The Concepts of Money and Capital: The Debate Continues

 

 

 

Below follows an exchange that davefairtex and I are pursuing in The Concepts of Money and Capital thread on TAE. The debate centers on concepts of Value as it translates to Money and Assets.

RE

Discuss this ongoing debate at the Economics Table of the Diner

 

In some sense, both sides in this debate are talking about a denouement caused by widespread defaults on unpayable debts.

Reading over some FOFOA posts, it does appear that he acknowledges that defaults lead to deflation. But his claim is that the CBs won’t allow that deflation to stand for very long – moments, minutes, hours, or days, and that they’ll quickly react by exchanging money for all the defaulted assets.

Folks here seem to think that the CB won’t be allowed to do this; the Fed will be prevented from wholesale replacement of bank credit with base money.

Likewise, FOFOA also points out that there is a overabundance of dollars in circulation outside the US especially on CB balance sheets, and a collapse of confidence in the dollar would lead to a hyperinflationary rush out of the many forms of the buck into “real things”, of which gold is favored because it is something that’s had long historical significance as a store of value, and it stores better in vaults than Rembrants or barrels of oil.

Each party tries to put forth evidence to support their concept – newly popular “end the fed” campaigns, reading the tea leaves on various Bernanke speeches trying to assess his willingness to print, fading trade surpluses and falling purchases of treasurys by China, and so on.

But at the end of the day, it all boils down to guessing what the Fed (and/or the ECB) will actually be able to do when the debt default crisis arrives. And that seems to ride on one thing: do the banks still have enough political power to make this happen the way they did in 2008? If they do, then we could well have a confidence collapse in the currency. If not, then we get a deflationary depression. No doubt the Fed would try to thread the needle and print just enough to restore the system, but not so much so as to cause a collapse of confidence.

So which is it? Its an interesting question, and not one I have the answer to. And perhaps the answer changes over time. Perhaps the answer is “no” today, but maybe “yes” next week, depending on how events unfold in the world – Greece, Spain, Italy, Japan, etc. If Greek society ends up exploding on TV after a debt default, the Fed and indeed the ECB might well get permission to do practically anything…

Re: FPC: The Concepts of Money and Capital 23 hours, 30 minutes ago #3184

davefairtex wrote:

In some sense, both sides in this debate are talking about a denouement caused by widespread defaults on unpayable debts.

Reading over some FOFOA posts, it does appear that he acknowledges that defaults lead to deflation. But his claim is that the CBs won’t allow that deflation to stand for very long – moments, minutes, hours, or days, and that they’ll quickly react by exchanging money for all the defaulted assets.

Folks here seem to think that the CB won’t be allowed to do this; the Fed will be prevented from wholesale replacement of bank credit with base money.

What the CBs DO, how they react and what is Politically Possible for them to do at any given time varies, but it is still just a part of the equation.

The CBs can provide virtually endless liquidity and also buy assets at par value, regardless of what the actual worth of said asset is. What they cannot do at this point is force the retail banks to make any of the money they create available to the real economy.

If the TBTF Banks who are the recipients of the new Cash for Trash don’t then go ahead and make NEW LOANS into the retail economy, the new Sea of TP just sloshes around in their reserves and/or is “invested” in IPOs like Facepalm where it burns up rapidly. A few new Billionaries are made, but otherwise much more is accumulated on the liability side of this balance sheet.

At some point in the future, the postulate here is that the Trillions created here are going to exit Bankster Reserves and Sovereign holdings and simply flood the market with Dollars. Except, waht will they BUY with these Dollars? More Facepalms? More Copper they can’t sell because new Mcmansions aren’t being built fast enough and don;t need wiring and plumbing? More Gold that will just sit like a big Paperweight in the Basement Safe of the PBoC?

What the CBs cannot do is make the Dollars CIRCULATE in any meaningful fashion. Dumping them makes no sense if there is nothing really worthwhile to BUY anymore if you are Prepped Up. How many more Copper Mines do the Chinese NEED to buy anyhow? They can’t unload the Coper they have stacked up in the Warehouse ALREADY!

Euros are another story entirely. In this case, the Eurotrash already see the Writing on the Wall, the currency is collapsing and they will RUN, but not into Gold for the most part. They will RUN to the Dollar. Why? Because the Dollar is the Currency of the Big Ass Military. The SAFEST guy to bet on here is the guy with the Biggest Gun.

RE

Re: FPC: The Concepts of Money and Capital 15 hours, 35 minutes ago #3187

RE –

Perhaps the CBs will monetize sovereign debt, which will be deficit-spent directly into the economy by the government via social security, medicare, medicaid, defense spending, AFDC, SNAP, and the like.

As long as the banks don’t end up going under and presenting FDIC with a massive resolution bill, cash for trash is a success.

Limping along collecting your salary & bonus beats the hell out of a deflationary depression – especially if you’re a banker with a big house in the hamptons.

.

Re: FPC: The Concepts of Money and Capital 14 hours, 32 minutes ago #3189

davefairtex wrote:

RE –
Perhaps the CBs will monetize sovereign debt, which will be deficit-spent directly into the economy by the government via social security, medicare, medicaid, defense spending, AFDC, SNAP, and the like.As long as the banks don’t end up going under and presenting FDIC with a massive resolution bill, cash for trash is a success.Limping along collecting your salary & bonus beats the hell out of a deflationary depression – especially if you’re a banker with a big house in the hamptons.

Perhaps they will continue to monetize Sovereign Debt and continue to dribble out money in the form of various social welfare systems like Social Security and the SNAP Cards, but they are not pouring out GUSHERS of money this way to J6P.
If you take what is happenning in Greece as a Model, Pensions are being cut and Wages are being Cut and Goobermint Jobs are being eliminated. So you are not seeing Funny Money moved into the Main Street Economy this way there at this time.

I have said many times before that as soon as Da Goobermint starts pushing money out directly to the population, either by Make Work WPA projects or by expanded Social Welfare payments, THEN you WILL get serious inflation, though still probably not HI until all faith is lost in the currency.

At the moment here in the FSofA, public jobs are being cut while the SNAP card program expands. A portion of the population is being forced into a more meager existence this way. It’s stil not a Tidal Wave though here yet, it’s a more gradual process.

There is no indication at the Top that a massive WPA will be undertaken or that massive Free Money such as a National Subsistence Wage will be issued out. J6P is being gradually Squeezed out here in the deflation, and will continue to be squeezed until a breaking point is reached and there is a Revolt.

An HI can only happen here if the flood of liquidity hits the real economy, and this can’t come from J6P, he generally speaking has no savings to unload. It can only come from the notional dollars held by the Chinese and others overseas, but they cannot dump them without screwing their own pooch.

The status quo of a Boiling Frog is what TPTB hope to continue with. Unfortunately, people are not Frogs and there will come a social breaking point. Greece is at it. So will we be soon enough.
Coming Soon to a Theatre Near You.

RE

Re: FPC: The Concepts of Money and Capital 12 hours, 11 minutes ago #3191

RE –
I don’t take what’s happening in Greece as a model. Greece cannot monetize its own debt, and the US can – and did up until last year. State & Local jobs are being cut here, but Federal jobs are expanding. I’d guess net-net it has resulted in job cuts overall, but our monetized deficit spending (10% of GDP each year) has kept the economy above stall speed to date.HI happens when a flood of money hits the real economy, just as you say. There are lots of ways for that to happen – including government dropping actual cash via jobs programs. Whether you think those ways are likely, or unlikely, depends on your own personal assessment.At FOFOA they note there is a wall of USD-denominated bonds sitting offshore on reserve at a bunch of central banks. The number of claims on real wealth vastly outweighs the actual real wealth out there – that’s what I learn from reading Stoneleigh.

So my follow-on to that is, if the US Fed stops deflation from happening by buying up all the trash and pretending there’s nothing wrong, all it takes for HI to take effect is for some subset of paper wealth holders to decide they want to convert their claims into real wealth before its too late, and then the game is up.

Once again, what triggers this move out of paper wealth? What triggers a bank run? Same sort of question – its some straw breaking the back of the camel of confidence. The potential for it is there. The only question is, do the banks (and the Fed, their servant) have the political ability to monetize in order to stave off deflation when push comes to shove? If not, we get a deflationary depression. If they can monetize, then we get moderate inflation (through government deficit spending) until a trigger event is reached and a wall of money hits the real economy.

I believe that the more unrest we seen in europe and the more “austerity” turns into a highly-visible death trap, the more support there will be for Fed money printing as our way out. Whether that’s enough – I don’t know. I think it could go either way.

Re: FPC: The Concepts of Money and Capital 10 hours, 39 minutes ago #3192

davefairtex wrote:

So my follow-on to that is, if the US Fed stops deflation from happening by buying up all the trash and pretending there’s nothing wrong, all it takes for HI to take effect is for some subset of paper wealth holders to decide they want to convert their claims into real wealth before its too late, and then the game is up.

See there is the rub here. CONVERTING paper claims into “Real Wealth”.

At the small scale, you can see how this can be done, sorta. For instance, I “own” many USTs. I could liquidate them and buy with the proceeds a decent part of Alaska at current valuations on the land here. However, this purchase is more a liability for me than an asset if I made that trade. I cannot control such a large swath of Real Estate, and I sure would not want to pay the Taxes on it since I only would be using a tiny part of it for myself.

On a much larger scale, the Chinese face much the same problem. They COULD in theory liquidate their holding of USTs not just to buy a piece of Alaska, but the whole fucking STATE. REAL WEALTH there, right? Except problem is, what would they DO with Alaska once they bought it? They can’t organize up and run their own patch of the earth in China all that well, do they really need a Headache of ANOTHER patch of land to run here?

I’ll make the analogy to a small Biz I worked for a few years back. The Biz I worked for had one location, run sorta well, and they bought up a competing Biz run in another part of town. Problem was, it stretched all the anagement out too much, and trying to keep the Sattelite running was a money loser. Closed up the shop after a couple of years.
Everybody is working on a BAD paradigm here, and further EXPANSION of a bad pardigm does not make it better, it makes it WORSE.

There is NOTHING the Chinese can spend their dollars on here now, they canot even buy Alaska without incurring more liability, and Alaska is a relatively GOOD purchase here all considered. Certainly better than Facepalm anyhow.
A flood of dollars has to come form somewhere from somebody who wants to try to liqudiate those dollars for something ELSE they think is a worthwhile purchase. On the GRAND scale here, not even fucking ALASKA is a great deal. Liquidity Lock Up. Nothing worthwhile to buy or sell. That is the problem.

RE

Re: FPC: The Concepts of Money and Capital 8 hours ago #3193

RE –
Hmm, ok that’s convincing. You’re probably right about the Chinese, and likely the Japanese as well. Its tough to place a trillion dollars somewhere useful and at the same time relatively low risk.But I’m not so sure about the actions of a bunch of rich people. They are seemingly better placed to individually make semi-smart decisions on buying stuff. They have big stashes of treasuries (like you do) and are wondering where they might put them. I wonder that about my small pile of bank deposits!We are allegedly seeing this in London. Rich Greeks (and perhaps rich other europeans) are taking paper and using it to buy real estate in London. It seems absurd on the surface, but from what I hear, its happening.

I respect what you say when you claim that there’s nothing out there to buy. But try this thought experiment. If I told you that your pile of treasuries would be chopped in actual value by 75% through a default, would you still say “I can’t find anything to buy?” Maybe buying medium-sized chunks of Alaska might look more attractive than a 75% loss.

Would a panic out of bonds usher in a “freegold” world? Who knows. I’m a bit suspicious of claims that something (other than a property of basic physics) is guaranteed to happen. It just reminds me too much of Marx’s assurance that the state would simply wither away. But gold would likely benefit from a flight from paper, likely driven first by default and then by the monetization response – among other things.

Again, if the Fed (and ECB) aren’t allowed to buy up all that bad debt, we get deflationary depression. If they do have enough political capital to both monetize and buy up bad debt, there’s enough excess claims to real wealth floating around out there to really cause a whole bunch of price inflation if even a fraction of it decides it is better off in “real stuff.” Even Alaska properties, Florida condos, little gold bars, or Picasso paintings.

Re: FPC: The Concepts of Money and Capital 0 minutes ago #3199

davefairtex wrote:

RE –
Hmm, ok that’s convincing. You’re probably right about the Chinese, and likely the Japanese as well. Its tough to place a trillion dollars somewhere useful and at the same time relatively low risk.But I’m not so sure about the actions of a bunch of rich people. They are seemingly better placed to individually make semi-smart decisions on buying stuff. They have big stashes of treasuries (like you do) and are wondering where they might put them. I wonder that about my small pile of bank deposits!We are allegedly seeing this in London. Rich Greeks (and perhaps rich other europeans) are taking paper and using it to buy real estate in London. It seems absurd on the surface, but from what I hear, its happening.

I respect what you say when you claim that there’s nothing out there to buy. But try this thought experiment. If I told you that your pile of treasuries would be chopped in actual value by 75% through a default, would you still say “I can’t find anything to buy?” Maybe buying medium-sized chunks of Alaska might look more attractive than a 75% loss.

Would a panic out of bonds usher in a “freegold” world? Who knows. I’m a bit suspicious of claims that something (other than a property of basic physics) is guaranteed to happen. It just reminds me too much of Marx’s assurance that the state would simply wither away. But gold would likely benefit from a flight from paper, likely driven first by default and then by the monetization response – among other things.

Again, if the Fed (and ECB) aren’t allowed to buy up all that bad debt, we get deflationary depression. If they do have enough political capital to both monetize and buy up bad debt, there’s enough excess claims to real wealth floating around out there to really cause a whole bunch of price inflation if even a fraction of it decides it is better off in “real stuff.” Even Alaska properties, Florida condos, little gold bars, or Picasso paintings.

There are other problems the Chinese have besides the actual worth of whatever they might buy is concerned. If they try to dump treasuries, the value of those treasuries will drop faster than they can find buyers for them. Only Da Fed could buy them by printing, and why would they do that? Force the Chinese to hold them to maturity at low to nonexistent interest rates instead.

Far as non-Sovereign holders of this debt is concerned, like me the question is what is a better bet here? The Greeks buying London flats is the Real Estate equivalent of buying Facepalm Stock. That RE has nowhere to go but down, WAY DOWN.
To a lesser extent, the same is true for Alaska RE. I don’t know which will devalue quicker, USTs or a Farm in Palmer. You know, there is a very decent likelihood in about 4 years when the Pipeline has to shut down for lack of enough Oil to pump through it that the entire economy of Alaska will completely TANK, and 99% of the population will move out. Why BUY the farm if that is the case? I could simply walk in and squat it, along with numerous properties up here ALREADY vacant.
I really do not have anything worthwhile to BUY anymore other than Food really and Gas for the Bugout Machines while it remains available. Some folks keep Day Trading around their assets trying to make a Killing here or there, certainly shorting Faceplant is a decent way to make some Toilet Paper these days. I don’t bother with that though because it really doesn’t matter. In the end, just about all these “assets” are going to drop to near ZERO in value, and holding onto Real Property is going to take your own Army. Farms and just about everything else will likely be Nationalized under either a Fascist or Communist regime.

Up at the top, games are being played with comparative currency devaluations, I wrote about that over on the Diner. Overall, the Dollar is the best looking Dog in the Kennel for the next couple of years anyhow I think. Somewhere along the line we may reach a Tipping Point and hit a Sudden Stop event, or the Boiling Frog effect may continue through to the end of my lifespan, but either way there still really is not anything worthwhile for me to buy, I am as Prepped as anybody reasonably can be IMHO. You cannot truly “own” anything you cannot carry with you or anything you cannot Protect and Defend. You cannot count on the “Law” to protect you, as evidenced by today’s article from Surly on the Diner.

It remains to be seen what the Big Boys do as far as shifting assets go to try to protect and defend their own “Wealth” is concerned. I am reasonably certain though at this point that the final Battlefield for this will not be on the Economic Front. War is coming now, to be sure. Whether this will be an International War or Civil Wars on a Global Scale occuring simultaneously I do not know for sure, but one way or the other, a lot of BLOOD will be spilled to try to wash away this debt, that truly can never be repaid at all. Mother Earth herself has been scarred badly, and we all will pay the price for that.

RE

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