In 1998, the Long Term Capital Management (LTCM) blow-up (aka "the worst financial crisis of all time,") happened. To fight the pernicious effects of this crisis, the Fed expanded its asset base, which is a fancy way of saying that they pushed a bunch of cash out into the banking system
Well, that crisis passed, and the Fed slowly re-absorbed that excess cash and returned to a more normal rate of exponential money expansion.
Then the Y2K 'crisis' came along and the Fed shoved tons of money into the banking system in anticipation of a crisis that never was. (Hey, they didn't know that.) Unfortunately, all this hot money poured onto an already-raging stock market mania and served to fuel the final blow-off that finally burst in the spring of 2000.
Then 9/11 came along, and this was by far a larger shock to the system than either of the prior crises. Again, money was shoved into the system and then reeled back in later.
Well, then, this picture will help you put this current crisis into context.
Yikes.
The opportunity for this level of monetary monkeying to end up in the hyperinflationary ditch is very, very high.
I think he meant up until that point, however the Great Depression looks like it was probably worse, seeing that I have no idea what the LTCM crisis was and have never heard of it.
Looks like they may see inflation as–the best way out–or perhaps–the only way out----With hyperinflation—the $500K house bought in 2005 and now worth $300K…may be worth $500K again and may solve their asset/liability banking crisis.
Although it may mean that we wake up to the dollar being worth 25 cents ( e.g., Argentina ) but they may see that as the lesser of two evils…
I don’t know—as Chris stated in Chapter 19…"twists and turns along the way" … buckle your seat belts!
Beautiful graph – puts it all in perspective. As did Bloomberg’s market summary today: the S&P 500 experienced its "worst annual drop since 1937." That bear market ended in a 50% drop (basis DJIA) in less than 13 months (10 Mar 1937 to 31 Mar 1938). Well hey, counting from the peak on 9 Oct 2007, we’re tracking 1937-38 pretty well. Only another 15% to go! By the time it’s over, it won’t feel any worse than a mosquito bite.
Ben’s frantic King Canute effort to fight the tide shows just how far the Fed went "off mission" into market manipulation, instead of tending to its statotory knitting: price stability.
Dr. Martenson has described "The End of Money." If I may be so bold, I think he meant "paper money." Like Dr. M.L. King, I have a dream: "The End of Central Banking."
LTCM was probably the largest nominal fiscal problem in the history of the United States (prior to this year). As a percentage of the actual economy though, it was a laugh.
But newspapers sure like their worsts. Just like we recently had the ‘worst drop in the Dow ever!’ (in the nominal sense anyway.)
At the time, the LTCM thing was a pretty big deal but the point remains that it was only 1/100 of the amount that will be spent on the bailout. Also consider the precedent that was set by the LTCM deal; large scale failures will be bailed out. This of course only works as long as the monetary system is worth something…
This is how I would argue this debate. Imagine that all the money in the world is like a giant growing swamp of bees. It is getting bigger all the time by the actions of central banks (ie, the debt is getting bigger everyday). Now, currently this swamp of bees is leaving the stock market, real estate and temporily residing in Treasury…so people who are in the stock market and real estate may feel "deflation". But remember, the swamp of bees (money) is growing by the minutes (ie, debt is not being reduced). When Gold and Oil (due to peak oil) go thru the roof, I believe that this giant swamp of bees will come back and land on any stocks associated with gold and energy. Dumping gold and energy stocks right now is like dumping an oil well in exchange for pieces of papers that can be created by the government out of thin air. How foolish are people. So prices may decline, but this is definitely inflation in my view.
Hello Pong, This year gold has gone up, and my gold stocks have gone down - way down. Also I’ve noticed that my energy stocks don’t exactly correlate with the price of oil.
So I’m confused by your assertion that "dumping gold and energy stocks right now is like dumping an oil well." Please explain your thinking on this. I’m really curious.
Pinecarr, I tried to understand that article, but it was way beyond me and I really want to understand deflation. Would you boil down what you got out of it for me?
Well I don’t own oil wells…I wish I do because of peak oil. In my view, the next best thing is to own stocks with companies that own and develop oil wells or alternative energies. Once peak oil becomes a public topic, all stocks related to energy will be swamped by the public, institutions and sovernign wealth funds with tonnes of paper money. This is my view.
I think we, as a society, assume we need these ideas such as inflation, deflation, and etc to function in a first world economy. But do we really? If we have a system of a marginal amount of debt, due to the lack of debt available, then I say that system would eliminate the current problem of in/deflation we’re dealing with at the current moment. For example if there was only $100 in a community of 4 families and I had to borrow $5 from my neighbor who added interest to the $5, then I would have to labor harder this month or cut back on something else to repay the $5 plus interest. The alternative would be to default and move out of that community (which is entirely burdensome) and have the lender recoup his loss by laboring more himself. What we have done, in this country, is print an extra $5 plus interest to recoup the debt when the system is dependent upon labor to sustain it. A simple but understandable example would be something like this: (I am extending my version of this example that ultimately began with Chris’ example in his Crash Course.Family A has $25Family B has $50Family C has $12.50Family D has $12.50If family A spends almost nothing into the system and hoards their money then it doesn’t really affect B, C, and D…because B, C, D are commencing with only $75 (for ‘x’ length of time- let’s say 10 years)… which becomes identical if all four families trade with $100… Either way they are always working with an ABSOLUTE number.------------------------My own objections below… It gets tricky when you enter in the factor of morality with that of commerce. For example if all four families work commercially with exactly $100 but family D lost their currency because their currency burned in a house fire, then Family D should get his $12.50 back. But who will make the money? What if it really didn’t burn and they hid their money in a barn but claimed it did burn with the house? What if Family D was extremely negligent and it so happened that was their fourth fire in the last five years, and each time the other three families had to increase their labor to build them a new home and furnish them with food and necessities lost in the fire. What if the person printing the money was unethical and printed himself a few extra bills. But this shouldn’t happen since everyone should be documenting all monetary activity on ledgers. But what if someone found some really neat ways to cook the books? What if… what if… what if… The hypotheticals are endless and in the end someone will get burned. It is inevitable. If the crooks aren’t getting stiffed, then who is? Us? Yep. Someone, by the very nature of a system of un/accountability and loopholes, will ALWAYS get burned. The question remains as to whom. If we’re dumb enough to let the crooks stiff us, AGAIN, by printing more money then we’re getting the short end of the stick. Since there is no way to ensure a flawless system where there will always be ethical and honest people, then someone will always lose. It seems as though everyone is trying to outsmart the next guy and by doing so we’ve dug ourselves into a mire of shit. The only perfect system is one where every hypothetical example, attempting to disprove the hypothesis, is included. But… since we cannot predict the future very well, then that will never happen. I say get a new system, stop printing money, and educate ethics from birth. Our system and hence our lives depend upon it.
I'm learning, too, so what I got out of the article is more of a surface-level impression and hopefully the beginning of basic understanding. I hope this helps! And if I am not explaining it right, I welcome someone who understands this better to help us out, so we can both get a better understanding of what's going on.
Ok, so what the article helped me see more clearly was the actual relationship between the amount of $ being created, the amount of that $ that actually makes it through the banks to become credit available to the economy (liquidity?), and how this increase in liquidity (money supply) can make the difference between an outcome of deflation (a decrease in the money suppy) vs inflation or hyperinflation (an increase in the money supply).
I guess the analogy that came to me was that deflation is like a plane heading straight down, and the pilot pulls up as hard as he can to gain altitude and keep the plane from crashing down. In this case, the fed is the pilot, and he’s pumping $ into the system as hard as he can to try to increase the $ available to the system, and keep our economy from crashing due to a loss of $ supply (lack of liquidity/credit). But, like a pilot or driver trying to pull out of a crash, if you pull real hard, you can over-correct. So if the fed keeps pumping out $, $, $, $ to keep our economy from crashing, there is the danger of an over-correction in the opposite direction, into hyperinflation (a spike up in the $ supply, which results in the dollar being worth less).
I feel like someone learning a foreign language (economics) and I can kind of follow some of it when I read it, but am not at all sure if I can speak the language correctly yet! So I welcome corrections/clarifications by others!
but what about the defaulted debt? if debt = money, then money is leaving the system as debt money erodes. that is deflation, not inflation. additionally, "non-liquidity" must also be considered a form of deflation. With respect to non liquid paper assets, without a valuation on the paper assets, in an open, non liquid market, one must assume the paper asset is worth Purchase price - some variable x, which is deflation as well. That describes the market we are in. However, it can be assumed there will be a baseline achieved between ‘actual liquid value’ and ‘speculative acquisition cost’…once this happens, we will start seeing our hyperinflation again…and one has to assume this is an inevitability, with the fed and the gov’t pushing hard to reach inflation again.
In that article (an awesome article btw) there was a link to a fed publication detailing their strategies for handling a deflationary situation. They all involved printing money to buy something in the real economy. Here’s a summary of their options:
buying foreign currency - targeted dollar depreciation
monetizing a massive tax cut - the "helicopter drop"
buying real goods & services
buying longer term government bonds (reducing incentive to save, encouraging consumption)
buying mortgages or equities
Some of the options the Fed can do on their own, others require coordination with the government, whereby the government buys the item and issues debt to do it, and the Fed prints money and buys the debt.
According to the paper, the foreign currency option seems least likely, since the foreigners could simply do the same right back to us.
Of course, any time the Fed prints money, everyone holding dollars has their holdings instantly devalued. But according to their playbook, these are the options open to them to deal with a deflationary situation. Here's the link to the fed playbook.
Fed deflation play book (pdf)
It seems like any of these actions would be gold-positive, oil-positive, and dollar-negative. And it seems like it would spike interest rates as well.
They didn't discuss gold confiscation, or capital controls with a foreign exchange rate peg, which I found interesting.
