Credit deflation and the reflation cycle to come (part 2)

[sancho panza]

7 hours ago, MrXxxx said:

OK, so based on the above (and this is for everyone not just B&M) , the fact that governments have been pumping money into zombies, and recent investor buyers, when the big crash comes does it not mean all the inflationary effects of the recent QE printing will be annulled?..as surely the recently increased money supply will disappear over night.

This is the difficult part predicting what will happen with the money once it's injected into the economy and aslo how it unwinds if loans or the economy goes sour.I'm going to try and use an example of where I think the difficulties occur with modeling and therfore right sizing as DB puts it..I accept this is a very simplistic model and I'm ignoring things like capital ratios'/FRB.

I don't mean to insult anyone's intelligence here and welcome anyone who can educate me where I might be worng... @Castlevania @DurhamBorn anyone???

 

 

Assume a new build estate,all the hosues are the same.

Stage 1

CB injects £200,000 money into Bank A who then lend Buyer A a 100% mortgage of £200,000 to buy House A.The Housebuilder A takes the £200,000 from Buyer A and spends £100,000 building House B and deposits the other £100,000 with Bank A.

At the end of stage 1 the CB has a £200,000 asset in the loan to bank B, Bank A has an asset(the loan) for the loan to Buyer A £200,000,Buyer A has an  a liability to Bank A of £200,000.Housebuilder A builds another House B with some of the proceeds has a £100,000 asset marked at cost and £100,000 in the bank which the bank keeps on it's balance sheet.Bank A also has a liability to the CB for £200,000 and a liability to Housebuilder A for £100,000.

So after Stage 1 an injection of £200,000 has created

assets/store of value worth £200k(CB)+£200k(Bank A)+£200k(hosuebuilder A)=£600k.

The liabilities  £200,000(Bank A to CB)+ £200K(Buyer A to bank A) +£100k (Bank A to Hosuebuilder A)=£500k

For the ease of working it through we'll stop the circle there but in reality the £100,000 spent on the new build would create assets/stores of value elsewhere in the economy and eventually the money would end up parked back at the CB as excess reserves.

The key point here is that once the £200k leaves the CB they have little control over how it gets spent.

Stage 2

6 months later Bank A takes a look at it's balance sheet and feels it's strong enough to create a loan of thin air for £200,000 to Buyer B who buys House B borrowing 100% of the £200,000 from Bank A and buying from Housebuilder A who does the same again as he did before.

After Stage 2 is complete CB has £200k assets,Bank A now has £400,000 in assets,HousebuilderA has £300k cash and £100k in built House C.=£1million

Liabilities are £200k Bank A to CB,£300k Bank A to Housebuilder A, £400k Buyers A+B to bank A =£900,000

Roughly speaking a £200,000 CB injection has created £1.2million in assets/stores of value and within this little ecosytem liabilities of £900,000.

 

Stage 3

Buyer B then loses his job in a downturn.Gives the keys bank to the bank.Hosue B gets sold at 50% off for £100,000 at auction.

At the end of stage 3 the situation is

Assets=£200k CB loan+£200k(value of collateral marked to market Bank A)+£400k(housebuilder A in cash at bank plus built hosue C)=£800k

Liabilites= £200k Bank A to CB,£400k Buyers A+B to Bank A, £300k Bank A to Housebuilder A)=£900k

 

The key thing is that once that balance sheet starts looking unbalanced or too highly leveraged,Bank A will rein in credit creation and start to keep the capital it receives and it's very hard for the CB to model the point of no return to normal lending.

Also after stage 3 has occured we have to try and model Buyer B's behaviour because he most certainly won't keep making payments on a hosue as a) he's no longer in work and he's no longer living there.If he stops making payments then that could cause problems at the CB

Crucailly,after stage 3 if Hosuebuilder A wants his capital out then Bank A can no longer provide it.Credit deflation occurs at stage 3.

 

When we go from a one bank thre customer model to the modern economy,the modelling gets even harder as we start dealing with capital ratios that are tuned to the point of maximum leverage and forex issues can add to the mix.

 

 

 

6 hours ago, AWW said:

The money has to go somewhere. For everyone who loses their free money buying shares in bankrupt companies, there's a seller who made a profit (or a smaller loss!)

Not necessarily,as above,asset price changes can radically affect consumer behaviour.

Ther are two things .1 the cash exchange 2 the shares perfomrance as a store of value to the cosnumer

[sancho panza]

6 hours ago, DurhamBorn said:

No it will expand inflation.Liquidity doesnt go up in smoke it moves around and is still out there,most is parked in treasuries/bonds etc.The only people who can make it go are the CBs through tightening the QE,pulling it in and evaporating it.They will be trying to do that later in the cycle,but far too late.Its why the CBs have rates at zero and are trying to force inflation.They want the liquidity to move into the real economy.Never fight the Fed,Powell told everyone yesterday they will pump until it happens.

I wont be around much for a few days im building a couple of fish tanks,all rocks and plants,iv found myself taking in every little detail of how to get things perfect,and my son is moving house this weekend so im firing up the old estate.Nice to see the markets selling off,crucial to keep the foot on the Feds neck,no offence intended to BLM.

Good luck with the move DB.Your lad is very lucky to have you as a Dad.

4 hours ago, Majorpain said:

Would it though?  The vast majority of the population are living the good life with debt, which is simply consumption drawn from the future to be consumed in the present.  Remove that and i doubt that living standards would be anywhere near as high.

The only problem is its a treadmill, and you either keep jogging or get thrown off!

Interesting thesis here.

Guy states we've been in Depression since 2006 with no Real GDP growth,as  GDP not calucalted properly and deflated with CPI rather than  which reflects changes in living standards

1) GDP growth has been gamed by gaming GDP higher and infaltion down

2) much growth has been driven by govt expenditeure and driving debt to GDP ratios higher.

3) unemployment not being properly counted

Well worht 20 mins imho

 

 

[sleepwello'nights]

On 09/06/2020 at 09:46, Cattle Prod said:

I use a local guy to get me to Heathrow for work trips. He's on his second second hand Civic. His last one did 360k miles before he sold it, and was still working perfectly.

Regular long trips are more likely the most important factor in the longevity. Cruising at speeds that don't stress the engine and if on motorways or dual carriageways less braking and gear changing as well.

 

[Castlevania]

@sancho panzacommercial banks create money out of thin air when issuing a loan. The central bank created money doesn’t directly go to them.

[Harley]

1 hour ago, sancho panza said:

Interesting thesis here.

Guy states we've been in Depression since 2006 with no Real GDP growth,as  GDP not calucalted properly and deflated with CPI rather than  which reflects changes in living standards

1) GDP growth has been gamed by gaming GDP higher and infaltion down

2) much growth has been driven by govt expenditeure and driving debt to GDP ratios higher.

3) unemployment not being properly counted

I'll watch but my going in assumption is he's correct (maybe a few years later but I agree with the dynamics, plus no government debt and material unrecorded immigration into the UK, etc).

[Harley]

1 hour ago, Harley said:

I'll watch but my going in assumption is he's correct (maybe a few years later but I agree with the dynamics, plus no government debt and material unrecorded immigration into the UK, etc).

I meant not just government debt!  Corporate in particular.

[Bobthebuilder]

2 hours ago, sleepwello'nights said:

Regular long trips are more likely the most important factor in the longevity. Cruising at speeds that don't stress the engine and if on motorways or dual carriageways less braking and gear changing as well.

 

Japenes cars are mostly copies of western ones but better made and bullet proof. I cant fault them.

[Shamone]

15 hours ago, Castlevania said:

The share that must not be named has announced 5,000 job cuts. Half of which will be those in management roles. That’s 2,500 managers. What were they doing? No company needs so many managers. 

Nothing

[Sugarlips]

54 minutes ago, Shamone said:

Nothing

Well they sure will be now...

[JMD]

7 hours ago, Starsend said:

Not directing the question specifically at you JMD, just responding to your belief that central banks aren't evil with my own thoughts.

I get where your coming from Starsend and I was shocked when, during the 2007 crash, I learned how unstable, manipulative, and awfully unjust the money system is. But fast forward to today and I am now more concerned with how the coming cycle plays out (and how to navigate it). I say that because even if the cycle ends in monetary collapse, I still believe that any financial phoenix that may/does emerge will offer us the prospect of rectifying many of the problems.                                                                                                                                                                                                  But it's also because I consider that 'other events' have in some ways maybe even surpassed (time will tell) the financial/banking problem. If I may use a medical metaphor to help explain: I view the financial mess were in as a form of tumour, but one that can be surgically removed, and once excised, the patient will make a good recovery. The 'other events' I refer to is the identity politics (or low-level civil war), with the black lives matter agenda being just it's latest manifestation, and where here I would describe the whole 'identity' movement as being analogous to mental illness. Tragically like most psychosis, there is no real cure and the likely outcome is ever more extreme behaviour. With I think ever more dangerous political fissures being created by these culture wars.                                                                                                                                        However, perhaps I am wrong and maybe I'm just obsessing over what is in reality mere end-of-cycle (fourth turning) expected sociatal degenerations. The reason I spend any time at all thinking about these things is that it helps crystalise for me the type of policies/politics/leaders to expect down the line... as mentioned above, I think the financial system can be solved, but in my universe that still leaves a very sick patient.

[Lightscribe]

15 hours ago, DurhamBorn said:

I wont be around much for a few days im building a couple of fish tanks,all rocks and plants,iv found myself taking in every little detail of how to get things perfect,and my son is moving house this weekend so im firing up the old estate.Nice to see the markets selling off,crucial to keep the foot on the Feds neck,no offence intended to BLM.

Just as a slight derailment of the thread, freshwater or saltwater?

If freshwater I can recommend biohome filter media. Basically the aim of the game is to have a full cycle fish tank, that way water changes can be minimal (top ups).

You can get the kits to test the water which is handy. What the biohome media does, is once the tank is fully cycled, it allows the growth of a 3rd bacteria that feeds off the nitrates. So as you’ll probably know, fish produce ammonia which in turn is converted to nitrites by a 1st bacteria a 2nd bacteria then converts nitrites to nitrates, and finally the 3rd (very difficult to maintain without specific filter media) uses the nitrates.

Obviously helps with plant selection and a tank clean team too. Nerite snails will happily eat any algae build up on the tank walls, then cherry shrimp love cleaning up any fish waste. Java moss is an ideal home for cherry shrimp so they can hide, while plants like Amazon Frogbit eats nitrates so helps keep water in check.

I’ve had mine years and by creating a complete cycle in the aquarium, it helps keep maintenance to a minimum.

[ThoughtCriminal]

20.4% contraction in GDP for April

 

Now THAT is how you hysterically wreck your economy for a disease that’s as bad as flu 😎

[MrXxxx]

3 hours ago, Sideysid said:

Just as a slight derailment of the thread, freshwater or saltwater?

If freshwater I can recommend biohome filter media. Basically the aim of the game is to have a full cycle fish tank, that way water changes can be minimal (top ups).

You can get the kits to test the water which is handy. What the biohome media does, is once the tank is fully cycled, it allows the growth of a 3rd bacteria that feeds off the nitrates. So as you’ll probably know, fish produce ammonia which in turn is converted to nitrites by a 1st bacteria a 2nd bacteria then converts nitrites to nitrates, and finally the 3rd (very difficult to maintain without specific filter media) uses the nitrates.

Obviously helps with plant selection and a tank clean team too. Nerite snails will happily eat any algae build up on the tank walls, then cherry shrimp love cleaning up any fish waste. Java moss is an ideal home for cherry shrimp so they can hide, while plants like Amazon Frogbit eats nitrates so helps keep water in check.

I’ve had mine years and by creating a complete cycle in the aquarium, it helps keep maintenance to a minimum.

We really need another thread for bits like this...not because I don't like them in this thread, but I know in a few years time when I have my own place and can have such I won't be able to find gems like this (or pizza machines) amongst the main thread....and as for car longevity oil and filters every 5k miles...had a mk3 Escort do 200k miles, only scrapped it as the seals/bodywork were shot.

[TheCountOfNowhere]

On 08/06/2020 at 09:45, TheCountOfNowhere said:

I'm well in the green now ( thanks DB ) and it's heading up quickly.

This recovery is all to easy for my liking.

 

I really should start listening to myself 

Anyone getting nervous, thinking about selling out ?

[Bricks & Mortar]

10 minutes ago, TheCountOfNowhere said:

I really should start listening to myself 

Anyone getting nervous, thinking about selling out ?

I'm watching the markets.  Aware that several on my fintwit are calling this the end of the bear rally.  That this was the 'lower high', before it all goes down to the depths of Hades.
S&P futures are up though.  So I'm just about to go off for a day's work and leave everything unattended.

*fingers crossed*

[TheCountOfNowhere]

5 minutes ago, Bricks & Mortar said:

I'm watching the markets.  Aware that several on my fintwit are calling this the end of the bear rally.  That this was the 'lower high', before it all goes down to the depths of Hades.
S&P futures are up though.  So I'm just about to go off for a day's work and leave everything unattended.

*fingers crossed*

Im still thinking September.

[DoINeedOne]

20 minutes ago, TheCountOfNowhere said:

I really should start listening to myself 

Anyone getting nervous, thinking about selling out ?

Nope in fact hoping to buy more

[JMD]

29 minutes ago, Cattle Prod said:

I'm so nervous, I spent my investing time yesterday reading an academic paper on silver demand 

I find Gregorian Chant helps take my mind away from the markets!

(not sure which technique, yours or mine, is the more conducive form of meditation)

[Majorpain]

13 hours ago, sancho panza said:

Interesting thesis here.

Guy states we've been in Depression since 2006 with no Real GDP growth,as  GDP not calucalted properly and deflated with CPI rather than  which reflects changes in living standards

1) GDP growth has been gamed by gaming GDP higher and infaltion down

2) much growth has been driven by govt expenditeure and driving debt to GDP ratios higher.

3) unemployment not being properly counted

Well worht 20 mins imho

 

 

Fab video, and it certainly supports the idea that the "West" has been consuming its own capital to sustain its standard of living, the government has been complicit in the cover up lest the great unwashed realize that things are not quite so rosy as the headline figures suggest.  What cant be hidden is the gradual slide in standards of living which were becoming very obvious to people pre-Wu Flu, side effect of the pound losing its purchasing power as its steadily debased and the wealth is transferred abroad.

It is mad that the Government thought that supporting the poor in the North East by paying them to sit at home with tax credits and benefits was a better idea and cheaper than subsidizing the likes of Alcan in Lynemouth and the subsequent transport of Jobs and pollution (because its really not on another planet) to China.

[AWW]

1 hour ago, TheCountOfNowhere said:

I really should start listening to myself 

Anyone getting nervous, thinking about selling out ?

Nervous, yes; selling, no. Make a plan and control those nerves...

[ThoughtCriminal]

The count made me think of this 😉

[jamtomorrow]

19 minutes ago, Majorpain said:

Fab video, and it certainly supports the idea that the "West" has been consuming its own capital to sustain its standard of living

...

A lovely summary of where we are, if you don't mind me saying @Majorpain.

I've long "felt" this as a cultural malaise - organisations and individuals with a long-term outlook are now a rarity, most just looking for the next quick buck. Private equity and asset strippers part and parcel of that. But you can see it everywhere if you look - in the shabby state of the buildings and infrastructure in the UK, in the new-build estates disintegrating after just 20 years, and in the ever-increasing financialisation needed to keep the whole sorry show on the road.

We've become a nation of short-cutters and short-termists, and now the piper wants paying.

[JMD]

7 hours ago, JMD said:

I get where your coming from Starsend and I was shocked when, during the 2007 crash, I learned how unstable, manipulative, and awfully unjust the money system is. But fast forward to today and I am now more concerned with how the coming cycle plays out (and how to navigate it). I say that because even if the cycle ends in monetary collapse, I still believe that any financial phoenix that may/does emerge will offer us the prospect of rectifying many of the problems.                                                                                                                                                   But it's also because I consider that 'other events' have in some ways maybe even surpassed (time will tell) the financial/banking problem. If I may use a medical metaphor to help explain: I view the financial mess were in as a form of tumour, but one that can be surgically removed, and once excised, the patient will make a good recovery. The 'other events' I refer to is the identity politics (or low-level civil war), with the black lives matter agenda being just it's latest manifestation, and where here I would describe the whole 'identity' movement as being analogous to mental illness. Tragically like most psychosis, there is no real cure and the likely outcome is ever more extreme behaviour. With I think ever more dangerous political fissures being created by these culture wars.                                                                    

 However, perhaps I am wrong and maybe I'm just obsessing over what is in reality mere end-of-cycle (fourth turning) expected sociatal degenerations. The reason I spend any time at all thinking about these things is that it helps crystalise for me the type of policies/politics/leaders to expect down the line... as mentioned above, I think the financial system can be solved, but in my universe that still leaves a very confused and sick patient.

Just to (finally) add (promise!)... Genuinely hope i've not annoyed anyone with my 'perceived thread derailment' above, I do think its relevant but shan't post more about this as the financial topics here are equally fascinating for me... but did flag topic up because I am genuinely unsure if there is a shared correlation for those two apparent 'separate' topics. Anyway, I do hope (and pray!) they are both end-of-cycle effects and will both die a natural rhythmic death come end of cycle, because I definitely don't want to see (any more) social-justice-warriors in (...infecting?) our parliament. Because if that happens, we will all have lots to worry about - much more than the current crazy talk of banning Baden-Powel statues and Faulty Towers. Who could have predicted these thing happening just 10 years ago?

The great irony is that Neil Howe (Furth Turning) can't even comment on these issues in regard to his own theory. If he did discuss candidly 'social justice' movements, etc, he would be immediately de-platformed, dismissed from social media, etc. This should warn us how weird things have gotten already.

 

Anyway, signing-off with homage to our Great Government !!... Stay Home ('don't question'), Save Lives (not just black ones matter).

[JMD]

28 minutes ago, Majorpain said:

Fab video, and it certainly supports the idea that the "West" has been consuming its own capital to sustain its standard of living, the government has been complicit in the cover up lest the great unwashed realize that things are not quite so rosy as the headline figures suggest.  What cant be hidden is the gradual slide in standards of living which were becoming very obvious to people pre-Wu Flu, side effect of the pound losing its purchasing power as its steadily debased and the wealth is transferred abroad.

It is mad that the Government thought that supporting the poor in the North East by paying them to sit at home with tax credits and benefits was a better idea and cheaper than subsidizing the likes of Alcan in Lynemouth and the subsequent transport of Jobs and pollution (because its really not on another planet) to China.

Yes 'mad' indeed. I suppose in the absence of critical thinking, political dogma and posing will eventually have that effect. Perhaps that's why my own mind (currently sane I hope) has been wandering a little off topic - its so scary to realise just how dumb and ineffectual our current crop of leaders are, just when we need them most.

Btw, what did George in the video keep calling the Corona virus? Is it my hearing going, or was he using an Americanism i'm not familiar with?

[DurhamBorn]

1 hour ago, TheCountOfNowhere said:

I really should start listening to myself 

Anyone getting nervous, thinking about selling out ?

Count,you really need to stop watching the markets every day.Walk away,do something else etc.Markets are never linear and day to day,week to week moves will whipsaw you.Why would you want markets to go up anyway,are you drawing down as a pension?.Iv got many stocks iv been buying still paying dividends,i want reflation areas to stay down as long as they can,medium term would be fine,drops will be fine.VOD has gone ex divi,when that divi lands if im buying more Mosaic id rather they were $12 instead of $14 etc.Maybe il use the divi to expand my Telia holding,much rather they were lower than higher.

I sometimes think getting down to really simple thoughts helps people.In Feb my ex workmates were buying BP in their pension tracker funds at £4.60.I bought them at £2.60 in March.Its simplistic,but this game is about trying to outflank as much of the loss as you can,and capture as much of the gain,with a level of risk suitable for your age and financial position.