DOOOOOM! Oh wait, Nevermind. We're fine. You're still doomed though.

December 13, 2007 11:42 PM

Some see an economic apocalypse. Others see an err.. economic apocalypse. But have no fear! A solution is at hand.

Step 1 : Print up a lot of money. Auction it.

Step 2: Take whatever people have lying around for collateral.

Step 3. Make sure not to mention of what happens if you default. Make it anonymous.

Tada! The banks are saved!

Note - Not an economist but I found all of these to be interesting. Feel free to tear it apart and explain how this is misinterpreted.

posted by Lord_Pall (61 comments total)

Oh yeah. If it's to bloggy, just nuke it.
posted by Lord_Pall at 11:47 PM on December 13, 2007

There are a number of people commenting on this latest move by the Fed. Start at Tyler Cowen's post at Marginal Revolution and go from there.
posted by suckerpunch at 12:02 AM on December 14, 2007

Is this where I link to the "Gold is Money" message board and other lightly wacky gold-is-the-only-real money and OMG-The-Federal-Reserve-is-actually-a-private-entity-and-it's-run-by-satan/the jews (depending on which kind of ass-hat is writing) types?

From the very little I've read about the very latest round of financial mayhem (specifically banks not loaning to one another), it strikes me that the fed is doing well at trying to resolve a real clusterfuck. They have, that is, stopped digging.
posted by From Bklyn at 12:29 AM on December 14, 2007

Freaky Harrison Ford meets Donald Trump looking Peter Brimelow is going to haunt my nightmares.
posted by These Premises Are Alarmed at 2:44 AM on December 14, 2007 [2 favorites]

There was an excellent article on the co-ordinated liquidity provision by Martin Wolf in the FT this week. He concludes that it's a start, but more needs to be done.
posted by patricio at 2:44 AM on December 14, 2007

From Bklyn, the Fed CAUSED the clusterfuck. The fact that they're trying to do more of the same thing that made us sick in the first place -- print too goddamn much money to try to insulate us from the reality of a strongly deflationary global environment -- doesn't make them heroes.
posted by Malor at 3:16 AM on December 14, 2007

it's possible i'm misunderstanding this, but doesn't it work something like this?

the fed cuts interest rates, but there's a catch - it's too hard to find anyone who will loan you the money based on that rate (or that rate plus X)

but the fed can make money available at an auction and the rate (and that rate plux X) will be determined by the bidders

in short, "you can't have the cheap money, but you can have this money - and if the interest rates go up, we didn't raise them, the markets/banks did"

very slick
posted by pyramid termite at 3:22 AM on December 14, 2007

Again: this is just more of the same medicine that made us sick. You cannot ever ever ever print your way to prosperity. It doesn't work. It feels like it works for awhile, as it did all through the 90s and 2000s, but eventually, the real bill will be paid. The economy gets the wrong signals, builds the wrong things, and then when reality does strike home, there's hell to pay.

We were able to get away with it for so long because we originally were the wealthiest country in the world when we started this process (where wealth is defined primarily as manufacturing capacity, access to resources, and knowledge), so we were able to abuse our currency for a long time before things finally blew up irrevocably. By 2001, the game was mostly up. but then the Japanese and Chinese stepped in to prop up our currency and keep the game going. Had they not done so, things would already be very bad.

Economic apocalyse is pretty damn close to the reality of what's happening. The Fed is no fucking hero. Greenspan almost singlehandedly ruined the economy. It'll take us a generation at least to recover from his mismanagement.

We're starting to find that out now. Economics is SLOW.
posted by Malor at 3:22 AM on December 14, 2007 [1 favorite]

Malor - (and I say this respectfully, having read a bunch of your posts in previous economic-meltdown threads) - Go blow it out yer... just kidding.

Yes, but as I understand it they aren't just printing money, but re-assessing the way it is then distributed, (1.)

(2.) It was Greenspan's Fed that brought us here, it's Bernanke's mess to clean up and as I, in my grotesquely limited way, understand it, he's taking some not-stupid, responsible steps. (I don't think they can just stop 'printing money' one day to the next, and my understanding is that they are trying to slow down the 'printing of money' without creaming the economy in the process. Especially tricky since Greenspan floated the economy from one bubble to the next - the last and most irresponsible one being the free 'printing of money' which has led to this current imbroglio. I could be wrong, but I think that's the gist of it.)

(3.) from the FT article patricio linked: "There is no risk of contributing to moral hazard, that is, rewarding past reckless lending or borrowing behaviour by banks and other financial intermediaries, as long as the collateral offered in the repos is valued properly and subject to appropriate haircuts. " OK, so maybe trading beauty secrets for bad loans isn't the smartest economic strategy, but it might be a little better than what was posing for financial leadership of past Fed leaders.
posted by From Bklyn at 3:28 AM on December 14, 2007

Sometime in 2008...

Bernanke takes the stage. There is a maniacal gleam in his eye, a fifth of rotgut in his hand. He taps the microphone. Takes a swig. Clears his throat.

"Fuck this shit," he says, "gentlemen. The base rate. The capital auctions. It's not enough. It's not enough. I must have more."

The whine of an Army chopper catches the attention of those in attendance. A photographer in the second row glances up in time to see a bale of small bills plummeting toward him. On impact, he dies instantly. A reporter for the FT screams.

Bernanke is unperturbed. "I'm not getting through. And so," another swig, "I'm here today to announce our new initiative. We're gonna cut to the chase, this time. The banks had their chance. Airdrops in ever major city." He reaches down, pulls out a half-dozen wrapped packets of bills and tosses them into the audience. Another bale hits. To the rapidly-dwindling crowd:

"New York. LA. Chicago. Atlanta. I've had enough," his voice rising, "of these fucking bankers. I'm taking it to the streets. In the next 24 hours, we'll be distributing n billion dollars straight to the bloodstream." He catches himself. "With an eye toward any inflationary tendencies as stipulated by our legislative mandate, of course. And, uh, the, uh, moral hazard."

Only a few members of the press remain, cowering under makeshift shelters as the hail of FRNs continues.

"I've got them on triple-time over at the Mint. The world has never seen," he raises his bottle in a toast, "a more efficient operation for the printing of money. And get this," he chortles, "I'm paying these guys," and drains the bottle in one swift motion, "in dollars!" He chucks the bottle over his shoulder and doubles over laughing, and laughing, and laughing.
posted by enn at 3:51 AM on December 14, 2007 [20 favorites]

> we'll be distributing n billion dollars straight to the bloodstream.

Well, finally. If they had just had the sense to pay me to drive off with a U-Haul full of money a few years back I would certainly have plowed it all back into the economy by now. But then I would have bought gold, ammo, and dried food, which is probably not what they had in mind--not much multiplier effect there. (fuller puts on goat-hair robe and sandals, picks up "Repent, the End is near" sign. Been carrying this thing around since February third of nineteen hundred and sixty two, that's 16751 days. No, 16750 days, today isn't over yet. Bound to get a winner one day.)
posted by jfuller at 4:32 AM on December 14, 2007

A summary from The Economist.

Is this a subsidy for banks? Are these loans at risk if everyone has things they have to write down on their balance sheets?
posted by sien at 4:52 AM on December 14, 2007

Malor: The key to this intervention is, as mentioned in the Economist article above, that "there will be no net addition of liquidity"
posted by patricio at 5:03 AM on December 14, 2007

Here's another Librul-running dog (look at the linked site!) giving his self-important two cents about this whole dollar fiasco. (Actually, more about the dollar and less about the banking mess specifically, but still a good read.) Paul Craig Roberts
posted by From Bklyn at 5:16 AM on December 14, 2007

Face it. If you're anywhere in the middle-class or lower, you're boned. You are going to be hung-out to dry. What we're seeing is the beginning of the very rich and powerful scrambling to protect their own asses.

Wall Street stamping its feet like a spoiled child because it didn't get everything it wanted (as if rates could ever be low enough to please them) Maybe someone should take a 2x4 to Wall Street's collective head and "suggest" to them that they're as much to blame for the mess as is Fed policy. Perhaps more so.
posted by Thorzdad at 5:24 AM on December 14, 2007

There is no risk of contributing to moral hazard, as long as the collateral offered in the repos is valued properly and subject to appropriate haircuts.

"Even as some banks have said that the value of their CDO portfolios is unknowable and the ratings agencies have been mercilessly—if belatedly—downgrading formerly highly rated debt securities, the Federal Reserve has announced it will pay 85 cents on the dollar for CDOs with no market price available. That sounds like a pretty sweet deal in today’s markets."
posted by sfenders at 6:25 AM on December 14, 2007

The hope is that by extending the maturity of central-bank money, broadening the range of collateral against which banks can borrow and shifting from direct lending to an auction, the central bankers will bring down spreads in the one- and three-month money markets. There will be no net addition of liquidity.

This is a blatant contradiction, within the same paragraph, even. Didn't this guy even read what he just wrote? If new kinds of collateral can be used to used to get loans from the Fed -- i.e., creating money -- then OF COURSE there's an increase in liquidity, duh.

There's also the problem that 'money' has morphed into something quite different than it used to be, aided and abetted by the Fed. We have the old standards of M0, 1, 2, and 3, but modern financial instruments could easily be classed as M4 or M5, and the Fed has completely missed the ball on this.

As I've said before, when asset prices soared to 100, and then collapsed to a more reasonable, but still silly, average level of 40 -- the Fed didn't try to figure out how things got so crazy. Instead, they have focused solely on getting those prices back to 100 again.

It's economic engineering, central control, and it has no place in a 'free market' system. Central planning didn't work for the Politburo, and it's not going to work for us either.

On preview: sfenders, that 85 cent offer is a pretty sweet deal, and it's among the worst ideas I've ever heard. The Fed is willing to do ANYTHING to prop up the system, including monetizing bad loans, which means the dollar is doomed.

We've entered a whole new era of fiscal irresponsibility, people.
posted by Malor at 6:35 AM on December 14, 2007

Sigh. "used to used to" shouldn't have repeated. I'm annoyed and not proofing carefully.
posted by Malor at 6:39 AM on December 14, 2007

In case you're wondering, Schultz is up 21.42% over the past 12 months according to the Hulbert Financial Digest, vs. 7.51% for the dividend-reinvested Dow Jones Wilshire 5000.

That's not hard to do with international stocks these days. The Chinese ETF FXI is up like 57% over the past year
posted by delmoi at 6:46 AM on December 14, 2007

Two interesting statements from the FT article:

Massive losses have been incurred on a wide range of asset-backed securities (not only subprime mortgage-backed (RMBS)) that have not yet been recognised by the owners of these assets, revealed and reflected in balance sheets and profit and loss accounts. Hundreds of billions of US dollars worth of capital losses are still ‘missing in action’...The failure of too many banks to come clean about their losses is acting like a prohibitive tax on new lending.

Which seems to indicate that what we have here is a situation where trust has completely disappeared from the banking market. A kind of paranoid 'pass the parcel' until one or more banks own up and confess to holding the ticking bomb.

Second:

There is no moral hazards as long as central banks provide the liquidity against properly priced collateral, which is in addition subject to the usual 'liquidity haircuts' on this fair valuation.

Well isn't that the whole point of this auction? That the central banks will accept dodgy collateral in order to prop things up? Which sounds to me like there is definitely a huge 'moral hazard' and the inefficient banks are going to reap the rewards.

It seems as though Peter Eavis in Fortune has the same feeling:

The potentially dangerous aspect of the TAF is that it will allow banks with problems to borrow their way out of trouble, rather than by taking measures like issuing large amounts of stock to bolster their balance sheets. Struggling banks are struggling chiefly because they were mismanaged and wrote too many risky loans when credit was cheap. The TAF potentially gives mismanaged banks even more cheap credit, which will delay a much-needed restructuring of the banking sector. Nervousness about banks could then deepen, leading to even fewer loans being made.
posted by Duug at 6:59 AM on December 14, 2007

The central banks are all taking these kind of moves and it's possible that the Euro might take more of the hit than the USD in the next leg, given the lofty levels where it's been. The market started to take on the reality of that in the middle of last month -- when the Euro flirted with $1.50 -- and the Euro has now fallen by a meaningful amount. At this point, a $1.25 Euro looks at least as likely to me me as $1.60 Euro.

What may ultimately save the dollar is the PPI and CPI. For all its lamentable bidability, the Fed recognizes that fighting inflation is its more important mission when it comes down to a choice between stimulus and inflation.
posted by MattD at 7:11 AM on December 14, 2007

As I've said before, when asset prices soared to 100, and then collapsed to a more reasonable, but still silly, average level of 40 -- the Fed didn't try to figure out how things got so crazy. Instead, they have focused solely on getting those prices back to 100 again.

It's economic engineering, central control, and it has no place in a 'free market' system. Central planning didn't work for the Politburo, and it's not going to work for us either.

But it's been working extremely well for the Chinese. It's also not anything different what the U.S. has been doing for the past 70/80 years or whatever, during which our GDP has grown... what like a hundred fold? (At least the dow has gone up that much)

These crazy pronunciations of doom and gloom just don't seem that credible, especially given how many cranks seem to think they're economic experts.
posted by delmoi at 7:15 AM on December 14, 2007

But it's been working extremely well for the Chinese.

deciding to make whatever foreigners want them to make is not central planning

It's also not anything different what the U.S. has been doing for the past 70/80 years or whatever, during which our GDP has grown... what like a hundred fold? (At least the dow has gone up that much)

1) 80 years ago it was 1927

2) inflation can make anything grow a hundred fold
posted by pyramid termite at 7:24 AM on December 14, 2007

Even as a simple panda, I'm still really interested in what this specific development could mean. After following all these links and even this thread, I still don't get it. Anyone have any pointers to something written in english?

As far as I can tell, the FED is gonna auction of multi-billion dollar blocks of.... what exactly? Is it just cash from the reserves? And if so, how is that not super-inflationary?

NOT ECONOMIST
posted by butterstick at 7:26 AM on December 14, 2007 [1 favorite]

Folks, the long and short of the whole situation is this: we are not in a liquidity crisis, we are in the midst of a balance of accounts crisis, or more succintly put: we owe more than we make and the debt has become overwhelming.

In essence, Wall Street has created a lot of creative methods for hiding debt and for making debt look like an asset/capital/etc. They've found ways, similar to Enron, for shifting this debt around like the proverbial hot potato. So long as nobody called to cash in on it, there was no problem.

However, today the situation is that the people offering the capital are getting spooked and are cutting back on lending. Much of this lending is short term lending for 30 days or less. Federal banks are trying to offer cash to lubricate these markets and entice the banks to loan money. These short term loans are the backbone of the economy (small business owner gets paid from his clients on the 30th of the month, but needs cash on the 15th to make payroll: takes a short term loan to cover payroll. Standard Operating Procedure).

If these short term loans seize up and banks balk at making them, the economy freezes up.

Basically, financial institutions over extended themselves and owe far, far, far more than they will recoup. Especially in the mortgage business (a bubble that formed after the .dot com bubble in 2000).

On a somewhat unrelated note, there are arguments that the modern American economy, which has moved away from manufacturing, can only sustain itself by creating new asset bubbles (S&Ls, internet, housing, hell, tulips....).

Anyhow, just keep one thing in mind: if you owe more than you make, one day the lender will call for his money back. You best have it on hand.
posted by tgrundke at 7:46 AM on December 14, 2007

It's not from reserves, it's magic money created out of thin air. In exchange for providing the valuable service of typing in all those zeroes, they charge interest. In essence, they get to extract a tithe on that money simply by creating it, at no cost to them. They're the bank that can't go broke, because anytime they need money, they create it.

By auctioning the money, they're doing it more as an open market thing, but I don't see it as being substantially different than the old way. The old way was, "The money is 5.25%, and we'll provide X amount of it." Now it's "The money is available to whoever bids highest, and we'll make X available." But they'll be able to control the interest rate by how big X is.

I think it may be an excuse to flood the market with insane amounts of liquidity, while preserving a mask of responsibility and fiscal discipline.

Again, this is exactly what got us in such deep trouble. We've had countless shocks over the last twenty years, and each time, the Fed has ALWAYS printed money to smooth things out. They never let the economy underneath adjust to anything. Now it's getting to the point of outright collapse, and they're still doing more of the same old thing, the same medicine that made us sick originally.

We have to take our lumps. The longer we delay taking them, the worse they will be. The fallout will already be the worst catastrophe in living memory; if they continue down this reckless path, it will probably destroy the entire world economy.

That'll take a number of years, but endless streams of magic money from nothing really fuck up an economy. We SHOULD already be learning this, but it doesn't appear that we have anyone with a clue at the helm.
posted by Malor at 7:53 AM on December 14, 2007

And yet, as this whole situation has unfolded, Goldman Sachs has stated unequivocally that it will not write down any investment it has in SIVs or other goofy mortgage-based securities.

The story here is this: traders wanted the Fed to cut 50 bps on Tuesday because that would have triggered a rally. Doing so would have created additional inflation which traders like because it also inflates stock prices. But they won't tell you this. So instead they come up with a convoluted story about how the Fed is too academic or asleep at the switch, and how business are going to fail, people are going to lost houses, etc.

But the reality is that "the people" are walking away from their mortgages and renting. They aren't homeless. Mortgage companies might go out of business, but nothing the fed can do will stop this because the housing market is simply slower than it was at the peak of activity. If all these companies were needed to service the overheated housing market, then logically fewer companies are needed to service a normal market.

The Fed cares about one thing - inflation. Cutting rates generates economic activity by making money cheaper, and cheap money requires more money to by things of a given value, i.e. cheap money = inflation.

On Wednesday we learned that, surprise! the system is inflating. Producer prices rose faster than they have in 34 years. 34 years ago was 1973. Anyone want to return to the halcyon days of 1973?

The mechanism described in the post is a way for the Fed to get cheap money to firms that desperately need it without cheapening the money for everybody. Furthermore they are coordinating these efforts with banks worldwide so that they don't crush the dollar. They dollar is holding up, and in fact has appreciated since this was announced on Wednesday.

Inflation is a big problem, the Fed sees it, and is trying to mitigate a bad situation that it caused under different leadership. Commodity prices are stratospheric and have been all year, and it's only because of China's rough peg to the dollar that most Americans haven't seen the inflation yet.

I have felt all along that oil was and is the proxy floating Chinese currency. You can't bid up their currency, so you bid up the common underlying production input that has powered their economic growth. So here we are at $100 oil. I also suspect that as China starts to grate on world economics - product quality and safety issues, lack of environmental policy, exporting of local jobs to china, etc - we are going to lose that component of oil prices that relates to China speculation, so it wouldn't surprise me if oil comes down 20%. But the real demand for it is there, so unless some magic technology comes online, or the dollar appreciates significantly in the short term I don't think we are ever going to see $30 oil again.

I think the Fed knows this, and is desperately trying to keep the economy chugging along in 2008 now by cutting rates so that it can start to raise them a year from now to fight inflation.
posted by Pastabagel at 7:57 AM on December 14, 2007

deciding to make whatever foreigners want them to make is not central planning

That doesn't even make sense. How is it not central planning if the central governments gets together and "decides" this. And I suppose you might be 'coalescing' the millions of individual decisions that are made to pursue this into one 'decision' but if so how is that refuting what I said? If the execution of the decision is driven by central planning, then it's centrally planned.

Compare the situation in China to the situation in India, a country with much more freedom, and not nearly the same kind of manufacturing capabilities. If it was based entirely on "the market" then why wouldn't manufacturing in India have done as well as in China?

Anyway, the free market can't create things like Shenzhen in 30 years.

2) inflation can make anything grow a hundred fold

Huh? U.S inflation since 1936 has been 14 fold, not 100 fold. Are you seriously saying the US economy is the same size it was in the 1920s and 1930s? Seriously?

The point is, Malor was saying "central planning" fails even though the U.S. has been doing what he considers central planning for a long time. The Federal Reserve opened in 1913. There have been downs, but over time things have gone well. (and by the way, are you also saying that the U.S. economy is more centrally planned then China's?)

And anyway, these economic doomsaying articles tend to bring out people who tend to throw out terminology as if they were experts talking to other experts, but in a seemingly arbitrary way. It seems more like they're just spouting clichés they hear on crank blogs.
posted by delmoi at 7:59 AM on December 14, 2007 [1 favorite]

I don't know about the rest of you, but I'm not worried because the National Review says everything is just fine!
posted by The Card Cheat at 8:06 AM on December 14, 2007

Anyway, the free market can't create things like Shenzhen in 30 years.

No, but it did create Silicon Valley. The undecided question is which is more valuable.
posted by Pastabagel at 8:07 AM on December 14, 2007

That doesn't even make sense. How is it not central planning if the central governments gets together and "decides" this.

there's too much individual initiative going on in china right now for it to be called "central planning"

Huh? U.S inflation since 1936 has been 14 fold, not 100 fold.

"It's also not anything different what the U.S. has been doing for the past 70/80 years or whatever, during which our GDP has grown... what like a hundred fold?"

can't you make up your mind?
posted by pyramid termite at 8:20 AM on December 14, 2007

delmoi, they didn't really start the central planning stuff until Black Tuesday in the Reagan administration. At that point, they built the Plunge Protection Team, to keep the stock market from doing things they didn't like. When Greenspan took over, he essentially decreed that there were only two acceptable economic outcomes; boom and less boom.

Booms are terrible for an economy, because they result in mismanagement, waste, and outright fraud. We've been in boom-and-less-boom mode, without a really serious recession, for just about 25 years. As a result, the economy is a real mess, incredibly fat and lazy, and with very little ability to generate real wealth. (primarily, physical things that can be sold to other people, but also knowledge and entertainment... we're doing well in entertainment, but Hollywood can't hold up the whole country's economy.)

The particular mess we're in now is the debt-and-real estate bubble popping. This was caused by the Fed desperately trying to avoid the fallout from the LAST bubble, the stock market. But you can't dodge the consequences of bubbles; if you try, you just make things worse. To try to prevent the fallout from a nuclear weapon, the Fed set off two fusion bombs directly underneath, and now we are really fucked.

The stock market fallout would have been painful but survivable. I'm not sanguine about our odds of extricating ourselves now. We've just taken too much damage.

The primary responsibility of a central banker, before anything else, is to prevent bubbles, because they're so incredibly dangerous. Our Fed has actively created them.

Oh, and Pastabagel, you seem to have faith that Ben is somehow different than Alan, you keep insisting that it's "different management". Get real. He's called Helicopter Ben because he seriously and literally said that the Fed should drop dollars from helicopters to prevent deflation.

That is almost exactly what he's doing now. But he's doing it for the benefit of the banks and Wall Street. You... well, you he's bending over the counter and getting the broomstick ready. No kiss, no lube.
posted by Malor at 8:22 AM on December 14, 2007

China, btw, is in trouble too. They have imported our inflation; as we have printed massive amounts of money, they've sopped up a lot of it, selling their own currency to buy it. All that yuan creation means that the banks have big deposits, meaning they can make even larger loans. This has helped to drive their enormous expansion, one of the biggest in history. That's not a boom, that's a bubble.

Even ordinary booms are bad, not good. You want steady, slow growth, with occasional recessions as things readjust. China is likely to find itself in a fairly hard way eventually, because of all the fraud, waste, and corruption that will need to be cleaned up from their bubble, an echo of ours.

That said, however, they have a ton of manufacturing capacity, and that will give them more power over their fate than we'll have.
posted by Malor at 8:45 AM on December 14, 2007

Malor is dead right about needing to take our lumps now. The longer we delay, the more prolonged and stagnant the economy will become (malaise). See for example Japan from roughly 1990 to the present day....
posted by tgrundke at 9:47 AM on December 14, 2007

So, Malor and Pastabagel and everyone else, what does this all mean for us as individuals? Is there anything we can do to protect ourselves besides the obvious (save money, get out of debt, keep a diverse portfolio)? Beyond the OMG SEL ALL OF YOUR MONEYS AND BUY GOLD!!!1!! approach, is there anything regular middle class people should be doing? Or should we just stock up on suicide pills "just in case?"
posted by infinitywaltz at 10:21 AM on December 14, 2007

infinity, you needed to be getting ready for this for years, basically. Specific advice is hard to give, because it's still not entirely clear whether will we have a debt deflation, profound inflation, or something between the two. I'm personally betting on inflation, but the continued dislocation in the derivatives markets makes me wonder very strongly if I have that right. A true crisis of confidence -- if everyone decides at once that the bullshit derivatives really are bullshit -- could easily overwhelm any ability of the Fed to monetize things. But they're showing they're willing to go to remarkable lengths to keep traction (they're trying to avoid the 'pushing on a string' effect of the 1930s), so it's a matter of whether their ingenuity and willingness to destroy the dollar to save moneyed interests can outpace those interests' desire to protect themselves.

As a first step, I'd say maintaining some cash balances in multiple currencies would be a good idea, with the bulk of your holdings in commodities of various sorts. We're probably at an interim peak right now, so it's probably not the best time to buy right this second, but if you see any real serious drop in commodity pricing, you might want to pick some up.

My overall belief is that if the Fed _really wants_ to destroy the dollar, they'll figure out how. But it could get tricky.

You might want to read iTulip for some good advice. They've been consistently ahead of the curve. The last time I mentioned them, Pastabagel sneered pretty thoroughly, but so far, they've gotten it very right, where Pastabagel -- hasn't.

Their model is what they call their 'Ka-POOM!' theory -- the Ka is a short time of sharp deflation, lasting a year or so, and then a wild inflationary POOM! after that.
posted by Malor at 11:35 AM on December 14, 2007

Malor I'm taking all your advice. I'm doing exactly what you say. If it doesn't work out, and my children starve and we have to eat our dog, I'm hunting you down with a chainsaw and vengeance in my heart.


And not a moments inrospection that I was a jackass to listen to someone on the internet over my own native common sense...
posted by From Bklyn at 12:32 PM on December 14, 2007

"It's also not anything different what the U.S. has been doing for the past 70/80 years or whatever, during which our GDP has grown... what like a hundred fold?"--delmoi

can't you make up your mind?

I can. Read what I wrote again and when you figure out what I was actually saying, and why it's not contradictory, let me know.

Booms are terrible for an economy, because they result in mismanagement, waste, and outright fraud. We've been in boom-and-less-boom mode, without a really serious recession, for just about 25 years. As a result, the economy is a real mess, incredibly fat and lazy, and with very little ability to generate real wealth. (primarily, physical things that can be sold to other people, but also knowledge and entertainment... we're doing well in entertainment, but Hollywood can't… bla bla bla

Malor, without citations these types of statements might as well be line noise. I mean, you're taking a hundreds of million multi-agent system and talking about it as if it was a car with a low coolant level. For example, when you say that we've lost our ability to generate real wealth, well, how much wealth, in dollars or euros or whatever, can we actually generate today? I mean can you give me a real number? A number with a confidence interval? How does that compare to the situation in 1980? You say our economy is "lazy" Well, how lazy? How do you measure that? Your comments in this thread amount to a long stream of baseless opinions. It's actually quite aggravating. Just give me one real measure to back up what you've been saying. How much wealth are we able to create each year, including intangibles? How does this compare with 1980?

The stock market fallout would have been painful but survivable. I'm not sanguine about our odds of extricating ourselves now. We've just taken too much damage.

Like, what does that even mean? Do you think we'll all starve to death, or what?

No, but it did create Silicon Valley. The undecided question is which is more valuable. -- Pastabagel

Have you heard of this thing called the "Military Industrial Complex"? Silicon Valley didn't start out making iPods. Obviously Silicon Valley grew in a much more organic way then Shenzhen (and it's simply an extension to a huge, already existing city, whereas Shenzhen is completely new)
posted by delmoi at 12:41 PM on December 14, 2007 [1 favorite]

LOL, Bklyn. Honestly, I hope I'm dead wrong, and that they can hold it together. This is a lot like telling a spouse that they're going to have a heart attack if they keep eating fries. Even if you take out a ton of life insurance, that doesn't mean you actually want them to have a heart attack.

I've been talking about this for at least eight years, to the point of completely pissing off all my friends and family members... they thought I was a nutjob for the longest time.

They're not thinking that so much anymore, but in this case, turning out to be a crackpot would be a better outcome than actually being right. So far, it's looking just as dismal as I thought it would be. Actually worse in many respects; it's happening much faster and much more thoroughly than I expected. Things are BAD in the world of high finance.

On preview: delmoi, I've been accumulating this stuff for years, and I haven't been very active on research for quite some time, so I no longer have active links easily available. But if you've been paying attention, you know that a huge chunk of our manufacturing jobs have gone overseas. That's the real source of wealth -- manufacturing. To a lesser degree, intangible knowledge can certainly be wealth, but we're not all that great at creating that either anymore, with our schools in total failure in many places in the country.

I don't have the numbers you want handy, and I don't have time to go find them now. But look it up for yourself... a very large fraction of the economy has turned into services. Most services don't create wealth directly, they just make wealth creation more efficient. Without the actual underlying creation power, the improved efficiency doesn't matter much.

Basically: we get rich making Edsels, not cutting each others' hair. We've become a nation of hairdressers, while most of the Edsel-building has gone to China. The Federal government is fifty trillion dollars in debt per the GAO, debt we can't possibly service over the long term. We have the mountains of consumer debt as well, all the weird derivative structures piled on top of THAT, and drastically impaired manufacturing capability to generate wealth to pay for everything.

This stuff is all easy to find, you just have to do a little searching.
posted by Malor at 12:59 PM on December 14, 2007

I can. Read what I wrote again

"It's also not anything different what the U.S. has been doing for the past 70/80 years or whatever, during which our GDP has grown... what like a hundred fold?"

it's wrong

Malor, without citations these types of statements might as well be line noise.

by an odd coincidence, my irony meter just blew and line noise is all i'm getting from it

you don't know what you're talking about
posted by pyramid termite at 1:17 PM on December 14, 2007

My favorite Harbinger of Doom is the Bush administrations mathematical tap dance on inflation. So laughably transparent you can almost hear the sound of Cheney stomping his suitcases of Swiss Francs closed before they ship on the midnight flight to Switzerland.
posted by tkchrist at 2:18 PM on December 14, 2007

you don't know what you're talking about

Let me go over this slowly:

1) When I make statements about things I know, I don't put questions marks at the end of them.

2) The chart you linked too was inflation adjusted, and shows an increase by a factor of 12.77.

3) Inflation over that timespan was a factor of 11.02.

4) 12.77*11.02 = 140

5) Therefore the contemporary dollar value of the GDP increased 140 times in the period covered in the data you linked too.

Now my original "like 100 times" remark was not meant to be inflation adjusted, so it's actually pretty close. It was meant to be an order of magnitude estimate. Now you said inflation can make "anything" grow 100 times, I pointed out that inflation was much less then that, and couldn't account for the 100x figure. And that's still correct, and you're still wrong about that.

I see when you said I was "confused" you might have meant that my "100x" figure was illusory because it didn't figure in inflation, and that's a reasonable point, but you didn't actually say that, so how else could I respond? For all I know, you really did believe that the inflation rate was 100x since 1936. When you don't actually explain why you think people are wrong, it's not very credible.

On preview: delmoi, I've been accumulating this stuff for years, and I haven't been very active on research for quite some time, so I no longer have active links easily available. But if you've been paying attention, you know that a huge chunk of our manufacturing jobs have gone overseas.

Well, that's debatable. But, OMG meta filter has already taken away so much wealth from my employer today already...

. The Federal government is fifty trillion dollars in debt per the GAO, debt we can't possibly service over the long term.

We don't have 50 trillion dollars in interest baring debt, rather, our social security and Medicare expenditures are expected to over-run their income. However, those are not real debt obligations, and the government can get out of them or raise the money by changing the laws. In the case of Social Security, the probably can be fixed almost entirely by removing the eligible wage cap, or even just raising taxes a bit.

And here's the cute part, Social Security payouts are indexed by inflation, so if the fed drops the value of the dollar, the SSA has to increase Social Security checks by the same amount. At least based on the current law. Which obviously can change.
posted by delmoi at 2:22 PM on December 14, 2007

I hate to tell you guys but Malor is probably about 70% right. Our major export in the US has been pictures of dead presidents... and they ain't worth SHIT anymore and they are going to be worth less by EOY 2008. Very bad things are going to happen eventually. Likely sooner than later.

Thank GOD, based on the sound advice of my financial person, I converted everything to Euro based funds in 2000. (Right before I saw that Bush was going to be elected.) Anybody who still had 401k's or money-markets with ties to US dollars after 2001 was just not paying attention. You are fucked.
posted by tkchrist at 2:24 PM on December 14, 2007

My favorite Harbinger of Doom is the Bush administrations mathematical tap dance on inflation. So laughably transparent you can almost hear the sound of Cheney stomping his suitcases of Swiss Francs closed before they ship on the midnight flight to Switzerland.

Switzerland? Try Paraguay.
posted by delmoi at 2:26 PM on December 14, 2007

Switzerland? Try Paraguay.

Wow. That's a good idea. I was thinking in the mountains Oaxaca.

But Paraguay probably has no shortage of AK47s and goons for hire that work cheap. A guy could really throw his weight around.
posted by tkchrist at 2:32 PM on December 14, 2007

Let me go over this slowly:

i'll go over it fast - you're wrong

all the double talk in the world doesn't hide that your sloppy writing was caused by sloppy thinking - gnp did NOT increase a hundredfold

it takes a unique sort of nerve to criticize me for a casual statement based on YOUR figures

if i'm wrong, you're wrong

period
posted by pyramid termite at 2:46 PM on December 14, 2007

OK, this is my last input on a subject about which I know absolutely nothing (always a dangerous sign, eh?) I've just had dinner with a very good friend of mine who's a very senior guy in a very prominent financial institution at the heart of all this stuff (albeit he's based in Europe). Malor is right I'm afraid. It's bad. Very bad. They don't know exactly how bad, which I suppose is part of the problem. Horse's mouth I'm afraid.
posted by Duug at 3:27 PM on December 14, 2007

Wow, this thread got kind of unpleasant, yuck.

You two are arguing about definitions; you're both correct.

It's interesting to note, however, that a 12x increase in 80 years is only about a 3.2% real growth rate. All the rest of the claimed growth has been sucked up by the invisible tax of inflation.... and most of the growth of the last 10-12 years has been built on false principles, and is likely to be destroyed in the upcoming economic pain.

Offhand, I'd say fiat currency has done us no favors.
posted by Malor at 5:01 PM on December 14, 2007

Does anyone ever factor in North Korea's "Superbills" and the endless money the CIA throws into the world underground? I should think the US dollar is significantly diluted just by the actions of those two groups, let alone the missing billions in Iraq.
posted by five fresh fish at 6:38 PM on December 14, 2007

pyramid termite:

Well, I could have been clear about whether or not I was talking about inflation adjusted figures or not. But there is a difference between imprecise language and being incorrect. And on top of that I made it clear that I wasn't sure about the figure by phrasing it as a question

it takes a unique sort of nerve to criticize me for a casual statement based on YOUR figures

I didn't do anything of the sort. You said inflation could cause something to increase a hundredfold in 80 years, which is 1) Totally wrong, and 2) Implies you understood that I was talking about non-inflation adjusted values in the first place (after all, it makes no sense to talk about inflation if you thought I was talking inflation adjusted values).

In fact, this last complaint implies you still don't understand the difference between growth and inflation, because I gave a growth figure, and you seemed to think it was an inflation figure. Then later when I gave an inflation figure, you thought it contradicted my statement about growth. It seems like the person with the sloppy thinking here is you, really. But it's not actually possible to tell, because you're not actually saying what you think.

I'm sorry you're having trouble dealing with your error, but I'm tired of snaky criticisms from people who don't know what they're talking about. If you going to disagree, do it politely in the first place. That way, I won't have to point out explicitly how mistaken you actually are.

It's interesting to note, however, that a 12x increase in 80 years is only about a 3.2% real growth rate. All the rest of the claimed growth has been sucked up by the invisible tax of inflation.... and most of the growth of the last 10-12 years has been built on false principles, and is likely to be destroyed in the upcoming economic pain.

Malor, I was going to ask you what your actual prediction would be. One thing that bugs me about these dire predictions is that the predictors never actually say what will happen, just that it will be bad. But if this comment is right you think that the last 10 years of economic progress is going to be erased. What indicators would you use here? The stock market? (Dow at 7k?) The GDP ($8T)?

I would be curious if you could put a dollar figure on the upcoming catastrophe, or even a range of probable values, over a range of dates for the catastrophe.
posted by delmoi at 7:35 PM on December 14, 2007

a few billions is nothing

don't ask me how that 270 TRILLION dollars (in 2005) gets settled or how much of it is real - i haven't got the faintest idea
posted by pyramid termite at 7:36 PM on December 14, 2007

Well, I could have been clear

even better, you could spare us your ego filled endless rants

*plonk*
posted by pyramid termite at 7:42 PM on December 14, 2007

Delmoi, you're asking something of me that nobody can provide. I can tell you with absolute certainty that it will be terrible, and that the longer we try to put off the crunch, the worse it will be, but I can't tell you exactly what will happen. Neither can real professional economists. Economics is called the dismal science for a reason... it's nearly impossible to make more than very general predictions.

In general, wealth generated during bubbles is illusory and disappears after the bubble pops; the economy shrinks to a smaller point than before the start of the bubble. But that's assuming a reasonably stable currency, with a central bank that's trying to protect it, rather than the current Fed that's actively promoting this impossibly stupid derivative system, and deliberately inflating multiple bubbles at the same time.

There has never, in the history of the world, been a maladjustment so enormous, and thus the consequences are likely to take us into entirely uncharted territory. Nobody, nobody ANYWHERE, can give you very firm figures... but from the very big picture, we're likely to drop back to 1996 economic levels at the very least. Worst case is a slow, near-total disintegration of the world economy.

They can hide these adjustments to some degree with big inflation, but the economy can only be manipulated for so long before it starts to blow up. Economies are always unstable, and always trying to correct, but given sufficient monetary impulse, can be bent way out of shape for a long time. But that builds enormous pressure, and eventually, something gives... and when the economy does come back, it wildly overcorrects the other way.

My working assumption is that we'll end up in something like the 1970s stagflation, but far, far worse. I really fear what could happen in this country in a dire inflation like Zimbabwe's.
posted by Malor at 10:24 PM on December 14, 2007

Boy, wouldn't it be cool to be President for the next four/eight years?
posted by From Bklyn at 11:34 PM on December 14, 2007

Delmoi, you're asking something of me that nobody can provide. I can tell you with absolute certainty that it will be terrible

But what even counts as "terrible"? When you say it will be terrible, you're not making an actual statement, it's just a qualitative thing. That's the worst part of the whole doomsaying thing, no testable prediction. Any downturn can be described as "terrible."

So what's the cutoff? When does a meerly annoying situation become "terrible"? how do you measure that? Unemployment numbers? Real Wages? the value of the dollar? Number of Foreclosures? There has to be some measurable indicator, and there must be some threshold that you consider "terrible".

In other words, how would be know if something is "terrible" or not? What has to happen for you to be proven incorrect?

--

even better, you could spare us your ego filled endless rants

*yawn* Please be more creative.

*plonk*

So is that like the internet equivalent of saying "ICE BURN" or "ZING" After an insult?
posted by delmoi at 1:09 AM on December 15, 2007

Plonk used to be 'the sound of being killfiled', but since MeFi doesn't offer that, it's kind of... um, well, weird to post it here.

As far as 'terrible'... I mean economic catastrophe, something on the order of the Great Depression. I can't be more specific than that, because how things play out is almost entirely dependent on the actions of a few intelligent entities with a lot of power near the center. The best outcome would be a crushing deflation and something very much like the Great Depression. That's the BEST outcome. The scenarios where they deliberately try to inflate their way out of the problem end up looking, at best, like like a huge version of the 1970s that lasts for a generation or more. At worst, it'll look like the Weimar Republic.

How can this prediction be falsified? If, in ten years, you're not very aware of profound economic problems affecting the entire country, if it's not the central issue that everyone is thinking about, then I was wrong. Other specific predictions: the 'subprime' problems will spread and spread and spread, you'll start to hear 'subprime contagion', if you aren't already. The subprime market is just the biggest example of a really bad idea, derivatives, and there's lot more of them out there. You will hear many many many different explanations about what's wrong, as people all try to grasp the issues from their piece of the economy. Few of them will be correct: the true problem is that the Fed provided too much liquidity and failed to understand that the new financial instruments being created acted as money. They ignored, even encouraged, multiple bubbles. THAT is the core problem, and the other things you will hear are all echoes, symptoms caused by that central problem... too much liquidity in a form the Fed didn't understand, and didn't care to understand.

If the Fed can hold it together, then things will quiet down for another year or two, but you'll become aware of strong inflation in the things you buy yourself. If they can't hold it together, then you will probably see deflation instead. The straight-and-narrow path could still happen, but it's gradually getting narrower and narrower, and we WILL eventually fall off it one direction or another. The economic structures we've built are not stable, and require constant central management to stay even remotely viable.
posted by Malor at 4:22 AM on December 15, 2007

To butt in - let's be clear, Zimbabwe style inflation would be terrible, 30's style depression with 25% unemployment would be terrible. These are the concerns the doom sayers are worried about.
Malor and I disagree about fiat money, with his view being you can't trust the money printers to be responsible, so the only alternative is commodity (read gold) backed currency.
That said, Malor has been consistent in his concerns, and so far his concern has been justified. The money printers (the Fed Reserve in the USA) have been irresponsible, visibly from the spike in inflation seen last week.
The idea that the Fed will accept leaky SIVs and other CDOs at 85% book price is frightening. These derivatives are *clearly* suffering a major correction, offering to back them in this fashion postpones or removes the real reassessment of values, and will ultimately place significant downward pressure on the US dollar.
A significantly falling US dollar will hurt most of the world, but Americans particularly. Probably it will intensify what is looking like a pretty serious recession.
posted by bystander at 4:35 AM on December 15, 2007

As for people asking what to do in layman's terms. Nobody can be sure.
As was mentioned up thread, it could all break up to inflation, hopefully not a barrow load of bills for a loaf of bread, but certainly lots of pain if you are a retiree living off investments or a home owner with an adjustable rate mortgage (but not as bad if you are fixed).
Or it could break into deflation, with a contracting economy as nobody buys stuff because it will be cheaper in a few months. This bad because you will lose your job.
Ideally, you will use this window to get ahead of debt, pay a few extra months off your mortgage, close out some credit cards, both prudent strategies no matter what happens.
If you have a substantial retirement account definitely diversify if it is all in US equities, my own is 1/3 fixed interest, 1/3 equities and 1/3 international equities (with a bit of commercial property as well).
If you are close to retirement I would be looking at no equities and a mix of global bonds - why? - well if it does unravel the equities market will drop like a stone, and your cash based investments will hold enough value in the face of inflation to buy back in when equity prices are much lower.
If you are 22yro living paycheck to paycheck for god's sake save up some cash to cover you if you do lose your job and nobody is hiring - make sure you can pay your bills for a few months, or at least those bills you can't eliminate immediately if you become unemployed.
My own bet is it will fall to inflation, based on the US Fed desire to print more money so houses stay worth $500,000 even if a Toyota starts to cost $200,000. Even if I am wrong it is easier to move from an inflation stance (for me, a fixed mortgage and no other debt) to deflation (refinance lower) than trying to go the other way if I am wrong.
posted by bystander at 4:51 AM on December 15, 2007

My prediction is that this will be about as bad as the dot.com colapse. I.E. bad for people in the industry, and annoying (I guess). I suppose if you had a huge portfolio, it would suck, but for most Americans who don't have big investments it's not going to be a big deal.
posted by delmoi at 9:32 PM on December 15, 2007

Beyond the OMG SEL ALL OF YOUR MONEYS AND BUY GOLD!!!1!! approach, is there anything regular middle class people should be doing?

Uh, sure.

OMGSEL ALL UR MONEYS AN BUY EUROS/PANDAS/MAPLE LEEVES.

If your assets are pegged to the Dollar, you are an optimist and/or an idiot. But don't bother buying gold. Maybe if this were, say, a couple of years ago, or even one year ago and you had taken my advice, you'd be sittin' pretty right now. But now all the suckers are jumping ship and the boats gettin' ready to sink.

That last link's a great one, by the way. Languagehat got all in my ass for recommending that someone not buy a house in the Tuscon, AZ market last year! I loves me the smell of egg on face.
posted by Civil_Disobedient at 4:40 AM on December 16, 2007

My prediction is that this will be about as bad as the dot.com colapse.

Another optimist.
posted by Civil_Disobedient at 4:40 AM on December 16, 2007