Rolling US Economy Into The Shitbin Thread

How about if you look at it like this

http://bigpicture.typepad.com/comments/images/2008/10/23/adjusted_monetary_base.png

Is there anything to say that this won't sawtooth like in 1999 as the amount credit in the economy declines?

That graph shows continued expansion with the only (shortlived) dip coming exactly one year after a 15% expansion...not really sure how that graph is different to the stlouisfed one. As the periods of these graphs are not deflationary they are as I would expect to see them. But now the US is in a deflationary period (which I accept as far as the US goes!) but monetary expansion has shot up. Curios on opinions as to what this means (not now - where there is no multiplier) - but 6,12,24 months down the line

is inflation - a flat tax wealth transfer - that punishes the young and rewards asset holders.

This is just nonsense.

Inflation erodes savings and debt. Deflation increases savings and debt.

How on earth does the value of savings declining reward asset holders?

And nobody is in a deflationary period yet. They are in a disinflationary period. Lets try and get things straight.

Thats not entirely true. It also depends on the form of inflation. Only wage inflation erodes debt. Price inflation does not (a larger proportion of income going towards living costs doesn't help erode any debts taken on)

The rising cost of goods such as bread, gas or milk is a flat tax, the poor are disproportionately affected relative to income

As you suggest, inflation erodes the debt that asset holders took out. Those that follow face higher levels of debt to pay for the same asset.

Any decline in value of savings relative to assets benefits those that converted savings to assets early

Also, re sterling. The estimate purchasing power parity exchange rate would be about $1.50 to the pound (sorry, no source), so we are finally where we should be. It was our relatively high interest rates keeping it artificially high before. Of course, we could fall a lot further, but a positive development so far, as we are also an exporting country, and it is probably a good thing if Chinese toy robots get more expensive and whisky gets cheaper for Chinese toy-robot-factory executives.

Sorry, I know the UK has its own shitbin thread. I should be using that.

Of course it has been the asset price inflation of the last 25 years that benefits asset holders (rather than the next 10). But like any other price inflation its a symptom not a cause.

You do know that ANY wage inflation erodes debt? It doesn't have to be above rate of inflation. (I know your quirky views on real wage inflation.)

I take your point re price rises on staples disproportionately affecting the poor.

Agreed re: Sterling being highly overpriced over the last 5 years.

UK does not produce or save enough. A debtor country without sufficient productive or export capacity

If my incomings rise 10% and my costs rise 25% my ability to service my debt is diminished. The proportion of my wage needed to pay my debts has increased

Also as we now have general inflation, but large falls in various asset classes, inflation doesn't necessarily mean asset-price inflation.

I was using asset in the much wider sense in the post above. (ie people owe you money ie savings)

So is this good or bad news in the long run?

Food prices on the way down

I'm a lot better off than I was last month. Paying less tax, mortgage down, energy costs down, fuel down. And I haven't got any savings. I suppose this is all just peripheral to the bigger picture?

Well, the thing is whether your real disposable income going up makes you go to the shops or whether you save it and if you save it whether the bank hold on to it or lend it to a productive enterprise or not.

Normally, prices falling actually acts as a stimulus in itself, but whether it will this time is moot.

Falling prices mean I won't buy now what I can buy cheaper next year. Also my employer won't make so many of the thing we sell

If my incomings rise 10% and my costs rise 25% my ability to service my debt is diminished. The proportion of my wage needed to pay my debts has increased

Yes, but if my incomings rise by 10% and my costs rise by 11% and my debt-service costs are 5% of my income, I'm better off.

Yes, overall deflation is really, really bad, for the reason that K says. But falling food and energy prices should in the short term have a stimulatory effect, as you won't put off buying food or energy, and the spare money can then be used for other things.

Falling prices mean I won't buy now what I can buy cheaper next year

But that doesn't apply to most of the things I buy week on week i.e. food, petrol, energy, my mortgage. I spend the extra on eating out. Got to keep the service industry going.

If my incomings rise 10% and my costs rise 25% my ability to service my debt is diminished. The proportion of my wage needed to pay my debts has increased

Actually, no. The proportion of your WAGE needed to pay debts has decreased, but the proportion of your DISPOSABLE INCOME has increased. But this all depends on how big a proportion of your income goes on debt-serviceing in the first place.

The British do not behave like the Japanese.

serviceing?

Yeah, Ned proves my point! As long as we all spend any extra income on eating out, everything will be fine!

The British do not behave like the Japanese.

Exactly! This is what most commentators seem to be missing. We're not prudent. We're not like the Germans either. We're fucking crazy and we don't give a shit about the future. The great British consumer will NOT retrench!

(this really is the wrong thread - sorry - I'll stop now)

One of the reasons the Japanese had the lost decade is that the japanese squirrel away any extra money they have they are not good at splurging, where as any extra fiver a brit gets will be vomited up outside yate's wine lodge on the next friday night.

It's everybody's shitbin

Correct, I meant to say proportion of available wage left over. Apologies

Of course none of this takes into account taxation

BTW anyone here Canadian? How are things bearing up there?

well there are some important caveats but things look better than most other G20 countries. first caveat should probably be that i dont actually live in canada right now lol.

the canadian financial sector is much more tightly regulated than elsewhere and capital requirements for all FIs are much higher. only two of the five major banks were heavily involved with complex credit derivatives and the govt't forced them to take on extra capital in 2007 when those assets were looking troubled.

major cdn investment banks are just arms of the large retail banks and they didn't have the same incentives or structure to encourage the riskier behviour that effected FIs elsewhere. as well the cdn market is almost an oligopoly fees there are much higher than U.S. or europe for most financial products which means that banks and by extension ibanks, fund managers and even insurance companies remained solidly profitable w/o needing to 'innovate'. there's a really good studio 2 podcast where the panel discusses how what were considered the main flaws in the cdn system: lack of competition, high fees, low innovation, lack of risk-taking have become the things that have insulated the cdn financial industry from the worst of the global credit crunch.

as well the cdn gov't has been fairly conservative with fiscal policy aggresively paying down debt and putting through tax cuts over the last few years. inflation is not a problem and hasn't been too much of a worry over the last decade running consistently around the 2% target. fed govt was still has a surplus and the central bank has a room for rate cuts even after the current round so there's more leeway with both fiscal and monetary policy.

Being a net exporter probably helps too.

this is a side issue that comes from reading the thread but i'm really disappointed in the way i was taught economics. so few of the economics courses i took really emphasised the way models and theories worked in the real world or gave any extra ability to understand things like the inflation discussion you've been having.

part of this is my fault, i did my writing in the major requirements in the math dept and i took mostly micro courses, but most of what i was required to do was manipulate variables rather than demonstrate a fluent understanding of how this shit actually, for real, works.

haha i suppose it's not a newsflash that someone can get high marks in school w/o learning much of anything but i'm still disappointed

I am wondering what all the econ classes here on campus are doing this fall -- must be a bit like the poli sci classes with the elections, it's almost a temptation to say "Look, forget all this stuff in the outdated textbooks, here's what's happening NOW."

Being a net exporter probably helps too.

it didn't help germany! and being a net exporter is a mixed blessing for canada, i think

so who else thinks a post-General Motors era sounds kinda cool?

o few of the economics courses i took really emphasised the way models and theories worked in the real world or gave any extra ability to understand things like the inflation discussion you've been having.

Ha - well, Kondratieff is on some heterodox economics trip (I think), and I don't know what the hell I'm talking about, so that might also explain it.

michael lewis knows how to tell a story

http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom?tid=true

I was coming here to post that. Great article.

there's a really good studio 2 podcast where the panel discusses how what were considered the main flaws in the cdn system

link?

“We have a simple thesis,” Eisman explained. “There is going to be a calamity, and whenever there is a calamity, Merrill is there.” When it came time to bankrupt Orange County with bad advice, Merrill was there. When the internet went bust, Merrill was there. Way back in the 1980s, when the first bond trader was let off his leash and lost hundreds of millions of dollars, Merrill was there to take the hit. That was Eisman’s logic—the logic of Wall Street’s pecking order. Goldman Sachs was the big kid who ran the games in this neighborhood. Merrill Lynch was the little fat kid assigned the least pleasant roles, just happy to be a part of things. The game, as Eisman saw it, was Crack the Whip. He assumed Merrill Lynch had taken its assigned place at the end of the chain.

this was probably linked already but holy fuck, how depressing

http://www.bloomberg.com/avp/avp.htm?N=av&T=Roubini%20Sees%20Crisis%20Worsening%2C%20Hurting%20Emerging%20Markets&clipSRC=mms://media2.bloomberg.com/cache/vcYqArJFMJgA.asf

'best' part:

he talks about how because this isn't like the 80s where the countries lending us money were allies, but its our rivals who hold our debts this will have very real geopolitical impact, i.e. China says they forgive the debt but get Taiwan - (audience laughs nervously). Roubini, dead serious: "I'm not joking."

Hey guys I have been right about a lot of things lately in my chosen field of expertise to which I have devoted a lifetime. Now listen, that makes me a credible expert in other fields as well! For instance, I have a passing interest in foreign policy and national relations. China will dick us over for a tiny island they already claim they control.

it was an example of how being a debtor nation will have geopolitical impact which seems entirely reasonable to me

i think tom had entered the zone where every post he read was going to be met with derision no matter what

http://img.photobucket.com/albums/v134/tracerhand/roubini.jpg

ok that was funny

"soldier hole"

roubinis getting a lot of shine from predicting our current situation or whatever - but has anyone studied his previous forecasts - is he just some resolute bear

i agree w/toms skepticism as to his foreign policy chops - its not like china is holding our paper just to be friendly

i like that hes beefing with nick denton, nothing screams "2008" like ceo of a blogging company having a facebook fight with the economist that predicted the collapse

i agree w/toms skepticism as to his foreign policy chops - its not like china is holding our paper just to be friendly

― ice cr?m, Sunday, November 16, 2008 11:56 AM (1 hour ago) Bookmark Suggest Ban Permalink

that was roubini's point, not toms

China's holding of US Treasury debt is an interesting situation. It buys China plenty of immunity from US meddling and arm-twisting. However, that debt maintains a detente that cuts both ways. As an old piece of wisdom goes, "if you owe the bank a million dollars you can't pay back, you have a problem; if you owe the bank a billion dollars you can't pay back, the bank has a problem."