Paradoxical Deflation coming?

[Ed Breen]

Quote from Swan Noir:

I simply wanted to correct one mistaken generalization. You seem to want to use a hundred words in each post to refute that.

Thanks for straightening that out.

As you and maybe others appear to want less words, here is the nub, the basics, that answer noob trad3r's question and applies to other mistaken notions expressed on this thread:

Currency in circulation is not inflationary.

Money is credit.

Credit is depends on asset value.

Assets are prossessory rights to future income streams.

Asset value is the estimated future after tax income stream discounted to the present.

Asset value depends on fiscal policy in the future.

Inflation is increasing leverage on assets.

Deflation is decreasing leverage on assets.

Hyperinflation is deflationary.

I hope that clarifies the relevant issues without extra words.

 

[FrostBead]

Quote from Ed Breen:

Excellent comments? Are you joking? That is a prescription to make everywhere look like Detroit! You're right it makes housing really cheap. You should go to Detroit and buy and house.

I don't know how to deal with the massive debt overhang, but it will be dealt with or dealt an outcome in the coming years. But any system you launch for the long term afterward, I think is much better off with taxes shifted towards real estate. This economic rent should be captured by the government and not the finance industry. This oversized private mortgage debt that hangs over the economy is much worse than the overpaid investment bankers you see in the news.

Real income has declined for low skill workers, the solution cannot be that they should all join in on a new housing scheme? It has tons of negative distortions, having expensive housing makes you labor force internationally less competitive.

 

[trefoil]

Quote from Swan Noir:

It is always solvent customers that take down the money in bad times. And part of what induces them to do that is the rate. I ran a business in Switzerland in the late 70's and early eighties. Interest rates went negative in the local currency and, as a foreign controlled entity we were debited 2% on an annualized basis for demand deposits by our banks. The rate mattered and we figured out real fast how to run our business with lower cash balances.

BTW ... I love the in real life reality matters argument but all things are never equal ... lol. The phrase has an accepted meaning that people have used for centuries to allow real debate to happen. This one is now not worth the candle.

In real life, in the US, enough people are insolvent that you could have negative interest rates and it still wouldn't matter IN THE AGGREGATE, which is what we're talking about. This is Economics, not Anecdotes & Pleasantries. Try to keep that straight.

 

[Swan Noir]

But that is the whole point. The Fed is hoping for a bit of inflation so real rates (as opposed to nominal) will be negative. Their hope is that in that scenario some animal spirits will be birthed. It is of course very difficult to do after 40 years of debauchery but that is clearly the game plan.

Quote from trefoil:

In real life, in the US, enough people are insolvent that you could have negative interest rates and it still wouldn't matter IN THE AGGREGATE, which is what we're talking about. This is Economics, not Anecdotes & Pleasantries. Try to keep that straight.

 

[trefoil]

Quote from Swan Noir:

But that is the whole point. The Fed is hoping for a bit of inflation so real rates (as opposed to nominal) will be negative. Their hope is that in that scenario some animal spirits will be birthed. It is of course very difficult to do after 40 years of debauchery but that is clearly the game plan.

Yeah I know. My point is rates would be where they are now regardless.
You probably know this, but just to clarify, the Fed Funds rate isn't a rate the Fed can just mandate, like the discount rate. It sets a target and then tries to make sure the rate comes in at that target.
That's because that rate is the rate banks charge each other for lending each other money. Needless to say, they charge each other whatever the market will bear.
Does the Fed's targeting have any real effect on where Fed Funds land? Some, I'm sure, simply because the Fed is a player, and sometimes, if it wants, the largest player, in that market. But as, for instance, the Hunt Bros found out when they tried to corner the silver market, being the largest player isn't all it's made out to be.
The Fed Funds market is, in the end, a market. It's where banks go to get money wholesale, so they can sell it retail. But just because it's a wholesale market doesn't mean it's immune to supply and demand and it certainly doesn't mean any one player can dictate what the cost of the commodity being traded in that market, in this case money, will be.
As I said earlier, the Fed mostly deals in hocus-pocus. The reason why is simple: since the FDIC came along, it hasn't really had a reason for being in existence. It's superfluous. Actually, it's existence does positive harm.

 

[Swan Noir]

If your point is that the Fed is running low on bullets, I agree. I just think it is revisionist history to think the Fed never had any bullets ... even post the formation of the FDIC. They shot the Hunts between the eyes and that was not hocus-pocus.

You may have more to say here but on this narrow edge of your larger conversation I'm pretty much done.

Quote from trefoil:

Yeah I know. My point is rates would be where they are now regardless.
You probably know this, but just to clarify, the Fed Funds rate isn't a rate the Fed can just mandate, like the discount rate. It sets a target and then tries to make sure the rate comes in at that target.
That's because that rate is the rate banks charge each other for lending each other money. Needless to say, they charge each other whatever the market will bear.
Does the Fed's targeting have any real effect on where Fed Funds land? Some, I'm sure, simply because the Fed is a player, and sometimes, if it wants, the largest player, in that market. But as, for instance, the Hunt Bros found out when they tried to corner the silver market, being the largest player isn't all it's made out to be.
The Fed Funds market is, in the end, a market. It's where banks go to get money wholesale, so they can sell it retail. But just because it's a wholesale market doesn't mean it's immune to supply and demand and it certainly doesn't mean any one player can dictate what the cost of the commodity being traded in that market, in this case money, will be.
As I said earlier, the Fed mostly deals in hocus-pocus. The reason why is simple: since the FDIC came along, it hasn't really had a reason for being in existence. It's superfluous. Actually, it's existence does positive harm.

 

[StarDust9182]

Quote from Ed Breen:

Excellent comments? Are you joking? That is a prescription to make everywhere look like Detroit! You're right it makes housing really cheap. You should go to Detroit and buy and house.

Sorry for taking a while to get back to you. I got stuck in Salmon Arm behind the Sicamous floods. Mom will be moving into a seniors home. That has been my first priority.

I had a friend trying to get me to invest in Detroit housing for 20000 a pop to rent out. Now it is likely 5000 a pop and no unarmed person rents it. It sounded too good to be true to me at the time.

Firstly, I commend this person's attempt at solutions as I had asked for. It doesn't matter if it is the perfect solution, but the discussion is vital. I had to think more about the implications before I critiqued it. I think you had the best grasp of the complex issues in this thread from a theoretical POV. We need some practical solutions though. Do you have any suggestions to improve on this first attempt at a solution?

The idea of cheaper housing has some merit in one sense. Banks boost the cost of housing by their financing activities and it was this liar loan problem (caused by poor political implementation of the equal rights admendment) that was the nexus of the second wave down. In 2003???, I wrote about the Greenspan put, which was the first wave down. Now we face the solution phase three I think. No large bank has been punished as far as I know, but the people have been punished greatly seeing their net worth drop off a cliff.

If housing were built more like the pioneer days (no bank) and the government "rented them" to the poor, then the issue of 5 big screen TVs and 200 dollar cell phones for the poor and the elderly could be controlled for less cost than the welfare payout contributions made to bank profits now I'll bet. Stability of lives with a familiar center of shelter should be better. Crime would be less as well I suspect. So as a WAG, government taking the profits from housing might help. Of course we need to think this through some more.

Detroit is not a fair example. Detroit is an example where it seems that taxation. government fraud, unions, and socialism on steroids undermined their local economy. Housing followed what happened to jobs and movement patterns. There are some areas around Detroit that are still fine I seem to recall.

Food stamps are feeding lots now. So shelter and food and water are covered and an effort to ensure an incentive to learn trades and get out of this situation should be encouraged. Positive re-enforcement rather than punishment by bureaucratic starvation. And death by a thousand (budget) cuts.

I don't understand why if you make one dollar over a welfare cut off line, you have zero support. Wouldn't an incentive where you kept 50% tax free of your work income and the government kept 50% to subside your payments work better. Eventually some would make it out of the welfare ghetto.

Our credit system is an issue. It boosts the real goods costs and forces someone into poverty by its very nature I think. Part of the deflation we face occurs because credit is no longer available to all. In hindsight, a slight deflation and less credit say 5 years ago, with more moderate house price rises would have helped everything. The mighty Greenspan put failed and there was no plan B. Yet gentle Ben is left to clean up the mess using his theories of economic science. A science that has no experimental side.

Your comments and reasoning are great Ed. How would you go about solving some of the issues our society faces?

 

[StarDust9182]

"..... Debt can be expanded at a rate that exceeds the rise in real income in only one way: by lowering interest rates so the same income can support a larger debt...."

From:
http://www.zerohedge.com/news/charles-hugh-smith-why-debt-dependent-status-quo-doomed-one-chart

This is an answer to one of the questions I posed much earlier: The interest rate piece of the balloon pumping analogy.

Surprisingly enough my theory is that deflation started in the 1980s for those who could see it on the interest rate chart for decades.

 

[Ed Breen]

Stardust...lowering interest rates is a supply issue....expanding credit is a demand issue. That was the whole point of the too many words I have already written in this thread. Just becuae the lower interest rates make it possible to afford more debt at the same income doesn't mean that the investment model is different. Interest rates rarely are the key issue in an entrepreneural decision.

The best that can be done for housing is to let it find its clearing price and to remove all the distortions and subsidies to home ownership. The reason that the middle class lost 40% of its net worth in the last decade is becuase they were conned into thinking that housing was an asset. They saw the inflation and they appreciated the tax subsidy so they invested in housing as thier largest investment for retirement. Now that housing is revealed not to be a real asset (becuase its income stream is the rental value and not the tax subsidized leveraged momentum value) the middle class has lost the largest part of thier retirement savings.

We should stop trying to prevent foreclosure and keep people in thier houses. People who are underwater should be alowed to walk away without diffeciency judgements so they can start over without having to go through bankruptcy. In fact people who are underwater should be paid a stipend to leave thier houses and go find something they can afford in a place they can have the best chance of getting a job. The banks that have the underwater loans will have to write off the losses and bundle the vacant homes for auctions to buyerys who can deal with them, rent them out to people who can afford them or sell them at the market clearing price to people who can affort them. If we did that three years ago instead of all this crap we have been doing, the housing crises would have been over a year ago.

You have a tendency to look for command solutions to issues, like you think the government should do something about housing prices...I am suggesting they have already done too much. Housing will find its proper value if you just stop distorting the market.

Land Use law, Tax deductiblilty of mortgage interst, Capital gains exclusion, Property Tax structures all impact home pricing. The cost of owning is really property tax, mortgage cost, capital cost, insurance, utilities and maintenance. The house is cheap or not only compared to your income. The decision to own a house for a lot more than it would cost to rent is a decision to use your surplus income to consume rather than to invest.

 

[FrostBead]

Ed Breen,

How would you tackle the hit bank balance sheets are going to take by letting house prices clear? This would probably lead to insolvency scares and mistrust in the financial system all over again.