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Deflation does what it does best: removing excesses
Gastopinie door Frank
Please consider following videos as they give you an impression what happens when central banks blow bubbles :
Deflation is upon us and it's removing excesses quite efficiently. It shows us how many irrational and unproductive investments were made in the past credit boom. Once the credit growth came to a halt, these projects started suffering massive losses. The recession we are living, is not really a recession, it is just the bill that is presented to us for our stupid and excessive mistakes from the past. When I look at these videos, it feels almost unrealistic that none of the project managers building these 'things' ever thought about the irrational investments of their time and money, not to mention the excessive use of the depleting resources of our planet. Deflation is long overdue. Thousands of people are working on excessive and unproductive goods and services. Thousands of companies are producing goods and services that are totally absurd in a deflationary environment. Thousands of people are unprepared for what is going to hit them. Central banks are trying hard to prop up the markets, but thechances of central banks reinflating the bubble are next to zero. We should pray to God that it wakes up everybody so we can all come to our senses and start working and saving.
31 Comments
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frederic
On 26 May, 2009
Sometimes I agree with Frank, this is one of those times.
Extreme excesses like this must get cleared out.
Just the point "working and saving" well actually this is a contradiction. Somebody had to spend before you can work ;-) . If everybody saves, nowbody has work. -
Frank
On 26 May, 2009
@Frederick
I don't think it is a contradiction. It's ok to spend, it's even ok to take on credit. As long as your debt is backed by savings, your spending is sound. Or as long as your investment with the credit is productive and can pay itself back your credit is sound. This crisis however is about spending based on credit backed by nothing but fiat money printed out of thin air. What you are saying is that nations who save much have a bad economy. It's always about balance ... -
incognito
On 26 May, 2009
I think that the most important function of deflation is that it's the only way to get rid of excessive debtlevels (together with hyperinflation).
The big, fundamental problem of the current US (and western) economy seems to me to be that it requires ever increasing amounts of debt to increase gdp with the same percentage, as shown on this well-known graph:
http://farm4.static.flickr.com/3393/3341735012_b280932d21_o.gif
Which is clearly an unsustainable and doomed dynamics because interest rates can't become negative. There comes a moment that they can't be lowered anymore, and that the credit flow the economy so craves for (like an alcoholic craves for alcohol), doesn't expand anymore, but shrinks to a trickle.
If that line would be horizontal, I would agree that we can look forward to a continuation of the economic boom and the bull market, as soon as the banks are sound again.
But it isn't. Why in fact? Why does the economy have to go through (inflationary) periods, characterised by a rising gdp/debt ratio and (deflationary) periods, characterised by a falling gdp/debt ratio?
And couldn't we change the financial and/or economic system, so that this megacycle disappears (inflation fluctuates around zero all the time)? -
Scrutinizer
On 26 May, 2009
I was a bit distracted by ms. Ling who even with clothes, still looks better IMHO than the other woman on the 10th minute, so I may have missed some details, but while dreaming away of Asian ladies, I just couldn't help but thinking of Shanghai, where a development equally impressive to that in Dubai has transformed the landscape in the past 15 years: the entire Pudong didn't even exist back then, it was just meadows back in '94. Let's see if indeed this time what happens in Vegas does not stay there.
But amidst the misery there were also hopeful developments such as the woman on minute 18 who actually improved herself, both morally and financially, because no longer does she encourage people to incur debt which they cannot repay, her new job also rewards her with impressive financial benefits or what else to think of $150 of untaxed tips on what she calls "a bad night"? Unless she used to be the mortgage broker's CEO I trust this amount by far exceeds her previous nett wage. So, once again it is demonstrated that morality pays: switching from selling a dream (of ever rising real estate prices) to offering WYSIWYG, increased her compensation. One would almost believe there actually IS a god. -
Scrutinizer
On 26 May, 2009
Overigens een vraagje aan allen:
Kent iemand een goede site voor onroerend goed "nationwide" (en dus tevens van meer dan slechts 1 enkele agent) genre immoweb.be, funda.nl of realtor.com maar dan voor
- Dubai,
- Singapore
- Canada (of alleen Vancouver),
- Spanje (Malaga stad (zelf))
- Panama,
- Argentinie (BA) of
- Uruguay (Montevideo)?
Dank bij voorbaat.
Sommige landen of steden wil ik louter uit academische interesse volgen, maar het is niet uitgesloten dat ik (over 5 jaar) ergens denk een zaak te kunnen doen, na de zaken jarenlang op de voet te hebben gevolgd.
Ook indien iemand maar voor slechts 1 land/stad een goede site komt, ben ik al heel dankbaar voor de info. (Mag overigens ook in het Spaans zijn).
Momenteel volg ik -louter uit academische interesse en zonder enige koopintentie op wat voor termijn dan ook- de situatie in een aantal Amerikaanse steden, waaronder met meer dan gemiddelde belangstelling Las Vegas en vooral Detroit. Het is onvoorstelbaar hoe goedkoop een villa met zwembad in Vegas RELATIEF is (bv. t.o.v. Belgie) maar het is helemaal onvoorstelbaar hoe goedkoop Detroit ABSOLUUT is. Zelfs in een provinciestadje in China betaal je omgerekend per vierkante meter al iets dan daar. Ik praat dus niet over Shanghai of zo, maar over pakweg Yichang (Huh? Waar? Juist ja, daar dus).
Anyhow, dank bij voorbaat. -
Alex
On 27 May, 2009
@Scrutinizer
zelf volg ik via sites en blogs in vooral VS en Europa trends, tendenzen en opinies op het vlak van 2e verblijvenmarkt; geen concreet aanbod. Kan je daar wel enkele nuttige links bezorgen. -
Jeroen13
On 27 May, 2009
Hi Frank, thanks for the good writings like always ;-)
I disagree on one thing, I don't like to see the crazyness in Las Vegas and Dubai in the same post. It is true that the debt bubble created the opportunity for malinvestment across the world but there is a fundamental difference between the two regions. Las Vegas: no savings, mountains of debt; Dubai: lots of savings and no government debt except for the $10 billions since a few months, ofcourse there is/was a lot of speculation with loaned money what resulted in the harsh crash which is only a positive thing because prices are now becoming more affordable for the working population who have been eager to by a home but couldn't because of the ridicilously high prices.
Also, Dubai has the ambition to grow by making itself an attractive place for business. They even are considering lowering taxes which are business related. Dubai also doesn't know any income taxes so government doesn't enslave its people like here in the west. In conclusion I would like to say the past debt bubble has made it possible in Dubai to build a great infrastructure and with almost no debt at all, a lean government en the ambition to grow on a productive way, Dubai is the place I would want to live instead of here in Belgium where our leaders still think Keynes was a wise man :-) -
Marty
On 27 May, 2009
Removing excesses quite efficiently maybe, but creating human hardship at an alarming rate definitely.
Deflation, inflation, removing excesses or even the state of the economy should not be goals in it self but at best means to an end. The end hopefully being human happiness and I can't see any of that being created by deflation.
@screw tin ijzer
If you would rather have some grubby old American sticking dollars down the panties of your daughter then her working at a mortgage broker, I think you might have had to much excess removed from your liberal brain ;-)
BTW I could put you in touch with some brothers in Detroit who also have some quite liberal views. Let's see who will be the fittest to survive then ;-) -
Scrutinizer
On 27 May, 2009
@Marty
If your alleged brothers are real libertarians and live by the anti-agression principle, they might be interesting folks. If however they are criminals hijacking a philosophy's name to justify their behaviour, while not at all consistently applying its principles, then I'm not interested in meeting them.
As for my daughter: obviously there are other profession's a father might have in mind for her, such as MD or grand slam finalist, so pole dancer might not be top of my list indeed, but from a moral point of view, I'd be more proud if she makes her money in an honest way than by telling people a bunch of lies, such as a politician or your average real estate or mortgage broker who'd do anything to make a commission, even trying to convince her victim that real estate prices only go up.
Perhaps Walter Block's "Defending the Undefendable", freely available on the internet btw, (and translated in Dutch as "Ter verdediging") might open your eyes and make you realise who is actually doing an honourable job (inspite of the brainwashed public opinion) and who is not (hint: people -including law enforcers- living from expropriated taxpayer money are most definitely not).
One last request: please don't use the world liberal in reference to me when writing in English, as people might think I'm some sort of leftist in favour of a welfare state and of the high taxation that goes with it. -
Jeroen13
On 27 May, 2009
Deflation? yes, asset deflation, but we will experience massive inflation in our daily lives when buying food products and all other daily necessities.
http://cash.rnews.be/nl/geld-en-beurs/nieuws/china-bouwt-voedselreserves-op/article-1194507491160.htm -
MarcVdB
On 27 May, 2009
You might be interested reading this:
http://pensionpulse.blogspot.com/2009/05/liquidity-drowning-meaning-of-inflation.html -
Marty
On 27 May, 2009
@Screw tin ijzer
You are right, of course you are libertarian and not liberal in the American sense of the word.
Notice how you use words like "honest", "proud" and "honourable" to qualify things and people. Important values, but in an economic sense they might not be that relevant. Unfortunately these kind of qualifications are used predominantly when discussing the economy in the popular media and even on this site.
Here's a clip explaining that moral preferences are not right or wrong but just moral preferences:
http://www.ted.com/index.php/talks/jonathan_haidt_on_the_moral_mind.html
I would like to see what a scientific economical discussion based upon facts not moral preferences would look like. -
Kevin
On 27 May, 2009
@Marty
> Deflation, inflation, removing excesses or even the state of
> the economy should not be goals in it self but at best means
> to an end. The end hopefully being human happiness and I
> can’t see any of that being created by deflation.
You seem to think it's a matter of choice - that it's a matter of choosing the path that leads to the greatest amount of human happiness.
And don't get me wrong, i'm all for it - if it were a matter of choice. The thing is, if it were a matter of choice, we wouldn't be in this crisis. Nobody decided to have a nice good crash to get rid of the excesses - on the contrary, the crash is caused by the excesses. If too many people borrow at rates that are impossible to pay off, then mass insolvencies are the only possible result. That's what's going on.
The excesses have become public knowledge. Everyone knows that the American housing market bubble has left a massive financial hole. What remains to be decided is who will end up paying which part of the bill. That is the process of deleverage, the process of working off the excesses if you will. Governments can print money, but they can't print wealth. There's nothing they can do to save the system, all they can do is save parts of the system. Printing money means pensioners see they savings wiped out. Not printing money means the economy goes bankrupt. Borrowing to stimulate the economy is nice as long as you haven't already borrowed 100% of your gdp.
There's nothing that can be done, this system will deleverage. The only question is what group(s) of society will end up paying the bill. -
Scrutinizer
On 27 May, 2009
@Marty,
Wel eens van objectivisme gehoord? Er is dus wel degelijk een absolute moraal. En doorredenered op het ecomonische terrein kom je dan uit bij de Oostenrijkse school van Von Mises, die in de jaren '20 reeds Wereld Depressie I voorspelde en waarvan aanhangers (bv. op mises.org) al jaren geleden de huidige WDII zagen aankomen. Nou, daar heb je dan meteen je scientific economic discussion. -
Jeroen13
On 27 May, 2009
@Scrutinizer
http://www.expatriates.com/classifieds/dub/re/ -
frederic
On 27 May, 2009
@Frank,
Still, excesses like dubai or anywher else, they made jobs.
All working and saving is a contradiction, one needs to spend before one can work and visa versa.
You do have a point about the money that was spend and backed by nothing , but that nothing had nothing to do with the fiat system, that nothing was the overvalue (mainly on the housemarket) .
And all the money spend by that overvalue did get into the economy and brought jobs to people.
When you say we have spend to much, somewhere someone has worked to much. People have bought to many cars, tv's, cell phones, ... well someone did have to make those things. -
Frank
On 27 May, 2009
@jeroen13
Thanks. You have a point about Dubai. Consider also that they have the oil we need and it won't stay cheap forever ... The one million dollar question however remains: "How bad is this deflation going to get before we enter a currency crisis?"
@Frederick
I still think you miss the point.
1. Excess consumption creates excess production. There are also excesses in production. (housing, cars, travel, ...)
2. If the excesses according to you provided us with equally as much jobs and along equally as much income, then why where there so many people who started to default on their loans. The problem remains that the fractional reserve lending system and micromanagement of intrest rates by central banks led us to a borrowing and spending orgy which has now ended. We failed to invest in productive capacity that repays itself and choose to consume our way to prosperity. The point is that the orgy should never have happened. There is no way one generation can get so rich so fast. We borrowed too much from the future to spend today. -
frederic
On 28 May, 2009
Frank,
I do get the point, but still fundamentaly working = someone spending.
Many spending = many working
Many saving = less work
The reason why many people where getting defaults on there depths is because they weren't working and where only spending (they got credit on there overvalued houses for example) . There was to many defecit.
So who was working ? China, and also Europe for a part because Europe exports a lot to China, but mostly China offcourse, if the US wasn't spending like hell, China's growth would be much smaller, China has worked to hard.
In dubai there was no work, lots of poverty. The excesse spending has brought many jobs to the regular emerate worker.
I stick to the point, when you say we have al spend to much, someone has also worked to much. -
Marty
On 28 May, 2009
@Kevin
To a certain extend it is a matter of choice. Choices that have been made and choices that will be made. I know not all the right choices where made in the past. I do not know which choices should be made for the future. I find it a bit to easy and uninteresting to scrutinize and judge from the libertarian ivory tower and denounce all measures that have been taken if they are not along the lines of the libertarian ideology. -
Marty
On 28 May, 2009
@Screw tin ijzer
Constructivisme is de tegenhanger van objectivisme, waaruit al blijkt dat er mensen zijn die er anders over denken.
mises.org
Motto: Tu ne cede malis, sed contra audentior ito (Latin: Do not give in to evil but proceed ever more boldly against it)
Rather morally opinionated I would say. Not wrong or right but definitely a moral opinion. The fact that they predict this crisis or others does not change this nor does it make them all knowing. -
ivan
On 28 May, 2009
Deflation is a dangerous phenomenom. However it is not dangerous on itself, but because government policies have made some prices - like wages - downwardly sticky. Workers do not accept wages cuts, not so much because of unions, but because they prefer unemployment over lower wages, even in times when real wages rise because of deflation. Why accept a cut in your wage if you can still earn a decent living while being unemployed? So wage cuts are resisted, markets cannot clear, and deflation leads to higher unemployment. If governments refuses to let markets work, then this situation can only be resolved by inflationary policies. The only way for governments to keep the system running is by steadily expanding credit and aggregate demand. Inflation is the result of this system. And recurring crises as well, because the structural misallocations won’t go away if the market cannot work. Seen in this way it’s quite extraordinary that the intellectuals have succeeded in brainwashing the people into believing that the current financial and economic crisis is the result of the free market.
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Kevin
On 28 May, 2009
@Marty
It's always a matter of choices, but not all choices are available. We can't choose to fly, for example, and we can't choose to make this crisis go away as if nothing happened. The choices we are facing are all hard ones. The challenge is which bad option to choose.
Plus, nice of you to share your feelings on ivory tower libertarians. I'm not sure why you brought it up in reference to me, but i guess it was sort of interesting to hear nonetheless. -
MarcVdB
On 28 May, 2009
@ Ivan
I disagree with the notion that deflation is not a danger in itself. If at any given time it would be more beneficial to people to stuff their money under a mattress rather than putting it to use as a means of exchanging goods or investing (which as it happens is the definition of deflation) you would be killing all investment and consumption during that period. Talk about boom bust! I would predict a bust so hard you would never again wake up to see boom again.
Currency (spot the term!) is not a store of value and it never was meant to be one. It is like sand in your hands. Squeeze it and you'll lose it even faster. Our value is in people, in morality, in community. Our biggest treasure is the next generation. -
frederic
On 28 May, 2009
Deflation also makes you depth stronger, it makes it harder to pay back your depth because the value of the depth has increased. This in a world of depth .... I asume you get it won't be a pretty picture.
So Deflation is not only dangerous because people would start acting towards it, it is also dangerous on itself because it has some serious sideeffects wich could set an unstoppable downwards spiral into action.
But not to wurry, I stick to my opinion from months ago, we will have a short period of deflation folowed by an longuer period of strong inflation.
once the economy is trying to get back up, people will start to spend again in a world with a very streamlined productioncapacity. This means much money, less products = inflation. As an extra leverage, the company's bringing there production back up, so they are going to invest, lend the money wich is now already waiting in de central banks (wich they can't get into the market at this moment). Meaning not only the consumer his money is going back into the market but also the central banks there money is going to get back into the market. -
MarcVdB
On 28 May, 2009
@ Frederic
I share your view that inflation is ahead, but I think my outlook is a bit longer than most. I guess when the smart money is guessing the economy is revving up again there will be an enormous outflow out of sovereign bonds, which will decapitate any recovery that was on the cards. After that, nothing will work anymore, at least for a while. -
Marty
On 29 May, 2009
@Kevin
The ivory tower libertarians remark was not aimed at you but more related to the little discussion thread on going with Scrutinizer... I apologize if you took offence. -
Scrutinizer
On 30 May, 2009
@Marty
Our current society is far from libertarian and look what mess the collectivist politicians (and others such as trade unions etc.) got us into (we're actually living the Atlas Shrugged plot almost page by page! - incredible how visionary the book's author was when she wrote it back in '57).
But the collectivists just keep denying it like true negationists: denying the facts and coming with "remedies" that are basically more of the same e.g. more debt and more cheap money (suddenly rebabtised "QE" to obfuscate the fact that it's a continuation of their earlier failed policies) as a "solution" for financial crisis. Now THAT's what I call an Ivory Tower. -
Jeroen13
On 2 Jun, 2009
Right on Scrutinizer!! I'm on your side.
@Frank
This wil be in your interest:
Wanneer zo'n derivaten contract ontploft wordt de notionele waarde de reeële waarde. Je kan dat vergelijken met de verzekering van uw woning. De maatschappij verdient daar elk jaar een premie mee. Maar als het spel afbrandt of ontploft wordt de verzekeringswaarde de reeël negatieve waarde voor de verzekering. Op het moment dat de verzekering uitbetaalt neemt de geldhoeveelheid toe met een kleine 300.000 euro in mijn geval.
Dus, zolang er niets fout gaat zijn derivatencontracten inkomsten voor de bank. Gaat het fout, dan wordt de notionele waarde (verzekerde waarde) de echte negatieve waarde voor de bank. Dat geld is er natuurlijk niet dus wordt het bijgemaakt, dus stijgt de geldhoeveelheid enorm wanneer derivaten de mist in gaan, vandaar hyperinflatoir.
Nu dit nog in verband brengen met AIG en je zou al op weg moeten zijn naar de goudwinkel :-) -
Jeroen13
On 2 Jun, 2009
Deflation?
Everything is going up. Copper is up 65% so far this year. Oil is up 53%. Soybeans are up 22%. Stock markets are up about 30% worldwide. And gold is up 12%.
Copper has risen so much, say the papers, because China is buying all it can get. What it is doing with the stuff we don't know; maybe it is stocking up at what it believes are low prices.
Maybe it is hedging its bets. China has the biggest pile of Treasury bonds in the world - $768 billion of them. That's 768 billion reasons to worry. Because each T-bond is denominated in dollars...and while everything else is going up, dollars are going down. Yesterday, the dollar touched a new low against the euro for this year - at $1.42.
T-bonds are down too - minus 5% for the year. It would not be at all surprising for the Chinese to be stockpiling oil, gold, copper and all the other inflation hedges they can get. Their dollar-denominated bonds may go down...but their commodities and gold would go up. Overall, they'd come out even. You can also hedge your own nest egg with commodities by buying gold coins and bars.
