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

Discussion of Web Log and Analysis topics from the Generational Dynamics web site.
vincecate
Posts: 2371
Joined: Mon May 10, 2010 7:11 am
Location: Anguilla
Contact:

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

Post by vincecate »

John wrote: I recently read an article, but can't find the reference right now, about how inflation is increasing in China.
Note that China has been pegged or nearly pegged to the dollar. Also note that if world commodity prices going up and China lets their yuan go up by 1.5% compared to the dollar they then see 1.5% less of the world commodity inflation than when measured in US dollars. Also note that most of what America buys comes from China, so if China has inflation American prices for Chinese goods should be going up at that inflation rate plus the 1.5% change in the exchange rate. Really inflation rates in the US should be higher than in China. I think the reason US rates are lower is that the US is not as honest in reporting inflation as the Chinese are.

http://english.peopledaily.com.cn/90001 ... 39597.html

xakzen
Posts: 80
Joined: Wed Mar 25, 2009 11:59 am

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

Post by xakzen »

vincecate wrote: Defaulting to non-voting foreigners can help your local economy, you get ride of a debt burden. However, Japan owes this debt to their own citizens, including the ones that are retiring. Defaulting to your own retiring voters, who you need to take care of anyway, does not provide any gain to the local economy. Defaulting to your own voters, when you can print money, is unheard of. It won't happen. Japan will print money and pay off these loans. As they do, the value of the yen will fall fast, people will flee the yen, and they will get hyperinflation.

Some call printing money to pay off loans defaulting, since you are paying with cheap money and not giving full value. So maybe that is what you meant.

Bankruptcy for governments that can print money is called "hyperinflation".
I think anyone getting inflated currency for their retirement benefits would consider that a default on that obligation. If we continue down the Koo stimulate & monetary expansion route, we will see hyperinflation as the only way out of that much worse problem. That will be 20 years from now. In the mean time the economy will continue to deflate as has done in the Japanese economy. All of those toxic assets are still on the books and will have to be either paid off or written off. Paying down is what the Japanese have been doing and are still doing. Writing off will cause a great deal of bankruptcies and privation, but then it will be over much quicker and the world can move on without the great over hang of debt. The other problem with paying down the debt is that it is unproductive allocation of resources that is dragging down what is left of the productive economy.

Yes, I agree that hyperinflation is in our future; unless the gov & Fed can be stopped from pursuing this insane course of spending. This is the political re-alignment that John is talking about and we are seeing before our eyes. It's why the political elites are all scratching their heads in wonder and horror at the election results. There will be a great gnashing of teeth on 3 November 2010.

vincecate
Posts: 2371
Joined: Mon May 10, 2010 7:11 am
Location: Anguilla
Contact:

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

Post by vincecate »

xakzen wrote: If we continue down the Koo stimulate & monetary expansion route, we will see hyperinflation as the only way out of that much worse problem. That will be 20 years from now.
When governments get to where their deficit is 40% of spending they usually only have a few years left before they get hyperinflation. Japan was unusual in that the local population had a very high savings rate and was loaning their money to the government. Nobody else has ever lasted anything like 20 years. Americans don't save like the Japanese used to and don't trust their government like that. The only way America last more than 5 years or so is if things really change drastically and soon. However, even if a few Tea Party people get elected, I don't see things changing nearly enough to get the deficit back below 40% of spending. There are just too many groups that have been promised too many things. Many of these promises were part of the reason they paid taxes for all the years they did (social security, medicare, etc).

Also, this is the age of Internet and computerized trading. All kinds of really smart guys (some of my friends from CMU even) are looking for all kinds of patterns in history and programming computers to make money off those. Similar to how the credit markets suddenly froze or we had a flash crash, the dollar fall will probably happen much faster than most people expect.

http://www.amazon.com/Monetary-Regimes- ... 213&sr=8-1

John
Posts: 11479
Joined: Sat Sep 20, 2008 12:10 pm
Location: Cambridge, MA USA
Contact:

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

Post by John »

Oh, why do I try? Why do I bother? But here I am again.

Once again, Vince, the US dollar is not the Zimbabwe dollar. The US
dollar has taken on a life of its own. If the US is about to default,
then it will not be possible to "print money" to avoid default. The
US will default. Ironically, the dollar may even strengthen in that
scenario, because the threat of "printing money" will be over.

I'll propose an analogy to Greece. Greece is on its way to default,
because it doesn't "own" the currency. Greece cannot print more euros
to get out of default.

Well, what I'm telling you is that the US dollar is much more like
Greece than Zimbabwe. At this point in time, the US is the caretaker
of the dollar, but it doesn't own the dollar. The world owns the
dollar.

John

vincecate
Posts: 2371
Joined: Mon May 10, 2010 7:11 am
Location: Anguilla
Contact:

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

Post by vincecate »

John wrote: If the US is about to default, then it will not be possible to "print money" to avoid default. The US will default.
[...]
At this point in time, the US is the caretaker of the dollar, but it doesn't own the dollar. The world owns the dollar.
The foreign holdings of US treasuries is around $4 trillion. The Fed printed around $2 trillion in the last 24 months. Some of that was to buy Fannie and Freddie bonds from China etc. The US owns the US dollar printing press, not the world. What makes you think it is not possible for them to print enough to pay off the external debt? You think they will default to the voters? The Treasury might default to the Fed, sure. Maybe they print the money over a few years as the bonds come due. Maybe a few years from now people are not happy with how little the dollar can buy. But what would keep the US from printing money and paying off the bonds as they came due? You think Congress would do nothing if the Fed refused to print money and buy more bonds from the Treasury so it could pay off existing bonds that came due?

http://www.treas.gov/tic/mfh.txt

xakzen
Posts: 80
Joined: Wed Mar 25, 2009 11:59 am

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

Post by xakzen »

vincecate wrote: When governments get to where their deficit is 40% of spending they usually only have a few years left before they get hyperinflation. Japan was unusual in that the local population had a very high savings rate and was loaning their money to the government. Nobody else has ever lasted anything like 20 years. Americans don't save like the Japanese used to and don't trust their government like that. The only way America last more than 5 years or so is if things really change drastically and soon. However, even if a few Tea Party people get elected, I don't see things changing nearly enough to get the deficit back below 40% of spending. There are just too many groups that have been promised too many things. Many of these promises were part of the reason they paid taxes for all the years they did (social security, medicare, etc).
It's called Generational "Dynamics" not Statics. Every time I hear a pundit on TV make this line of reasoning that Americans will never save as much as the Japanese, I have to shake my head in disbelief. American's already have had savings rates in the 20%+. During the last Great Depression. This is part of the re-alignment of my generation (Gen-X) as we enter middle age and see the Boomers hitting retirement with nothing but empty government promises to eat. I have always known that SS will not be there for me and have saved accordingly, but most of my peers are just waking up to the fact that there is no Soc Sec "Lock-box" for us. As more and more of us wake up to that fact, the savings rate will continue to rise. Already Bernake & crowd are bemoaning that we are not spending and that's why the stimulus has not worked. The attitudes are already changing. That thinking is also what is behind the Tea Party, "If I'm having to cut back, the gov should too!"

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.

vincecate
Posts: 2371
Joined: Mon May 10, 2010 7:11 am
Location: Anguilla
Contact:

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

Post by vincecate »

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 any case, I just expect the Fed to be printing money for Treasury bonds that come due, not all debts everywhere.

jldavid47
Posts: 33
Joined: Mon Aug 24, 2009 3:30 pm

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

Post by jldavid47 »

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.

vincecate
Posts: 2371
Joined: Mon May 10, 2010 7:11 am
Location: Anguilla
Contact:

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

Post by vincecate »

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.
In what economic theory do all debts and notional value of options count as money? In this wikipedia article showing a table of all the definitions of money wikipedia users know about it does not show any that include either "all debt" nor anything like "notional value of derivatives". Do you know of any real economist who thinks that all debts and notional value of derivatives count as money?

http://en.wikipedia.org/wiki/Money_supply
jldavid47 wrote: You can't get rolling bubbles in tech stocks, real, estate and commodities without massive debt leveraging which purchased those assets.
I agree that an asset bubble needs an infusion of money. Clearly the Fed was injecting money into the economy to make these bubbles. However, that does not mean that "stocks" or "real estate" or "commodities" or "debt" or "notional value of derivatives" are money. Also, I don't think a bond bubble, which we have now, needs massive debt leveraging to happen, just an infusion of money (say Fed buying up a trillion or two in bonds).

Again, Japan is the exception. If you look at 100 other cases of hyperinflation things happen much faster. Nobody else lasted as long as Japan has with such high debt and deficits before getting hyperinflation.

Notional value is not a real thing. Imagine I sell you an interest rate swap where I will pay you 1% interest on $1 million dollars US and you pay me 1% interest on $767,000 Euro for the next 3 years. I might sell you this for just $10,000 yet the "notional value" is $1 million US. Do you really think the notional value counts as money?

http://en.wikipedia.org/wiki/Notional_value

Guest

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

Post by Guest »

vincecate wrote: In what economic theory do all debts and notional value of options count as money? In this wikipedia article showing a table of all the definitions of money wikipedia users know about it does not show any that include either "all debt" nor anything like "notional value of derivatives". Do you know of any real economist who thinks that all debts and notional value of derivatives count as money?

http://en.wikipedia.org/wiki/Money_supply
Vince, not top be rude but you're quoting wiki. I don't even allow my HS students to quote from wiki. All debt is money and all of our money that we have today is created out of debt.
sy

Post Reply

Who is online

Users browsing this forum: No registered users and 47 guests