18-Sep-10 News -- Near-zero CPI hints at deflation

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Expand view Topic review: 18-Sep-10 News -- Near-zero CPI hints at deflation

Re: 18-Sep-10 News -- Near-zero CPI hints at deflation

by vincecate » Sat Sep 25, 2010 2:02 am

OLD1953 wrote: A bit of correction here, of course the government can "print" money at any rate they please if they are willing to pay the political consequences. HOWEVER, how can they circulate it? Bush essentially sent everyone a check, but that just won't be repeated with 30K each. And money per household of that magnitude would be required to reinflate the bubble economy. Ain't gonna happen.
The government can just spend money to get it into circulation. The deficit is about $1.5 trillion per year. With 115 million households this is about $13,000 per household per year. So $30K would take 2.4 years.

Now the Fed has "only" been printing about $1 trillion per year, so they are currently on a bit slower schedule really. However, if people stop buying bonds they could also get money into circulation just by paying off bonds as they came due. So they might change to a much faster schedule at any time.

When governments can print money and have deficits of 40+% of spending, hyperinflation starts soon after people stop buying enough bonds. As the government pays off existing bonds and is not able to sell more, printing will be more than 40% of spending even if the deficit is "only" 40% of spending. With short term bonds printing could be well over 100% of spending. Think about how fast the US will have to print money if $12 trillion in mostly short term bonds can not be "rolled over".

In most countries people only keep buying bonds for a few years after deficits get over 40% of spending. Japan is setting the record for how long people keep buying enough bonds. No other previous country has come close to lasting as long as Japan has so far and I doubt any future country will ever match it either. Usually it is more like 4 years.

So to me the question is just, "When will people stop buying enough US bonds?". I think it is not really possible to tell exactly when a system depending on the confidence of so many humans will fail. And the US is an unusual case, since it is the main reserve currency, so not sure how it will compare to regular currencies. However, I think it is in the next couple years, with a real chance even in the next 6 months.

http://pair.offshore.ai/38yearcycle/#hyperinflation

Re: 18-Sep-10 News -- Near-zero CPI hints at deflation

by OLD1953 » Sat Sep 25, 2010 1:26 am

jldavid47 wrote:
vincecate wrote:
xakzen wrote: The money being destroyed has already been destroyed in the 50-500 trillions, but remains on the books of these Too Big To Fail (TBTF) firms. There is hopefully no political will to print that much money after Nov.
I don't believe you should count all debt, let alone notional value of options, as money.
In which case you are an idiot. Of course, all debt is money. You can't get rolling bubbles in tech stocks, real, estate and commodities without massive debt leveraging which purchased those assets. As the deleveraging process happens, debt is destroyed faster than the government can create "money". That's exactly what has been happening and is exactly what happens in a deflation. It's exactly what has been happening in Japan over the past 20 years and exactly what happened in the US in the 1930s. Hyperinflation will only happen if the government continues to print money in massive quantities AFTER the deleveraging is complete. That's entirely possible, but is at least 5 years down the road.
A bit of correction here, of course the government can "print" money at any rate they please if they are willing to pay the political consequences. HOWEVER, how can they circulate it? Bush essentially sent everyone a check, but that just won't be repeated with 30K each. And money per household of that magnitude would be required to reinflate the bubble economy. Ain't gonna happen.

Re: 18-Sep-10 News -- Near-zero CPI hints at deflation

by vincecate » Thu Sep 23, 2010 9:58 pm

Higgenbotham wrote: LOL, VInce! You're the same guy who said fractional reserve lending is a fraud. Give it up!
:-) When these fraudulent fractional reserve banks blow up, which they do every now and then, there are victims. These days the taxpayers are the victims. But this is a different thing from counting the money supply.

Maybe it is better to say that lending out long term using money from demand deposits is a banking system design defect. This causes "bank runs" and blows up banks. The deposits should be for the same time period as the loans (10 year or whatever). If I was in charge it would be illegal to use demand deposits for long term loans. There is a fraud in that sometimes the bank can not really give the person their money back on demand, even if all their customers are making payments on loans as they are supposed to. A bank run can bust a bank, unless the Fed steps in an "provides liquidity" (gives them cash so they can pay off the depositors).

Most definitions of money do not include long term private bonds. So when someone gives up their money for a bond and the bank then loans the money out to someone else, the money is only counted once. If the deposit was in a demand deposit savings account, instead of a long term bond, things are different. Then the guy who made the deposit thinks he has money and the guy who got the money from the loan has money. So the same money is counted twice and there is more total money.

Re: 18-Sep-10 News -- Near-zero CPI hints at deflation

by Higgenbotham » Thu Sep 23, 2010 9:24 pm

vincecate wrote:
Higgenbotham wrote: Since it's proven that the "Oracle of Omaha" has said almost exactly the same thing I've repeatedly said on this forum maybe we can put this issue to rest. Somehow I doubt it though.
I can understand how fraud can be used to get real bonuses or drive up a stock price so the CEO's options are worth more. So I can understand "make money" in the sense that a fraudster "makes money" off people. However, after Enron or whatever fraud is exposed, there will be people who lost the money that the fraudsters got. They did not make new money out of thin air, they defauded real people of real wealth.

In fraud there are victims, it does not change the total money supply so it is nothing like how "banks make money" where the total accounting of money goes up. Again with banking, both the cash put into a savings account and the same cash loaned out to someone else are counted. So by the standard definitions of money, there is more total "money" after the bank loan.
LOL, VInce! You're the same guy who said fractional reserve lending is a fraud. Give it up!

Re: 18-Sep-10 News -- Near-zero CPI hints at deflation

by vincecate » Thu Sep 23, 2010 8:23 pm

Higgenbotham wrote: Since it's proven that the "Oracle of Omaha" has said almost exactly the same thing I've repeatedly said on this forum maybe we can put this issue to rest. Somehow I doubt it though.
I can understand how fraud can be used to get real bonuses or drive up a stock price so the CEO's options are worth more. So I can understand "make money" in the sense that a fraudster "makes money" off people. However, after Enron or whatever fraud is exposed, there will be people who lost the money that the fraudsters got. They did not make new money out of thin air, they defauded real people of real wealth.

In fraud there are victims, it does not change the total money supply so it is nothing like how "banks make money" where the total accounting of money goes up. Again with banking, both the cash put into a savings account and the same cash loaned out to someone else are counted. So by the standard definitions of money, there is more total "money" after the bank loan.

Re: 18-Sep-10 News -- Near-zero CPI hints at deflation

by Higgenbotham » Wed Sep 22, 2010 8:50 pm

vincecate wrote:Yes, the Fed still accounts for the dollars it issues as liabilities. However, since the Fed no longer redeems dollars for gold, it is not a real liability. They can print all they want and never have more "liabilities" than they can handle. Given that a derivative is a real liability for one party and an equal asset for another, there is no real net wealth produced when the price changes. It is just transferring wealth from one party to another.
True for exchange traded derivatives that are marked to market in accounts each day. But it's not true for over the counter derivatives because they can be marked to whatever the parties want to as they are unregulated.

Hence, there can be "real" net wealth produced due to inaccurate or fraudulent models or "myths".

[The point I was trying to make is that exchange traded derivatives are an integral part of the financial system, appear on balance sheets as assets and liabilities and are treated the same way basic money balances are treated. The reference to the Fed was to show that bank cash and cash equivalent assets and liabilities operate similarly to and integrally with derivatives in how they are accounted for on balance sheets. I could have used the example of private money market assets and liabilities or some similar thing to make the same point, but even if the Fed creates more dollars there are still equally offsetting assets on the other side of the Fed balance sheet. However, as we've discussed, Fed purchases of illiquid mortgage assets have muddied that concept up quite a bit.]

vincecate wrote:I understand "banks making money". If a demand deposit counts as money, and the bank really lent the cash out to someone else who has it to spend, then the money is counted twice, so there is more total "money". I just don't see a similar thing for derivatives.
It's similar in that "extra" money is created on balance sheets due to inaccurate or fraudulent markings. One place where it's verified is in the 2003 Berkshire Hathaway annual letter referred to above and written by Warren Buffett where he describes the process of unwinding a derivatives mess he inherited from the purchase of an insurance company called General Re, as I recall.
Warren Buffett wrote:I can assure you that the marking errors in the derivatives business have not been symmetrical. Almost invariably, they have favored either the trader who was eyeing a multi-million dollar bonus or the CEO who wanted to report impressive “earnings” (or both). The bonuses were paid, and the CEO profited from his options. Only much later did shareholders learn that the reported earnings were a sham.
Since it's proven that the "Oracle of Omaha" has said almost exactly the same thing I've repeatedly said on this forum maybe we can put this issue to rest. Somehow I doubt it though.

Re: 18-Sep-10 News -- Near-zero CPI hints at deflation

by John » Wed Sep 22, 2010 7:52 pm

xakzen wrote:
vincecate wrote:...
Given that a derivative is a real liability for one party and an equal asset for another, there is no real net wealth produced when the price changes. It is just transferring wealth from one party to another.
...
The wealth is "created or destroyed" as the derivative fluctuates between it's notional value and zero at expiration. The only initial money that transferred is the premium that was paid which is usually a small fraction of the notional value. Of course the real problem is in the counter party risk. If I bought a $10 million credit default swap on AIG for $10,000 from GS and AIG went bankrupt (never mind that they already have), Goldman would have to come up with the $9,990,000 difference to pay me. That is GS would have a $10 million liability for which they only received $10K. If they couldn't pay, they would have to declare bankruptcy too and I wouldn't get my money either. If I was an insurance company that also held AIG bonds worth $10 million, I'd be out that too. In which case CDSes on GS would have to be paid too. That is what is meant by TBTF. Alternatively if we pretend that AIG did not go bankrupt, I'm out the $10K premium when the contract expires and I still have $10 million in bonds that are not paying dividends, but I get to pretend on my books that it will eventually be paid back. So quite obviously derivatives do "create or destroy" wealth in a nuclear destruction scale as Warren Buffet once said before he figured out he could make a lot of money selling them knowing that the Fed would never allow them to be paid out. So perhaps you are right that the Fed doesn't consider them "money", but they are treated as money for calculating bonuses.
That's a great explanation.

Alan Greenspan once said that derivatives were zero-sum securities.
He was wrong about that too.

John

Re: 18-Sep-10 News -- Near-zero CPI hints at deflation

by xakzen » Wed Sep 22, 2010 7:37 pm

vincecate wrote:...
Given that a derivative is a real liability for one party and an equal asset for another, there is no real net wealth produced when the price changes. It is just transferring wealth from one party to another.
...
The wealth is "created or destroyed" as the derivative fluctuates between it's notional value and zero at expiration. The only initial money that transferred is the premium that was paid which is usually a small fraction of the notional value. Of course the real problem is in the counter party risk. If I bought a $10 million credit default swap on AIG for $10,000 from GS and AIG went bankrupt (never mind that they already have), Goldman would have to come up with the $9,990,000 difference to pay me. That is GS would have a $10 million liability for which they only received $10K. If they couldn't pay, they would have to declare bankruptcy too and I wouldn't get my money either. If I was an insurance company that also held AIG bonds worth $10 million, I'd be out that too. In which case CDSes on GS would have to be paid too. That is what is meant by TBTF. Alternatively if we pretend that AIG did not go bankrupt, I'm out the $10K premium when the contract expires and I still have $10 million in bonds that are not paying dividends, but I get to pretend on my books that it will eventually be paid back. So quite obviously derivatives do "create or destroy" wealth in a nuclear destruction scale as Warren Buffet once said before he figured out he could make a lot of money selling them knowing that the Fed would never allow them to be paid out. So perhaps you are right that the Fed doesn't consider them "money", but they are treated as money for calculating bonuses.

Re: 18-Sep-10 News -- Near-zero CPI hints at deflation

by vincecate » Wed Sep 22, 2010 5:22 pm

Higgenbotham wrote:
vincecate wrote: I understand that options/derivatives can change in value many times their original value. But for every winner their is an equal loser. These are not like an equity or bond where it is possible that counting all parties involved there is a net change in wealth, right? So how does this create or destroy money?

All basic forms of money in our system (including instruments like exchange traded derivatives that act more like money than not) are simultaneously an asset and a liability. So, for example, if someone has a positive number on their balance sheet because they are holding a Federal Reserve Note, that note is simultaneously the liability of the Federal Reserve. So, what about the exchange traded derivatives? Likewise, an exchange traded derivative such as an option is simultaneously a positive dollar number on one balance sheet and an offsetting negative number on another balance sheet.
Yes, the Fed still accounts for the dollars it issues as liabilities. However, since the Fed no longer redeems dollars for gold, it is not a real liability. They can print all they want and never have more "liabilities" than they can handle. Given that a derivative is a real liability for one party and an equal asset for another, there is no real net wealth produced when the price changes. It is just transferring wealth from one party to another.

I understand "banks making money". If a demand deposit counts as money, and the bank really lent the cash out to someone else who has it to spend, then the money is counted twice, so there is more total "money". I just don't see a similar thing for derivatives.

Re: 18-Sep-10 News -- Near-zero CPI hints at deflation

by Higgenbotham » Wed Sep 22, 2010 11:03 am

vincecate wrote:
Higgenbotham wrote: This is a repeat of a reply I made to a nearly identical post of yours a few months ago. I don't think you responded. Values of debts and notional values of options (or more broadly, derivatives) in many cases are not counted in money supply figures.
Are there any economic theories or economists who count all debts and notional values of options as money? Do you have any references?

I understand that options/derivatives can change in value many times their original value. But for every winner their is an equal loser. These are not like an equity or bond where it is possible that counting all parties involved there is a net change in wealth, right? So how does this create or destroy money? But more to the point, who counts the notional value on these as money?
To be more clear in this post, I'll need to separate exchange traded derivatives that are marked to market each day from over the counter derivatives that are marked to model or marked to myth.

Exchange traded derivatives (options as an example) act more like basic money (Federal Reserve Notes or paper dollars as an example) from an accounting standpoint.

Over the counter derivatives act more like bonds or other securities that can change value.

All basic forms of money in our system (including instruments like exchange traded derivatives that act more like money than not) are simultaneously an asset and a liability. So, for example, if someone has a positive number on their balance sheet because they are holding a Federal Reserve Note, that note is simultaneously the liability of the Federal Reserve. So, what about the exchange traded derivatives? Likewise, an exchange traded derivative such as an option is simultaneously a positive dollar number on one balance sheet and an offsetting negative number on another balance sheet. From a practical standpoint, an options trader can clear their account at the market by 4 pm and have the proceeds wired into their bank first thing the next morning. Additionally, any excess in a futures account that is over margin requirements can be wired out immediately or used directly to purchase commodities from the account itself. So positive futures marks equate to direct money for the purchase of commodities.

Thinking about things like bonds that have time dependencies, when, say, a government issues a bond it has a certain initial par value but the value can change. My understanding is, yes, the overall wealth in the system will increase if interest rates fall and the value of the bond goes up. However, the overall wealth in the system won't change over the entire term of the bond because the original terms don't change. Over the counter derivatives act much the same way except the mechanism is different and the means to increase wealth are illegitimate and fraudulent. Since there's no exchange traded market for these derivatives, they are "marked to myth" in many cases, allowing positive net worth to appear due to fraudulent markings.

Probably the reason no economists count these as money is because economists, bankers, and even the Federal Reserve itself on the whole act as fraudsters and rent seekers during these generational booms and they know the wealth effect is temporary and fraudulent. The securities that are generated are fraudulent, they have essentially printed money out of thin air, the regulators look the other way, and then the whole Ponzi scheme collapses. When the illegitimate forms of money disappear, then the money supply numbers will really be representative.

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