ALL BLOG POSTS AND COMMENTS COPYRIGHT (C) 2003-2014 VOX DAY. ALL RIGHTS RESERVED. REPRODUCTION WITHOUT WRITTEN PERMISSION IS EXPRESSLY PROHIBITED.

Tuesday, June 25, 2013

Inflation vs deflation XI

I'll start off this last round in the debate by pointing out that I have most certainly not claimed that federal spending somehow doesn't count as inflation. I was simply pointing out that the Federal Reserve's attempt to inject money into the economy has been effectively limited to one delivery vehicle because the banks and households have proven to be surprisingly ineffective channels for doing so. Again, Nate inadvertently shows how his refusal to accept the intrinsic relationship between credit and money renders his analysis incorrect.

I very much agree that “for the purposes on inflation it doesn't matter who's spending the new money”. And I agree that “government spending is merely the delivery method for injecting it into the economy”, but what Nate is failing to mention here is that government spending isn't the only, or even the primary, delivery method used by the Federal Reserve. The significant thing is that government spending is the only delivery method of the four the Fed has been attempting to utilize for the past five years that has worked at all. Despite the larger part of the Fed's efforts being directed at the financial sector, that credit sector has continued to shrink. So has the household sector despite the attempts to replace the housing sector bubble with an education bubble. The corporate sector has responded, a little, but the $1.8 trillion increase since 2008 is barely more than half the contraction in the financial sector.

Nate claims that prices are rising everywhere across the board and that it doesn't matter where the government spends the new money. Both assertions are incorrect. Gold prices are down 24 percent since the start of the year. Home prices are up 1.1 percent in that same time frame, but are still down 29 percent from their 2006 peak. Gasoline prices are up from January, but have been trending down since the spring of 2012. And the inflated stock market is showing every sign of a steep, long-overdue price correction. But these are merely symptoms, and short-term symptoms at that. I see them as reflections of the credit disinflation, Nate sees them as signs of incipient hyperinflation. Only time will tell who was correct, so there is no point in further belaboring the price issue.

Nor do I see any point in providing an extended explanation of why Ben Bernanke appears to be signaling an end to the quantitative easing program, or the significance of the initial indications that Shinzo Abe's massive attempt to print money in Japan is failing, because Nate took things in a rather different direction with his focus on the idea that hyperinflation is a psychological phenomenon rather than a material one. Those who are interested can find effective summaries of those two not-insignificant events on Zerohedge. Nate wrote:

Hyperinflation is what happens when people decide that the fiat money they have in their pockets and in their accounts is no longer going to be honored in the future and start spending it as quickly as possible.  That is the unstoppable train of inflation.  The printing presses cannot be stopped because the people will not stop spending the money as soon as they get it.

But this perspective on hyperinflation again fails to account for credit, which is how most people are spending most of their money these days. Even when literal credit cards aren't involved, they are paying their bills with direct bank debits and debit cards that draw from their credit money account. If one considers the recently reported fact that 68 percent of Americans possess less than $800 in savings, it should be clear that they simply don't have any fiat money in their pockets. To quote the report: “After paying debts and taking care of housing, car and child care-related expenses, the respondents said there just isn't enough money left over for saving more.” Emphasis added. Nate's unstoppable train simply doesn't have enough of an engine to leave the station, especially when the credit money that is in those accounts begins vanishing in the inevitable bail-ins. 

In considering the possibility of hyperinflation versus the likelihood of deflation, it is important to do something we have not yet done in this debate, which is to examine the differences between the present situation and the most famous historical hyperinflation. As has been previously noted, in the USA, L1 total credit has remained very close to flat since 2008, increasing only 11.2 percent in five years. By contrast, in the period leading up to the Weimar hyperinflation, the Reichsbank debt increased from 3 billion to 55 billion marks between 1914 and 1918, and to 110 billion by 1920.  

"Businessmen found it very profitable to borrow money from the bank and buy up goods, shares and companies. Their debt was wiped out within weeks by the rapid inflation, and the businessman remained holding the valuable assets he had bought. The net result was a huge "private inflation" caused by the rapid expansion of credit.... By October 1923, 1% of government income came from taxes and 99% from the creation of new money."

It should be readily apparent that Weimar represented a very different scenario than the one we observe today.  We are not seeing an increase in private borrowing, but rather, a net contraction. This means the only way hyperinflation can even theoretically begin in the present circumstances is if the Federal Reserve elects to permit the debtors in the various debt sectors to pay off their debts rather than encouraging them to default by raising interest rates, and uses the government to begin electronically injecting dozens of trillions of dollars into the economy through the mainstream equivalent of food stamp cards.

Is it possible? Theoretically. Is it improbable. I think so, which brings this entire debate back to the beginning, which is that one's opinion on hyperinflation versus deflation depends entirely on one's belief that the Federal Reserve is willing and able to choose the former over the latter. Setting aside the fact that there are already those who believe that Bernanke has followed the Depression-era Fed's lead in choosing the latter on the basis of his cryptic remarks concerning “tapering”, it is my contention that the Fed is not only unable to massively inflate, but that it is totally unwilling to do so.

Nate will have the last word, but since you've indulged his imagination concerning the widespread abandonment of the dollar, perhaps you'll indulge mine concerning the motivations and mindset of the Federal Reserve in the present environment. Inflation and hyperinflation benefit borrowers. Deflation benefits lenders, as they are repaid in increasingly valuable currency. Default also benefits lenders as long as the collateral backing the loan exceeds the value of the outstanding debt. So, in closing, I will simply ask you one simple question: at this point in time, is the Federal Reserve a net borrower or a net lender?

By way of example, let me propose a hypothetical scenario that is perhaps a little outlandish, if not completely in the zone of economic science fiction. The Ciceronian political cycle predicts aristocracy, not tyranny, as the post-democratic political system. And what would be a more effective way to legally establish a wealthy aristocracy with a relative minimum of societal disorder than to encourage vast indebtedness, then trigger mass defaults by raising interest rates, which then results in the acquisition of title to all of the defaulted collateral?  Even the most hard core libertarian couldn't find anything to complain about such an action; (merely the idiocy of the centralized structure that permitted it to happen), and it would be a damn sight more legal than three-quarters of the activities with which the administration's agencies occupy themselves these days.

Labels: , ,

145 Comments:

Blogger Nate June 25, 2013 9:12 AM  

HEY! Look at this!

I haven't even read it yet.. but I just want to say I'm thrilled to see it posted. I know how busy you've been and I know better than most how much goes into these things.

Thanks mate.

Hangman's Body Count, my response, will be up tomorrow morning.

Anonymous FUBAR Nation Ben June 25, 2013 9:12 AM  

The problem with Nate's analysis is wrong is that hyperinflation has never occurred in an advanced developed economy. The reason it happened in Germany was that the communists attempted a takeover and foreigners and citizens lost all faith in the German government to honor its debts.

That is why there will be no hyperinflation in Japan or here.

What's actually more likely is a huge dollar rally since the US is still the best game in town. Look for dollar/euro parity.

Anonymous jack June 25, 2013 9:12 AM  

What would be, in your opinion, the best example of a system where aristocracy actually was able to effectively rule a population and provide at least some of the freedoms our Founders felt were 'God given rights'? This could be a nation state or a sphere of influence perhaps. [my own limited sense of history would be the far reaching British empire at its height'.

Anonymous Toby Temple June 25, 2013 9:20 AM  

Finally!

Time to read long and hard again.

Anonymous VD June 25, 2013 9:25 AM  

Thanks mate.

Sorry about the delay. The thing that was taking me so long was that I either had to write something that went on for about ten pages, most of which was irrelevant to your argument, or just set it aside and address the main argument. I would have preferred to do the former, but I just don't have the time. But this should address the heart of the matter.

I leave it to the readers to decide which scenario they find more credible after they read your piece tomorrow, to which I will, of course, link.

Anonymous Josh June 25, 2013 9:29 AM  

This was a very good response, although I think for most of the readers it's inconsequential, since Vox and Nate have been talking past each other for the last several portions of the debate.

Vox has done an excellent job showing how this isn't Weimar. And given the historical comparison, the Fed will have to massively expand its balance sheet to even get the ball rolling.

Anonymous Salt June 25, 2013 9:30 AM  

One thing I have noted is rents, and most especially those pertaining to business. Anecdotal, local per Sq.Ft. is coming down. Not that so many don't try for the gold ring, but it's brass people are willing to pay.

Anonymous Josh June 25, 2013 9:31 AM  

Vox, in addition to the mass default rising interest rates would create, it would also collapse the US Government, which would seem to benefit the rising aristocracy.

Blogger Nate June 25, 2013 9:31 AM  

"The Ciceronian political cycle predicts aristocracy, not tyranny, as the post-democratic political system. And what would be a more effective way to legally establish a wealthy aristocracy with a relative minimum of societal disorder than to encourage vast indebtedness, then trigger mass defaults by raising interest rates, which then results in the acquisition of title to all of the defaulted collateral? "

Oh you dirty bastard.

Anonymous The other skeptic June 25, 2013 9:40 AM  

It is surprising to learn how enterprising some at the FBI are.

Blogger swiftfoxmark2 June 25, 2013 9:44 AM  

"And what would be a more effective way to legally establish a wealthy aristocracy with a relative minimum of societal disorder than to encourage vast indebtedness, then trigger mass defaults by raising interest rates, which then results in the acquisition of title to all of the defaulted collateral?"

Like what Joseph did to the Egyptians when they were starving. Only we aren't starving, which makes such a scenario even more tragic and foolish.

And what most people fail to recognize is that Joseph's actions probably gave way to the genocidal policies enacted against his own people centuries later.

Anonymous Catan June 25, 2013 9:45 AM  

Isn't the whole aim of the banking establishment to inflate, then pop bubbles, in order to maximize their acquisition of real wealth?

Popping the bubble they have been inflating for the last several years (and decades) would be what benefits them, not hyperinflation which would endanger their system altogether.

Anonymous Josh June 25, 2013 9:46 AM  

Deflation benefits lenders, as they are repaid in increasingly valuable currency. Default also benefits lenders as long as the collateral backing the loan exceeds the value of the outstanding debt. So, in closing, I will simply ask you one simple question: at this point in time, is the Federal Reserve a net borrower or a net lender?

If deflation benefits banks, would the only reason the banks have been so afraid of deflation be 1) that they are net borrowers and 2) default doesn't benefit them because the collateral for their loans is worthless?

Anonymous Josh June 25, 2013 9:50 AM  

Isn't the whole aim of the banking establishment to inflate, then pop bubbles, in order to maximize their acquisition of real wealth?

Yes and no. Banks like inflation because they get to use the newly created money first. The problem is that banks have no capital reserves and go bust when the bubble pops.

If your model for running a bank is to make your borrowers go into default so you can take their stuff, it's a pretty bad model. Banks don't like to own stuff other than money.

Anonymous VD June 25, 2013 9:52 AM  

If deflation benefits banks, would the only reason the banks have been so afraid of deflation be 1) that they are net borrowers and 2) default doesn't benefit them because the collateral for their loans is worthless?

Yes to both. Remember, despite managing the whole system, the Federal Reserve is owned by a very small number of banks.

Anonymous VD June 25, 2013 9:57 AM  

Isn't the whole aim of the banking establishment to inflate, then pop bubbles, in order to maximize their acquisition of real wealth?

Their aim is to simply skim off the top and live off the churn. But the core of the establishment is not going to risk their own wealth and power in a futile attempt to extend the game on behalf of the outer circle.

Anonymous stg58/Animal Mother June 25, 2013 9:57 AM  

The best aristocracy I can think of is a society ruled by male land owners. An aristocracy whose doors are open to all men willing to work hard to lift themselves into the class of men who own property and have a stake in the future of the society they live in.

All women should wear tight clothing, and all men should carry powerful handguns.

Anonymous Josh June 25, 2013 9:58 AM  

Remember, despite managing the whole system, the Federal Reserve is owned by a very small number of banks.

Looking at the Fed's balance sheet, lots of their assets are worthless bonds. What types of assets would you foresee them acquiring in the future in order to facilitate the defaults? Natural resources, commodities, precious metals, real estate? And how would the public reaction be managed?

Blogger swiftfoxmark2 June 25, 2013 10:00 AM  

The best aristocracy I can think of is a society ruled by male land owners. An aristocracy whose doors are open to all men willing to work hard to lift themselves into the class of men who own property and have a stake in the future of the society they live in.

All women should wear tight clothing, and all men should carry powerful handguns.


Given our current corporate culture, I doubt that will come to pass.

Blogger aaron June 25, 2013 10:01 AM  

"Banks don't like to own stuff other than money." Hmmm banks are sitting on a ton of foreclosed homes, not even putting them on the market. Perhaps they are being subsidized with gov't money to do so or are waiting for something....

The American Ideal has been debased to one word: Expansion. Every company is trying to own everything.

I wouldn't be surprised if in the next decade people live in places like FirstNationalBankville

Anonymous Josh June 25, 2013 10:03 AM  

Hmmm banks are sitting on a ton of foreclosed homes, not even putting them on the market. Perhaps they are being subsidized with gov't money to do so or are waiting for something....

If they sell them, they have to recognize those losses on their books and, boom, goodbye bank.

Anonymous VD June 25, 2013 10:05 AM  

Looking at the Fed's balance sheet, lots of their assets are worthless bonds.

Which could be traded for Federal land, tax-farming rights, etc.

Anonymous Josh June 25, 2013 10:05 AM  

I wouldn't be surprised if in the next decade people live in places like FirstNationalBankville

I would be. Banks have no desire to be landlords. It's much less lucrative than their traditional business models.

Anonymous zen0 June 25, 2013 10:08 AM  

@ Josh:
And how would the public reaction be managed?

What public reaction?

Anonymous Josh June 25, 2013 10:09 AM  

Which could be traded for Federal land, tax-farming rights, etc.

Good point. So it's the return of the publicani and latifundia?

Would the collapse in value if all their mortgage bonds be irrelevant then?

Anonymous Salt June 25, 2013 10:10 AM  

Vox, your Ciceronian scenario is most apropos. Question is, will the aristocracy be of people or government?









Blogger tz June 25, 2013 10:18 AM  

Thy creditors might get title to the defaulted collateral, but they can't make it be worth something. Consider the toxic junk on the Fed's balance sheet. There are MBS or sales for homes (or what is left of them) in Detroit.

Consumption itself destroyed capital. The debts are not collateralized by capital, but by the derivative daisy chain / pinwheel. People whohave promised to write a check to cover the debt if someone else defaults.

Blogger Nate June 25, 2013 10:21 AM  

"Yes to both. Remember, despite managing the whole system, the Federal Reserve is owned by a very small number of banks."

Must I point out that banks made a killing during Weimar?

They don't fear hyper-inflation.

Anonymous Salt June 25, 2013 10:32 AM  

Thy creditors might get title to the defaulted collateral, but they can't make it be worth something.

They don't have to, as most collateral has a value greater than zero.

Anonymous TheExpat June 25, 2013 10:33 AM  

hyperinflation is a psychological phenomenon

But deflation is even more so.
http://research.stlouisfed.org/publications/mt/page12.pdf
Until the velocity line starts trending steadily upwards, I'm just not seeing any signs of hyperinflation.

I think that the U.S. and the West may eventually get higher inflation and then hyperinflation, but only as a final Hail Mary type last grasp before everything goes to hell, and that we will see deflation and defaults first. The reason is that deflation and defaults may result in destitution and bread lines, but those can be managed to an extent. Hyperinflation, on the other hand, has always led to conflict/war and the ultimate collapse of that society into chaos. Hyperinflation is the End Game.

Blogger Nate June 25, 2013 10:33 AM  

"They don't have to, as most collateral has a value greater than zero."

Actually much of Vox's case is predicated on much of it being worth exactly 0.

Blogger Positive Dennis June 25, 2013 10:35 AM  

I am with Yogi, it is difficult to make predictions especially about the future. I have no idea what the various governments will do when the fecal matter hits the air circulation device. But ask yourself a question. What benefits the rich and powerful? That is what will happen.

Blogger Nate June 25, 2013 10:36 AM  

"I think that the U.S. and the West may eventually get higher inflation and then hyperinflation, but only as a final Hail Mary type last grasp before everything goes to hell, and that we will see deflation and defaults first."

Hyper-inflation will not be a planned event. It will happen between 2015 and 2016 and will happen entirely independently of Fed action or planning.

Anonymous p-dawg June 25, 2013 10:41 AM  

Doesn't Stanek v. White already tell us that whoever issues a note or negotiable instrument owns the debt discharged by that note, even if no legal obligation remains? I believe that would give the Federal Reserve legal grounds to take every asset of the US and its possessions in the event of a default by the USG. In other words, haven't they already set the stage for the end-game you're describing, the same way the land banks did to the farmers in the Great Depression? I am sincerely requesting correction if I'm mistaken.

Anonymous Porky June 25, 2013 10:41 AM  

Vox, your Ciceronian scenario is most apropos. Question is, will the aristocracy be of people or government?

It's neofeudalism. The Lords are the banksters. The Vassals are politicians. The Clergy is the intelligencia and the media.

And you will either be a serf or a slave.

Blogger Brad Andrews June 25, 2013 10:48 AM  

I have wondered why the stock market wouldn't boom in a hyperinflation situation. Where else would the money go?

I suspect that is one of the reasons it is doing so well now. Not much else and hiding it under the mattress is not compelling today.

====

Another thread, but I had heard that silver coins are more available now. I don't know if that is true or not though.

Blogger tz June 25, 2013 10:49 AM  

How much is Times Beach Missouri worth? Or any EPA Superfund site. Remember things can be worth LESS THAN zero if they require taxes, fees, etc. Cities are going into the banks on the foreclosed properties that become a nuisance. That is one reason they don't want to foreclose - then they have to pay the taxes and keep up the property (and have deep enough pockets for the cities to go after).

Student loan debt currently can't be removed in a bankruptcy, but I don't think that will last forever, and it doesn't matter if it can't be repaid anyway.

Also, "collateral" might be a claim on gold, but ask Portugal how good their claim on Lehman was. Or the various other suspensions of delivery in favor of cash settlement. The Bundesbank is going to repatriate it - over many years, and the Queen visited the Bank of England and saw the potemkin vault.

Anonymous TheExpat June 25, 2013 10:52 AM  

Hyper-inflation will not be a planned event. It will happen between 2015 and 2016 and will happen entirely independently of Fed action or planning.

Well then, we have an event and an approximate time frame, so time to break out the popcorn and wait.

Blogger Nate June 25, 2013 10:54 AM  

"Well then, we have an event and an approximate time frame, so time to break out the popcorn and wait."

Yes. I've said from the begining if by the end of 2016 it hadn't popped I would concede that Vox was correct.

Given that Vox's time frame stretches into the 2030s I don't think it unreasonable.

Anonymous Porky June 25, 2013 10:58 AM  

I wouldn't be surprised if in the next decade people live in places like FirstNationalBankville

Think "Frito Lay Retirement Village" or "Google Agricultural District" and you'll be in the ballpark.

Anonymous TheExpat June 25, 2013 11:01 AM  

I don't think it unreasonable.

Not unreasonable at all, but I will be watching the velocity chart in any case. If the line starts trending sharply up or if they stop publishing it a la M3 statistics, I'll give the incipient hyperinflation case a bit more weight.

Blogger Nate June 25, 2013 11:04 AM  

"Not unreasonable at all, but I will be watching the velocity chart in any case. If the line starts trending sharply up or if they stop publishing it a la M3 statistics, I'll give the incipient hyperinflation case a bit more weight."

I don't think it will be something you'll see on a chart before hand. I think its more like a catastrophic event. Remember the Baltic Dry Index Chart from 2008 that showed the epic crash? Something like that...

Anonymous Salt June 25, 2013 11:04 AM  

Actually much of Vox's case is predicated on much of it being worth exactly 0.

I agree that an asset greatly overpriced with no buyers is worth nothing at sale, but that's due to skewing of the marketplace rather than an asset having an actual zero value.

Blogger James Dixon June 25, 2013 11:05 AM  

> Is it possible? Theoretically. Is it improbable. I think so...

I'll have to disagree on this point. I think it is not only probable, I think it's inevitable.

> And what would be a more effective way to legally establish a wealthy aristocracy with a relative minimum of societal disorder than to encourage vast indebtedness, then trigger mass defaults by raising interest rates, which then results in the acquisition of title to all of the defaulted collateral?

Well, it's not like it hasn't been done before. But that assumes the government debt can be resolved somehow. Speaking of which...

> I believe that would give the Federal Reserve legal grounds to take every asset of the US and its possessions in the event of a default by the USG.

I'm sure it does. But I haven't noticed our government being bound by the law anytime lately, have you? If you think the government is really going to honor their debt to the Fed, I have a bridge and some ocean front property to sell you.


Blogger Nate June 25, 2013 11:07 AM  

"Another thread, but I had heard that silver coins are more available now. I don't know if that is true or not though."

You still can't find them around here but Monex has them. obviously. The thing to remember is... how many claims are out there on silver and gold... vs how much silver and gold there actually is.

There is a giant disparity... and that means that after this protracted buying opportunity... things should get interesting on a level previously considered insane.

as in.. actually having just a few ounces of physical gold in your hands could actually make you rich.

Blogger Ciphra Summam June 25, 2013 11:11 AM  

I'm going to go back and re-read the original posts. Thanks Nate and VD, this debate is one of the best I've viewed.

Anonymous TheExpat June 25, 2013 11:12 AM  

Kitco apparently has silver coins in stock, albeit at around a $3.50 - $4/oz premium.
They also show 1oz bars at around a $2/oz premium.

Anonymous Porky June 25, 2013 11:14 AM  

So I'm assuming all you hyperinflationistas are mortgaged to the hilt then?

Anonymous Hoots June 25, 2013 11:17 AM  

What about the political factors? The fed and its owners might benefit by calling in the collateral on widespread defaults, but the political outcry would be tremendous. The same would happen if the Fed created hyperinflation. Both would rightly be seen as failures of the banking/financial system. It seems like they're increasingly walking a tightrope and their "independence" is at risk. I think they have the ability to go in either direction, but have to consider the very survival of the debt-serf system.

To inflate they could expand purchases to any asset they wanted to support (as they have done with housing). It would require some drastic rule changes, but they could do it in theory. To deflate, they just reduce purchases, or even sell. Much easier. By definition they can never be insolvent. Fed (or Federal Reserve system) credit IS the currency, so the fed's capitalization ratio is meaningless since the denominator (liabilities) is zero risk by definition as long as at least one entity in the whole world is willing to borrow.

Is there an error in my summary?

Presently, there is a window to blame the next deflationary event on China/Japan and deflect political blowback. Methinks they'll take advantage.

Blogger Nate June 25, 2013 11:20 AM  

"So I'm assuming all you hyperinflationistas are mortgaged to the hilt then?"

Do you also assume that the deflationists are hording cash?

Anonymous liljoe June 25, 2013 11:23 AM  

The US National Debt can never be repaid, so the US will default. Vox, have you considered the possibility of debt repudiation? The US govt will just turn to the fed and say," look our debt is zero now, let's start over." Where else is the Fed going to go? China?

Anonymous Porky June 25, 2013 11:26 AM  

Do you also assume that the deflationists are hording cash?

Well... you sound so confident....

Anonymous Starbuck June 25, 2013 11:26 AM  

as in.. actually having just a few ounces of physical gold in your hands could actually make you rich. - Nate

Nate,
Could you expand on this a little bit? I am curious as to why you said that. Because I can't quite figure this one out. Why would small amounts of gold make you wealthy? When gold just maintains wealth. It doesn't build wealth. Or so I have been told.

Anonymous VD June 25, 2013 11:28 AM  

I'm going to go back and re-read the original posts. Thanks Nate and VD, this debate is one of the best I've viewed.

You're welcome. I hope it has proved, if not exactly interesting, at least informative.

Blogger Subversive Saint June 25, 2013 11:29 AM  

@VD You're mind is a scary place sometimes

Anonymous VD June 25, 2013 11:30 AM  

Vox, have you considered the possibility of debt repudiation?

That is a form of default. It's one theoretically potential outcome, to be sure, but highly unlikely given the fact that the officials responsible for taking any such action are selected and vetted by the parties to whom the debt is owed.

Blogger Nate June 25, 2013 11:30 AM  

" I hope it has proved, if not exactly interesting, at least informative."

hey! there are least 4 commenters who thought it was interesting. So... that means there had to be at least... 12 lurkers or so that also thought it was interesting.

Blogger James Dixon June 25, 2013 11:32 AM  

> Kitco apparently has silver coins in stock, albeit at around a $3.50 - $4/oz premium.

Apmex also seems to have some supplies in stock.

Blogger James Dixon June 25, 2013 11:34 AM  

> ...hey! there are least 4 commenters who thought it was interesting.

Well, I thought it would be obvious that I would find it interesting, so I didn't feel the need to mention it.

Blogger Nate June 25, 2013 11:34 AM  

"Could you expand on this a little bit? I am curious as to why you said that. Because I can't quite figure this one out. Why would small amounts of gold make you wealthy? When gold just maintains wealth. It doesn't build wealth. Or so I have been told."

Because, as Vox has said many times, we are in uncharted territory. Its possible, and at least one badass trader is predicting, that Gold will not just store value... but will itself spike in value because we have, through shenanigans, created a kind of proxy shortage of it.

Imagine everyone thinking they own something... only to find out there are only handful of such things in existence. How much would those things suddenly be worth?

Blogger Nate June 25, 2013 11:35 AM  

"Well... you sound so confident...."

Its a debate. how exactly do you expect me to sound?

Anonymous Salt June 25, 2013 11:38 AM  

Why would small amounts of gold make you wealthy? When gold just maintains wealth.

That would be covered under the Last Man Standing theory. Given so many (the majority) hold no gold (or silver) at all, even a small amount would confer wealth.

Anonymous VD June 25, 2013 11:39 AM  

Your mind is a scary place sometimes

No, what is scary is that I am a dumbed-down version of the people who are actually in a place to make these decisions. They're smarter than I am and understand more than I do. I understand the way they think, to a certain extent, and I'm not entirely unsympathetic to their perspective.

But I suspect they underestimate the complexity of the world and their ability to control it. Success makes everyone complacent and contemptuous.

Anonymous Toby Temple June 25, 2013 11:54 AM  

Great move on the Weimar comparison. Vox makes a compelling case here for deflation.

I look forward to Nate's rebuttal.

Anonymous Mr. Nightstick June 25, 2013 11:55 AM  

But I suspect they underestimate the complexity of the world and their ability to control it.

This is why the so called "skeptics" of the world have failed us. They should be going after these people rather than religious folk because it will be these people that do the most damage.

Anonymous John Regan June 25, 2013 11:58 AM  

First, isn't it quite obvious that the Fed must be net lender? Isn't that the nature of the beast?

Anyway, rising interest rates. What are the effects, assuming they can even engineer such a thing? Let me think it through a bit on here, because I appreciate any other opinions on the matter I might get.

First, lender's existing "assets" collapse in value. Can't see how this is anything other than certain and unavoidable.

Second, what can the lenders do to address that? Get busy making new loans at higher rates.

Third, any qualified potential borrowers sitting on the sidelines who have been waiting for their moment to jump in and borrow will do just that. It would seem unlikely that there are any significant numbers of such individuals or businesses. The federal government, of course, will still have a voracious borrowing appetite regardless of higher rates, but then Ben has said that there's going to be "tapering".

Accordingly, it seems to me that the Fed cannot engineer higher rates, especially if they intend to start the "tapering" process with respect to their buying up of government debt. Moreover, even if they could engineer rates nominally higher it wouldn't matter, because their only reliable borrower of any size is the US government.

Moreover, even assuming the lenders are content to seize all the collateral - and the better argument is that they're not, VD is right that their game is "churn and skim", in fact they're not even equipped to possess the collateral beneficially for themselves or anyone else which is why they simply turn places into ghost towns; in fact, the whole "seize the collateral" enforcement device is an in terrorem mechanism that begins to lose its power the more it is used - it is a losing proposition for them the more it happens. The more they seize, the less value it has.

So again, where you wind up is that neither inflation nor hyperinflation is anywhere in sight.

But deflation is.

Anonymous John Regan June 25, 2013 12:01 PM  

Also, I should add I don't see any reason they would want higher rates. What's the benefit?

Anonymous Noah B. June 25, 2013 12:02 PM  

A few random points... if we adhere to the 2033 timeline for collapse to occur, and if we assumed that a Weimar-like hyperinflation would take ten years to unfold completely, then it's worth pointing out that we still could have another ten years before the process of hyperinflation even becomes noticeable.

Also, is there any disagreement at this point that deflation, if allowed to occur to any significant extent, would lead to systemic collapse? If that contention holds true, and the endgame for the Fed is a collapse of the economy leading to an aristocratic/neofeudal system, then what is the Fed waiting for? Couldn't they bring this about at any moment simply by halting the creation of new money? I don't discount the possibility of the Fed intentionally moving toward neofeudalism, but thus far, the Fed's actions do not seem entirely consistent with this scenario.

And if inflation is not desirable to the banks, why has the Fed desperately been attempting inflation for the past five years? The only logical explanation I can find is that the Fed has been providing the minimum level of inflation that it believes is necessary to prevent systemic collapse, hoping that the growth of credit bubble will resume at some point. Otherwise, it's hard to imagine why the Fed would want inflation, as it's a certainty that banks would love to be repaid in more valuable currency. That may not be a realistic option, however. The choice banks face may now lie between receiving real profits as interest payments in devalued dollars or experiencing real losses from widespread foreclosures. This is no difficult decision for the banks.

Blogger Nate June 25, 2013 12:03 PM  

"Also, I should add I don't see any reason they would want higher rates. What's the benefit?"

because if they don't raise rates... by 2014 they will actually be losing money.

The Fed doesn't lose money.

Blogger Nate June 25, 2013 12:05 PM  

I'm starting to wonder if some of you guys have actually read the debate posts at all.

Anonymous Noah B. June 25, 2013 12:06 PM  

"So I'm assuming all you hyperinflationistas are mortgaged to the hilt then?"

No, I'm neither that confident or that brave.

Anonymous Josh June 25, 2013 12:07 PM  

And if inflation is not desirable to the banks, why has the Fed desperately been attempting inflation for the past five years? 

Because most of the banks are insolvent, and inflation masks that.

Anonymous Salt June 25, 2013 12:09 PM  

hoping that the growth of credit bubble will resume at some point.

The party has been good for the banks. Best to keep it going till it can't.

Anonymous Noah B. June 25, 2013 12:09 PM  

Exactly, Josh. So inflation is not only desirable, it's an absolute necessity for them.

Anonymous CunningDove June 25, 2013 12:17 PM  

"So I'm assuming all you hyperinflationistas are mortgaged to the hilt then?"

No, because it is always the little guy that gets forced to repay that which is owed. Either through tax increases or "violations of the law" resulting in his property being confiscated.

The underlying theme of today's world is that the right hand does not know what the left hand is doing. Many people will think that they have a great plan & will be positioned to come out well. Some will be right, most will be wrong. Going forward, if it is not in your possession, it has no value.

Our society is also shifting to one based on envy. If you are perceived as being one of the "haves", you will be targeted by the angry hoards. Mortgaging to the hilt will give the impression that you are a "have". Better to not play with fire.

Also, like Noah B. said... I'm not that confident that I am right. All the best laid plans of mice & men.... and such.

Anonymous VD June 25, 2013 12:18 PM  

Also, I should add I don't see any reason they would want higher rates. What's the benefit?

To force the default and seize the collateral.

And if inflation is not desirable to the banks, why has the Fed desperately been attempting inflation for the past five years?

Don't confuse the Fed with the banks. The Fed will help out the banks until it is no longer in their interest to do so. Then it will shut them down. Think of the banks as the milk cows and the Fed as the farmer. It will milk them as long as it is viable, then sell them for hamburger.

Blogger IM2L844 June 25, 2013 12:20 PM  

I hope it has proved, if not exactly interesting, at least informative.

It's been both and I expect it will become even more so as events unfold.

Anonymous Bank Of Canada June 25, 2013 12:20 PM  


We are Canada's central bank. We work to preserve the value of money by keeping inflation low and stable.

Anonymous allyn71 June 25, 2013 12:22 PM  

"Exactly, Josh. So inflation is not only desirable, it's an absolute necessity for them." - Noah B. June 25, 2013 12:09 PM

To create inflation they have to have someone to lend the money to. Who would that be?

That has been the crux of Vox's entire position. Despite how bad they might want to lend, they can't because there is no one to lend to.

Interest rates have been at record low levels for a record amount of time and all sectors of credit have been basically flat except Government. The Government sector, while quite large, can't make up the difference for the other debt demand sectors. This has also been covered in the disinflation posts from a couple of weeks (or so) ago. Despite what the cat lover believes, the demand for debt is not inexhaustible and we can only hover or go down from here.

Blogger tz June 25, 2013 12:23 PM  

@VD But I suspect they underestimate the complexity of the world and their ability to control it. Success makes everyone complacent and contemptuous.

It is not so much underestimating, but forgetting that in order to understand or model anything you need to simplify and to remove or reduce variables which are small or slow, but not really constants, and there is an error term. Every so often I'm asked if it is possible to do dead-reckoning distance measurement with an accelerometer. The math is straightforward, but it requires two integrations with two unknown constants, one becoming a squared term which grows like something Karl Denniger likes to post.

When things are flowing smoothly (literally in the case of fluids in laminar flow), the simple models work. But when there is turbulence, every things gets (mathematically) chaotic. There may still be some regularity and reversion to the mean, but it is unpredictable. And the estimation errors - the noise/error terms themselves - can easily go to an order of magnitude above the signal/data.

But that is where the really smart intellectual rationalization hamster comes in and says just ignore the noise right now, it will only matter in the long term.

As to defaulting or repudiating debts, a debt that cannot be repaid will not be repaid. Japan for 20 years - every one of the big Japanese banks was a zombie bank with lots of "loans" on the books at the original value, with the underlying asset crashing. Or even here during the S&L crisis. Can they pretend the debts are in some way owed, or good, or that they will start digging up graves to pull the gold from the teeth of the debtor? Yes. They can call it what they want, and pretend, but if they are not going to get the original amount of capital back plus interest, it is in default. Inflation is not technically a default if the interest rate is fixed, but it is effectively a default, though it tends to be widespread.

Anonymous Toby Temple June 25, 2013 12:25 PM  

Also, I should add I don't see any reason they would want higher rates. What's the benefit?

Higher rates make debtors default. Then lenders get the collateral.

Think about it. What is paper to actual properties(land, precious metals, etc)?

Blogger tz June 25, 2013 12:26 PM  

If you are mortgaged and we get hyperinflation, the government will simply break all contracts and say they are now "variable rate", the inflation rate plus the original interest rate.

Anonymous Salt June 25, 2013 12:29 PM  

What is paper to actual properties(land, precious metals, etc)?

Especially paper conjured.

If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks…will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered…. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs. – Thomas Jefferson in the debate over the Re-charter of the Bank Bill (1809)

Anonymous allyn71 June 25, 2013 12:30 PM  

OT but very interesting in it's potential meaning. The Voting Rights Act appears to have been struck down by the Supreme Court.

Appears Eric Holder won't be able to tell states how they draw up their districts or what restrictions they can place on polls. This one will have the demonrats more ticked off than the ruling on corporate money.

Blogger Nate June 25, 2013 12:54 PM  

"Don't confuse the Fed with the banks. The Fed will help out the banks until it is no longer in their interest to do so. Then it will shut them down. Think of the banks as the milk cows and the Fed as the farmer. It will milk them as long as it is viable, then sell them for hamburger."

On this we agree.

We must also keep in mind that the Farmer is neither omnipotent nor is he self-employed.

Anonymous MendoScot June 25, 2013 1:00 PM  

I hope it has proved, if not exactly interesting, at least informative.

Both.

In latest news, Argentina is now going to block the export of flour in order to try and maintain its price control on bread.

And it's expanding the monetary base at 40%/yr.

Tick, tick, tick...

Oh, and AEP thinks that an Italian crisis will be triggered by "a bad event in Argentina".

Just sayin'.

Blogger James Dixon June 25, 2013 1:03 PM  

> Accordingly, it seems to me that the Fed cannot engineer higher rates,

They don't need to. All they have to do is stop supressing them. Rates will rise of their own accord. Zero interest rates require intervention. Higher rates do not not.

> Also, I should add I don't see any reason they would want higher rates. What's the benefit?

To them? Not much. But more people might be willing to keep their money in a bank if they paid a rate anywhere near the inflation rate.

> Also, is there any disagreement at this point that deflation, if allowed to occur to any significant extent, would lead to systemic collapse?

Among economists or here? Here, there's quite a bit of disagreement.

> The Voting Rights Act appears to have been struck down by the Supreme Court.

At least partially, so I've heard. I'm going to have to do some reading, obviously.

Anonymous ArcaneRhino June 25, 2013 1:14 PM  

“And what would be a more effective way to legally establish a wealthy aristocracy with a relative minimum of societal disorder than to encourage vast indebtedness, then trigger mass defaults by raising interest rates, which then results in the acquisition of title to all of the defaulted collateral?”

While entirely possible, I am not sure that intentional acquisition of titles is their goal or even necessary, and I will explain why.

In late 2008 or early 2009, Bernanke was justifying the Fed’s infusion to the banks (which WASN’T just printing up more money, mind you. He emphasized that point so it must be true.) At any rate, he said this was necessary to increase the net worth of the private home owner. I will never forget it because I was driving at the time and actually pulled over because I needed to think about that.

Why does a private home owner need a larger net worth? Increased/more revenue streams, yes, but with rare exception, home ownership is not a means of production that will benefit from reinvestment by borrowing against its net value. A larger net worth will not directly increase one’s standard of living. What it will do, however, is allow a home owner the ability to borrow against his own assets. From what we have observed over the last several decades, this is generally to either increase or maintain a consumer’s standard of living.

I presumed at the time that they expected that the prices on necessities would increase while revenue streams stagnated or decreased, which has certainly been my experience over the last five years.

All the above to say, why would they bother jacking up interest rates to cause defaults when they can create voluntary indebted servitude, with increased payments, and then ride that cash cow until such a time that people voluntarily abandon the home or die? Then they get the title back and can start the process all over again, no muss no fuss.

And better yet, they can live with all of the perks of a traditional aristocracy without any of the pesky responsibilities of a traditional aristocracy.

Anonymous Fred June 25, 2013 1:23 PM  

Nate needs to read Martin Armstrong who was modeling this conversation in 1980. Armstrong laughs at Hyperinflation as those that claim its imminent never stop to think that its happened almost never in history..rather what frequently happens is govt turns on its citizens and confiscates their assets to compensate for debt deflation.

Blogger swiftfoxmark2 June 25, 2013 1:24 PM  

hey! there are least 4 commenters who thought it was interesting. So... that means there had to be at least... 12 lurkers or so that also thought it was interesting.

We're at the threshold.

Blogger Nate June 25, 2013 1:37 PM  

"Armstrong laughs at Hyperinflation as those that claim its imminent never stop to think that its happened almost never in history..rather what frequently happens is govt turns on its citizens and confiscates their assets to compensate for debt deflation."

By almost never I suppose you mean 55 times?

Anonymous Oye Vey June 25, 2013 1:39 PM  

By almost never I suppose you mean 55 times?

We're back to that again?

Blogger Nate June 25, 2013 1:41 PM  

Vox and I have decided to do an epub version of the debate. I'm handling the formatting and such so be patient.

I'll have it done... when I have it done.

Blogger Nate June 25, 2013 1:41 PM  

"We're back to that again?"

Look... you don't get to claim something almost never happens... when it in fact happens quite a bit.

Anonymous Cheddarman June 25, 2013 1:46 PM  

Vox and Nate,

thanks for your work on this.

Sincerely


cheddarman

Anonymous Noah B. June 25, 2013 1:51 PM  

"To create inflation they have to have someone to lend the money to. Who would that be?"

Right now it's the US government or those financing the purchase of a home. Or foreign central banks, via currency swaps. Tomorrow, it could easily include states and municipalities.

Anonymous Porky June 25, 2013 1:57 PM  

Think of the banks as the milk cows and the Fed as the farmer. It will milk them as long as it is viable, then sell them for hamburger."

You lost me here. Farmer Bernanke wouldn't be where he is and doing what he's doing unless Goldman Sachs had put him there in the first place.

Who's milking who?

Blogger James Dixon June 25, 2013 2:03 PM  

> ...unless Goldman Sachs had put him there in the first place.

What makes you think Goldman Sachs is only a bank?

Anonymous Porky June 25, 2013 2:20 PM  

What makes you think Goldman Sachs is only a bank?

That's kind of my point. Any single one of the major financials has assets to dwarf the Fed. They also control the politicians who appoint the Fed's board.

These are no milking cows.

Anonymous Matthew June 25, 2013 2:37 PM  

"I'm handling the formatting and such so be patient."

Will you supply Vox's writing with ellipses, where he forgot to include them?

Blogger Brad Andrews June 25, 2013 2:43 PM  

Nate,

Dallas Gold and Silver Exchange seemed to have some junk silver in stock when I talked with a lady there last week. I am debating now whether to put $200-300 a check (maybe more) into them and pay the sales tax or to save up to get above the $1000 amount and save the tax. (An odd law in Texas.)

On inflation, gold is only down compared to the time frame mentioned. Compared to 2000 it is significantly up. What timeframe is fair to use for comparing inflation/deflation?

I know food is definitely up and that is more necessary than many things that have stayed flat.

Of course my house, which I want to sell so I can move, is flat since 2002.

Blogger Brad Andrews June 25, 2013 2:45 PM  

I will wair for the epub version. Nicer to read at one (or over) time.

Anonymous CunningDove June 25, 2013 2:47 PM  

Brad Andrews June 25, 2013 2:43 PM
I am debating now whether to put $200-300 a check (maybe more) into them and pay the sales tax or to save up to get above the $1000 amount and save the tax. (An odd law in Texas.)


That law is going away in October of 2013. Gov. Perry signed it earlier this year. Not sure if that will impact your decision in the short term, but starting in October it seems much more practical to budget to purchase silver.

Blogger Nate June 25, 2013 2:51 PM  

"Dallas Gold and Silver Exchange seemed to have some junk silver in stock when I talked with a lady there last week. I am debating now whether to put $200-300 a check (maybe more) into them and pay the sales tax or to save up to get above the $1000 amount and save the tax. (An odd law in Texas.)"

I'm all for paying less tax. I don't see a huge change in silver prices between now and then. Generally my answer is buy buy buy. Do as thou wilt. My advice? Don't miss out just because you wanted to try to maximize.

Blogger Nate June 25, 2013 3:10 PM  

"On inflation, gold is only down compared to the time frame mentioned. Compared to 2000 it is significantly up. What timeframe is fair to use for comparing inflation/deflation?"

As I said early in the debate I am agnostic on the claim that we can even measure the money supply at this point. The situation is just to fubared.

Vox has done an excellent job showing what is going on right now in this debate. Obviously we all agree we saw inflation from 2000 to 20008. Post 2008 is where we differ.

Blogger Nate June 25, 2013 3:12 PM  

"
That's kind of my point. Any single one of the major financials has assets to dwarf the Fed. They also control the politicians who appoint the Fed's board.

These are no milking cows."

No porky. They don't. They have lots of big numbers on paper that literally do not exist.

They are broke... and the only way they continue to stumble around and stink up the place is because the Fed keeps giving them more credit to play with... and the government keeps giving them more money to blow.

Blogger James Dixon June 25, 2013 3:14 PM  

> That's kind of my point.

I don't think you're not making the point you think you are. The Fed could put all the banks down and Goldman Sachs would still exist.

Citibank, Chase, BOA, and their ilk have far more to fear than Goldman Sachs does.

Anonymous Josh June 25, 2013 3:17 PM  

Any single one of the major financials has assets to dwarf the Fed.

Incorrect. The Fed has a balance sheet of $3.3 trillion or so. The largest US bank, Citi, has less than $2 trillion.

$2 trillion does not dwarf $3.3 trillion.

Anonymous Noah B. June 25, 2013 3:22 PM  

"Don't confuse the Fed with the banks. The Fed will help out the banks until it is no longer in their interest to do so. Then it will shut them down. Think of the banks as the milk cows and the Fed as the farmer. It will milk them as long as it is viable, then sell them for hamburger."

While the Fed and the banks are separate entities, it seems that their interests are, for the most part, closely aligned. I have no doubt that the Fed would many banks if necessary for the good of the banking system as a whole.

The Fed is an unusual entity in that -- at least ostensibly -- it has little motive to directly generate profits. Since most of the Fed's "earnings" are regularly turned over to the US Treasury, and the dividends paid to its member banks are relatively small, the most powerful incentives for the Fed are to carry out the will of Congress and to provide for the well being of the banking system as a whole. While on paper Congress is in control of the Fed, their past actions (TARP, QE1...n) would seem to indicate that they are more controlled by the banks than by Congress.

Blogger vonTilly June 25, 2013 3:23 PM  

"FUBAR Nation Ben
The problem with Nate's analysis is wrong is that hyperinflation has never occurred in an advanced developed economy."

I suppose the hyperinflation in Brazil doesn't count? It wasn't (or is) an developed economy, but Brazil had a big economy nonetheless.

And, can anyone tell me where I can read the rest of the debate?

Anonymous Noah B. June 25, 2013 3:25 PM  

With regard to TARP, although it was paid for by the Treasury and not the Fed, my point is that Paulson, a long time GS insider, orchestrated the whole thing. The bankers were firmly in control, not Congress.

Blogger LP 999/Eliza June 25, 2013 3:37 PM  

Great post, great thread. I always enjoy the defl/infl debates.

Anonymous Noah B. June 25, 2013 3:46 PM  

And I always find these threads interesting and informative. Thanks, guys, for taking the time to provide these well thought out arguments.

Blogger Nate June 25, 2013 4:15 PM  

A search of "Inflation vs Deflation" will get the posts... but it will require some bouncing around and scrolling. a lot of scrolling.

I hope to have the epub out by next week but I can't promise anything.

Anonymous E. PERLINE June 25, 2013 4:29 PM  

This debate is interesting. The disagreement seems to be about whether hyperinflation is imminent.

I see inflation in housing and food stocks and government service. Also the public is sold on gasoline staying under the flash price of $4.00 per gallon.

But there has been little inflation in non-designer clothing. And thousands of items that are produced by foreign labor are being sold here cheap. Another factor, not taken into account, is the increasing productivity of today's manufacturing.

For these reasons, the onset of inflation may be delayed. But eventually it may rear its head.

Anonymous Porky June 25, 2013 4:38 PM  

Nate: "No porky. They don't. They have lots of big numbers on paper that literally do not exist."

Which the Fed is buying up like crazy.

They're not milkin' the cow, they're strokin' the bull. The only people being milked are you, me, and the rest of the taxpayers.

They are broke... and the only way they continue to stumble around and stink up the place is because the Fed keeps giving them more credit to play with... and the government keeps giving them more money to blow.

And here's where we differ. You think Farmer Ben keeps the stinky, dried-off cows around because he's an idiot and has no idea how to farm. I think he knows exactly what he's doing and furthermore, he's doing it because the cow told him to. Blankfein and Ben have been buddies since college. Neither of them is an idiot.

James Dixon: "Citibank, Chase, BOA, and their ilk have far more to fear than Goldman Sachs does."

Not if Bear Stearns and Lehman are any indication. Goldman Sachs survived by becoming a commercial bank and jumping into bed with government. Furthermore, if Citibank goes under and gets eaten by JP Morgan that is not a net loss to the power of the bankster.

I think you all fail to appreciate the real meaning of "too big to fail". If I am trapped in a room with a hungry bear and I shoot the bear I survived because I am too big to fail. Get it? It's not about size, it's not about whether something bad might happen if I die. It's about who has the real power.

Josh: "Incorrect. The Fed has a balance sheet of $3.3 trillion or so. The largest US bank, Citi, has less than $2 trillion."

You consider toxic assets to be real assets? Hint: balance sheet you just googled is a load of crap.

Anonymous Salt June 25, 2013 4:57 PM  

ZeroHedge has a little Tuesday humor.

After fluctuating wildly this morning between $1 and $35, the price of money spiked to an unprecedented $90 a dollar in afternoon trading, plunging international financial markets into chaos.

Blogger Res Ipsa June 25, 2013 5:10 PM  

Vox,

Thanks. This was a much better post than what you had been doing. Before it seemed like you were phoning it in, this is a much better effort.

Anonymous farmer Tom June 25, 2013 5:20 PM  

I agree with Res Ipsa,

this was good stuff.


Looking forward to Nate's response.

Anonymous Stilicho June 25, 2013 6:36 PM  

Pardon me if this has already been addressed in the comments, but I did not have time to read them.

Inflation and hyperinflation benefit borrowers. Deflation benefits lenders, as they are repaid in increasingly valuable currency. Default also benefits lenders as long as the collateral backing the loan exceeds the value of the outstanding debt. So, in closing, I will simply ask you one simple question: at this point in time, is the Federal Reserve a net borrower or a net lender?

Indeed. One other aspect to consider: the Fed has been injecting enough credit money into the economy to stave off large-scale defaults and to keep those debt payments coming in to the banks (for now) who are squirreling it away to an unprecedented degree (excess reserves anyone?). This way, if deflation and defaults do occur, the banks have an additional cash cushion on top of collateral value that they did not have five years ago.

Nate is correct about the psychological aspect of hyperinflation, however, Vox is correct to point out that there must be a means of expressing it. With 75% of Americans living paycheck to paycheck, they may have the motivation, but not the means or opportunity to abandon dollars they do not have. What they do have are credit cards, etc. but aggregate consumer credit isn't increasing to any significant degree (outside of student loans) and THAT particular boondoggle can hardly be described as exchanging dollars for value in anticipation of inflation. Given the value of most of the degrees obtained thereby and the horrible job market, it is best described as speculation or just a debt-financed party.

Anonymous Stilicho June 25, 2013 6:47 PM  

All women should wear tight clothing, and all men should carry powerful handguns.

Alas, millenial men/boys are wearing skinny jeans while governments are trying to ban/destroy all guns they don't control.

Think "Frito Lay Retirement Village" or "Google Agricultural District" and you'll be in the ballpark.

Brawndo has electrolytes!

Anonymous John Regan June 25, 2013 6:56 PM  

Me: Also, I should add I don't see any reason they would want higher rates. What's the benefit?

VD: To force the default and seize the collateral.

Well, I don't see this. I could be wrong, though, so please bear with me.

Let's assume for purposes of discussion that the debt currently already incurred is all at fixed interest rates. When they engineer higher rates, that's only for new debt, not existing debt. How do higher rates for new borrowers force old borrowers into default?

Now, if you question the assumption I'll agree that there is a significant amount of debt at variable rates, though contractually the variation is limited. At least in theory.

Anyway, I'm just trying to get the idea down, not all the potential footnotes. I don't see how prospectively higher rates force retrospective defaulting. At least not directly.

One absolutely certain and immediate consequence of rising rates, though, is that the value of the lender's loan portfolio yielding, say, 3% gets decimated when prevailing rates rise to 10%. I can't see lenders wanting higher interest rates at all, if only for that reason.

Also, at very low rates lending is actually relatively more profitable because of the spread. If you can lend at 4% and borrow at 1% you're doing a lot better than if you can lend at 20% but borrow at 10%. The latter is more like the 1970's, which was not a good time economically or for banks, and perhaps of some interest here was the US's most prominent experience with inflation in modern times. The former is a lot like now.

Finally, I can see them wanting some collateral - a large business for example, like General Motors - but I don't think they really want, for example, people's homes. What good are they as financial assets to financiers? They're just a pain in the ass to maintain and sell. They want people having mortgages on their homes because they believe people are fundamentally lazy and won't produce unless they fear they will lose their home if they don't. And they want people producing.

I think you were so right when you said their game was churn and skim. Put differently, they want productive economic activity - FROM OTHERS. They take their cut, but if they take too much and start to quash economic activity there is less activity for them to take a cut of. So like a lot of things, they're trying to strike a balance - the most skimming they can get away with without discouraging production.

It's a managed economy when you have a central bank. Maybe we should think of the skimming as the managers' fees, which maybe there is a rationale for it if they're managing things well, but there's no justification at all for it if they're not.

Blogger Nate June 25, 2013 7:00 PM  

"With 75% of Americans living paycheck to paycheck, they may have the motivation, but not the means or opportunity to abandon dollars they do not have."

its a bit frustrating... what with this already being covered in the post Vox is responding to here... never the less... I will be spelling out explicitly in the final post on the matter.

Anonymous Stilicho June 25, 2013 7:04 PM  

These are no milking cows.

No, they are bulls who get to choose a farmer. The rest of the herd is viewed as expendable. Problem is, once the hamburger making gets started, some of the bulls may end up in the grinder as well. They all assume it might happen to the other bulls, but not them.

Blogger Nate June 25, 2013 7:12 PM  

"And here's where we differ. You think Farmer Ben keeps the stinky, dried-off cows around because he's an idiot and has no idea how to farm."

No. I don't. I think he is a bright guy that has a job to do and he's doing it.

What THEY are trying to do is very different. They are figuring out to get from where we are... to where we are going... while making as much money as possible along the way.

Anonymous Stilicho June 25, 2013 7:13 PM  

its a bit frustrating... what with this already being covered in the post Vox is responding to here... never the less... I will be spelling out explicitly in the final post on the matter.

Fair enough, I didn't re-read your post (and probably didn't agree with your point when I did read it) but I must say it's not nearly as frustrating as people who refuse to accept the fact that goods are bought with...credit...which is leveraged into more credit...which is a house of cards just waiting to collapse back to the "real" money that is the base of all the leveraged credit. Expanding that base does not necessarily change the volume of the pyramid if some of the leveraged sections are shrinking.

Blogger Nate June 25, 2013 7:15 PM  

"No, they are bulls who get to choose a farmer."

You should remember how TARP actually happened.

The bankers flew to DC thinking they were about to be thrown in jail. If there is a bull... there is only one... and it is Goldman Sachs.

Blogger Eric Wilson June 25, 2013 7:28 PM  

John Regan,

I am likewise puzzled by why banks would want higher interest rates. Maybe so much more stuff is variable rate than I think, but if it's fixed I'm not sure how higher interest rates help them.

Anonymous John Regan June 25, 2013 7:44 PM  

Well, Eric, maybe someone can explain. Maybe we're missing something.

Anonymous sprach von Teufelhunden June 25, 2013 7:49 PM  

@Nate June 25, 2013 10:36 AM

"I think that the U.S. and the West may eventually get higher inflation and then hyperinflation, but only as a final Hail Mary type last grasp before everything goes to hell, and that we will see deflation and defaults first."

Hyper-inflation will not be a planned event. It will happen between 2015 and 2016 and will happen entirely independently of Fed action or planning.


Agreed.. Hyper-inflation will be an unintended consequence of QE [whatever]. One cannot plan or predict hyper-inflation anymore than one can the arrival of Wormwood.

Wormwood is a brown dwarf. It is the binary companion to our Sun. It is coming. Those with a good telescope can see it. It will arrive by or before 2018. [1]

It will not be a coincidence that a hyper-inflated economy will precede and/or coincide with the arrival of a celestial body, at least the size of Jupiter, and +60 times the mass of planet Earth. At least Paul Craig Roberts agrees in part with your timeline.

Vox, for real credibility, you should be debating Dr. Roberts. He was after all the Assistant Secretary of the Treasury. Roberts is on, in the economic realm. However, he is if off on Snowden, and other matters of geopolitical intelligence...


-------
[1] Interesting enough, about the same time The Economist said to be ready for the Phoenix currency, back in 1988.

Blogger Brad Andrews June 25, 2013 8:06 PM  

Nate,

> As I said early in the debate I am agnostic on the claim that we can even measure the money supply at this point. The situation is just to fubared.

I don't care about the money supply. I just care what I get paid and what I pay for the things I need to live. I have a very hard time seen the latter going down. If they could go up (necessities) and we could still be in a deflation then the deflation argument doesn't make much practical sense.

I suppose I need to finish the RGD book. I only made it part of the way into that one.

I didn't know about the Texas law change. That would make sense that the government, even in Texas, wants more income.

Anonymous Porky June 25, 2013 8:20 PM  

No. I don't. I think he is a bright guy that has a job to do and he's doing it.

Sorry, I was mistaken.

You should remember how TARP actually happened.
The bankers flew to DC thinking they were about to be thrown in jail. If there is a bull... there is only one... and it is Goldman Sachs.


Paulson, Geithner and Bernanke held the gun to Goldman's head just like everybody else. Of course, the threat was "You take this briefcase with billions of dollars in it or we'll kill you."

It was a short meeting. Lol!

But yeah, Goldman is the alpha bull for sure. Basically what happened is one Goldman guy told Timmy Geithner to milk the Goldman cow or another Goldman guy was gonna shoot the cow in the head. Timmy looked down and said "But Hank, that's not an udder. It's a penis. And you've got eight other bulls lined up in the milking pen!"

Goldman guy says "Start milking, bitch."



Anonymous zen0 June 25, 2013 8:30 PM  

swiftfoxmark2 ignorantly proclaims at June 25, 2013 9:44 AM:

Like what Joseph did to the Egyptians when they were starving. Only we aren't starving, which makes such a scenario even more tragic and foolish.

You are just repeating something someone told you and they are either ignorant or retarded, or evil.

There is no way you can get that interpretation from the text. Joseph saved Egypt from a world wide famine, such so that people came from other areas to get food.

I thought I would wait until less people were reading to chastise you, so that less shame falls upon your family.

Anonymous zen0 June 25, 2013 8:45 PM  

Nate says Hyperinflation will happen even though the Fed people are well aware of how hyperinflation happens and are well aware of his arguments (thank you NSA) but they will be powerless to stop it.

Vox says deflation will happen even though the Fed people are well aware of how deflation happens and are well aware of his arguments as well (thanks again NSA), but they will either be powerless to stop it or embrace it in a Machiavellian fashion.

I hope I have not misrepresented anything here, but so far this is what I see. From my perspective, however, the Fed has more power to do something than I do.

Just sayin'. Maybe God will decide.

Blogger Nate June 25, 2013 8:51 PM  

"I must say it's not nearly as frustrating as people who refuse to accept the fact that goods are bought with...credit...which is leveraged into more credit...which is a house of cards just waiting to collapse back to the "real" money that is the base of all the leveraged credit. Expanding that base does not necessarily change the volume of the pyramid if some of the leveraged sections are shrinking."

Yes it does... because the base is their excuse for expanding the credit.

Additionally... if you would bother to read my last post... you'd see it has absolutely NOTHING to do with my case for Hyper-inflation.

Blogger Nate June 25, 2013 9:28 PM  

'Nate says Hyperinflation will happen even though the Fed people are well aware of how hyperinflation happens and are well aware of his arguments (thank you NSA) but they will be powerless to stop it."

Close. Nate says Hyperinflation will happen regardless of what the Fed does... but the Fed's will take action early in the process to make things worse instead of better... because they will actually misread the hyper-inflation as... believe it or not... a money shortage.

Anonymous Stilicho June 25, 2013 9:57 PM  

Additionally... if you would bother to read my last post... you'd see it has absolutely NOTHING to do with my case for Hyper-inflation.

This time. I suppose I'm dredging up other discussions we've had re: the nature of money/credit money in our current system (although that's where this debate started). But that debt-deflation is going to happen and, when it does, money will seem scarce (less credit bidding on goods and services alongside cash). People will want cash. The probably extreme response to this situation could lead to hyperinflation, but the debt deflation will come first.

Blogger Nate June 25, 2013 10:16 PM  

"But that debt-deflation is going to happen and, when it does, money will seem scarce (less credit bidding on goods and services alongside cash)."

It will never have a chance to happen. It doesn't have time to happen. Because it will blow up in hyper-inflation long before that.

Blogger Nate June 25, 2013 10:18 PM  

"I am likewise puzzled by why banks would want higher interest rates. Maybe so much more stuff is variable rate than I think, but if it's fixed I'm not sure how higher interest rates help them."

Banks are don't care. The Fed cares. higher rates help the Fed make money. The Fed announced months ago that if things kept up like this... it would start losing money in 2014.

Blogger Nate June 25, 2013 10:18 PM  

I would just point out that Greenspan really wanted to raise rates in 1998 too... but suddenly up and changed his mind after a meeting with Clinton.

funny how that works.

Anonymous zen0 June 25, 2013 10:50 PM  

Nate says:

Close. Nate says Hyperinflation will happen regardless of what the Fed does... but the Fed's will take action early in the process to make things worse instead of better... because they will actually misread the hyper-inflation as... believe it or not... a money shortage.

Because the Fed does not know how many U.S. dollars are outside of its purview, as you mentioned in "March to the
Scaffold" and velocity will arrive as a surprise?

Anonymous Noah B. June 26, 2013 12:35 AM  

"The Fed announced months ago that if things kept up like this... it would start losing money in 2014."

But... why does the Fed care about making a profit? The dividends they pay are pretty miniscule compared to the profits banks earn in other ways.

Maybe I'm missing something, but the fact that they turn over the bulk of the profits to the Treasury would seem to greatly lessen their incentive for profiteering.

Of course there are other factors at work. In your example from 1998, Greenspan just wanted to keep his job. We can't ignore the role that self-interest plays among the Fed's decision-makers.

Anonymous The other skeptic June 26, 2013 2:29 AM  

And what would be a more effective way to legally establish a wealthy aristocracy with a relative minimum of societal disorder than to encourage vast indebtedness, then trigger mass defaults by raising interest rates, which then results in the acquisition of title to all of the defaulted collateral?

So, they will have no further need of this democracy thing they seem so enamored with at the moment?

I imagine that a lot of people will be unhappy. Women, children, LGBT and minorities hardest hit, I imagine.

Anonymous The other skeptic June 26, 2013 3:13 AM  

Women in heat

I am told it is about women doing man things. Peeing standing up? Taking lots of punishment and not whining?

Blogger foxmarks June 26, 2013 9:37 PM  

The banks in general may not want higher rates that force default. But the FedRes member banks are the prospective new aristocrats. That elite cabal would be interesting in seizing all real assets as means of asserting political control. Big Bank eats small bank.

If the current bubble is in education loans, look for legislation that will allow default of that debt, but tied to that debt becoming collateralized. The prospective new generation of serfs must be given obligations they can fulfill. The current arrangement, without collateral, allows the serfs the option of just laying idle and producing no benefit to the aristocrats.

Post a Comment

NO ANONYMOUS COMMENTS. Anonymous comments will be deleted.

Links to this post:

Create a Link

<< Home

Newer Posts Older Posts