Minderbinder
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Posts posted by Minderbinder
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I think this links in very nicely to EDM's "Absurd inflation" thread and my "Fiat money" thread.
Indeed.
It is the potential for a similar scenario in this country that I have been attempting to highlight. People are losing faith in policy-makers to preserve the value of their currency. The Russian population, because they have been there before and recognise all the signs, are ahead of us in converting their cash into dollars or buying hard assets or even going on holiday before the rouble becomes as good as worthless.I genuinely believe we could see a similar response in this country. I also expect exchange controls to be imposed sooner rather then later.
Disclaimer: I don't really know what I'm talking about.
Anyway, as I understand it, a currency has value largely because foreigners buy it (exchange it for their currency) in order to buy assets denominated in that currency. So GBP has value as long as foreigners continue to buy goods and services from the UK (stuff denominated in GBP).
Maybe we'd have a currency failure if we didn't poduce anything much of value. Maybe that's possible in these deflationary times, and given so much of what we produce is in the financial services sector?
I guess the Ruble has value because countries buy a lot of commodities from Russia. Commodity prices are falling heavily and that seems likely to continue as demand falls heavily. Presumably that's the reason for Ruble weakness? Also, isn't oil denominated in USD? And USD has strengthened dramatically because of the ongoing debt unwinding (so much world debt is USD denominated)?
I don't think these currency falls are due to loss of faith in the currency. It is not due to CBs printing or fear that they will. They are due to falling demand for goods denominated in those currencies.
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To take just your first point (because I think the others depend on this) in general the rules of the money game are that the savers and prudent will be rewarded and the debtors and defaulters will be penalised. It seems of late that these rules have been changed.
Which is why I was making a distinction between rules and law. Many of the rules we associate with money are not even stated, they are assumed. But they all contribute towards building the confidence that is required for fiat money to succeed.
Yes, that is true. But when too many have been imprudent, then the system punishes everyone.
Too many defaults destroys those prudent saver's deposits. Too much credit destruction means precious little credit for even the creditworthy. Too little credit means well run businesses collpse. Unemployment rises sharply. Everyone stops spending because they fear their income stream is in danger.
That is the deflationary spiral we're staring into.
Some here think the we should let the deflation proceed unchecked. But they will suffer too. Isn't it better to stop that destructive spiral, to help the prudent? The profligate are still going to get creamed anyway.
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This is what I was thinking.
But I think there are a few advantages to debt forgiveness over 'quantitative easing'.
1. It's instant.
2. It is for a defined amount, no more, no less, so there is no chance of Gordon accidentally forgetting to turn the presses off...
3. It plays much better in people's mind as a final solution to the crisis so things can get back to normal.
I realise that any nation doing this alone is doomed, but as our Lord and Saviour of The World keeps telling us, global problem. So do it globally then.
Quantitative easing is for a defined amount. That's where the 'quantitative' bit comes in. In QE, the BoJ 'printed' to keep prop up stricken banks, while maintaining its own cash reserves above a certain level.
http://europe.pimco.com/LeftNav/Viewpoints...tive+Easing.htm
QE would enable mass defaults to take place without bankrupting banks or destroying depositor's money. And it would allow asset prices to fall to new levels accordingly, as reposessed assets were sold off.
Your across the board debt forgiveness has similar effect, but much more so. You would be writing off debt that could have been paid back, as well as debt that couldn't. So you'd have to print a lot more money, and asset prices would fall much further, far more wealth would be destroyed.
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...........so why are most of us still playing by the rules? Governments and banks ceased to play by the rules years ago.
Not sure what you mean here. There are laws that dictate what actions a central bank and government can take with respect to the money supply. In the US, I believe these are ensconced in the Federal Reserve Act and that (for example) it stipulates that the Fed can buy (with newly created money) treasury debt and 'agency' debt (not sure what this means .. government-sponsored agencies such as Freddie and Fannie?). The Fed's recent quatitative easing announcements expressed its intent to buy commercial debt-based assets fom banks etc. I have read elsewhere that the Federal Reserve Act does not permit this, and this course of action would be illegal. I do not know the veracity of these claims.
If true, that's a valid complaint that those in power changing or simply breaking the 'rules', i.e. the law. Otherwise I think there are many cases of those in power simply chaning their strategy. It might feels like they're breaking the rules because we don't understand what the strategy changes are, why they have been made and what will be the result. We feel powerless to defend ourselves from the impending economic havoc because we can't tell what it will be. There's also an inclination for some to believe the actions of governments and central bankers are mendacious.
You and most inflationists on this thread seem to be arguing that high/hyper inflation wll arise people will because people will lose faith in the currency. I'm not sure that counts as inflation in the sense that EDM means. Its more a matter of complete currency failure. Not sure, but I think you're arguing that loss of faith in the currency will become manifest as runaway inflation, and not the other way around.
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Bankruptcy is debt-forgiveness.
But it comes with strings. The bankrupt loses most of their assets and may have to pay a portion of future earnings to repair the damage. As others said, the damage is that someone's capital is destroyed when a debtor defaults.
Not sure what the OP is suggesting ... write down 50% of all outstanding debt, even if its not about to default?
The credit-crunch mayhem basically stems from a larger than expected number of defaulters on debt. So a global write-off of more debt would be like the credit crunch only much, much worse. More insolvent banks (well if that's possible). Bigger taxpayer handouts. Instead of our childern paying for it, we'd have the next 7 generations paying.
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It certainly is going round in circles with such unsubstantiated and therefore rather pointless posts such as this
I have no problem with you ripping my argument to bits. I just have a probem if you make pointless comment that add nothing to the debate. If you feel it is going round in circles you could always save yourself the energy of posting
Just sayin' ... EDM has spent a lot of time and effort in the last couple of days responding to posts like the one you just made, and it looks as though you haven't read them. Most of the thread (esp EDMs posts) are well worth reading.
E.g.
The forces at work in the economy are enormously deflationary, and to fight them you need to try to reflate the economy with the reflationary policies, much as you need to use disinflationary policies to fight inflaiton....
Where was the hyperinflation in the US after their reflation of the mid-1930's? Please don't tell me it's different this time. It isn't - this is hugely deflationary and we need hugely reflationary methods to deal with it.
To say that printing money under any circumstances is inflationary is simply moronic.
I'm banging my head against a wall here: No one is trying to create inflation - even a little bit of it! They are trying to mitigate/reduce deflation...One more point to make here (or to repeat from my first post in this thread). Yes inflation needs fire-fighting when it is too strong. You fight inflation with disinflationary policies, but that doesn't mean you get deflation form fighting inflation.Deflation also needs fire-fighting - many see it as more difficult to fight - and the way you fight it is with reflationary policies. But that doesn't mean you get inflation from it.
It's like saying that a sky-diver shouldn't use a parachute in case it gets caught in a tree.
Inflation is difficult to control once it gets too large. Not because it is technically difficult to get down, but because the cure for it has nasty consequences once inflaton is high enough, but it has to be brought down all the same. Some people here believe that policy-makers will not notice inflation or its leading indicators until it is too high. I don't agree with them.As for inflation accidentally over-shooting: If it does, it will be the shortest inflationary period in history. Believe me, these guys know about inflation - as PM says they have been fighting it for more than a generation. There is absolutely no reason to think that they are incapable of the (pretty lazy, I have to say) thinking going on among the inflationists here.They can make a mistake by not doing enough to combat deflation as well as not draining narrow money when the time comes. Given that they have loads of experience fighting inflation and none fighting deflation, I would think they (especially here and in the Eurozone) are more likely to make the former mistake than the latter. -
But, stopping deflation is inflationary.
In vague answer to the OP's question, there should be at least one more absurd inflation thread because this one is going round in circles.
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It isn't the newspaper cutting costs. The jobs section is compacted because there are no jobs.
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Can't find it now but on the BBC website there was also a story about how he denied deflation was a threat.
Same article (beeb just retitled it):
Speaking to a key Commons committee, he added that deflation was not a risk. -
It is obvious there a problems with a system of debt-based fiat currency. But where is the better alternative? The only plausible alternative is a gold standard, and that has problems too. Especially as the shiny stuff is dug out of the ground in large quantities in only a few countries. Better to base your monetary system on the labour of your citizens, so you are master of your own destiny.
The Spandiard likes to argue that the problem with debt-based fiat is: who controls the supply. He advocates state control of the money supply, and an end to credit creation by private banks.
He doesn't go so far as to suggest an end to fractional reserve, but others (including mish) do. I guess you could have debt-based fiat without fractional reserve.
The problems are deep and complex. There is no known, proven alternative. A former denizen of the Fed said: "We are absolutely without a permanent monetary system".
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Mish wrote an interesting piece on the subject last year: "Why does fiat money seemingly work?". I'm not convinced by all his arguments, but its still a very good article ...
http://globaleconomicanalysis.blogspot.com...ingly-work.html
The two major pillars of the system are based on coercion: directly via the legal tender laws (which decree that fiat currency must be used/accepted for all payments of debt, public or private) and indirectly via the value imputed to government debt which rests on the faith in the government’s ability to extort enough future tax revenue to be able to repay its debt.This latter point is extremely important for the system to function. Government bonds are the tally sticks of our age, and serve as the main ‘backing’ of bank notes and their digital counterparts in circulation. They are what is tying the government and the banking system together, via the central bank.
The central bank has the power to ‘monetize’ such debt by creating money out of thin air, however, this roundabout way of going about it is an essential part of the confidence game, the creation of the illusion of value.
In a free market with a relatively stable supply of money, the supply and demand for money would still be subject to fluctuations similar to that for other goods, depending on time preferences. The free market interest rate would at all times correctly signal to entrepreneurs what the state of time preferences was at a given point in time, allowing them to allocate capital in the most efficient manner.A fiat money system with interest rates administered by a bureaucratic central economic planning agency meanwhile constantly sends wrong signals to entrepreneurs about expected future demand and the true cost of capital and thereby encourages malinvestment.
The phases during which credit expands and malinvestments proliferate are known as "economic booms", and everybody loves them. When the liquidation phase occurs, otherwise known as "busts" few people are aware that it is the preceding booms that are at fault. And so the cry for more monetary and fiscal intervention arises, which lengthens and deepens the malaise by putting malinvested capital on artificial life support.
Government mandated fiat currency simply does not work in the long run. We have empirical evidence galore – every fiat currency in history has failed, except the present one, which has not failed yet.
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It has everything to do with coaxing populations to engage in a different set of risky behaviours to all of the previous sets of behaviours which have been practiced to excess in the past (the successes we term "productivity" - some in the peanut gallery would term the failures "academia", but the point remains).
Outside the Goldilocks bands of tolerance, we want neither super-risk-aversion nor super-risk-affinity. We wish to constrain the less welcome outcomes which derive from the highly correlated behaviours a population would otherwise pursue once a game-winning (or losing) strategy is discovered.
But the problem is that the everyone has just realized:
1) They are too heavily indebted and need to pay down debt, not take more on
2) They may not have a job & income for much longer
Do policy-makers expect people to borrow and spend in those circumstances? Pretty much all economic activity now seems high-risk.
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The full story is, fiat currency has no value apart from trust and confidence IN POLICY MAKERS.
The value of debt-based fiat currency is in the ability of the populace to do productive work, and the government's ability to raise revenue through taxes on that productivity.
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We must want the future that policy-makers will next attempt to engineer.
Unfortunately for most people, even the best future that policy-makers can engineer is bleak. Tough sell.
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The ratio, developed in 1969 by Nobel Prize-winning economist James Tobin, shows the Standard & Poor’s 500 Index is still too expensive relative to the cost of replacing assets, said Napier. While the 39 percent drop in the index this year pushed equity prices below replacement cost, history suggests the ratio must sink further as deflation sets in, he said. The S&P may plunge another 55 percent to 400 by 2014, Napier said.
http://www.bloomberg.com/apps/news?pid=new...id=aKNSK0gYlqB0
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FT article:
http://www.ft.com/cms/s/0/8979777c-c591-11...?nclick_check=1
Effectively, there isn't any CDS market now....
For several years, I have been among those calling for thoughtful, prudent, moderate steps for the reform of the credit default swaps market.
I was wrong. The global credit default swaps market should just be liquidated, the contracts allowed to expire and the booby traps defused.
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There are three possible defences for treating the CDS market as a going concern: its support for capital raising, its utility for price discovery and its role as a risk-management tool. All have melted like so many Lehman deal cubes in waste incinerators.
Noel?
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I still fail to see a method for this government to print. One way would be to issue notes directly to employees as payment. They are prevented to do this as currently that would be counterfeit money.
You said something similar in another thread this week. Can EDM please clarify this a bit?
Bloo Loo thinks the BoE will not "print". I think he means that the BoE will only create narrow money that is backed by new government debt, i.e. the treasury will auction new gilts, investors will buy them, and subsequently the BoE will buy them from investors using newly created money. Right Bloo Loo?
But I think that quantitative easing is "printing", i.e. it is buying assets with newly created money that is not backed by newly created government debt. If the BoE (like the Fed) embarks on quantitative easing, it will create new narrow money to buy commercial debt-based assets from banks.
EDM, what do you say?
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No, if they wanted low yields enough, they would just cap secondary market bond yields much as they did in the 1940's - simple and effective.
Sorry, that's too technical for me. What I'm getting at is the often expressed fear that at some point the UK (or any other) government will fail to attract sufficient investment for its bonds and so will have difficulty in funding bailout nation. I guess foreign investors might leave first and there's little the government could do about it. But they could drum up more domestic investor appetite by forcing banks to buy.
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Supermarkets sell out of tin foil.
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No, they wouldn't be forced to buy treasuries. I am saying that even if they used their excess reserves to buy treasuries in the secondary market, it still means that more money is in the system than if they had left it in the form of excess reserves at the Fed.
You didn't say banks would be forced to buy treasuries, but it has been said elsewhere and discussed here.
http://ftalphaville.ft.com/blog/2008/12/05...sa-and-bondage/
I was wondering if the two things are connected. Very low or negative interest rates isn't attractive to investors, maybe causing bond auction problems for governement sometime soon .. forcing banks to buy treasuries mitigates the problem?
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I got my notice a couple of weeks ago. Will get paid for most of next year. In IT, btw.
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Sounds like the beginning of the sub-dom crisis.
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These exchanges remind me of ...
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Excellent article from Robert Peston:
http://www.bbc.co.uk/blogs/thereporters/ro...wcapitalism.pdf
... he summarises the present mess, how it happened, who's to blame, and hints at what happens next.
Economic conditions in 2009 will be treacherous. There'll be a formal recession in most developed economies, and the economic contraction is highly likely to be moresevere in the UK than almost anywhere else.
When loans were used to buy houses, or to support property developments, or to finance hedge funds that trade in every imaginable security and commodity, or to fund the buyouts of companies by private equity firms, these loans pushed up the value of assets. This rise in the value of assets sparked yet more lending, often at higher ratios of the loan to the value of the asset, to do more deals – which in turn pushed up asset prices further.As we entered 2007, whether you were borrowing several billion pounds to buy a company or £250,000 to buy a house, lenders were prepared to lend you almost 100% of the purchase price with few strings attached.
There's a subtle but important point here. There were twin connected bubbles in assets and credit. Both of those bubbles have burst. Falling asset prices are leading to losses for those who borrowed to buy those assets (hedge funds, private equity firms, billionaire corporate raiders, banks, homeowners). And as they struggle to pay their debts, they sell other assets, driving down the price of those assets and causing losses for other borrowers. And when they can’t repay banks, the resources of banks are depleted, which means there's less credit available – and no 100% mortgages or other loans – which drives down asset prices further, which leads to a further contraction of lending, and so on in vicious cycle of decline.
Who's to blame?...
The authorities in the US and the UK were aware of the dangers of allowing the financial and trade deficits with China and other exporting nations to persist. They could have corrected these deficits by using tax and interest rate policies to reduce our rampant consumption. But they chose not to do so, because it all looked too difficult. Our own Government turned a blind eye to all the evidence that a rampant lending binge was taking place, because the Exchequer was receiving all those lovely tax revenues from the housing and City bubbles
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But it’s quite hard to hard to mount a convincing argument against the notion that most at fault were the banks and bankers – because they systematically failed to do what they were handsomely remunerated to do, which was to properly assess the risks of all that lending.
Homes For £100,000
in House prices and the economy
Posted
http://www.guardian.co.uk/money/2008/dec/1...prices-property
Don't get too excited as their second example is a derelict barn for 110k.