Liquidity Traps & Asset Class Sinkholes

Off the keyboard of RE

Published originally on Reverse Engineering on October 27, 2010

Discuss this article at the Economics Table inside the Diner

Examining the Monetary system and looking at the possible outcomes of Deflation or Hyperinflation have been a concern of mine since the Collapse of Bear Stearns. In honor of the Anniversary Week here on the Doomstead Diner, I dug up a pair of related articles on the topic I wrote in the Reverse Engineering Yahoo Group in October of 2010. This topic has since been explored inside the Diner in great detail at the Economics Table, in the Hyperinflation vs Deflation thread. It’s one of the most popular Dishes serve up in the Diner. Visit with the regular Diners and drop in your thoughts on this still unresolved question.

Liquidity Traps & Asset Class Sinkholes

I want to examine a very important concept in the Inflationista-Deflationato
debate which I think has been overlooked in a contracting economy, what you
might call Liquidity Traps or Asset Class Sinkholes.For markets to operate efficiently, you have to have Buyers and Sellers of the
various Asset Classes, so that if you decide you want to sell something you own,
you can readily find a buyer for it at the price you think its worth, which in
general is something near what you paid for it at least. If you are an
Investor, what you hope for is that the asset has appreciated in price between
the time you bought it and when you try to sell it, that is how you make a
profit.As more and more asset classes were defined, markets developed to trade those
assets on a daily basis. To keep them operating efficiently, you have “Market
Makers”, Banks that have enough liquidity to put in a buy order at near the
market price for anything you choose to sell. It gets very complicated when you
talk about all the derivatives and abstract financial products out there now, so
I’ll simplify it here to the Used Car market.Lets say I have a Car as one of my assets which I decide to Sell, because I have
to pay my mortgage and have been laid off from my Job and my UE bennies have run
out after 99 weeks. In normal times, I might take out an Ad in the paper and
put a For Sale sign in the window of the car, and wait for a Buyer to come along
and give me the price I think the car is worth. However, sadly for me, times
are not normal, lots of other folks are UE and ALSO have their cars up for sale,
and no buyer shows up. So now I drive it over to the Market Maker, the Used Car
Dealer. In normal times, the Used Car Dealer will ALWAYS buy my car at some
price, just probably not anywhere near what he thinks he will be able to sell it
to someone else at. The difference between those prices is how the market maker
makes a Profit. Sadly for the Used Car Dealer at this time, he is overloaded
with inventory of Used Cars he can’t sell, and he won’t buy my car at ANY price.My car is an Impeccably Maintained Jag which I paid $120K CASH for new two years
ago, but now I can’t sell it to anyone at any price! My Jag is a Liquidity
TRAP. An Asset Class Sinkhole. It’s a lovely hunk of Metal, Leather and Glass
sitting in my driveway, but it has ZERO value because I cannot SELL it.Now, let us look at what has happened in the RE market, and then further the
commodities markets including PMs. Many people bought McMansions at inflated
prices, and besides that they didn’t even buy them in Cash, they have loans
outstanding on them they have to service. Now they want to sell off the
Vacation Home, but there are no buyers for it, so sad. The Market Maker here,
the Banksters ALSO can’t sell it, their Used Car lot of McMansions is ALREADY
full, so they don’t even want to Foreclose on it. Then they have the liability
on the Upkeep of the McMansion and the Taxes.The McMansion is a Liquidity Trap/Asset Class Sinkhole. It now has Zero value
because it cannot be sold to anyone. Nobody wants to invest money in something
they won’t be able to sell later if they need the money for some reason.

So now, let us assume you are just FLUSH with money, but you are really WORRIED
that Hyperinflation is going to turn your mattress full of Cash into worthless
Toilet Paper. You now need to take that Cash and BUY some Asset Class you think
is going to at least hold value, if not increase in value. So you run to the
Commodities Market and bid on Pork Bellies, because you KNOW there are 1.3B
Chinese out there who love Pork Fried Rice, so you know you will have a buyer
who will pay what you ask to make a profit on those Pork Bellies. Problem being
of course that in bidding for the warehouse full of Pork Bellies, you were
bidding against somebody who had exactly the same thought process, so the price
went up pretty high. When you go to sell the Pork Bellies against some other
Pigman you won in the auction, Chen Rice Wine only has enough money to buy half
as much Pork as he did last month, so you are left with a warehouse still half
full of Pork Bellies, which if you don’t discount them will just start
attracting flies. You are also paying storage fees, so eventually here you sell
them at a loss or you burn down the warehouse and try to collect Insurance
damages on them. LOL. Yes indeed, you guessed it, those Pork Bellies were a
Liquidity Trap/Asset Class Sinkhole.

So you still are trying to protect your gobs of Money, and you run from the
Comex over to the NYSE to buy some Stocks, which you do not need to Warehouse
and which won’t attract flies when they go bad. Problem here is those Stocks
are just like the Used Car, you buy it but once you bought it you cannot SELL
it, not at the price you paid for it anyhow. This is where the TBTF Banks are
at right now. They are taking all the Free Money Helicopter Ben issues them and
buying stocks with it, propping up that market, but they cannot sell those
stocks in any kind of volume even to each OTHER, for if they do, the asset class
will drop precipitously in value as HFT Algos Go WILD. The Stocks are a
Liquidity Trap/Asset Class Sinkhole.

To maintain some Liquidity here, Da Fed as World Market Maker keeps Buying any
Dogshit that the TBTF Banks want to unload off their Balance Sheets and they
print more money to make that purchase from them, and forkload over a truckload
into Lloyd Blankfein or Jamie Dimon’s Basement Safe. At which point the TBTF
rinse and repeat and use the money to buy still MORE of the same dogshit Stocks
they bought last week after the las POMO, AAPL and Netflix! Is ANY of this
“money” making its way out into the economy to hyperinflate ANYTHING except the
stock of AAPL? Almost NONE of it is escaping into the general economy, beyond
the Bonus Money the Pigmen pay themselves and use to buy $5000/night Hookers.
The Hookers use the money to buy $5000/oz Coke to stuff up their noses and the
Mexican Drug Dealers use the $5000 to buy the truckloads of Ammo they need to
stay in bizness and the Ammo producers use the $5000 to pay off Congress
Critters in their district. This is the money multiplier effect of Commerce in
the FSofA today. Sadly however, keeping Ford Models noses stuffed full of Coke
and the Ammo production lines running does NOT do wonders for the general
economy J6P is part of. LOL.

Eventually for one reason or another the TBTF Banks will face a margin call here
because some Illuminati Pigman will demand a Put Back of the Fraudulent MBS they
bought from Another Illuminati Pigman, and they will have to unload overvalued
stocks on SOMEBODY OTHER THAN DA FED. Da Fed cannot directly go and buy the
stocks, THAT is why they are using the Primary Dealers to buy them. Anyhow,
once that happens all the Toilet Paper printed here to drive these values up
goes UP IN SMOKE. NO BUYERS. Through the Primary Dealers, by Proxy, for almost
ALL asset classes right now, Da Fed is the ONLY buyer! Its ALL Notional money
issued by Da Fed, and so now all anybody would be left with is a lot of
worthless TP issued by Da Fed, but not actually owning ANYTHING. Can-U-Spell
C-I-R-C-L-E J-E-R-K?

Its never going to get that far of course, because the Illuminati are not going
to sell off everything and once they stop taking Fed TP in exchange for other
assets, the Music Stops. What assets will they try to retain? No doubt the Oil
Companies and the Railroads (didn’t Warren Buffett buy Burlington Northern?) as
well as as much decent Farmland as they can buy up. Issue here is all such
assets are subject to expropriation and nationalization as the Political
Landscape changes in the aftermath of the monetary system collapse.

Perhaps hyperinflation plays out in some neighborhoods at some time in this
theatrical production of Civilization Collapse, but its not the driving force
here, Credit Collapse is the driving force. This is by nature DEFLATIONARY,
since Debt is Money, and a lack of Credit means a lack of money. If/when the
Banksters start Lending money to J6P WILLY-NILLY again, THEN we might see
Hyperinflation inside this portion of the world economy. That HAS been the case
for the last decade, which is why yes this decade HAS ALREADY seen
hyperinflation in various asset classes, primarily Real Estate but also Car
loans etc. However, are the TBTF continuing to loan money out now willy-nilly
to J6P? Nope. Short of an Executive Order to do so, I don’t see Banksters
loaning money out to J6P, nor do I even see J6P taking the money if it was
offered now, he’s already in debt up to his eyeballs and cannot pay it back.

Anyhow, as this Theatre plays itself out, I do see extreme Volatility in prices,
especially in Commodities, they will ROCKET upward, then followed by downward
CRASHES sans parachute. Any Hyperinflationary endgame will be very short lived,
and will simply mark the end of Fiat Money on a Global Basis. So if it does
happen, I would expect it to happen in the last few months before 12/21/2012.
Gotta love the Mayans.

RE

All the talk about the hyperinflationary end game here keeps me pondering on the
nature of the inflation of the money supply to begin with. Under the Fiat/Debt
as Money system, the only way to increase the money supply is to keep issuing
more and more Debt, which requires of course that you get some sucker somewhere
to Sign on the Dotted Line and take on some debt. As soon as he does, the Local
Bankster puts in a phone call to Helicopter Ben who then prints up the money and
Loans it to the Local Bankster at a lower Interest Charge than the Local
Bankster loaned money to J6P. The Retail Bankster never had the money to loan
in the first place, and in fact it only got created the moment J6P signed on the
dotted line. The local Bankster makes his money on the Spread, the difference
between the Interest he is charged by Helicopter Ben and the interest he charges
J6P. At least that is how its supposed to work. Remember however that nowhere
in this Creation of Money here has enough money been created to pay the Interest
Charges

Now, let us take a trip back in Mr Peabody’s WAYBAC Machine to the Post WWII
period and the Bretton Woods agreement, and the need the Banksters had to create
more money. The way it was done was through the idea of “Home Ownership”, the
creation of Fannie Mae and “cheap” loans to J6P Veterans to buy his very own
Levittown Tract House with a White Picket Fence. This was the “retail” end of
money creation in Post WWII Amerika, along with similar models in Europe.

At the same time on the “wholesale” Illuminati end, HUGE sums were loaned out to
well connected Bizmen to ramp up Automobile Production, and now with tons of
money flowing through the economy greasing the wheels of commerce, J6P starts
toiling hard to make enough money to pay for his tract house and Ford Mustang.
Still more new money is created and lent out as various other industries
develop, and the economy is now swimming in still MORE money. However, at no
time in any of this loan making process is money created to pay the interest
charges that accrue over time, but as long as the economy keeps growing and
there are more people who will take out loans to build still further out the
system keeps running. Of course as time goes by, some individuals and biznesses
fail, their assets are taken by others but in that process STILL no new money
was created to pay the interest charges.

Real Growth probably stopped around 1970 or so when the FSofA reached local Peak
Oil. To continue the process of Build Out into suburbia after that, J6P had to
be convinced to continue to take on more Retail Debt, which mainly came in the
form of ever increasing Housing Prices with longer debt repayment schedules, all
while wages remained stagnant. Debt was layered on debt here as J6P used the
ballooning value of his House to buy still more toys produced in China, which
created still MORE money, but STILL no money being created to service the
interest charges that were accumulating.

Mathematically speaking, all the debt accumulated here at the individual,
corporate and state levels has become unserviceable now that real economic
Growth is no longer occurring. So its crashing everywhere in all sectors at the
SAME time. The only way to Reinflate here is to get SOMEBODY to take on more
debt. However, nobody will willingly do so now, and besides if they are
unemployed or underemployed or still employed but underwater on their mortgage,
they wouldn’t be qualified for a loan anyhow. Biznesses won’t take out Loans to
expand, because people do not have money to buy their products or services
already. With neither the average J6P OR Biznesses willingly taking on Loans
and creating money, Da Goobermint is doing it FOR them and by proxy putting the
bill for the loan onto the backs of the Taxpayer, DESPITE the fact the Taxpayer
is saying “NO MORE, we don’t WANT that debt!” If Da Goobermint does NOT take on
debt in the name of the Taxpayer, then all money in a Fiat/Debt Based system
disappears! Lose-Lose scenario either way.

Pretty deep into the Rabbit Hole now, with Da Fed and Da Goobermint basically
force feeding Debt into the system to try to reflate the economy. Problem being
that although they can keep adding more debt into the system ad infinitum, they
cannot get anyone to pay it back if they don’t have money or jobs. There is no
way to “Balance the Budget” at the Goobermint level, Corporate Level or
Individual Level. More money printing just results in bigger debts and more
interest payments and more defaults. So the system has to crash either way and
it amounts to the same thing, either all money disappears here or all the money
that is printed becomes worthless.

The ONLY way to Reboot is “Jubilee”, which is going to occur here in either
scenario. If nobody has money to pay off their debts, they will go BK. If the
currency is hyperinflated to worthlessness, they won’t be able to pay off their
debts with that money because nobody will take it in payment. So again they go
BK. The real PROBLEM you have when everyone goes BK is “Who owns what, and what
is it WORTH?”

Picture the Austrian Scenario, where we let all the TBTF Banks INCLUDING the
Federal Reserve to FAIL, as they should. Meanwhile, J6P who took out a $500K
loan to buy his McMansion from this system of Banking still owes $400K on it.
Who does he owe that to? The Banking system he took the loan out from no longer
EXISTS. Who should he pay his monthly Mortgage to here? What money would he
have to pay it with, since the folks who issue that money NO LONGER EXIST?

The fairly obvious answer to this problem is that Da Goobermint will become the
“Owner” of your McMansion, and to live in it you will have to pay Da Goobermint
in whatever New Money Da Goobermint issues out after the Demise of the Dollar.
However, it remains unclear as to what the distribution method will be of any
new currency, whether it will come from the Federal level or the Local level and
exactly WTF it will be based on. Many Unknown Unknowns here.

In any event, what I am trying to demonstrate is that as far as
“Hyper-Inflation” is concerned, it already occurred, beginning with the
“ownership” paradigm for Housing in the post-WWII period. This is how the supply
of Debt Money was created. Loans for houses on the retail level was the basis
for most of the expansion of the money supply through the period, and on the
wholesale level Loans for Industries from Automotive to Dot Com added still more
debt money to the system. A few mega rich folks got even richer through this
period, and a few lucky folks who caught the wave at the right time also got
mega rich. However, from around 1970 onward, about nobody has become rich
without it being at the expense of somebody else, or at the expense of the
living environment of the Earth.

The folks in charge of Creating Money will do what they will, but they cannot
Make Something From Nothing. What they will ATTEMPT to do is consolidate any
remaining resources into their own greedy little hands and leave J6P hung out to
dry. This will work for a while, and many J6Ps will go to the Great Beyond
utterly clueless about how they were SCREWED here. Eventually however, as in
Frogland already, many J6Ps will begin to REVOLT. A Small Ripple will become a
TSUNAMI. The Wave will wash over the Planet, and the Devastation will be
incalculable. It’s a matter of NUMBERS though. The Meek Shall Inherit the
Earth. Right after the Meek get VERY VERY ANGRY.

RE

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