Category: Primers

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The Future Belongs to the Adaptable

As our readers know, we do not provide investment advice. We do not exist to help people make money in the markets, but to help them avoid losing what they have in a deflationary crisis, at a time when almost everyone will lose a great deal. Our position is that being in cash on the sidelines is by far the safest option at this point, and where most people would be better off by far. Those who are still in the markets are playing a very dangerous game. Many of them know this perfectly well, but they can’t walk away from the casino. The upside is limited, possibly very limited, and the risks are steadily increasing.

Stock market bubbles (and housing bubbles etc) are ponzi schemes. As with all ponzi schemes, only a few manage to cash out, and the majority are those who do so early. Those who do not cash out become the designated empty bag holders, but that empty bag can look awfully attractive at a market top. Trying to catch the top tick, and wring every last ounce of profit out of a collapsing system, is foolish. Most investors who play that game are likely to lose badly. Continue reading “The Future Belongs to the Adaptable”

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A Future Discounted

Humans are not good at the taking the long term view. Our ability to do so does vary significantly with circumstances though, depending on our perception of stability. When we collectively feel that tomorrow will be similar to today, and that we have our basic needs covered, then we are free to think about longer term concerns and the bigger picture.

In contrast, when we exist under circumstances of little forward visibility, and where we are not confident about our access to basic necessities, then the luxury of the long term disappears, and we are pitched into a state of short term crisis management.

Economics describes this parameter as a change in our discount rate. When the discount rate rises, it means that the future is discounted increasingly steeply in comparison to the present, so that today has far more value than next week, and almost infinitely more value than the far future. This has been the natural state for humanity throughout much of its existence. Continue reading “A Future Discounted”

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The Infinite Elasticity of Credit

“Beautiful credit! The foundation of modern society. Who shall say this is not the age of mutual trust, of unlimited reliance on human promises? That is a peculiar condition of modern society which enables a whole country to instantly recognize point and meaning to the familiar newspaper anecdote, which puts into the speculator in lands and mines this remark: “I wasn’t worth a cent two years ago, and now I owe two million dollars.”

Mark Twain (1873), The Gilded Age: A Tale of Today

 

I wanted to put our current predicament into historical context, and to demonstrate that the situation we find ourselves in is not novel. It differs quantitatively, but not qualitatively, from what has gone before – many times before in fact. Great cycles of expansion and contraction are part of the human condition, and there are patterns of boom and bust that continually repeat themselves, as they are thoroughly grounded in human nature.

Collective human optimism and pessimism are extremely powerful drivers, acting over very long time scales. They are powerful enough to drive tremendous cycles of socioeconomic expansion and contraction. As population grows and optimism increases during a long expansion phase, pressure emerges that can only be relieved by increasing the elasticity of the money supply, often in spite of existing rules intended to prevent this very dynamic in the name of maintaining sound money.

 

As a historical generalisation, it can be said that every time the authorities stabilise or control some quantity of money M, either in absolute or volume or growing along a predetermined trend line, in moments of euphoria, more will be produced.

Or if the definition of money is fixed in terms of particular liquid assets, and the euphoria happens to ‘monetise’ credit in new ways that are excluded from the definition, the amount of money defined in the old way will not grow, but its velocity will increase [..]

….My contention is the the process is endless: fix any M(i) and the market will create new forms of money in periods of boom to get around the limit and create the necessity to create a new variable M(j).

Charles Kindleberger, Manias, Panics and Crashes

 

There have been many examples of this process throughout history and it is instructive to look at such periods. For instance, the medieval expansion of the eleventh and twelfth centuries had very much this character. Continue reading “The Infinite Elasticity of Credit”

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Bubble case-studies: Ireland and Canada

As I travel around and visit many different places, the disparity in the speed at which the credit crunch is unfolding in different places is readily apparent, and with it the attitudes of local people to warnings of hard times to come. In places where the bursting of the credit bubble is more advanced, such as Ireland, people are generally more interested in understanding what went wrong and what they can do for themselves and their communities. In such places, where homes may already only be worth 40% of the mortgage on them, there is more public recognition and discussion of the issues, even if there is still a great deal of collective denial.

In other places where the impact of the bubble has yet to be felt, for instance Canada, where I am currently, there is still a sense of invulnerability. We haven’t got as far as denial yet. That’s hardly surprising when you can’t tell a crack-shack from a mansion in places like Vancouver. This is bubble psychology at its most extreme, where no one cares what they pay for something, because they think someone else will always pay more, and no one cares what they owe, so long as the monthly payment is manageable in the short-term. Most other Canadian cities are  still in the grip of bubble psychology as well, although not to the same extent. Needless to say, the level of public discussion in Canada is abysmally low. Continue reading “Bubble case-studies: Ireland and Canada”

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Nicole Foss takes on John Williams: Deflation it is

There’s an interesting interview at The Energy Report with John Williams of Shadow Stats ( John Williams: Times That Try Our Souls ), which I wanted to discuss because, while there are many aspects are we would agree with, there are other glaring differences with how The Automatic Earth sees the future unfold. It is worth looking at the article in some depth in order to find the source of the disparities.

Mr Williams’ prediction is hyperinflation, although, like us, he is predicting a great depression. One major distinction between TAE’s view and that of many inflationists is the definition of inflation. It is clear from the interview that Mr. Williams’ definition is increasing prices. Readers of The Automatic Earth will know that our definition is a monetary one – an increase in the supply of money, credit and velocity thereof relative to available goods and services. We have consistently pointed out that using a price definition of inflation removes all the explanatory and predictive value from the concept. Prices changes are lagging indicators of changes in the money supply, complicated by other factors, both globally and locally. For instance, global wage arbitrage has been a major factor driving prices down in recent years, despite a tremendous credit expansion. Continue reading “Nicole Foss takes on John Williams: Deflation it is”

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Deflation Revisited (The Studio Version)

The Automatic Earth has been predicting a devastating deflationary period for as long as we’ve been in existence, and prior to that we did so at The Oil Drum Canada. We have always and consistently said that worrying about inflation in the next few years is completely misguided.

The debt deflation that is already underway will be so destructive to our lives and societies that we must be aware of what is coming in the short term and what we can do to prepare for it, instead of worrying about a possible inflationary period that may or may not follow afterwards. Continue reading “Deflation Revisited (The Studio Version)”

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The Rise and Fall of Trade

As the world has become a smaller and smaller place over the last few decades, we think less about the differences between locations. Global trade has allowed us to circumvent many local constraints, evening out surpluses and shortages in a more homogenised world.

We have a just-in-time world built on comparative advantage, in the name of economic efficiency. Under this economic principle, every location should specialise in whatever activity it executes most efficiently and the resulting products from all areas would then be traded. The idea is that all will then be better off than they would have been had they attempted to cover all bases themselves for reasons of self-sufficiency. Continue reading “The Rise and Fall of Trade”

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Dollar-Denominated Debt Deflation

Since I generally tell people to hold cash or cash equivalents, it makes sense to expand on that a little, and to point out some of the location-specific risks of doing so. I tell people to hold cash because that is what they will need access to in order to make debt payments and to purchase the essentials of life in a society with little or no remaining credit. The value of cash domestically – in terms of goods and services in your own local area – is what matters most.

Domestic currency value relative to other currencies internationally will be very much a secondary concern for most people, as the ability to exchange one currency for another is not likely to last far into the coming era of capital controls. Currency risk is likely to become very large, and almost everyone will be better off holding whatever passes for cash wherever they happen to be. Continue reading “Dollar-Denominated Debt Deflation”

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Oil, Credit and the Velocity of Money Revisited

Let me try to resolve apparent contradictions by answering some questions from a TAE reader:

Q: In 1933 there was a shortage of everything. Commerce had been dead for enough years – killed by gold- buggery – that there was shortages except for crops that were rotting in the fields (and petroleum that was wasted, according to Jeffrey Brown, who I believe.) No money meant no production = shortages = no commerce = no new money in the system in a self- reinforcing cycle. Citizens hoarded paper dollars as they had hoarded specie. Paper dollars were still worth more than (pauperish) 1930’s commerce.

Continue reading “Oil, Credit and the Velocity of Money Revisited”

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The Imperial Eurozone (With All That Implies)

In the light of events in Greece, I want to address the structure and prospects for the eurozone, and specifically how the structure pre-determines the prospects. Talk about long term austerity measures in southern Europe by no means covers a worst-case scenario.

All aggregate human structures at all degrees of scale are essentially predatory. They all convey wealth from a necessarily expanding periphery towards the centre, where wealth is concentrated. The periphery may be either forced or enticed to join the larger structure, but that does not affect the outcome. Such structures are all inherently self-limiting, as the fundamental dependence on the buy-in of new entrants grounds them in Ponzi dynamics. Continue reading “The Imperial Eurozone (With All That Implies)”