Bad, bad deflation

It seems that EU and USA currently fear deflation more than anything else. After all, the argument goes, decreasing prices motivate people to postpone consumption, which adds to the downturn.
This seems like an obvious truth but it is unlikely to be the only consequence of deflation, or even the most important one.
This is a banking crisis, during which the value of banks' assets decreased significantly. Plus, they perceive every asset as much more risky than before. Therefore, they are not willing to lend money because they do not have enough of the assets to feel safe. The deflation, plus at least in Czech Republic obvious hunger for deposits (interest rates are highest I have seen in the long time despite low rates set by CNB), motivates people to save. Saving on a banking account instead of in cash in the attic has twice as high rate of return and if there is one thing clear from this crisis, it is that the banks' deposits are safe.
Increased deposits will make banks to feel safer and to start lending again. This will re-start investment, which will require new employment, which will make everybody feel safer and start spending again.
From still strong reluctance of banks to lend, it seems that the government shortcut to just motivate people to spend seems unlikely to work, especially in the US, where the levels of consumption were not sustainable in the long term

P,S. I prefer to be a lender, not the borrower. Personally, I prefer deflation also because of this. But I believe that it may not be as harmful to the economy as everybody thinks so, given the type of crisis we are in.

The end of capitalism

Dilbert Blog is probably the best blog I know. Funny, smart, surprising, honest and to the point. It is written by a non-economist with great economic intuition. Adam Scotts' investment advice is based on the idea that you (or nobody else in the long term) cannot beat the market, which is quite well understood by most economists and confirmed by his experience with his own management of money, when compared to Goldman Sachs.

The last post is mostly wrong, however. He claims that we will soon see the end of capitalism because

Capitalism was conceived before the Internet, and before the gears of commerce became computerized. The system could absorb a lot of con artists because they didn't have the ability to steal fast enough to cripple the system. As you know, that has changed. Crooks in expensive suits now have the ability to swindle trillions, collectively, thanks to the efficiency of the system. And idiots in expensive suits can do even more damage.

This is mostly true but the result is not the need to abolish capitalism. It will encourage people (most people) to be more careful. At least I will try. Most smart people will. And the governments should stop caring about stupid people. Not because they don't deserve it but because it encourages stupidity.

Further comments suggests lack of understanding what the money is:

The balance of power has swung to the crooks and the market manipulators. Even if we could regulate away these problems, it's already too late. There isn't enough money left to support the planet under the current social systems, at least not when the boomers start retiring and unemployment starts climbing.

Whether or not the capitalism can support current social systems does not depend on how much money are being printed out but how well it can motivate people to work and how efficient the production can be. The biggest danger then comes from the (stupid)restrictions on trade. The people possess the technology to feed ourselves and to sustain and well increase our average standards of living (even if for some part of the society the standards of living might go down). The question is whether there will be sufficient incentives to use that technology, to keep looking for more efficient ways of producing stuff and to sell it.

Finally:

But the biggest change could be in what sort of consumption is allowed under the new economy. Most of our problems were caused by people who couldn't control their own spending. Banks could tighten their credit requirements but that won't be enough to stop the spending junkies from depleting their own nest eggs. So you might see some forced savings rules in the new economy.

No, the problem was not caused by people borrowing money they could not afford to pay back. It was caused by people willing to lend them and even more by people who bought such debt or were willing to bet that it was a good debt. Some stupid people will always try to spend more than they can afford to. The only thing the government needs to do to make their life miserable (thought not unbearable), not support them or save them to discourage such behavior.

The interesting question is whether anything can be done with the herding behavior (causing bubbles and their bursting) but most likely not.

The extent of the crisis

This does not seem like a reliable information but if true, it is unbelievable:

Europe was especially hard hit as previously placed truck orders were canceled. After Volvo cleaned out those orders from its books, the net order intake in the third quarter was a mere 115 trucks, compared to nearly 42,000 trucks in the same period last year.

If that keeps going on, we will live through some interesting times.

Interesting Times

Terry Pratchett has a book called "Interesting Times", in which is this lovely quote

" They have a curse…

They say…


May you live in INTERESTING TIMES "

If you had no idea what that means, you should right now. Or you better check the news quickly.

The Crisis

It keeps getting better and better. First reports of negative repo rates, today. Another good question by Paul Krugman.

On more optimistic side (with a inflation warning), Jeremy Siegel, via Megan McArdle :

Bear Sterns and JPMorgan

For those who don't want to read all the details, here is the picture that summarizes what probably happened:



Notice two things. First is the green little text in the left upper corner (yeah, 10% is nice) and the jump in the graph. Well, this happens if you buy what cost $170 two month ago for $2.


I can't find other name than "theft", but opinions obviously differ.

P.S. I accept that it is very hard to know what to do, given the "success" of Northern Rock. So maybe this is not that bad after all. Yet it still looks like JPM get itself a pretty good deal.

Fairy tale

Let me tell you a fairy tale about one not-so-poor family. There is a husband, who makes gizmos and sells them to other families. His wife cleans his home, cooks etc. They are a strange family so they pay each other money for everything they do. Wife gets money for cooking a dinner from husband, he gets money from her when she uses a gizmo etc.
Both of them are buying lot of crap - new large HD TV, new Ipods, IPhones,Italian shoes, French wine cars and other rather useless stuff they just have to have. They spend much more than they earn. But it was not a big problem because other families believed that the gizmos the guy was developing will be selling well and so he and his wife was able to borrow a lot. Because they were a rich family, they had their own money unit (say dollars). So all their outstanding loans were in dollars and they were able to print more, if necessary.
They lived happily and borrowed merrily until a crisis came - there was nowhere to borrow!
They had two options - stop spending, start saving. It would not be easy, because if wife does not uses a gizmo, the husband does not have money to pay for her cooking. So it would hurt a little.
But since they could print the money and borrow them, there was a second option that seemed so much better - just borrow from their own little printing machine and keep spending. Some might say that those money circled a little and left their happy family for some larger HD TV, but that would ruin this fairy tale. Instead, they kept borrowing from their printing machine, until ... It's time to go to bed, kids!

If you don't understand what this fairy tale is saying, you have probably lived on a remote island for a last year or two. Or you study economics. In any case, read guru Krugman. If you think spending will get us out of the mess it get us into, you should get a PhD, too. Honoris causa.

The truth in the credit crisis (UK version)

Watch this:

It is funny. And true.

Fires 2

The fires did not stop during the night. In fact, everything got much worse. Area just to the other side of the highway I-5 was evacuated (according to the local radio station), the electricity was off for some time, the ash is falling down, cell phone networks are overloaded.The projections are that it will take at least 2 days before it will start getting better. And btw: fires are mostly not contained, which means that the firemen did not get them under control.
UCSD is at Red Alert, but we are not in any immediate danger. All classes have been suspended, though. All courts in SD are closed, most of the schools as well. Qualcomm stadium has been designated as one of the evacuation points. It is this huge
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