Janjuahmanji!

It's hard to find much wrong with Bob Janjuah's views in a recent CNBC interview. He shows all the wisdom of Hendry, with none of the ego.

The bears are lining up:

Deflationists: Hendry, Janjuah, Prechter
Inflationists: Faber, Rogers

As for me, my views most closely track those of Hendry. Excessive debt is resolved by deflation. But I think everyone (with the exception of Prechter, who is bearish on gold) is mostly correct in the larger sense.

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Am I the only one who would

Am I the only one who would rather see a deflationary depression?

I posted before that I would prefer deflation

Deflation is a good thing. It's the conversion of economic assets into liquid form so they can be re-arranged into a stronger, wiser structure. It takes away bad information. It reminds people of the need for thrift, far future planning, and responsibility. It engenders virtue.

Inflation, OTOH, does the very opposite. A hyperinflation would not just destroy the economic system, but maim the very soul of the American middle class.

The gold sellers have been claiming hyper inflation

for 50 years. It can't happen as long as the dollar is the world reserve currency. Money deflation favors people who live off investments. Moderate inflation favors people who are paying off a mortgage because they are paying off with cheaper dollars. The main concern for the working class is how many hours they have to work to pay for food, shelter, and clothing.

I don't recall any claims of hyper inflation

It's enough just to claim that we would have inflation.

You are wrong about inflation favoring those who live off investments. You see those who do so can also borrow. It turns out that the rich actually are more in debt than the poor. Donald Trump has borrowed far more money than most everyone. The very poor just don't qualify for loans. Therefore inflation favors the rich over the poor working slob.

yes

while most likely inevitable, it is a horrible time for just about everyone. Destabilizing and usually violent, this is not something to wish for, but to fear. Even Greenspan, the probable architect of our current situation, preached allowing things to fail and deleverage, but when faced with a crisis, he became as Keynesian as Keynes himself.

I really think crisis economics requires a blend of ideologies. Keynesian initially to save banks and institutions in order to prevent a domino effect that runs far too much to the downside in order to correct the balance sheets. Then Austrian to shake out the bad debts and allow some creative destruction to flourish. Once the initial crisis dominoes are stopped, then some tough love is in order to flush out bad assets and companies. It is a careful balancing act and trying to keep the party going is the wrong idea this time around. i.e. uber stimulus. We were in a pretty unsustainable cycle. Attempting to reflate the bubble is unwise, IMHO. Tis the reason why I think your wish is going to come to fruition.

Keynesian initially to save

Keynesian initially to save banks and institutions in order to prevent a domino effect that runs far too much to the downside in order to correct the balance sheets.

Is the price worth the cost? Should AIG, the institution that stupidly wrote credit default swaps on CDOs backed by shitty bonds based on even shittier mortgages, exist at all? We've perpetuated the shittiness in the system. I think we'd have been better off if the USG had let AIG and the banking institutions go bust. The information cloud encapsulating AIG and big Wall Street institutions needs to evaporate or else better, smarter information can't take its place.

I never said it was an easy call

but during an economic crisis, everything flies out the window and a manic desire to prevent the downward spiral creeps into even the most ardent Austrian school proponent. Maintaining banking is kind of important, for a reference, see 1930's America. Hoover allowed the banks to fail; believed the deleverage had to occur and the market will get it right. Guess what? It didn't get it right. It spilled over to other healthy areas of the economy and basically took everything down, including the little main street guy that lost his savings.

Crisis economics defies a devil may care attitude and faith in the market. It is the market gone totally mad. A nasty domino effect that swamps liquidity and destroys the market. Preventing the spill over is important to contain a crisis and attempt to ride it out with some semblance of institutions still standing in order to aid liquidity in the die off that follows.

A devotion to an economic theory that does well when times are good does not necessarily qualify it to speak to when times are in crisis. The Austrian school can not prevent crisis, they are a hallmark of capitalism. How we respond is important and almost by definition requires thinking that differs from what got us to the crisis in the first place.

but during an economic

but during an economic crisis, everything flies out the window and a manic desire to prevent the downward spiral creeps into even the most ardent Austrian school proponent.

And rational people will, sometimes late at night, believe in ghosts and monsters.

Maintaining banking is kind of important, for a reference, see 1930's America. Hoover allowed the banks to fail; believed the deleverage had to occur and the market will get it right. Guess what? It didn't get it right. It spilled over to other healthy areas of the economy and basically took everything down, including the little main street guy that lost his savings.

There is such a variety of explanations of the Great Depression.

Crisis economics defies a devil may care attitude and faith in the market. It is the market gone totally mad.

That is not a plain fact but a disputed theory of the Great Depression and of the current recession.

Alternative policies

Is the price worth the cost? Should AIG, the institution that stupidly wrote credit default swaps on CDOs backed by shitty bonds based on even shittier mortgages, exist at all? We've perpetuated the shittiness in the system. I think we'd have been better off if the USG had let AIG and the banking institutions go bust. The information cloud encapsulating AIG and big Wall Street institutions needs to evaporate or else better, smarter information can't take its place.

Hoover allowed the banks to fail; believed the deleverage had to occur and the market will get it right. Guess what? It didn't get it right. It spilled over to other healthy areas of the economy and basically took everything down, including the little main street guy that lost his savings.

Three thoughts:

1. But today the little main street guy today wouldn’t lose his savings because those savings are backed up by the Federal Deposit Insurance Corporation. And his income is protected to some extent by unemployment insurance and Social Security Disability Insurance. And his pension is backed up to some extent by the Federal Pension Guarantee Corporation, and supplemented by Social Security. Etc.

So maybe we don't need government to engage in interventions today -- not because intervention is always wrong, but because we already have sufficient interventions in place to keep people from panicking.

2. How about this alternative scenario: Instead of bailing out the big guys the US focused on bailing out the little guys?

Imagine that while debating the bailout of Wall Street and the auto industry in 1998, the US sells gobs of bonds in anticipation. Then the US announces, “We’ve decided not to bail out any firms; you’ll have to stand or fall on your own. Yes, some firms will fail, and unemployment will rise. In anticipation, we’ve stockpiled enough cash to provide unemployment insurance until 2020 without debasing the currency. Thus the American consumer can be reasonably confident of his income, and can continue consuming, albeit at a slower rate. Firms that can sell to that consumer can feel reasonably confident of having sales, albeit at a slower rate. And everybody else – well, best of luck to you.”

3. Of course, if the US did this, lots of investors would end up burned, and would henceforth be more reluctant to lend/invest. This "friction" in the system would create a drag on the economy -- at least, relative to the go-go days of the mid-2000s.

So here's the big question: Should government try to make people feel confident in the face of uncertainty? Many aspects of government intervention, both during the current crisis and more generally, seemed to be designed to reduce people’s fear of loss, and increase people’s willingness to take risks. Is that sound public policy?

The FDIC helps people feel comfortable depositing money in financial institutions. I suspect the FDIC is sound policy. We could expect every consumer to incur the cost of investigating the soundness of every financial institution he invests in, but this would be pretty inefficient. Moreover, the fear of a bank failure can trigger a run on a bank, causing the very event that is feared. Deposit insurance seems to defuse this self-defeating fear, producing social benefits that arguably justify the social intervention.

Government blesses certain ratings agencies -- Moody's, Fitches, Standard & Poors (S&P) -- and gives certificates to "Certified" Public Accountants, all in an effort to provide people with greater assurance about data. Is this just a fool's errand?

Is there sound public policy in, for example, keeping interest rates low, thereby encouraging greater investment (and correspondingly less savings) than would otherwise occur? I’m iffier about this. The Austrians clearly don’t think so. Yet GDP tends to grow faster than population. If we live in a world in which positive externalities exceed negative ones, then society may well have an incentive to induce you to take risks beyond those that you would choose to take based solely on self-interest.

Finally, is it desirable for a president to appear at the scenes of disasters and offer reassurance? Perhaps, in the short run. But these reassuring words arguably make it harder to remind people that we live in a world of risk, that we can console ourselves that this generation faces a lower risk of imminent death or injury than any generation preceding it, and that we might benefit from stoically acknowledging and facing risk. I suspect we’d all be better off if we could acknowledge that the risk of harm from most types of terrorism is not worth the cost of trying to thwart terrorism. I suspect we’d all be better off if we concluded that the benefits from capital punishment are not worth the cost of implementing capital punishment. And I suspect we’d all be better off if we concluded that the cost of protecting various industries is not worth the cost. But I’m not sure how to create a system that rewards leaders for this type of INaction.

Post this as a new post...

...and I'll respond with a new post.

has been a great thread though, IMHO

grand discussion. Makes me not even miss techsideline's UWS.

Your beliefs do not correspond to reality

"Hoover allowed the banks to fail; believed the deleverage had to occur and the market will get it right."

No he didn't. He was called "The Great Engineer" and had all sorts of stimulus and economic plans in the works that he immediately put into action. FDR continued and expanded on those programs. That's what caused the Great Depression to last so long.

You are disparately in need of watching this video: