econonoise

[solarbird]

Okay, so, up front, some linkless material: I'm not a technicals person, but we should've seen a bounce Wednesday in the equity markets, as a continuation of previous ticks up. Seriously, we should've, and we didn't. The market is crazy oversold and there wasn't much shocking news and we're overdue for a little corrective jump, and so far, we aren't really seeing it. What we have been seeing is a clusterfuck of Hindenberg Omens¹, and these are the conditions where historically you see crashes.

Oh, and Saudi Arabia yesterday told buyers to get used to high oil prices. Um, yeah, we know.

Mish is coming all out and saying we're fucked; it's deflation. He's talking Austrian terminology, which means money and money-equivalent supply, and not necessarily price. I still think oil issues will defeat price deflation overall, but that's not better, and wage pressures are pretty much zero, so don't look for inflationary input on that side - or pay hikes to help deal with rising costs of things you need, either. Karl at Market Ticker is even more bearish.

I'm really hoping that various theories that China will stop being such a huge buyer of US dollars as soon as the Olympics are over are wrong. Really hoping. (Link is to Brad Setser's article over at the CFR website.) One thing they want the US to do is shore up the dollar, but that'll be some work. Again, I'm not a technicals trader, but if I were, I'd bring up the six month chart on the dollar index and note you can draw a very nice "bear flag" with a channel that the dollar has just broken out of, down. The target would be a new low of, eh, 66ish, if I understand that sort of thing correctly. Which I'm not sure I do, so don't go placing shorts on my word for it - if you're one of those people, you should do your own drawing. I think it's nuts enough in equities where people believe in it; I think forex traders are less likely to buy in.

Bank of America went through with its plans to buy Countrywide. This is crazy. Seriously, what the hell are they doing buying a zombie housing lender that's being sued from coast to coast? S&P downgraded BoA stock from "sell" to "strong sell" (a.k.a. short the hell out of this) on the news. Presumably the intent is to loot and destroy, but you can't duck the legal liabilities that way.

Shaking out what's left in the sack:

The Fed appears to be having some trouble defending its target rate. That's neat. Credit card losses are worse than expected, which is a no-brainer, but still. The government-chartered housing corporations Fannie Mae and Freddie Mac are seeing delinquencies continue to rise. California lender IndyMac is having to spend a lot of time swearing it's not about to die. I'm hearing otherwise. And Dr. Roubini at RGE Monitor has given a lot of interviews lately, some of which are linked on that page.

And that's that.

¹: Yes, I am proposing this as a new plural; a school of fish, a murder of ravens, a clusterfuck of Hindenberg Omens.

Comments

[firni.livejournal.com]

Sounds like shorting stock is going to become big business.

[solarbird]

Shorting stock has been huge, huge business for months now. And the permabulls are really, really pissy about it.

[firni.livejournal.com]

I have the password to P's brokerage account. Time to have some fun!

[solarbird]

Okay, but don't get greedy. Three kinds of traders: bulls, bears, pigs. The first two make money.

[firni.livejournal.com]

It'd be funny to do to him what he (and his business partner) did to me several years back.

One hint: I was shrieking "MARGIN CALL? WHAT THE HELL?"

[solarbird]

SQUEEL, PIGGIE! SQUEEL!

[llachglin.livejournal.com]

Ah, you reminded me where I saw the link to the "shopping center economic model is dead" article that I linked to earlier this week despite it being two months old. It's a link in the Mish article that you mention.

[solarbird]

He links to it pretty regularly. I've linked to it before. I've also sent mail about it to City Council here.

[denelian.livejournal.com]

not that i UNDERSTAND economics. but i was told in my international econ (which is somehow a poli-sci class...) that much of this will be/can be alleviated by actually re-pinning the dollar to the Gold Standard. and that this was a thing being discussed...
and i haven't seen anything like this. have you?

[solarbird]

lulz gold standard

Okay, so. I am not a gold bug. I think it's stupid. I note that the credit cycle existed just as strongly when economies actually were on a gold standard and that accordingly, trying to stabilise (or even moderate) the credit cycle by going onto a gold standard is clearly not going to work. I note that the late Roman Empire was still in theory on a gold standard and its currency inflated right the fuck out of existence anyway.

But all that said, here's the case for the gold standard, such as it is:

There is a thing called money supply. It's the amount of money - cash in one form or another, be it bills, coins, electronic notation, etc. - available to the economy. It functionally includes available credit; this is very important. From an Austrian school of economics standpoint, inflation refers not to price increases, but increases in the supply of money; deflation, the opposite. Inflation is also correlated to increases in prices (which we'll call "price inflation") and vise-versa.

So note these terms:

inflation (or monetary inflation): increase in the supply of money
price inflation: cost of goods rising
deflation (or monetary deflation): decreases in the supply of money
price deflation: cost of goods falling

The method by which monetary inflation leads to price inflation is basically that of supply and demand; if the supply of money rises without a corresponding rise in the availability of things to do with that money, that money becomes of lesser value compared to the things you can do with it; people demand more of that money in exchange for those things.

There also exists a thing called the credit cycle. In a credit-supporting economy, such as ours, one method of creating "money" (and/or money-like instruments) is the issuance of credit with interest. This creates monetary inflation, which if not matched by an increase in actual production of goods and services (things you can do with it), results in price inflation. At certain levels of money supply, increases in money supply result in the enabling of the creation of more goods and services than new money; the value of the money in question actually goes up through the creation of more money, as opportunities to do things expand when more money is injected into the system. People with value-creating ideas are able to act upon those ideas where they couldn't without that injection of money; loans are paid off, with interest; the economy grows.

This creates incentives for money lenders to lend more money, which creates what's referred to as a virtuous cycle; the more you do something, the better off everybody gets, so you do more of it.

The problem is that as time goes on and the overall supply of money and people available to lend it grows, discretion declines, and the real economic return declines relative to the amount of new money created. So whereas, say, on average, lending $10 with $1 in interest would enable the creation of, say, $4 in new actual economic output, the average declines; over time, on average, you only get $3 in actual gain. Then more time goes on, and it's $2. Then $1. Then less than $1.

Now you're creating less in new economy than you're creating in new money. This does not mean you're not paying back the loan! You are! But the value of that money declines, and so you will start to see price inflation. But there's still incentive to keep lending, because the lenders are still getting the interest paid back, and also, people's perceptions lag badly behind reality.

(More next comment)

[solarbird]

(continued from previous comment above)

But we're not done. That lending continues; less and less real value is added, until the amount of added real economic value becomes negative; the more money you lend, even if you get paid back, the more damage you do to the actual constant-value economy. The housing boom is an exact example of this type of inflationary blow-off.

And then you see the interest payments not being made anymore, and instead of monetary inflation, you see the destruction of money and money-like instruments (such as debt); willingness to lend evaporates (as do a large number of banks), the money supply contracts sharply (monetary deflation), and you see a deflationary crash. These happen in regular cycles. In the short form, it's just referred to as the economic cycle; in the longer form - there is a history of 80-year-ish meta-cycle of cycles. The last such deflationary blowoff was the Great Depression; the previous was the Panic of 1870, and so on back in time.

If this cycle is repeating, we are at that point in this cycle, and we are in an extremely dangerous position.

Now, the twofold animating idea of the gold standard is that gold is "true money" as recognised throughout history (which is a superstition, as far as I'm concerned), and, more usefully, that by tying money supply to a fixed-quantity item at a fixed rate, you retard monetary inflation and limit the amount of possible monetary expansion, so that as an economy produces more, you see price deflation throughout, and no monetary inflation.

It's lovely theory but it didn't work before, so I don't know why it'd work now, and it carries with it a lot of problems I don't have time to detail now. But that should get you started. ^_^

[denelian.livejournal.com]

wow...

just wow. i excpected a couple of sentences. that... that was a mini-work of beauty. i am sacing all of this, because you just explained all the concepts i was having trouble with in one large blow!

[denelian.livejournal.com]

let me try to save my ego a bit ( 8-)

i understand basic economics - elastic/inelastic, supply&demand, inflation/deflation, economic cycles, etc. i know how a CLOSED economy works (i.e. i can easily model an economy. thats a weird phrase that seems to mean more than what i was told it means). i understand the BASICS. but i am a poli-sci major, not a econ major, and this class assumes about 10 econ classes i haven't had (i've had only two, and they were both introductory). so, in answering what i thought was a small and kinda silly question, you actually managed to explain a large part of what it was assumed that i know, that i don't actually know - and explain it so that i GET it, which is even more amazing, considering everything.

i HEART you.