For the week I have off I have been surprisingly busy. The wife wanted to repaint the dining room which took a couple of days prep and paint. The pet Pug had a minor injury that required a trip to the vet for pain meds. We also stopped in the the local human society to look at kitties but I am still a bit gun shy about another cat.
The last week of the NFL season is upon us which brings me much sadness. The playoffs are the big show however and this year promises some very exciting action.
I think I will be doing the usual Friday night post so get your requests is!
Please have a happy and safe New Years Eve! We always stay home on New Years because it is just too crazy to go out.
The Winner is Maintaination!
Even here at years end a quick scan of the major headlines and themes seem to focus on the inflation/deflation debate. I have used up plenty of pixels on that debate as well over the year. The inundation of information over the past 2 weeks has settled the score in my mind once and for all and I would like to debut my call tonight.
And the winner is........
Before I explain lets review the other two -ations and see where they are:
One word, so many definitions!
I will simply state that deflation is the falling of credit and asset prices. You can argue amongst yourselves the particulars. With my definition in place, deflation is a loser. It has lost. It is done.
There was some asset deflation (housing especially) but overall asset classes across the board look more like 2005 than 1995. Credit has contracted in some ways (personal credit outstanding, revolving credit) but credit has expanded enormously in many other way (I will come back to this).
There is not going to be a Depression era-like deflation event and anyone betting so is going to lose. If it was going to happen it would have. It has not. It will not.
Hyper or otherwise, inflation has more definitions than it's brother deflation. I will state inflation to be the rising in assets prices and an expansion of credit. With my definition in place inflation is a loser, especially the hyper case. While the FED/Treasury have put more money into play than ever before, not much of it is making it's way into the economy. Asset prices have stabilized, but are not rising (side step the rally in stocks which has stopped dead over the past 2 months) to any real degree. Forget about wage inflation as well. This one is toast.
There may well still be a major inflation event in the future, but the chances now are very small and betting this way is a loser.
So what is Maintaination?
It is basically what is sounds like. A formal backstop of the entire system to maintain values at some level. This is done through money creation (yes, the printing press) but this money is not real in any sense, it exist only as a paper balance for books.
I know this sounds crazy but bear with me.
Consider even after TARP (whatever variant) and all the other big aid programs the economy was treated to (and will still receive) the following:
-Another run at cash for clunkers (my estimate)
-Extended permanently housing tax credit (my estimate)
-GMAC soon to be unlimited help (Zero Hedge)
-Unlimited Fannie/Freddie Help (some think this is nothing, but you know better than that I would hope)
-Extended unemployment benefits for up to 5 years (my estimate)
-Health Care program will cost 2-3 times estimates (my estimate)
-Pensions all over will need aid (my estimate but I am hardly alone!)
-Several large states will face bankruptcy and will be bailed out (Michigan, Arizona and of course California)
-And just in case, 4 trillion dollars for the next implosion (Unreal; see Mish)
Are you getting the picture?
So how does all this work? Well that is the beauty of it and maybe the time off has given me the distance needed to get a better perspective on all the garbage we saw happen over the last year or so.
The FED/Treasury creates all this money; some of it gets used right away (AIG payouts, etc) but most of it only NEEDS TO EXIST is a notional sense. If the US says FNM/FRE/FHA mortgages are golden they will trade that way. If the markets think liquidity is aways going to be around (it will) they will trade that way. As long as not all of this money HAS TO BECOME REAL all at once than this hijacking of the US treasury will go off without issue.
Now you are going to argue that this kind of monetary printing will cause bond yields to spike and the US will face a funding issue. I would reply, have they so far? We could argue about who is buying these things, but someone is and more importantly nothing comes of it.
Say the FED is the "household" buyers of 1/3 of all bonds issued over the last year. So what? Where are yields? Where is the failed auction? Do you think the Chinese and others would have no idea this is going on?
I am of the firm opinion that what the US is doing is very dangerous and the first effort on a scale this large. Players around the world are both not in any position to do anything about it, and are complicit in the process in an effort to save their own behinds.
So Maintaination is:
The artificial support of asset classes by monetary policy that requires participants to accept printed cash as real and trade as such but never to actually ask for the mythical principle.
So there you have it. My own personal theory.
What can go wrong? Plenty. Any major shock to the system could collapse the whole thing. Someone may actually need some kind of "unlimited help" and that price tag will cause a panic to get hands on the "mythical" money that remains, the final bank run if you will.
I probably need to develop this a bit more and I am sure the comments section will be chock full of good stuff so let the debate begin!
Have a good night.