Doomsday Economics FAQ

[MoonShadow]

Note that I did not say that deflation did not happen. I said that the Fed aborted the "deflationary correction".

And s an Austrian, I reject the very concept that central planners have any such abilities.  The deflation is the correction.

About what you are saying, there has been monetary deflation for sure, specially in the longer term debt (M3) towards cash or shorter term debt (M2). But if the Fed had not monetized government debt (pushing new money directly into the market) it would had been far more intense.

Sure, it would have been more intense, but it would likely already be over.  Which is worse; 18 months of an unabated natural correction, with high unemployment, bank failures and forclosures; or the same exact end results over 10 years?

I'd rather take rip off the band-aid fast.

As for prices, consumer goods prices, the CPI which is usually what is referred as "prices" when talking in macroeconomics, have not gone down. If you look at shadowstats statistics is even worse, and they have been increasing around 5%. Sure, homes have gone down, stocks have gone down, etc... but the articles that people buy everyday, like food, have not gone down, and have keep going up, slower than usually, but still up.

So markets vary, and different industries correct in different ways on different timelines.  That does not alter the overall results.

I have checked the statistics in page 10 of that report, and yes its a big decline, but it seems to include all goods and only small business. Its interesting data, but it does not represent the whole thing.

Neither does the CPI, or even GPD for that matter.  Human minds require looking a small slices of representative data at a time, which is why we depend upon statistics to begin with.

And I am not denying there are deflationary presures. I believe the deflationary correction is going to start showing again (its already showing) until the Fed starts printing again on what its being called Quantitive Easing 2. Then prices will start rising again and heavily. Note that I am saying that prices will rise, not that the economy will recover, therefore stagflation.

That may yet be, but it still looks like this is running more like 1932 than 1978 to me.

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[hugolp]

And s an Austrian, I reject the very concept that central planners have any such abilities.  The deflation is the correction.

The thing is that the central planners use violence therefore they dont operate under the same market rules the rest of us do. Specifically, the central bank manages the monopoly on money imposed by the government using force. The Fed is not omnipotent, but it does have a very strong influence, greater than anything else probably.

Sure, it would have been more intense, but it would likely already be over.  Which is worse; 18 months of an unabated natural correction, with high unemployment, bank failures and forclosures; or the same exact end results over 10 years?

I'd rather take rip off the band-aid fast.

I completely agree.

So markets vary, and different industries correct in different ways on different timelines.  That does not alter the overall results.

Neither does the CPI, or even GPD for that matter.  Human minds require looking a small slices of representative data at a time, which is why we depend upon statistics to begin with.

Yes, but it seems very clear to me that the new money injected by the Fed is not going to go to blow another bubble in the typical way, but rather concentrate in the most needed products: food, commodities, energy, etc... So its my opinion that the bubbled industries (mainly housing) is going to keep going down in price for a while, but the basic stuff like food or energy is going to go ballistic. The UK government is studying what would happen if the price of oil goes ballistic like it happen in the 70's:http://www.telegraph.co.uk/news/newstopics/politics/liberaldemocrats/8016774/Liberal-Democrat-Conference-Oil-price-could-double-in-return-to-1970s-style-shocks.html

Keep in mind that I am saying that prices will go up, but the economy will not recover. Unemployment will be still high.

That may yet be, but it still looks like this is running more like 1932 than 1978 to me.

We will have to wait and see.

[redengin]

I still trust that having come this far, the Fed will persevere and maintain order.

Mmmmm, are you a CNBC comentator?   

Can you be a bit more specific on the exact options and actions that the Fed could take to remove the money that sits as excess reserves in the banks? Also, do you believe that the treasury will be able to finance itself without the support from the Fed?

Btw, let me remind you again that Bernanke when starting QE1 said that it would remove the liquidity. Less than a month ago announced that it would use the money its getting from the maturing MBS into buying more treasuries, and has been doing so. So basically he is not removing the money.

Also, in the Jackson Hole meeting, Bernanke basically assured that QE2 will be a reality, or at least that is what everybody understood.

I think there is still a chance, albeit getting smaller as time goes on, that the Fed will be able to sell treasuries to mop up the excess reserves.  It does appear that the banks still have quite a way to go with the new worries about credit unions.  Until confidence returns, the liquidity is necessary to keep the economy moving.  As certainty in the US's economic future returns, US investment should increase, and allow the Fed to act in kind to remove the excess reserves.

[S3052]

the fed will never be able to get out if this.

we will first see massive deflation and depression, much worse than in the 1920's

[kiba]

the fed will never be able to get out if this.

we will first see massive deflation and depression, much worse than in the 1920's

Sound like a prediction that can be set to the test.  All it need is the date of happening and specific level of unemployment rates, amongst other things.

A reminder that I should continue and make progress everyday.

[S3052]

exactly! i will be one of the first with this prediction.

1) timing of stock market low
2) DJI in nominal points at the low
3) unemployment rate in June 2016

[MoonShadow]

exactly! i will be one of the first with this prediction.

1) timing of stock market low
2) DJI in nominal points at the low
3) unemployment rate in June 2016

This is risky, but I'm willing to give #1 a shot, the other two are beyond unpredictable.


I say the stock market low for this cycle will either be in October 2010, or the low for October will be within 5% of the cycle low whenever that occurs. 

Considering the recent rally, this may seem absurd, but hear me out.

The second October following a new presidency is traditionally the market low month, as politics always affects the market, the 'honeymoon' period is over, and tensions are highest leading into the mid-term elections.  After the election, the near term future tends to look more clear regardless of the outcome, and uncertainty is always bad for stocks.  Add that to the overall state of the market, and if next month isn't the worst, it'll still be bad for those currently still in the market. 

Of course, it could also be a 'fire sale' for those who got out years ago and have the capital to jump back in.

[Anonymous]

I predict Obama wont run for president again and Hillary Clinton will take over.

Thats one scary woman.....

[BrightAnarchist]

exactly! i will be one of the first with this prediction.

1) timing of stock market low
2) DJI in nominal points at the low
3) unemployment rate in June 2016

1) 2015 ~ 2016
2) < 3,000
3) > 20%

[MoonShadow]

I predict Obama wont run for president again and Hillary Clinton will take over.

Thats one scary woman.....

That's not as far-fetched as it seems.  It wouldn't be the first time that the incumbent president was defeated in his party's primary.

[MoonShadow]

exactly! i will be one of the first with this prediction.

1) timing of stock market low
2) DJI in nominal points at the low
3) unemployment rate in June 2016

1) 2015 ~ 2016
2) < 3,000
3) > 20%

It won't happen that way, because if #3 happens, there will be a revolution.  The Hamptons will burn and there won't be a Dow Jones Index to report.

Who is John Galt?

[Anonymous]

I predict Obama wont run for president again and Hillary Clinton will take over.

Thats one scary woman.....

That's not as far-fetched as it seems.  It wouldn't be the first time that the incumbent president was defeated in his party's primary.

That and Obama's wife doesnt like being first lady -he might not even get to the primaries 

[hugolp]

You definitively either work at CNBC or watch too much CNBC.

I think there is still a chance, albeit getting smaller as time goes on, that the Fed will be able to sell treasuries to mop up the excess reserves.

Treasuries are only selling now because the Fed is buying some (POMO) and people are frontrunning the Federal Reserve who has guaranteed another big intervention in the future. But this is a short time trade, very profitable but short term. Once the Fed has done its second big intervention the game is over. If the Fed does not support the Treasury then the interests that it will have to pay for the debt will be mean default for the government. In this scenario do you really think the Fed will stop buying treasuries, and even start selling them? And even if it did so, how much is the Fed going to get from a junk government bond?

It does appear that the banks still have quite a way to go with the new worries about credit unions. Until confidence returns, the liquidity is necessary to keep the economy moving.  As certainty in the US's economic future returns, US investment should increase, and allow the Fed to act in kind to remove the excess reserves.

What good does JPM, GS or CityGroup do to the economy? They are horrible capital allocators as proven by the crisis. You dont want to get this economy artificially alive. You want the bad companies to go under, so new and efficient ones can prosper. You have to think that the USA was living a bubbled economy not a sustainable one. Returning to a bubbled economy is not the objective.

By saving the banks and trying to save all the zombie companies (f.e.: GM) the government has turned what could have been a one-two year recession into a long depression.

[hugolp]

This is risky, but I'm willing to give #1 a shot, the other two are beyond unpredictable.


I say the stock market low for this cycle will either be in October 2010, or the low for October will be within 5% of the cycle low whenever that occurs. 

Considering the recent rally, this may seem absurd, but hear me out.

The second October following a new presidency is traditionally the market low month, as politics always affects the market, the 'honeymoon' period is over, and tensions are highest leading into the mid-term elections.  After the election, the near term future tends to look more clear regardless of the outcome, and uncertainty is always bad for stocks.  Add that to the overall state of the market, and if next month isn't the worst, it'll still be bad for those currently still in the market. 

Of course, it could also be a 'fire sale' for those who got out years ago and have the capital to jump back in.

I agree with this. All the GDP forecasts are going down. The USA will show a weak GDP. Ireland just announced a -1.2% GDP. All european advanced indicators are showing a decline. This is actually good for the economy because it means that the inefficient industry from the bubble is disappearing, but in the short run its going to hurt. The stock market is disconnected from reality because of all the liquidity, but its not going to get away from this. Then at some point Bernanke will appear with QE2 and more monetization and then stagflation will start.