Peter Johnson

Salsman on “The deflation myth”

48 posts in this topic

And as my last post on the topic (some of us have to get to work!) I believe Britain is currently doing what Canada did and as a result will be a phenomenally successful country in the near future. Their debt problems - both corporate and at state level - and impossibility of healthcare restructuring keep me off the GBP but I am, for the first time since Thatcher, hopeful.

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First off, you are wrong, hoarding is not what caused the Panic of 1893 nor the Crash of 1929. For a "real account" of what happened I refer you to Richard Salsman's lecture "The cause and consequences of the Great Depression." The economist that promote the ideas that your are repeating are fundamentally unsound and hence they have a total misunderstanding of the causes and it's effects.

Hoarding was the depression that followed on 1893 and 1929 in the contracting phase. Both the Panic and the Crash were the first steps in hoarding. Sustained hoarding, especially as it reaches down to the level of small businesses and household budgets, causes the economic activity to go nil and unemployment to go up and buisnesses to fail beyond what might be in an oridinary downturn in the business cycle. Bernake is a historical expert about this, though what he is forced to do is without historical precedent.

Bernake: the sharp deflation of the price level that occurred during the contraction phase of the Depression

Salsman has an agenda that requires sheeple to do as he would like them to do. The first horders, whether by design or accident, profit from an economic collapse.

What the Fed is doing by injecting new money that is supposed to be directly invested (rather than just circulated) is to take the profit out of hoarding. Too bad for Soros and Salsman, alike.

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I cannot figure out your question, but it looks like it would require a technical response I could not come up with in any case.

Nothing that technical about it.

there may well be no political capital for a further bailout.

That covers your bank bailout example - now please could you provide justification for the second round of QE we have just witnessed?

Right, tell us again how the possibilty of $5.5 trillion leaving the U.S money markets in a single day is just one of those things like the Panic of 1893 and the Crash of 1929 and that the deflation in the 1990's in Japan was not so bad for Japan -- sort of looking on the bright side of death as Salsman purports we ought to do.

The point of any QE even when not Keynesisn is to avoid widespread deflation and you argue that putting the interest rates at -8% is not an option (obviously). What else, then?

I have argued that the best economic solution for now, rather than just Fed tinkering, at least, to avoid deflation, is to get rid of Obamacare and then get rid of Obama. Your argument against that is . . . ?

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First off, you are wrong, hoarding is not what caused the Panic of 1893 nor the Crash of 1929. For a "real account" of what happened I refer you to Richard Salsman's lecture "The cause and consequences of the Great Depression." The economist that promote the ideas that your are repeating are fundamentally unsound and hence they have a total misunderstanding of the causes and it's effects.

Hoarding was the depression that followed on 1893 and 1929 in the contracting phase. Both the Panic and the Crash were the first steps in hoarding. Sustained hoarding, especially as it reaches down to the level of small businesses and household budgets, causes the economic activity to go nil and unemployment to go up and buisnesses to fail beyond what might be in an oridinary downturn in the business cycle. Bernake is a historical expert about this, though what he is forced to do is without historical precedent.

Bernake: the sharp deflation of the price level that occurred during the contraction phase of the Depression

Salsman has an agenda that requires sheeple to do as he would like them to do. The first horders, whether by design or accident, profit from an economic collapse.

What the Fed is doing by injecting new money that is supposed to be directly invested (rather than just circulated) is to take the profit out of hoarding. Too bad for Soros and Salsman, alike.

Your statements on Salsman are unfounded and on the verge of idiotic. Calling people names and is not discussing their subject matter and if that is the best you can do, then you are a waste of my time. Have you listened to Salsman's lectures? Have you read any of his writings with an active mind to attempt to understand him? What do you think his "agenda" is?

What the fed is doing by "injecting new money" is taxing without the average person knowing it, it is also causing a devaluation of the currency and prices will go up which means the average person will be under an even large demand to achieve their goals and needs. Companies will have to lay off people to afford the increase in taxes that they will have to pay and on and on and on.

It seems someone is the "sheeple" and it is not Salsman nor I nor anyone that can grasp the the government is screwing us over. Unfortunately most of the American public thinks their getting a beauty queen but instead they are getting a used hag that has been passed around since the 19th century.

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Right, tell us again how the possibilty of $5.5 trillion leaving the U.S money markets in a single day is just one of those things like the Panic of 1893 and the Crash of 1929 and that the deflation in the 1990's in Japan was not so bad for Japan -- sort of looking on the bright side of death as Salsman purports we ought to do.

Not talking about the bailout. Talking about QE. But sure, if you want to discuss bailouts... where would those 5.5 trillion have gone? Fancy investing in lovely Europe? Beautiful castles, if you can ignore 1/3 of population on welfare and politicians who make foreign investors into scapegoats. Maybe Japan? With its ratio of debt to GDP that high, and huge willingness to intervene to weaken its currency, that's sure a great bet. Maybe one of those fast growing emerging markets? Like Ecuador? Oh dear, your money just got nationalized. Brazil, perhaps... oh wait, plenty of capital already there, so much they don't know what to do with it. Argentina? With the Kirchners? Forget it. Maybe Chile. Oh wait, that's taking a punt on the direction of copper. Russia? Look up Hermitage Capital. If you're buddies with Putin, maybe... Iceland looks stable. Clean streets, high rates... bam. Maybe the Middle-East? Think again - nobody will want your money there. China is then the obvious choice, until your manager takes your capital to build a factory and parallel company, and leaves you with a shell and a bankrupcy. Not to mention if you invested prior to the change of capitalization rules in one of those hot NYSE or HKSE-listed places, you're now screwed.

And then you realize the US has a decent balance sheet, a population that actually wants to work and is unwilling to pay for other people's laziness, and extremely transparent markets with incredible depth and liquidity. So you rush right back in.

The point of any QE even when not Keynesisn is to avoid widespread deflation and you argue that putting the interest rates at -8% is not an option (obviously). What else, then?

Well actually, a 4 trillion QE would have brought the yields down to a -8% equivalent. So would a 3% revaluation of the renminbi. Chances are the Fed will scale up this QE - they left the option open and this is why commodity markets correlations have gone to 1 (i.e. everybody is trading commodities depending on the likelihood of further buying).

I have argued that the best economic solution for now, rather than just Fed tinkering, at least, to avoid deflation, is to get rid of Obamacare and then get rid of Obama. Your argument against that is . . . ?

Didn't see it mentioned before. But sure. But in that case you can't argue about hoarding. If you argue for the balance sheet recession theory, then you should also be in favour of fiscal stimulus (since - and read Koo to understand why - his main argument is that in a balance sheet recession, should you wish to impact inflation, you need to act fiscally as monetary policy will be completely powerless). So choose one. Hoarding or restructuring?

I'll leave you on a thought about hoarding (since you didn't answer any of my points other than a perceived attack on the guaranteed deposits, I feel I should answer your main one): when is an investor most likely to hoard? When money is expensive or cheap?

It may seem counterintuitive so let's see it in another way.

When are you most likely to buy a car? When there are 2 hour queues and the dealership asks you for 3 printed copies of your contract, and a 30% premium? Or when you get 5 phone calls a day from dealers desperate to sell their stock, offering you a 40% discount on any of their models?

It's the same with markets. Stocks with P/E ratios of 100+ were deemed insanely attractive in 1999, and 2 years later, at P/Es of 15 or 20, good luck finding anybody for your issue.

In that stream of thought, is making money cheaper during hoarding going to make consumers go out and borrow? Corporates lever up their balance sheet? Should they? Of course. Debt is highly productive if used for investments (that IS the whole point of debt, that you can do something better with it than the investor!). If it's cheap, you should jump on the opportunity. So do people like Warren Buffett, or Seth Klarman. Nobody does. So let's not make it worse by signalling that nobody is borrowing.

This discussion is not very useful, anyway. The Fed will destroy the value of the dollar because it needs to, because otherwise, the US cannot pay back its liabilities, or roll over its debt to bribe more taxpayers with their own money. This is pretty much an accepted fact. No amount of Republicans and John Boehner is going to affect this fact. The question is where to invest (gold is already at 1300-1400 when it was at 200 not so long ago, so that's a dangerous bet you are making, although one I fundamentally agree with, if you have the balls to see through the correction down to 900 that everybody is expecting). Everybody knows this. Why are the Chinese "stimulating" their economy? Is it because they are deep down socialists? No. The Chinese have been the most capitalist civilization on the planet for 2 millenia. Look at all the assets they are buying up around the world. They're buying now because assets are cheap and their dollars are going to lose a hell of a lot of value pretty soon, and the government is using the occasion to build things China needs like roads, dams, coal and nuke plants and power lines. But value will be lost in euros, yens, and pretty much every currency in the world (since currencies are traded on the USDCNY, with emerging markets on the Chinese side pushing their currencies down, and developed world countries on the US side keeping in line with the USD more or less). So what do you do? What has been priced in? What will happen if the Tea Party succeeds in a Canadian-style restructuring of the US? Then your gold is not worth very much.

Sorry for the stream of thought. I'm extremely busy with work at the moment, and had wanted to post all of these but have had no time to structure it. Hope this answers your question, and will spark some more discussion.

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Btw, on US "investors" holding US assets waiting for the government to pick them up, the Europeans (now held up as a virtue of hawkish central banking) were not exempt. Why were the fringe countries bailed out? Because EU banks - especially German banks with Greek debt - hold several hundred billion dollars' worth of PIIGS debt. They hold it because they know full well that their governments are never going to let them go bankrupt and screw entire populations. We're talking dozens if not hundreds of millions of citizens without a bank.

It's a bold play and one that was spot on. Merkel was fuming even as she, 2 weeks after annoucing "tough" to the Greeks, did a 180 degree turn to announce plenty of Deutsche Marks, sorry, Euros, heading towards Athens (probably in one of those ferries that sink so often over there). She probably got a few phone calls from German bank CEOs...

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I think the Germans were most annoyed when they read on the front page of their newspapers that Greece, despite only having 6 taxpayers classified in the >100k EUR/year bracket, was the largest importer of Porsches in Europe.

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What the Fed is doing by injecting new money that is supposed to be directly invested (rather than just circulated) is to take the profit out of hoarding. Too bad for Soros and Salsman, alike.

Ooooh, hadn't spotted this gem.

You are basically arguing for the purposeful dilution of savers (by arguing that "hoarders" should have their assets diluted to stop them from "hoarding"). Aside from the fact you are wrong on the mechanics (who holds US bonds? "hoarders" - your average Joe can't tell a 5y from a 30y, even the smart members of the Forum, yourself included, seem unable to recognize this fairly simple vocabulary and words like yield), this is pretty much Marx's argument, in which case I'm afraid we are extremely divergent in philosophy, at effectively complete opposites of the spectrum, and therefore, I wish you well with your opinions and good luck convincing me.

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Aaaand because these days I post quickly and without thinking about restructuring (Betsy, please feel free to collate these posts) I'll add that I share your distaste for Soros, even though I admire his investing skill, his trading skill, and his management skills which make him amongst the top 3 investors/managers/traders alive today (in all three fields). His method of managing money is quite literally the best in the world and I hope will become a model for endowments now that the intellectually arrogant Harvard investment model (a pale imitation of Swensen's much better Yale model) has been proven wrong so spectacularly.

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Right, tell us again how the possibilty of $5.5 trillion leaving the U.S money markets in a single day is just one of those things like the Panic of 1893 and the Crash of 1929

. . . .

I was asking this question in the context of your/Salsman consistent and non-contradictory economic philosophy via-a-vis government intervention, and I see you chose to avoid answering it.

I have argued that the best economic solution for now, rather than just Fed tinkering, at least, to avoid deflation, is to get rid of Obamacare and then get rid of Obama. Your argument against that is . . . ?

Didn't see it mentioned before. But sure. But in that case you can't argue about hoarding.

Again, I was asking about your statement of Fed monetarist tinkering versus fundmental change. This is to say the U.S. would have to change Obama's "change" to recover in spite of anything the Fed could do.

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Again, I was asking about your statement of Fed monetarist tinkering versus fundmental change. This is to say the U.S. would have to change Obama's "change" to recover in spite of anything the Fed could do.

Don't know, the Fed tinkering is not really Keynesian in its goal, no matter what they advertise, so...

I would say, in the hypothetical world where the Fed really WAS trying to stimulate the economy - when you are a bit hungover, recovering from serious drinking, do you have another beer? Or do you wait the headache out?

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What the Fed is doing by injecting new money that is supposed to be directly invested (rather than just circulated) is to take the profit out of hoarding. Too bad for Soros and Salsman, alike.

Ooooh, hadn't spotted this gem.

You are basically arguing for the purposeful dilution of savers (by arguing that "hoarders" should have their assets diluted to stop them from "hoarding"). Aside from the fact you are wrong on the mechanics (who holds US bonds? "hoarders" - your average Joe can't tell a 5y from a 30y, even the smart members of the Forum, yourself included, seem unable to recognize this fairly simple vocabulary and words like yield), this is pretty much Marx's argument, in which case I'm afraid we are extremely divergent in philosophy, at effectively complete opposites of the spectrum, and therefore, I wish you well with your opinions and good luck convincing me.

No, I am not talking about "savers" and T-bill holders etc. (though they would be affected favorably if they invested prior to the crash & hoard). I am talking about corporations/banks/investment firms sitting on a minimum of $1trillion in cash which is not "saved" or invested. The purpose of the run on the money markets in 9/18/08 was the same as any run on a bank -- it is not withdrawing money to reinvest somewhere else but to keep around as cash in hopes the prices of everything from goods to investments will come down [in real deflationary contraction as in 1893 and 1929]. If the Fed can force investment and make buying-in more expensive in the near future, then with fears of losing out, hoarded cash will get put into investment.

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No, I am not talking about "savers" and T-bill holders etc. (though they would be affected favorably if they invested prior to the crash & hoard). I am talking about corporations/banks/investment firms sitting on a minimum of $1trillion in cash which is not "saved" or invested. The purpose of the run on the money markets in 9/18/08 was the same as any run on a bank -- it is not withdrawing money to reinvest somewhere else but to keep around as cash in hopes the prices of everything from goods to investments will come down [in real deflationary contraction as in 1893 and 1929]. If the Fed can force investment and make buying-in more expensive in the near future, then with fears of losing out, hoarded cash will get put into investment.

It IS invested - in T-bills. The holders of treasuries are the bank prop desks, the hedge funds and other speculators who rightly understand that there is guaranteed demand for certain maturities (it is their job to go for the highest return/risk ratio after all). The game for the past month was to guess which. The Chinese aren't smart or fast enough to trade it, and they are too big anyway. They don't dare sell anything in case it triggers a sell off and inevitable yield collapse, even though as stated above there's few alternatives to T-bills, and the Chinese don't have to mark to market. So they've been feeding the bonds to the market slowly and hoping to transform these USD receipts in assets before it all collapses.

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The purpose of the run on the money markets in 9/18/08 was the same as any run on a bank -- it is not withdrawing money to reinvest somewhere else but to keep around as cash in hopes the prices of everything from goods to investments will come down [in real deflationary contraction as in 1893 and 1929].

Where do you get that notion from?

Ever been on a trading floor when large credit events happened? How do you know how institutionals and sovereigns trade?

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Your statements on Salsman are

And here I thought you were done with me.

And here I thought you knew something of what you were talking about, but I was wrong. So, where are the responses to my quesitons? If you stick around here, you will find that I am never done, long-term. Like most Marines and Energizer bunnies, "I keep going and going and going."

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The purpose of the run on the money markets in 9/18/08 was the same as any run on a bank -- it is not withdrawing money to reinvest somewhere else but to keep around as cash in hopes the prices of everything from goods to investments will come down [in real deflationary contraction as in 1893 and 1929].

Where do you get that notion from?

That is what deflation is.

http://inflationdata.com/inflation/inflati...s/Deflation.asp

"a decline in general price levels, often caused by a reduction in the supply of money or credit. Deflation can also be brought about by direct contractions in spending, either in the form of a reduction in government spending, personal spending or investment spending. Deflation has often had the side effect of increasing unemployment in an economy, since the process often leads to a lower level of demand in the economy"

What Is Deflation and How Can it Be Prevented? provides a more detailed pros/cons view.

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The purpose of the run on the money markets in 9/18/08 was the same as any run on a bank -- it is not withdrawing money to reinvest somewhere else but to keep around as cash in hopes the prices of everything from goods to investments will come down [in real deflationary contraction as in 1893 and 1929].

Where do you get that notion from?

That is what deflation is.

http://inflationdata.com/inflation/inflati...s/Deflation.asp

"a decline in general price levels, often caused by a reduction in the supply of money or credit. Deflation can also be brought about by direct contractions in spending, either in the form of a reduction in government spending, personal spending or investment spending. Deflation has often had the side effect of increasing unemployment in an economy, since the process often leads to a lower level of demand in the economy"

What Is Deflation and How Can it Be Prevented? provides a more detailed pros/cons view.

Here is your biggest mistake, as deflation is not objectively defined in the quote you use. Deflation is an increase in the purchasing power of one's currency. Inflation is a decrease in the purchasing power of one's currency. And since the American government has been inflating our currency at an irrational and incredible rate over the last 4 years our currency has less purchasing power and hence the mess we are in (one cannot have infaltion and deflation at the same time so your assesement is contradictory). As stated earlier, you have misunderstood the nature of currency and it's production right from it's root and hence why you have a misunderstanding of the cause of the problem. If you want to know why investors are holding on to their currency it is because they know they cannot make any profit from it here in America (or at least very little) and hence why they are taking it to countries where they can make a profit. And the more our government increases regulations and taxes the longer the one's that have the wealth will sit on their wealth or go somewhere else with it.

So, I once again, recommend that you purchase (with your currency) Richard Salman's lecture "The Cause and Consequence of the Great Depression" as the failure that happended then and now were not caused by capitalism but instead by statism. Capitalism is the system of growth and prosperity and statism is the opposite. When there seems to be a contradiction, "check your premise" and you will find that there is none, so at the root of America's economic problems you will find that the interjection of statist programs are the cause and the cure is to disacrd them not increase them.

I offer the link below to those that care to do their own research.

http://www.aynrandbookstore2.com/prodinfo.asp?number=DS72M

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The purpose of the run on the money markets in 9/18/08 was the same as any run on a bank -- it is not withdrawing money to reinvest somewhere else but to keep around as cash in hopes the prices of everything from goods to investments will come down [in real deflationary contraction as in 1893 and 1929].

Where do you get that notion from?

That is what deflation is.

http://inflationdata.com/inflation/inflati...s/Deflation.asp

"a decline in general price levels, often caused by a reduction in the supply of money or credit. Deflation can also be brought about by direct contractions in spending, either in the form of a reduction in government spending, personal spending or investment spending. Deflation has often had the side effect of increasing unemployment in an economy, since the process often leads to a lower level of demand in the economy"

What Is Deflation and How Can it Be Prevented? provides a more detailed pros/cons view.

Here is your biggest mistake, as deflation is not objectively defined in the quote you use. Deflation is an increase in the purchasing power of one's currency. Inflation is a decrease in the purchasing power of one's currency.

Increase/decrease purchasing power is an effect by the cause deflation/inflation, not the definition, and Salsman's rendering increase/decrease is directly proportional to increase/decrease of "gold content" of currency is similarly not definitional but causal.

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Increase/decrease purchasing power is an effect by the cause deflation/inflation, not the definition, and Salsman's rendering increase/decrease is directly proportional to increase/decrease of "gold content" of currency is similarly not definitional but causal.

Inflation is defined as an undue expansion or increase of the currency of a country, especially by the issuing of paper money not redeemable in specie. So, when one's government expands the currency by issuing paper money that is not redeemable (fiat) they also have decreased the purchasing power of that currency. In other words you currency is worth less, or it takes more to buy the same amount of goods. It should be quite easy to recognize that deflation would be the opposite. And if one understands that one's currency is a representational tool of one's productivity (real goods) then one should also recognize that deflating the money supply to match that which it represents does not cause a negative effect, but instead stimulates growth and prosperity.

"You have heard economists say that they are puzzled by the nature of today’s problem: they are unable to understand why inflation is accompanied by recession—which is contrary to their Keynesian doctrines; and they have coined a ridiculous name for it: “stagflation.” Their theories ignore the fact that money can function only so long as it represents actual goods—and that at a certain stage of inflating the money supply, the government begins to consume a nation’s investment capital, thus making production impossible." [Ayn Rand, “Egalitarianism and Inflation,” Philosophy: Who Needs It, 134.]

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Increase/decrease purchasing power is an effect by the cause deflation/inflation, not the definition, and Salsman's rendering increase/decrease is directly proportional to increase/decrease of "gold content" of currency is similarly not definitional but causal.

Inflation is defined as an undue expansion or increase of the currency of a country,

Inflation is not defined as an undue expansion of the currency as the latter may be a cause for inflation but not its only cause.

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Increase/decrease purchasing power is an effect by the cause deflation/inflation, not the definition, and Salsman's rendering increase/decrease is directly proportional to increase/decrease of "gold content" of currency is similarly not definitional but causal.

Inflation is defined as an undue expansion or increase of the currency of a country,

Inflation is not defined as an undue expansion of the currency as the latter may be a cause for inflation but not its only cause.

And as I stated already, your definistion is unsound, non-objective and hence why your conclusion is incorrect. Look up the term inflation in the dictionary and you will find exactly what I wrote.

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