Did No-one “see this coming” too?
Today’s 4.78% fall on the S&P could easily be reversed tomorrow if the BLS unemployment number is better than expected; equally today’s fall could turn out to be just the starters if it is worse. But beyond the volatility of the stock market, it is becoming obvious to everyone now that the crisis that began in 2007 is still with us.
When the crisis first hit, many of those whose behavior (or delusional economic models) helped cause this crisis claimed when it hit that “No-one saw this coming”–that it was an unpredictable event. Dirk Bezemer gave the lie to that with his paper of the same name, identifying the handful of academic economists and market commentators who had anticipated this crisis because they focused on the explosion in private debt that had occurred since the 1987 stock market crash.
The same group–myself included–argued that this crisis would not end until that debt was substantially reduced, and that the process of debt reduction would usher in a second Great Depression.
I’ll write more on this process next week, but given that the minds of market speculators and politicians are now refocused on yet another economic downturn, I thought it prudent to note that this downturn was also something that was obviously going to happen, given the private sector’s process of deleveraging. Below are some relevant blog posts on this topic:
June 13, 2010: Empirical and theoretical reasons why the GFC is not behind us
September 20, 2010: Deleveraging with a twist
October 19, 2010: Deleveraging, Deceleration and the Double Dip
June 11, 2011: Dude! Where’s My Recovery?
Mish Shedlock also has a very good piece today, challenging the people who expected hyperinflation to occur because of the Fed’s money printing:
When was Hyperinflation Supposed to Start?
As Mish notes there:
Hyperinflationists simply do not understand the role of credit in a global economy. China has a huge inflation problem and various property bubbles because credit growth is soaring 30% annually.
In the US, banks want credit-worthy borrowers. However, credit-worthy borrowers are parking cash, not asking for more of it.
Discussion (17) ¬
The reason im parking cash is because anything i look at i fear may drop in value.
Also i am getting 6% p.a. on any money on deposit. So if assets are dropping and i get a little money from a T.D. then i am in front for taking little risk.
Peter
House in America?
Steve, I was wondering if you’ve looked into BitCoin at all?
BitCoin solves a number of problems any digital currency must face;
– cryptographically secure transfer of ownership
– since bits are so easy to copy, a log of history to prevent double spending
– pseudo-anonymity. Transfers can be traced, but identification may not be possible
But as a replacement currency it has a number of issues;
– since coins are created only by CPU power, the system as a whole doesn’t behave much like other currencies.
– The current exchanges for trading in other currencies encourage ponzi speculation
– without a stable value, coins are currently useless for trade
– without trade they may never have a stable value
– huge amount of wasted energy in their creation and log generation (currently about 10^16 hashes per second) that could be better spent
I’m hoping to build a similar solution for a global scale micropayment system. Obviously I’d like to build something that is better suited as a currency replacement. A system that may also be employed at a local level with the potential to replace local currencies.
I loath the idea of building a system that encourages 3rd party creation of credit, so I was thinking of modelling the system based on a private bank minting an initial fixed size bundle of digital notes. The current owner of a note bundle would create a transaction to transfer ownership, almost identical to transactions in BitCoin, a transaction can split or join bundles of notes. Transactions can be created offline, but would need to be uploaded by either party to the bank they were issued from. The bank would check for double spending, perhaps extracting a tiny fee for the service. A log of all transactions would be made publicly available for auditing purposes.
Perhaps the bank would start the system by trading these notes in exchange for other assets / currencies to seed the digital economy. Offering to buy them back again at the same fixed price to give the currency stability and help to define the value of each note. Perhaps the value could be based on the bank’s assets, a kind of “gold standard”. Or just declared by fiat. Though if anyone has any better ideas, I’d like to hear them as it would be important to get this right from the outset.
While I might endeavour to create a single global bank for international trade, this would be an open system that allows others to create, issue and verify notes with different values. With the end user software choosing which types of notes they trust and accept, either manually accepted by the user, or verified by some auditing entity, like browsers do with SSL certs.
Another potential use for such a system could be for tracking ownership of company shares, or other similar financial instruments. Since the bank would know the public key of each owner, you could pay dividends in some other currency by issuing them to the same key. Or accept votes for AGM style decisions as you could verify that they were signed by the owner of the shares, without needing to know their identity.
I think also that professor Richard Werner (http://en.wikipedia.org/wiki/Richard_Werner) predicted the crisis (or perhaps was only the Japan crisis). He is the author of “Princes of Yen” and “New Paradigm in Macroeconomics: Solving the Riddle of Japanese Macroeconomic Performance”. His work is also centered around credit creation/credit bubbles. With Steve Keen, he is my favorite economist. I wonder if Mr. Keen knows about his works and, also, if Mr. Keen and Mr. Werner ideas (which are quite opposite of the other leading expert in the japanese bubble, Mr. Richard Koo from Nomura Securities) are compatible
Best regards,
Jaume
Placing a cost on holding cash will continue to undermine confidence in the USD. It is actually confirming that the currency is worthless — no longer desirable. Savers will be driven to gold in hordes.
The USD is facing a loss in confidence. That is the cause of hyperinflation. My view on the current DJI fall is that it follows wide press coverage of the IMF MD’s comment on the USD:
http://www.youtube.com/watch?v=snVkfJKvjwk
The problem for the US is that there is so much of its currency outside of its control. The “exorbitant privilege” of USD being world reserve has been wonderful for the illusion of prosperity on the rise but it has potential to literally fall off a cliff when it loses that privilege — that is happening now.
I expect Ben Bernanke is now firmly stuck between a rock and a hard place. QE3 will drive confidence in the currency lower. Targeting GDP growth in the US is inconsistent with a stable USD. They even use fraudulent measures for inflation in the US that understate actual inflation. The US is the global reserve currency. For currency stability they need to monitor and adjust to what is happening across the globe not what is happening in the US.
It is evident that the world economy requires a new stable store of value for its medium of exchange — money. That is no longer the USD. I saw some calculations showing gold needs to be exchanged for USD84k/oz for gold to form the current role of USD in global physical economy — excludes the large gambling component.
Hi Bamokato, I wasn’t aware of Werner’s work so I will get a copy of his book and see what I make of it.
Quick point I like to make is that the inflation/deflation debate is usually a problem of definitions– most would agree the result will be a kind of stagflationary/bi-flation collapse once we clarify our definitions.
Matthew K August 5, 2011 at 5:24 pm
You said: “the inflation/deflation debate is usually a problem of definitions”. Totally agree. The quality of debate on such an important issue is very poor and muddled, even among professional economists and central banks, as they rarely define clearly what they referred to as inflation in their discussion.
For example, the original Phillips Curve was a relationship between the change in money wage rates and the rate of unemployment. From causal reasons, it is not surprising to find some reasonable statistical relationship between the two variables. Over time, the meaning of inflation has shifted from wage rate inflation to consumer price inflation (and its expectation). This may be justifiable, but only if there is a close relationship between unit labor cost and consumer prices, which is not always the case.
My interpretation of Phillips Curve is that if unemployment rate is low, then workers can demand greater wage rises. Clearly the reverse is false: inflation of money wage rates does not lower unemployment or increase employment.
With Milton Friedman’s monetarism, where increased money supply leads to price inflation, the chain of flawed reasoning (of Bernanke) is complete: pumping money into the economy will create employment. There is never any detailed explanation of the economic process of how this (more money => more employment) would occur.
The events of the last two years have comprehensively discredited the idea that increasing the money supply can create employment. With global financial markets tanking sharply, will we see still more money pumping to prop up markets?
Dear RickW,
Gold is Worthless, it is without doubt the new Ponzi scheme in town.
Western cash is the only real commodity of value, not because it should but because it is. Think about it, all assets are calculated and traded in money not a barter system that operates in Gold or other intrinsic vessels, even the value of gold is calculated and purchased with money. For the financial system to operate it need a fraudulent currency like Fiat money, how else could the powerful get rich without work? You are correct gold should be 100,000/ounce but that would indicate that the world is fair, also it would mean that the only way to create wealth was to find Gold. People will always find a way to enslave others just by being smarter than them.
Kind regards, kalman
Lyonwiss thanks for the comment, your statement re money printing reminded me of something FOFOA said — they can only print volume, not value. As to your final question my thoughts are ‘Of course we will!’ The system will be preserved at all costs.
Kalman, I suggest you read some FOFOA — currencies are for transacting, gold is for wealth preservation.
Seeing as Steve added a link to Mish, I will counter with some links to FOFOA
http://fofoa.blogspot.com/2010/09/just-another-hyperinflation-post.html
http://fofoa.blogspot.com/2010/09/just-another-hyperinflation-post-part-2.html
http://fofoa.blogspot.com/2010/09/just-another-hyperinflation-post-part-3.html
http://fofoa.blogspot.com/2011/04/big-gap-in-understanding-weakens.html
Dear Matthew K:
Thank you for beating me to the relevant FOFOA posts. I know that the many
voices on this blog hold strong (and they believe well reasoned) opinions on the
subject of this deflation/inflation debate. I will say categorically that, until you have
given yourself the opportunity to read, digest, and come to understand the logic
of FOFOA’s presentation on this subject (and it takes a lot of real effort and time)
you will never have truly challenged the deepest arguments against YOUR thesis.
You may still come away unconvinced, as many do, but like a fighter who has only
had to beat “patsies” you will never know how good you are until you can logically
refute HIS thesis. So may the best thoughts win!
Dear Professor Keen:
I am generally an infrequent commenter here, first, being an American, and
second because I have no education in economics beyond the reading of many
articles and papers. You may recall the Alan Kirman link, re: SMD, and the
“Walras unfortunate lagacy” papers. If you ever have the free time to read
what in my view is the best work to date on the deflation/hyperinflation debate,
I can give no better suggestion than the links provided by commenter Matthew K.
This work has fundamentally changed my thinking.
Matthew K may be right to say that printing increases the volume of fiat money tokens and reduces the value of the existing ones but that’s only half the story. The other half is that taxing reduces the volume of fiat money tokens and increases the value of the remaining ones.
So the government can provide a stimulus without causing inflation by printing money tokens and issuing them to each citizen, provided that it also takes back the same number of tokens via taxes. That way just as much money is being destroyed as is being created.
However you need to use the right tax. If you just give everyone $1000 in January and tax it back from them in December, you shouldn’t expect much of a stimulus, since sensible people will just put the cash in a savings account and wait 12 months. If you want economic activity you have to ensure that the people being given the tokens are not the same as those who have to return them. That way exchanges have to happen to swap the tokens around. So say you gave the $1000 to each woman but taxed each man the same amount, that would be a more effective stimulus than just giving everyone $1000 and taxing it back from them.
Even that’s not enough to make a strong stimulus. People swap money tokens for goods and services. So for a strong stimulus you need to give the monetary tokens to people who need goods and services and tax people who have more goods and services than they need if you want some swapping (aka economic activity) to happen. Doing it the other way round won’t create so much of a stimulus.
So for a strong stimulus without inflationary consequences, the government needs to implement a cash giveaway to all citizens combined with a matching asset tax like land value tax or a carbon tax. That’s not to say that other tax+spend combos like VAT/GST plus a cash rebate won’t work. It’s just that they will likely be less effective.
Werner was also one of the people behind the “Positive Money” guys submission to the UK Independent Banking Commission http://www.positivemoney.org.uk/our-proposals/submission-independent-banking-commission/
Hi Robert, I had known of FOFOA for sometime and read bits here and there without getting the big picture but upon committing some real time to his writings I have to admit that my views on money changed significantly.
Derek, I have to say that I disagree with you on your view. I don’t believe that taxing reduces the volume of fiat notes, just moves them. Even if the government ran a surplus, it’s investment program of the surplus funds would be putting them to work back in the economy.
Hi Matthew:
Since all fiat is created either by bank lending or by government, whether by borrowing or printing, the only was taxing would reduce the volume of fiat would be if it were used to cancel debt, either government or private. Currency is merely
zero interest debt of unlimited duration. So, in short, I agree with you.
Hi Rob, this is my favourite of FOFOA’s posts, I’m sure you know it
http://fofoa.blogspot.com/2009/03/all-paper-is-still-short-position-on.html
In this post he breaks down the monetary deflation argument by pointing out that economic deflation and monetary inflation are completely compatable and why the collapse of credit money is the collapse of monetary assets but not money in use — incredible insights.