Wednesday, May 19, 2010

A Real Mess

Ever since I returned from vacation I have been in slow motion. Of course I am out of time again tonight so just a few items and an open thought experiment.

A Real Mess
It is probably better I am out of time because there was plenty of breathless screaming headlines today of all sorts that seemed a bit over the top. Enough confusion for one day. Here are some things I found most important.

via Zero Hedge (among many others):
FOMC Minutes: No Asset Sales Until After First Rate Hike
Take home point:
A majority preferred beginning asset sales some time after the first increase in the Federal Open Market Committee’s (FOMC) target for short-term interest rates. Such an approach would postpone any asset sales until the economic recovery was well established and would maintain short-term interest rates as the Committee’s key monetary policy tool. Other participants favored a strategy in which the Committee would soon announce a general schedule for future asset sales, with a date for the initiation of sales that would not necessarily be linked to the increase in the Committee’s interest rate target. A few preferred to begin sales relatively soon...

No decisions about the Committee’s longer-run strategy for asset sales and redemptions were made at this meeting. For the time being, participants agreed that the Desk should continue the interim approach of allowing all maturing agency debt and all prepayments of agency MBS to be redeemed without replacement while rolling over all maturing Treasury securities. Participants agreed to give further consideration to their longer-run strategy at a later date.
See you in 2013.

One of the more screamer headlines but still worth a look (via The Telegraph):
Germany's 'desperate' short ban triggers capital flight to Switzerland
Case in point, the Swiss intervention in the FX market was very huge and was news. Here is the "capital flight" number:
The short ban set off instant capital flight to Switzerland. BNP Paribas said €9.5bn flowed into Swiss franc deposits in a matter of hours on Wednesday morning.
Is that figure outsized? I am not 100% sure but I would think it is not. Still, worth noting money direction.

The thought experiment for this evening comes from a find by The Illusion of Prosperity on CNBC with Dennis Kneale providing the following quote:
I'm, I'm sorry but update me please... why is it that we've doubled the money supply of dollars around the world... how could we possibly have the opposite of inflation? - Dennis Kneale, May 18, 2010

It is an excellent question. Things to consider:
-By what mechanism is this even possible?
-What would the next step be (if there is one) given this dynamic?

On a related note:
Japanese GDP Deflator Plunges To Multi-Year Low As GDP Comes Below Expectations
Consider that Keynesians think Japan has failed to stop deflation becasue they simply did not go hard enough and long enough into QE.

Have a good night.


Lurker said...

For Friday night, please play "Disco Duck" by Rick Dees.

getyourselfconnected said...

Geez, you are early this week!

Stagflationary Mark said...


This is why I think Dennis Kneale is missing some of the picture.

The Quantity Theory of Aluminum

scharfy said...

>"I'm, I'm sorry but update me please... why is it that we've doubled the money supply of dollars around the world... how could we possibly have the opposite of inflation?" - Dennis Kneale, May 18, 2010

Is this actually true? Is credit not contracting much quicker than we are printing it?

Aren't most of the central bank printing ops just sitting around padding the deflating assets of banks, and not truly chasing goods?

Given the choice - If I gave you 1MM cash or a million bucks of property in Anytown, USA - what would you take?

If you said the cash, you might be a deflationista more than you care to admit....

But I am brushing up on stagflation to see what that's all about...

getyourselfconnected said...

I have no idea why my comments are not showing up.

getyourselfconnected said...

Looks ok now;
Lurker, you are early this week!

I am sure Dennis is missing many things, but then again so am I.

Yes you are getting to where we need to thik about things.

jeff said...

We have guaranteed and backstopped the dollars instead of printing real dollars. This is a big difference. The dollars are also disappearing due to being sucked away by massive debt. I sold some metals late on monday including 50% of my silver. Deflation is very possible at this point which will be followed by inflation. Scary tines

Stagflationary Mark said...

Blogger is busted again, both on your site and mine.

I see "7 comments" right now when I look at the article but just 5 comments when I look at them individually.

That does not count this one, which I guess will bring us to 8 and 6!

There's comment deflation!!!

Anonymous said...

First time, wait for dark to fall. Then strip naked, turn off the lights and stand before a window. Hold your arms out and say;

Venus. goddess of beauty
Goddess of power
Goddess of women
Goddess of love
I call upon thee
Hear me
Transform me in your image
Like your beauty, mine shall be unsurpassed

Venus, goddess of beauty
Goddess of power
Goddess of women
Goddess of love
Fill me with your radiance
Transform me,
Transform me
Transform me
In your image
This is my will.

Or not. It's really your choice.

getyourselfconnected said...

wow that was some comment.

Moneta said...

Why not inflation?

The banks (and Pimco)have sold at least 1 trillion dollars worth of non performing loans to the Fed which put them on its books and exchanged these for 1 trillion worth of "freshly printed" dollars with which they bought Treasuries or just kept as deposits with the Fed.

Basically, a large chunk of the printed money was used to replace the crappy stuff in portfolios (CDOs, MBSs, CP, etc) and this has not impacted current GDP. It will impact future GDP and prices because you've now got trillions in portfolios that one day will be liquidated to fund purchases for products and services that probably won't exist because of current malinvestment.

I know that Pimco managed to sell its non-performing MBSs (to the Fed)and replaced them with treasuries. So a lot a new money is going to fund the deficit. That money is going into the GDP (cash for clunkers, 8K tax break for homes, unemployment insurance, etc). And since the economy tanked by more than the money that was injected for the purchase of goods and services, prices did not go up.

Secondly, zirp permitted a lot of companies across many industries to refinance their debt. So supply has not gone down by that much. But now with rates at 0, the next time the economy drops, companies will not be able to refi and that's when we're going to see bankruptices skyrocket. When capacity drops, that's when we'll start to see inflation.

Since the Chinese currency is pegged to the US dollar. Every time the US prints so does China. So in the last couple of years China has been investing and increasing capacity like crazy. This created more supply.

But at one point, if the US keeps on printing and China mantains its peg, inflation is going to kick in like crazy (we're already seeing it)and their exports will start to cost more making goods more expensive for Americans.

getyourselfconnected said...

An excellent well reasoned argument with a longer term macro look. Of course I am biased because I agree with you, but I think it was a nice write up based on the questions I asked. You get to lead off friday night entertainment's music section with a request.

Stagflationary Mark said...

Printing money and offering credit are not the same things.

If one borrows to increase capacity, that's the stuff deflationary Great Depressions are made of.

You start with a commodity bubble because borrowers all buy commodities at the same time to create the overcapacity.

Eventually the overcapacity leads to a bust though.

I'm still deflationary.

Moneta said...


"Credit is not money" is one of the most pervasive memes I keep on coming up against. It's technically true but only so you don't count the money twice.

When I bought my house eons ago, I wrote the owner/seller a big fat check. I was the proud owner of a mortgage and his house was paid off, so that money went straight into his bank account.

Technically my debt was not money but his deposit sure was.

As for capacity and this output gap they keep on talking about, I'm not sure that the capacity we built over the last few decades is the capacity we'll need for the future. The population is ageing and the needs will be different. For example, how many friggin banks do we need?

I worry more about inflation than deflation. Deflation is a no brainer. I'm debt free so with deflation I don't have to take risk and my money is worth more every day. Inflation would be the killer... That's why I put zero energy into the deflation debate.

My focus is on purchasing power more than inflation vs. deflation.

There is good deflation and bad deflation. The good deflation is when you can buy more with your dollar, the bad one is when prices are coming down but you have no money yourself to take advantage of those lower prices. So you could argue that that's inflation.