Posts Tagged ‘debt deflation’

DEBT AND DELEVERAGING: A FISHER, MINSKY, KOO APPROACH

DEBT AND DELEVERAGING: A FISHER, MINSKY, KOO APPROACH

Courtesy of The Pragmatic Capitalist 

The following paper by Paul Krugman is an excellent analysis of the current situation in the United States.  Professor Krugman accepts Richard Koo’s “balance sheet recession” and draws similar conclusions to Koo – primarily that government must maintain large deficits in order to offset the lack of spending by the private sector.  The key component missing in both Krugman and Koo’s argument is the idea that a nation that is sovereign in its own currency cannot default on its “debt”.  Nonetheless, the conclusions we all come to are similar – a temporary deficit is not only necessary, but an economic benefit during a balance sheet recession:

“In this paper we have sought to formalize the notion of a deleveraging crisis, in which there is an abrupt downward revision of views about how much debt it is safe for individual agents to have, and in which this revision of views forces highly indebted agents to reduce their spending sharply. Such a sudden shift to deleveraging can, if it is large enough, create major problems of macroeconomic management. For if a slump is to be avoided, someone must spend more to compensate for the fact that debtors are spending less; yet even a zero nominal interest rate may not be low enough to induce the needed spending.

Formalizing this concept integrates several important strands in economic thought. Fisher’s famous idea of debt deflation emerges naturally, while the deleveraging shock can be seen as our version of the increasingly popular notion of a “Minsky moment.” And the process of recovery, which depends on debtors paying down their liabilities, corresponds quite closely to Koo’s notion of a protracted “balance sheet recession.”

One thing that is especially clear from the analysis is the likelihood that policy discussion in the aftermath of a deleveraging shock will be even more confused than usual, at least viewed through the lens of the model. Why? Because the shock pushes us into a world of topsy-turvy, in which saving is a vice, increased productivity can reduce output, and flexible wages increase unemployment. However, expansionary fiscal policy should be effective, in part because the macroeconomic effects of a deleveraging shock are inherently temporary, so the fiscal response need be only temporary as well. And the model suggests that a temporary rise in government spending not only won’t


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Telling Signs-of-the-Times: Layaways, Off-Brands, Goodwill Stores, Consignment Sales, Frugality, all Thrive in Middle-Class Suburbia

Telling Signs-of-the-Times: Layaways, Off-Brands, Goodwill Stores, Consignment Sales, Frugality, all Thrive in Middle-Class Suburbia

Courtesy of Mish

Boutique window display

Telling Signs-of-the-Times: In grocery stores, "No-Name" sales are up 2% and now represent 22% of total sales. Some full priced stores now offer consignment sections, an unheard of practice a couple years back.

Layaway sales are back in vogue at Toys-R-Us and jewelers alike. Layaways are a depression era phenomenon that all but died with the mass marketing of credit cards.

Old Stigmas Become New Badge of Honor

Frugality is the new "badge of honor" says the Yahoo!Finance report In a tough economy, old stigmas fall away

The Goodwill store in this middle-class New York suburb is buzzing on a recent weekend afternoon. A steady flow of shoppers comb through racks filled with second-hand clothes, shoes, blankets and dishes.

A few years ago, opening a Goodwill store here wouldn’t have made sense. Paramus is one of the biggest ZIP codes in the country for retail sales. Shoppers have their pick of hundreds of respected names like Macy’s and Lord &Taylor along this busy highway strip.

But in the wake of the Great Recession, the stigma attached to certain consumer behavior has fallen away. What some people once thought of as lowbrow, they now accept — even consider a frugal badge of honor.

At the supermarket, shoppers are buying more store-labeled products, like no-name detergents and cereal, and not returning to national brands.

And in a telling trend, Americans are turning to layaway more often when they buy expensive items such as engagement rings and iPads. The wealthy are also using layaway more often, a drastic change from the past.

"The old stigmas are the new realities," says Emanuel Weintraub, a New York-based retail consultant. "Now, people don’t have a problem saying, ‘I can’t afford it.’ It’s a sign of strength."

Two years ago, having second-hand clothes in the same store that sells regular-priced goods might have driven well-heeled shoppers away. Today, the concept works. The new consignment area, called My Secret Closet, has brought in new customers. Shoppers browse both the retail and consignment areas without hesitation.

"We are seeing a permanent change in how people shop, and we have to respond to that," says Tom Patrolia, who has owned the store for 24 years.

The growth in layaway also reflects Americans’ new willingness to set aside


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A DEFLATIONARY RED FLAG IN THE $U.S. DOLLAR

A DEFLATIONARY RED FLAG IN THE $U.S. DOLLAR

Courtesy of The Pragmatic Capitalist 

Red Flag against Blue Sky

If the chart below doesn’t grab your attention then few things will. In my opinion, the performance of the dollar is the surest evidence of the kind of environment we’re currently in. The surging dollar is a clear sign that inflation is not the concern of global investors. This is almost a sure sign that deflation is once again gripping the global economy and should be setting off red flags for equity investors around the world.

The recent action in the dollar is eerily reminiscent of the peak worries in the credit crisis when deflation appeared to be taking a death grip on the global economy and demand for dollars was extremely high. The recent 16% rally in the dollar is a sign that investors are once again worried about the continuing problem of debt around the world and they’re reaching for the safety of the world’s reserve currency – the dollar. As asset prices decline and bond yields collapse this is a clear sign that inflation is not the near-term concern, but rather that the debt based deflationary trends continue to dominate global economic trends.

This is exactly the kind of market action we saw leading up to Lehman Brothers. In 2008 the dollar rallied as signs of deflation began to sprout up. This was an instant red flag for anyone who understood the deflationary forces at work (and a total surprise for the inflationistas). The dollar ultimately rallied 26% from peak to trough. Coincidentally, the dollar had rallied 16% from trough to peak just prior to the Lehman collapse when the dollar surge accelerated.

USD2 A DEFLATIONARY RED FLAG IN THE $U.S. DOLLAR

 

Of course, the inflationistas will argue that gold is rising in anticipation of inflation. In my opinion, this is incorrect. First of all, if inflation were a major global concern the Goldman Sachs Commodity Index wouldn’t be almost 65% off its all-time high and just 33% above its 2009 low. Second, and perhaps most importantly, bond yields around the globe wouldn’t be plummeting if there were rampant inflationary fears. For a much more detailed analysis on the reasons why inflation is not a near-term concern please see here.

Oriental dragon mask

As for the gold rally, I think it’s clear gold is rallying in anticipation of its potential to become a future reserve currency. The…
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Why The World Is Headed For A Balance Sheet Recession

"Balance sheet recession" explained.  It characterized the Great Depression and Japan’s Lost Decade, and includes weak consumer spending and private sector deleveraging.  During this process, the three Ds come into play: debt deflation, deleveraging, and ultimately depression. – Ilene 

Why The World Is Headed For A Balance Sheet Recession

Courtesy of Edward Harrison at Credit Writedowns 

In my post Koo, White, Soros and Akerloff videos from inaugural INET conference I highlighted four speeches from the recent George Soros-sponsored pow-wow. I have already written up a post based on the one by William White in "The origins of the next crisis."

This post serves to give you some colour on another of those speeches, the one by Richard Koo and his balance sheet recession.

 

Koo believes the US, Europe and China are headed for a period of incredibly weak consumer spending not unlike what Japan has been through. Let me say a few words about this balance sheet recession theme, private sector deleveraging, and the related sovereign debt crises. Then, at the bottom, I have embedded a recent paper of his which has a bunch of graphs that explain what Japan has been through as a cautionary tale for the global economy.

I have described Koo’s thesis this way:

Nomura’s Chief Economist Richard Koo wrote a book last year called “The Holy Grail of Macroeconomics” which introduced the concept of a balance sheet recession, which explains economic behaviour in the United States during the Great Depression and Japan during its Lost Decade.  He explains the factor connecting those two episodes was a consistent desire of economic agents (in this case, businesses) to reduce debt even in the face of massive monetary accommodation.

When debt levels are enormous, as they are right now in the United States, an economic downturn becomes existential for a great many forcing people to reduce debt. Recession


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Bank of England Throws Money at Economy

Bank of England Throws Money at Economy

Currency Projected on Stock Market Listings

Courtesy of Mish

It’s no wonder that gold is soaring with the US, UK, and China all printing money like mad. Throw enough money around and gold is bound to rise regardless of anything else that might happen (all of it bad).

Please consider the latest insanity in the UK: BOE May Expand Bond Plan as Officials ‘Throw Money’ at Economy.

The Bank of England may increase its bond-purchase plan by 50 billion pounds ($83 billion) today as central bankers and politicians scramble to shore up Britain’s banking system and drag the economy out of recession.

Governor Mervyn King’s nine-member Monetary Policy Committee will expand the asset-buying program to 225 billion pounds at 12 p.m. in London, the median of 48 forecasts in a Bloomberg News survey shows. That follows Prime Minister Gordon Brown’s pledge this week to spend almost 40 billion pounds in a second bailout of two the nation’s biggest banks.

Any increase in the Bank of England’s emergency program would be the third since King unveiled the plan in March. Brown’s first bank bailout, the government’s fiscal stimulus measures and an injection of 175 billion pounds in newly printed central bank money have so far failed to end Britain’s longest recession on record.

“They’ve got to throw money at it,” said Neil Mackinnon, an economist at VTB Capital Plc and a former U.K. Treasury official. “The fact of the matter is that the U.K. economy is lagging behind. As to whether quantitative easing is working, the jury is still out.”

Quantitative Easing History Lesson

Mackinnon does not know if the strategy is working yet still insists “They’ve got to throw money at it.”

Neil Mackinnon is in dire need of a history lesson. Quantitative Easing was a spectacular failure in Japan, it will prove to be a spectacular failure in the UK as well. For more on the lesson of Japan, please see Is Debt-Deflation Just Beginning?

However, this should not take a history lesson. Common sense alone says you cannot cure a debt problem by throwing still more money at problems hoping something will stick.

It is impossible to have a sustainable recovery based on loose money policies. The global housing bubble should be proof enough of that.

Mike "Mish" Shedlock

 


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Is Debt-Deflation Just Beginning?

Is Debt-Deflation Just Beginning?

deflationCourtesy of Mish 

Last Thursday I received an email from David Meier, Associate Advisor at the MotleyFool concerning Debt-Deflation.

David asked if I had any comments on his article Debt-deflation: Just the beginning? Here is a partial listing:

The debate rages on.

Is inflation or deflation the bigger threat? There are lots of people — lots of smart people — on both sides of the debate and they present lots of good arguments. One thing that I have not seen — and maybe I just missed it — was an analysis using Irving Fisher’s debt-deflation framework. So I decided to put one together myself and to inject my understanding of what Bernanke is try to do to stop deflation from taking hold.

The question I keep coming back to, especially as I read more about the situation Japan faced (I’m reading everything I can by Richard Koo, including his book "The Holy Grail of Macroeconomics."

And just to make sure I am not being one-sided, I am countering my fears of deflation with "Monetary Regimes and Inflation" by Peter Bernholz, which should arrive next week.

Without further ado, below is my research on debt-deflation.

Dave

Dave’s research is a 70 Slideshow Page On Debt-Deflation that is easy enough to read or download from Scribd.

Here is my response ….

You should not be afraid of deflation.

You should be afraid of policies attempting to fight it.

Deflation (rather price deflation) is actually the natural state of affairs. As productivity increases, more goods and services are produced relative to the population and prices would therefore be expected to drop.

It is the Fed, along with misguided Keynesian and Monetarist economists who think falling prices are a bad thing. Who amongst us does like falling prices (except of course on things we own like houses, but even then who is not sick of higher property taxes that result)?

The reality is inflation benefits those with first access to money. Guess who that is? The answer is easy: banks, government, and the already wealthy. Inflation is actually a tax on the middle class and the poor who get access to money last. During the housing bubble, by the time the poor could get access to to money easily, it was far too late to buy.

Given that inflation


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Phil's Favorites

Why Jack Dorsey's Square paid a record $39 billion for Afterpay

 

Why Jack Dorsey’s Square paid a record $39 billion for Afterpay

Courtesy of Lien Duong, Curtin University and Sonny Pham, Curtin University

The A$39 billion (US$29 billion) that Twitter founder Jack Dorsey’s digital payments company Square is paying to acquire Australian upstart payments outfit Afterpay is the biggest takeover deal in Australian corporate history.

It surpasses the A$32 billion European commercial real estate giant Unibail-Rodamco agreed to pay for Frank Lowy’s Westfield Corporation in 2...



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Zero Hedge

Texas Judge Blocks Governor's Order Halting Transport Of Covid-Positive Illegals

Courtesy of ZeroHedge View original post here.

In a short-term victory for the Biden administration, a federal judge in Texas blocked an executive order which restricts the transport of infected illegal immigrants on Tuesday, suggesting that the order itself would have the effect of "exacerbating the spread of COVID-19."

U.S. District Judge Kathleen Cardone of El Paso agreed with the Justice Department, which accused Governor Greg Abbott (R) of potentially worsening the spread of the virus - as impeding the transfer of undocumented migrants would prolong the ...



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Chart School

RTT browsing latest..

Courtesy of Read the Ticker

Please review a collection of WWW browsing results. The information here is delayed by a few months, members get the most recent content.



Date Found: Saturday, 13 March 2021, 06:40:57 PM

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Comment: @crossbordercap Peak liquidity already evidence from our GLI momentum signal...has 6-9 month lead-time on markets and 15-20 months on economies



Date Found: Friday, 19 March 2021, 10:55:22 PM

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Comment: ...



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Biotech/COVID-19

Americans Tend To Stick To Their Stance On COVID-19 Vaccines

 

Source: Bloomberg, via ZeroHedge

Courtesy of Felix Richter, Statista

As U.S. health officials and the Biden administration desperately try to kickstart the stalling rollout of COVID-19 vaccines in face of the highly contagious Delta variant, President Biden...



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Digital Currencies

What are stablecoins? A blockchain expert explains

 

What are stablecoins? A blockchain expert explains

Stablecoins promise more stability than other cryptocurrencies. DenBoma/iStock via Getty Images

Courtesy of Stephen McKeon, University of Oregon

Stablecoins are a type of cryptocurrency linked to an asset like the U.S. dollar that doesn’t change much in value.

The majority of the dozens of stablecoins that currently exist use the dollar as their benchm...



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Politics

Bipartisan infrastructure deal begins to address consequences of a warming planet: 3 essential reads

 

Bipartisan infrastructure deal begins to address consequences of a warming planet: 3 essential reads

A lot of coastal infrastructure wasn’t designed for the frequent flooding and crashing waves brought by rising seas. Jeffrey Greenberg/Universal Images Group via Getty Images

Courtesy of Bryan Keogh, The Conversation and Stacy Morford, The Conversation

...



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Promotions

Free Webinar Wednesday: July 7, 1:00 pm EST

 

Don't miss Phil's Webinar on July 7 at 1:00 pm EST. It's FREE and open to all who wish to join.

Click here: 

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Join us to learn Phil's trading tactics and strategies in real-time!

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Kimble Charting Solutions

Crude Oil Cleared For Blast Off On This Dual Breakout?

Courtesy of Chris Kimble

Is Crude Oil about to blast off and hit much higher prices? It might be worth being aware of what could be taking place this month in this important commodity!

Crude Oil has created lower highs over the past 13-years, since peaking back in 2008, along line (1).

It created a “Double Top at (2), then it proceeded to decline more than 60% in four months.

The countertrend rally in Crude Oil has it attempting to break above its 13-year falling resistance as well as its double top at (3).

A successful breakout at (3) would suggest Crude Oil is about to mo...



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ValueWalk

Managing Investments As A Charity Or Nonprofit

By Anna Peel. Originally published at ValueWalk.

Maintaining financial viability is a constant challenge for charities and nonprofit organizations.

Q4 2020 hedge fund letters, conferences and more

The past year has underscored that challenge. The pandemic has not just affected investment returns – it’s also had serious implications for charitable activities and the ability to fundraise. For some organizations, it’s even raised doubts about whether they can continue to operate.

Finding ways to generate long-term, sustainable returns for ...



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Mapping The Market

Suez Canal: Critical Waterway Comes to a Halt

 

Suez Canal: Critical Waterway Comes to a Halt

Courtesy of Marcus Lu, Visual Capitalist

The Suez Canal: A Critical Waterway Comes to a Halt

On March 23, 2021, a massive ship named Ever Given became lodged in the Suez Canal, completely blocking traffic in both directions. According to the Suez Canal Authority, the 1,312 foot long (400 m) container ship ran aground during a sandstorm that caused low visibility, impacting the ship’s navigation. The vessel is owned by Taiwanese shipping firm, Evergreen Marine.

With over 2...



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The Technical Traders

Adaptive Fibonacci Price Modeling System Suggests Market Peak May Be Near

Courtesy of Technical Traders

Our Adaptive Fibonacci Price Modeling system is suggesting a moderate price peak may be already setting up in the NASDAQ while the Dow Jones, S&P500, and Transportation Index continue to rally beyond the projected Fibonacci Price Expansion Levels.  This indicates that capital may be shifting away from the already lofty Technology sector and into Basic Materials, Financials, Energy, Consumer Staples, Utilities, as well as other sectors.

This type of a structural market shift indicates a move away from speculation and towards Blue Chip returns. It suggests traders and investors are expecting the US consumer to come back strong (or at least hold up the market at...



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Lee's Free Thinking

Texas, Florida, Arizona, Georgia - The Branch COVIDIANS Are Still Burning Down the House

 

Texas, Florida, Arizona, Georgia – The Branch COVIDIANS Are Still Burning Down the House

Courtesy of Lee Adler, WallStreetExaminer 

The numbers of new cases in some of the hardest hit COVID19 states have started to plateau, or even decline, over the past few days. A few pundits have noted it and concluded that it was a hopeful sign. 

Is it real or is something else going on? Like a restriction in the numbers of tests, or simply the inability to test enough, or are some people simply giving up on getting tested? Because as we all know from our dear leader, the less testing, the less...



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Insider Scoop

Economic Data Scheduled For Friday

Courtesy of Benzinga

  • Data on nonfarm payrolls and unemployment rate for March will be released at 8:30 a.m. ET.
  • US Services Purchasing Managers' Index for March is scheduled for release at 9:45 a.m. ET.
  • The ISM's non-manufacturing index for March will be released at 10:00 a.m. ET.
  • The Baker Hughes North American rig count report for the latest week is scheduled for release at 1:00 p.m. ET.
...

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