patrick.net

netdance,

in the 1930s, USD is a gold-backed currency. Their hands were tied.

Debasing the USD is the path of least resistance for a government and a nation deeply in debt. Technically, we will NEVER be able to get out of debt if USD retains its purchasing power. So let's not have any fantasy about USD retaining its buying power if we just shore up our dollars in the bank earning almost no risk 3% (so far) Fed rate. It ain't gonna happen.

Japan lacked ammo because it doesn't have a world reserve currency. It is also a saver nation with prudent consumers. The culture is similar to China, which has a problem stimulating internal consumption despite the huge base of savings. Asians like the count their wealth instead of spending it.

You don't want the Japanese-style deflation either. Wage income and passive income dropped faster than housing price, because jobs disappeared faster, and banking interest went negative. Savers are CHARGED money if they leave their savings with the bank, it happened in Hong Kong as well. Yes, housing price went for a long dive, but your wealth also shrinks along with everything else, because equity market tanked, Japanese Treasury yielded 0.2%, birth rate went sharply down and there was no money to be made by anyone.

"tons of optimism still left in the market" Wow! Really?

Wouldn't be anyone "I" know. Things have shifted. I think the whole "bears-bulls" thing is now outdated altogether. (Whether you just have a 401K at work) or are in the primary mkt. most of us have at best been "cau...tiously optimistic" (yet ready to pull the plug at a moment's notice!)

We were even cau...tiously optimistic when our pockets were being lined! Great. We had 40% returns last year! Does this mean you're bullish? Oh HELL... no.

How many of you still know people out there touting DOW 30K!?

I'm stilling trying to wrap my head around that chart. I think I misinterpreted the linked article, comments and charts the first time around. Let me try again.

The big drop in SOMA, matched by a nearly as big increase in TAF, all happened in the Dec-Jan 2007-2008 timeframe. That means that the big20 primary dealers returned their borrowings to the Fed, and then the Fed promptly lent it out again through the other teller window. Whether the TAF money went to the big20 or then directly to smaller banks is hard to say, and I suspect there is no data available because of the anonymity offered by TAF. It *may* have been that primary dealers were very happy to return the money and let the Fed assume the risk more directly.

Going back to August, there is a noticeable drop in the SOMA balance around the time of the credit crunch, indicating that big20 banks were returning money, whether from reserves or from called-back credit to others. But I don't see any Fed action *causing* the August crunch, except of course for the previous excessive sloppiness under Greenspan finally catching up with us as a whole.

DinOR, would be interested in your take on this interpretation. Am I getting closer?

DinOR,

Didn't mean it to sound like an attack; it wasn't meant to be. I don't know what's going to happen to China or BRI(c) -- I'm at the far end of the information food chain (i.e. msm and blogs).

It's just that there's so much apparent wonderment about China that I think that we need to be a bit skeptical. There's so much of it: China's going to build cars! China launched a rocket! China is building a tall building!

Without a doubt, parts of China are entering the 20th century. But most of what they are doing and accomplishing has been done before -- they just do it cheaply (see earlier post for reasons). A place to make money: you bet. An unstoppable world power ready to overwhelm? I don't know (and will probably be dead by the time that question is answered).

Well, China is a misanthropist's nightmare.

It is understandable that China is a huge market because it has literally over one billion of willing consumers.

I am not a believer of larger markets. I prefer niche markets. China is already attracting too much competitions.

I don't think the chart indicated that the FED is voluntarily reducing the monetary base. The FED's intention cannot be clearer, inflate.

It was merely an indication that FED's policy of sprinkling money around got stuck in the pipeline, because for some reasons the banks didn't want it. Don't worry, FED will go back and re-hash another mechanism to get everybody take the money.

Ed S,

I hope you're around... well around long enough to see all the things you WANT yo see! :)

No I didn't take it as a confrontation at all. Like you, we've been told since we were kids that China will have this great awakening and it will be wonderful (or horrifying) to witness! (Personally.. I'll take wonderful)

Hey and don't sell the blogs short. Yesterday when Hank spoke he took great pains to articulate that "Project Lifedone" (I mean LifeLINE damn'it) would *not be extended to "investors and speculators". Well where in the hell did he get the idea that was a priority to anyone?

revengeofaone-

I noticed the same trend. UAL cranked up their ticket price the day after Elmer FED went into action, to which I responed by not purchasing the ticket I had planned and instead waited a week for a frequent flier freebie. I also cancelled my annual trip "home" for the holidays and didn't attend an auction in Vegas for the first time in 4 years.

Cable rates also went up here, and unfortunately for Comcast my Tivo died about 2 weeks later. Had an absolutely precious conversation with some teleprompted customer care representative wanting to know if I was moving. Can't handle commercials anymore, and since Tivo recently decided against the lifetime plan, hello Netflix. Couldn't be happier catching up on House MD with a 4x discount. NFLX anyone?

Just doing my part to keep that inflation theory under check.

justme,

No, no your explanation is better than anything I could provide! I think OO has it right w/ "re-hash mechanism" for further definition as well.

I was on a conf. call yesterday and it should have been called "Whatever happened to M3?" A lot of it was over "my" head. The PM DID say though that (in spite of OO's cruel, cruel words) that it "might" be time to actually re-visit Japan? He pointed out that 60% of the Nikei is trading below BOOK value!

Then again Bill O'Neil would say things trade where they're at for a reason?

Couldn’t be happier catching up on House MD with a 4x discount. NFLX anyone?

House is one of my favorite TV show characters. What is better than a misanthropist MD? :)

Amazon.com Unbox is pretty cool too. I get my Stargate Atlantis there.

I actually increased my organic buying at Whole Foods, because the grocery price has been going up so much that buying organic makes more sense financially, at least for now.

I love tomatoes on vine, they used to be $2.99 a pound and sometimes you can get it for $1.49 on sale at Safeway. These days are over. Now they are stubbornly $3.99 or higher, which makes Whole Foods' organic tomatoes on vine at $4.99 look very attractive. Same story for some other vegetables, milk and eggs. The gap is closing between the conventionally grown and organic food.

in the 1930s, USD is a gold-backed currency. Their hands were tied.

No, they weren't: FDR confiscated all the private gold, then changed the redemption rate from $20 to $35 overnight.

That's a devaluation of the currency that our current gov't can only dream of.

So no, that didn't work then, and it's not likely to work now. It's been tried.

But that is the second most common answer I get when I ask the question, after the "raised rates into the crisis" answer.

Japan lacked ammo because it doesn’t have a world reserve currency.

But Britain had the reserve currency before us, and that didn't work out very well for them, did it? It was lost in a matter of months.

Sorry, I don't find either explanation for why "it's different this time" to be very compelling.

“tons of optimism still left in the market” Wow! Really?

Buffet offers the monolines a buyout of the only profitable part of their business, and the market roars upward. If that isn't optimism, then it's insanity. Especially given the other announcements of the day.

I stand by my claim of (unwarrented) optimism. Just because it isn't insane optimism, doesn't mean it isn't there at all. How else to explain GOOG's share price? or any tech's share price?

netdance,

you are talking about FDR. Don't forget we need to go from Hoover to FDR, and if FDR was put in place of Hoover, and we confiscated gold way earlier, would the Great Depression still happen?

I am not saying that we won't see the depression again, but history doesn't simply repeat itself, it rhymes with a slightly different tone.

Britain came out of the Great Depression way faster than other countries, you can look up this on wiki, precisely because they debased their currency more aggressively. It was the first western country to recover.

If that isn’t optimism, then it’s insanity.

Unfounded optimism IS insanity.

@netdance,

What OO said.

I don't recall ever saying, "the government's efforts to inflate our way out of our massive solvency crisis will be 100% successful, and the banks and speculators will all live happily ever after as the price of everything continues its rise skyward unabated."

What I have said for about the past 3 years is, inflation is the path of least resistance to our short-term obsessed government. It is also the *least unpalatable* option for a general populace with the attention span of a gnat and little-to-no understanding of what's happening to them.

It's not different this time, but that won't stop the government from pulling out all the stops and enacted stupid and desperate measures to try to prevent the Great Debt Unwinding.

Also note that Japan's ZIRP and "zombie loan" policies, while they did not prevent housing from falling precipitously in real terms, also did not completely fail to accomplish their primary objectives. They vastly slowed the rate of decline (16+ years) and prevented a full-blown Depression.

When inflation is the path of least resistance, all roads lead to inflation.

They vastly slowed the rate of decline (16+ years) and prevented a full-blown Depression.

IF I were a realtor, I would prefer a sharp housing price decline followed by a stable and gradual recovery.

A long and slow decline will kill the real estate industry. This is NOT what we want, of course.

What "we" (responsible saver-renter-taxpayers) and peon Realt-turds want is irrelevant. It's what the banksters and PTB wants that matters. If they feel a sharp abrupt drop in RE prices will crash the economy and trigger a massive credit/derivatives unwinding (not to mention political instability), then they'll do anything they can to prevent that. This is what appears to be happening now.

The ONLY important question: how do we profit from it. Buying ultra short ETFs is insufficient. We need more leverage. Ideas?

It will be completely tragic if we have to go through 16+ years of depression like Japan does.

One can only live so long, and for most people here on this blog, we are at the prime of our lifetime. I would rather the government trash the USD once for all, default on all debts, hit the bottom and be done with it.

Peter P,

if we are going through a long-drawn depression, you CANNOT profit from it. At the beginning, you may profit from an ultra-short ETF, or buying certain commodities at the reflationary phase. But when all asset categories collapse, things move very slowly so that shorting itself may no longer be profitable any more.

Unlike Japan, when they entered depression, US was booming so that Japanese savers could profit from investing overseas. When the whole world plunges into depression, there's no escape. And such a long-drawn, massive-scale depression usually has only one resolution - war.

But when all asset categories collapse, things move very slowly so that shorting itself may no longer be profitable any more.

There are other ways to participate in downside movements. Shorting is just one of them. If options are expensive enough (IVs are usually high in down markets), writing or spreading them may be profitable.

I personally prefer bear markets because it fits my misanthropist philosophy. Moreover, down markets are more interesting to watch. They are full of surprises though.

Not investment advice.

netdance,

Let's not mistake a relief rally for an unbridled and out of control optimism? I wouldn't call the response to WB's actions "roaring" exactly either. Pointing to rare instances like GOOG (which has pulled off quite a bit anyway) doesn't make a broad case for harboring unrealistic expectations. Nearly everything bought in the last year is under water.

"usually only one resolution - war"

O.K, this is getting a little doom and gloom for even me. Long... drawn... out..., no_escape_ ugh...

War is bad. But it is a natural state of affairs in human societies. The current relative world peace is also a bubble that is bound to burst.

In the end Nature prevails.

yes, we were planning on leaving our snowy midwestern suburb for the president's week holiday to go to Florida (see fam/friends/Mickey) or Las Vegas (see fam/friends in LV), but with the need for 4 tickets + lap child or 5 tickets at $500+ not gonna happen.

We could afford it, but we just don't see the value when we were just able to fly ALL of us for less than that Christmastime!

Moreover, with the flights so full, do we really want to see Mickey, the beach, the Strip, or Uncle Buck that badly after packing us all up, ensuring we don't have too much liquid/gel/toothpaste in our carryon and ziplocking it appropriately, driving to the airport, finding out the covered parking deck is full, going to outdoor parking, taking a shuttle bus, hauling the kids through the airport (and through the lines to demetal our kids for the security check), praying that we can get seats together since we and the kids are not Elite fliers and the electable seats are already full online, paying a few nickels and dimes more for luggage (we made sure it was not >50lbs already at home, right?), making the flight (on time?), getting the luggage (hopefully making the flight with us), shuttle to the rental car, waiting in line for rental car (because the supposed bypass straight to the $500-600 car with the outrageous 30-45% tax is not available per the sign at the rental car agency), driving to the resort/hotel/friend's house or whatever, getting settled, getting the kids to decide yes they should sleep at night even if it's not their usual bed, and then enjoying the rest of the trip, only to replay the above in less than a week later!.

Instead, we can sleep in our own beds, enjoy ourselves, get sitters, go skiing locally, support the local economy eating SUSHI and drinking JAMBA JUICE and relax!

Yeah, go buy 100 houses and save the world!

Not investment advice

Gosh HiThere that's great. Let me ask you though, were we in the midst of a Global Financial Meltdown of an unprecedented scale at any of those times?

What REIC Rag did you dredge that up from? Seriously.

One can only live so long, and for most people here on this blog, we are at the prime of our lifetime. I would rather the government trash the USD once for all, default on all debts, hit the bottom and be done with it.

Tell it to the Wiemar Republic. That worked out so well for them.

When inflation is the path of least resistance, all roads lead to inflation.

OK, after having poked holes in my analogy, my turn to poke at yours:

Tell me - how are we going to get widespread price inflation without wage inflation? Because wage inflation is certainly not going to happen.

Instead, it's more likely that the price of all imports will go up, briefly, before a complete deflationary collapse, while wages hold roughly steady (for those who still have jobs). In short, the iTulip ka-poom theory looks good to me. Once deflation takes hold here, that spells doom for most of the world's economies, and you can expect that temporary spike in prices to come back down.

Weimar Republic owed gold and francs to the creditor nations. It also lost its most productive regions as a war settlement.

We owe other countries USD, so we just print them the face value and voila, problem solved (in the meantime we may selectively fulfill certain obligations to some nations that we care about). Grant it, nobody wants to lend us money in the future, but we have enough resources within North America. We have a big enough population base, why do we need world trade?

50 years of isolation later, after this generation dies off, who will remember what we do today? Globalization can start all over again.

netdance,

haven't you heard of stagflation? Things that you absolutely need, like food and fuel, will go up. Things that you don't really need, like houses and electronics, will go down.

We went through this in 1970s.

@netdance,

The Weimar Republic did not have:
a) the world's reserve currency
b) a credible military

And come to think of it, defaulting on foreign debts and rearmament was exactly the way the Nazis solved Germany's Wiemar hyperinflation woes.

Tell me - how are we going to get widespread price inflation without wage inflation? Because wage inflation is certainly not going to happen.

Those $100k REIC credit cards I already mentioned? (not all that different from those 'Katrina' cards, just on a much bigger scale)
How about adding a zero or two to everyone's bank accounts, Brazil-style?

I suspect stalwart Deflationists like Mish are missing a salient point: we have a fiat currency that can be expanded at will by government in myriad different ways.

When government (made up of politicians who always think short-term and in their own interests) faces problems like $45 Trillion Medicare/S.S. unfunded future shortfall, $8.6 Trillion National Debt, consumer Peak Debt, etc., what other option is there really?

Because wage inflation is certainly not going to happen.

Why not? I thought they just recklessly increased the minimum wage.

When government (made up of politicians who always think short-term and in their own interests) faces problems like $45 Trillion Medicare/S.S. unfunded future shortfall, $8.6 Trillion National Debt, consumer Peak Debt, etc., what other option is there really?

I proposed abolishing Medicare/S.S.

My two cents on the Fed report is that it’s really not that important. It doesn't really reflect inflationary or deflationary policy at all, though the deflationists will surely argue that angle. The reduction in credit is merely a reflection of the lockup, and when FOMC woke up to the solvency risks of a declining RE market the Fed simply reeled back the lines. No big whoop.

This is not an indication of unwillingness to direct liquidity in other areas. The stimulus handout might even be viewed as an inflationary indirect Fed injection of liquidity into the system, and as obscene as it is maybe preferable to throwing cash at insolvent banks.

Some speculation, but my guess is they endeavoring to walk a middle ground between a long, dragged out Japan scenario and the rapid shock to the system. So, what do they do next? They are asking themselves how they inject liquidity directly where it is needed. This is piece that is maybe a bit scary.

Figure we've a Fed and "financial" team that is going to be much more proactive is staving off a depression this go around. If we are to assume that their two priorities right now are getting a solid floor under RRE and equity markets, what might they do? Could we see them actually directly buying equities in our markets? How about a massive purchase of RE, removing inventory from the market and providing a nice political win providing shelter for needful?

We are in a serious crisis, I'd not discount the possibility of our team doing unprecedented things. Netdance, you asked what ammo they have left? Well, I think a large inventory removal or stock purchase is possible. Huge government deficit spends will be inflationary. Massive government infrastructure spends. Along with tax cuts as the tax base crashes and deficits balloon. This is where we will likely see the inflationary policy take hold.