Defensive Interpretation on GD?

[Higgenbotham]

...
This is an extremely complex issue, certainly not as simple as those who are sure it will be this way or that way make it out to be.

We are already agreed in previous discussion that this is point where things are not so clearly.
BUT, I understand that you supporting your deflation theory.
And that is in my point of view - absolutely correct and right.
... UNTIL the point when you projected YOUR picture - as ONLY correct.

Yes, we can always look at the history. I agreed, because that is ONLY "hard facts". (You understand me. )

The very good examples of such deflation are the Great Depression of the 1930s and the Japanese recession of the 1990s and you described them very detailed on your site.
(Even if I do not agreed with all historical circumstances and implications for today - generally the historical events are correctly described).
Additionally, you are absolutely correct here:

That example is also highly relevant because Britain had the world reserve currency at that time and in order to make a proper historical comparison that needs to be the case. Has a central bank ever been able to reverse a debt bubble once it has burst? There are many historical examples of this and not once has a central bank ever been able to do so, despite heroic attempts to do so.

... BUT again - ALL historical circumstances MUST be considerate in serious discussion:
Which "cover" was behind British currency at this time, i.e. which standard the people "measured" the value of the currency than?

Even for - inflationary scenario there are many examples too, such Weimar Germany 1920, Milosevic Serbia 1990,or Zimbabwe today...

I am taking again "help" from previous site:
"...
Given that under today’s fiat money regime, central banks have the sole authority to create money out of thin air. Such authority entails vast power. To illustrate this point further, imagine you are the only person in town who has the authority to create money out of any piece of paper with your own signature. Wouldn’t this make you a pretty powerful person in town? With such power, you can acquire anything you wish at the expense of others. Likewise, the paper money that we have today is exactly such money. Look at any piece of paper money today and you will find the words of a government decree (e.g. “This Australian note is legal tender throughout Australia and its Territories”) and perhaps a signature or two.
Therefore, some kinds of ‘rules’ are necessary to fetter and curb such vast power. Without these ‘rules,’ it is impossible to maintain the integrity of money. If money loses its integrity, the financial system and economy will break down and we will be reduced to primitive bartering.
..."

Further it is already discussed (previous discussion) we can find the simple scheme for function of the system:
"...
1. The creation of fiduciary money (credit) lies in the power of the banking system through the granting of credit. Today, with the proliferation of non-bank financial institutions and financial ‘innovations,’ the central bank is not able to control the supply of fiduciary money.
2. The central bank sets the target price of money (interest rate), which influences the quantity of standard money (base money). Setting the target price of money involves open market operations. Injecting or draining base money from the financial system involves buying and selling government bonds and entering into repurchase agreement (repos).
...
Such scheme of arrangements is just a tiny fraction of ‘rules’ that ‘govern’ the vast power associated with the authority to create money. Now, imagine that those above-mentioned ‘rules’ are being relaxed such that the government can order the central bank to bail out everyone and every business that is financially insolvent by giving them freshly printed money. Overnight, this will solve the problem of bad debts and we will not have any credit crisis to worry about. Everyone will be happy right?

Wrong.
...
Take the example of Japan in the 1990s. As this article from the Ludwig von Mises institute said,

If banks held 100% reserves, this would not sound the death knell. But for a fractional-reserve system, it’s institutional death. Only the central bank can prevent total collapse. It must act as a lender-of-last resort. Yet, when the credit expansion of the boom has been particularly extreme, making good on all bad loans with monetary inflation is something the central bank dare not do for fear of hyperinflation.

The current [1995] level of bad debt in Japanese banks is estimated to be between 50 and 80 trillion yen, which translates to a 30 to 50% increase in the narrow money stock. The Bank of Japan simply cannot bail out the system with this level of monetary inflation.

The main point is, once those ‘rules’ are rolled-back to give the government more power and authority with regards to their monopoly on money, the slippery road towards the ultimate loss of confidence in the integrity of money begins. A very fine example is Zimbabwe. With an autocratic despot in power, such loss of confidence is manifested in the form of hyperinflation.
...

"

As said before - neider me or you (or anybody) have "RIGHT" on "future prediction".
We can only discussed - different options.
Nothing more- nothing less.

Are we moving towards such a scenario?


One thing we have to be clear. Assuming that the ‘rules’ are strictly adhered to, there will only be one outcome for the current credit crisis: deflation.
But alas, we live in a democracy where the mob rules.

"...
Even if Ben Bernanke is an Austrian economist, political pressure alone will do the job of forcing him to act otherwise. This is the Achilles’ heel of democracy. The mob will scream at the Fed to bail them out by ‘printing’ money (i.e. pump liquidity into the economy in the form of cutting interest rates). Should the Fed refuse to comply, we can imagine the mob storming the Federal Reserve to demand the head of Ben Bernanke. Therefore, the Fed will have no choice but to acquiesce to the desire of the mob, whose aim is to avoid immediate pain as much as possible."

There is no way any politician can sell the message that America needs a severe recession (or even a depression) to cleanse the economy from the gross excesses, imbalances, blunders and mal-investments.
Thus, it is very likely that they will have to fight deflation till the very bitter end, till the last drop of blood from their last soldier.
Since the current structure of ‘rules’ will be too restrictive in such a war against deflation, there will be popular momentum towards the bending and rolling back of these ‘rules.’
If they press on relentlessly till the final end, there can only be one outcome:
the US dollar will be joining the long list of failed fiat paper money in the annals of human civilization.
Since the rest of the world’s currencies are as fiat as the US dollar and are based on the US dollar standard, you can be sure the result will be ugly for the global financial system.

Period.

malleni,

Just to clarify, I am not John, the owner of the site.

I agree severe inflation will be the end result but the question is how long it will take, and what path it will take.

I'm not really sure how to respond to the rest of what you wrote. You will never find a past historical example that exactly matches a current example, but we can find similar examples. That is what I attempted to do when I pointed to Britain in 1825. While we are all familiar with the examples of Weimar Germany and Zimbabwe, those countries do not have the world reserve currency, so the force of debt liquidation is not acting to counter inflation. Britain from the 1930s on is a good example too. The British pound lost 80% of its value in the 50 year period after the 1930s but most of that loss occurred after World War Two (after the Bretton Woods agreement made the US dollar the world reserve currency). The British pound was relatively strong all through the 1930s even though Britain was a debtor nation. So while the pound was eventually devalued in stages it took a long time. My guess is that the relative position of the US is weaker than that of Britain in the 1930s. If the process takes half as long, it would still be a 25 year process.

[Higgenbotham]

Still, you never answer or discuss this main abnormality of the today system:

...
It is simply impossible for a pure deflation to take place because of one notable anomaly that perverted all standard Keynesian economic theory: namely the fact that the worlds largest debtor nation controls the international currency regime. From this rather strange "logic," all market anomalies flow.
...

(I do not found it anywhere - perhaps you did)
How this simple fact (abnormality) can be without discussion in this rotten system?

malleni,

I agree with that statement. We will not have a pure deflation and are not having one now. If we had, all of the institutions that the Fed propped up in the past year would have been taken through bankruptcy, etc., etc.

[mannfm11]

I noticed the guy prefaced his opinion with the idea he knew because he went to Yale. Interesting that Professor Shiller is also at Yale and has conflicted with the official Wall Street attitude for years and been very timely with his books. They use the same formulas whether you go to Yale or Texas A&M. The difference is your family quite likely has enough stature to put you in a position where it at least looks like you are brilliant, when in fact the world has been set on a tee and they have people down the fairways to improve your lie. The letter John posted by Andrew Lahde spoke of this.

I appreciate your post Mo because I have debated that attitude for years. People forget all this money out there is owed back to the Fed. They also forget that gold is like cash in the matress. We are dealing with bank paper, not official money and it derives its value out of the need to possess it to pay debts and hold property posted as collateral. What is confused as monetary growth is more the Fed functioning as the lender of last resort due to the fact that most securities are nonmarketable right now and that the system would have already totally collapsed if this financing wasn't forthcoming.

The problem with gold is that those that possess a massive amount of it keep it on the market to earn interest. There is the constant cry of naked shorts, but there isn't any cry about naked longs, which in fact are in excess of the naked shorts on the futures market. The longs are paying the interest carry on gold without knowing it. This, more than anything probably busted gold in 1980, the upward carry costs.

I believe John has come up with a rational explanation why people don't learn from history, because different generations have different experiences. I was a late boomer, born in 1955. My experience with the economy was extremely polar to a Gen Xer, in that I got out of high school in the midst of the first energy crisis and a horrible bear market, along with high inflation and Watergate. I got out of college at the peak of the following rebound, walking right into horrible recession that pretty much lasted 4 year. We didn't see single digit mortgage rates until 1987. The Xers, in return saw a steadily improving economy literally from the time they got out of high school until present. Their perceptions are that Clinton fixed the economy when in fact, Rubin rigged the economy. Following the Watergate mess, we didn't see unemployment as low as present rates for a over a decade. The definition for full employment was moved while I was in college from 4% to 6%. Now 6% is considered a depression and consumer confidence is in the tank with existing home sales at a 5 million annual pace. Existing home sales were 2 million in 1981 and never over 4 million in any year prior to this bubble. Through my experience, I can see the boomer attitude, where the economy was so good while I was really young and so tough while I was just out of school, while the reverse held true for the Xers. It might be one reason the Xers despise the boomers, that they have done it so well while we stunk. Credit bubbles make a lot of difference. We are all about to be baptized by fire.

[Higgenbotham]

http://www.federalreserve.gov/paymentsystems/coin/

Currency
Federal Reserve notes comprise more than 99 percent of all U.S. currency in circulation; the remainder includes United States notes, national bank notes, and silver certificates, all of which remain legal tender.


These definitions are basics. If people don't know the proper definitions, there can't really be a coherent discussion.

To say that, "Remove the panic tomorrow, and you will discover suddenly that the world is drowning in US currency, repeat, DROWNING." is simply not true by definition. There are approximately 7 billion people in the world, and there are approximately $800 billion in Federal Reserve notes in existence (as also noted in the link above), or $100 for every person in the world.

If making a statement like that isn't equivalent to throwing garbage at the wall, then I don't know what is.

[Gordo]

...we will hit a deflationary cycle but the overall cycle will be high inflation

Do you really disagree with him? If you look back at the great depression, we only had 3 years of deflation. Your friend specifically mentioned a 15 year period. He also seems to think the deflationary cycle will occur at the beginning of that 15 year period (as in, right now). So I don't see what the conflict between you is? I think he is right.

As for your list of predictions - many of them are trivial. Won't be mass student protests over the war in Iraq like there was over Vietnam? Reality check - we didn't have tens of thousands of Americans being killed in Iraq or a draft that could suck you in at any moment and already sucked your friends in. I bet if we had these conditions, you'd see your big protests, but maybe I'm wrong, generational theory was NOT put to the test here!

Most of the rest of the list has also not been tested, and much of it is not specific. You predicted in 2003 we were in a deflationary spiral? Ouch, what's the difference between being 6 years early and being wrong? We haven't even had a single quarter of negative CPI yet. Now I'll grant you that the deflationary forces right now are overwhelming, we SHOULD get some lower prints on CPI, but if you were betting on this in 2003 you would have been a big loser. And even now, you aren't specific - how much of a decline in CPI do you expect? How long will the deflationary period last? I see nothing specific.

Roadmap to peace in Israel will fail? Wow, big stretch of the imagination there
No civil war in Iraq? Granted, a lot of knuckleheads were concerned about this - but come on, what is the probability of a civil war in any country? Very low, and especially when politicians and analysts are worried about it - probability even lower! Same story with civil war in Lebanon... Predict a civil war (that hasn't already started!) instead of "no-civil war" if you want to impress people assuming you get it right in a reasonable timeframe .

Politicians will fight and not accomplish much? Hahah, brilliant observation.

Most of the rest haven't happened (China wars? World wars? DOW 4000?). I guess we'll just have to wait and see.

[malleni]

-- Dalai Lama changing position on China

There's a little reported story that may have important significance
in a month or so.

The Dalai Lama is changing his position from one of being almost
totally accommodating to the Chinese Communist Party (CCP) to being
increasingly confrontational.

http://www.asianews.it/index.php?l=en&art=13623&size=A

He's complaining that the CPP have been persecuting Tibetans much
more than in the past, and that negotiations have been a failure. He
hints that he may call for Tibetan independence at a meeting of
Tibetan exiles at the end of November.

Ironically, this would do little to stir up the Tibetans, since
they're in a generational Unraveling era. The most you could expect
from them would be a few demonstrations.

But the CCP, with the most paranoid politicians on earth, will get
VERY stirred up, and may overreact.

China has been on very good behavior in the lead-up to the Beijing
Olympics, but those restrictions are now removed, and there's a good
chance that the paranoia will show itself again, in one way or
another.

Sincerely,

John

I think that exactly this is an absolutely "private" understanding of the global events based on the wrong observations.
Of course - the wrong "concussions" are inevitable.

Whole Planet are aware that the Tibet 'uprising' was CIA financed i.e. USA is deeply involved in this event.
You need not a PHD in "generational dynamics" to understand it.
It is quite enough with little - logic.

And what is more unbelievable John, you link to the Italian paper with OBVIOUS involvement of West countries (in the text -British foreign minister, David Milibrand)!!!

You need not to search thought "whole Internet" to find some Asias paper - who wrote THIS (at time of Tibet 'uprising' - in spring this year):

http://www.atimes.com/atimes/China/JC26Ad02.html

John,
You gave a West based link with explanation of deep involvement of West countries in "free Tibet" story.
... and than your comment as well as some "prophetic GD axioms"...?
.... and THAT should be a "neutral position of the GD"...?
I do not think so.

John, I have one proposal (I think that it would be good for a while)
Please - no more "prophecies"...
- (... or if you insist on them - call "them" than just "your thoughts" (or something in this direction) without axioms from "GD theory")
It is just painful to see and discuss the logical and REAL issues around us on this way.
Moreover - I think that even your GD theory suffering of these kind "prophecies"...

Thanks
malleni

[John]

Dear Gordo,

> Do you really disagree with your friend?

It wasn't my friend. It was my web site reader's friend.

Your posting is really funny. Of course all the predictions are
obvious now that they've all come true. But none of them was obvious
when I made them.

What we have here is a Gen-Xer who'd rather eat mud than ever agree
with a Boomer.

Everyone was predicting huge anti-war demonstrations in Iraq, and
when they didn't happen the "draft" excuses started appearing from
antiwar pressure groups who were desperately hoping for a repeat of
the 1960s. I went out on a limb and said that there would be no
antiwar movement among college students, and I turned out to be
exactly right, and most everyone else turned out to be wrong.

** Why aren't college students protesting against the Iraq war?
** http://www.generationaldynamics.com/cgi ... 601antiwar

Roadmap to peace failing: That's obvious now, but it wasn't in 2003.
Furthermore the common wisdom was that when Yasser Arafat
disappeared, then the roadmap to peace would succeed. I predicted
that when Yasser Arafat disappeared, it would be part of a
generational change that would make things worse. Nobody else ever
said anything like that, but I did and I was right, and most everyone
else turned out to be wrong.

And now, of all things, you're saying that the prediction of no civil
war in Iraq was obvious. Are you really so lacking in intellectual
honesty? I've written literally hundreds of articles on this
subject, quoting many, many sources who were convinced that Iraq was
in a civil war. Here's one about the stupidest man in the Senate:

** Senator Joe Biden wants to move troops from Iraq to Darfur civil war
** http://www.generationaldynamics.com/cgi ... 29#e070429

Here's one about Donald Trump:

** Donald Trump goes on a hysterical rant on CNN
** http://www.generationaldynamics.com/cgi ... b#e070319b

Here's where the entire NBC news network put on a big dog and pony
show about declaring the Iraq war a civil war:

** News as theatre: NBC announces it will call Iraq war a "civil war"
** http://www.generationaldynamics.com/cgi ... 29#e061129

Incidentally, the behavior of all of these people, and others like
them, was completely disgraceful, and bordered on treason.

The fact is that my 2003 prediction was incredibly accurate.
Democrats got it wrong. Republicans got it wrong. I don't know of
any reporter, politician, analyst or pundit who got it right except
for myself.

** The new Iraqi 'civil war' fizzles out, as expected
** http://www.generationaldynamics.com/cgi ... 01#e080401

Once again, there is no web site or journalist or analyst in the
world with anything remotely like the predictive success of this web
site.

And your predictions haven't turned out so well. In e-mail messages,
you've said that brokers would never go bankrupt, something that was
"obvious" when you wrote it, but isn't so obvious today. And here's
one you sent to me on February 6, 2007:

> Here's my prediction for you - the Gen X and Y'ers are going to
> shock you by supporting policies that represent withdrawal from
> the world - military cuts, pullout of foreign countries, cutting
> off foreign aid, possibly even withdrawing from the UN.

I guess this was another "obvious" prediction from you. We'll have to
see whether President Obama makes your prediction come true.

I could go through your old e-mail messages and look for other
"obvious" predictions. Would you like me to do that?

It's easy to call a prediction "obvious" after it's come true.

And here's one more thing: Within a year or two, I'll have to put up
with you or someone like you, probably another Gen-Xer, saying, "Big
deal. Everyone could see that a deflationary spiral was coming. That
prediction was completely obvious."

Sincerely,

John

[John]

> Whole Planet are aware that the Tibet 'uprising' was CIA financed
> i.e. USA is deeply involved in this event. You need not a PHD in
> "generational dynamics" to understand it. It is quite enough with
> little - logic.

I've admonished you several times in the past that ephemeral political
events are not relevant to long-term generational trend predictions,
except to narrow the time window. I have no idea whether the CIA was
involved in Tibet or not, but a few CIA operatives will not change
the attitudes and behaviors of the great masses of Han Chinese or the
attitudes and behaviors of the great masses of Tibetans. Those
attitudes are caused by events that occurred decades, or possibly
even centuries ago, and no political event can have an effect today.

You claim to be using "logic," but you're not using logic at all.
You're pulling random ephemeral events out of the air -- events that
just happen to match your own ideology -- and drawing illogical
conclusions from them.

You might as well say that "All the world knows that it rained last
March, and that caused the Tibetan uprising." That's how logical you
are.

You claim to be an engineer, but I don't see many engineering skills
here, just the usual fatuous ideological nonsense, disguised as
"logic."

Sincerely,

John

[Gordo]

Everyone was predicting huge anti-war demonstrations in Iraq

Leave it to a boomer to called a handful of other boomers "everyone"! Haha. No John, everyone was NOT predicting huge anti-war demonstrations...

many sources who were convinced that Iraq was
in a civil war.

Weren't all these sources silly liberal boomers of the anti-war persuasion that you like to poke fun of?
Sure the media was concerned about a civil war in Iraq, Shia & Sunni don't get along so well. Who cares?

And your predictions haven't turned out so well. In e-mail messages,
you've said that brokers would never go bankrupt,

John, didn't we have this discussion in email already, a while ago? I never said brokers would never go bankrupt, that is such a retarded false accusation.

> Here's my prediction for you - the Gen X and Y'ers are going to
> shock you by supporting policies that represent withdrawal from
> the world - military cuts, pullout of foreign countries, cutting
> off foreign aid, possibly even withdrawing from the UN.

I guess this was another "obvious" prediction from you. We'll have to
see whether President Obama makes your prediction come true.

Well the support for Obama among X & Y'ers is overwhelming, time will tell how this plays out. If deep cost cutting becomes a necessity, my prediction will come true sooner rather than later.

And here's one more thing: Within a year or two, I'll have to put up
with you or someone like you, probably another Gen-Xer, saying, "Big
deal. Everyone could see that a deflationary spiral was coming. That
prediction was completely obvious."

YOU DON'T HAVE TO WAIT A YEAR OR TWO - I'll say it NOW, guess what John, bubbles pop!! Haha, is this so hard to predict???
I still don't think you get it? Saying a deflationary death spiral is here in 2003 was WRONG. We had an extension of one of the most massive credit bubbles and credit expansions of all time then and for years after then. Commodities SOARED from 2003, real estate was still soaring then. The time to predict asset deflation is when you see the asset's price INCREASING EXPONENTIALLY. Personally I think the best way to measure a persons ability to accurately forecast the future is by examining how much money they made investing in their own forecast! I shorted oil when it hit $135. OK, I admit I was early, as it would go to $150, but ultimately my prediction was pretty good.

So now commodities have crashed, housing & stock markets are down 40%. Guess what, bubbles pop. Does that really surprise anyone? How is it different from when the NASDAQ went parabolic in '99-'00? I shorted that market too, on the way down, and did very well.

The next time an asset class goes irrationally parabolic, I'm going to short that too. You don't need to ask me for predictions, just look at a LOT of charts. Haha. And the same applies to parabolic declines. Just turn the chart upside down, and buy instead of sell.

So will we get an actual negative print on CPI? Yes, I'm sure we will, but it hasn't even happened yet, so someone predicting this in 2008 should look a lot better than someone predicting it in 2003. But lets get beyond that - how many quarters or years of negative CPI do you expect? Why all the cloak and dagger? I've already put myself out there in stating that a great depression like the last one is impossible, and I stand by that. There will be no significant runs on banks (which is a direct contradiction to your own predictions). Heck I'll go out on a limb even further - this year's Christmas season is going to be significantly BETTER than the dismal forecasts given by all the pundits & wall street analysts. I believe its possible that we will not even have one full year of deflation (as measured by CPI) but 1 or 2 would not surprise me, 3 would match the great depression, and would be totally unexpected by me.

p.s. Just for the record, I also predicted right here in your forums, the powerful counter-trend rally in the stock markets that we are currently experiencing. I covered all of my shorts before this rally.

[malleni]

http://www.federalreserve.gov/paymentsystems/coin/

Currency
Federal Reserve notes comprise more than 99 percent of all U.S. currency in circulation; the remainder includes United States notes, national bank notes, and silver certificates, all of which remain legal tender.


These definitions are basics. If people don't know the proper definitions, there can't really be a coherent discussion.

To say that, "Remove the panic tomorrow, and you will discover suddenly that the world is drowning in US currency, repeat, DROWNING." is simply not true by definition. There are approximately 7 billion people in the world, and there are approximately $800 billion in Federal Reserve notes in existence (as also noted in the link above), or $100 for every person in the world.

If making a statement like that isn't equivalent to throwing garbage at the wall, then I don't know what is.

Thank you Higgenbotham for the link.

Personally I think, that FED "definition" of "what currency is" - "is irrelevant" (as John like to say - but he of course has no exclusive right on this phrases).

What is in my opinion important - is what the currency is in reality?

... and we already talked about it.

Best regards
malleni