Moral Hazards Amok

Impending Inflation? The Global 'New Deal' All but Guarantees It

User 270430, thanks for the link that you provided explaining how inflation work itself into a monetary system such as ours. (mises.org/story/2901)...

However, in most ways the article actually argues in favor of deflation. Here are a couple of its more salient quotes:

“The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion.” Ludwig von Mises – 1949

And this one…

“However, banks' limited equity capital wouldn't allow expanding credit and money supply any further, whatever the amount of excess reserves. Perhaps even more important, a contraction of the means of payment, accompanied by a sudden stagnation of credit supply, can be expected to exert downward pressure on money prices, production and employment.”

At this point in the crisis, the government will attempt to rescue the banking system so lending can begin again. The first strategy is injecting peoples' tax money into banks. The second strategy is buying banks' risky assets, and the third is monetizing banks' risky assets.

We are now, or soon will be, doing all three, but here’s the key, credit will still continue to collapse. Even after the Fed’s efforts, banks and finance companies will not be willing to lend so extremely promiscuously again. As previously pointed out, lending standards will be much tighter in the years ahead.

Also, at least for a few years, individuals and business will not wish to borrow nearly as much again as jobs are being lost and prices for everything is in freefall. As JasonC so diplomatically puts it…

“No, prices are not going to trend up after a brief scare.

Earth to inflationary brainstorm clueless people, please write on a blackboard 500 times, "the demand for money is not a constant".”

Impending Inflation? The Global 'New Deal' All but Guarantees It

Very good article overall. You made the deflationary case quite well, but it seems that the inflationary case is somewhat lacking in details. It’s those details that I’m looking for and am not just finding in the arguments of the hyper-inflation proponents.

The US government isn’t going to simply print money and throw it out the windows of helicopters. As you point out in the article, the government expends the money supply by going into debt, but the much larger great credit super-bubble has popped. Will they issue enough bonds to balance the $20 trillion that has been lost? What about the next $20 trillion after that? I’m not saying that this is the end of the world, but I just don’t see hyper-inflation.

Four factors are in motion that will make the next several trillion in losses pretty much baked in.

1. Most asset prices are collapsing, not just real estate. Oil, precious metals, agriculture… all. Count ‘em and stack ‘em, nothing is safe and the tape doesn’t lie.
2. Incomes all over the globe are falling, jobs are being lost, and Joe the plumber is reacting by popping handfuls of Xanax and tightly hording his savings (that he doesn’t have).
3. Credit is much harder to obtain and will stay that way. Yes, the current credit freeze is thawing but still credit standards will be much stricter in the years ahead than they were during the last 15.
4. The world's economy is caught in several deflationary feedback loops due points 1 through 3 above. These dynamics all feed off of each other and they are even accelerating.

Also, will a New Deal necessarily be inflationary? It wasn’t during great depression 1, why would it be now?

Thank you for making both sides of the argument. However I think you made a much better case for deflation rather than inflation because it’s hard to see how government’s efforts can stop the super cyclone of credit and asset destruction.

Are More Big Falls Ahead?

I take it that no one here is playing this little bear market rally? You’re leaving money on the table.

Can’t you just hear the drum beat of clueless commentators stating that the market in undervalued, there’s an incredible amount of cash sitting on the sidelines just waiting to get in, that the Fed’s printing presses are running red hot and so we’re now set up for the biggest bull run ever, etc, etc, …

All this should make for quite a significant bounce. After it sucks in the masses and tops out, then go short.

The Crash of 2008

This article seemed to generalize what’s going around in much of the popular media. More meaningful specifics would have been useful. I’d also like to empathically agree with what ddtuttle said and expand a little there.

3. imho, we have had far too few meltdowns of this severity to reasonably game where this current one will end and a new bull leg will begin, or how high the rally will go. I would think that we would need at least a couple hundred meltdowns to gather statically meaningful trends. Too many people from Cramer to Roubini compare this crisis to 1987 or 1929. Today’s crisis is neither because important dynamics are so different. Sorry to use the overused cliché, but we really are in uncharted waters. Throw away the book on those past episodes when it comes to predicting the current market. They don't apply, imho.

4. It would have been nice to know what specific measures the author was referring to. VIX, Put/Call ratio, magazine covers, newsletter authors, men’s beards? Not all of these indicators are yet at pessimistic extremes. Also, how do we quantify “maximum pessimism”? I would be willing to bet that at the bottom of every economic crisis the population believed that things indeed could get much worse, and guess what, they were right. So how do we know when we’re really at a bottom?

That being said, my technical indicators suggest that we may indeed at a short-term bottom and ready for a good bounce, so late Friday I stuck my toe in the water and bought calls in ABK and IDEV. But I used specific (albeit rule of thumb) quantifiable indicators. We shall see.

Think of These as Short-Term Troubles

If you can keep your wits about you while everyone around you is losing their's…


Perhaps it’s because you’re just not understanding the situation. The great credit superbubble has burst.