Re: Financial topics
Posted: Sat Jul 30, 2011 7:01 pm
“… In the earlier work of Marx, however, the idea of creative destruction or annihilation (German: Vernichtung) implies not only that capitalism destroys and reconfigures previous economic orders, but also that it must ceaselessly devalue existing wealth (whether through war, dereliction, or regular and periodic economic crises) in order to clear the ground for the creation of new wealth.”
Aadens- Sat Jul 23, 2011 10:17 pm
On the use of deflationary surgical strikes to stabilize the effects of Quantitative Easing.
Deflation, like any other force of nature, cannot be stopped, but what if it could be channeled in a way that may cause less damage than if it were to whirlpool its way through the world, sucking cash out of circulation from one economy to the next. Were the deflationary effects of major institutional failure first noted as a potential tool during the 80’s with the Continental Illinois and other assorted Savings and Loan failures? Or, more likely, were the deflationary corollaries of just such a malfunction discussed for decades beforehand and judged un-useful (or immoral) at the then current levels of U.S. dollar float? The demise of Long Term Capital Management and the highly visible scrambling to keep the public’s confidence by most of the major financial players may have been a good test case. 2008 however, and the unraveling of Bear Stearns, Lehman, AIG, and multiple other leviathan creditors and other entities sopped up a lot of wilty lettuce out there. I’ve read some estimates of 15 trillion dollars removed from the system after that bout of the autumn vapors suffered by the out-of-favor crowd and their weak and ill counterparts, plus the subsequent bank failures that have occurred to date. (Speaking of which, the FDIC money being credited to the balance sheets of the firms taking over the failed banks is no crisis as of yet. Americans for the most part seem content leaving their funds under the new flags of each bank when it’s taken over. This being a testament to the reputation and management of the FDIC. It remains to be seen, however, how many Americans will renege on their mortgage obligations and the extent of the injury that may cause to the takeover firms and the FDIC. I do not think it will be crushing.)
Back in early 2005 I had a chance conversation with an employee of Ambac. Ambac of course being one of the companies that underwrote many subprime mortgage backed securities. This gentleman was deeply concerned about the underwriting standards of the banks providing the mortgages, how low these standards were going, and their possible effect on Ambac should the newly minted mortgagees run into trouble. I’ve since read that the failure of Ambac alone removed over 1 trillion from the pool of dollars. There are at this time over $500 trillion in derivatives active. During the next crisis, as with the previous one, many will cancel each other out, but there will be spillover. Can the spillover be controlled in a “surgical” manner?
I continue to agree with John that there will be deflation, but I think it will be purposefully routed to the extent possible and occur over a brief period as it did in 2008, to be followed by inflation. The trick will be to judge the out of favor, the weak, and the outright marks that are being positioned to take the shot and not have an ownership interest in these entities or have any savings with them unless insured by a government entity. Or, to short them. And I also think that we may see further deflationary surgical strikes used to contain the ensuing inflation to the extent possible. You often hear that a master of the martial arts knows before an opponent strikes him and is able to strike first. What you never hear (probably because they can’t sell many karate school memberships with it!) is that a true master is one that is not even there when the attack happens.
(The Fifth Maxim of Sun Zi: To win without fighting is the highest achievement of a warrior.) Figure out who’s the mark and don’t be there.
Aadens- Sat Jul 23, 2011 10:17 pm
On the use of deflationary surgical strikes to stabilize the effects of Quantitative Easing.
Deflation, like any other force of nature, cannot be stopped, but what if it could be channeled in a way that may cause less damage than if it were to whirlpool its way through the world, sucking cash out of circulation from one economy to the next. Were the deflationary effects of major institutional failure first noted as a potential tool during the 80’s with the Continental Illinois and other assorted Savings and Loan failures? Or, more likely, were the deflationary corollaries of just such a malfunction discussed for decades beforehand and judged un-useful (or immoral) at the then current levels of U.S. dollar float? The demise of Long Term Capital Management and the highly visible scrambling to keep the public’s confidence by most of the major financial players may have been a good test case. 2008 however, and the unraveling of Bear Stearns, Lehman, AIG, and multiple other leviathan creditors and other entities sopped up a lot of wilty lettuce out there. I’ve read some estimates of 15 trillion dollars removed from the system after that bout of the autumn vapors suffered by the out-of-favor crowd and their weak and ill counterparts, plus the subsequent bank failures that have occurred to date. (Speaking of which, the FDIC money being credited to the balance sheets of the firms taking over the failed banks is no crisis as of yet. Americans for the most part seem content leaving their funds under the new flags of each bank when it’s taken over. This being a testament to the reputation and management of the FDIC. It remains to be seen, however, how many Americans will renege on their mortgage obligations and the extent of the injury that may cause to the takeover firms and the FDIC. I do not think it will be crushing.)
Back in early 2005 I had a chance conversation with an employee of Ambac. Ambac of course being one of the companies that underwrote many subprime mortgage backed securities. This gentleman was deeply concerned about the underwriting standards of the banks providing the mortgages, how low these standards were going, and their possible effect on Ambac should the newly minted mortgagees run into trouble. I’ve since read that the failure of Ambac alone removed over 1 trillion from the pool of dollars. There are at this time over $500 trillion in derivatives active. During the next crisis, as with the previous one, many will cancel each other out, but there will be spillover. Can the spillover be controlled in a “surgical” manner?
I continue to agree with John that there will be deflation, but I think it will be purposefully routed to the extent possible and occur over a brief period as it did in 2008, to be followed by inflation. The trick will be to judge the out of favor, the weak, and the outright marks that are being positioned to take the shot and not have an ownership interest in these entities or have any savings with them unless insured by a government entity. Or, to short them. And I also think that we may see further deflationary surgical strikes used to contain the ensuing inflation to the extent possible. You often hear that a master of the martial arts knows before an opponent strikes him and is able to strike first. What you never hear (probably because they can’t sell many karate school memberships with it!) is that a true master is one that is not even there when the attack happens.
(The Fifth Maxim of Sun Zi: To win without fighting is the highest achievement of a warrior.) Figure out who’s the mark and don’t be there.
