Financial topics

[malleni]

...
.

I agreed.
Your comparison is ok.

Actually the main reason for this discussion was the some new points I realized lately.
Namely, in discussion "inflation or deflation" - many things were not so clear then.
Now, I am more than sure.
"Story" about "monetary deflation" (especially of some prominent member of this forum) AND "strong dollar" - make me just laugh today.
(and one of those members of forum were not just so "sure" in those "canards", but he was very arrogant to any (including me) who did not agreed with him! Fortunately - it is just past and I am sure that even this member of forum need not more evidence - to see his own stupidness).

It is quite strange that almost same story about "the 17th Century private goldsmith bankers" - is very actual today too.
Unfortunately, many people (especially on this forum) do not want to see similarities.
You are an exception.

Anyway, I do agreed that:
1. ... we can consider "Federal Reserve Notes are ... the parallel ...an old goldsmith banknote".
2. ... that "US Treasuries ... are the equivalent to what gold was in the 1930's and under the old goldsmith banking system."


So take again extreme situation:

1. Over-leveraged goldsmith had nothing to support his notes and value of his notes - increased!.
Of course - nonsense.
In this case - we would even today have a "very strong" goldsmith notes.
Those over-leveraged paper notes was destroyed in this instant as "confidence" in goldsmith "paper" - disappeared!
(EVEN if goldsmith printed thousand time more notes (AND credits!) to people around!)

Why some people (predominately in US!) - expecting that US (FED) notes will last "forever"?
Even worse...
Why some people (predominately in US!) - believe that this FED (goldsmiths) notes will "increase" in value?

... It going to be unanswered question.

2. With your very good comparison US Treasuries - Gold...
I try to imagine situation now vs. "goldsmiths time".
Then you had something not so easy to acquire or to counterfeiting. Namely - gold!
Today you have a - Debt... (of US state which in same time issuing the notes too)...
You explained it nicely:
"...the value of US Treasuries is based upon the ability of the US government to tax and collect revenue to support the debt."
In situation when you have enormous unemployment in US, debased production, collapsing banking system:
Why some people (predominately in US!) - expecting that US Treasuries (US "paper gold", i.e the DEBT of US state) will "increase" in value even if the State of USA are NOT able to repay it (perhaps in "small dollars" only! ) ?

-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Sorry, but when I read what happen to the 17th Century private goldsmith banker and his notes - (after "leveraging") - it will be very stupid to think that this time "things are different".
I agreed in some grade that "things are different"...
YES. Things are much worse now that in goldsmith time.
1. The non existing gold (US state debt) is under burdensome counterfeiting. (Goldsmith had no such problem, or not in this grade (you describe how difficult it was and I am sure that this crime was connected to death penalty too!))
2. The "leveraging" is in comparison to Goldsmith time - enormous!

I could imagine that in the "Goldsmith time" when the people loose confidence in Goldsmith notes - they realized that:
1. The paper they have in their hands rapidly loosing value EVEN if paper notes (AND credit!) amount increased.
2. The "things they needed" suddenly increased in "value" measured with Goldsmith notes. AND besides "things they needed" MOSTLY and which were short on the market - increase enormously.
3. after this realization - they killed Goldsmith and probably took some gold from his treasury (if he had any)... but "investors" in his bank - loosed money.

As conclusion:
1. It is obvious that World (village) "confidence" in the US dollar - is at the end! (somewhere on the end of previous point 2).
2. Without "confidence" - it is obvious just a nonsense to talk about "strong dollar" (I think that even W would not talk about it - anymore!)
3. Same lack of "confidence" is obvious in the US debt (or ability to repay it)
4. The famous "Deflation" will come. (People on this forum just love - Deflation)... Unfortunately - it will NOT be the "monetary deflation" as John "preached" on his site - but Deflation in commodities (or if you like - "things we needed" as food, energy, resources...). Simple example: imagine TRILLIONS of paper US notes, but too less grain for the population... It is really nonsenses to talk about "strong dollar" anymore....


On the end one very amazing video!
(This women is obviously - a "inspector general" of FED)
http://www.youtube.com/watch?v=PXlxBeAv ... r_embedded

NOTICE:
They talking about TRILLIONS! (NOT billions!)
This is really strong killer of ANY confidence in the US system, dollar, treasury, paper gold.....

[Higgenbotham]

Malleni,

I'm still expecting deflation and about the same probability of deflation as I expected last Fall, though I expect the specifics to be a little different.

Where I've modified my views from last Fall is that I'm expecting the coming deflationary jolt to be more concentrated and severe to the point where, combined with something like a pandemic (in other words, too many things happening at once), we could see anarchy and breakdown along the lines of what Freddy posted from Gene Inger today.

[MelodyofLove]

I just read some of your articles and you're a remarkable man. Thanks for what you do.

Melody

[John]

I just read some of your articles and you're a remarkable man. Thanks for what you do.

Melody

Wow! Thank you for the compliment.

In fact, that goes double, since, based on your name, I'm imagining you to be a
beautiful woman. So thank you twice as much.

Sincerely,

John

[John]

Dear Higgie,

> I'm still expecting deflation and about the same probability of
> deflation as I expected last Fall, though I expect the specifics
> to be a little different.

> Where I've modified my views from last Fall is that I'm expecting
> the coming deflationary jolt to be more concentrated and severe to
> the point where, combined with something like a pandemic (in other
> words, too many things happening at once), we could see anarchy
> and breakdown along the lines of what Freddy posted from Gene
> Inger today.

I can't even imagine a scenario leading to US dollar inflation. The
most I can imagine is regional inflation, where a lot of paper money
is injected into some region for some reason, possibly
counterfeiting.

I agree with your concept of a "deflationary jolt," and anarchy and
breakdown of law and order. During these crisis periods, it's almost
always the case that there are roving bands of criminals who will
kill anyone for a few bucks. In this atmosphere, a dollar is going
to be extremely valuable, which means deflation.

Here's an interview on Bloomberg that I transcribed today:

> Economics numbers were not as good as the optimists were hoping
> for. But that was to be expected.

> This is not going to be a fast economics recovery. It's going to
> be very slow indeed. It's going to be characterized by low
> inflation, probably negative inflation, and interest rates at
> negligible levels for years, possibly for a whole decade.

> But within that I believe that you're going to get profits
> generally that are very satisfactory. ...

> The level of optimism that had developed about economics recovery
> was unsustainable. And we've gone down in economics terms. We
> have a couple of good numbers, and the consensus moved from
> extreme pessimism to - I think - unjustified optimism overnight.

> The reality is that the economy has slowed down sharply and it
> probably is going to recover, but exceedingly slowly. And the
> recovery is going to last many years, possibly much longer than a
> decade.

> We should see that sharp rises are unrepresentative, and will
> probably be followed by quite sharp falls. ...

> [Q: A lot of people are saying that the economy will improve next
> year, but you don't seem to buy that.]

> Absolutely not. By the way, look at what those guys were saying
> a year, 18 months ago. They didn't pick the recession /
> depression. That's my story, and I think it's persistent. If we
> ae anything like depression - and in fact, that's my story -- then
> it's going to be a long, dull period.

> [Q: Countries around the world are using stimulus.]

> We tried it in the 30s, it didn't work then. We tried it in Japan
> in the last 18 years, it hasn't worked then. I don't think it's
> capable of being resolved. I think once you're in depression, you
> are stuck.

Sincerely,

John

[Higgenbotham]

I can't even imagine a scenario leading to US dollar inflation. The
most I can imagine is regional inflation, where a lot of paper money
is injected into some region for some reason, possibly
counterfeiting.

I agree with your concept of a "deflationary jolt," and anarchy and
breakdown of law and order. During these crisis periods, it's almost
always the case that there are roving bands of criminals who will
kill anyone for a few bucks. In this atmosphere, a dollar is going
to be extremely valuable, which means deflation.

The Fed and Treasury have pretty much played all their good options out and have not really been able to generate much of a recovery or much inflation. It appears they gambled and lost big. Kind of like a gambler or trader who blew his whole account.

Now that they have gambled and lost, I'm not really sure what they can do except reverse course and try to salvage as much as they can to save themselves. For example, that might mean they pull the plug on the money market guarantees, take the Treasuries back onto the Fed's balance sheet and dump the bad debt back on the banks and let them fail, etc. I don't really know what they can or will do. The options don't look good.

[MGUYH8]

John --
Over the last year or so, I have become an avid reader (and mostly a believer) of your writings. Thank you for your attempt to provide us with a unbiased point of view. While I am not in a panic mode, I have quickly transferred those assets that could be transferred to "non-risky" investments. Right now I have a big chunk of money in a Money Market Account at an online broker and I have another chunk of money invested in Vanguard's Short Term Bond Index Fund. Assuming the panic that you predict, which account is the safest? (a) The Money Market Account or (b) the Short Term Bond Index Fund or (c) None of the above.

[aedens]

Inertia:
To write an intelligent new set of rules, one must understand both market history and human nature. Raghuram Rajan, a University of Chicago finance professor, has been doing a great deal of thinking about both. The solution isn't just to boost capital ratios, or ban certain transactions. Such strictures would only be diluted during the next boom. "We have tremendous faith in regulation at times like these," Rajan said. "But we reform with the delusory belief that the regulated and the markets they operate in are static that things will not change."

Rajan suggests requiring banks to have a new class of contingent capital. It would be a form of convertible debt, which is relatively cheap to raise during good times. When the bank or the system falls into crisis, however, the debt would convert into equity.

This idea is not without pitfalls. The debt would have to be held by an entity outside the banking system — maybe a sovereign wealth fund, Rajan suggests — or else these debt conversions could spread problems from one bank to another.

http://stlouisfed.org/news/fiyc/assets/ ... rJones.pdf

Here is one way it could operate. Megabank would issue capital insurance bonds, say to sovereign wealth funds. It would invest the proceeds in Treasury bonds, which would then be placed in a custodial account in State Street Bank. Every quarter, Megabank would pay a pre-agreed insurance premium (contracted at the time the capital insurance bond is issued) which, together with the interest accumulated on the Treasury bonds held in the custodial account, would be paid to the sovereign fund.

http://www.cfr.org/content/publications ... Paper3.pdf

The new instrument resembles long-term debt in normal times, but converts to equity when the financial system and the issuing bank are both under financial stress. The regulatory hybrid security the authors envision would be transparent, less costly to taxpayers, and more effective than the ad hoc measures taken in the current crisis.

SNB USD Bills will be included in the list of collateral eligible for SNB repos. Consequently, they may also be used in SNB repo transactions. Moreover, in accordance with art. 16 of the Banking Ordinance, these securities may be counted as liquid assets.
The Swiss National Bank (SNB) is introducing a new monetary policy instrument. It will issue its own debt certificates in US dollars (SNB USD Bills) with terms of less than one year. The instrument will be employed as of mid-February 2009 and will be used until further notice to finance the SNB’s loan to the SNB StabFund.

[freddyv]

After the 1929 crash, nothing much happened for about a year, after
which all hell broke loose. It looks like we're approaching that
point right now.

Sincerely,

John

John,

I agree. It may take a while to build back up but I see it coming. I have even noticed many people who have been all over this economic calamity covering their tracks just a bit but this has made me ever more certain that we are about to enter the "reality" stage. Last year it was high drama as great financial institutions bit the dust after weekend meetings by important people who themselves seemed to be unnerved by the happenings. Just as with the September 11th attacks it was horrible but fascinating at the same time. We were watching history but it really didn't reach into our lives except to provide a bit of excitement.

2009 will be, IMO, the year that this economic crisis comes home to roost and makes itself felt right where we live. As more and more people lose their jobs they will become farther and farther behind in their credit card and mortgage payments with no credit left for a rainy day. The banks have already cut credit lines and will become more and more aggressive in doing so and will work every angle they can to raise profits by increasing interest rates and charging fees every time they get a chance.

More and more people will walk away from their homes and once pension funds begin to go under we will see an increase in corruption among those in our society who begin to feel cheated out of what they were promised. The two, along with the increasing number of unemployed will generate increasing social problems at a time when local governments are having to cut back at all levels of spending, including law enforcement.

We'll hear more about the problems with social security and medicare and the government's inability to raise the revenue needed to fund all the bailouts and stimulus. Rating agencies will begin to note that the credit-worthiness of the US Government isn't what it used to be and China will make it ever more clear that they will be investing more at home and less in America. Oh, and did they mention their desire to move away from the USD as the world's reserve currency?

The recession turns into a depression and we finally see that it really can happen again. We discover that the real difference is that a recession only affects your neighbors while a depression affects you. Having a maxed out line of credit, a house that is underwater by 30% and an unemployed adult child living in your basement IS depressing, especially when you are one of only a few left with a job down at the office.

The Dow breaks 5,000 and Cramer calls the bottom again, only this time you don't believe it and you pull what's left of your 401k out of the market for good.

Your local government lays off 80% of the police department and some druggies take over the vacant houses in the neighborhood. 30% of your neighbors are gone and you're beginning to feel like a stranger in what was not long ago a friendly and safe place.

So maybe it won't happen but where is our engine of growth to get our economy going again? How can we justify P/E ratios of 50, 100, 1000...? Why should banks invest when they can bleed the spreads and the little guy and never take any risk? Why should I expand my business when I know my taxes are going to take away more and more of my profits? Why should I pay my mortgage when I am underwater and I can probably live in the house for 6 months until they throw me out?...IF they throw me out.

The government will take care of us, that is what many people believe and what they are being told. They HAVE taken care of us. They have turned our pockets inside out and stolen everything we had right before our very eyes and yet most people are so addicted to tax credits and promises of the easy life that they will go right on believing that the government can take care of us. The media will continue to tell us that the green shoots have been planted and will be springing up any day now. The low is just around the corner. China will pull us out of this....

God help us. We have created a huge mess and we have no one but ourselves to blame.

--Fred

[mannfm11]

I have too many things going on in too many directions to write. Unfortunately, I don't know how to use this gadget or I would. I am one of the best known, unknown deflationist in the world, having written extensively on the new since 2001. Somehow the Fed printing is different, so it seems to the average Joe, but the Fed doesn't print any more money than the typical bank that issues a credit card or lends money to buy a car. The Fed generally only takes better assets, as the IRS can seize your car to pay the bonds the Fed possesses. You have to understand liabilities to understand what is called money, which is better known as credit. Federal reserve notes, backed 100% by government debt, is the only money in the system. Some might not think of this as money, as it does change form and lose value, but it is a lot closer to the bone than what most folks are using to by stocks and bonds and other assets and goods these days. In credit all assets are liabilities.

Robert Prechter had a quote that stands as the very lynchpin of why deflation occurs and they can't really stop it without collapsing the system. I am going to start a couple of sentences before his important point. He says: "Record debt requires record optimism. We already know that governments in collusion with central banks have fueld bank credit. But banks fuel consumer credit, and...debt has permeated society out to the very edges of viability. Marginal debtors are the very bedrock of the whole system. The double irony is that (1)marginal debtors are about to expand their numbers, and (2)it won't help the system but will kill it, because most of the marginal debtors will morph into bankrupt debtors. (June 16, 2006 Elliott Wave Theorist). You can read Prechters entire deflation writings by joining club EWI on his elliottwave.com website.

This is what confuses most folks about what happens when deflation hits. Irving Fisher said aggregate demand dropped and debts were paid down resulting in swollen dollars which made the remaining debt larger in proportion. This is in some ways true, but the cause isn't so much debt being paid down as the marginal debtor failing. The US has run out of credit on the margins. The margins were the subprime borrowers. They were the home equity extractors. Every time they borrowed, they created a credit entry in the system, which became what some other person calls his money. There is more money, but there is more bad debt and I think most money increase is due to speculation and security reasons of business in desiring to hold more liquidity. The marginal debtor is busted and only more joining them will bail this system. But, the capacity of the system to create good debtors has topped the hill. The boomer generation is now facing retirement with their easier softer way provided by Wall Street, a tale told by an idiot and believed by many. What is going on now?

Some of those that still have credit cards left are going shopping. The government is pushing money through the housing industry. Housing went bust with sales in the 4.5 million to 5 million annual rate on preowned homes. The sales rate had never sustained above 4 million prior to 1997 and hasn't been below since. Normal recessionary preowned home sales are in the 3 million or less range, not in the 4.5 million to 5 million range. These sales rates are speculative bubbles and not normal markets. The only thing that slowed down was the ridiculous financing. Few understand that the foreclosure bargains will eventually become the normal sales price, as sales of this level cannot be sustained. Also, there will be much less equity pulled out of housing, which in itself decreases the pool on the margin. Many can't sell their homes for what hte market will bear and many of those that can, won't walk away with much. I have to believe from my own experience in the real estate and mortgage business that people still sell homes to pay off their debts with the idea of getting a larger home.

The stories are being told too fast. The complaint about the stimulus package in the US was that it happened too slowly. So, in no time at all, the economy has been rescued by the package. Bernanke said green shoots in early March and it caught on with little evidence then or now. Oil is going up with storage at record highs, pure speculation. They forget that $55 to $70 was the normal range in boom times and that the $144 price was merely a peak of a speculative blowoff.

It won't sink in that what the Fed and government have done is move the chairs on the Titanic while it is going down. When it hits, the hooks will be set and those that went out with the idea of gambling on a bottom and getting rich will be caught in trap. The debt problem is worldwide and the next problem will be a money grab. If the green shoots, rapid recovery theory was correct, we wouldn't see 90 day t-bills at .16% would we? Remember Bens overnight target is 0 to .25% and 90 days is a long ways past overnight. All this money that has been piled onto the platter will have to be paid back in some fashion, here and abroad. Artificial interest rates only run so long.