Rolling US Economy Into The Shitbin Thread

Bush on TV defending capitalism at the moment...

Capitalist at work:

http://www.secondtimearoundminifarm.com/images/shearing3.jpg

citigroup trading under 8 bucks??

http://www.forbes.com/opinions/2008/11/12/recession-global-economy-oped-cx_nr_1113roubini.html

uh, well, damn.

http://www.suntimes.com/news/politics/1275442,CEO-daley-layoffs-chicago-economy-budget-111208.article

that roubini photo makes him look like some kind of kgb interrogator.

"your capitalist system, it is doomed"

Roubini: "Deflation also implies a debt deflation where the real value of nominal debts is rising, thus increasing the real burden of such debts."

Deflation would be bad, bad news. I say this, even though I would be a nominal 'winner' in a deflation scenario. I say this, even though I am certain that a policy of infinite economic growth will eventually kill the planet and deflation would first shrink the economy and then slow down growth to a crawl for as long as it prevails.

The problem with deflation is that is stifles innovation and promotes economic stagnation at a time when dynamism and innovaton are needed very much. It punishes the young and will give more power to the old and the ossified (like me) who hold assets.

Thats only kind of true. It is inflation - a flat tax wealth transfer - that punishes the young and rewards asset holders. Deflation punishes the leveraged (most middle class asset holders) and rewards...well, anyone that manages to stay in employment. Depends whether you are a true asset holder or are leveraged to the hilt for it

My feeling is that this is not a true deflationary episode - well thats not entirely true, the dollars reserve currency means that for the US anything is possible and could make a deflationary episode in a debtor nation an option (however for the UK, Ireland, Austria and the others I would be much more suspicious about expecting deflation)

BTW anyone here Canadian? How are things bearing up there? I read that comparatively Canada steered clear of the worst excesses of Europe, Australia and the US? Any truth in this?

canadians avoiding excess? gtfo!

http://www.mercuras.com/1008/bailout_economic_crisis_336x280.jpg

My feeling is that this is not a true deflationary episode - well thats not entirely true, the dollars reserve currency means that for the US anything is possible and could make a deflationary episode in a debtor nation an option (however for the UK, Ireland, Austria and the others I would be much more suspicious about expecting deflation)

We are going to get deflation because we will import it. however take a look at this logic: Government lets loose monetary and fiscal policy, people end up with more money, rather than spend they pay down large accrued debts, either on shore or to foreign creditors, then surely the money supply decreases and you get deflation. Your fiscal stimulus has allowed people to destroy money or at least destroy it as fast as it is created, which is surely deflationary. The credit crunch has forced a repayment situation on the economy so money supply is contracting so deflation is a possible result.

Fancy a pint this evening?

http://research.stlouisfed.org/fred2/data/BASENS_Max_630_378.png

This shows base money supply increasing even as deflation occurs (for the US). Haven't seen stats for UK

But the UK is not comparable to the US, the global flight to 'safety' is the flight to the dollar (however temporary this may prove - different question). There is no flight to sterling, but precisely the opposite. The UK is surely closer to Iceland than it is to the US

pay down large accrued debts, either on shore or to foreign creditors

And heres the rub. And why sterling is suffering. No one wants it

The UK is surely closer to Iceland than it is to the US

A topic of conversation on the Today programme today about how close to Iceland the UK and Switzerland are.

and Austria and Ireland i presume

probably.

So how does deflation occur if there is capital flight and a potential run on the currency. The US is acting as temporary high ground for many countries. The UK is not

I think because a lot of the capital was use as collateral to raise debt so although capital may be leaving the leveraged positions are being wound up leading to deflation. I'm not necessarily suggesting that the UK gets Japan style deflation just a deflationary episode.

Does Iceland face deflation? Deflation is surely marked by a strengthening currency yet GBP is heading towards halving in value against the yen (and is falling against most everything else). Not a good look for a country reliant on imports

Is it inflation if people aren't buying?

I believe there is falling consumption in Iceland. And price rises are a symptom not a cause (what is interesting is whether some of the hit taken by increasing import prices will be counterbalanced by decreasing commercial rent payments)

Back to the US - what do you make of this graph?

http://research.stlouisfed.org/fred2/data/BASENS_Max_630_378.png

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