at the peak of the 2008 bubble securitization fx'd almost like money but this has not been the case since the financial crisis. this is where inflationists miss the deflationary argument. they think these bad debts still represent liquid money and not debt.
Aside from this beginning of the paragraph, I agree. The deflationary argument isn't missed, it's just based on different assumptions. When assuming that the debt will be discharged at a loss, I arrive at the same conclusion you do.
Bad debt doesn't represent liquid
money, no. It is just locked-up and unable to be either redeemed or made use of. The debt hasn't vanished: it's still tied to assets by the respective creditors and debtors; the creditor has been swapped out for another in the case of the Fed. It can't
be made to disappear unless the Fed were to take all of the write-downs - forgive all the debt it's acquired. That would do a lot of damage, if not destroy the institution and economy in general. Or, the debt needs to be replaced with a liquid form of money.
Maybe we should offer our definitions of bad debt so we can be sure we're on the same page. My understanding of bad debt is simply a contractual agreement in which at least one party is not able to or is unwilling to meet the obligations to the other party or parties. Can it get more legalese?
There is a difference between debt that is simply extended credit which can be withdrawn, and debt that is effectively monetized by market actions. The Fed's printing is really just a formality, so it doesn't matter whether it continues or not (although pressure will persist for it to proceed).
no idea what you're talking about here.
The bad debt as money notion. Since the bad stuff is already out there and completely gumming up the works, the options for the economy are: die now (deflation) or die later (inflation, then deflation). The "formality" is that the Fed is only going through the motions of what it's officially supposed to do - dead man walking.
no its not if i understand you correctly here. you're claiming existing debt is equal to money. this is wrong. during the good times debt instruments were so liquid they were almost considered like cash; no more. the debt has become bad debt which is now defaulting and decreasing the virtual USD supply and thus the total amount of USD's in the system thus driving up its value.
If the debt is written off there are still assets that were associated with the debt, no? What happens to them? Is the creditor or debtor helped or harmed; was the debt "good" or "bad" from the creditor's perspective, or the debtor's? When does the transition from "good" debt to "bad" debt make that same debt disappear? Bankruptcy proceedings? What is the actual destruction process? If you can explain your understanding of the mechanism for this, I'd greatly appreciate it. As far as I see now, there is no pause or reset button for this game and the line between a mere asset and money remains blurred.
What's being described is like putting piles of cash into a safe and forgetting the combination to open it. It's no longer liquid but it's still there, you just can't get to it. Now what? Some form of common money is needed to keep the show going, pay the bills. Who would believe you
when you tell them you locked your money in your own safe and can't get to it? (US to China: sorry, we can't pay because, uh...) You'll come off as either foolish, stupid or a liar. (War?) Wouldn't it be easier to duplicate the money that's locked up to act as a replacement until the safe can be opened? (Everything's fiiiiine, really! Nothing to see here, it's all good, we swear on the Founding Fathers! Just give us another month or twenty!)
Now that both sides (creditors and debtors) involved with the debt that's been tied up are in a frozen position (creditors receiving income & debtors using credit lines), they'll need liquid assets to keep going. How much will they need? Well, how much was held in reserve (if any), what's the minimum to maintain solvency and how much was the debt worth? Be honest - $700 billion, $2 trillion, $1.4 quadrillion? Ok, now can both sides survive a resonable time before reality sets in?
Repeat that situation millions of times, at all scales. Everything is already broken, the Fed is just handing out the playbill. It comes with a complimentary $1 billion for those who can afford seats to begin with.
Almost forgot the kicker: what happens when the safe is re-opened? Are the safe owners richer, or is it just an illusion? I think in percentages.
perhaps the Fed regarded this as a small price to pay to reinflate the markets. doesn't mean they are linear thinkers as well. at this point they see the danger in letting it ramp to $2000 or higher.
these crises are occurring b/c of constant Fed intervention causing boom bust cycles by suspending the business cycle.
So there wasn't danger in allowing gold to rise past $500/oz? $1,000/oz? $1,600? What happens when $2,000 is broken? Will the Fed see danger in allowing the price to go past $2,500 or $3,000? What I'm getting at is: at what point does the Fed finally decide, enough is enough?
If the Fed intervening is causing these boom/bust cycles, do you think it stands to reason that the problem might grow so great that the Fed can't manage the problem? When will the Fed get out of the way and allow the business cycle to right itself? Is that even possible now, or will the whole system snap in two?
my OP and this entire thread has been clear where i stand. deflation, the end of the gold bull and a generational rise in the USD.
I was thinking more about the next two months, but that works. So a gradual or rapid decline in gold from here with a corresponding lift-off in USD?
the contraction in the shadow banking system of securitized debt argues against those same securities effectively acting as money. they're contracting from defaults:
The chart shows securitized debt is contracting while traditional forms of debt are rising. The "bad" debt doesn't just disappear - the valuation is reallocated, often losing some of its attributed value along the way, but certainly not all of it.
Another issue is how these "defaults" are occurring. Where has it been stated that the debt is being defaulted on? Use of that term is dangerous; likely to cause a cascading panic among counterparties. Is the bad debt really being defaulted on through bankruptcy and write-offs, or simply being reclassified? Either way, the debt still doesn't just disappear. If it's an accounting change, then nothing has really
Even in the case of bankruptcy and write-offs, the asset and/or debt involved reverts to one party. For the loser, it's like having grown and learned how to use a sixth finger, then being forced to cut it off because someone else wants it for skin grafting after his face was blown off when he lit a firework. Default causes some loss of value, but there is still a shift in asset allocation (again, assets don't disappear as if via magic) that proves detrimental overall.
I think I've beaten a dead horse enough for now. There are more immediate developments to pay attention to at the moment:
Persuant to the physical gold premium issue
discussed earlier: $17 gold and $2.48 silver premiums in China
. Spread far enough, the paper/physical connection fully severs and the banks lose all
control. Demand must be alleviated in the short term.
One last point - has anyone been paying attention to the Japanese Yen
? The final round may be in the chamber. Bernanke's playbook reads: kick USD up, smack gold down, announce terrible news that reverses those positions.
Bitcoin should also do well if there's more inflation in store...