GOLD

[hotairmail]

QUOTE (bigtbigt @ Sep 5 2008, 02:59 PM)

"why did the PoG and PoS just do what they just did this last hour?"

 

QUOTE (wrongmove @ Sep 5 2008, 03:00 PM)

"US employment numbers worse that expected."

 

Eeerrrr... OK??

 

You're probably right. But I'd have thought that in most peoples minds bad employment => implied recession => implied deflation => drop in gold price

 

Perhaps the reaction is instead therefore one of growing panick (as I spkoe of a few posts back). If so great! People are getting nervous and likley to be increasingly easily pannicked. Good time for a black swan as far as gold bulls are concerned.

 

This marks a very clear divergence from price of oil!!!

 

You're good.

 

I wrote this on another thread at 3.15pm

 

http://www.greenenergyinvestors.com/index.php?showtopic=4166

 

Interesting.

 

Higher than expected unemployment figures leads to dollar weakness and according result on commodities etc.

 

Now commodities (esp. oil) falling again....because of counter effect of expected fall in demand...which then causes the dollar to strengthen?

 

My brain hurts.

 

I wouldn't bet on the divergence lasting.

 

[rgleeson]

Any and all forms of loan termination (paying it back or defaulting on it) destroys that money (returns it to the future)

 

You may well be right that defaulting destroys money, but I don’t understand how, mind elaborating?

[Magpie]

G0ldfinger addressed that point above and you said, “That's a decent statement of the inflationary argument…….”

 

http://www.greenenergyinvestors.com/index....ost&p=56916

 

I was talking about his reference to the existing money reservoirs. I don't think he addressed the point that the CB injections are not inflationary in themselves. He merely pointed out that there are counter-balancing inflationary pressures to the deflationary deleveraging of banks.

[Magpie]

Default is more deflationary because the bank must re-pay the loan on their balance sheet out of their profits/capital

 

Exactly

[rgleeson]

But the bank can only clear the debt from its own reserves if it’s an uncorrelated default. The situation today, is that the banks don’t have enough reserves to cover correlated defaults.

[hotairmail]

Exactly

 

Yes. But not exactly, exactly.

 

Because the bank's capital is wiped out by having to pay off the customers' loan for him in the event of default, it means the bank's capacity to lend is constrained by the appropriate regulatory capital requirement (c.10x average for on balance sheet lending). They either have to raise additional capital (which is effectively a transfer from elsewhere) or they have to either call in their loans or not grow the book so quickly as they rebuild their capital ratios out of profits.

[ziknik]

And if through weight of default they collapse or obtain capital from a central bank?

 

Collapse is very deflationary. The bank does not have time/years to play with the books and make up losses from future profits. The receivers will continue to collect debt repayments, but are very likely to call in every loan (where allowed by the T&Cs) causing more defaults. This allows the receivers to wrap up the bank quicker without having to wait years for debts to be repaid.

 

When a Central Bank provides a loan to a bank, the Bank does not lose much of its ability to lend. It is a much less deflationary.

Edit to add. Providing the CB provides a loan to cover 100% of the losses

[rgleeson]

Collapse is very deflationary. The bank does not have time/years to play with the books and make up losses from future profits. The receivers will continue to collect debt repayments, but are very likely to call in every loan (where allowed by the T&Cs) causing more defaults. This allows the receivers to wrap up the bank quicker without having to wait years for debts to be repaid.

 

When a Central Bank provides a loan to a bank, the Bank does not lose much of its ability to lend. It is a much less deflationary.

Edit to add. Providing the CB provides a loan to cover 100% of the losses

 

Ah I see...

 

Edit:

 

OK I see in principle the theory here. But I doubt any goverment or central bank would allow receivers to act in this way due to the spread of systematic risk.

 

They didnt wrap up Northern Rock this way after all.

[Magpie]

You may well be right that defaulting destroys money, but I don’t understand how, mind elaborating?

 

I think the technical answer is that it doesn't but it still creates deflationary pressure.

 

An outstanding loan counts as an asset to the bank, and supports its credit creation. But if loans are defaulted on then the bank is forced to take some of its income to rebuild the balance sheet rather than to support new loans.

 

So normally as debts are repaid, the bank will use the money to lend out new money. But in a period when they have to take a lot of debt writedowns, then as money is repaid, the bank can't loan out the same amount.

 

So defaults are deflationary but in an indirect way.

 

But going back to your original statement - new loans create money, paying loans back destroys money. So the important thing in terms of inflationary or deflationary pressure is the balance between the two - whether more money is being paid back or loaned out. So we can see that debt default is a deflationary pressure because it affects this balance.

 

What we currently have is high debt defaults, huge debt defaullts on the horizron, bank's imaginary assets being written down all the time. But also huge reservoirs of money sloshing around the world from the recent expansions of money supply. No wonder there is some confusion as to what might happen next.

[Magpie]

Yes. But not exactly, exactly.

 

Because the bank's capital is wiped out by having to pay off the customers' loan for him in the event of default, it means the bank's capacity to lend is constrained by the appropriate regulatory capital requirement (c.10x average for on balance sheet lending). They either have to raise additional capital (which is effectively a transfer from elsewhere) or they have to either call in their loans or not grow the book so quickly as they rebuild their capital ratios out of profits.

 

OK, "exactly" to you then.

 

[ziknik]

Any and all lending creates new money (its being borrowed from the future)

Any and all forms of loan termination (paying it back or defaulting on it) destroys that money (returns it to the future)

 

So these things (loans, paybacks, defaults) are affecting Money Supply.

…

 

Repaying a loan is deflationary in terms of prices because money is being used to repay loans rather than chasing goods.

 

In terms of money supply, repayment is inflationary because the money is paid back with interest. This allows the bank to lend even more.

 

[ziknik]

Yes. But not exactly, exactly.

 

Because the bank's capital is wiped out by having to pay off the customers' loan for him in the event of default, it means the bank's capacity to lend is constrained by the appropriate regulatory capital requirement (c.10x average for on balance sheet lending). They either have to raise additional capital (which is effectively a transfer from elsewhere) or they have to either call in their loans or not grow the book so quickly as they rebuild their capital ratios out of profits.

 

Yes. I was keeping it simple for myself above.

 

The Circa 10 times applies to the USA where the reserve requirement is 10%. In the UK, the reserve requirement is 2% (?) so the banks can lend 50 times the high powered money

 

[hotairmail]

Repaying a loan is deflationary in terms of prices because money is being used to repay loans rather than chasing goods.

 

In terms of money supply, repayment is inflationary because the money is paid back with interest. This allows the bank to lend even more.

 

Or, strictly speaking - repaying a loan is deflationary as money is removed from the system...but as ziknik says, if the bank makes a profit (of which interest is one of the revenue streams) then the bank has more capital against which it can lend a multiple of money (assuming it doesn't pay it all out as dividends and taxes).

 

I would argue - but I've not had this confirmed anywhere - that the charging of interest itself may in fact be deflationary as it creates additional liabilities which need to be paid out of the existing money supply...i.e. the velocity of money has to rise. But this is contentious. Lending also brings forward consumption from the future and raises effective prices for goods and services - so in effect borrowing is short term inflationary and longer term deflationary in terms of demand.

[ziknik]

Ah I see...

 

Edit:

 

OK I see in principle the theory here. But I doubt any goverment or central bank would allow receivers to act in this way due to the spread of systematic risk.

 

They didnt wrap up Northern Rock this way after all.

 

It may well come down to the lesser of 2 evils.

 

The Government can’t keep printing money to cover losses or it will become worthless (hyperinflation)

 

[wren]

Bank lending is inflationary.

 

Debt payment is deflationary.

 

Default = no change (i assume)

 

When we talk about people hunkering down and paying back debts, that sure sounds deflationary... and if populations were able to pay back debts tomorrow through some miracle, then I would feel more confident siding with this arguement. However, the banks are in problems because such a large proportion of people, companies and other banks have v. large & long term debt which cannot be paid back quickly, or perhaps at all. So does the deflationary actions of the people paying back long term debt in tiny increments outwiegh the inflationary support of defaults????

People, tell me if the following is wrong. I get a loan from the bank. Most of that loan is newly created money so the money supply has gone up (for the sake of simplicity let's assume all the principal is new money). I go and spend it, so that's new money gone somewhere in the economy. If I pay back the loan properly, the principal repaid goes back to where it came from (thin air) and of course I have to pay interest which I get from somewhere in the economy, and passes from me to the bank.

 

So repaid principal reduces the money supply back to where it was before the loan and the interest has no net effect on the money supply. If I default the principal does not disappear over time as it was supposed to, which means more money in the economy than was supposed properly to happen.

 

So

1 ) Loan -> inflation

2 ) Paying back principal -> deflation, ie. reversal of step (1) and net neutral

3 ) Interest payed -> no net effect on the money supply, just existing money changing hands

 

But if

4 ) Default -> failure to pay principal, i.e. not a reversal of step (1), which default is net inflationary

5) Bank pays principal itself with existing money-> makes up for step (4) which gets us back to no net inflation or deflation

 

Or

6 ) Bank is broke and cannot pay the principal itself -> net inflation, i.e. not a reversal of step (1)

7 ) Central Bank gives new money to the bank to pay the principal -> net inflation, as step (1) is reversed but the man behind the curtain created an equal amount of new money!

 

In this simple scheme proper repayment is net neutral, and default is either neutral if the bank can pay the principal themselves or inflationary if not.

 

Is this wrong? I don't see any net deflation.

[bitbigt]

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

QUOTE (ziknik @ Sep 5 2008, 02:09 PM)

The number of unemployed persons rose by 592,000 to 9.4 million in August

Average hourly wages still went up despite the job losses.

Average hourly earnings rose by 7 cents, or 0.4 percent, over the month

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

...stagflation me thinks! ....now that makes perfect sense!!!!

[Magpie]

In this simple scheme proper repayment is net neutral, and default is either neutral if the bank can pay the principal themselves or inflationary if not.

 

Is this wrong? I don't see any net deflation.

 

Some people couldn't see deflation if it wore a big shiny DEFLATION t-shirt and kicked them in the nuts.

 

On a more reasonable note I actually think these kinds of examples can confuse as much as clarify, but here are a couple of thoughts.

 

4 ) Default -> failure to pay principal, i.e. not a reversal of step (1), which default is net inflationary

5) Bank pays principal itself with existing money-> makes up for step (4) which gets us back to no net inflation or deflation

 

When you say 'existing money' where does this money come from? The point about money supply is that it is out there in the economy and can be spent. If the bank has to take money out of the economy, then yes that is deflationary. And there is the knock-on deflationary effect of causing it to draw future lending in.

 

6 ) Bank is broke and cannot pay the principal itself -> net inflation, i.e. not a reversal of step (1)

 

Therefore bank takes a loss of the amount of the loan.

 

7 ) Central Bank gives new money to the bank to pay the principal -> net inflation, as step (1) is reversed but the man behind the curtain created an equal amount of new money!

 

Central bank actually swaps this for an asset or loans it to the bank, which is different. The money prevents the bank's loss but only shores up its balance sheet. Either the bank has lost the (admittedly possibly worthless) asset from its balance sheet, or it now has a liability to repay the money to the CB.

 

The point about this last example is that it can be seen as inflationary in one sense, as it prevents the deflationary effect of the bank having to find the money elsewhere. But it is closer to being neutral, and by saying the CB 'gives' the bank the money you're ignoring the fact that it actually loans it or swaps it for an asset, both of which have future deflationary effects (eg the bank will be forced to take more in debt repayments than it loans back out).

 

 

[ziknik]

I was talking about his reference to the existing money reservoirs. I don't think he addressed the point that the CB injections are not inflationary in themselves. He merely pointed out that there are counter-balancing inflationary pressures to the deflationary deleveraging of banks.

 

If you take the SLS as an example: It is designed to stop the deflation. The BofE have put a lot of time in to the design of the scheme to ensure it is not inflationary. If it runs as per design, it will probably be a bit inflationary. It’s a difficult balance and it cannot be 100% right.

 

The chances are that the SLS loans will run for several years and halt the deflation that is needed and cause some (a little) inflation.

 

But, on top of the SLS, we have Northern Rock. NRK was a 100% bail out. The money will be unrecoverable and is very inflationary.

 

If another bank on the SLS goes bust we have more of the same. Especially if it is 100% bailed out like NRK.

 

Remember, there’s already enough money in existence to create a devastating inflation scenario (if not hyperinflation). We need some deflation

 

 

 

[drbubb]

KEY LEVEL:

 

Looks like Gold-to-Oil is right at the key level: 0.13

 

$811 x 13% = $105.43.

 

If oil falls below this, perhaps because Gold rises while oil lags, that would be a sign of the decoupling

(that I have been waiting for.)

 

It's nice to see Gold showing some strength while stocks are so weak.

That's how it supposed to work, especially in September

 

[hotairmail]

If you take the SLS as an example: It is designed to stop the deflation. The BofE have put a lot of time in to the design of the scheme to ensure it is not inflationary. If it runs as per design, it will probably be a bit inflationary. It’s a difficult balance and it cannot be 100% right.

 

The chances are that the SLS loans will run for several years and halt the deflation that is needed and cause some (a little) inflation.

 

But, on top of the SLS, we have Northern Rock. NRK was a 100% bail out. The money will be unrecoverable and is very inflationary.

 

If another bank on the SLS goes bust we have more of the same. Especially if it is 100% bailed out like NRK.

 

Remember, there’s already enough money in existence to create a devastating inflation scenario (if not hyperinflation). We need some deflation

 

The SLS provides liquidity not capital. So whilst it stops deflation as a result of a market shortage of liquidity, it does not solve the issue of default wiping out capital and the consequential effect on lending capacity.

 

Re Northern Rock - the capital injection is 'inflationary' to the extent that it is expected to replace capital that is expected to be wiped out. However, the plan is to shrink the book to about one third I think over the next few years which is very deflationary.

[wren]

So anyway, it looks like a big competition between new money being created and old money going back to thin air. If the central banks do nothing, banks may reduce their lending enough that new money creation is smaller than old money destruction (repayment of principal) which could result in net deflation.

 

But never fear Helicopter Ben and his ilk are trying to do their bit.

[ziknik]

The SLS provides liquidity not capital. So whilst it stops deflation as a result of a market shortage of liquidity, it does not solve the issue of default wiping out capital and the consequential effect on lending capacity.

 

Agree with that.

 

Re Northern Rock - the capital injection is 'inflationary' to the extent that it is expected to replace capital that is expected to be wiped out.

 

It is inflationary the maximum extent because all the banks that lent money to NRK got their money back in one day rather than receiving it over years.

 

However, the plan is to shrink the book to about one third I think over the next few years which is very deflationary.

 

It could be deflationary if people paid back their loans within a few years but they are not going to do so. They are going to move their loans to another bank so it will make no/little difference.

 

[bitbigt]

Friends - I really think there's some horrific confusion creeping into this money supply debate...

 

I believe it's like this:

 

MONEY CREATION AND LOSS

1. A owns £100, so 'Total Money Supply' = £100

2. B borrows that £100 from A, so A now owns an IOU (which is £100 of money!!!!), so now 'Total Money Supply' = £200 [new money created]

3. If B pays back the loan (so A forced to then tear up the IOU), we're back to 'Total Money Supply' = £100 [new money destroyed]

4. A writes off the loan (i.e. A chooses to tear up the IOU), we're back to 'Total Money Supply' = £100 [new money destroyed]

 

TIME FRAME IS IMPORTANT

Time 1. going to time 2. involves an increase in money supply

Time 1. going to time 3. or 4. involves no change in money supply

Time 2. going to time 3. or 4. involves a decrease in money supply

 

DON'T CONFUSE MONEY SUPPLY WITH WEALTH (TOTAL ASSET VALUES)

An asset can be deemed to be worth £1,000,000 one day (owner is wealthy) and then 10p the next day (owner is suddenly not wealthy) - but money supply has not changed

 

DON'T CONFUSE WEALTH AND INFLATION/DEFLATION

Money supply dictates level of inflation or deflation in the long term, but several other factors come into play over shorter time frames. So its very risky to make arguments that directly connect loans, defaults etc and inflation

 

SO LOOKING AT WRENS RECENT EXAMPLE

I would change it to the following...

 

1 ) Loan -> inflation

[no: Loan -> increased money supply]

2 ) Paying back principal -> deflation, ie. reversal of step (1) and net neutral

[no: this reduces money supply back to where it started - takes years or decades for mortgages]

3 ) Interest payed -> no net effect on the money supply, just existing money changing hands

[yes]

 

But if

4 ) Default -> failure to pay principal, i.e. not a reversal of step (1), which default is net inflationary

[no: it is a reversal of step 1, and its short term effect upon inflation depends upon what else is happening in the economy]

5) Bank pays principal itself with existing money-> makes up for step (4) which gets us back to no net inflation or deflation

[no: same situation as (4) as IOU has been torn up]

 

Or

6 ) Bank is broke and cannot pay the principal itself -> net inflation, i.e. not a reversal of step (1)

[no: if bank goes bust, this is asset/wealth destruction which does not affect money supply, and any effect upon inflation depends upon what else is happening in the economy]

7 ) Central Bank gives new money to the bank to pay the principal -> net inflation, as step (1) is reversed but the man behind the curtain created an equal amount of new money!

[no: CB exchanges cash for the banks MBS's which are just assets whose price has fallen (so not influencing money supply at all), and the CB gets the new cash for this action by its own new borrowing via issuance of new long bonds (90% taken up by foreigners) which does create new money in the UK system. Again, any effect upon inflation depends upon what else is happening in the economy]

 

...at least that's how I understand it

[Johan van der Smut]

Anyone know why silver's just fallen off a cliff? Down to $12.37 according to Kitco.

[ziknik]

…

I would argue - but I've not had this confirmed anywhere - that the charging of interest itself may in fact be deflationary as it creates additional liabilities which need to be paid out of the existing money supply...i.e. the velocity of money has to rise. But this is contentious. Lending also brings forward consumption from the future and raises effective prices for goods and services - so in effect borrowing is short term inflationary and longer term deflationary in terms of demand.

 

Money supply has kept growing to cover the interest of past loans so there has been no deflationary affect.

 

The interest causes deflationary affects only when money supply does not grow fast enough. This has not happened. Money supply in the past has grown to cover interest and more.