Thursday, Nov 19, 2009

QE: are you buying it?

Market Oracle: Deflationists Are WRONG, Prepare for the INFLATION Mega-Trend

Recently, there have been some arguments expressed on this blog that quantitative easing is a harmless accounting excercise that is not inflationary. I think it's time to put forward an opposing view. Despite the regrettable use of capitalisation, Wayalat's recent article puts an inflationary argument across quite well. So, will the central banks stop quantitative easing and what will the effect on (property) assets be?

Posted by quiet guy @ 01:00 PM (2483 views)
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41 Comments

1. cynicalsoothsayer said...

He can't spell either.

Thursday, November 19, 2009 01:18PM Report Comment
 

2. little professor said...

Interesting article, but was very difficult to read due to the OVERUSE of RANDOM CAPITALS and bold RED TEXT for NO REASON!!!

Thursday, November 19, 2009 01:19PM Report Comment
 

3. jackas said...

The people who hope that QE won't turn out to be inflationary are the same people who hoped house prices would only ever go up.

Tabliod economics, innit.

Thursday, November 19, 2009 01:25PM Report Comment
 

4. will said...

Inflation would lead to higher interest rates, and that wouldn't be good for home owners. 1990's all over again, it lead to high interest rates and wage inflation.

Thursday, November 19, 2009 01:52PM Report Comment
 

5. mountain goat said...

Nadeem is a fairly light-weight trend-following investor, although I appreciate the open minded website he runs.

When you are in debt you don't call the shots. Western governments cannot inflate their way out of this because debt holders won't tolerate it. They are the equivalent of the IMF saying no more loans to Zimbabwe. Once they perceive a commitment to inflate away problems they will sell debt instruments. Whereas currently the debt markets are signalling deflation. Why? -if they believe like Nadeem that we are in for an inflationary future? There is arguably no money printing since the QE money is backed by equivalent bonds. The bond market is clearly buying this argument, if you look at prices. It is nonsense to scream once monetization of debt starts it DOES NOT STOP until the currency is DESTROYED!. Once the bond market believes this assertion, monetization will have to stop. That is what I meant by "when you are in debt you don't call the shots". The smartest investors in the world deal in bonds and they are betting on deflation with their hard-earned. If the bond markets change and signal inflation and governments ignore that signal by continuing stimulus and keeping IR low, only then will I start to take this hyperinflation story seriously. But not Nadeem with his 8 month market rally in a zombie world economy kept breathing by government stimulus programs!

Western governments only call the shots by having the biggest military stick. So either they try pull off a managed deflation of the private, corporate and public debt bubble to keep debt holders happy or they go to war and wipe the ledger book clean.

Thursday, November 19, 2009 01:57PM Report Comment
 

6. montesquieu said...

It's all the usual gold-ramping tosh anyway - isn't that always the subtext behind screams of DEFEND YOUR WEALTH!!!!!!!!!!!

Thursday, November 19, 2009 02:04PM Report Comment
 

7. the number cruncher said...

This Gold Bug stuff gets my goat - as it is just vested interests.

Those that look for speculative gain from capital appreciation, whether its houses, gold, stocks or oil are the greatest problem in our global economy -

Your a bunch of parasites and IMO you should be exterminated with a healthy does of targeted taxation.

If you want money go and earn it through working. GOLD tax sounds fun

Thursday, November 19, 2009 02:13PM Report Comment
 

8. Scotle said...

Im no economist and I understand that there are myriad things that I don’t understand. But is it not correct that if you create more of something (in this case Money) its value will decrease i.e. inflation. This will lessen the real value of debts (on over priced houses) and government / Public sector borrowing, and of course pensions and other savings. ?

Thursday, November 19, 2009 02:14PM Report Comment
 

9. Crunchy said...

This gold bug stuff gets my goat.

I wished I had listened years ago. LOL Inflation all the way!

Thursday, November 19, 2009 02:35PM Report Comment
 

10. tpbeta said...

Since no-one knows whether we're going to get inflation or deflation, loud assertions one way or another in typo challenged inappropriate fonts should be treated with suspicion.

But my money is on deflation, albeit with a bolt hole if I realise I'm wrong in time.

Thursday, November 19, 2009 03:10PM Report Comment
 

11. hpwatcher said...

But my money is on deflation, albeit with a bolt hole if I realise I'm wrong in time.

If we are in a period of deflation, why are prices everywhere going up?

Is it not inflation?

Thursday, November 19, 2009 03:54PM Report Comment
 

12. inbreda said...

I do not believe that deflation of any serious consequence is even possible in a fiat money system. A temporary illusion of deflation might be possible if the government are able to fiddle the inflation figures, but seeing as we all trust our government to be honourable in every possible way, that couldn't possibly happen.

Thursday, November 19, 2009 04:10PM Report Comment
 

13. hpwatcher said...

I do not believe that deflation of any serious consequence is even possible in a fiat money system.

Absolutely not, money can always be printed and dropped from helicopters!



I wished I had listened years ago. LOL Inflation all the way!

Still isn't too late to buy. Gold still has a long way to climb, but it will get there!

Thursday, November 19, 2009 04:16PM Report Comment
 

14. mountain goat said...

@Scotle - it must be seen in the context of lending, lending and more lending for decades on end. That is money creation too, at a breath-taking pace by the private sector. You go to the bank walk out with big wad of cash, created from... thin air. Now when the economy slows down and some of those debts go bad, the lending slows down, house prices fall, falling prices mean financial speculation decreases, the debts keep being paid back. So even though the government tries to spend lots of money, the amount of money in the economy in the broadest terms (i.e. including loans) will actually contract because they will not keep pace with the contraction in the private sector. The doubts come from not knowing what is happening faster.

@hpwatcher - there is a problem with the definition of inflation which is sometimes meant as increasing money supply more than economic expansion, and sometimes as increasing prices. In the long run these two things happen together, but in the short term they don't. Throw in currency fluctuations and the two seem almost unconnected.

Thursday, November 19, 2009 04:16PM Report Comment
 

15. hpwatcher said...

@hpwatcher - there is a problem with the definition of inflation which is sometimes meant as increasing money supply more than economic expansion, and sometimes as increasing prices. In the long run these two things happen together, but in the short term they don't. Throw in currency fluctuations and the two seem almost unconnected.

Yes, but for most the issue is one of relativity i.e. movements in money in relation to the cost of living, savings as this is where the measurements can clearly be seen etc. The expansion of money should always be in relation to the amount of wealth creation, that way, more money does not mean higher prices. Unfortunately, QE is not related to wealth creation, it is related to debt.

Thursday, November 19, 2009 04:34PM Report Comment
 

16. hpwatcher said...

Nadeem is a fairly light-weight trend-following investor

Would you care to suggest someone rather more heavyweight?

Jim Rogers?

Thursday, November 19, 2009 04:36PM Report Comment
 

17. rumble said...

MG, convincing.

Seems we have quite a standoff!

Thursday, November 19, 2009 04:38PM Report Comment
 

18. techieman said...

I think they put it quite nicely here (although this applies to the US the same argument can be made here). BUT remember the whole reason for lowering rates etc is not to inflate but to stave off deflation. If there was no concern about that they wouldnt have done what they have done. If it were really inflationary then we would be seeing some real heavy duty increases in the price of materials in their denomination,

To my mind its like a number of small holes in a damn... you can win the battle but eventually the whole thing collapses under the weight of water. We are trying to shore up the damn but eventually its gonna (IMO) collapse under the deflationary weight.
:
http://www.elliottwave.com/freeupdates/archives/2009/11/12/Hyperinflation-Worries-Laid-to-Rest-Part-I.aspx


http://www.elliottwave.com/freeupdates/archives/2009/11/13/Hyperinflation-Worries-Laid-to-Rest-Part-II.aspx

Thursday, November 19, 2009 04:53PM Report Comment
 

19. mountain goat said...

hpwatcher - I like Jim Rogers but think he talks his book too much, so don't trust his forecasts. John Mauldin and Mish publish stuff on Market Oracle I recommend. But mainly I recommend Robert Pretcher for the big picture.

Rumble - excellent one of my favs

Thursday, November 19, 2009 04:55PM Report Comment
 

20. hpwatcher said...

To my mind its like a number of small holes in a damn... you can win the battle but eventually the whole thing collapses under the weight of water. We are trying to shore up the damn but eventually its gonna (IMO) collapse under the deflationary weight.

I just don't believe that in a fiat more system, deflation is possible. It only occured in the past due to adherence to the gold standard, it simply isn't like that today.

Thursday, November 19, 2009 05:02PM Report Comment
 

21. techieman said...

im really confused by what you call deflation hpwatcher. If you call it the decrease in money (fiat system or not) you have to include other types of money too - i.e. credit. Its the contraction of credit thats the issue here.

you are entitled to a view which may oppose mine - i have no problem with that and it might turn out that you are right. Read the two links i posted - they contrast Zimbabwe with the US, and then see what you think. [hyper] Inflation aint a done deal.

Now as i have said before its the easiest argument to say we will have inflation because thats what has happened before, so the deflation argument should pay the big odds and deflationists will - by that definition - be in the minority.

PERHAPS you can have asset deflation at the same time as (imported) food inflation. But then you will IMO just get a margin squeeze - i dont see any evidence of bumper pay rises following a real or perceived inflation. if thats right (and infact its more than right because of the increase in unemployment) then how are people going to bid up their prices (of their labour)?

If they cant do that then how can you get a wage price (or more accurately price wage) spiral?

Thursday, November 19, 2009 05:21PM Report Comment
 

22. techieman said...

and before you say it..... bankers bonuses excepted :-).

Thursday, November 19, 2009 05:22PM Report Comment
 

23. rumble said...

HPW, Japan?

Thursday, November 19, 2009 05:23PM Report Comment
 

24. inbreda said...

techie - why do you (if I understand correctly) think that the reduction in credit will be deflationary, when the creation of that same credit wasn't apparently inflationary?

Thursday, November 19, 2009 05:35PM Report Comment
 

25. mountain goat said...

Inbreda @24 - even though question not aimed at me, surely house price bubble classes as inflation?

Thursday, November 19, 2009 05:37PM Report Comment
 

26. hpwatcher said...

Hi,
by deflation I mean there is a decrease in the general price level of goods. So there is less money being spent and - therefore borrowed - so the price of goods drop. Basically a shortage of money.

Thursday, November 19, 2009 05:54PM Report Comment
 

27. quiet guy said...

@little professor & tpbeta

Yes, I agree it's a pity Walayat chose to 'decorate' his prose in a way that could easily put readers off the content of his article.

Thursday, November 19, 2009 06:25PM Report Comment
 

28. chrisa said...

Deflation was, and still for the moment remains, a lovely piece of BoE propaganda sold to the masses by the likes of Edmund Conway and Ambrose Evans Pritchard at the Daily Telegraph, and others, in order to justify QE the purpose of which has been shown to be around 99% to do with buying UK government debt. This is the only reason deflation is trumpeted.

Thursday, November 19, 2009 06:29PM Report Comment
 

29. quiet guy said...

Would anybody care to comment on this part:

"the Debt bubble is NOT deleveraging, the bad debts are being dumped onto the tax payers! The huge derivatives positions that act as the icebergs under the ocean as compared to the asset price tips that we see above water are not contracting but expanding!"

If Walayat's assertion that derivatives are increasing in value is correct then that appears to offer a counter to the deflationist argument that credit is declining at a faster rate than central banks create money hence we are experiencing deflation (as defined by Austrian school economists.)

Thursday, November 19, 2009 06:37PM Report Comment
 

30. icarus said...

There are inflationary and deflationary forces and how they play out is complicated as well as politically influenced. But Walayat isn't the one I'd choose to guide me through the maze.

Thursday, November 19, 2009 06:38PM Report Comment
 

31. quiet guy said...

@the number cruncher and montesquieu

OK, so you don't like gold but Walayat doesn't say anything about the shiny stuff in his article. I was hoping to start a discussion about his theory that we are experiencing inflation.

Thursday, November 19, 2009 06:41PM Report Comment
 

32. rumble said...

Inflation defined as increase in money supply, we must be experiencing 'cos of QE, even if it's not reaching the general public, and not a whole lot of debt is getting written off. So if QE stops, money supply is no longer inflated, bad debt gets written off -> deflation. Separate thought: if no QE is reaching general public, the banks are only lending to "trustworthy borrowers" who then buy shares etc IF* they are lending roughly the same amount as previously then stock market is inflating by roughly the same amount as hpi + cars + ps3 (gen pub spending) was inflating... yes?

Thursday, November 19, 2009 07:34PM Report Comment
 

33. the number cruncher said...

quiet guy @ 31
I have nothing against gold - it is nice and shiny and a utterly irrelevant metal apart for some specialist uses in chemistry, electronics and putting on my wife's hand when we got married.

What I do have a problem with is people who are trying to manipulate others opinions for their own financial advantage. They are no better than the bankers and speculators who keep this world in the state it is in.

Walayat seems to have a common thread throughout all his postings and that is buy gold.

I think people should work for their Income by being useful to other members of the community. All forms of capital gains on speculative investment based on changes in valuations of assets should be taxed to a point that make them not worth the effort. That is the main reason this forum exists, is it not?

Thursday, November 19, 2009 08:10PM Report Comment
 

34. techieman said...

Inbreda @ 24 -

http://209.85.229.132/search?q=cache:Qm7Pc2A0PX0J:www.goodeandallen.com/upload/ota/Essays_and_Articles/Defining%2520inflation%2520deflation%2520money%2520and%2520credit.doc+hamilton+bolton+deflation&cd=8&hl=en&ct=clnk&gl=uk

This part in particular:

"At some point, a rising debt level requires so much energy to sustain - in terms of meeting interest payments, monitoring credit ratings, chasing delinquent borrowers and writing off bad loans - that it slows overall economic performance. A high-debt situation becomes unsustainable when the rate of economic growth falls beneath the prevailing rate of interest on money owed and creditors refuse to underwrite the interest payments with more credit."

There are therefore two questions:
1. have we reached that point,
2. have we done enough to arrest its development.

1. is clearly true (the savings rate has gone up and liquidations whether by debt being delinquent or being paid off has happened)
2. The jury is out, and i concede that what governments have done may have worked (my view is that it hasnt and wont but i could be wrong).

You could argue that the governement has stepped into the shoes of the banks so that while"creditors refuse to underwrite the interest payments with more credit." - the government has stood in and therefore not refused.

However as is becoming very clear this cant last and it may very well be that we have a further contraction in demand caused by the increasees required in taxes to pay back this PSBR. Therefore whichever way you look at it demand contracts, credit contracts, which means that margins contract etc etc.

The government (and the tories would have done the same - although there is a separate argument whether they would have let us get here [i think they would have]) have thrown the dice and have got everything crossed, but the peeps arent playing ball

Perhaps GB thinks he can stem the tide but he is the modern day king canute!

Thursday, November 19, 2009 09:10PM Report Comment
 

35. quiet guy said...

@the number cruncher

"Walayat seems to have a common thread throughout all his postings and that is buy gold."

I was very surprised by that comment - not my impression of Walayat at all! Out of interest, I had a look at the index of articles he has written for Market Oracle:
http://www.marketoracle.co.uk/UserInfo-Nadeem_Walayat.html

Out of 221 articles he published in 2009, only 4 mention gold in the title. Your criticism of Walayat as a gold ramper seems very unfair to me.

"All forms of capital gains on speculative investment based on changes in valuations of assets should be taxed to a point that make them not worth the effort."

I don't believe in taxing money and that's all gold is: a form of money that is relatively safe from fiat devaluation. As it happens gold investments except for legal tender coins are subject to CGT anyway.

Thursday, November 19, 2009 09:39PM Report Comment
 

36. hpwatcher said...

Walayat seems to have a common thread throughout all his postings and that is buy gold.

I have never regarded Walayat as a gold bug.

Thursday, November 19, 2009 10:19PM Report Comment
 

37. d'oh said...

Number cruncher: you were probably saying the same things about gold in 2000.

I'm glad I didn't listen to people like you back then. I find some British people's lack of understanding of how much of the rest of the world's population views gold quite astounding. The visceral hatred of it by some is perplexing. In Australia, the gold price is reported on the news every single night, and has been so since I can remember - the last 30 to 35 years at least.

Yes, it is pretty darn useless except for a few minor uses in electronics etc. and you don't get a non-capital returns on investment, but it is no less useless than pieces of paper or electronic records with your bank. Gold is money. It has the properties of money, and in hard times many populations have turned to it as a means of preserving wealth. Anyhow, if you think gold is barking mad, consider the Pacific islanders who use the ownership of large rocks (some of which are lost beneath the ocean waves, as a record of wealth.

Thursday, November 19, 2009 11:10PM Report Comment
 

38. devo said...

Which would be the better token of currency:

Something of value, like coffee beans?
Or something comparatively useless, like conkers?

Thursday, November 19, 2009 11:26PM Report Comment
 

39. quiet guy said...

@techieman 9.10pm

An extract from your article:

"Financial Values Can Disappear
People seem to take for granted that financial values can be created endlessly seemingly out of nowhere and pile up to the moon. Turn the direction around and mention that financial values can disappear into nowhere, and they insist that it is not possible. "The money has to go somewhere...It just moves from stocks to bonds to money funds...It never goes away...For every buyer, there is a seller, so the money just changes hands." That is true of the money, just as it was all the way up, but it's not true of the values, which changed all the way up."

I was struck by the choice of words "The money has to go somewhere". I can remember having the a discussion with a friend about the property market with exactly the same phrase used regarding property values.

Thursday, November 19, 2009 11:38PM Report Comment
 

40. d'oh said...

Devo @ 38: Neither, because both grow on trees (well, plants at least)...just like paper money. As they are easy to produce, their value should be more or less equal to their cost of production as any deviation will be arbitraged by farmers.

Of course gold has value only by common assent. If everyone decided that it wasn't worth anything, it would be worth more or less nothing...just like a paper currency. The fact is that gold and silver have had long histories of being valued and considered a store of wealth by many human societies, hence they considered a store of wealth by humans now. It's value as money is based on the belief that others believe it is money and, as long as enough people believe it is valuable, then it is valuable. It's just one great big bootstrap process.

The other advantage gold has is that it is relatively difficult to inflate - there are no more South Americas and Australias to discover on the planet.

Friday, November 20, 2009 05:02AM Report Comment
 

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