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$ Facing A Devaluation Of Some 98% - Denniger

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http://market-ticker.org/archives/2539-James-Bullard-We-Blew-It.html

That's the only take-away I can get from this one....

They studied abstract economies in which the monetary policymaker follows an active Taylor-type monetary policy rule, that is, the policymaker changes nominal interest rates more than one-for-one when inflation deviates from a given target. Active Taylor-type rules are so commonplace in present day monetary policy discussions that they have ceased to be controversial. Benhabib, et al., also emphasized the zero bound on nominal interest rates. They suggested that the combination of an active Taylor-type rule and a zero bound on nominal interest rates necessarily creates a new long-run outcome for the economy. This new long-run outcome can involve deflation and a very low level of nominal interest rates. Worse, there is presently an important economy that appears to be stuck in exactly this situation: Japan.

Yep.

But this is where Bullard loses his connection to reality. He goes on to opine:

Taken at face value, the Taylor-type policy rule has been fairly successful for the U.S.: Inflation (by this measure) has not been above three percent nor, until very recently, below one percent, during the January 2002 to May 2010 period.

Well, taken at face value with inflation numbers intentionally distorted, and thus policy rates set at the behest of intentionally falsified data, one can conclude nothing of value - other than that when you put garbage into a formula, you get garbage back out.

Need I remind Bullard that our inflation numbers (and indeed the OECD's) are all tainted? That until President Clinton we had much-more reliable ones, but even those were manipulated. For instance, counting "owner's equivalent rent" instead of house prices, when a majority of households in fact have fee-simple real estate in their name, is beyond foolish - it's intentionally fraudulent.

Many of the responses to this situation described below attempt to remedy this situation by recommending a switch to some other policy in cases when inflation is far below target. The regime switch required has to be sharp and credible. policymakers have to commit to the new policy and the private sector has to believe the policymaker. Unfortunately, in actual policy discussions nothing of this sort seems to be happening.

.....

I conclude that promises to keep the policy rate near zero may be increasing the risk of falling into the unintended steady state of Figure 1, and that an appropriate quantitative easing policy o¤ers the best hope for avoiding such an outcome.

And here is where Bullard goes entirely off the rails.

"Quantitative Easing", if really practiced, is nothing other than unbacked emission of currency. It is in fact unlawful for The Federal Reserve to engage in this policy.

Scott Garrett made this point when questioning Bernanke recently on The Hill - by "buying" MBS, which in fact do not have a full faith and credit guarantee in perpetuity, Bernanke has set himself to potentially take an action that he is Constitutionally prohibited from taking.

This, incidentally, is why the Federal Reserve Act requires Bernanke to only buy instruments with that guarantee. Bernanke's reliance on the CFRs, which he cites and which apply only to Section 13, that is, discount or loan operations, as justification for purchases of Fannie and Freddie paper of any sort is bereft of validity in that it both violates the black-letter law of The Federal Reserve Act but in addition is unconstitutional on its face - a fact that cannot be fixed with federal regulation - fixing it would require a Constitutional Amendment or a Statute passed by Congress explicitly authorizing the type and amount of "money printing" that The Fed wanted to engage in.

But here's the general problem that Bullard ignores and which is fatal to his argument: Unbacked emission of currency is a death spiral from which you will not escape.

The danger in such a pronouncement is that if it is believed private capital lending instantly ceases, because while your avowed claim is to make "inflation" positive what you're doing is diluting the existing currency without any promise - or ability to deliver - that the outcome will be what and where you want it to be.

In order for such a pronouncement to be credible you must promise to do "whatever it takes" to reach your goal. But "whatever it takes" might be wildly dilutive to existing currency stores, and in fact mathematically it always is in any system where material amounts of credit are outstanding against that currency. In this case there is about $50 in credit for each dollar in currency, so a "money printing" regime to establish a 2% inflation rate from zero would require something on the order of one trillion dollars of emission, or a 50% dilution!

The problem with such a dilution is that it is both permanent and immediate, and lenders of private capital will discern that this is wildly out of whack with what they lent. That is, the lender of capital is entirely within his reasonable belief that the dilution is not 1 or 2% (which he can price for), but fifty percent, which he cannot. He thus immediately leaves the market with his funds.

On a micro level this doesn't seem to be such a catastrophe. But on a macro level it is, because the $53 trillion in loans in the market have duration, and must be rolled. If the average duration is ~5 years in the marketplace for the entire $53 trillion (probably reasonable in aggregate as an estimate) then each year some $10 trillion must roll over.

But with the private lender's wallet snapped closed, the government is now faced with a horrifying problem: there is now $10 trillion of credit that comes due to be rolled, but there are no lenders.

Now what?

The only solution available to the central bank (or the government) in this case is to emit the entire $10 trillion!

But if you do that - just once - then you can bet the other $40 trillion will not roll either.

So let's see the practical effect here - the government and/or central bank is forced to emit the entirety of the outstanding credit base as unbacked currency in order to prevent an immediate deflationary credit collapse. Yet by definition replacing $50 of credit for each dollar of circulating currency would cause a devaluation of some 98%. That is, the $DX, or dollar index, would go from 81 to about 1.6.

No, that last number isn't a misprint.

This would be the literal destruction of the currency.

Incidentally, this is exactly what happened in Weimar, and it is exactly what happened in Zimbabwe.

Why doesn't this happen with the expansion of credit - that is, the Federal Reserve loaning against the emission of Treasuries?

That's simple: The emission of unbacked credit is a naked short against the currency system. That is, it is a promise to pay with something you don't have, but think you can acquire. A secured loan (where the security is worth more than the borrowed amount) carries no such implication, as there is an offsetting asset you are borrowing against. In effect, a secured loan is a liquidity facility, not a credit facility, while an unsecured loan is pure credit - the promise to pay tomorrow for what you wish to eat today, when you have no means to purchase with accumulated surplus at the present time.

Bullard, along with the rest of The Fed, is desperately grasping with his fingernails at a rapidly eroding ledge. The Fed and Congress, in collusion, have put forward policies that resulted in the unbacked emission of credit dramatically beyond owned assets. This caused "prices" to rise dramatically for those very same assets, even though their utility value was not improved.

That is, actual production did not take place to turn a raw good into a finished one with enhanced utility value; rather, a Ponzi Scheme was spawned and maintained where the only increase in value was perceptive.

But all of this unbacked credit emission comes with interest due and payable. When the amount of carried interest obligation reaches the total surplus that the borrower is able to produce, he goes bankrupt. Now the very cycle that led to perceptive increases in value (as opposed to utility value) unwinds. This is the nature of all naked shorts - they are self-limiting as the underlying mathematical foundation has not changed - only perception changed.

The only solution to this problem is to let the perceptive value change unwind. Policymakers, of course, do not like this course of action, as it would force them to admit that they were complicit in intentionally fostering a false belief in the value of various assets - and thus the supposed "wealth" of the population was a chimera - a phantom - a fraud.

In turn it reveals that the supposed "profits" earned by those in the financial system for packaging and "intermediating" all of this faux wealth was nothing other than a sophisticated asset-stripping scheme, founded on that very same fraud, and which came into being at the explicit behest and creation of those very same policymakers!

I wish Bullard luck in his endeavor to cover up the policy acts of the Federal Reserve and Government. He's going to need it, because every indication I have in the metrics I follow say that there is no possible way he can come up with a credible policy move that meets his claimed desires.

The only credible choices that remain before us are to accept the unwind of Ponzi-enhanced "values", or destroy our currency and political system through further puerile and intentionally-fraudulent attempts to conceal the truth.

Denniger clearly thinks they are going to completely trash the value of the dollar.

Still I'm sure none of this will happen as the US is an advance economy no to tin pot 3rd banana republic run by a corrupt political elite.

Just have faith because in fiat that's all you've got believe the hype.

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Guest Noodle

http://market-ticker.org/archives/2539-James-Bullard-We-Blew-It.html

Denniger clearly thinks they are going to completely trash the value of the dollar.

Still I'm sure none of this will happen as the US is an advance economy no to tin pot 3rd banana republic run by a corrupt political elite.

Just have faith because in fiat that's all you've got believe the hype.

No chance.

Watch all the central banks in the East track the dollar. Baht's already starting to lose a little value against it even today.

Race to the bottom.

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http://market-ticker.org/archives/2539-James-Bullard-We-Blew-It.html

Denniger clearly thinks they are going to completely trash the value of the dollar.

Still I'm sure none of this will happen as the US is an advance economy no to tin pot 3rd banana republic run by a corrupt political elite.

Just have faith because in fiat that's all you've got believe the hype.

Did I mention state failure yet?

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No chance.

Watch all the central banks in the East track the dollar. Baht's already starting to lose a little value against it even today.

Race to the bottom.

The world has been doing this for years, it is the logical outcome for a globalised system where companies can play nations off against one another to force their population into working for ever smaller amounts of money.

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In turn it reveals that the supposed "profits" earned by those in the financial system for packaging and "intermediating" all of this faux wealth was nothing other than a sophisticated asset-stripping scheme, founded on that very same fraud, and which came into being at the explicit behest and creation of those very same policymakers!

I wish Bullard luck in his endeavor to cover up the policy acts of the Federal Reserve and Government. He's going to need it, because every indication I have in the metrics I follow say that there is no possible way he can come up with a credible policy move that meets his claimed desires.

The only credible choices that remain before us are to accept the unwind of Ponzi-enhanced "values", or destroy our currency and political system through further puerile and intentionally-fraudulent attempts to conceal the truth.

do they feel lucky

next few years should be fun

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No. But you did mention they don't exist.

How something that doesn't exist can fail, I don't know.

:)

You run out of resources to be able to keep pretending.

:)

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[it started at £20million,

then

200million

then 400 million

then 1 trillion

then 4 trillion

then the day after 5 trillion

now, numbers like 50 trillion are being bandied around...

scared yet? :unsure:

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When America sneezes the rest of the world catches a cold.

When "it began in America" the Eurozone went belly up and had to be bailed out by the ECB. The sovereign debt probelms "appear" to have been solved last week when nearly all the banks passed the stress tests with flying colours. But does anyone seriously believe the EU is now on an even keel?

Globalisation has created interdependence. Most multi-national companies are controlled in some way by the US--even BP has more US shareholders that Brits.

The reality is that the US is the world's largest economy. If that economy sees a devaluation of 98% in its currency it is because that country no longer has a GDP to support it.

Denninger might be a gold bug, I don't know. But this kind of thread is deja vu of about 3-4 years ago when Brown caused the pound to soar to 2.13 at the peak. America was at an end and everyone was hailing the new superpower under Comrade Putin. But it didn't happen and Russia is up to its eyes on Sovereign debt.

The US are first in on the double dip which I still believe is 100% certain and guaranteed. We have felt nothing here yet because we are still basking in the afterglow of Brown's miracle debt that has, so far, no consequences. Speaking of which, my friend just told me tonight that her house has failed to exchnage contracts after 6 weeks of being "sold." I was sorry for her but it reminded me of what is happening beneath the surface of prosperity and a soaring pound--the rapidly disappearing sand beneath the feet of UK Plc.

As go house prices so go we. :(

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When America sneezes the rest of the world catches a cold.

When "it began in America" the Eurozone went belly up and had to be bailed out by the ECB. The sovereign debt probelms "appear" to have been solved last week when nearly all the banks passed the stress tests with flying colours. But does anyone seriously believe the EU is now on an even keel?

Does anyone seriously think that because oen thing fails another must succeed?

Globalisation has created interdependence. Most multi-national companies are controlled in some way by the US--even BP has more US shareholders that Brits.

While they can pay, yes. When the cheques bounce, no.

pipers, tunes etc

The reality is that the US is the world's largest economy. If that economy sees a devaluation of 98% in its currency it is because that country no longer has a GDP to support it.

The reality is that the US is the largest consumer.

Denninger might be a gold bug, I don't know. But this kind of thread is deja vu of about 3-4 years ago when Brown caused the pound to soar to 2.13 at the peak. America was at an end and everyone was hailing the new superpower under Comrade Putin. But it didn't happen and Russia is up to its eyes on Sovereign debt.

he's got some great articles completely trashing gold and can't stand the bugs.

The US are first in on the double dip which I still believe is 100% certain and guaranteed. We have felt nothing here yet because we are still basking in the afterglow of Brown's miracle debt that has, so far, no consequences. Speaking of which, my friend just told me tonight that her house has failed to exchnage contracts after 6 weeks of being "sold." I was sorry for her but it reminded me of what is happening beneath the surface of prosperity and a soaring pound--the rapidly disappearing sand beneath the feet of UK Plc.

Felt nothing?

:unsure:

As go house prices so go we. :(

While we are tied to worthless fiat currencies and their masters, yes. That game has an end point.

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Does anyone seriously think that because oen thing fails another must succeed?

While they can pay, yes. When the cheques bounce, no.

pipers, tunes etc

The reality is that the US is the largest consumer.

he's got some great articles completely trashing gold and can't stand the bugs.

Felt nothing?

:unsure:

While we are tied to worthless fiat currencies and their masters, yes. That game has an end point.

For every action there is an equal and opposite counteraction.

The US is the largest economy and lines the pockets of oil producers and China--they also line our pockets as they are, as a single nation, our largest trading, er, "partner."

So far, no real effects from the bursting of the Brown bubble. FTSE is doing fine, Pound up, Houses still at a reasonable 2006 high (but starting to gather pace again to the downside). No jobs lost in the public sector that anyone would notice.

The world is full of fiat this or that but nothing changes much over the centuries. In an internet driven world and economy it is unlikely that fiat money will be switched to fiat metal as such would be hard to exchange electronically. And can anyone really trust anyone who says they have X amount of silver or palladium in the vault to back whatever it is they are exchanging for something or other. In the end its all about trust.

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For every action there is an equal and opposite counteraction.

Right. And don't eat yellow snow.

The US is the largest economy and lines the pockets of oil producers and China--they also line our pockets as they are, as a single nation, our largest trading, er, "partner."

The US is the largest consumer. if fatty stops eating, we can all have more cake, says the chef.

So far, no real effects from the bursting of the Brown bubble. FTSE is doing fine, Pound up, Houses still at a reasonable 2006 high (but starting to gather pace again to the downside). No jobs lost in the public sector that anyone would notice.

Oh, indexes. You don't look at all that tosh, do you?

The world is full of fiat this or that but nothing changes much over the centuries. In an internet driven world and economy it is unlikely that fiat money will be switched to fiat metal as such would be hard to exchange electronically. And can anyone really trust anyone who says they have X amount of silver or palladium in the vault to back whatever it is they are exchanging for something or other. In the end its all about trust.

And all know for an absolute fact that central bankers cannot be trusted.

:)

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Guess what happens to gold when this happens ...

It becomes irrelevent as the general public have to find their way and gold can't be their choice?

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Gold will be what nations/governments choose. Plans are under way already and have been for some time.

They are just people, Errol.

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No chance.

Watch all the central banks in the East track the dollar. Baht's already starting to lose a little value against it even today.

Race to the bottom.

Don't believe in a 98% devaluation (against what anyway? Against loaf of bread? ). However 20-30% devaluation and increase in valuation against other currencies

happens all the time (GBP/USD goes to $2.10, then back down $1.40 etc).

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  • 153 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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