$this->bbcode_second_pass_quote('firestarter', 'W')hen you made the loan that $300,000 was, roughly, the equivalent of a small yacht, or a (very) fancy car. In a deflationary environment the banker gets as much of your money as he can, and then he also gets the house! You lose big, but does he lose? Well, not really. He started with an asset (money) that was roughly the utility value of the home, and he ended up with the home itself, which has the same utility value. Further, the money he gets before you default goes up in value, as premium comes out of hard assets.
--snip-- So exactly what is all this "poppycock talk" about helicopters and such?...
PeakOil is You
THE Deflation Thread (merged)
Re: Why bankers will CHOOSE deflation
by Iaato » Sun 10 Aug 2008, 15:16:56
While I agree with you that we will end up with a few omnipotent banks out of all of this, no matter the course, Dante is right that this thing is full of holes. The main one is the idea that hyperinflation occurs primarily through direct handouts to middle class America. Hyperinflation is going to occur through bailouts to banks. Banks will receive treasuries in exchange for their worthless paper and so will remain solvent. The value of houses will depreciate and houses as assets will either be retained by the banks or nationalized. Token amounts will be given directly to the people as a sop and as a backdoor wage inflation. The "captains of finance" will get richer, while the middle class lose their jobs and their houses and descends into poverty. Eventually everyone who does not hold real assets will suffer as hyperinflation takes hold.
I do not know what Mr. Denninger means by "[banks] can force hyperinflation." What bankers fear the most is extinction. Inflation is an insidious slippery slope. No one wants hyperinflation, but you get there incrementally through the growth of the fiat reserve system. It eventually goes exponential.
“Paper money eventually returns to its intrinsic value ---- zero.” --Voltaire
-
Iaato - Heavy Crude
- Posts: 1008
- Joined: Mon 12 Mar 2007, 03:00:00
- Location: As close as I can get to the beginning of the pipe.
Re: Why bankers will CHOOSE deflation
by Twilight » Sun 10 Aug 2008, 19:58:25
We will see.
As far as interests go, I think he is correct. Naturally banks prefer gradual inflation to hyperinflation. Chaos in your neighbourhood is bad for business. Money men need some excitement to make anything but outright instability is not in their interest at all.
Another reason to allow deflation to run its course is countries are more easily controllable in that state. In the energy-related crises to come, I expect to see much prescriptive mitigation. Command-industrial public works such as those pursued in the US and in Germany during their attempts to recover from economic collapse in the 30s are difficult in a hyperinflationary environment. It represents defeat, one way or another it leads to disorder and loss of power. If you see hyperinflation, it means you screwed up whatever you were trying to do.
That does not mean people will not screw up. Inevitably somewhere they will. But you could be looking at failed states there. I doubt the US will make all the mistakes that lead down that road. There is a country and a society to remake, and that is not going to be sacrificed in favour of everyone getting the right nominal sum in the correct column.
As far as interests go, I think he is correct. Naturally banks prefer gradual inflation to hyperinflation. Chaos in your neighbourhood is bad for business. Money men need some excitement to make anything but outright instability is not in their interest at all.
Another reason to allow deflation to run its course is countries are more easily controllable in that state. In the energy-related crises to come, I expect to see much prescriptive mitigation. Command-industrial public works such as those pursued in the US and in Germany during their attempts to recover from economic collapse in the 30s are difficult in a hyperinflationary environment. It represents defeat, one way or another it leads to disorder and loss of power. If you see hyperinflation, it means you screwed up whatever you were trying to do.
That does not mean people will not screw up. Inevitably somewhere they will. But you could be looking at failed states there. I doubt the US will make all the mistakes that lead down that road. There is a country and a society to remake, and that is not going to be sacrificed in favour of everyone getting the right nominal sum in the correct column.
- Twilight
- Expert
- Posts: 3027
- Joined: Fri 02 Mar 2007, 04:00:00
Re: Why bankers will CHOOSE deflation
by Roccland » Sun 10 Aug 2008, 20:10:38
I am not sure how anyone can take Karl serious about anything he says when his answer to declining net available energy is his VW veggie mobile.
Really - he has ZERO concept of PO or other peak energy issues.
Really - he has ZERO concept of PO or other peak energy issues.
500 MPH into a brick wall - me
-
Roccland - Heavy Crude
- Posts: 1604
- Joined: Sat 16 Jun 2007, 03:00:00
Re: Why bankers will CHOOSE deflation
by Iaato » Sun 10 Aug 2008, 20:16:18
$this->bbcode_second_pass_quote('Twilight', 'A')nother reason to allow deflation to run its course is countries are more easily controllable in that state. In the energy-related crises to come, I expect to see much prescriptive mitigation. Command-industrial public works such as those pursued in the US and in Germany during their attempts to recover from economic collapse in the 30s are difficult in a hyperinflationary environment. It represents defeat, one way or another it leads to disorder and loss of power. If you see hyperinflation, it means you screwed up whatever you were trying to do.
The error that the deflationists make is that the decision-making is based on politics and situational reactions to problem after problem. The decision-making is not based on logic or what is best for the country.
Bear Stearns looks like it's going bankrupt, and we can't have that because then JPM would have to mark its $92 trillion in worthless derivatives to market. So we bail them out by issuing IOU bonds in exchange for deals and bad paper. Things don't get better, and then the biggest GSEs in the country look like they're going belly-up, and we can't have that because then this, that and the other would collapse. So we write open-ended promises to bailout and/or nationalize half of the country's mortgages. Each time things get worse, the ante goes up, and the bailouts accelerate. The numbers start to look kind of small. The final coup de grace comes when all of the USD that have left the country in financial games come flooding back through SWF and other mechanisms. The minute that happens, the simmering inflation boils up out of control into hyperinflation.
The idea that taking our medicine and allowing the failed financial edifices to collapse is an idea based on logical, long-range strategic planning. The decision-making that inevitably leads governments in control of fiat to develop hyperinflation is short-term crisis intervention based on the politics of the entities have allowed themselves to overexpand into dangerous territory and need rescuing. Decisions made in crisis are emotional short-term thinking based on personal threat and are oriented towards self-protection and an attempt to maintain control and power. These are almost never good decisions by definition.
“Paper money eventually returns to its intrinsic value ---- zero.” --Voltaire
-
Iaato - Heavy Crude
- Posts: 1008
- Joined: Mon 12 Mar 2007, 03:00:00
- Location: As close as I can get to the beginning of the pipe.
Re: Why bankers will CHOOSE deflation
by CrudeAwakening » Sun 10 Aug 2008, 20:59:24
So...on the basis of self-interest:
Banks want deflation?
Governments want inflation?
Is the tail wagging the dog, or the dog wagging the tail? Whose interest wins out?
But anyway, deflation is not necessarily good for banks. They earn their interest income via controlled inflation. They don't really want you to repay your loan, they want you to pay interest in perpetuity as long as they can continue to book your promise to repay principal as an asset.
Deflation makes loans harder to repay in real terms, increasing defaults, reducing the value of loan collateral, and adversely affecting bank equity.
I think both banks and government generally desire a small amount of inflation. After all, together they are an inflation-creating unit.
Banks want deflation?
Governments want inflation?
Is the tail wagging the dog, or the dog wagging the tail? Whose interest wins out?
But anyway, deflation is not necessarily good for banks. They earn their interest income via controlled inflation. They don't really want you to repay your loan, they want you to pay interest in perpetuity as long as they can continue to book your promise to repay principal as an asset.
Deflation makes loans harder to repay in real terms, increasing defaults, reducing the value of loan collateral, and adversely affecting bank equity.
I think both banks and government generally desire a small amount of inflation. After all, together they are an inflation-creating unit.
"Who knows what the Second Law of Thermodynamics will be like in a hundred years?" - Economist speaking during planning for World Population Conference in early 1970s
-
CrudeAwakening - Tar Sands
- Posts: 834
- Joined: Tue 28 Jun 2005, 03:00:00
Re: Why bankers will CHOOSE deflation
by Twilight » Sun 10 Aug 2008, 22:30:37
$this->bbcode_second_pass_quote('Iaato', 'T')he idea that taking our medicine and allowing the failed financial edifices to collapse is an idea based on logical, long-range strategic planning. The decision-making that inevitably leads governments in control of fiat to develop hyperinflation is short-term crisis intervention based on the politics of the entities have allowed themselves to overexpand into dangerous territory and need rescuing. Decisions made in crisis are emotional short-term thinking based on personal threat and are oriented towards self-protection and an attempt to maintain control and power. These are almost never good decisions by definition.
I agree, but these decisions are made one by one and the outcome becomes more clear the closer one approaches. I doubt the US will make that final irrevocable decision to hyperinflate. More likely they will get close to the point of no return and say "sod this" (or whatever it is you say) and stand back as the collapse proceeds in the other direction. Thereby giving themselves a future. To hyperinflate is to guarantee that someone else picks up the pieces.
$this->bbcode_second_pass_quote('CrudeAwakening', 'I') think both banks and government generally desire a small amount of inflation. After all, together they are an inflation-creating unit.
And they will get it. Deflation is a relatively brief correction before normal service resumes. They are not signing up to it in perpetuity. Only a few years in a century.
- Twilight
- Expert
- Posts: 3027
- Joined: Fri 02 Mar 2007, 04:00:00
