Economic Black Hole

[FaninAma]

I thought this situation was a good enough reason to come out of my posting hiatus.

After looking at the current financial morass from every possible angle I have come to the conclusion that the debt/liquidity crisis will not be solved by the 700 billion dollar bailout. It won't even be solved by the 2 trillion dollar infusion that is more likely to follow.

As the derivatives complex unwinds like a gargantuan ball of yarn it will act like a black hole and suck every dollar the US and other Western governments shovel into it in a desperate attempt to stave off a credit collapse.

The infusions will temporarily give a respite but then the process will resume.

The credit collapse cannot be stopped at this point. It will run its full, ugly deflationary course.

My recommendation is to diversify and be very long in cash. And get out of freaking debt as soon as you can!

If by the small chance that the FED and other central banks are able to hyperinflate their way out of this mess it might be a good thing to have some tangible assets in your portfolio.....ie. commodities.

Oh, and if you want to know who is responsible here is the answer from an article written in 2003, although the author underestimates the FEDs and other central banks' ability to keep inflating asset bubbles. At some point they cannot continue to reinflate the next asset bubble and the result is what we are seeing today.

http://www.zealllc.com/2003/infdef2.htm

[OklahomaRed]

All I want out of this mess is for the taxpayer to not get left holding the bag once again.

I have no sympathy for individuals who speculated on the housing market and lost.

I have no sympathy for individuals who bought more house than they could afford.

I have no sympathy for banks who were stupid enough to loan them money.

I have no sympathy for Wall Street who greedily took the Federal Government's money through Fannie Mae and Freddie Mac and didn't even bother to see if the loans were solvent or not.

I have no sympathy for individuals who bought homes on interest only payments thinking they were going to get rich quick (which many of them did).

I do have a problem with my 401K going to a 301K in a year and a continued push for it to become a 201K if something doesn't give.

My suggestion?

The government has to step in and add some "grease" to the credit crunch.
Laws have to be changed that protect the taxpayers from individuals who are speculating on others' money.
The ability to invest tax free dollars in one's retirement has to be changed so that there are more options than Wall Street in my 401K.
The ability to speculate on borrowed money needs to be overhauled.
The ability to short sell stock has to be revised to prevent those will Mega dollars from manipulating the market.
Those who lost and robbed from others in this mess need to be held accountable, their assets frozen, and they need to feel the pain more than others. Some of them need to go to jail.
The ability of lobbyist to get in Democrat and Republican lawmakers back pockets needs to be changed through campaign finance reform laws.
Career politicians need to find other careers. After so many years they become out of touch and only worry about their own welfare.
Areas of the country that were speculating and loaning more bad money than others (i.e. the east and west coast) need to be held responsible for the % of the bad mortgages that their region causes. I have not seen the numbers, but I figure that more of the bad loans and speculation was coming out of California and Florida?
Those who bought more house than they could afford need to find an apartment and their house needs to be sold and the money put back in the "bail out" debt retirement plan.

[tommieharris91]

I was wondering where you have been, FaninAma.

[JohnnyMack]

Hi Fan!

[Taxman71]

This reminds me of a debate I have had many times over with various other professionals....to pay off your mortgage or invest excess cash. Obviously, you want to do both to various degrees, but assuming you had limited excess funds each month to EITHER pay down on a mortgage or invest.....I have usually advised clients to pay off their mortgage. (Obvious exceptions are if they are likely to move or otherwise dispose of the house in the near future).

Sure, there are some tax benefits to keeping your mortgage alive, especially if you after-tax market return exceeds your after-tax mortgage interest rate. However, considering the market losses of 2008 and the comfort level of knowing your house was paid off, it seems like a no-brainer. Chesapeake's stock lost 41% last quarter, has anyone's house in Oklahoma depreciated like that?

Americans should start thinking like their grandparents thought.....if you don't owe anyone any money, you can't go broke......there is no such thing as "good" credit.

Sorry, rant over.

[BigRedJed]

Grandma?

[soonerscuba]

Americans should start thinking like their grandparents thought.....if you don't owe anyone any money, you can't go broke......there is no such thing as "good" credit.My grandma also thought Catholics ran the world and cheated at bingo... fwiw.

[sooneron]

What if my grandparents were around in, say, 1929?


and I was wondering when Fan would rise...

[Taxman71]

My grandma also thought Catholics ran the world and cheated at bingo... fwiw.

They don't?....and EVERYONE cheats at bingo.

[Stoop Dawg]

assuming you had limited excess funds each month to EITHER pay down on a mortgage or invest

This implies that you have no credit card debt, student loans, car loans, etc. and already have several months worth of living expenses in the bank. So, you're talking to about, what, 1% of Americans? ;)

Also, do you consider saving for retirement in a 401K to be "investing"?

[FaninAma]

What if my grandparents were around in, say, 1929?


and I was wondering when Fan would rise...

Doleo convinced me it was time. :P

And I think the Catholics would tell you they have been the guardians against the Iluminati and the Rothscheild descendants who really run the world. (And no, I don't believe this so save the caustic remarks.)

[FaninAma]

But, Fan, are we throwing enough to the tight ends? ;)

Yes, but we aren't running enough of the triple end around pass option to the QB.

[FaninAma]

This implies that you have no credit card debt, student loans, car loans, etc. and already have several months worth of living expenses in the bank. So, you're talking to about, what, 1% of Americans? ;)

Also, do you consider saving for retirement in a 401K to be "investing"?

Pretty much, that's why this is going to be PAINFUL.

I have looked at the issue of paying off your mortgage early v. investment. And I have concluded that now is not the time to invest. Now is the time to accumulate cash and if you do have 6 months of expenses saved up then start paying off interst incurring debt that has no tax benefits foloowed by interst incurring debt that does have benefit.....prett much what Dave Ramsey says.

[Taxman71]

Here's what I was thinking...credit cards paid off each month, several months of living expenses in savings, student and car loans being serviced on predetermined am schedule, 401k contributions up to the employer match is mandatory. Thus, issues/options frequently faced:

1. Pay off student/car loans vs. house?
2. Add'l 401k investment/other investment vs. pay down mortgage?
3. Pay down mortgage/student loan/car loan/add'l 401k vs. stockpile all excess cash you can.

Historically, I tend to diversify and pay excess principal on all debt (student, car, house) and double the employer match on my 401k. However, student loans die with you if you go and cars depreciate rapidly, thus, I tend to put those at the end of the line.

I know 401k contributions save you 30% off the top for taxes, but, in this market, paying down my mortgage seems more attractive.

[Taxman71]

Pretty much, that's why this is going to be PAINFUL.

I have looked at the issue of paying off your mortgage early v. investment. And I have concluded that now is not the time to invest. Now is the time to accumulate cash and if you do have 6 months of expenses saved up then start paying off interst incurring debt that has no tax benefits foloowed by interst incurring debt that does have benefit.....prett much what Dave Ramsey says.

That would imply to payoff student loans before mortgage. In my case, I would rather roll the dice and, if I die, let those loans die with me. Home equity stays around for the wife and kids. Plus, I have decided to drive my car until the wheels fall off....which may not be that long since it is a Ford.

[Mjcpr]

All you have to do is pay off your debt? Why didn't somebody tell me it was so easy before now?!

[FaninAma]

Hi Fan!

Hey JM.

[FaninAma]

All you have to do is pay off your debt? Why didn't somebody tell me it was so easy before now?!

heh. It does go against all that has been culturally ingrained and encouraged in our society. That is why the minions of Wall Street and Madison Avenue are so evil. Accumulating debt is encouraged and fostered by those who promote and pimp the fiat money system. That is how its masters gain power over us poor working slobs.

Think about it. My Mom never worked. My Dad wasn't rich but we never thought we went without necessities as kids.

Now everybody thinks they can't live without their I-Phone, I-Pod, Blueberry, Blackberry, 56 inch LCD television, 2nd vacation home or a car less than 2 years old.

We have grown obese at the debt trough but the reaper will not be denied and this country is about to have a financial heart attack.

Oh, and one other thing I forgot about is that if you are heavily in cash you should be able to pick up some great bargains in almost any investment class you want when we finally do hit bottom.

Of course, if the hyperinflatin scenario plays out then cash is the last place you want to be.....but I see no way that the FED and Congress will create enough liquidity to do that.

[OUDoc]

I have about 6 days' worth of expenses saved up.

[Veritas]

Americans should start thinking like their grandparents thought.....if you don't owe anyone any money, you can't go broke......there is no such thing as "good" credit.
Bingo. The over-reliance on credit is at the root of this issue.

[JohnnyMack]

Bingo. The over-reliance on credit is at the root of this issue.

There is good credit out there. People don't always use common sense in that regard. Just because someone offers you credit doesn't mean you gotta use it.

[dolemitesooner]

Are guns a good thing to invest in? What about bullets?

[Stoop Dawg]

Just because someone offers you credit doesn't mean you gotta use it.

Not according to Oprah's mom:


MILWAUKEE - Oprah Winfrey's mother says she shouldn't have to pay a nearly $156,000 debt to a high-end fashion store because store officials shouldn't have extended credit to her.

Valentina Inc. alleges that Vernita Lee of Milwaukee racked up $155,547 in purchases and interest as of July 1. The company sued, saying Lee fell behind in minimum monthly payments of $2,000.

Lee filed a counterclaim Friday contending that Valentina took advantage of her "lack of knowledge, ability, and-or capacity" when creating her credit account.

Court papers say Lee resolved a 2002 case with the company over a $175,000 bill. The resolution prohibited Valentina from extending further credit to her.

A message left for Valentina co-owner Tony Chirchirillo was not returned Tuesday.

http://news.yahoo.com/s/ap/20081001/ap_on_en_tv/people_winfrey_s_mom

[Veritas]

There is good credit out there. People don't always use common sense in that regard. Just because someone offers you credit doesn't mean you gotta use it.
Not to be overly contentious, Mack, but unless I've misinterpreted your words this sentiment is somewhat contradictory to the position that you've been taking on where they blame lies vis a vis this mortgage cluster****.

[JohnnyMack]

How do you figure?

[StoopTroup]

Not according to Oprah's mom:



http://news.yahoo.com/s/ap/20081001/ap_on_en_tv/people_winfrey_s_mom

I bet Orca is pissed.

[Taxman71]

Well put FaninAma

[Oldnslo]

Hey Fan. Nice to see you're back.

My concerns about our economy aren't that we'll have hyperinflation, if one defines that as a short period of superhigh inflation. Instead, I think what we're looking at is a loooooooong period of high inflation.

I've been pretty much selling blood to get into metals. My 401k is in little more than oil, coal, and business which support the extraction of oil and coal. If I diversify beyond that, it'll be into agriculture. I think no matter what, people are still going to want to eat.

The weird thing is that the price of metals, although getting higher, has been so relatively low. Monex, one of the leading suppliers of gold and silver, has the bottom of the barrel left in stock. You want American silver and gold coins? They might still have some gold buffalo coins, but no eagles, silver or gold. No Canadian silver or gold maple leafs. No kruggerrands. Those have been gone for weeks and weeks. The only silver bullion they have are the commercial bars. You know, the 1000 oz ones. The 100 oz bars are a dim memory.

But when supplies are low, shouldn't prices go UP?

They're not necessarily doing that. And I don't understand that one bit. You can go on e-bay right now and find people buying and selling silver for $20/oz and gold for 1000/oz. Why aren't the traditional markets reflecting the "street" price?

It's fair to say that I'm somewhere between "curious" and "scared". Buckle up, friends. I think the next several months and years will be... interesting.

[Jerk]

Are guns a good thing to invest in? What about bullets?

Yes, and a few fishing polls. If you don't know how to skin and clean an animal and cook it over a fire, you need to learn.

I hope squirrel tastes good.

[SoonerKnight]

.

[FaninAma]

Hey Fan. Nice to see you're back.

My concerns about our economy aren't that we'll have hyperinflation, if one defines that as a short period of superhigh inflation. Instead, I think what we're looking at is a loooooooong period of high inflation.

I've been pretty much selling blood to get into metals. My 401k is in little more than oil, coal, and business which support the extraction of oil and coal. If I diversify beyond that, it'll be into agriculture. I think no matter what, people are still going to want to eat.

The weird thing is that the price of metals, although getting higher, has been so relatively low. Monex, one of the leading suppliers of gold and silver, has the bottom of the barrel left in stock. You want American silver and gold coins? They might still have some gold buffalo coins, but no eagles, silver or gold. No Canadian silver or gold maple leafs. No kruggerrands. Those have been gone for weeks and weeks. The only silver bullion they have are the commercial bars. You know, the 1000 oz ones. The 100 oz bars are a dim memory.

But when supplies are low, shouldn't prices go UP?

They're not necessarily doing that. And I don't understand that one bit. You can go on e-bay right now and find people buying and selling silver for $20/oz and gold for 1000/oz. Why aren't the traditional markets reflecting the "street" price?

It's fair to say that I'm somewhere between "curious" and "scared". Buckle up, friends. I think the next several months and years will be... interesting.


Glad to be back. The ony problem with metals and commodities is, as you pointed out, the huge disconnect between the futures market and the actual cost of physical metals. Silver Eagles are selling 50% above the official spot price which is dictated by the futures market. there are no 100 oz silver barsd availabe. Similiar situation with gold. This would seem that the futures market is being grossly manipulated in the short term.

Gold should be a safe haven right now but the FEDand other central banks are doing everythingin their power to maintain the USD as the reserve currency of the world. If the USD falls then the other currencies aren't far behind.

In light of a 700 billion dollar bailout(probably more when it is all said and done) the USD should be collapsing short term but is actually going up. How in the world is that happening? And can this gravity defying manipulation continue?

Of course if the derivative black hole sucks in all of the new liquidity and we see a credit collapse the USD will actually go higher. The best case scenario is exactly what oldnslo said.....a short hyperinflationary period until the debt mountain is remonetized is far preferable to a deflationary collapse or extended stagflation period.

[tommieharris91]

I've been hearing from some people that no intervention could cause deflation because banks aren't lending to each other (or consumers) now. What's worse, hyperinflation (ohhh 10% next year) or deflation (loss of asset value for just about everyone)?

[colleyvillesooner]

Please answer a noob question. We will be completely out of a decent sized credit card debt by Christmas. Only thing left will be one car payment, (under 9k) and a small student loan.

I keep hearing to get out of debt as soon as possble, which we did. (at the expense of saving for a down payment on a house). Why is good to be out of debt right now with the economy headed the way it is. How does the "credit collapse" work and effect people.

[tommieharris91]

Please answer a noob question. We will be completely out of a decent sized credit card debt by Christmas. Only thing left will be one car payment, (under 9k) and a small student loan.

I keep hearing to get out of debt as soon as possble, which we did. (at the expense of saving for a down payment on a house). Why is good to be out of debt right now with the economy headed the way it is. How does the "credit collapse" work and effect people.

Not being in debt right now means having better credit scores, so that when you finally decide to mortgage a house, a bank will actually lend to you. Right now, a lot of people that have even decent credit scores can't get credit to buy a car, house, etc. So pay your bills on time. It's a good thing.

[tommieharris91]

As for the credit collapse, Vaevictis explained what is going really well in this wordy post. (http://www.soonerfans.com/forums/showpost.php?p=2417250&postcount=3) Specifically, this:


Now, on to why the Treasury and the Fed are scared out of their minds.

The Money Multiplier

This one is rather short and sweet. Deposit accepting banks only have to keep a fraction of the amount of money you deposit on hand. They can loan out the rest. This is called the 'reserve rate.' Banks keep this rate very low when they're bullish, and raise it when they're scared or in trouble.

If I recall correctly, the statutory minimum is 10%. This means that for every $100 you deposit, $90 can be loaned out. But this $90 gets spent, and deposited elsewhere -- that bank can now loan out $81.

This process repeats until you have $100 in deposits and $1000 in loans. This is called the money multiplier. Because of the fractional reserve system, deposits multiply the amount of money in circulation.

But what happens when banks get spooked (like they are now) and they raise their reserve requirements? Let's assume they raise it to 25%. Doesn't seem like a lot, does it?

The impact it has on the amount of money in the system is huge. Instead of $1000 in loans per $100 in deposits, you now have $400. That's a 60% decrease.

This sort of contraction in the money supply causes...

Deflation

Deflation is the opposite of inflation -- as time passes, your money becomes worth more. Doesn't sound so bad, does it?

But it is. It was one of the major causes of the Great Depression. It has the nasty effect of lowering prices on goods -- but not lowering costs to produce those goods as fast (like wages).

It has an extremely nasty effect on debtors -- because the dollar is worth more, but your payments are contractually set in advance -- your cost of debt skyrockets.

Deflation is also a self-reinforcing loop. People get scared, so they hold cash. Taking cash out of the money supply causes deflation. This causes more people to get more scared, taking more cash out of the money supply.

The worst part is that the central bank has few options when an economy goes deflationary. Their main tool -- the Federal Funds Rate -- becomes useless. You can't reduce it below 0% -- and because the economy is deflationary, the interest rate charged on debt may actually be 0% or less -- you don't need it to be high when the value of the money is increasing.

The Bailout

So, we get to the bailout. One of the things you need to understand is that Bernanke was a respected, tenured finance professor at Princeton. One of his specialties was the Great Depression.

There's a reason he's freaking out right now, and he's behaving the way he's behaving. He knows that a contraction of the money supply was one of the prime causes of the depth and duration of the Great Depression.

He knows that banks are spooked -- they're increasing reserve requirements, they're not lending to each other or consumers, and this has the potential to trigger a deflationary cycle.

Taking these toxic assets off of their hands would loosen them up -- they'd have stronger balance sheets, and they'd know the other banks do too. Hopefully, they'll start lending again, and we'd bypass the deflationary cycle and have a simple recession.

Conclusion (and some editorial content)

Is the current bailout plan the best we can possibly get? I don't know.

I do know that if we don't find a way to stabilize the banking system, we're in deep, deep trouble. I don't think that letting a bunch of banks fail is going to accomplish that.

Are you scared yet? You should be. Some of you need to stop worrying about the fat cats getting paid; there are bigger things at stake here.

For goodness sake, let's not cut off our nose to spite our faces. If a second Great Depression really is in the cards -- and Bernanke CLEARLY thinks there is -- we need to do something. Now. And if that includes a few people taking their pound of flesh or getting unjustly rewarded, well, it sucks. But I think I can live with that much easier than with another Depression.

What he concluded is pretty much what I also concluded. If these big banks are not bailed out, the chances of a depression are MUCH than if they do get a fix. Now, the major consequences of this bailout will be dollar weakness and high inflation. I think those are better than long periods of negative GDP growth and deflation.

[Stoop Dawg]

With no disrespect to Vaevictis, and while readily admitting that I am no economist, here is a quote from the link in Fan's first post:


The last time the US witnessed real falling general prices was during the Great Depression of the 1930s. As shown above, in the early 1930s near the ultimate post-1929 stock-market bottom general price levels actually fell more than 10% over one year! This environment was truly great for savers because with each passing month the capital they had painstakingly set aside grew more and more valuable. Their same dollars could buy more in houses, cars, food, and everything else we need to survive and enjoy life.

While today’s socialist Keynesian historians who bow at the idol of Big Government try to tell us that deflation was bad, they are dishonorably bending history to advance their own Marxist agendas. Falling general prices are not necessarily bad, and there is no doubt they helped countless American families survive the Great Depression as each of their dollars went farther and bought more of the crucial goods and services they needed to survive. If you were out of a job and had to feed your family, would you rather live in an environment where each of your dollars was worth more every day (deflation) or each was worth less every day (inflation)?

Furthermore, as this article points out, many govt programs have been implemented since the Great Depression (such as Unemployment Insurance and Food Stamps) that help cushion unemployment. $700 billion would go a long way toward paying for those programs.

http://ingrimayne.com/econ/EconomicCatastrophe/GreatDepression.html

Maybe I'm in the minority, but I'm not afraid of a recession - or even depression. I think it may actually be good for Americans to learn (again) that dollars in a savings account are worth more than dollars owed on a credit card.

I'm tired of being the guy who pays his mortgage while others default.

I'm tired of being the guy who pays his credit cards while others file bankruptcy.

I'm tired of being the guy who saves for retirement only to see his Social Security benefits come under fire because he (*gasp*) has other retirement accounts.

And I'll be damned if I'll be the guy who willingly bails out the morons who ran their businesses into the ground with risky investments and bad business decisions.

**** those guys.

And if the economy tanks because of it - so be it. Some of our National Parks could use a face lift anyway.

[Vaevictis]

The problem with this...


While today’s socialist Keynesian historians who bow at the idol of Big Government try to tell us that deflation was bad, they are dishonorably bending history to advance their own Marxist agendas. Falling general prices are not necessarily bad, and there is no doubt they helped countless American families survive the Great Depression as each of their dollars went farther and bought more of the crucial goods and services they needed to survive. If you were out of a job and had to feed your family, would you rather live in an environment where each of your dollars was worth more every day (deflation) or each was worth less every day (inflation)?

... is debt. The premise only works if people have little or no debt.

Deflation just straight up creams people with debt. Especially folks whose jobs are heavily reliant on commodities. Like say, farmers. Commodity prices -- and hence their income -- go down , but their debt load doesn't. In comes the bank with a foreclosure notice. This happened a lot in our history during deflationary periods, and not just the Great Depression. We practically had farmers revolts over deflation. Or maybe literally -- I don't recall, and I don't want to look it up.

But, with respect to current times:

Many people who have hereto been responsible are going to be creamed by this if we get into a serious deflationary cycle, ESPECIALLY small business owners that rely on spot sales. Many of them are going to be in the same place those farmers I mention above -- they took out loans to start or grow the business, they have leases, contracts, etc, in place. Prices deflate on the goods that they're selling, and hence so does the absolute number of dollars they bring in.

But their contracts are locked in. They have a lease agreement, and a loan agreement, and contracts, all of which specify dollar amount payments at certain times.

If this goes the way Bernanke fears, lots of totally innocent, responsible people will get ruined by deflation.

[tommieharris91]

Yes, deflation essentially causes real interest rates to be higher. However, as prices fall, wages tend to stay sticky. No worker in their right mind would take a pay cut just because of deflation, but the real dilemma becomes the choice of whether the worker must take the pay cut or get laid off. When prices deteriorate to a level where producers of goods and services cannot make a profit, they will simply go out of business. This is how too much deflation can be devastating for an economy.

One of Obama's economic platforms is to index the minimum wage rate to inflation. If this also goes for deflationary economic times, then the minimum wage rate will fall. So the Mexicans that cook your fries at McDonalds will be forced to take a paycut. There is a chance this will trickle upward.

[Vaevictis]

I guess, in short, the problem with deflation is that it's a cycle. Deflation starts happening, so people hold cash because the return is attractive. People holding cash causes more deflation. Repeat.

And all the while this deflation is happening, debt loads that had been responsible turn into crushing debt by virtue of people earning less dollars but not having debt levels similarly adjusted.

Deflation is just bad ****ing juju when you're in debt.

And, well, last I checked, the vast majority of Americans are already in more debt than they ought to be.

[Vaevictis]

I've been hearing from some people that no intervention could cause deflation because banks aren't lending to each other (or consumers) now.

Last week AT&T couldn't even issue commercial paper with maturity greater than 24 hours.

It's loosened up a little bit since then, but holy hell, that's bad.

If that sort of thing continues, you're going to end up having major companies simply not making payroll, unable to pay suppliers, etc, for lack of short term debt. People are going to start demanding COD, and then things get really fugly.

[Stoop Dawg]

I guess, in short, the problem with deflation is that it's a cycle. Deflation starts happening, so people hold cash because the return is attractive. People holding cash causes more deflation. Repeat.

Inflation is a cycle. Housing is a cycle. Hell, there are a bajillion cycles going on in our economy - and they always break at some point.


And all the while this deflation is happening, debt loads that had been responsible turn into crushing debt by virtue of people earning less dollars but not having debt levels similarly adjusted.

Deflation is just bad ****ing juju when you're in debt.

And, well, last I checked, the vast majority of Americans are already in more debt than they ought to be.

You make it sound like "responsible debt" is going to turn into "crushing debt" over the course of a few months. I'm under the impression that deflation would occur at a rate similar to normal inflation - which is to say 2-3% per year.

Also, wouldn't deflation make lending money very attractive? And isn't the real problem today that credit markets are too tight?

Since lending money is so attractive during deflationary periods, wouldn't people with "responsible debt" be able to refinance into lower rates before it became "crushing debt"? And when Mr. Landlord's tenants start moving out, won't s/he be prone to renegotiating some leases?

Like I said, I don't really know jack about this stuff, but it seems like that for every point made by one side there is an equal and opposite point made by the other. In the end, I'm just not buying this "the sky is falling" stuff. That's not to say that everything is peachy, but I don't think the country is going to disband either.

[Chuck Bao]

Inflation is a cycle. Housing is a cycle. Hell, there are a bajillion cycles going on in our economy - and they always break at some point.

You make it sound like "responsible debt" is going to turn into "crushing debt" over the course of a few months. I'm under the impression that deflation would occur at a rate similar to normal inflation - which is to say 2-3% per year.

Also, wouldn't deflation make lending money very attractive? And isn't the real problem today that credit markets are too tight?

Since lending money is so attractive during deflationary periods, wouldn't people with "responsible debt" be able to refinance into lower rates before it became "crushing debt"? And when Mr. Landlord's tenants start moving out, won't s/he be prone to renegotiating some leases?

Like I said, I don't really know jack about this stuff, but it seems like that for every point made by one side there is an equal and opposite point made by the other. In the end, I'm just not buying this "the sky is falling" stuff. That's not to say that everything is peachy, but I don't think the country is going to disband either.

I suppose deflation can be seen as just the opposite of inflation and gradually worsen year-by-year. However, in my experiences, deflation was triggered by a shock, was immediately severe but progressively still worsened as the fall-out of the initial shock kept the economy on a downward constricting spiral.

I'm mainly thinking about the forced devaluation of the Thai baht in July '97and the subsequent 6-month hell as one neighboring country after another was forced to devalue, sending the baht further lower.

Lending was not an option for Thai banks back then since they were all technically insolvent. I remember that we were all initially so shocked about some crazy estimates that 20% of all loans in the country were in default. Two years later, more than half of all loans in the country were clearly in default.

We saw very quick and severe deflation. I guess it depends on a lot of factors, including diversification of the economy, elasticity of demand, etc.

[Vaevictis]

Inflation is a cycle. Housing is a cycle. Hell, there are a bajillion cycles going on in our economy - and they always break at some point.

Yeah, even the Great Depression broke at some point. It sucked rather badly in the mean time, well beyond a normal 'recession.'


You make it sound like "responsible debt" is going to turn into "crushing debt" over the course of a few months. I'm under the impression that deflation would occur at a rate similar to normal inflation - which is to say 2-3% per year.

If I recall correctly, from 1929-1933, US deflation was on the order of 10% per year.

Again, you've got to consider the money multiplier effect. People holding just a little more cash results in huge swaths of dollars taken out of the market.

Consider 10% deflation and a person that has a 5% mortgage. Suddenly, their real interest rate goes to 15%. Or a company that has 12% bonds outstanding: real interest rate 22%. Heh, folks think high income taxes are disastrous -- at least you only pay income taxes if you actually have income.


Also, wouldn't deflation make lending money very attractive? And isn't the real problem today that credit markets are too tight?

It would not make new loans very attractive, only the existing ones. If you demand (or are willing to pay) a real return of 8%, you're going to adjust the rate on the loan to give you that real return based on your expectation of deflation or inflation. If you expect 3% inflation, you'll charge 11% for the loan; if you expect 3% deflation, you'll charge 5%.

Worse, if deflation occurs at a rate such that it equals the real return you demand, you'll simply stop lending money -- because you can already get the return you demand just by holding the cash and not exposing yourself to any risk. And by holding the cash, well, you cause even more deflation.


And when Mr. Landlord's tenants start moving out, won't s/he be prone to renegotiating some leases?

Just like Mr. Tenant has contractual obligations hanging over his head to Mr. Landlord, Mr. Landlord has his own contractual obligations to meet. All it takes is for one person in the chain to refuse to renegotiate to break everyone down the line.


Like I said, I don't really know jack about this stuff, but it seems like that for every point made by one side there is an equal and opposite point made by the other. In the end, I'm just not buying this "the sky is falling" stuff. That's not to say that everything is peachy, but I don't think the country is going to disband either.

Look, you can believe what you want. I don't mind that. I think it's completely rational to oppose the bailout, if you understand what the possible consequences are. I just want to make folks aware of the risks being run.

I don't know that things are going to turn out as badly as I say that they could. I just know that they could, because we've seen it before.

[Oldnslo]

LOCUSTS! srsly.

[SanJoaquinSooner]

how do you cheat at bingo?

[jkjsooner]

All I want out of this mess is for the taxpayer to not get left holding the bag once again.

I have no sympathy for individuals who speculated on the housing market and lost.

I have no sympathy for individuals who bought more house than they could afford.

I have no sympathy for banks who were stupid enough to loan them money.

I have no sympathy for Wall Street who greedily took the Federal Government's money through Fannie Mae and Freddie Mac and didn't even bother to see if the loans were solvent or not.

I have no sympathy for individuals who bought homes on interest only payments thinking they were going to get rich quick (which many of them did).

I do have a problem with my 401K going to a 301K in a year and a continued push for it to become a 201K if something doesn't give.

My suggestion?

The government has to step in and add some "grease" to the credit crunch.
Laws have to be changed that protect the taxpayers from individuals who are speculating on others' money.
The ability to invest tax free dollars in one's retirement has to be changed so that there are more options than Wall Street in my 401K.
The ability to speculate on borrowed money needs to be overhauled.
The ability to short sell stock has to be revised to prevent those will Mega dollars from manipulating the market.
Those who lost and robbed from others in this mess need to be held accountable, their assets frozen, and they need to feel the pain more than others. Some of them need to go to jail.
The ability of lobbyist to get in Democrat and Republican lawmakers back pockets needs to be changed through campaign finance reform laws.
Career politicians need to find other careers. After so many years they become out of touch and only worry about their own welfare.
Areas of the country that were speculating and loaning more bad money than others (i.e. the east and west coast) need to be held responsible for the % of the bad mortgages that their region causes. I have not seen the numbers, but I figure that more of the bad loans and speculation was coming out of California and Florida?
Those who bought more house than they could afford need to find an apartment and their house needs to be sold and the money put back in the "bail out" debt retirement plan.

Wow, post of the year stuff there! You, like, read my mind.

Can I add one more? I don't care how many local governments are having financial issues becuase of lower real estate appraisals. They apparently did fine with much less money years ago; they should be able to do it again.

[mdklatt]

So is hoarding cash is good or bad now? :confused:

[tommieharris91]

So is hoarding cash is good or bad now? :confused:

I hear mason jars are a good investment these days...