FABER: DEFLATION WOULD BE A GOOD THING
18 June 2010 by Cullen Roche
23 Comments
Source: CNBC
Disclosures - Unless otherwise noted, authors have no positions in any securities mentioned and readers should never consider this to be investment advice. Always consult your financial advisor before acting on any ideas.
Comments Guideline - Readers who denigrate authors or other readers will be banned without warning. This site does not tolerate any sort of reader abuse. The goal of this site is to create an environment that is conducive to learning and better understanding of the monetary system and the investment world. We expect readers to behave maturely and responsibly. We welcome and encourage intense and intelligent discourse, but the site adheres to a strict 1 strike policy. While it is your right to speak freely, it is not your right to behave childishly. Above all else, please enjoy the site. It is intended to be used as an educational tool and we hope the intelligent and mature debate will further that purpose. We hope readers will make an effort to respect that goal. Comments with excessive linking or foul language will be moderated before posting.
Comments
I find it ironic the US central bank has been so desperate to prevent deflation over the years that they create excessive debt situations which create NASTY deflationairy trends. Reads like a bad science fiction novel in which the protaganist sees the future and in the effort to prevent it fails miserably.
If the Fed would actually allow a little pain every once in a while we wouldn’t have these situations . . . . When I get around to it I’m going to blog about it.
“FABER: DEFLATION WOULD BE A GOOD THING”
Sounds like a vulture to me. People should lose their jobs so Mr. Faber can add to his wealth?!
The problem with not allowing a little deflation or market carnage every once in a while is you get into situations Greece or Japan are in, too much debt. The WHOLE country will go POP in a blaze of inflation, debt defaults and other nastiness. If you don’t do a little debt flushing every once in a while it builds up.
Compare it to a forest. For years the US department of the Interior would NOT allow forest fires to occur. They always tried to stop every single one of them. What happened? The forest floor built up with all the dead wood that did not burn. After a while if there was a fire in an area it was MUCH worse and did much more damage to the forest ecosystem than if they had let smaller fires occur and clear out the dead wood. The Dept of Interior now realizes this and if life and/or property are not threatened they allow the fires to have a ‘controlled burn’ in various areas. It’s much more healthy for the forest as a whole.
http://en.wikipedia.org/wiki/Controlled_burn
Now translate this to the economy. The Fed is now allowing any fires to occur and the deadwood has built up. Whether it be from too big to fail banks or the failed Freddie and Fannie (there’s more examples!) there’s a HUGE amount of ‘deadwood’ on the forest floor and the Fed actually has a MUCH HARDER JOB NOW. Their margin for error has dropped dramatically. IMHO they should be trying to slowly deflate the bubble and that’s going to be very hard.
edit: in the last paragraph that should be “The Fed is NOT allowing any fires . . . .”
I understand Austrian economics well and I reject it. Why? Because it assumes that since inflation is bad deflation is good. I hold that no decrease in the money supply is good. As for inflation it is acceptable as long as it does not cause price inflation.
My point is you need to allow corporations to fail on occasion otherwise it becomes a systemic risk. The Greenspan and now Bernanke puts have prevented a small scale ‘forest fire’ to occur and now because of it we will most likely have a much longer nastier period of deflation ‘Major denude the forest completely fire’.
Look at a long term chart of debt / gdp. (since 1900)
IMO the amount of debt in America is way too high. It will come down via gdp going up OR (debt going down via paydowns/defaults or inflation).
I think neither long term inflation nor deflation is ‘good’
“My point is you need to allow corporations to fail on occasion otherwise it becomes a systemic risk.” Greg Merrill
Of course. I’m talking about the “cluster of business errors” the Austrians speak of. They are not “errors” but merely the weaker victims who do not survive a collapse of credit.
Most of what’s wrong in the world economy stems from greed. I’m not so sure people have to loose their jobs due to deflation. Problem is that prices have been driven up so much that if companies were willing to give up a little profit workers could stay employed and maybe the company could offset lower profits with slightly lower bonuses for management or simply make up the difference in volume resulting from higher sales due to the lower prices. I’d be interested to see a comparison of historical and present profit margins, but I’m guessing they’re a lot higher now. I think many companies are pricing themselves out of business and I think that was the point Faber was trying to make – we could all be happier with lower prices.
FBeard—”no decrease in money supply is good”….Seriously, the only solution to excessive leverage is de-leveraging and that necessarily requires a decrease in money supply. And, it will happen in spite of the monetary authority….you should examine the persistent decline in M2 while you repeat your courses in Austrian Economics.
” And, it will happen in spite of the monetary authority….you should examine the persistent decline in M2 while you repeat your courses in Austrian Economics.” kds
Looking at the M’s would be instructive but as for learning from the Austrians, no more. I suspect they are closet goldbugs and wedded to the idea that deflation is good since they cannot conceive of a principled way to halt it. The Keynesians wish to stop the deflation but their methods are unprincipled and would use more debt to cure the problems caused by debt.
“.Seriously, the only solution to excessive leverage is de-leveraging and that necessarily requires a decrease in money supply.” kds
No it does not. The US Treasury could create some new legal tender fiat and just give it, not lend it, to every US adult. Borrowers could pay down their debt with it and no net decrease in the money supply need result. Savers would rightly complain so give them an equal amount too. To prevent hyper-inflation with the new high-powered money, reserve requirements could be set to 100%.
So, you see deleveraging could be accomplished without a decrease in the money supply.
Really, do you guys feels compelled to play by the government backed counterfeiting cartels rules? I don’t.
Correction: make that
“Really, do you guys feel compelled to play by the government backed counterfeiting cartels rules? I don’t.”
Come on guys. Are we willing to suffer a Great Depression so the counterfeiting cartel can enjoy the benefits of having some of the few remaining dollars in circulation?
I seem to remember Faber making multiple calls for a below 5000 dow and 500 S&P. I find him a slippery and ultimately ignorant type who talks his gold book. I don’t understand why he’s such a star in the financial world. I’m a late-comer to this world, but it seems to me that his appeal is his simplistic “plaintalkin” style–but one that doesn’t have a lot to do with reality. He’s been blowing the hyper-inflation trumpet for two years now.
The Austrians are wrong. He’s not a closet gold-bug. He is a goldbug period.
I find him a slippery and ultimately ignorant type who talks his gold book.
+1. But he’s fairly entertaining, so I enjoy listening to him, anyway.
I don’t understand why he’s such a star in the financial world.
For the most part, the business media doesn’t hold managers and analysts accountable for their bad calls. I suspect that’s largely because media is a competitive business, so they can’t afford to alienate and lose their guests, who help to maintain the viewership, which creates the ad revenue that pays for it.
The only way to assess their performance is to track them yourself. However, there are so many of them that this becomes a waste of time. Given how wrong many of them are most of the time, it’s probably safest to ignore most of their advice.
For me it’s a plague on both your houses.
The Neo-Liberal have deregulated so much they’ve even removed the safe guards that were the ‘cultural memory’ of the ’30s.
The Neo-Keynesian have borrow points from the great man and applied them outside their context and to a extend way beyond his intent. Like any true master, Keynes knew the rules and he knew when to break them.
I think it’s a matter of energy. You need energy to drive the future growth that repays the loans taking to build an asset. Last time we came out of a recession cycle we had sub US$20 oil. This time we have a price hovering around US$80. People are going to try to fill that gap with coal, but that too will raise in cost, because ultimately its value is determined by the energy ‘gold standard’ (pun intended), oil.
Thanks to the emergence of China, India & co, we don’t have the cheap energy to justify the new debt. That means deleveraging, one way or the other. Deflation now is one way and likely the least traumatic. I suspect the governments will try to save face and grow their way out of it, ultimately pushing leveraging farther out of whack with underlying energy availability. Just delaying the fall.
I find Faber’s views are a breath of fresh air. He’s trying to bell the cat. The system keeps finding new inventive way to push the inevitable into the future. One day Faber will be right. I’m not convinced that Faber’s way of trying to conserves value will save much. Got to admire him for trying.
“I think it’s a matter of energy. You need energy to drive the future growth that repays the loans taking to build an asset. ” Gnoll110
You think energy is the solution? Sure it is part of it. But what about the wasted energy of young people who can’t find jobs? The money creation process is crooked. It is just about the most crooked thing I can think of, new money from nothing, backed by nothing, in exchange for a promise to repay that money at interest which doesn’t necessarily even exist. The system requires an ever increasing amount of debt just to avoid collapse.
Even in the days long before fractional reserve lending, when money was just gold, silver, and copper, debt forgiveness was commanded (Deuteronomy 15:1, Leviticus 25). How much more should it be required today when debt is many multiples of the amount of money needed to repay it?
There are ways today to implement money that don’t even require debt. Common stock would be one form. It would allow a corporation to simply BUY assets with its stock. But interestingly, if a corporation bought assets with its common stock it would be sharing wealth at the same time it acquired it. Thus the need for a conventional money intermediary would not even exist.
Not only is gold a barbaric relic but conventional money is too. It divides us into those who have money but do no work and those who can’t work if there is no money. That’s outrageous.
You’re a nutter! Anyone using Deuteronomy and Leviticus as a basis for a post agricultural economy does not understand the fundamental changes that happened during Renaissance/Reformation. Without the modernisation of the Reformation you don’t get the capital formation you need to fund the Industrial Revolution. No Industrial Revolution, no wide spread application of the idea & benefit that flowed from the Renaissance. Just look at level of development in countries where the equivalent Qur’anic texts still apply.
“Without the modernisation of the Reformation you don’t get the capital formation you need to fund the Industrial Revolution” Gnoll110
Capital and money are two different things. Capital is such things as human talent, land, energy resources, technology, skills, factory machinery, etc. Money, OTOH, may buy or rent (and in a government enforced monopoly money supply, steal) capital but it is not itself capital.
As for capital formation, the common stock company (in a free market) is the ideal way to accomplish that. Common stock as money could simply be spent into circulation to buy assets. No borrowing or lending of money is thus required. Fulfilling this?
“You shall not charge interest to your countrymen: interest on money, food, or anything that may be loaned at interest.
You may charge interest to a foreigner, but to your countrymen you shall not charge interest, so that the LORD your God may bless you in all that you undertake in the land which you are about to enter to possess. ” Deuteronomy 23:19-20 (New American Standard Bible) from http://www.biblegateway.com/passage/?search=Deuteronomy+23:19-21&version=NASB
I rest my case…
“I rest my case…” Gnoll110
LOL.
Actually, ethics is an excellent approach to economics. Everyday, in the market place, we see affirmation of:
1. “Thou shall not steal.”
2. “Thou shall not lie.”
3. “Do unto others as you would have them do unto you”
4. “The generous man will prosper.”
5. etc., endlessly
The Bible is the greatest book on economics on the planet. That is the secret of Western economic dominance.
“You’re a nutter!” Gnoll110
Actually, I advocate for complete liberty in money creation, usage and acceptance after a necessary bailout of borrowers and compensation for savers. In that environment, we would see who understood money best. It can hardly be said that those currently in charge understand what they are doing so no wonder that amateurs are drawn into the discussion.
Faber: “I think it would be very good for the world to have deflation … at this level I’m not particularly interesting in buying anything.”
What’s funny is that Faber wants his hotel room rate cut by 75-80%, but he’s certainly not offering to cut his asset management fees by 75-80%.
The problem with the pro-deflation Austrians is that they assume deflation wouldn’t reduce their incomes to match the reduction in prices. In reality, most inflation is in the form of wages, so when deflation becomes the norm, most of us will be earning far less money, and then hoarding what we have left of it.
The primary result of deflation is not lower prices, but collapsing output. In a deflationary spiral, the London hotelier about which Faber complains isn’t just going to cut prices, it’s going to go out of business.
The good news, though, is that with all of the other businesses failing in a deflationary spiral, Faber would have less reason to travel to London in the first place. And at that point, it would probably resemble something out of “Children of Men”, so you wouldn’t want to travel there, anyway.
Well said, Angry MBA. But here is the key point, IMO: Debt is ratcheted up during the boom but is not allowed to fall during the bust. It is then devil take the hindmost. Well, there are just too many in the hindmost position this time because they were driven into debt via a long period of negative real interest rates in housing. The solution is a bailout of EVERYONE followed by genuine reform.