patrick.net

I guess what I am saying is, bad is when resonsible people who understood risk lose their home because of a really bad economy.

Well said.

Over the past few years, people who understood risks were not reasonable people, judging by societal standards.

Bad is when Mtn’ View drops from $1.1m to $500k and people lose that $400k of actual, real equity made out of 10 years of dual inome pumping dollars into mortgages.

You predict that Mtn View prices will fall to 1998 levels? I presume you means a $900k mortgage started in 1998 that has been paid on for ten years. In that case, only about $156k in "real" equity would be paid off (at 6%).

Or did you mean a $500k house in 1998, rising to $1.1 million, "ought" to be $900k (your $500k + $400k), that will fall back to $500k?

Interesting. Fortune magazine now describes deflation as the "new" threat: http://money.cnn.com/2008/11/06/news/deflation.fortune/index.htm

New to whom?

500 jobs get axed at AMD, mostly in Sunnyvale.
100 jobs gone at Serena, Redwood Shores.
Also, layoffs at LinkedIn, Mountain View.

Forced "holidays" for Christmas at several companies.

Wild arsed rumors about many other big name tech and software companies.

Could the BA go back to 1998 valuations?
I don't think so.
But.
It could.
Almost every job is very vulnerable.
Other web sites disclose how Health Care is a bubble industry.
Tech is 'good enough' that people can easily delay the next best thing.
Biotech has such deep startup costs that remind us that even good and proftiable ideas are shelved in bad times.
All BA work can be performed more cheaply in, say, Vegas. We already had tech flight once before when the Motorolas (4 pahse, Zilog, etc) of the area left.
So, my guess is no. But it could. . .

Bush to Obama:

"Hey, do you think you'd like to start early?"

Obama to Bush:

"Sure, Jan 2010"

Wait, please distinguish asset deflation from monetary deflation.

We can have a combination of asset deflation AND monetary inflation, in midst of wage disinflation and attempted reflation.

http://www.mercurynews.com/ci_10916051?source=most_viewed

And he claims to be a Republican?

To balance the state budget, the best way is to downsize the government and cut services. We need more tax incentives to keep businesses here not tax hikes to drive them away.

California always runs into problem in tough times because its taxes are too dependent on growth.

Why can't McClintock become the next governor?

It is so gloomy. :(

If we have deflation, this will result in an default on the national debt.

When when our debt is denominated in dollars and we own the only printing press!

When when our debt is denominated in dollars and we own the only printing press!

The Federal Reserve owns the printing press. We do not own the Federal Reserve.

Eh, that should read, *not* when!

The Federal Reserve owns the printing press. We do not own the Federal Reserve.

Exactly. The Federal Reserve will print new money to satisfy our foreign creditors while the nations FB'ers spend the rest of their lives in debtors prisons.

# The Original Bankster Says:
your country is the worlds biggest debtor. If we have deflation, this will result in an default on the national debt.

In case of monetary deflation, interest rates are going to be low. So what is going to stop the government from simply 'refinancing' our government debt at 0% interest?

I am serious - is there a reason why the government can't do this?

We can have a combination of asset deflation AND monetary inflation, in midst of wage disinflation and attempted reflation.

The re-inflation is not likely to be sucessful. The proof will come when federal/state COLAs go negative. That is, when Cost of Living Increases are replaced by Cost of Living Decreases. Military and Civil Service pensions will get % decreases rather than the accustomed annual increases.

I am serious - is there a reason why the government can’t do this?

Sell Treasuries at 0%, and use the proceedes tp pay off high interest debt?

Or unilaterally declare the all outstanding debt to be 0%? Maybe add to it it a "principle reduction" based on the deflation rate. If the deflation rate averages -3% APR for a given year, just decrease year end principle balance by 3% in addition to what was paid off.

how can you have deflation and low interest rates?

Huh? Please explain. I thought low-to-zero interest rates go hand in hand with deflation.

The highlight of the Fed's H.4.1 report (at least for me) was the $185 billion increase in the Commercial Paper Funding Facility -- I almost thought they had resorted to electronic "printing" as there was not a commensurate increase from the Treasury injections (aka. the supplementary financing account). Then I noticed the $233 billion increase in "Reserve balances with Federal Reserve Banks". Still sterilized, and the Fed holds any "risk" inherent in the Commercial Paper -- nice. BTW, the Fed recalculated the interest rate on balances kept with it by member banks.

You can have all the money in the world at 0% and if no one can afford to borrow it because prices are too high or doesn't want to borrow it, you have deflation. Just a thought.

P.S.

However, when people feel secure again or wages catch up....LOOK OUT! Inflation will explode. It might be a while, but will happen under the current setting.

Inflation != printing. So long as demand for money is increasing faster than supply, we will experience deflation. It is simply a special case of the general S/D curve for asset classes, because typically everything else is priced relative to currency. Whenever money increases in value, that is effective deflation. It took me a while to understand that, but Randy finally got me through to daylight. That's why the stock market, treasuries and commodities all appeared to fall simultaneously---they weren't falling so much as U.S. dollars (the asset class) was rising. Right now, cash has become king, largely because so many debts that must be paid off are denominated in dollars. Demand for U.S. dollars has actually spiked.

Headset, the near-zero interest rates are a result of governments trying to combat deflation. Thus they tend to occur together but are not directly cause-and-effect. Governments will cut the interest rate close to zero in an attempt to spur lending (and thus growth). The lack of lending causes a liquidity freeze, which is largely a result of hoarding currency due to perceived market risks. Deflation encourages hoarding on the personal level because the currency is getting more valuable every day, and on the banking level because deflation tends to happen during serious economic crisis.

The problem comes when the banks feel that not borrowing ZIRP money is actually less risky than taking "free" money to make dangerous loans that might not get paid back. Japan ended up pushing on a rope; we are now experiencing the same thing. Instead of lending out money borrowed from the Fed, the banks are just holding that cash, which effectively drops their leverage ratios. Even at ZIRP, deleveraging is a guarantee (holding cash reserves automatically deleverages a bank), whereas lending can still be risky. Even if the Fed accepts crap as collateral, that crap still has a higher real value than a defaulted loan.

It is a huge danger to get into this situation. The only way out seems to be through sustained growth. Until growth kicks in, the deflation and lending risk can become a vicious cycle, where banks only lend to people who don't need it, and the government loses its most powerful tool (interest rates) to influence currency velocity. This is an asymptote that we didn't want to cross... but given the earlier upwards insanity, we had to overshoot into territory that not even Uncle Sam can control. It was like throwing an anvil off the peak; this is going to take a long, long time to fix.

Of course, we have the new American motto. "What do you mean I have to pay it back?"

Brand,
Does not lending have the same end effect as not borrowing?

low interest rates = cheap money = expansion of credit = expansion of money supply = inflation

Japan.

wait, what?

am i missing something here?

You are missing expansion of credit = expansion of debt.

Debt can either be repaid or defaulted on; both of which are deflationary. Defaults decrease money supply (M), repayments decrease liquidity/velocity of money (V).

The 'printing' that is going on is not inflationary because its replacing dollars destroyed by debt defaults. If the fed prints a $20 bill, a bank loans it to me and I eat it, that's deflationary. If the fed prints *two* twenty dollar bills to replace it, that's inflationary. If they just print another $20 its a wash.

There is way, way more debt out there than can ever be paid back if everyone living and their children worked to be 100 years old. The only possible alternative/solution is deflation. It *has* to happen at this point; the only other choice is hyper-inflation which would be much worse.

Headset, the near-zero interest rates are a result of governments trying to combat deflation. Thus they tend to occur together but are not directly cause-and-effect. Governments will cut the interest rate close to zero in an attempt to spur lending (and thus growth).

Brand, I understand the "tools" concept, that the gov can lower rates to stimulate a declining economy or raise rates to slow an overheating market.

But once deflation sets in, are market interest rates naturally going to be high or low? Market interest rates will rise during times of inflation since future dollars are cheaper dollars, thus a premium must be added to the desired rate of return. Similarly, during deflation, rates should track very low since future dollars are stronger dollars - you could actually gain future purchasing power by lending at 0%. Being in deflation puts a naturally downward price pressure on everything, including the rental cost of money.

Wasn't part of Japans problem due to the fact that even though they had all sorts of cheap money no one wanted to borrow it?

However, when people feel secure again or wages catch up….LOOK OUT! Inflation will explode. It might be a while, but will happen under the current setting.

That already happened. You may have heard of the housing bubble?

Okay,
I get it now.

Wasn’t part of Japans problem due to the fact that even though they had all sorts of cheap money no one wanted to borrow it?

One thing though... in a Boomer world, everyone wants to borrow and spend it NOW.

Well, yea I heard of the housing bubble. You think it can't happen again. FB's will not have learned a damn thing.

News reports said LinkedIn Corp. will lay off 36 of it 370 employees to save money.

The Mountain View company did not reply immediately to a request for comment.

In October, the business networking web site raised $22.7 million from venture investors. That came on top of $53 million raised in summer and brings the total money raised by the business to near $100 million.

LinkedIn gets money from advertising, subscriptions, job listings and company hiring help. It said earlier this year it plans to set up “several new lines of business.”

Reports suggested that pressure from venture investors to cut costs might have been behind the job cuts.

In a deflationary situation, it is possible for the US government to roll over the current long debt to 0% interest rate new bonds, with only one catch, nobody will buy any US bond at any rate, because holding on to their money is far better than lending it out, especially to an extremely debt-laden government in a deflationary environment, you know it will become a going concern.

At the height of Japanese deflation around 2001, when Japan dropped their rate to 0.1%, Japanese banks were CHARGED money for depositing Yen, and Japanese retail customers were charged more monthly fee than receiving interest. Many Japanese were so worried that the banking system would just collapse that they started withdrawing CASH from the bank and stuffed under their mattress, some of them started buying gold, which became the buying force that pulled gold out of a multi-decade low.

So, the option only exists for the US government during a serious deflation if investors and SWFs around the world are willing to buy the 0% yield T of a practically bankrupt government, but why should they? Why not just leave their cash at home?

oops, I meant to say you don't know if it (US gov) will remain a going concern.

LinkedIn is actually not that bad since it caters to working people and you can milk some dough there especially for job search reasons.

Facebook is the one that should just fold outright, how can these college kids with $10Ks of student loans afford anything? There will be no jobs waiting for them when they graduate.

TOB,

I view cheap money and worthless money as two different things. I see where you're coming from.

Well, yea I heard of the housing bubble. You think it can’t happen again. FB’s will not have learned a damn thing.

With what money?

The Fed funds rate is at 1% and the securitized debt market is gone.

You can play that card once. The end game is deflation.

Richmond asks: Wasn’t part of Japans problem due to the fact that even though they had all sorts of cheap money no one wanted to borrow it?

Actually, I think the government offered all sorts of cheap money, but banks didn't want to lend it. Don't get me wrong, borrowing during deflation is a horrible idea, too. If it deflates far enough, eventually your debt becomes worth more than the asset. But Japan was stagnated because no banks wanted to lend capital to businesses, which eventually strangled off their growth. ZIRP did spawn a carry trade as an outlet, for explanations better left to experts on Japanese economics.

FWIW, a huge part of their problem was that their banks and companies held the bad assets in special holding tanks without realizing the losses. Many were effectively bankrupt by a massive margin, but they didn't actually fold. But nobody would lend to anybody precisely because of that problem. Only when they got a different prime minister to force the write-downs did things even begin to clean up.

HeadSet asks: But once deflation sets in, are market interest rates naturally going to be high or low?

I think you outlined it very well in your post. The only factor you need to incorporate is risk pricing. This is why Treasury yields briefly went negative (!!!) and all the yield spreads are so out of whack. The government can offer the banks money at ZIRP until the cows come home. The banks are still charging 6% for a prime mortgage and more for commercial lending.

IMPOSSIBLE! The US would have to default on our multi-trillion dollar debt.

the end game i fear is far worse.

How can we default on a debt denominated in a currency we control?

It's like you sell me apples and I pay you in IOU's. It's not like I can't just write more IOU's.

The 'far worse' end game would be hyper-inflation caused by the Fed mailing stimulus checks to everyone right from the printing press. *That* would be a disaster. Fortunately, I don't see that coming.

Get out of Iraq, soak the rich via progressive taxation and re-invest the proceeds in public works projects. New Deal 2.0, problem solved, thank you President Obama.

http://blip.tv/file/1417453

I give up.