"Macro" Musings

[giofranchi]

I think sometimes it's almost easier to take the birds-eye view. Think about it this way: Deflation means that the value of money rises in relation to the things you can buy with it. You can see this in commodity prices but what is true for commodities should be true for (most) productive assets, too. The products those assets produce are going to fall in price and this should bring asset prices down sooner or later.

 

There seems to be broad consensus that inflation lifts asset prices I wonder why there is so much resistance to the thought that the reverse should also hold true: Real deflation has to bring asset prices down. The only assets that won't get hurt are those that are assured to keep their cash generation levels at least where they are – especially US Treasuries.

 

I agree 100%.

 

Cheers,

 

Gio

[petec]

 

The euro zone, Japan, China, GB and even countries like Australia do the same thing now, albeit with different tools. On the other side of this trade there is more or less the US only (and smaller countries like Switzerland). Their consumers can buy products on the cheap, this increases their consumption and decreases their savings rate. Alternatively, the US could keep their savings rate constant by forcing people into higher unemployment – this forces consumption upwards in relation to savings as unemployed people still consume but don't save – or they would have to intervene in trade. They can intervene with tariffs (making imports more expensive), with higher consumption taxes or with monetary policy, essentially doing what the rest of the world is doing and, thereby, forcing the USD downwards.

 

 

Thanks ni-co.  I find Pettis' work excellent but as you say it can be counter-intuitive, so I find I have to think it through every time.  Not helped by the fact that although I have read the China book, I got TGR on Audible and I have discovered my concentration as a listener is no match for my concentration as a reader!

 

P

[petec]

I think sometimes it's almost easier to take the birds-eye view. Think about it this way: Deflation means that the value of money rises in relation to the things you can buy with it. You can see this in commodity prices but what is true for commodities should be true for (most) productive assets, too. The products those assets produce are going to fall in price and this should bring asset prices down sooner or later.

 

There seems to be broad consensus that inflation lifts asset prices I wonder why there is so much resistance to the thought that the reverse should also hold true: Real deflation has to bring asset prices down. The only assets that won't get hurt are those that are assured to keep their cash generation levels at least where they are – especially US Treasuries.

 

I agree 100%.

 

Cheers,

 

Gio

 

Yes.  The problem with this is simply that with all these efforts to debase the world's currencies we may get a proper inflation instead.  Either way I suspect most asset prices come down initially.  I think everything is currently priced for perfection: continued CPI stability in a world of unprecedentedly easy money, high debt, trade imbalances, wealth inequality, record margins, etc etc.  Good luck sustaining all that.

[ni-co]

 

The euro zone, Japan, China, GB and even countries like Australia do the same thing now, albeit with different tools. On the other side of this trade there is more or less the US only (and smaller countries like Switzerland). Their consumers can buy products on the cheap, this increases their consumption and decreases their savings rate. Alternatively, the US could keep their savings rate constant by forcing people into higher unemployment – this forces consumption upwards in relation to savings as unemployed people still consume but don't save – or they would have to intervene in trade. They can intervene with tariffs (making imports more expensive), with higher consumption taxes or with monetary policy, essentially doing what the rest of the world is doing and, thereby, forcing the USD downwards.

 

 

Thanks ni-co.  I find Pettis' work excellent but as you say it can be counter-intuitive, so I find I have to think it through every time.  Not helped by the fact that although I have read the China book, I got TGR on Audible and I have discovered my concentration as a listener is no match for my concentration as a reader!

 

P

 

I've also bought it on Audible. What works for me is taking it with me when I go for a walk. And I've listened to it twice and I'm going to listen to it at least a third time  :D

[ni-co]

I think sometimes it's almost easier to take the birds-eye view. Think about it this way: Deflation means that the value of money rises in relation to the things you can buy with it. You can see this in commodity prices but what is true for commodities should be true for (most) productive assets, too. The products those assets produce are going to fall in price and this should bring asset prices down sooner or later.

 

There seems to be broad consensus that inflation lifts asset prices I wonder why there is so much resistance to the thought that the reverse should also hold true: Real deflation has to bring asset prices down. The only assets that won't get hurt are those that are assured to keep their cash generation levels at least where they are – especially US Treasuries.

 

I agree 100%.

 

Cheers,

 

Gio

 

Yes.  The problem with this is simply that with all these efforts to debase the world's currencies we may get a proper inflation instead.  Either way I suspect most asset prices come down initially.  I think everything is currently priced for perfection: continued CPI stability in a world of unprecedentedly easy money, high debt, trade imbalances, wealth inequality, record margins, etc etc.  Good luck sustaining all that.

 

I've also been thinking about that. The critical issue here is timing. Dalio talked about this, too. I can't remember where I heard him saying it but he said something along the lines you'd get deflation first and inflation later. So, it's definitely something to be aware of but, as of right now, I'm also thinking of Howard Marks' quote that being far to early on something is indistinguishable from being wrong. I have to add though, that I always have a small fracture of my portfolio in gold LEAPs. I'm fine with losing 1% of my portfolio per year on them but I can't bring myself to buy a significant position. This might change someday but I find gold too volatile to regard it as a "real" currency the way so many hedge fund managers look at it. And even then I'd probably prefer to look at TIPS first. Preferring gold over TIPS practically means predicting the end of the world – I don't think "my" gold would be secure in such a scenario and I'm a bit too peace loving to buy the complementary guns  ;D

[petec]

 

The euro zone, Japan, China, GB and even countries like Australia do the same thing now, albeit with different tools. On the other side of this trade there is more or less the US only (and smaller countries like Switzerland). Their consumers can buy products on the cheap, this increases their consumption and decreases their savings rate. Alternatively, the US could keep their savings rate constant by forcing people into higher unemployment – this forces consumption upwards in relation to savings as unemployed people still consume but don't save – or they would have to intervene in trade. They can intervene with tariffs (making imports more expensive), with higher consumption taxes or with monetary policy, essentially doing what the rest of the world is doing and, thereby, forcing the USD downwards.

 

 

Thanks ni-co.  I find Pettis' work excellent but as you say it can be counter-intuitive, so I find I have to think it through every time.  Not helped by the fact that although I have read the China book, I got TGR on Audible and I have discovered my concentration as a listener is no match for my concentration as a reader!

 

P

 

I've also bought it on Audible. What works for me is taking it with me when I go for a walk. And I've listened to it twice and I'm going to listen to it at least a third time  :D

 

I've just started the second run - but my mind wanders a LOT more than when I am reading I find.

 

He is excellent though.  I find it very hard to fault his logic.  And the China book was revelatory.

[petec]

I think sometimes it's almost easier to take the birds-eye view. Think about it this way: Deflation means that the value of money rises in relation to the things you can buy with it. You can see this in commodity prices but what is true for commodities should be true for (most) productive assets, too. The products those assets produce are going to fall in price and this should bring asset prices down sooner or later.

 

There seems to be broad consensus that inflation lifts asset prices I wonder why there is so much resistance to the thought that the reverse should also hold true: Real deflation has to bring asset prices down. The only assets that won't get hurt are those that are assured to keep their cash generation levels at least where they are – especially US Treasuries.

 

I agree 100%.

 

Cheers,

 

Gio

 

Yes.  The problem with this is simply that with all these efforts to debase the world's currencies we may get a proper inflation instead.  Either way I suspect most asset prices come down initially.  I think everything is currently priced for perfection: continued CPI stability in a world of unprecedentedly easy money, high debt, trade imbalances, wealth inequality, record margins, etc etc.  Good luck sustaining all that.

 

I've also been thinking about that. The critical issue here is timing. Dalio talked about this, too. I can't remember where I heard him saying it but he said something along the lines you'd get deflation first and inflation later. So, it's definitely something to be aware of but right now I also think of Howard Marks' quote that being far to early with something is indistinguishable from being wrong. I have to add though, that I always have a small fracture of my portfolio in gold LEAPs. I'm fine with losing 1% of my portfolio per year on them but I can't bring myself to buy a significant position. Maybe this will change some day but I find it too volatile to regard it as a "real" currency – the way so many hedge fund managers look at it.

 

Dalio, and also Sam Mitchell at Fairfax, who said the key will be identifying the inflection point from deflation to inflation.  I recall Klarman has very long dated, way out of the money calls on gold.  Sounds good to me.  How long dated can you get leaps?

 

Also just finished reading Ned Goodman's Dundee annual letter which comes across to me at least as a rather poorly written and egotistical rant with some quite wooly thinking - but there's also some good stuff and I'm intrigued by his notion that the Chinese will eventually move the world away from the dollar as the reserve currency by backing the RMB with gold.  I don't think that'll happen for various reasons, but it just opened a door in my mind to thinking about how the world might go about dumping the dollar as the reserve currency, and who might want to make that happen. 

[ni-co]

I think sometimes it's almost easier to take the birds-eye view. Think about it this way: Deflation means that the value of money rises in relation to the things you can buy with it. You can see this in commodity prices but what is true for commodities should be true for (most) productive assets, too. The products those assets produce are going to fall in price and this should bring asset prices down sooner or later.

 

There seems to be broad consensus that inflation lifts asset prices I wonder why there is so much resistance to the thought that the reverse should also hold true: Real deflation has to bring asset prices down. The only assets that won't get hurt are those that are assured to keep their cash generation levels at least where they are – especially US Treasuries.

 

I agree 100%.

 

Cheers,

 

Gio

 

Yes.  The problem with this is simply that with all these efforts to debase the world's currencies we may get a proper inflation instead.  Either way I suspect most asset prices come down initially.  I think everything is currently priced for perfection: continued CPI stability in a world of unprecedentedly easy money, high debt, trade imbalances, wealth inequality, record margins, etc etc.  Good luck sustaining all that.

 

I've also been thinking about that. The critical issue here is timing. Dalio talked about this, too. I can't remember where I heard him saying it but he said something along the lines you'd get deflation first and inflation later. So, it's definitely something to be aware of but right now I also think of Howard Marks' quote that being far to early with something is indistinguishable from being wrong. I have to add though, that I always have a small fracture of my portfolio in gold LEAPs. I'm fine with losing 1% of my portfolio per year on them but I can't bring myself to buy a significant position. Maybe this will change some day but I find it too volatile to regard it as a "real" currency – the way so many hedge fund managers look at it.

 

Dalio, and also Sam Mitchell at Fairfax, who said the key will be identifying the inflection point from deflation to inflation.  I recall Klarman has very long dated, way out of the money calls on gold.  Sounds good to me.  How long dated can you get leaps?

 

Also just finished reading Ned Goodman's Dundee annual letter which comes across to me at least as a rather poorly written and egotistical rant with some quite wooly thinking - but there's also some good stuff and I'm intrigued by his notion that the Chinese will eventually move the world away from the dollar as the reserve currency by backing the RMB with gold.  I don't think that'll happen for various reasons, but it just opened a door in my mind to thinking about how the world might go about dumping the dollar as the reserve currency, and who might want to make that happen.

 

I roll 2 year out of the money calls on GLD. I think there are far better ways for institutional money managers like Klarman doing this with OTC options. Michael Pettis suggests to use special drawing rights as a global currency.

[yadayada]

How about hedging this by buying the HKD, or stocks that have HKD cash balances? The HKD is arguable quite undervalued, and you can buy some really nice cheap stocks in that area.

 

If inflation starts to happen, they will likely cut the peg, and the HKD would shoot up. So in a way the HKD is a hedge against the dollar?

 

Also studying the great delevering of the UK, or Great brittain is an interesting study here. If someone can explain to me where their inflation came from...

 

Between 1947 and 1969 they had 4% inflation on average each year.

 

Nominal wages increased 5.8%, their m0 money supply decreased, and productivity increased by 2.5% each year.

 

yet total debt/gdp went from 400% to 160%....

 

And real GDP increased 2.82% a year.

 

That is what I call a beautifull delevering!

 

So where did the 4% inflation come from? Why are they trying to get inflation right now, and we are still levering up, yet still near deflation! They delevered from 400% gdp to 160% gdp, and got 4% inflation in the process, and their m0 money supply went down...

 

Right now US m0 money supply is up by trillions of dollars. Does that mean there was a lot to invest in in the 50's and 60's? So the printed money never entered into the m0 money supply, but straight away went into m1 and m2? But right now there are simply no interesting investing opportunities? So the money goes back to the central bank.

 

Then what was so interesting to invest in back then? even with sky high debt levels.

 

I cannot find m1 and m2 data that far back.

 

This inflation thing is just a mystery to me. Everytime I think I understand where it comes from, I see something like this and then I dont get it.

[petec]

 

Then what was so interesting to invest in back then? even with sky high debt levels.

 

 

Rebuilding the country after the war.

 

It's interesting but I always wonder how good a period that is to study.  So much was so different.  The world was on its knees after the most awful war in history.  So much had been destroyed: homes, means of production, the works.  People had cut right back on absolutely everything and lived the most austere lives, consuming nothing and saving everything they could, lending to the government to fund an orgy of destruction.  Huge amounts of 'normal' GDP had been destroyed, temporarily replaced by this debt-driven GDP of destruction.  The one positive thing that had happened was that technology, developed to kill but usable in peace, had advanced tremendously.  And the one thing people wanted to do was forget it all, put the past behind them and get on with enjoying life.  Basically I think the scene was set, economically and psychologically, to rebuild the means of production, apply new technology to peacetime innovation, and enjoy consumption.  I don't have a clear answer for you on the inflation data but I'm sceptical, generally, that the postwar decades provide a good template for any other period.

 

P

[yadayada]

Yeah the problem is, that is the only good period we have on deleveragings. Go back before that, and the situation is even more different then now.

 

You could conclude then, that a nice delevering would need mainly 2 things, a population with a lot of work ethic and discipline, working their asses off and technology to improve productivity by large amounts (because 2.6% a year seems quite a lot, it has been lower in the past decade.)

 

Also maybe a third thing: a lot of women entering the work force really helped a lot? Population growth was only 0.54% a year, but possibly half the population slowly entering the work force made a huge difference?

 

And today there is too much entitlement, the only tailwind we have now is technology, and so far productivity growth is really letting is down at a little over 1% a year?

 

http://www.icecapassetmanagement.com/uploads/documents/2015.02%20IceCap%20Global%20Market%20Outlook.pdf

 

 

[petec]

Yeah the problem is, that is the only good period we have on deleveragings. Go back before that, and the situation is even more different then now.

 

You could conclude then, that a nice delevering would need mainly 2 things, a population with a lot of work ethic and discipline, working their asses off and technology to improve productivity by large amounts (because 2.6% a year seems quite a lot, it has been lower in the past decade.)

 

Also maybe a third thing: a lot of women entering the work force really helped a lot? Population growth was only 0.54% a year, but possibly half the population slowly entering the work force made a huge difference?

 

And today there is too much entitlement, the only tailwind we have now is technology, and so far productivity growth is really letting is down. 

 

http://www.icecapassetmanagement.com/uploads/documents/2015.02%20IceCap%20Global%20Market%20Outlook.pdf

 

I completely agree.  I would add that the UK had a (relatively) command economy back then, which probably led to a lot of inefficiency and inflation.  We only did so well because all the factors I mentioned before were *so* powerful.  Maybe that's how you get your combination of inflation but also real GDP growth and delevering.

 

I have felt for a while that the Great Depression is not a good template for the current delevering precisely because it was interrupted by the war which, crucially, changed the psychology around the economy.

 

The other template we have is Japan, though that example also has some unique characteristics that make it a sub-optimal comparator.

 

 

[yadayada]

Well you can learn something about the current situation by looking what we are lacking right now, and how each deleveraging is different? So you could argue that the current deleveraging will not be so pretty precisely because there is no tech boom, and no gritty population full of spartan like people, and no women's lib?

 

And you could argue that because those things are lacking, we are kinda screwed now in the west. Especially because China and India does have at least some of those things.

 

Their population will soon be able to do all the things that we can do, except cheaper, and with more discipline.

 

Seems like there is an eb and flow of these things. When a country goes through a really rough period, the years after that rough period will be better. But when things go well for a while, newer generations will be more spoiled and lazier, causing wealth to flow out of those area's. Causing more poverty, rince repeat :) .

[petec]

I have no problem with that general synopsis.  I'd add:

 

1. China will have big issues before things get better because it has misallocated the most capital, by a staggering degree, and has unhelpful demographics.

 

2. The West is helped by its willingness to accept immigrants.

 

3. We might actually be on the cusp of a huge technological revolution.  Mobile phones are a massive enabler.  Driverless cars could simply transform life and productivity.  But it'll be very disruptive; old industries will die and it might take time to replace those jobs. 

[yadayada]

Agree with that, especially the immigrant part. Part of Chinese and Indian hard working talent will move to US and Europe.

 

But the problem with the tech boom is that it will remove jobs for lower level workers.

 

For example if a new solar panel is invented that is very cheap and very efficient. You will see a massive solar boom, and cost of energy going down. But those things will be made in factories that mostly require high level labor, as all the low level labor is automated away by robots and software. In the 50's and 60's, productivity growth and new technology created massive demand for low level factory workers, as we did not have software and automated robot arms back then.

 

Same with driverless cars. Only creates jobs for high level workers, and removes jobs for low level workers.

 

Or synthetic biology, will make healthcare cheaper. But it mostly creates jobs for people with advanced university degrees...

 

New much cheaper batteries? Removes demand for oil and oil workers, and the high level oil workers with engineering degrees will move to the battery sector, and there is no demand for highschool or simple university degree level workers.

 

So that will leave like half the population in a pretty bad shape, since half the population has an IQ of 100 or lower. Engineers, biologists and physicists will see their demand skyrocket, and highschool dropout oilworkers can barely get a mininum wage job with mcdonalds if they are lucky. 

[ni-co]

How about hedging this by buying the HKD, or stocks that have HKD cash balances? The HKD is arguable quite undervalued, and you can buy some really nice cheap stocks in that area.

 

That's exactly what I did. Hedging my positions denominated in USD partly with a short USD/HKD position. Though I have to say I'm afraid to be a bit too clever by half there. I don't know whether I'm going to keep that hedge.

[yadayada]

why not buy companies with a lot of HKD cash and cash flow outright? Take for example future bright or asia standard? Or keck seng. Those will pop when the peg is removed right? And you can own a productive asset at cheap prices at the same time, and not have to be dependant on timing or macro elements.

[ni-co]

why not buy companies with a lot of HKD cash and cash flow outright? Take for example future bright or asia standard? Or keck seng. Those will pop when the peg is removed right? And you can own a productive asset at cheap prices at the same time, and not have to be dependant on timing or macro elements.

 

Have you seen what happened to Swiss equities on the day the peg broke? You have to be very confident that your productive assets remain productive when export prices shoot up by, say, 30%.

[jb85]

 

Between 1947 and 1969 they had 4% inflation on average each year.

 

Nominal wages increased 5.8%, their m0 money supply decreased, and productivity increased by 2.5% each year.

 

yet total debt/gdp went from 400% to 160%....

 

And real GDP increased 2.82% a year.

 

That is what I call a beautifull delevering!

 

So where did the 4% inflation come from? Why are they trying to get inflation right now, and we are still levering up, yet still near deflation! They delevered from 400% gdp to 160% gdp, and got 4% inflation in the process, and their m0 money supply went down...

 

Right now US m0 money supply is up by trillions of dollars. Does that mean there was a lot to invest in in the 50's and 60's? So the printed money never entered into the m0 money supply, but straight away went into m1 and m2? But right now there are simply no interesting investing opportunities? So the money goes back to the central bank.

 

Then what was so interesting to invest in back then? even with sky high debt levels.

 

I cannot find m1 and m2 data that far back.

 

This inflation thing is just a mystery to me. Everytime I think I understand where it comes from, I see something like this and then I dont get it.

 

according to dalio's deleverging report, M0 money supply as a % of GDP went UP about 0.35% per year in the UK form 1947 to 1969...that works out to a total increase of M0 as % of GDP of about 7% over the 21 year period..fairly substantial imo, no? enough to cause 4% a year inflation?

 

 

these are extremely rough numbers, but in the US now, M0 as % of GDP = 6%, M1 = 12%, M2 = 60%.  So have your low base money go from 6% of GDP to 12% of GDP would effectively double the supply of money and get you about 4% annual inflation over 20 years, just like the UK had???

 

 

furthermore, a lot of this gets complicated when you look at short term time frames.  M. Friedman as right that over the long run inflation is soley a monetary issue, but different willingness to lend at different levels of the money pyramid could easily cause a scenario where m0 declines, but because at the M2 level, banks are more willing to lend, we actually get inflation.  over the VERY long run, those lending rates should even out, and therefore M0 is tied to inflation.  But seems to me these different cycles of willingness to lend can last 20-50 years so...

[yadayada]

why not buy companies with a lot of HKD cash and cash flow outright? Take for example future bright or asia standard? Or keck seng. Those will pop when the peg is removed right? And you can own a productive asset at cheap prices at the same time, and not have to be dependant on timing or macro elements.

 

Have you seen what happened to Swiss equities on the day the peg broke? You have to be very confident that your productive assets remain productive when export prices shoot up by, say, 30%.

Only one with significant risk of this is Future Bright, as they have most of their income in the pattaca. Keck seng looks the most attractive as they have almost no income in Hong Kong.  They have almost their market cap in cash. But I don't know if this is all in hong kong dollar, or spread out in different currencies. For some reason they do not disclose this.

 

Actually looking more closely it doesn't seem like a good bet on the HKD, still like them without that element though.

 

according to dalio's deleverging report, M0 money supply as a % of GDP went UP about 0.35% per year in the UK form 1947 to 1969...that works out to a total increase of M0 as % of GDP of about 7% over the 21 year period..fairly substantial imo, no? enough to cause 4% a year inflation?

 

 

these are extremely rough numbers, but in the US now, M0 as % of GDP = 6%, M1 = 12%, M2 = 60%.  So have your low base money go from 6% of GDP to 12% of GDP would effectively double the supply of money and get you about 4% annual inflation over 20 years, just like the UK had???

 

 

furthermore, a lot of this gets complicated when you look at short term time frames.  M. Friedman as right that over the long run inflation is soley a monetary issue, but different willingness to lend at different levels of the money pyramid could easily cause a scenario where m0 declines, but because at the M2 level, banks are more willing to lend, we actually get inflation.  over the VERY long run, those lending rates should even out, and therefore M0 is tied to inflation.  But seems to me these different cycles of willingness to lend can last 20-50 years so...

 

Yeah it declined against a % of gdp. Could it be that the decline of the m0 supply against gdp declined because it was absorbed into m1 and m2? There was much lower inflation when it increased the 20 years prior.

 

So when we see our m0 supply decrease now, without fed selling back securities, that means we will get inflation?

[jb85]

 

 

Yeah it declined against a % of gdp. Could it be that the decline of the m0 supply against gdp declined because it was absorbed into m1 and m2? There was much lower inflation when it increased the 20 years prior.

 

So when we see our m0 supply decrease now, without fed selling back securities, that means we will get inflation?

 

No, it went UP as a % of GDP.

 

at link below, page 14, row titled, "M0 Growth % GDP, Avg. Ann."

 

http://www.bwater.com/Uploads/FileManager/research/deleveraging/an-in-depth-look-at-deleveragings--ray-dalio-bridgewater.pdf

 

 

...and yes it's certainly possible that even with a decline in m0, that we get inflation.  Im not predicting it will happen, but if the time frame is short enough, i don't think m0 is a great indicator of future inflation.  I could see a scenario where M0 goes from 12% of GDP to 8% of GDP, but over the same time frame M2 goes from 60% of GDP to 75% of GDP.  Again, not saying/predicting anything...but outlining a possible way that we get inflation even with an m0 decline.  raw of amt of money supply definitely matters, but so does the lending rate at each level of m0, m1, m2 etc.  The lending rate is harder for the fed to control and largely decided by the banks themselves.  Since, 2007, we've seen a huge increase in m0, but not a proportional increase in m2...because the m0 got "stuck" in the banks who didn't want to lend.  The opposite of that would be where the fed takes m0 out of the system (m0 declines) but the banks at the same time DO want to lend, and therefore increase the m2 money supply and we would get inflation. 

 

at least that's my understanding...this stuff is complicated and I admit i don't fully understand it all :/

[yadayada]

oh weird, im basing my numbers on this one:

http://bwater.com/Uploads/FileManager/research/how-the-economic-machine-works/ray_dalio__how_the_economic_machine_works__leveragings_and_deleveragings.pdf

 

Same source, but which one is right? Or am i reading that graph wrong?

 

Page 300.

[jb85]

that is weird... The table vs chart show two completely different things

 

I did some digging, and i think ultimately you're right.  I managed to find m0, m1, m2, m3 ,m4 data for The UK during the time frame from a different source...assuming that data is accurate, i did some calcuatlions and seems that across the board, m0 and m4 all declined as a % of GDP from 1947-1969 (though they went UP on an absolute basis)...so now i'm with you...where did the inflation come from? 

 

here's my calculations below (highlighted are cells i calculated, rest was given data)

 

http://i.imgur.com/v316izS.png

 

___________

and the original excel file i got from here:

 

https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CB4QFjAA&url=http%3A%2F%2Fwww.bankofengland.co.uk%2Fpublications%2FDocuments%2Fquarterlybulletin%2Fthreecenturiesofdata.xls&ei=HjbmVLjKOpGmyATQ-oEw&usg=AFQjCNHdilZGDt4Az7OCUC1dxo6LcWquzA&sig2=0pEmMrcEw7urGHyklHYm9w&bvm=bv.85970519,d.aWw

[rb]

 

Also studying the great delevering of the UK, or Great brittain is an interesting study here. If someone can explain to me where their inflation came from...

 

Between 1947 and 1969 they had 4% inflation on average each year.

 

Nominal wages increased 5.8%, their m0 money supply decreased, and productivity increased by 2.5% each year.

 

yet total debt/gdp went from 400% to 160%....

 

And real GDP increased 2.82% a year.

 

That is what I call a beautifull delevering!

 

So where did the 4% inflation come from? Why are they trying to get inflation right now, and we are still levering up, yet still near deflation! They delevered from 400% gdp to 160% gdp, and got 4% inflation in the process, and their m0 money supply went down...

 

Right now US m0 money supply is up by trillions of dollars. Does that mean there was a lot to invest in in the 50's and 60's? So the printed money never entered into the m0 money supply, but straight away went into m1 and m2? But right now there are simply no interesting investing opportunities? So the money goes back to the central bank.

 

Then what was so interesting to invest in back then? even with sky high debt levels.

 

I cannot find m1 and m2 data that far back.

 

This inflation thing is just a mystery to me. Everytime I think I understand where it comes from, I see something like this and then I dont get it.

 

Hi YadaYada,

 

I'm new here and I haven't gotten all the technical aspects down yet, so I apologize if the post looks funny.

 

Inflation is actually a topic that isn't very straight forward and tends to be muddled a lot. It's a big subject and I don't want to make the post too too long so I"ll try to keep as tight and summarized as possible.

 

Inflation isn't something mechanical. It's not like someone prints more money and inflation magically appears. It happens through the mechanism of supply and demand. There are two kinds of inflation. Supply side and demand side.

 

Supply side is the nasty one. It happens when something bad happens to your factors of production like a war or a commodity shock. Then you get inflation and unemployment. Really bad.

 

The other is demand inflation when people have money and jobs and want to buy more than the economy can produce and the economy overheats - wages go up, inflation goes up and unemployment is below NAIRU (normal unemployment). This may seem unpleasant to some but it's actually not so bad.

 

For deleveraging you reference the case of UK after WW2. That wasn't really a deleveraging like we have now. The debt (nominal) hasn't really been paid back. The stats you quoted are indicating a robust economy which is working very well. The inflation (4% isn't that much and it's skewed by higher supply side inflation right after the war) is mostly demand side of ppl having money and buying stuff.

 

Let's look at the debt ratios now. I don't know where you got your numbers but I'm going to assume they are correct. Gov debt to GDP peaked in 1949 at 250-270% depending on the source. Let's say it was 270. Then private debt/GDP was 130. In 1969 Gov debt/gdp was 55%. This means that private debt/gdp was 105%. During that time nominal GDP increased by 6.82% per year. That means that in that period nominal GDP increased by 274%. This means that nominal gov debt increased by 80% and nominal private debt increased by 202%. The ratios improved not because anybody paid down debt, but because of GDP growth, a bit of inflation, and war debt forgiveness from the US.

 

I also wouldn't read too much into money supply numbers until you have a solid grasp on mechanisms of inflation transmission, esp into M0. For example, one way that M0 declined in that period is the evolution of banking and ppl using less physical currency.

 

Today you have totally different situation. Today you have zero interest rates and nominal private debt paydown. This is because equilibrium interest rates are negative and even at zero interest rates are too high for people to borrow (debt markets out of equilibrium) so they pay money back. This depresses demand and you get low inflation and bad economy and weird M0 movements. The antidote would be for Gov't to increase spending and counter these demand effects. But in the age of austerity this isn't happening.

 

This is getting really long now, so I'll close with a snapshot of how money supply effects work. In a normal economy, central bank lowers interest rates by increasing M0 by creating bank reserves. The banks take those reserves and make loans and spend those loans. In today's environment central bank creates reserves, but nobody wants to borrow the money cause interest rates are too high so the banks keep the new reserves on deposit with the central bank. And no you won't get inflation when M0 starts to go down in the future.

 

rb

[yadayada]

rb, that perfectly explains it, thanks!

 

Interesting that deflation after the civil war in 1865 to 1890 was 2.84%!

 

Yet you had highest gdp growth ever at 4.54% for 25 years.

 

I wonder what debt gdp was over that period? That tells you, you don't need inflation to stimulate consumers or investors. If the opportunities are there, people will spend and invest.

 

http://www.measuringworth.com/growth/growth_resultf.php?begin%5B%5D=1865&end%5B%5D=1890&beginP%5B%5D=&endP%5B%5D=&US%5B%5D=NOMINALGDP

 

So what is happening is really politics influenced economics to say that inflation is good, so politicians can borrow more money to get more power? Even though it is complete bullshit. Allthough at some point it becomes necessairy to inflate away the excessive debt. But at the expense of the common man.