Debt Deflation

Irving Fisher was a leading economist in the early 20th century. After being caught out during the Great Depression (he famously quipped, “Stock prices have reached what looks like a permanently high plateau.” right before the bottom fell out), he did a lot of soul-searching and research to understand where he and his profession had gone wrong. By 1933, he had come up with a framework which very well describes what happened during the depression and happens in similar episodes of credit crisis.

From an issue of Econometrica in 1933: “Assuming, accordingly, that, at some point of time, a state of over-indebtedness exists, this will tend to lead to liquidation, through the alarm either of debtors or creditors or both”. Then we may deduce the following chain of consequences in nine links:

1. Debt liquidation leads to distress selling and to 2. Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation. This contraction of deposits and of their velocity, precipitated by distress selling, causes 3. A fall in the level …

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Charlie Rose interviews Paul Krugman

Charlie Rose talks to Paul Krugman, in this interview we see an opinion that is contrary to the previous interview with Pete Peterson in which higher debt levels are encouraged. This is a fascinating opportunity to look at two sides of financial thought, that of the practitioner and that of the academic.

Peterson is totally adverse to defecits whereas Krugman is happy to see them baloon in order to get the Keynesian reaction in the market that he believes will come about, so now we have a grand scale and real life experiment, something that hasn’t really existed since the 30’s, that of seeing what comes about as a result of massive bailout plans when markets collapse, my hope lies with Krugman but by heart is with Peterson.

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Pete Peterson formerly of Blackstone, CFR, Lehman and Secretary of Commerce

Pete Peterson is a fascinating individual, he came from humble beginnings and went on to work at executive levels in some of the most well known finance houses in the world. He mentions some of the deficit fears that have been laid out in this blog many times in the past and the inflationary risk that comes with it, Peterson is in agreement with Volcker that there is a serious dollar risk forming.

Peterson is also a human, he is one of the few Wall St. legends to come out and admit that he needed psychotherapy in the past, this interview is absolutely worth watching and learning from.

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Inflation or Deflation…. 1923 or 1932?

TechTicker talk to Todd Harrison about the deflation or inflation question, many commentators have felt that inflation will be the true risk but that it is on the horizon for now and for that reason isn’t receiving enough attention, Gold is tenaciously holding the $900 dollar mark (give or take some volatility either side of that), and the truth likely lies somewhere in the middle. This video is worth a watch, it puts some interesting ideas into the debate.

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What stimulus is there after a 0% rate?

There are generally two strands to monetary stimulus, firstly there are interest rates, and then there is the actual money supply. We’ll talk about both of them here and what will mean for consumers.

Interest rate drops drive money into an economy in a few different ways, obvious to most is that the cost of borrowing comes down, so if a company has to borrow to hire people they can do so, people need less to service debts which increases their disposable income and that puts more money into circulation. The other thing that happens is that bank deposits look less attractive, interest rates dropping actually cause rate compression, something we discussed here before, and that means money (especially at a 0% interest rate) will not sit on deposit and will instead move to corporate bonds which will thus be a way of extending credit to companies and they can finance projects.

In the past many would ‘fly to quality’ …

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Merrill Lynch outlook for 2009

This is part 1 of 2 parts, the second one is here. The Merrill advisers think that the economy will be going more the way of Japan than into the inflation that we have felt was the most likely outcome, arguing deflation over inflation. We don’t agree with this outlook, but it is important to get a view from both sides of the argument. The credit collapse based recession/depression has been seen in the USA (1930’s) and also in Japan (1990’s), the question is which one is the current crisis most likely to resemble? Thought provoking, although not necessarily enlightening.

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The fallout of the credit crunch

In this post we will examine some of the likely fallout from the credit crunch. What we have seen developing in the world has shown that the international aspects of finance as well as the magnification of leverage are at the root of many of the problems. There has never been a more exciting time to be alive in the finance industry and while some pundits cite the Great Depression in every second sentence I believe that while the numbers and percentages might thwart every record hit, that the actual real economy fallout will not rival that of the Depression era.

Regulation: Regulation is likely to feature much more heavily in business, in particular in financial services, last week Patrick Neary called on all Stockbrokers to give the Financial Regulator an audit of their firms, they can do the audit themselves but they must get it done ASAP in order to demonstrate that client funds are fully protected.

In the mortgage and personal finance field we are likely to see increased regulation, …

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Currency markets Q4 of 2008

In the last few weeks we have seen some of the most volatile currency markets in history. Iceland (Króna) as a nation basically went bankrupt, there are serious currency risks in Hungary (the Forint), the Ukraine (the Hryvnia) and several other countries.

The downside is that this may be the prelude to a currency crisis not unlike that which we saw in Asia in the late 90’s. The move has been playing out in the markets at a time when most of us are concentrating on the Credit Crunch/Liquidity Crisis. The dollar was as low as $1.60 to the Euro and $2.10 to Sterling, then it snapped back to $1.25 and $1.60 respectively.

The Australian and Kiwi Dollars both got hammered, Iceland was next in line then the South African Rand and Polish Zloty took a beating. The South Korean Won and then the Hungarian Forint suffered, the Czech Republic Koruna is facing issues and the Mexican Peso is …

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