Hefaistos

De-Leveraging Is Not Deflation

Consider_this gave us an example with money supply (or was it economic activity? -unclear) as a swelling balloon.
I have another metaphor regarding money supply, which is maybe more clear. Think about it as a silo with flour, being rapidly filled by the Fed. But that the silo is full, doesn't mean that people will have a lot of bread! Until the flour leaves the silo, gets baked and distributed as bread, the flour is merely hoarding.
Soon, we will start to see some major M&A activity. THere are great incentives for principal financial actors to use all this available 'flour' to pick up business at rock bottom valutations. Look out for M&A as a leading indicator of a turnaround.

De-Leveraging Is Not Deflation

Thanks for a fine article written with warmth and humour! And a good discussion.
At the heart of the matter is of course Paco's Austrian definition of inflation as increase in Money supply. "Everyone else" agrees to the conventional measure of inflation (CPI change).
And, indeed, treasuries are not a bad investment in a time deflation, even if yield iz zero. We DO get more money in real terms back when the bond matures, our purchasing power has increased. That's what driving investors, together with risk aversion in troubled times.
I think we also all agree that treasuries ARE a potential bubble, since when (not if!) CPI inflation returns, they will 'crash'.
I would suggest the Austrian definition of money supply is totally irrelevant to our understanding of all this. Maybe it contributes to the deeper understanding of some mechanisms for some people - as well as the Marxist theory of profits as the 'hidden' surplus of labour might be helpful to marxists. For the rest of us, we'll do just fine with traditional concepts.

Definitely No Shortage of Money

"...whatever is causing this crisis, it's most definitely not a shortage of money." The money supply is of course linked to the real economy, albeit in a complex way.
There are a couple of things that have to be added to the picture:
1. The velocity of money. As long as it stays down, all the increase in money supply might have no effect at all.
2. Leverage. We have a strong period of deleveraging. That decreases money supply.
3. You have to compare the monetary base with the amount of wealth that is being wiped out by asset deflation

Also, it's as easy for the Fed to decrease the money supply, as it is to increase it.

Gold Cannot Be Inflationary, But the Dollar Sure Can

"The supply of dollars is increasing. So the dollar is losing value."
Then why has the dollar been strengthening in the latest time? Interest rates are zero, which gives really no incentive whatsoever to hold dollars. Apparently, we again see a flight to safety. Prospects are also lousy for the dollar, due to the stimulation packages due out, increasing the deficits in the balance of payments, increasing the risk of inflation. All of this should really bring the dollar down, instead we see the reverse. Supposedly we face another period of stress in the financial system, with redemptions, etc. This could of course also benefit gold.
Another thing that has to be added to the picture, is the velocity of money. As long as it stays down, all the increase in money supply might have no effect at all.
Thirdly, it's as easy for the Fed to decrease the money supply, as it is to increase it.

The Obama Inauguration Rally Begins

It's hardly a breaking news that Obama will be inaugurated, it might be futile to think that it will move the markets any more than it already has.
He is indeed a great speaker, but I believe his Words are all discounted since long.

Deflation Is Mostly Behind Us

I believe it's too narrowminded to exclude asset deflation from the picture. As long as real estate prices go down, there will be a continuing drag on the economy at large. There is a lot of demand destruction happening from the asset deflation, since deflation is still going on in so many asset markets. E.g., if you know that real estate prices will keep falling, you will certainly postpone buying a house and all the other things that come with it. Regrettably, we have only seen the beginning of the effects on the real economy.

Treasuries' True Risk

I agree with most of your analysis, Paco, but not with your conclusion and trade! I wouldn't take those short positions at this point in time - it's way premature. It will take a long time for the treasury bond market to crash. The Fed is already monetizing long bonds (buying them in the market), thus keeping rates down at extremely low levels, and bond prices high. This will continue as long as the housing market needs support by low rates, which most certainly is Obama policy. And that support will be needed for at least another year.
In the end, yes, there will be some inflation and maybe a crash in bond prices, but it will only happen when asset deflation in houses has stopped.

How the Treasury Bubble Will Burst and Why

It will take a long time for the treasury bond market to crash. The Fed is already monetizing long bonds (buying them in the market), thus keeping rates down at extremely low levels, and bond prices high. This will continue as long as the housing market needs support by low rates, which most certainly is Obama policy. And that support will be needed for at least another year.
In the end, yes, there will be some inflation and maybe a crash in bond prices, but I don't see it within a year.

Great Depression II: Machiavelli's Advice to Obama

"However, the bond market will eventually collapse". - That will take a long time. The Fed is already monetizing long bonds (buying them in the market), thus keeping rates down at extremely low levels, and bond prices high. This will continue as long as the housing market needs support by low rates, which most certainly is Obama policy. And that support will be needed for at least another year.

Where Are We on the Roadmap?

On the other hand, what should make us think that this is anything like an ordinary/average recession? As long as there is strong asset deflation, there are many more shoes to drop.

Deep in D: The Deflation Battle Rages On

Deflation in CPI prices isn't what this all is about. The main focus is the deflation in asset prices, mainly real estate. That's where the real devastation lies, and might continue ahead.

To make an example: There is price deflation in PCs, you get the same type of computer sold today for 500 usd for maybe 400 in a year. Or, you get a model with better performance next year. But how many postpone buying a PC because they know that they'll get a faster one next year? Not many.
On the other hand, if you know real estate prices keep falling, you will certainly postpone buying ...

Treasury Yields Hovering at Historic Lows

Chris B
excellent points, thanks.
I'm not so sure about that gold has been perceived as an inflation hedge in recent years, though. The runup in gold price came in the recent years, when there was very little inflation. I'd suggest that gold has more of the characteristics of a commodity, and that it was a lot of speculation driving prices up, together with most other commodities.
That the gold price didn't drop down all the way back together with other commodities in 2008 is due to that gold NOW is considered a crisis hedge, due to the pretty unique aspects of this crisis.

Insuring U.S. Government Debt: A Terrific Paradox

Thanks for a thoughtful article.

I'd say that these CDSs might have a useful function, aside of the unlikely event of a default. And that is to set a price on US risk, to provide price signaling. Actually, CDS markets are important for pricing credit risk.

This has relevance for e.g. the currency market. A higher spread on the CDS contracts might translate directly to a negative for USD.

Crisis Strategy: Coping With Trillion Dollar Deficits

The dollar has been strengthening because of a flight into safety: Long Treasuries. Interest rates are 2-3 percent, which gives a real yield since we have deflation. However, prospects are lousy for the dollar, due to the stimulation packages, increasing the deficits in the balance of payments, increasing the risk of inflation. All of this should will eventually bring the dollar down.
But, we cannot understand the dollar's development without taking into account what's going on with the treasury bonds. Sooner or later we will see a flight from them, and a crash of prices. That will also bring the USD down from current levels. When will it happen? Whenever we see that the economy starts moving a bit, commodity prices will rise, there will be reflation. Timeframe? Maybe late this year.

Gazprom to Ukraine: No Gas for You

Good analysis, without being partial, thanks!
During negotiations in December, an agreement was close, as you say, Russians were willing to continue the subsidization of Ukraine gas prices. But Ukrainians maybe wanted too low a price, resulting in a breakdown in negotiation, and in that Russians now totally want to abandon the subsidy. Medvedev has said there should be market price rule for everyone, incl. Ukraine. I think that is the only way to go. Subsidies will always encourage different types of market inefficiencies, and in this case corruption.
The longterm loser in this is probably Ukraine. They will have to pay a higher price, and they will eventually lose a lot of the transit gas revenues. Russia will also export by LNG, and is building new giant pipelines in the Baltic sea directly to Germany.