Re: Deficits no concern?


"Richard J Kinch" <kinch@xxxxxxxxxxx> wrote in message
news:Xns9B6FD4296E205someconundrum@xxxxxxxxxxxxxxxxx
Ed Huntress writes:

The money of the United States in is the hands of Congress, Richard.
We elect them to do what's best. If you disagree that they're doing
what's best, hey, that's a democratic republic for you.

So if the Congress decides to double the socialization of the country
from the current 25 percent to a new 50 percent of the economy, there is
nothing constitutional in the way?

Not that I know of.

They can just buy the banks and auto
plants and airlines and start running them as socialist business
enterprises, like the post office and public schools?

They could, but I don't think they will.

I agree they
could get away with it if public opinion went along. They did it with
the old Ma Bell and the TVA. And does anybody remember the Carter-era
Synfuels (http://en.wikipedia.org/wiki/Synthetic_Fuels_Corporation)?

The situation right now is not that Congress is trying to nationalize
industries. They're just talking about keeping them from fattening the
payoffs for executives and stockholders if we pump federal money into their
operations. My impression is that they'd rather not do either, but they're
not going to just throw money at them again, and watch while AIG throws big
conferences (parties) and the banks use their new "capitalization" to buy
other banks, rather than to make more loans, which is what the money was
for. Can you blame Congress for that?


Just like a corporate bankrupcy. How is it different?

Completely different. Corporations don't keep assets and pay less in a
bankruptcy. Neither do personal cases. The debtor forfeits all the
assets and the debt is cancelled. Now we are looking at proposals for
insolvent homeowners to avoid bankruptcy and be given a gift of lower
mortgage payments by judges who forcibly rewrite the contracts to the
harm of the creditor. Unlike a bankruptcy, the homeowner keeps the
asset, but the debt is (partly, in effect) still cancelled. Like an ARM
with a balloon that the owner can't pay being forcibly rewritten into a
30-year FRM, when the contract had no such provision.

Whoa. In a Chapter 11 bankruptcy for a corporation, the corporation usually
keeps the asset as a "debtor in possession." That's most of the corporate
Chapter 11s. As for the creditors, they may get nothing, or a reduced
payment. Just like the banks re-writing mortgage contracts. Same thing, only
the debtor makes out better than they usually do in a Chapter 11 corporate
bankrupcy.


Maybe you're confused that sometimes creditors in a corporate bankruptcy
will permit continued operations under reorganization instead of
liquidation, because they think they'll eventually get more that way
than if they claim the forfeited assets. Bankruptcy debtors cannot
"shuck off" any contracts on their own terms.

No, I'm not confused. There are three possible circumstances for
corporations. Under Chapter 7, they're liquidated and that's the end. Under
Chapter 11, if debts exceed assets, they're usually reorganized and the
stockholders get creamed. But MOST Chapter 11s allow the stockholders to
hang on to the company through the "debtor in possession" terms I mentioned
above. It's up to the courts, which have guidelines they're responsible to
follow.

In other words, it's a lot like re-writing a mortgage for an individual. The
individual gets terms a lot like those of a debtor in possession: they hold
on to the asset and they get a reduction in their debt, through a reduction
in interest, principal, or both. And they get it for the same reason:
economic distress, as determined under specific guidelines.

If it's good enough for corporations, it ought to be good enough for
individuals. Don't you agree?


So if someone is benefitting from deflation, paying less in dollars
today with dollars they saved before, then they're not living within
their means. They're not "thrifty people." If they're paying from the
interest income they're making on their investments, either they have
the good luck (which is why I brought up luck before) to have a
long-term interest rate locked in, or they're going to suffer a
decline in their interest income as the currency deflates.

What an odd view of thrift. If you save and earn interest and enjoy
that return, you are just a lucky speculator? Dollars appreciate in a
deflation, even if not put at investment risk.

What's odd about it? That's capitalism. You're not *entitled* to a return on
an investment. You gain returns by taking calculated risks. If you want to
cover yourself against some of the risk, you demand collateral, and accept a
lower rate of return in exchange. Or you hedge your investments in other
ways.

Now, if you're talking about money you've deposited (invested) in a bank,
and you're relying on federal insurance to cover you, well, that's much too
socialist an idea for you, I'm sure. You'd certainly refuse the FDIC money
if your bank went bust. <g>

But your deposit in a bank is an investment at risk just as surely as if you
invested that money in a venture capital fund. You're loaning it -- at
risk -- to the bank so that they can take it and make investments with
higher risks. You're accepting a low rate of return to have them manage the
higher-risk investments for you. But your money, absent the FDIC, is at risk
just like with any other investment. That's why you get a return of
interest.

That's not thrift. That's investment. You practice thrift so you have
something with which to make the investment.


All of
those trillions of supposed assets that tanked have had no effect on
the money supply -- which means they were not directly related to the
real economy, as I've suspected for months.

I disagree. Some estimates have hundreds of $trillions in paper like
credit-default swaps being traded at the peak of the bubble. The
government economists with their M1 and M2 figures don't count leveraged
assets as part of the money supply...

But you're the one who brought up money supply. Some of the world's top
economists have been saying for months that there is no clear relationship
between the face values of those derivatives and the effect they have on the
real economy. The thing I was pointing out is that they appear to have had
no direct effect on the money supply, as you had claimed, even though they
were theoretically liquid assests and they could be traded for other kinds
of assets.

They appear to have had no *indirect* effect on money supply, either. In
fact, it's not clear yet what effect they've had on the real economy. The
mortgage assets that went belly-up did so without being bundled into
securities. They were going belly-up anyway. And the fact that the resulting
paper was securitized, and then hedged with credit derivatives -- which
couldn't be collected -- only means that the hedge failed, and the
securities behaved as if there was no insurance at all (except that the
investors paid a small fraction of their money for insurance that turned out
to be a dud). Again, there's no clear effect from the trillions in
derivatives themselves, except that the economy has been behaving largely as
if they never existed in the first place.

Which is exactly what I suspected was going to happen. When you take them
away, all that happens is that the real economy continues as it would if
those hedges and insurance-like derivatives never existed, but we lost the
inflated part of the values of those houses. Or some people did. That's why
I haven't joined Unka' George in the daily wailing and chain-flailing about
the economy. d8-)

... when you or I will be spending based
on what we think we've banked from our houses, stocks, etc.
appreciating. We spend based on our net worth, or what the bubble
inflates our net worth to be. And when all those paper assets
disappeared, and the real asset values fell, that was an enormous
shrinkage in the money supply, whatever M1 and M2 have to say.

Nope. That isn't money supply. That's illiquid assets -- or it became
illiquid, as the paper proved impossible to unload. That's not money supply
in the sense that it motivates activities in the real economy. That's why
the Fed doesn't count it; it's more like other illiquid investments than it
is like money. They stopped reporting M3 largely because it was becoming a
meaningless number, full of institutional investments and repurchase
agreements, a mixture of things that really were savings rather than
currency flowing through the economy, and which had no direct effect on
prices or inflation. The derivatives appear to have been even more detached
from economic activities that send prices up or down, or that affect
employment.

So they've had no apparent effect on money supply, despite the fact that
some financial institutions counted them as collateral. It isn't clear how
much they served, indirectly, as reserves for loans that found their way
into the real economy -- apparently not very much, or the money supply would
have fallen off a cliff instead of continuing to increase. They seem to have
had little effect on liquidity. They do appear to have had a strong effect
on credit, but it looks like squeezing the balloon in one place pushed it
out in another, or, again, there would have been a contraction in the money
supply.


Just like the CPI has nothing to do with inflation. You have an obvious
and unquestionable 10X inflation from now back to the 1960s, yet the
compounded CPI figures integrate to more like 3X. The government
numbers about inflation and money are just political eyewash.

I'm not following you. The government's inflation figure is calculated from
the CPI, and it's 7.3 times the 1960 figure at present. If by the "1960s"
you mean 1969, it's 5.9 times.

http://www.usinflationcalculator.com/

What are you basing this statement upon? You'll get a slightly different
number from the GDP price deflator versus CPI, by no more than a couple of
tenths of a percent, but your figures suggest you're looking at something
else.


There's no decline in the money supply; it's just that the
economy has slowed down and the money isn't changing hands fast
enough.

If we appreciate (price) inflation and deflation as following demand
following household estimates of net worth, then (price) inflation and
deflation are going to follow wild asset bubbles and crashes, not just
some narrow technical money supply.

So, let's see the numbers to support that. Inflation rates have stayed
within a very narrow range since 1985, and there were a couple of bubbles
during those years. Inflation was quite low during and after the dot.com
bubble and the housing bubble. If you go 'way back you'll see big swings,
but that was a much different economy then.

Here are the official inflation numbers:

http://www.usinflationcalculator.com/inflation/historical-inflation-rates/

And here's a pretty good chart of GDP, so you can see where the booms and
busts were (you probably can find a better one of these):

http://seekingalpha.com/article/62350-historical-gdp-numbers-1947-present

So, how does the relationship between inflation rates and bubbles/crashes
shape up?

--
Ed Huntress


.

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