1. drewster said...

For once I think Anatole is right. The only way to ward off deflation is to print money. The alternative is Icelandic-style collapse.

3. andrew said...

So if all else fails, just give up and print money, however you wrap this package up it still stinks like a freshly baked turd.

I am sure the Chinese will not be overjoyed either.

5. drewster said...

andrew - If the Chinese are sitting on a stack of US Treasury bonds, they could sell them now and make a nice profit. Look at this chart of 10-Year Treasury Yields over the last two decades (low yields = high values). Note that the data ends in 2006 - I can tell you that today, treasury yields are around 2.20%, far lower than at any point on that graph. That means prices are far higher, which means the Chinese could easily cash in their chips and leave the casino.

(source: www.eurotrib.com + www.theoildrum.com)

The UK situation is different; but then the Chinese don't hold nearly as many UK bonds as US ones.
Overall - China isn't a big angry superpower. House prices in Shanghai are plummeting, factories are shutting down, millions of jobs are being lost and workers are thrown out in the cold with no welfare safety net. They have more than enough domestic troubles without worrying about where they've stashed a few dollars.

Inbreda - First of all, this thing is global. The US is printing money, the UK will soon, the Eurozone will have to, even China is getting in on it. There is no decoupling. If everyone prints together then all currencies remain stable against each other.
Secondly, even if other countries don't print, you can still have both inflation in imported goods and deflation in domestic non-tradable goods & services. When your food costs more but your salary is less, that's a bad combination of inflation and deflation. It leaves people with less money in their pockets; and therefore causes house prices to fall.
Thirdly, if a collapse in currency was all it took to kick-start the property market, we'd all be scrambling for a buy-to-let in Reykjavik. Priced in pounds, Icelandic homes are probably very cheap right now...

7. andrew said...

Anybody who has been following any newspaper for the last 2 weeks must see how this is being gently fed to us as a good idea.

Zero interest rates don't work, so print money, and don't worry, no it will not be like Zimbabwe or Germany, it's different this time, err, where did we hear that argument being used last ?

9. drewster said...

andrew - Would you rather suffer 10% inflation, or see the company that you work for go bankrupt because they can't afford the wage bill? Of course I wish we weren't in this situation in the first place. However from where we are now, printing money is the lesser of two evils.

11. doom&gloom said...

I am a long-time reader of the Times, and three years ago I used to read his column daily with interest, but now he just frightens me. He is as wrong as he could be with everything he writes IMO. He is in the same league as Gordon Brown with his delusional thinking.

Even his title is wrong: "We NEED pampering". From what exactly? After years of excess borrowing and the fulfilment of material wants, does he mean we need 'pampering' from the harsh reality of where we are now? This 'pampering' is in fact borrowing the money from the prudent and from our future generations to 'pamper' the voters of today.

He writes, "Without such tender care from central bankers and politicians, the year ahead could easily bring the death-throes of the globalised capitalist economic system". The problem is excessive debt within the Western economy, and what he always advocates is exactly what will, 'bring about the death-throes of the globalised capitalist economic system'.

His statement that "By cutting interest rates from 1 per cent to zero, the Fed opened the door to...a sort of economic Wonderland in which money can be distributed free to citizens and where governments can spend and borrow at will, without any increase in borrowing costs." just helps to demonstrate that he is living in financial-fantasyland.

Suggested money-printing methods incude, "for the Fed to buy safe assets, such as government bonds, mortgages...". The fed buying government bonds is the Fed 'buying' it's own debt. And since when have mortgages been safe? This is simply advocating taking bad credit from private balance sheets and transferring it to the taxpayer's balance sheet.

He continues, "The next option is to buy risky assets - commercial mortgages, bundled-up credit-card loans, perhaps even houses or shares. By making new money available for private sector mortgages, shares or other risky assets, the Fed would be able to drive up their prices making the private sector genuinely richer. Even more importantly, it could make new credit available directly to businesses and homeowners, bypassing the paralysed private banks - an example that the Bank of England and British Government should soon emulate if they have any sense."

The western debt experiment is doomed, and I'm off to buy gold. Now P4AC has been banned, someone has to fly the flag.

13. Poacher said...

Drewster, re your graph, surely Chinese holdings of US treasuries are so massive that they could only sell the tiniest proportion without (a) jeopardising the US treasury's chances of getting subsequent bond issues off the ground which would be counterproductive and (b) flooding the market and so driving up yeilds on the remainder of their holdings.

On another front, are the yeilds really so low on US gilts purely because of a flight to quality (which seems to be the press consensus) or is it because the Fed are effectively buying more treasuries than just their coupon passes suggest (i.e. have some of the Fed funds that Bloomberg can't get details on been used to soak up treasuries by some mechanism or another and, in so doing, improving banks and bond funds liquidity positions?).

15. Kruador said...

Printing money = inflation is a false statement in the modern economy.

When first stated, bank-created debt was a much smaller proportion of the overall money supply. Cash still made up 50% of the money supply. Increase that money supply faster than the increase in goods bought, and you get inflation as too much money chases too few goods.

Cash money now makes up less than 2% of the bank-created debt, due to our moves toward a cashless society - electronic bank transfers, and so on. Almost no-one is paid in cash. And I'm not even counting the non-bank money creation.

The bubble was largely caused by banks creating too much money as debt, causing rampant inflation - but of houses and commodities futures, not actually things that the CPI was tracking, so it all *looked* fine.

Now as people pay back their loans, and don't take out new ones, actual money supply is either contracting a bit - deflation - or not increasing with the pace of production - I'm not sure we're actually in recession until we see what small businesses are really doing (they can't be included in headline inflation/GDP statistics because we just don't have any data until we see their tax returns, up to a couple of years after the event). The government has already 'printed' lots of money by borrowing it from the banks (who created it from thin air) to give back to them as capital. Yes, the same money appears on both sides of the balance sheet, but because of the wonders of leverage, just borrowing and crediting the other side of the sheet makes the bank look solvent again.

Zimbabwe does not have an electronic economy, so printing paper money did indeed cause inflation.

17. Poacher said...

Drewster, yeah you are right, the $650bn is not so massive a sum when compared to the TARP (wierd how what seemed like incomprehensibly huge numbers a year or two ago seem run of the mill these days - surely that's inflationary...) so yes market mechanisms alone (i.e. supply vs demand) wouldn't necessarily do that much harm. The effect on sentiment could be pretty hefty though.

Thanks for Mish's summary re. discount window lending heading into treasuries - that makes a lot of sense. Assuming they buy historic as opposed to new issues of treasury debt they will add considerable liquidity that way and it also works to their advantage in terms of making equities a more attractive medium term investment too, which is reflationary too.

19. bellwether said...

Drewster II'm pretty much with you on all of this.

Poacher, the US will just print dollars to honour chinese debt ie efffectively default. It's a nil sum game, everyone is bound together in this mess, interdependant. If this had happened after a further 5 years I'd have been worried about a shift of power but China isn't up to that yet. Thankfully.

21. Hobdoll said...

Doom and Gloom @11 Excellent post.
I am now getting very worried about where we are heading and likewise I intend to move to gold,(never though I would say that). Will open an account with the Perth Mint today.
Hob

23. This comment has been removed as it was found to be in breach of our Blog Policies.