fjd10595

Extraordinary Popular Delusions and the Madness of Crowds

There was debt contraction then, and debt contraction now, but, now, there''s been a flood, worldwide, of currency introduction that will have dramatically different consequences than the '30's.

I have to admit that your comment was long, and thus I did not read it fully, but I say this: the liquidity that has been added cannot have lasting effect until it is loaned or put to work in the economy. You say the 'banks will soon loan to the vast majority still employed'. I guess so, assuming that they want the money. Is is possible that we are about to embark on a multi year, or decade, time frame in which we spend more and save less? I would expect deflation, or something near it, for an intermediate period of time.

On Oct 15 10:12 PM Tack wrote:

> Just two quick rebuttals:
>
> 1) The current situation is nothing --not even close-- like the '30's
> deflation. In the '30's the money supply, due to a tragic government
> mistake, contracted from 1929 to 1935, whereupon it began to exapnd
> again, but didn't even reach 1929 levels, again, until the end of
> 1938. This was the proximate cause of the deflation, and the government's
> lack of recognition of the mistake they made, followed by a rather
> tepid attempt to correct it, resulted in many years of deflation
> and stagnant economic circumstances.
>
> There was debt contraction then, and debt contraction now, but, now,
> there''s been a flood, worldwide, of currency introduction that will
> have dramatically different consequences than the '30's.
>
> The trouble is that in today's impatient world if we don't see the
> logical and inevitable effects of these actions in a few months or
> a year, we immediately conclude that 'this time it's different,"
> and formulate new theories. It's not different, and the consequences
> of a monetary flood will be the same as they've been in all other
> economic contractions, but possibly more so this time, given the
> unprecedented magnitude of the monetary largesse.
>
> 2) Everybody repeats over and over, ad nauseum, that all that new
> capital is tied up on bank balance sheets and isn't and won't be
> used for anything other than to counterbalance worthless paper, that,
> if it were marked own to true market values, would make many banks
> insolvent.
>
> There are two problems with this argument: a) the mark-to-market
> values that critics espouse were/are nothing more than the result
> of highly-manipulated and thinly-trade debt indices that clever shortsellers
> used, in conjunction with CDS positions, to decimate bank balance
> sheets and the market. They bear no relationship whatsoever to classical
> valuations based on actual cashflows being received and expected
> to be received by the actual note holders. That's why holders of
> debt assets re unwilling to dump them at nonsensical prices, thankfully,
> as this would result in the destruction of the financial system because
> fictitious losses, represented by "market" values, would suddenly
> be realized; b) for those that wish to track such information, the
> beleaguered debt indices that created all this angst have been steadily
> rising for several months, narrowing the gap between the genuine
> value of debt assets and the hysterical values previously created
> in the markets. Soon, this will result in the banks having excessive
> reserves that will start to be released back into earnings and will
> result in the banks being overcapitalized.
>
> When the foregoing happens, banks will start looking assiduously
> to put all that "dead" money to work. Coupled with increasing confidence
> by the vast majority of people employed, this will result in an increase
> in loan demand that will find amply funds to service it.
>
> The real risk for this economy, as with previous periods of monetary
> largesse, is that the government will fail to make timely reduction
> in the money supply until the demand-inflation cycle is well under
> way, so we'll get the same inflation that has followed most recessionary
> recoveries.