Sunday, December 6, 2015

MalCredit: You Cannot Give it Away

So the EU has now officially introduced negative interest rates.  So what does this mean?

The ECB pledged on Thursday to continue its €60bn-a-month bond buying quantitative easing plan until March 2017 and cut a key interest rate to a fresh record low of minus 0.3 per cent. But the measures disappointed investors that have come to rely on Mr Draghi to smash expectations, with a broad market sell-off after the ECB failed to deliver deeper cuts and an increase in the pace of QE.

If inflation is a monetary event in which the currency, warehouse receipts for gold or silver (or salt), are printed beyond the stock of money backing the currency, then prices rise in terms of the currency inflated.

The reason inflation is a hegemon policy (2%) is the bankers who create the inflation use the money before the prices rise in response to the mal-currency introduction.  The burden of the inflation is borne by the retail customer, who experiences a price rise with an income rise.  This is the heart of capitalism as practiced, and only the Austrian School of economics condemns this practice. (Although they have no objection to usury).  All hegemon policies are inherently evil, for they pick winners and losers.

If inflation is a monetary event involving money, and deflation is a monetary event involving...?  Money?  When there is less currency to go around, then less will be needed to buy a loaf of bread, or in other words, when a loaf of bread was $5, in deflation, a loaf of bread can be had for $1, since there are fewer dollars around to make purchases, those fewer dollars buy more.

My brain aches trying to wrap around that truth.  But that is how it works...  but now let's look at the credit twist and deflation.

Currency represents an asset, money, gold or silver or salt sometimes.

Debt represents something owed, and in its beneficial form it is backed by an asset, and in its malicious form it has no asset backing it.  Most of the world debt today has no asset behind it, the great unknown, to be discovered, is just how much mal-debt there is.

So cutting the interest rates paid on mal-debt to negative is deflation, but how so?

The practical reason for negative interest rates is proposing investors lose only 97% of their tallies come the next crash, when the popular alternative, equities, will see a 40% loss.

But what is happening as an economic phenomenon? Credit deflation has to be the mirror image of monetary inflation, so... deflation is a monetary event in which the debt,  receipts for currency loaned, is generated beyond the assets backing the bonds, then prices fall in terms of the assets underlying the bonds (debt).

Whew!  My brain aches... it take less Euros to buy a EU10,000 bond today than it did yesterday.  Clearly that is deflation.  Do I have the mechanics right?

As far as I can tell, no one is trying to figure out the mechanics of this, only looking at how to trade the event.

Feel free to forward this by email to three of your friends.


Luke Avedon said...

I think part of the reason deflation is confusing is in the mainstream
They use deflation to mean 3 different things: a collapse in demand lowering the velocity of money, a collapse in the quantity of money (i.e. Britain's famous return to the Gold Standard at pre-war price level), a gentle lowering of the price level due to increases in productivity (like what we see with computers every year).

As you often write, definitions are important.

Perhaps, we should have 3 separate terms (or more) for deflation - like how they say Eskimos have many different words for snow (Although, I'm told the snow thing is a myth!)

By conflating these terms they can justify their Keynesian and Monetarist intervention -- through obfuscation.
They just simply repeat: deflation = BAD. For decades they thought after all, that the gentle decline in the price level in late 19th century must have meant there was a severe depression for decades. Deflation = BAD...there is no thought beyond that mantra (although this is changing).

I enjoy reading your thoughts on deflation. Keep up the great work.

John Wiley Spiers said...

Eskimos, snow, brilliant... yes... it's likely as you say, so meany threads, all jumbled up...

J. K. Galbraith: ‘The study of money, above all other fields in economics, is the one in which complexity is used to disguise truth or to evade truth, not to reveal it.’ Money, p. 5