The entire deflation argument is a load of shit. The reasons for the Great Depression are no longer in effect. Fed kept rates unreasonable high long after the crash, money supply was constrained by gold, and bank runs. FDIC takes care of bank runs, gold-backed is gone, and Helicopter Ben floored rates to 0.5%. Even when the FED intentionally tried to induce horrible deflation during the Depression, the economy still recovered after the Government injected money for WW2 buildup. The difference is money supply and injecting that supply straight into the general economy. No liquidity trap hoarding, thanks. Now-a-days, solvent banks can loan to consumers at close to prime. Deflation is bailout fear mongering by unwitting dupes or paid shills. Let the Banks Fail, let the Market Crash, let the Auto's go, and the economy will still recovery. People have lost faith in Capitalism because the Bankers have sold an agenda of deflationary fear that demands an inflationary solution they need to recapitalize their balance sheets!!!! Not one person can name one historical example where money was plentiful and deflation went into cataclysmic overdrive. ITS NEVER HAPPENED. In order to get to that level of deflation, rates would have to stay at 20% + for a very long time. Thats the only way. Prove me wrong.
All solid points. Which is why the printing press will be used. We are now (or most likely will be) buying fannie maes and 30 yr t-bonds with printed money, not borrowed money. (heheh, borrowing money (selling 30 yr bonds) to buy 30 yr bonds is kind of pointless, eh?) That is the fed lending with new currency it just created. Everything you say is right. If we borrow too much and destroy our future viability with too huge a future debt burden, there is a breaking point somewhere where yields must rise (exponentially). Furthermore, borrowing from the world's savings to finance the future will eventually crowd out investment and capex, so that will not produce the desired result in the long run. It appears to me printing and doing aggressive investment-spending oriented stimulus (direct checks to citizens with caveats to discourage hoarding) is the only way to get economic activity back. Printing doesn't create more debt, and better yet a weakening currency stimulates export demand... I personally think they need to be creative with the economic stimulus, structuring in a way that ensures supply of fundamental parts of economy (energy) remains/trends in plethora, keeping input costs down while we dilute the money supply to stimulate our exports. That means nuclear power and electric car infrastructure to keep oil/crude depressed. If anything from the last inflationary speculation run, we should have learned that agg. supply not keeping up with agg. demand (function of amount of money out there) results in higher prices, inducing further inflation (cost push). Keeping oil price under control even amid a higher broad money supply will impact keeping food prices down globally as well (since we've seen how oil and food are correlated). Look to computer prices as evidence you can have increasing value per dollar spent even in an inflationary environment. The same can happen with the food/energy equation, freeing up an enormous amount of resources (disposable income) for future investment and global growth. This is why technological progress (productivity improvement, deflationary) is so wonderful in combination with dilutive central banking to keep asset values going up while our standard of living increases. That's what I'd do if I were running the show... fix agg supply of energy and increase money supply to keep the world population happy and economic activity (velocity) going strong. That might even mean direct stimulus checks ... not just subsidization of the banking system (which is so far all we've done with any amount of any consequence... which is reason to be bullish on prices long term, since the potential is high if you just pass money out). Guess I'm a commie socialist, right? My bet is the govt does energy too half-assed, so instead we'll trend more towards systematic hyperinflation with supply WAY behind when the cat is out of the bag... That cat will have rabies. (lemme add: the fed must not have started doing any substantial buying of fnma bonds yet... when they do watch out. With 30 yr treasury near 3.0 percent, no reason we shouldn't see mortgages going for under 4.0% That means the cash hasn't started flowing yet .. watch out when it does)
Achilles, I think I understand what you are trying to say, but the fundamental problem is the "unknown" solvency level. Liquidity...not a problem ..the Fed will print money till the cows come home; and in a sense, they might have to. Unfortunately, those that can lend are not going to do so,because they simply do not know what their risk exposure will be as they know they cannot even determine the value of the shit they already have on their books!!...and while they can get away with it, they don't want to know, besides there really is no market for their assets at present. We have a lending paralysis and what is more troubling is the future refinancing of debt. It doesn't have to be deflation ,recession,or depression ,but to simply state there are no simple answers other than the fact it is going to take a long time to unravel and get the economy back on an even keel.
On one hand, Taleb makes the point that basically because everybody is overleverged into debt, the unwinding will cause deflation. But he doesn't mention that one big boy has a massive debt habit that makes every drug addicted junkie turn red with embarrassment. And Uncle Sam also can make money the really old fashioned way to pay for it all. He's going to do his best to make damn sure we don't deflate. Will he make an error? Given that the feds are subject to a lot of political pressure and this stuff isn't hard science, that seems like a virtual certainty. Which way? Beats me. Deflation then inflation? Could be, maybe even deflation then serious Jimmy Carter inflation. Maybe worse. On the other hand, the feds seem to be running out of tools to inflate the money supply. But if all else fails, they can print currency and buy back Treasuries or just use the cash to fund normal operations and slush funds for intern orgies. It's hard to believe that everything is so #@^%ed up that we can't even tell if we're heading for serious deflation or hyper inflation. Dang.
Solvency is not a problem, since the fed will capitalize them until they are truly solvent. It is already happening. As a bank, you can borrow excess overnight reserves in the fed funds market for what I believe is fdic insurance + effective rate, which is about 1%.. Then you get paid on those excess reserves by the fed at the fed funds rate, 1%. So zero risk money to be 'solvent' on an overnight basis to never have to sell your bad assets (bad loans, underwater houses, etc). That is the whole point of this. (err: now I checked before I post this ... http://www.portfolio.com/views/blog...1/fdic-not-insuring-fed-funds?addComment=true So maybe the banks don't even need to pay fdic insurance. So now they make for free the difference between effective and target rate the fed pays out in addition to never having to sell bad assets. Good deal eh?)
I understand your point, but isn't it ridiculous a bank can borrow from one source (Fed) at a low cost and relend it to the same source for a higher cost...the taxpayer is the sap for the benefit of a few. The mind boggles...wished I could get a deal like that.
Sorry for coming off as a prick. Admittedly, I can get too excited.. You're one of the handful of posters here I avidly read. You know your stuff and regardless of our (sometimes) differing opinions, I respect your take.
When Bill Seidman patched the SL crisis.....recovery was made partly because of the government made float to the banks.... I do not have access to the actuals....but the total domestic deposits number is in the $7 Trillion range.... What seems to be the case is that a good portion of this has been lost by the bigger financials....The government has to intervene....and so far seems to be putting out the biggest fires first.... However valuation and mark to market still rule the day.....and prices look to be down from here....not up from here.... Also everyone here knows that $7 Trillion is a lot more than $7 Trillion that is further levered in a bank.... This is where the problem lies.... And remember who is paying the tool of debt....poorer segements that have actual savings....with recent strongly negative experiences..... Which leaves printing as the option.... The question being that if $7 Trillion was lost...and is replaced....does it show up as being dilutive when made available .....velocity of staid money is what it is.....velocity of something is something....velocity of nothing is nothing.... Another point is that there is a 0 savings rate.....and st rates are basically 0....