Posts Tagged ‘mish’

Audio: Inflation or Deflation?

2009, March 4
From CommodityWatch on August 24th, 2008 (In association with Minesite. com), presented by Dominic Frisby:
Inflation or Deflation? Part 1
James Turk of Goldmoney;
Mish Shedlock of Global Economic Analysis;
and Michael Hampton of Global Edge Investors.
From CommodityWatch on September 1st, 2008 (In association with Minesite. com), presented by Dominic Frisby:
Inflation or Deflation? Part 2
Bob Hoye of Institutional Advisors;
Dr Marc Faber of GloomBoomDoom.

H/T to Mike Shedlock.

Total Fiat Money (& Credit) Deflation Model – Mish

2009, February 22

Mike “Mish” Shedlock (Sitka Pacific), Global Economic Trend Analysis:

I don’t agree with some of his attitudes – for example: “Fiat Money” is backed not by a physical commodity, but by trust – one of the most precious forms of social capital, foundational to all human relationships and behaviour. “My word is my bond” is not backed by a physical commodity, but by trust – that hardly means it’s not worth anything. The fact that the States of Weimar and Zimbabwe betrayed that pooled trust, is symptomatic of a complete bankruptcy (literal and figurative) of trust and the social contract or order in those states. A kind of bizarro mirror-image is Kim Jing Il’s refusal to let his subjects use “fiat” (or any other) money until recently – a totalitarian, sociopathic Scrooge McDuck’s hoarding of all trust and exchange to himself.

I think that money is a measure, a bit like inches – a meter would still be a meter even if that rod in Paris was not there to physically back it. Money is a relative measure of all other goods that operates more like a daily index or telephone exchange that transmits messages. I can see how the system can be rigged and devalued, but don’t see that it’s value needs to derive from only one physical good.

The attraction I see with gold is that it has no counterparty risk: it’s unforgeable and limited, though fungible, so the social value derives from the trust itself derived from gold always being gold, and being limited as is trust, but also being transferable and dividable.

But I think the following is a really clear and succinct summary of what is happening – something absolutely missing from all the talking heads. He puts into relatively rigorous and logical terms that metaphor of the growing pile of money the banks are storing in case they need to plug those growing “black holes” of collapsing credit. It is also a useful way to navigate all the different definitions of inflation and deflation, and their resultingly different conclusions, I think:

Fiat World Mathematical Model

Fm = Fb + MV(Fc)

Fm = Fiat Money Total
Fb = Fiat Monetary Base
Fc = Fiat Credit, the amount of credit on the balances sheets of institutions in excess of Fb

MV(Fc) is the market value Fc

Inflation is an expansion of Fm
Deflation is a contraction of Fm

If only base money was lent out (no fractional reserve lending), MV(Fc) would equal zero. The equation ensures we do not double count credit in Fm.

MV is a function of time preference and credit sentiment (ie. Belief that one can be paid back). As long as that belief was high, banks were willing to lend.

Because (at the moment) Fc (credit) dwarfs Fb (base money), the system can only hold together as long as there is belief credit can be paid back and as long as there are not defaults. Needless to say, the perceived belief that Fc can be paid back is under attack, both by rising defaults, and by sentiment. That is why MV(Fc) is collapsing.

In other words, the mark to market value of credit is contracting faster than base money is rising.

See also:

“M Prime” (M’) – Mike “Mish” Shedlock

2009, February 18

TMS: A Truer Money Supply?

M Prime

Using Shostak’s definition and with much charting help from Bart at Now and Futures, I came up with M Prime (M’), arguably what TMS is supposed to be. For more details on the origin of M’, please see Money Supply and Recessions.

M Prime 1968 To Present

M' (M Prime) 1968-2008, with percentage changes

M' (M Prime) 1968-2008, with percentage changes

M’ dips below 2.5% or so are a strong signal of recession.

M Prime vs. TMS

As for measuring inflation or deflation, I do not think any of them will suffice for the simple reason that credit marked to market is plunging and that is the way things need to be looked at. Unfortunately, there is no accurate measure of the plunge in credit because financial institutions are not marking credit to market. Instead much credit is still in SIVs and/or hidden in Level 3 (marked to fantasy) assets.

… That is on top of the distortion I mentioned earlier in that M3 and MZM are expanding because credit lines are being tapped and parked in money market funds.

Judging from collapsing real estate, people walking away from homes, risk aversion sinking in, and banks unwillingness to lend, together with the idea that credit that should be marked to market isn’t, I believe we are in deflation, right here right now. Those focused on M3 or energy and food prices are truly missing the boat. Trillions of dollars of destruction in housing wealth (with much more coming) and another trillion markdown in bank credit coming (on top of what we have already seen) are far more important and far more representative of the state of affairs than is M3, or any other monetary aggregate for that matter.

M' (M Prime) versus TMS, 1968-2008

M' (M Prime) versus TMS, 1968-2008

Is Big Inflation Coming?

…a perfect 15 out of 15 conditions experienced in the great depression are happening today as discussed in Humpty Dumpty On Inflation.

Of course Humpty Dumpty can and does pretend that deflation is specifically about money supply, totally ignoring credit. And those same Humpty Dumpties were amazed by the collapse in commodities and were crushed shorting treasuries because they did not see this coming.