a joke right now. My father has been in the work force for over 30 years. What he made straight out of college is only $20,000 less than what he is making now. Take into account inflation, and though I cannot tell exact numbers, that figure is probably the same. Even sadder is the fact that, in 1986, he made MORE than he makes now (by 80's rates alone. This does NOT include inflationary representations of "today's dollars").


This is exactly what I'm talking about Jane, and to be honest I'm really not worried at all about the current state of the economy. What is going to change for me? Not a damn thing, except that now more than likely I won't be able to get student loans for college, which doesn't matter because there won't be any jobs to be had should I get a degree. The good news is since I won't be working 70-80 hours a week to pay off debt, I'll be able to spend that time studying and teaching myself.

I'm more amazed by people who are just now beginning to panic, the writing has been on the wall for at least 20, no 30 years.

[Krazy P]

I am reading from this post that you like the administration proposal (or some version thereof) and believe that it will help to put an end to the current chaos and, thereby, save us from serious economic consequences.
I agree that there are serious dislocations, as we speak, in many of the key financial markets but then I wondered why 100+ economic academics have signed a letter to congress begging them to reconsider and, essentially, saying the present situation is serious but not fatal i.e. less haste and more thought and, perhaps, let free market forces do their work (with enough Government intervention to stave off the direst of consequences).
What say you?

No, I do not favor any of the proposals right now (No-one is asking my opinion and no-one will).

I don't know enough about what is going on to opine about the specifics.

I can tell you that the key issue (as it is with most things) is - what is the price?

That is, what is the price that the government will pay for the securities? The devil is in the details. The problem is that all the securities are so different that it is very difficult to set the price.

If they did ask me, what I would say is that the government would offer 50 cents on the dollar with this provision - that if a company would sell that book at 50 cents, the company would have to offer an equal amount (par) of securities to the government at 25 cents on the dollar.

Under this idea, the company would have to make a rational decision about how they valued the securities and make trade-off decisions.

Thanks for all the posts. My worst case scenario (with a 5% probability) is 9% unemployment and 7% inflation - perhaps worse in certain areas.

By the way, Wachovia is next, followed by some large regionals (Downey), followed by community banks.

As each of these failures occurs, people will be getting more and more nervous. As a colleague mentioned yesterday, "We are in a great cash position, unless Amazon doesn't pay their rent..."

What if a major employer in your area didn't make payroll or missed a rent payment?

[Krazy P]

Are you even aware of the fact that unemployment above 5% and bank failures are both highly deflationary in a large economy?

You know nothing, stop talking.

LONDON (MarketWatch) -- European Central Bank staff on Thursday lowered their outlook for 2008 and 2009 economic growth, while boosting their inflation projections. They now project 2008 gross domestic product growth of 1.1% to 1.7%, down from a June forecast of 1.5% to 2.1%. For 2009, the economy is expected to grow between 0.6% and 1.8%, down from 1% to 2%. The ECB staff now see consumer inflation in 2008 between 3.4% to 3.6%, up from 3.2% to 3.6%. For 2009, inflation is seen between 2.3% and 2.9%, compared to a previous forecast of 1.8% to 3%.

"Stagflation is an economic situation in which inflation and economic stagnation occur simultaneously and remain unchecked for a period of time.[1] The portmanteau "stagflation" is generally attributed to British politician Iain Macleod, who coined the term in a speech to Parliament in 1965.[2][3][4] The concept is notable partly because, in postwar macroeconomic theory, inflation and recession were regarded as mutually exclusive, and also because stagflation has generally proven to be difficult and costly to eradicate once it gets started.

Economists offer two principal explanations for why stagflation occurs. First, stagflation can result when an economy is slowed by an unfavorable supply shock, such as an increase in the price of oil in an oil importing country, which tends to raise prices at the same time that it slows the economy by making production less profitable.[5][6][7] This type of stagflation presents a policy dilemma because most actions to assist with fighting inflation worsen economic stagnation and vice versa. Second, both stagnation and inflation can result from inappropriate macroeconomic policies. For example, central banks can cause inflation by permitting excessive growth of the money supply,[8] and the government can cause stagnation by excessive regulation of goods markets and labor markets;[9] together, these factors can cause stagflation. Both types of explanations are offered in analyses of the global stagflation of the 1970s: it began with a huge rise in oil prices, but then continued as central banks used excessively stimulative monetary policy to counteract the resulting recession, causing a runaway wage-price spiral.[10]

John Maynard Keynes wrote in The Economic Consequences of the Peace that governments printing money and using price controls were causing a combination of inflation and economic stagnation in Europe after World War I. Stagflation was also a very serious macroeconomic problem in the 1970s. In contrast to central bank responses to the oil price spike of the 1970s where similar policies were pursued on both sides of the Atlantic, the 21st century began with America going one way to fight recession and Europe going the other way to fight inflation.

Although it is clearly too early at this writing to draw conclusions, some economists and commentators suggest stagflation may be unfolding in the 21st Century. Many people adhering to this view suggest the condition may be the result of a prolonged maintenance of low, even non-economically low, interest rates by the Federal Reserve bank, starting in about 2001. An enormous increase in credit activity worldwide ended with the beginning of the Credit Crisis in 2007.

At around the same time, commodity prices soared resulting in, for example, a one-year gain in the price of oil from about $70 per barrel to about $145 per barrel at the July, 2008 peak, depending on market and grade. Agricultural commodities, many base metals, precious metals and most major currencies also appreciated significantly against the U.S. dollar during or before this rise in the price of oil, even provoking some government and inter-governmental agency action in currency and commodity markets."

(I certainly hope this doesn't happen, but the dollar will tank as a result of the bailout and oil is still scarce, so the conditions do exist for this to result. Again, as I said, I give it a 5% probability, but 5% is much higher than it was just a few months ago.)

"All of this has to have consequences. Now, some have argued that the consequences are going to be deflation because of the implosion of credit. You could also argue that it’s going to be very inflationary because the Federal Reserve Bank is essentially going to have to print more money to pay for all this stuff.

I fall into the latter camp. I think that gold continues to be an asset class of choice despite the decline that we have had over this late summer sell-off. And I think that the price band of $800 to $1000, which I thought would prevail (although that was penetrated on the downside), is still what your target expectations ought to be. If anything, I think it could be penetrated on the upside with the events that occurred last week."

I do agree that massive deflation and contraction is one possible outcome of current events.

"Credit is the lubricant of a modern economy. A seizure now would probably lead to the bankruptcy of General Motors and Ford in short order, but it would not stop with the US car industry. Waves of job losses would set off a self-feeding spiral. Yet more people would default on their mortgages (and car loans), driving house prices down even further. That, in turn, would threaten the solvency of the best banks. That is the way to Armaggedon."

- Ambrose Evans-Pritchard certainly sees huge risks in that direction.

Next week will be a pivot point on these events.

"Stop Talking"?

Gosh, that is open-minded of you!

Your approach towards dialog and an exchange of ideas is certainly enriching for yourself and others!

I don't know anything... but predicted the failure of Fannie and Freddie within 5 days of the actual event - 4 months ago.

I don't know anything... but made speeches last April predicting pretty much the events that have unfolded in the last few weeks.

I think I will just keep stumbling and bumbling along, ignorant though I am.

Funny how my phone is ringing off the hook at work and at home with people asking my advice.

Must be something about my track record...

[thod]

The US is in a very unusual position in that most USD is held outside of the US by foreigners. Now under deflation we suppose US citizens will be selling off assets to obtain currency. If the same is true abroad then those overseas will be doing the same, and to them USD is an asset and not currency. Thus all those dollars will hit the markets and the world will be awash in dollar sellers. This will mean deflation abroad and inflation in the US. By contrast the US negligible holdings of other currencies to sell.

The other nations are very worried that they will be repaid in toilet paper. They are all wanting to get the heck out of the dollar but don't want to be seen to be the first to sell. If the US does have deflation, then there are plenty of willing dollar sellers out there.

[TigerDak]

I remember watching a documentary, in high school several years ago, that said that as of ~1995, wages had only increased ~50% since 1960 while the cost of living has increased nearly ~400%. Please don't start lambasting me for poor recollection of exact figures, I'm merely using these to illustrate a point. How can a middle class standard of living be maintained when wages fail to rise alongside costs of living? And when the middle class is gone what is going to immediately grind to halt?

Wages of the lower class have not risen at all. Wages of the middle class have either not risen or have risen very little. I'm not sure if your numbers are correct, but from the data that I've seen it sounds about right. The reason why people have been able to maintain a middle class livelihood is because of debt. People don't own their vehicles anymore. Who really owns their home? The amount of debt, especially credit cards, has increased because people aren't making wages that have kept up with inflation and the overall cost of living.

[Henry]

Next week will be a pivot point on these events.

I thought it was friday? Or thursday? What was your "armageddon of the week" of the day? People who use words like "pivot point" are short term people who don't know what they're talking about.

Re stagflation - I know what it is. We saw a bit of it last year, but we're experiencing a commodity boost right now - oil's off 30% from its high and 150 per barrel oil was priced into the economy as was. So we've already got a deflationary force there. Then you add in generally slowing economic conditions all over the world - deflationary. Then you've got rising unemployment. Deflationary. A stabilizing dollar, again deflationary. And you've got banks going under. Deflationary.

We may see 9% unemployment, and we may see 10% inflation, but we will not see both.

Re gold, put your money where your mouth is and show the distribution of your holdings.


Your approach towards dialog and an exchange of ideas is certainly enriching for yourself and others!

Your "ideas" - ie fear mongering charlatanism - are wrong, short-sighted, and destructive.


I don't know anything... but predicted the failure of Fannie and Freddie within 5 days of the actual event - 4 months ago.

I don't know anything... but made speeches last April predicting pretty much the events that have unfolded in the last few weeks.

I think I will just keep stumbling and bumbling along, ignorant though I am.

Funny how my phone is ringing off the hook at work and at home with people asking my advice.

Must be something about my track record...

Good for you, ISTJ with a crystal ball. I'm glad you called Fannie when it was obvious it was going. I'm glad you pander to peoples' basest emotions and get a lot of attention accordingly. You still don't know what you're talking about when it comes to macroeconomic history or theory.

This situation is not really comparable to the 1970s, where the issue was a slowing rate of real productivity growth, declining international competetiveness, and a shift away from commodity money. These problems were occurred under an exceptionally liberal fed, and it led to a nasty inflation.

Its far more comparable to the late 1920s, where inflation and unemployment were both moderate, real productivity growth was robust, asset bubbles developed from overconfidence (re being one of them then too) people came to their senses over asset bubbles, a few banks rationally went under, panic starts and runs on banks shortly followed. Problematic, no doubt, but Keynes fixed this problem 70 years ago and Bernake and this federal government are Keynesian through and through (whether they admit it or not). And then, oops, there's the FDIC now which probably would have prevented the great depression wholesale had it been in place.

The fed undercorrects, in which case we get a spike in unemployment, the fed hits the money, in which case we get a mild recession and a decline in inflationary expectation, or the fed overcorrects, in which case we get an inflation. In any situation, nothing to lose sleep over for anyone except Bernake.

Wages of the lower class have not risen at all. Wages of the middle class have either not risen or have risen very little. I'm not sure if your numbers are correct, but from the data that I've seen it sounds about right. The reason why people have been able to maintain a middle class livelihood is because of debt. People don't own their vehicles anymore. Who really owns their home? The amount of debt, especially credit cards, has increased because people aren't making wages that have kept up with inflation and the overall cost of living.

Its not this radical. Household incomes have risen for all but the lowest 20% (mostly immigrants) over the past 30 years. Labor force participation and hours worked have also gone way up, but household income is (slowly) rising for everyone. Its rising much more rapidly for the top 40% and especially the top 10%, and wages are falling for some demographics, but its nothing dramatic anywhere.

[SoupNazi]

The problem is the Fed setting interest rates in the first place. The market would be self governing. As the demand for capital grows, the market interest rate rises to shut it off. Thus you do not get boom and bust cycles.

Markets would be self-governing, but this wouldn't eliminate business cycles - The aim of monetary policy is to smooth business cycles, which existed before central banks ever sought to manipulate interest rates. Are they any more effective over the long run at smoothing business cycles than they were prior to the lessons of the depression? judge for yourselves:
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(Also a great graph to get some perspective on how serious the depression was.. it's arguably the only meaningful deviation from the long run growth trend)

[bladeserver]

I thought it was friday? Or thursday? What was your "armageddon of the week" of the day? People who use words like "pivot point" are short term people who don't know what they're talking about.

Re stagflation - I know what it is. We saw a bit of it last year, but we're experiencing a commodity boost right now - oil's off 30% from its high and 150 per barrel oil was priced into the economy as was. So we've already got a deflationary force there. Then you add in generally slowing economic conditions all over the world - deflationary. Then you've got rising unemployment. Deflationary. A stabilizing dollar, again deflationary. And you've got banks going under. Deflationary.

We may see 9% unemployment, and we may see 10% inflation, but we will not see both.

Re gold, put your money where your mouth is and show the distribution of your holdings.




Your "ideas" - ie fear mongering charlatanism - are wrong, short-sighted, and destructive.




Good for you, ISTJ with a crystal ball. I'm glad you called Fannie when it was obvious it was going. I'm glad you pander to peoples' basest emotions and get a lot of attention accordingly. You still don't know what you're talking about when it comes to macroeconomic history or theory.

This situation is not really comparable to the 1970s, where the issue was a slowing rate of real productivity growth, declining international competetiveness, and a shift away from commodity money. These problems were occurred under an exceptionally liberal fed, and it led to a nasty inflation.

Its far more comparable to the late 1920s, where inflation and unemployment were both moderate, real productivity growth was robust, asset bubbles developed from overconfidence (re being one of them then too) people came to their senses over asset bubbles, a few banks rationally went under, panic starts and runs on banks shortly followed. Problematic, no doubt, but Keynes fixed this problem 70 years ago and Bernake and this federal government are Keynesian through and through (whether they admit it or not). And then, oops, there's the FDIC now which probably would have prevented the great depression wholesale had it been in place.

The fed undercorrects, in which case we get a spike in unemployment, the fed hits the money, in which case we get a mild recession and a decline in inflationary expectation, or the fed overcorrects, in which case we get an inflation. In any situation, nothing to lose sleep over for anyone except Bernake.



Its not this radical. Household incomes have risen for all but the lowest 20% (mostly immigrants) over the past 30 years. Labor force participation and hours worked have also gone way up, but household income is (slowly) rising for everyone. Its rising much more rapidly for the top 40% and especially the top 10%, and wages are falling for some demographics, but its nothing dramatic anywhere.
The two of you are having quite a spirited debate. It might be hard for lay people to sort out the wheat from the chaff.
I gather from the posts of Krazy that he is the CEO of a corporation. It doesn't give us any idea of his financial markets savvy or his understanding of economics but it is at least a little background.
You are quite outspoken Henry. What experience or academic background do you bring to the debate?

[sonofone]

Henry,

I always respect those who stay calm when most panic but I'm confused as to what your qualifications are? You seem to know a lot about economics but the 1920s and 2008 are two (slightly) different worlds. Much of Asia has seen 'explosive' growth over the years, and if their economic slowdown turns into a 'crisis' will that effect the ability of the Keynesian fed to stabilize the economy? I believe, in the long run, this will be good for the global economy but I think the short term will be slightly more difficult than you seem to believe. I'm not an economist, and, in all honesty, know very little about whats going on. I also feel that most the people here know little about whats going on. I'm just interested in why you seems so confident in your opinion?

[dissident]

credit deflation is not coming, credit deflation is here. There is no stopping it. At best they can postpone it.

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The standard of living in this country is about to take a serious downward adjustment, and lots of people are going to be thrown out of their "comfort zones" ... it's a long time in coming.

A fractional reserve debt based compound interest banking system requires perpetually accelerating growth in order to sustain itself.. when that growth is no longer possible, a liquidity trap occurs. Checkmate.

[Sir Mister]

I look forward to the depression. Hopefully it will serve to awake Americans from their slumber.

[sonofone]

Does anyone think we are going through a period that will create the 'launching pad' for the global economy? I could be wrong but I see a period of considerable growth after we get through this, and I think America will do very well. Another thought; do you think this could set Asia (specifically China) back on their ambition to surpass us? aka hurt China more than us?

[zippikay]

I would presume that this would be the end of US economic supremacy. note also that US' GAAP may soon be obsolete and US would adopt international accounting standard.
we shouldn't forget that most of productions occur in china and other asian countries. however, US played nicely as the banker and investor to those manufacturer, some may even argue specialization as in economic term. nevertheless, due to the fact of us economic collapse, i would wager that other countries may want to limit their exposure to us banking system in the future... the question remains who would play the banker in global trading? whoever gets to usurp wall street would become the new world lender and thus the new economic power, I suppose... I'm not sure about which country though, but london come to mind...

overall, i would see this event as the breaking point of US as the sole economic power

don't forget that US is also committed to expensive Afghanistan and Iraq wars, and I don't see any end to this expense just yet...

[DrEast]

A fractional reserve debt based compound interest banking system requires perpetually accelerating growth in order to sustain itself.. when that growth is no longer possible, a liquidity trap occurs. Checkmate.

This.

"If we can hit that bulls-eye, the dominoes will fall like a house of cards. Checkmate!"

[Henry]

The two of you are having quite a spirited debate. It might be hard for lay people to sort out the wheat from the chaff.
I gather from the posts of Krazy that he is the CEO of a corporation. It doesn't give us any idea of his financial markets savvy or his understanding of economics but it is at least a little background.
You are quite outspoken Henry. What experience or academic background do you bring to the debate?

My qualifications are the merit of the things I state. Do some fact checking for yourself.

That said, my undergrad was done at UCD and graduated in top 5% of my class. I cleared 1500 on the GRE. I was admitted to several econ PhD programs this past year, but got a ridiculously lucrative job offer at the last minute that I could not turn down. Econ PhD programs don't really teach abstract theory anymore, they teach linear algebra and advanced calculus. I can assure you that I know what I'm talking about.

I'm not allowed to comment on Crazy P anymore, and would imagine his posts are hidden from view. His arguments are long on conjecture and "prediction" and short on rationale or reference.

A fractional reserve debt based compound interest banking system requires perpetually accelerating growth in order to sustain itself.. when that growth is no longer possible, a liquidity trap occurs. Checkmate.

"Checkmate"? We've solved several of these so called "checkmates" in the past few decades. Money*Velocity=Price*Output. When M or V or Y drops for whatever reason, fed mints money, problems solved. Its worked for a long, long time, and will continue to work in the future.

Turn off your damned TV - its histrionics by ESFP hotties who know little/nothing about economics designed to get you to watch, very little of substance. Paulson and Bernake should be worried because they have a ton of work to do. You and I should not because its an easy fix from a policy perspective, which you can't say of the stagflation that was developing last year.

I always respect those who stay calm when most panic but I'm confused as to what your qualifications are? You seem to know a lot about economics but the 1920s and 2008 are two (slightly) different worlds.

Well they are and are not the same. Sure, there are a number of differences, but from a monetary/fiscal perspective they're essentially the same.

The problems are identical - asset bubbles bursting (for good reason), a few rational failures, panic and histrionics set in over the failures, runs on banks, banks go under, credit freezing up, unemployment and deflation set in.

Its an easy fix in a large economy - liberal monetary policy and increased government spending. It won't prevent a recession and a decline in inflationary expectations (neither of which, IMO, is a bad thing) but will certainly prevent a 10%+ unemployment.

There will not be another great depression because the great depression was an epic failure on the part of the federal reserve to increase liquidity at the time.

Much of Asia has seen 'explosive' growth over the years, and if their economic slowdown turns into a 'crisis' will that effect the ability of the Keynesian fed to stabilize the economy?

The fed has the power to mint money. It gives them the ability to create money whenever they see fit. They don't need to borrow it from China or Japan, and even if they did then an economic implosion in either of those countries would likely lead to an increase in the loanable funds they have available.

The importance of international trade for the American economy is grossly overstated. Beyond pushing interest rates to ridiculously low levels (which tends to create asset bubbles), allowing us to regularly save less than we spend, and some gains for consumers, the benefits of trade with Asia are minimal and the externalities associated with trade with China and Vietnam are quite high.


I'm just interested in why you seems so confident in your opinion?

Mostly because I can read and understand Keynes and Friedman, who are complete opposites politically but share similar views on the causes and fixes for these "general panics", and think that Bernake is a competent central banker (if dovish on inflation). No serious academic economist that I'm aware of is messing his or her pants like the media is every day.

redit deflation is not coming, credit deflation is here. There is no stopping it. At best they can postpone it.

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The standard of living in this country is about to take a serious downward adjustment, and lots of people are going to be thrown out of their "comfort zones" ... it's a long time in coming.

The best they can do is flood the street with money, which will quickly eliminate any credit deflation. It will produce an inflation, but that's better than a serious recession. They're just trying to hit a "sweet spot" of a moderate recession and a decline in inflationary expectations, but if these financial histrionics spill over to the real economy expect the fed to take radical action.


I would presume that this would be the end of US economic supremacy. note also that US' GAAP may soon be obsolete and US would adopt international accounting standard.
we shouldn't forget that most of productions occur in china and other asian countries. however, US played nicely as the banker and investor to those manufacturer, some may even argue specialization as in economic term. nevertheless, due to the fact of us economic collapse, i would wager that other countries may want to limit their exposure to us banking system in the future... the question remains who would play the banker in global trading? whoever gets to usurp wall street would become the new world lender and thus the new economic power, I suppose... I'm not sure about which country though, but london come to mind...

overall, i would see this event as the breaking point of US as the sole economic power

don't forget that US is also committed to expensive Afghanistan and Iraq wars, and I don't see any end to this expense just yet...

The "supremacy" of the US economy is based largely on productivity and low unit labor costs. That's not changing. The weaknesses in the US economy are an inadequate long term rate of savings and inadequate investment in infrastructure, manufacturing, education, and health care. That's not changing either.

This "crisis" will not change any of the structural strengths or weaknesses of the US economy. The past usage of the dollar as a reserve currency for other nations is probably not going to continue at the rate that its been at, but that's probably a good thing for the US in the long term.

[bladeserver]

Henry.
Thanks so much for providing a little personal background.
It was much as I suspected :).

[dissident]

the fed does not mint money, they merely create credit, but credit is useless unless it gets into the hands of the masses, us people that support the top and their lifestyle.

All this liquidity injection is nothing more then the fed promising to back up banks with loans, but that's useless if nobody wants to take out any more loans because they are strapped out. Most money the last 20 years has been created through loans and debt, and the compound interest system means debt is being created backed by old debt, with the compound interest payments taking up larger and larger amounts of the whole.

The only way to instigate inflation to inflate us out of this is to give away large sums of money to the masses that does not have to be paid back, and interest free (not created by debt, but rather by the treasury)

Right now these bailouts are merely just a last ditch effort by those who screwed the system up to get every last cent they can out before it crashes. None of this money is actually trickling down to the american taxpayer, which makes it snake oil.

The whole system is insolvent. Better to tear it down and rebuild from scratch, by dissolving the federal reserve system, and building from the ground up... a quick couple years of extreme pain is better then 15 years of slow and steady pain.

great video... MONEY AS DEBT
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"banks can create as much money as we can borrow"

[Henry]

the fed does not mint money, they merely create credit, but credit is useless unless it gets into the hands of the masses, us people that support the top and their lifestyle.

...

Yes, the federal reserve mints money. And creates credit. And they're both, from a macroeconomic perspective, the same thing.


Its hardly useless. It either gets loaned out, or it puts downward pressure on interest rates, which stimulates real investment and exports, both of which create jobs.

All this liquidity injection is nothing more then the fed promising to back up banks with loans, but that's useless if nobody wants to take out any more loans because they are strapped out.

The fed's focus point for taking action to lower interest rates are those who make direct investments. Direct investment is strongly influenced by even small changes in interest rates. This directly impacts employment.

Re individuals being strapped out: QQ

I am not strapped out, I don't know anyone other than a handful of people who are strapped out, and they've dug their own graves. Most will consume more if given more favorable terms.

Most money the last 20 years has been created through loans and debt, and the compound interest system means debt is being created backed by old debt, with the compound interest payments taking up larger and larger amounts of the whole.

And every penny of interest you pay is another penny of interest others earn. I, for one, am fine with compounding interest.

The only way to instigate inflation to inflate us out of this is to give away large sums of money to the masses that does not have to be paid back, and interest free (not created by debt, but rather by the treasury)

You're doing the exact same thing that you're accusing wall street of doing: asking other people to pay for past poor habits.

Right now these bailouts are merely just a last ditch effort by those who screwed the system up to get every last cent they can out before it crashes. None of this money is actually trickling down to the american taxpayer, which makes it snake oil.

The whole system is insolvent. Better to tear it down and rebuild from scratch, by dissolving the federal reserve system, and building from the ground up... a quick couple years of extreme pain is better then 15 years of slow and steady pain.

The system is going through a panic because so many peoples' emotions were and are out of control. The so called system is not insolvent.

[dissident]

I'm not asking for anything of the sort.. if it was up to me there would be no bailouts at all.

[DrEast]

Henry - you do realize you're pushing for inflation, inflation, inflation through expansion of credit, right? And that everyone outside of the disciples of Keynes (who was an idiot) see money as a store of value instead of economic grease, and consider that "theft", right? And do you realize that it IS theft, right?

It's the long run now. If we keep trying to follow Keynes, we're all gonna die.

Money ain't credit. To treat the two the same is to apply to credit the security that only money holds... but then, for that to work, you have to have actual money somewhere. We don't. We're all credit, all the way down.

"Inflation is a tax." - Fed Chairman Bernanke

[RPMcMurphy]

Interesting times alright

After the meltdown on Irish Banks on Monday, and the announcement of the Irish Government Guaranteeing the main Irish banks to the tune of 400 billion, I was all set to go out this morning and buy a pile of shares in BOI and AIB but unfortunately I decided I would be better off burying a few tins of beans down the back garden, would have made a pretty penny today If I did though.

[SoupNazi]

There will not be another great depression because the great depression was an epic failure on the part of the federal reserve to increase liquidity at the time.

The importance of international trade for the American economy is grossly overstated.

Haha, maybe you should consider one of the other causes of the depression.. Off topic, but I found it amusing

The best they can do is flood the street with money, which will quickly eliminate any credit deflation. It will produce an inflation, but that's better than a serious recession. They're just trying to hit a "sweet spot" of a moderate recession and a decline in inflationary expectations, but if these financial histrionics spill over to the real economy expect the fed to take radical action.

If this spread to the real economy in a serious way, the Fed acting unilaterally wouldn't find it so easy, since the T-bill rate is near zero. This will perhaps require a fiscal stimulus, monetary policy does become ineffective after a point.

I agree that another depression is extremely unlikely, the great depression was a perfect storm, a very serious cyclical downturn, coupled with short term policy that was the opposite of what it should have been, and long term policies that caused structural damage. That won't happen this time, and in the long term only structural issues matter. That does not, however, mean that this isn't a serious problem which could cause a deep recession if not properly managed. Your complacency seems excessive.

[Cygnus]

Sorry, this is about the only thing that came to mind when the bill failed to pass...

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[Henry]

Henry - you do realize you're pushing for inflation, inflation, inflation through expansion of credit, right?

Am I? Expansion of credit causes inflation if the economy is at capacity. The economy is not at capacity. A moderate monetary expansion will prevent recession. A large one will cause an inflation.

And that everyone outside of the disciples of Keynes (who was an idiot) see money as a store of value instead of economic grease, and consider that "theft", right?

Uh flatly wrong. Keynes and Friedman, the two leading experts on the depression and polar opposites politically, both agree that the most significant cause of the great depression was the massive contraction in the money supply. Both think that the fed was flatly wrong for failing to take steps to prevent this contraction.

Both agree that the money supply should be grown on a yearly basis, and this in and of itself does not cause inflation if grown at roughly the same pace as productivity.

The keynesian framework for understanding these general panics and cyclical failures is not significantly challenged by anyone credible that I'm aware of.

Secondly, making unsupported statements like "Keynes is an idiot" do not add credibility to your posts. Why was keynes an "idiot"?


It's the long run now. If we keep trying to follow Keynes, we're all gonna die.

Money ain't credit. To treat the two the same is to apply to credit the security that only money holds... but then, for that to work, you have to have actual money somewhere. We don't. We're all credit, all the way down.

...

Well I hope you're holding all your money now if that's the case.

"Inflation is a tax." - Fed Chairman Bernanke

Your point with this is what?

[DrEast]

Am I? Expansion of credit causes inflation if the economy is at capacity. The economy is not at capacity. A moderate monetary expansion will prevent recession. A large one will cause an inflation.


Any monetary expansion, at all, will cause inflation, period. Inflation is a reduction in the value of money, seen to consumers as a rise in prices. Producing more money through credit expansion will cause a shift in the real wealth of money towards those who lend and their immediate borrowers, and away from those who don't borrow... that is to say, frugal people, those on a fixed-income, and those too poor to hope to repay loans.


Uh flatly wrong. Keynes and Friedman, the two leading experts on the depression and polar opposites politically, both agree that the most significant cause of the great depression was the massive contraction in the money supply. Both think that the fed was flatly wrong for failing to take steps to prevent this contraction.


I don't care that they were political opposites, they both believed in the power of a central bank, which means that they were both believers in fractional reserve banking, the single most economically devastating practice ever conceived by mankind. Fractional reserve banking is fraud.


Both agree that the money supply should be grown on a yearly basis, and this in and of itself does not cause inflation if grown at roughly the same pace as productivity.

The keynesian framework for understanding these general panics and cyclical failures is not significantly challenged by anyone credible that I'm aware of.

Secondly, making unsupported statements like "Keynes is an idiot" do not add credibility to your posts. Why was keynes an "idiot"?



Because he believed in fractional reserve banking. By idiot, I'll admit I was choosing my insults poorly. I meant "fool," and more specifically, "authoritarian fool," or perhaps "totalitarian fool," which is to say, a man who believed in central economic planning.


...

Well I hope you're holding all your money now if that's the case.


A goodly portion of it, yes. Of course, I can't say whether it's depression or hyperinflation we're moving into, nor if this is the crisis point that will provoke it (although it seems likely, given the panic our esteemed leaders are trying to invoke, which is likely to stress the system to the breaking point).

In the case of hyperinflation, it's commodities, not reserve notes, you want to be holding.


Your point with this is what?

Just pointing out that the man who's job is the regulation of inflation is admitting that he holds the central power of government, wealth redistribution, in the palm of his hand. My point is that so long as we have a central bank, we don't have a representative form of government anymore.

[SoupNazi]

fractional reserve banking, the single most economically devastating practice ever conceived by mankind. Fractional reserve banking is fraud.

You keep saying that.. you do realize that with out fractional reserve banking, there is no banking, just secure money storage services which, instead of earning interest, would attract a fee. Banking is necessary for savings to be lent out efficiently, large lending institutions spread risk for depositors and allow the market to operate more efficiency by bringing borrowers and lenders together. There is nothing about fractional reserve banking that is innately unsustainable.. yours is an extreme view and I've seen you throwing it all over this forum, never with any supportive argument.

[DrEast]

You keep saying that.. you do realize that with out fractional reserve banking, there is no banking, just secure money storage services which, instead of earning interest, would attract a fee.


This is a wonderful idea!


Banking is necessary for savings to be lent out efficiently, large lending institutions spread risk for depositors and allow the market to operate more efficiency by bringing borrowers and lenders together. There is nothing about fractional reserve banking that is innately unsustainable.. yours is an extreme view and I've seen you throwing it all over this forum, never with any supportive argument.

Oh boy! I get to do supporting argumentation!

Fractional reserve banking, with its constant expansion of credit (and therefore money), is not free to those who do not associate with it. By inflating the supply of money, the banker, in the act of lending, actively drains wealth from anyone not involved in the lending transaction. The amount of wealth drained is not very large, but the number of lending transactions is very high.

As a (vastly simplified) thought experiment to prove this, imagine a situation with two customers, Alan and Bob, a banker, Carl, a sandwich seller, Dan, and a panhandler, Ezekiel.

Alan and Bob both buy a sandwich often. In doing so, they give money to Dan and he gives his customer a sandwich. If one of them fails to buy a sandwich because money is tight, he may, if he decides to do so, lower his prices to attract business. If both of them buy a sandwich on a day, he'll raise his prices to increase his profits, because he's obviously marked his sandwiches lower than the market clearing price. But no matter what he does to his prices, there's nothing wrong with him doing so. If transactions occur, they have no effect on the money supply, are freely and voluntarily entered into by both parties, and involve a simple exchange of wealth for a return of sandwiches. While some sandwich inflation may occur if Alan and Bob are both hungry, this will have no effect on the greater economy except that Alan and Bob will not be spending that money on other goods, possibly bringing those prices down, which could in fact benefit Alan and Bob in the future. What's more, if Alan and Bob both decide they prefer money to sandwiches, their money gains in value as it relates to sandwiches as Dan lowers his prices. This process is, perhaps, bad for Dan, but Alan and Bob will choose to buy sandwiches rather than starve, and the fact that they aren't buying what Dan is selling indicates that Dan's prices were too high to start with. In general, though, Dan manages to keep his prices at the point where he sells about two or three sandwiches a day, and that price hasn't changed in ten years.

Money, simply by being stable in amount and steady in value, has regulated this small economy without any help from an outside source, encouraging only safe and mutually beneficial deals.

Meanwhile, Ezekiel begs for money from Alan and Bob. If Alan and Bob both give Ezekiel money instead of buying a sandwich, not only does Ezekiel benefit directly, but since that money is not spent on sandwiches, Ezekiel gets a secondary benefit when he goes to exchange his wealth for goods, in that he can now purchase more sandwiches. If Alan and Bob give to Ezekiel and purchase a sandwich on the same day, they will realize this with immediate feedback as they find the price of sandwiches rising. Again, when the money supply is stable, prices give good information as to areas of under and over-investment. However, Ezekiel does not receive such largesse often, so he's the most prone to sandwich inflation when it occurs, having fewer funds to direct towards sandwich acquisition. After a while, the amount of money Ezekiel receives from Alan and Bob reaches a fairly stable rate, so we can consider Ezekiel on a fixed income.

Enter Carl, our friendly fractional reserve banker. For every dollar Carl has on deposit, he's legally allowed to loan out ten dollars with a wave of his magical banking wand and the power of his banking charter. When Carl sets up shop, with a sufficient initial deposit, he immediately promises easy credit at a low, low five percent interest for a signature and a song.

Joy! Now there's enough money for sandwiches for everybody! Alan and Bob immediately take out loans. Now they both can give to Ezekiel and, with prices being as stable as they have been, they can both buy a sandwich for every meal with no real worries for the next ten years! Meanwhile, with the big raises they have coming through, they'll be able to pay the loans off easily enough while being guaranteed enough to eat.

Suddenly, Dan's business is booming! Sandwich orders have increased by a factor of three. His prices start rising, and they don't stop. He finds himself awash with money, and immediately starts investing it in his now rapidly growing sandwich business, adding a second chair and taking on part-time help. Dan's business is now the model of modern capitalism, running on the smooth rails of a credit-based system to profit, profit, profit!

But something is happening in the meantime. As Alan and Bob continue to consume sandwiches, they find that the constantly raising prices, which go up slowly at first and then faster and faster (while still being expressed as a flat rate of inflation, since inflation, like interest, is compound), mean that their initial assumption that their loans would give them a ten-year supply of sandwiches has to be revised. After six and a half years, their sandwich funds are now completely out of money, and feeling a little nervous they turn back to Carl, needing another loan.

Carl, who has a hefty deposit from Dan, is more than happy to loan them what they need. After all, they're both sound credit risks, having never missed a payment, and the collateral they put up is worth far more than the loan. Relieved, Alan and Bob go back to their sandwich-eating ways, secure again in the sure and certain knowledge that their sandwich funds are stable.

But they're a little worried about this inflation stuff. Dan seems to have the best business in town. Maybe... maybe THEY should be getting some of that. After all, sandwiches are ten times what they used to be in value, and they're showing no signs of declining. Obviously the sandwich needs of this town are seriously under-serviced, and the smart investor needs to keep an eye open for deals like this.

So Alan and Bob take their new loans and money from some of their other investments and invest them in sandwich businesses of their own. After all, sandwich values can only go up, up, up!

But demand hasn't risen, since nobody new is buying sandwiches... only spending has increased. The signals Alan and Bob are receiving from Dan's menu are false.

Ezekiel, meanwhile, is long dead, having been unable to keep up with the constantly rising cost of sandwiches on his fixed income and having been unable to secure a loan with no collateral.

I'm sure you can see where this little tale is going, so I won't bother you with spelling it all out. So far we haven't even introduced bad banking practices... Carl's been doing exactly what a GOOD banker should do under fractional reserve banking. But the following changes have been made to the system:

1) The introduction of inflation. There's an immediate wealth transfer from those farthest from a loan to those closest to it, but it isn't made known for some time as sellers scramble to raise prices in response to people buying (what they view as supply and demand but is actually supply and easy credit). This banker's tax (which inevitably becomes the government's tax too) is dreadfully harsh on anyone without a source of income, and still very harsh to everyday laborers whose sources of income rise slowly (if at all).

2) The destruction of prices as a valid source of information. If we were to introduce a few more players and a little more time, this tale could be spun into a system with deep cluster error and eventually we could even bankrupt Carl... who would not have to have done a single thing wrong except fail to predict market trends.

3) The introduction of the boom-bust cycle (connected with #2). We didn't get into this yet (I don't have a whole lot of time), but with the oversupply of sandwich suppliers, prices would begin dropping and eventually Dan's part-time help would lose their job as Dan fought to remain competitive... a job which they had thought secure for the same reason Adam and Bob thought sandwich supply was a sound investment. That's unemployment and deflation.

If the bust was bad enough, not only would Adam and Bob lose their homes but Carl would go bankrupt and Dan would STILL not get all the money back that he kept on deposit with Carl, because fractional reserve banking makes it possible for debts to grow so large that it is impossible that they be repaid.

And that's why I say fractional reserve banking is fraud. It's responsible for the "crisis" we see today, just as it has been for every other recession and depression since 1913, and it's not going to get better with a little more regulation. People aren't wise enough to regulate pricing, and without something regulating pricing, investment becomes a crapshoot.

[Henry]

Any monetary expansion, at all, will cause inflation, period. Inflation is a reduction in the value of money, seen to consumers as a rise in prices.


Durr...not even close. If you hold the money supply constant and growth in output occurs, you get deflation. And its this level of economic understanding that is producing this so-called crisis.

Money*Velocity=Price*Output ....there's no way around the old equation because its true by definition of the terms.


Year 1
Money supply=100, Velocity=100, Price=100, Real Output=100

Year 2
Money Supple=100, Velocity=100, Price=97, Real Output=103

...as you can see, either price must fall or the real level of output must remain the same, which means unemployment if productivity is expanding.



ing more money through credit expansion will cause a shift in the real wealth of money towards those who lend and their immediate borrowers, and away from those who don't borrow... that is to say, frugal people, those on a fixed-income, and those too poor to hope to repay loans.

So inflating the currency is bad for debtors, even though it reduces the real burden of the loans they have? This argument is not strong.



I don't care that they were political opposites, they both believed in the power of a central bank, which means that they were both believers in fractional reserve banking, the single most economically devastating practice ever conceived by mankind. Fractional reserve banking is fraud.

Why is it a fraud? You can make statements like that, but if you do not provide supporting rationale, there's not much point is there?

I have never heard anyone call Milton Friedman a fraud. That is a first.


Because he believed in fractional reserve banking. By idiot, I'll admit I was choosing my insults poorly. I meant "fool," and more specifically, "authoritarian fool," or perhaps "totalitarian fool," which is to say, a man who believed in central economic planning.


"Central economic planning" is used to refer to those governments who directly plan how many widgets to build, how many farms to plant, etc. It is typically not used, except by the histrionic who are curiously also in panic over an inevitable asset bubble burst, to describe someone like Friedman, who advocates monetary policy that promotes 0 inflation. The worst you could credibly Keynes is "interventionist" and the worst you could label Friedman is "rare interventionist".

A goodly portion of it, yes. Of course, I can't say whether it's depression or hyperinflation we're moving into, nor if this is the crisis point that will provoke it (although it seems likely, given the panic our esteemed leaders are trying to invoke, which is likely to stress the system to the breaking point).

So its either depression or hyperinflation? What about something in the middle? Just totally out of the realm of possibility?

Just pointing out that the man who's job is the regulation of inflation is admitting that he holds the central power of government, wealth redistribution, in the palm of his hand. My point is that so long as we have a central bank, we don't have a representative form of government anymore.

Yeah you're right, having a central bank who inflates the currency 1.5-4% per year to grease the wheels of the labor and capital markets is totalitarian.

[SoupNazi]

Fractional reserve banking, with its constant expansion of credit (and therefore money), is not free to those who do not associate with it. By inflating the supply of money, the banker, in the act of lending, actively drains wealth from anyone not involved in the lending transaction. The amount of wealth drained is not very large, but the number of lending transactions is very high.
Wrong - I think everyone here either knows or can reason that, ceteris paribus, an expansion of the money supply decreases the value of money, that’s not the point. What is the point is:
a) As Henry says, Ceteris Paribus does not apply. If output expands (as it always does in the long run), the money supply must also expand to avoid deflation.. inflation is not inevitable by pure virtue of a fractional reserve banking system
b) More importantly.. inflation in itself is not a sign of inevitable catastrophe. Countries with low but positive levels of long run inflation are not, by pure virtue of this fact, destined for disaster


Enter Carl, our friendly fractional reserve banker. For every dollar Carl has on deposit, he's legally allowed to loan out ten dollars with a wave of his magical banking wand
Wrong.. Carl is allowed to loan out $10 for every dollar he has in RESERVE, not on deposit.. turns your magical banking wand into more of a.. regular stick


Joy! Now there's enough money for sandwiches for everybody! Alan and Bob immediately take out loans. Now they both can give to Ezekiel and, with prices being as stable as they have been, they can both buy a sandwich for every meal with no real worries for the next ten years!
Prices as stable as they have been? We’ve had fractional reserve banking for almost as long as we’ve had money.. what period of time are these sandwich eaters living in that their expectations are based on a world where banks do not exist?

Meanwhile, with the big raises they have coming through, they'll be able to pay the loans off easily enough while being guaranteed enough to eat
The only way these raises would have any applicability to your argument is if you are implying that they are false expectations.. fractional reserve banking does not produce false expectations by pure virtue of its existence. Surely you don’t mean to blame fractional reserve banking for people being morons?

Suddenly, Dan's business is booming! Sandwich orders have increased by a factor of three. His prices start rising, and they don't stop. He finds himself awash with money, and immediately starts investing it in his now rapidly growing sandwich business, adding a second chair and taking on part-time help. Dan's business is now the model of modern capitalism, running on the smooth rails of a credit-based system to profit, profit, profit!
What profit? Dans input prices are also going up, as are his costs of living. Is he such an inept proprietor that he only considers revenue when calculating profit and making investment decisions? And if he is.. you still have no point

The remainder of your story continues along the same lines.. blaming banking for people making poor decisions.. except that this problem is compounded by the assumption that these people (in your story) remain committed to decisions and do not change their approach when it becomes obvious that their decisions were based on false assumptions, thus producing the compounding effect that you rely on to make your story so frightening

1) The introduction of inflation. There's an immediate wealth transfer from those farthest from a loan to those closest to it, but it isn't made known for some time as sellers scramble to raise prices in response to people buying (what they view as supply and demand but is actually supply and easy credit). This banker's tax (which inevitably becomes the government's tax too) is dreadfully harsh on anyone without a source of income, and still very harsh to everyday laborers whose sources of income rise slowly (if at all).
1) Inflation devalues nominal money. It hurts people holding nominal money.. nominal money is usually held in banks, which typically pay interest above the rate of inflation
2) Again, inflation is not the end of the world, and is not an inevitable result of expanding the money supply

2) The destruction of prices as a valid source of information. If we were to introduce a few more players and a little more time, this tale could be spun into a system with deep cluster error and eventually we could even bankrupt Carl... who would not have to have done a single thing wrong except fail to predict market trends.
umm.. no, prices are still a valid source of information. People make decisions based on RELATIVE prices, not based on the prices that prevailed before banks existed

3) The introduction of the boom-bust cycle (connected with #2). We didn't get into this yet (I don't have a whole lot of time), but with the oversupply of sandwich suppliers, prices would begin dropping and eventually Dan's part-time help would lose their job as Dan fought to remain competitive... a job which they had thought secure for the same reason Adam and Bob thought sandwich supply was a sound investment. That's unemployment and deflation.
Boom-bust cycles would exist without a banking system, through changes in the velocity of money.. I can’t prove this of course, because fractional reserve banking has existed for much, much longer than serious economic records have been kept.. interesting how we haven’t yet doomed ourselves, and long run growth has been so stubbornly consistent and positive over that time, isn’t it?

If the bust was bad enough, not only would Adam and Bob lose their homes but Carl would go bankrupt and Dan would STILL not get all the money back that he kept on deposit with Carl, because fractional reserve banking makes it possible for debts to grow so large that it is impossible that they be repaid.
But you JUST SAID that debts have grown large as a result of inflation in your story.. if nominal debts are large that doesn’t mean that real debts are large

And that's why I say fractional reserve banking is fraud. It's responsible for the "crisis" we see today, just as it has been for every other recession and depression since 1913, and it's not going to get better with a little more regulation. People aren't wise enough to regulate pricing, and without something regulating pricing, investment becomes a crapshoot.
Don’t ever say ‘regulate pricing’ and ‘wise’ in the same sentence again… EVER

[lisakki]

My qualifications are the merit of the things I state. Do some fact checking for yourself.

That said, my undergrad was done at UCD and graduated in top 5% of my class. I cleared 1500 on the GRE. I was admitted to several econ PhD programs this past year, but got a ridiculously lucrative job offer at the last minute that I could not turn down. Econ PhD programs don't really teach abstract theory anymore, they teach linear algebra and advanced calculus. I can assure you that I know what I'm talking about.

I'm not allowed to comment on Crazy P anymore, and would imagine his posts are hidden from view. His arguments are long on conjecture and "prediction" and short on rationale or reference.



"Checkmate"? We've solved several of these so called "checkmates" in the past few decades. Money*Velocity=Price*Output. When M or V or Y drops for whatever reason, fed mints money, problems solved. Its worked for a long, long time, and will continue to work in the future.

Turn off your damned TV - its histrionics by ESFP hotties who know little/nothing about economics designed to get you to watch, very little of substance. Paulson and Bernake should be worried because they have a ton of work to do. You and I should not because its an easy fix from a policy perspective, which you can't say of the stagflation that was developing last year.



Well they are and are not the same. Sure, there are a number of differences, but from a monetary/fiscal perspective they're essentially the same.

The problems are identical - asset bubbles bursting (for good reason), a few rational failures, panic and histrionics set in over the failures, runs on banks, banks go under, credit freezing up, unemployment and deflation set in.

Its an easy fix in a large economy - liberal monetary policy and increased government spending. It won't prevent a recession and a decline in inflationary expectations (neither of which, IMO, is a bad thing) but will certainly prevent a 10%+ unemployment.

There will not be another great depression because the great depression was an epic failure on the part of the federal reserve to increase liquidity at the time.



The fed has the power to mint money. It gives them the ability to create money whenever they see fit. They don't need to borrow it from China or Japan, and even if they did then an economic implosion in either of those countries would likely lead to an increase in the loanable funds they have available.

The importance of international trade for the American economy is grossly overstated. Beyond pushing interest rates to ridiculously low levels (which tends to create asset bubbles), allowing us to regularly save less than we spend, and some gains for consumers, the benefits of trade with Asia are minimal and the externalities associated with trade with China and Vietnam are quite high.




Mostly because I can read and understand Keynes and Friedman, who are complete opposites politically but share similar views on the causes and fixes for these "general panics", and think that Bernake is a competent central banker (if dovish on inflation). No serious academic economist that I'm aware of is messing his or her pants like the media is every day.



The best they can do is flood the street with money, which will quickly eliminate any credit deflation. It will produce an inflation, but that's better than a serious recession. They're just trying to hit a "sweet spot" of a moderate recession and a decline in inflationary expectations, but if these financial histrionics spill over to the real economy expect the fed to take radical action.




The "supremacy" of the US economy is based largely on productivity and low unit labor costs. That's not changing. The weaknesses in the US economy are an inadequate long term rate of savings and inadequate investment in infrastructure, manufacturing, education, and health care. That's not changing either.

This "crisis" will not change any of the structural strengths or weaknesses of the US economy. The past usage of the dollar as a reserve currency for other nations is probably not going to continue at the rate that its been at, but that's probably a good thing for the US in the long term.

"Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve System. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."

-Ben Bernanke

This was basically what I was trying to point out in the other thread about the house rejecting the bailout. Of course, I'm not nearly as qualified as the quoted poster here. If we manage to pass a bailout, we'll finally know for sure if Milton Friedman was right about the depression.

[Krazy P]

Henry seems to be quite emotionally invested in his view. I certainly hope that the worst case we have in this situation is a "simple" deflation. I will give Henry the concession that it is the most obvious and likely outcome. I hope that is what happens. Seriously.

My original post was to generate a dialog about possible outcomes. Henry got all excited and apparently has authority issues.

Now, the bad news is that my alternate scenario is seeming more likely all the time. While in the short term we can see the deflation beginning, the problem is that the Fed (and every other Central Bank in the world) is pumping money into the system at a truly unbelievable rate. M1 and M2 are exploding. And, the consensus view is that the Fed will lower the interest rate at the next meeting my 50 bp. Yikes!

I am waking up in a full body sweat in the middle of the night. Normally when that happens it is not a good thing. Like many of our ilk, I tend to process lots of data at a subconscious level. I have been a CEO for half my life (27 years now) and it doesn't feel like we are in a good place.

Regular people from across the U.S. are walking into their banks and taking our cash and hiding it in their homes. Seriously. Large sums.

The "run" on Wachovia took less than 48 hours to bring it down.

The TED spreads and libor keep setting new records every day.

Tomorrow will be very interesting. I am not looking forward to next Monday.

Love you, Henry! Peace Baby!

[Henry]

Henry seems to be quite emotionally invested in his view. I certainly hope that the worst case we have in this situation is a "simple" deflation. I will give Henry the concession that it is the most obvious and likely outcome. I hope that is what happens. Seriously.

My original post was to generate a dialog about possible outcomes. Henry got all excited and apparently has authority issues.

Now, the bad news is that my alternate scenario is seeming more likely all the time. While in the short term we can see the deflation beginning, the problem is that the Fed (and every other Central Bank in the world) is pumping money into the system at a truly unbelievable rate. M1 and M2 are exploding. And, the consensus view is that the Fed will lower the interest rate at the next meeting my 50 bp. Yikes!

I am waking up in a full body sweat in the middle of the night. Normally when that happens it is not a good thing. Like many of our ilk, I tend to process lots of data at a subconscious level. I have been a CEO for half my life (27 years now) and it doesn't feel like we are in a good place.

Regular people from across the U.S. are walking into their banks and taking our cash and hiding it in their homes. Seriously. Large sums.

The "run" on Wachovia took less than 48 hours to bring it down.

The TED spreads and libor keep setting new records every day.

Tomorrow will be very interesting. I am not looking forward to next Monday.

Love you, Henry! Peace Baby!

I have "conjecture issues". I have "empty prediction issues". I have "problems with histrionic people who cause fake crises issues". I have "people who can't provide any supporting rationale for their argument issues".

Calling yourself an authority figure is downright epic.