"When logic and proportion have fallen sloppy dead"

"When logic and proportion have fallen sloppy dead"
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inflation; deflation; duck season! rabbit season!  

Posted by howard in nyc in , ,

9/3/11  17:50

some of my best lessons have come from people with whom i seriously disagree.  i am often rewarded when i read/pay attention to viewpoints and ideas provided by smart, thoughtful people i think are wrong about one thing or another, large or small.

Jesse, on his wonderful daily blog, Jesse's Café Américain is one of those.  kinda sorta.  there is precious little of his economic and market analysis and opinion with which i disagree.  but, he is an 'inflationist' (horrors!).  no, he does not believe inflation is a good thing; he anticipates the resolution of our economic collapse will be inflation.  he proffers that the commodity inflation we have experienced was an entirely expected result of conditions and behaviors by leaders over the past few years.  he called it before and during QE1 and QE2.  mad props for his profferings.

he writes a wonderful piece today, entitled About Those Falling Interest Rates and the Fallacy of Monetary Deflation at the Zero Bound

folks spend time arguing inflation vs deflation without ever clarifying their definitions of or understanding of the terms.  jargon, technicalities, and lack of agreement over simple historic events confound defining and mutual understanding of the very definition of these words.  even once those chores are complete, inflation and deflation are difficult factors to understand, much less to forecast.

money is an even more difficult, complicated concept.  juxtaposed by the apparent simplicity of the question 'what is money'?

Jesse begins with addressing what is and what is not money, in the context of the events of the last few years.  i appreciated that he and others do not consider credit and debt to be money (many other folks, including me, do so consider).  but i did not understand why he did not consider credit to be money.  until i read his piece today.

Let me give you three things to think about.

First, credit is NOT money. Money can be created from a number of sources throughout an economy. The expansion of credit at the business and banking level, often involving savings and fractional reserve leverage, is the major organic source of money, the point of its creation from economic activity or transactions themselves.   It is the most utilitarian form of money, because it is directly tied to what one might ordinarily expect to be productive investment and economic benefits.

Sometimes this mechanism is distorted and abused, in the case of fraud or reckless lending for speculation as an example, and then the money supply begins to decouple from the real economy.  It is the job of the regulators and the Fed to control this.

Like gold or any other asset or liability, credit must be transformed into a utilitarian form of wealth, or money, in order to effect the exchange. You may HAVE a million dollars in credit somewhere, but at some point someone must agree to transform that credit into actual money for you to use it. If an unused million dollar credit line expires, we do not see ourselves as a million dollars poorer.

When organic credit expansion fails to create money, the Fed or the Treasury can step in and create money non-organically, that is, not as the result of economic activity. In the case of an external standard, the Treasury can formally devalue the currency, as the US had done in the first half of the 1930s. Monetary authorities do not like to do this, because it makes their activity more transparent, and therefore more controversial. 

i don't agree with many of Jesse's points and arguments.  i am not smart enough or knowledgeable enough to counter many of those disagreements clearly or intelligently.  but the essay helps me understand his position and perspective much more than i had previously.  

i will briefly state that i believe his distinction between credit and conversion of same into actual money is a distinction without a difference, when applied to the US economy of the past 15 years.

without bothering to try to find some actual numbers (hey, i'm a blogger, not a frigging economic historian; and i ain't getting paid for this), i am gonna take a wild leap and guess that the vast majority of credit made available during the 90s and 2000s was actually converted into money (and debt).  and further converted into assets.  housing, other real estate, stocks, bonds, wages, goods and services.  and vast amounts of those debts were destroyed, (default), as were many of those assets (housing/real estate equity and valuations, stock share values).

and, in short, at least i now understand why and how Jesse does not consider credit to be money or a money equivalent.  i don't agree, but i get where he is coming from.  and i sure as shit understand he may well be right, and i may be wrong.  (um, i think the betting public would be justified and correct in setting odds on him, and against me.)

unfortunately, Jesse falls into some rhetorical traps (while discussing the mother of all liquidity traps), lumping all of the opposing point of view into a mis-characterization he describes.  and some name calling.  these are tense times; there is a lot of falling into such traps going around.

Jesse correctly (imo) states a pair of truths in his other two of three things to think about:

The second thing to remember is that the extent of inflation or deflation is a policy decision in an otherwise unconstrained environment.

Greece does not have such a choice, for example, because the ECB controls their currency.  The US probably has the most choice of all, because it not only owns its currency, but the dollar is also still the world's reserve currency. While the audience is not captive, it is at a disadvantage.

The third thing is that the creation of money from the Fed or Treasury may result in more money, but it may not result in a sustainable recovery.    Money created by the Fed is high powered money, created as it were from the will of the monetary authority's policy.

Money creation, or monetary stimulus, works well in situations wherein the economy has fallen into a temporary slump, especially because of some exogenous shock or a slack period that is cyclical in nature, such as seasonal variation.

But in the event of a secular crisis or problem, monetary stimulation is a palliative, but no cure.   The remedy lies generally on the fiscal and political policy actions, with the aim of correcting or repairing whatever had caused the problem in the first place.  

Monetary stimulus alone, without the will to effect political reform for example, results in very uncommon economic conditions, one of which Keynes described as a 'liquidity trap.'

even if i reject my own analysis, opinions, and judgments that rest upon what i have managed to learn about our economic collapse, and 100% agree with Jesse's formulation of the finance/macroeconomic world, i can continue to hold tightly to one of my central ideas regarding the path of our collapse.

it is an idea that was little more than a wild-assed guess in 2007.  and today, while i have acquired a rudimentary understanding of macro and finance, this idea is informed much more by human action, than by numbers and exponents.  (wtf did you expect?  i love mises to pieces; and Human Action is a great fucking book.)

as bad as a deflationary depression is for the interests of the true powers that be, the people who actually run the country and the economy (not our puppet president and elected officials), a hyperinflationary collapse is worse.  much worse, if you are a superwealthy former chief executive of a wall street bank, pharmaceutical house, or other mega corporation.

and while collapse is inevitable, particularly since zero significant reform and restructuring has occurred in our banking and finance system, the mode of collapse is ultimately a policy choice.  (Jesse said so!)  and while high inflation is very appealing if you are a short-sighted politician (sorry for that redundancy), it is the only thing more scary to the uber-rich who actually call the shots than deflation.

i learned a lot from this essay, gained tremendous food for thought, and came to value his ideas and opinions that are directly contrary to my own even higher than the price of Apple stock three weeks ago.  like Chomsky, Richard Brookheiser, Gore Vidal, at times Howard Zinn, and tons of others, thank goodness for really smart people whose ideology i do not share, but whose ideas i always value and often find agreement.


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