Tuesday, Aug 24, 2010
Ground Control to Uncle Tom
Pragmatic Capitalist: Myth of the great bond bubble
UT apologies for the weak Bowie pun but you recently described the attached artivel as "Tripe" when I led it as supporting the proposition that bond yields signal deflation and not a bubble. UT if you pick up on this could you make some specific arguments re the article.
As general observation I have yet to see a convincing explaination as to how infl will happen, beyond the vaguest of references to QE. There seem to be 2 major obstacles to inflation (1) however we look to devalue our currency everyone is at so it must becomes nil sum - inflation is, if nothing else, a relative phenomenon (2) how would a surfiet of £/$ get into the system, usually this would be via wage spiral as in the 1970's but that is not happening. People are just glad to stay emp and suck it up.
7 Comments
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1. uncle tom said...
Major Tom to bellwether:
This guy is so full of his own self-importance, he seemingly can't see the elephant in the room.
He goes on about bubbles needing a 'disequilibrium' as he puts it, but seems blind to the fact that the US government creating money to buy its own bonds is just such an situation.
You could take the argument further, and say that all US taxation is unnecessary, because the govt can go out and create all the money it needs.
The likely upshot of these games is that the dollar price of everything the US imports will steadily climb, forcing inflation into their economy.
2. Crunchy said...
Price Inflation coupled with wage stagflation and higher taxation = Hyperinflation in the pocket = Hyperinflation wherever one looks.
WWIII may help the dollar some but the price of petrol and transportation?
Wer'e doomed Mr Mainwaring!
I can't think why people are still entertaining the idea of deflation before a complete collapse.
I feel some 'here' have learnt little, perhaps that's the reason. You are welcome to prove me wrong. :)
3. stillthinking said...
I think the bond bubble does have some truth to it.
At the moment money is disappearing, borrowers are vulnerable to and are being short-squeezed, and the mechanism for the temporary disappearance of cash is the move to government bonds, equivalent to cash, which being hoarded effectively disappear. The only way to avoid deflation is for this hoarded money to be pumped straight back in to the economy via deficit spending.
However, there is a limit to deficit spending because the government has a limit on how much they can realistically raise to repay, and the UK has already gone past the limit, unfortunately restricted more by existing government debt, pension liabilities, demographics etc etc
So the choice will be to either accept deflation (i.e. let debt funded bubble speculators take their losses) or go past the limit.
As this impacts on the solvency of the banking system apart from particularly in the UK the adjustment, if too quick, causing mass unemployment and repossessions quite aside from insolvent banks, there is a very real chance for the UK and US that they will go past this limit and issue more debt than they can realistically pay.
So I think that the bubble does exist, because it is not necessarily rational to believe that government debts can be repaid once they go past a certain limit and both the UK and the US are not reigning in spending even now. I find it hard to believe that both central banks will finally take the step of purely printing money irrespective of what they say, but at the same time they have steadfastly refused to allow deflation to reduce asset prices to a level where it is profitable to borrow money (and increase the money supply) to buy them.
4. mark wadsworth said...
Bellwether, agreed. Low interest rates are a sign that most people expect a depression and low inflation. They might all be wrong, but that seems unlikely.
5. Crunchy said...
3. mark wadsworth said..."Bellwether, agreed. Low interest rates are a sign that most people expect a depression and low inflation. They
might all be wrong, but that seems unlikely."
Hasn't unlikely been the theme of the decade. Why change now.
2. stillthinking, Yes, covert printing and some currency manipulation. Sorry, my manners, QE.
6. cyril said...
It seems to me that high inflation is inevitable because the Chinese and others have been supplying cheap goods for a while now, but now they are consuming the world's resources to supply their own increasingly affluent populations.
7. mountain goat said...
The article seems pretty reasonable, although in the short term bond prices do look "over-bought".
I agree with what Stillthinking wrote above. If you don't let a major credit bubble burst but instead bailout the lenders then you get the Japanese style liquidity trap. You get the deflationary impact of debts that need to be paid back, and when the debts are mortgage debts then the recovery is very slow because the debts are paid back slowly.
China may be selling but within the USA there is massive Treasury buying potential, if everyone expects a long recession as MW wrote. US pension funds still hold historically low levels of Treasuries, and as boomers go on pension these funds need to moved into safer and less speculative assets.