Monetary flat-spin... Denninger

[Bigmack]

Comments???
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"Uh oh.. Monetary Flat Spin"



"The problem with an M1 multiplier below one is that the effect of printing money is of course multiplied by the velocity. That is, if you print up $10 into the economy the impact it has on economic activity depends on how many times that $10 circulates in a given amount of time. The more it circulates the higher the impact and the more your efforts do for the economy.

The bad news is that when the multiplier is less than one the more money you spew into the economy the worse the impact, as you get less for each additional dollar."

"What is the right thing? Paradoxially, it is to withdraw liquidity and by doing so force the bad debt into the open where it does (and must) default.

How far can the above ratio contract before we cross an "event horizon" from which there is no escape?

I don't know.

But I do know that there is a "too late" point, as there is for all such things, and that we are approaching it, as I have been saying for months.

BTW, evidence that Bernanke's Monetary Flat Spin is already impacting the economy in ways that may do critical (if not fatal) damage was found this morning in the Case-Schiller numbers. Everyone, including Bernanke, was expecting the rate of home price declines to start to slow in the second half of the year. Instead, they accelerated.

We're in uncharted territory folks, and the forecast is for dark-and-stinky storms.

Buckle up."

http://market-ticker.denninger.net/archives/703-Uh-Oh.....-Monetary-Flat-Spin.html

[notesdev]

1. Bernanke and Paulson

were told they were headed in the wrong direction.

So they consulted a map, and charted a course straight off a cliff.

When do the responsible adults step in and stop this madness?

[GliderGuider]

2. Bang on

As I have said for more than a year the only way out is to force the bad debt out into the open and default it. Yes, this will produce bankruptcies - lots of them, including some for "inconvenient" people like Paulson's buddies on Wall Street.

But until and unless that happens adding more debt to the system depresses the multiplier effect of that debt on circulation further, and harms, rather than helps the situation.

Dragging all those toxic assets out into the light of day and revaluing them is the only true solution to the crisis. Unfortunately, with over half a quadrillion dollars in toxic assets, the 99% devaluation that is probably called for would ruin the world economy for a period of time. While that period of time might be short in geologic terms, on a human scale it's probably much too long for comfort.

[marketcrazy1]

3. Bang on

I enjoy reading your posts, you obviously "get it" unlike many less informed posters ( the information is available IF you bother to LOOK and I have been looking for the last year and a half and what I see scares the shit out of me! ). I have seen you mention derivatives before and you seem to concentrate on the TOTAL market of 680 trillion (approximate) worldwide. in the post above you mention half a "quadrillion" dollars in toxic assets, I am sure you are using this number as a HOOK to get peoples attention ( god knows we need to wake up! ) as you must realize this figure represents "notional value" and not total risk (loss) exposure. less than 10 percent of this market is composed of CDS (credit default swaps) with the lions share ( 66+ percent ) being made up of IRS contracts. the total loss exposure in the CDS realm is probably something like .8 to 1.5 percent (best case) or as high as 5 to 7 percent (worse case)( my best guess is somewhere in the middle, 2.5 to 3.5 percent ) these loss levels should be manageable ( if counter parties are solvent ) I agree that this un regulated market is at the root of our problems, but how do we fix it?, bring them onto a regulated exchange? unwind and eliminate them entirely? neither of these remedies would be without risk ( to world wide financial markets ). what would you suggest??

[GliderGuider]

6. Thanks, but all I'm still feeling my way where derivatives are concerned.

Since I expect accelerating global cascades of insolvency over the next two to ten years, I'm fully prepared to believe loss exposures at the upper end of the range. Unfortunately, I don't know enough about IRS operation and risks to say how much clear and present danger they represent. From 50,000 feet, though, I'd expect that a Chapter 7 (or the national equivalent) by one party to a swap would damage the other as well, so total a loss of 20% ($100 trillion) over the next few years wouldn't surprise me. If it was spread over 5 years, the loss of $20 trillion per year approaches a third of the global GDP. Who knows what the knock-on effects of something like that would be? I'm sure Bernanke and Paulson don't know, and I sure as hell don't, but the scale of the risk we're confronting truly beggars the imagination. The potential losses are well beyond the point where even nationalizing entire economies would help.

Business as usual is a guaranteed calamity, so since both approaches (regulate or unwind) present risk, you pick the one that's has the best chance of being an actual long-term cure. IMO that would be to drag the whole mess out into the sun and let it rot in the open air. Attempting regulation leaves a manipulable system in place, and simply re-exposes humanity to the same risk further down the line.

[unlawflcombatnt]

7. Hmmm

Dragging the toxic assets out into the open and letting them collapse would only hurt the people that own toxic assets. The rest of us who don't, would have greatly increased buying power from the deflation thus caused. Our real wages would increase, even without any increase in our current-dollar wages.

Those who were responsible, and own only solid assets, would see their real wealth increase, as the fake wealth of the toxic assets dissipated.

The price of assets like gold might not go up--and might even go down--but the real purchasing power would go up.

I agree with Denninger. The fake wealth from the toxic assets assets needs to be exposed and destroyed. It never existed in the in the first place -- except in the delusional minds of its holders.

[Hawkowl]

4. Excellent post!

This is the first discussion of monetary velocity I've seen in regards to the current crisis. It is another way to observe the liquidity crisis which is simply a name for a crisis in confidence (thus the archaic term for recesseion was "panic"). Simply pumping up M1 is analogous to giving someone aspirin to keep a fever down while the infection still running rampant. Bernake have been trying to treat a symptom instead of the cause. What we need to do is perform a radical surgery and lance the boil or amputate the infection. These toxic assets have to be brought out into the light, written off, and the rich that caused this mess have to be taken down and regulation restored. Until that happens we continue deepening this Bush Depression.

[Danascot]

5. More from Denninger:

File this under 'Why am I not surprised?'

"Now let's talk about what else happened Mr. Paulson.

In 2000 you do recall that you went to the SEC and Congress to request that the leverage limits that bound Goldman Sachs (your company) and the other investment banks be removed, right?

You also remember that in 2004, following that failed attempt, you tried again, and this time your request was granted, right?

You do recall that every one of the failed firms - Lehman, Bear, Fannie, Freddie and AIG - all had leverage more than double that of the previous limits when they blew up, right?

Again, you said:

Spain and the UK were much more like the US with housing being the biggest bubble.

Yes Mr. Paulson, and what do you need to create a speculative investment bubble?

Why you need lots of credit - that is, debt, right?

And how do you get lots of credit Mr. Paulson?

Why you increase your leverage. And when 14:1 isn't enough, you go to Congress and the SEC and ask them to remove the "shackles" so that your "finely tuned risk models" can take on more leverage - that is more debt, which is a necessary condition to grow such a bubble.

So now we get to the bottom of this entire charade by your own admission, which is that you personally were largely responsible for the mess we find ourselves in."

http://market-ticker.denninger.net/archives/706-Get-The-Rubber-Room-Ready-Paulson.html