Monday, June 28, 2010

The Monetary Game Still Means Deflation

John, I guess I am going to have to watch these. Things are starting to get crazy, as California is looking at ending welfare. Time to arm the citizens of California and open the borders so those getting aid can go back home maybe. Looks as if Arizona can't police its own borders, there is nothing left to do but cut off aid to all people getting it, lest it bankrupt the states. We have a president that is aiming at spending us to peonage to support those that are going to be holding the middle class of the US in peonage, namely the connected wealthy, by putting debt on our tab to send to those that really need it, but having the proceeds flow to those that hold the debts in the first place. We are clearly seeing a struggle for the survival of the US middle class in the midst of this transfer of future income.

In the meantime, I have recently read a couple of articles of interest. One is some very solid theory by Steve Keen, neo-keynesian economist of Australia, who seems to understand this mess as well as anyone out there, in an article dated January 31, 2009., Keen blows holes right through the theory being used by Ben Bernanke and finishes the article by saying "Having failed to understand the mechanism of money creation in a credit money world, and failed to understand how that mechanism goes into reverse during a financial crisis, neoclassical economics may end up doing what by accident what Marx failed to achieve by deliberate action, and bring capitalism to its knees". This is directed at Bernanke and what Marx called the Roving Caviliers of Credit.

On the contrary, Ambros Evans Pritchard has this article: it, he claims RBS is telling clients Bernanke is about to double the QE to $5 trillion. If you read Keen, you will realize that Bernanke is hastening deflation, while at the same time filling the banks with money to speculate on the stock market and other stuff. One of the problems in Japan has been the banks are stuck in the stock market and can't liquidate to get back into the game of lending. Also, the US bubble was so large that the excess demand created by credit was 30% of GDP and roughly 22% of aggregate demand. Bernanke is ignorant of the fact that the Fed did in the early 30's what he accuses them of not doing and it did no good, because fiat money has very little to do with money in general in the US and instead the credit inside the banking system is the game. Of course, the procedure of buying debt with money isn't any different in general than a bank buying the same debt with money. As you have said in the GD mold, the PTB are going to go over the falls in a barrel to attempt to keep their errors of the past from being laid bare.

Here is a link to a Bank of International Settlement study dated March 2009. Much of it is beyond my comprehension, but the gist of the study is pretty easy to understand, "that there isnt' enough dollars in the world to satisfy the liabilities of international lenders. This clues me into the idea that Bernanke actually bought securities off European banks to solve the big problem funding these liabilities. You might recall all the talk about the TED spread when the mess was really hot. In this article it is pretty easy to see how big a mess this $31 trillion ball of wax is and probably how big a part the failure of Lehman had in depriving the market of all the derivative fake money that is assumed to be out there through these trades.

All this adds up to why this is such an impossible situation and why we are going to see a crash. Ones attention has to move from the idea of money to the idea of liabilities in general. I read an interesting writing by a guy named Lysander Spooner, who lived up in your area back in the 1800's. Of all the things I have read about money, this is one of the more eye opening ideas I have read. I had written over and over again that "This Note is Legal Tender, for all Debts, Public and Private" was the essense of the US currency and what gave it value. Whereas I had argued deflation online for the past 9 years with a bunch of gold bugs, I would bring this phrase up in my writings. It was my understanding that what would cause deflation was the shortage of money, created out of debt itself, to satisfy contracts. As borrowing ran its course, we would be left with contractural liabilities that couldn't be paid once the supply of credit slowed.

Here is the key paragraph of what I believe to be one of the great intellectual pieces ever written on American money: "But it will be said that Congress are authorized “to coin money, and regulate the value thereof, and of foreign coins.” This is true-but its obvious meaning is, that Congress shall fix the value of each kind or piece of coin, relatively with the other kinds or pieces, - that they shall, for instance, decide what weight and fineness in a silver coin, shall con­stitute it equal in value to a gold coin of a certain weight and fineness. It means that they shall have power to declare that a dollar of silver shall be equal in value to a dollar of gold, and that they shall decide what weight and fineness of each of these metals shall constitute the dollar, or unit of reference. Congress, then, have power to fix the val­ue of the different coins, relatively with each other - or to make them, respectively, standards of each other’s value. But they have no power to make them “standards of the value” of anything else, than each other - or to fix their value relatively with anything, but each other. Nobody will pretend that Congress have power to fix the value of coin relatively with wheat, oats or hay-that they have power to say that a dollar shall be equal in value to a bushel, a peck, or even a pint, of wheat or oats. And it is only in the single case of a “tender in payment of debts,” that the legal value of the coins, relatively with each other, can be set up. In all other cases individuals are at perfect liberty to give more or less for any one of the coins than they would for any others of the same legal value."

Spooner later became an early anarchist, as he recognized the corruption of organized government and how it set up favorites in the economy and despite the constitution, passed laws to the contrary. The nature of the piece was "The Constitution of the United States, (Art. 1, Sec. 10,) declares that “No State shall pass any law impairing the obligation of contracts.”" In it, he also said that gold and silver were commodities and that their value fluctuated and were no more stable than the other commodities out there. Thus, with India and China and their roughly 2.5 billion or so people between them having a desire to wear gold rings and other jewelry, there is a high demand to melt down gold and make jewelry. India has historically been a hoarder of silver. They also have their own debt bubble, as does China. Demand around the world is being financed by credit that has a limit. We are certain to see the end of this run soon, to be followed by a collapse in demand for all commodities and a liquidation of positions in these metals due to weak markets. In the meantime, tender for payments of debt, debts to banks and debts owed by banks (both sides of the ledger are liabilies, but the liabilities of the banks are of stated amount, while the value of their assets are not stable) become harder to satisfy.

I think these 4 links put together the idea of what we are looking at, as the entire idea behind the establishment solution to this problem, one that has already failed in Japan, is going to fail. This is going to be a conflict that literally rips the world apart, as maybe China can't collect from the US, as people opposed to the welfare state begin to realize their own pensions, 401K's, bonds and other assets can't be saved. I have thought this situation over and over and the only thing I can see that would work is a declared bankruptcy for everyone that would result in a lower price structure, a legal liquidation of debt and at least some portion of all assets being saved to allow for some kind of retirement. Otherwise I think it could all go up in thin air, the last being the currency, should the various governments survive. We have the making of civil and international strife that few can comprehend and little willingness to make adjustments to shorten the disaster that is certain to come.


Blurtman said...

Standing on the beach
With a gun in my hand
Staring at the sea
Staring at the sand
Staring down the barrel
At the banker on the ground
I can see his open mouth
But I hear no sound

I'm alive
I'm dead
I'm the stranger
Killing a banker

I can turn
And walk away
Or I can fire the gun
Staring at the sky
Staring at the sun
Whichever I chose
It amounts to the same
Absolutely nothing

I'm alive
I'm dead
I'm the stranger
Killing a banker

I feel the steel butt jump
Smooth in my hand
Staring at the sea
Staring at the sand
Staring at myself
Reflected in the eyes
Of the dead man on the beach
The dead man on the beach

I'm alive
I'm dead
I'm the stranger
Killing a banker

David said...

you write "pensions, 401K's, bonds and other assets can't be saved"

I'm attempting to avoid this with my IRAs being in T-bills, Treasury-only MMF, and out-of-the-country gold trusts (CEF and PHYS).

If the Treasury goes after this source of funds, it will be no better morally than Argentina was ten years ago.

Do you see things really getting that far here?

marvin @ global economic analysis

mannfm11 said...

David, I will look for you on Mish's site. The paradoxes are so deep in these matters that it is damn hard to think in both directions. Those that the government owe, owe the government. The government can only pay a little at a time. The best case is the government is going to need to keep its credit rating for a rainy day. If we get too deep, there will be a haircut. But, everything is relative. If the rest of the world lost 90% of its money and you lost 50% of your money, you would be a relative 5 times as rich. It is more a case of naming your poison. I think paper assets are going to be the worst place to be. Not all paper assets. Titles to property are paper assets. If you own a deed of trust or owe one, you are going to fare worse than if you sold out right now. I'm thinking real estate will hold 50% of its value, meaning if you can sell something now, it might be wise. Stocks? They could easily lose 90% or more, but the rebound will be better and the marketability will be there for most surviving companies. 401K? Ask the folks at Enron.