The pocket calculator reveals the truth

A spendidly indignant Karl Denninger explains how the $600 "stimulus cheque" sent to American taxpayers will be more - much, much more - than paid for, by higher borrowing costs.

Where are the forthright Cassandras on this side of the Atlantic? Are they silent because nobody here believes in our country?

The "little hand-mill"

Official figures going back to 1963 show that bank lending has NEVER stopped increasing.

Lowest: 1.1% annualised, for the quarter ending 31 December 1966.
Highest: 44.9% annualised, for the quarter ending 30 June 1972.

Median: 11.9%
Mean: 13.45%

Is it my imagination, or does the graph spike regularly before stockmarket crashes and recessions?

Original BoE data here.

In the late 60s, my school magazine carried a major bank's advert, for 16-year-old school leavers to join them. I aimed at a degree instead. Perhaps I'd have chosen differently if the ad had read "39 thieves looking to recruit trainee".

Do recessions lead to inflation?

Robert Murphy thinks so, and produces a graph that to him suggests prices go up during a recession, not down:

However, this picture suggests to me that recessions follow periods of higher inflation, and maybe where that inflation continues during the recession, it could be put down to a sort of residual momentum. Why should prices fall at precisely the moment the NBER says a recession has started? Even a cut flower will maintain its bloom for a while.

On the other hand, it seems clear from the above graph that prices do generally seem to fall after a recession. Perhaps this is because of the recently reinforced lesson about thrift, so people become less keen to spend too much on stuff they don't need.

But it's also possible that the recession has cleansed certain inefficiencies in the use of capital - businesses that should have folded faster - and as that capital gets better employed elsewhere, it does its work of improving productivity.

Which it needs to, when people have become more cost-conscious. I recall reading about an American who found a way to sell dresses for a dollar in the Great Depression - he used a machine to stamp out the outline of 100 at a time, so only the machine sewing was needed, not the measuring and cutting. So it was still possible to buy a dress for your sweetheart when money was tight.

But the little hand-mill of monetary inflation continues to grind...

Tibet and China: clash of cultures

I’d long been interested in Tibet and had a romantic vision of the Land of Snows, but I’d never been there. Now I learned that the Tibetans have a different way of seeing the world. My classmates were Buddhist and had a strong faith, which inspired me to reflect on my own views about the meaning of life. I had been a materialist, as all Chinese are taught to be, but now I could see that there’s something more, that there’s a spiritual side to life.

[...]

The Chinese protesters thought that, being Chinese, I should be on their side. The participants on the Tibet side were mostly Americans, who really don’t have a good understanding of how complex the situation is. Truthfully, both sides were being quite closed-minded and refusing to consider the other’s perspective. I thought I could help try to turn a shouting match into an exchange of ideas. So I stood in the middle and urged both sides to come together in peace and mutual respect. I believe that they have a lot in common and many more similarities than differences.

But the Chinese protesters — who were much more numerous, maybe 100 or more — got increasingly emotional and vocal and wouldn’t let the other side speak. They pushed the small Tibetan group of just a dozen or so up against the Duke Chapel doors, yelling “Liars, liars, liars!” This upset me. It was so aggressive, and all Chinese know the moral injunction: Junzi dongkou, bu dongshou (The wise person uses his tongue, not his fists).

Read the rest of Grace Wang's Washington Post article here.

GloomBoomZoom vs. GloomBoomDoom

Not only do we have the Great Debate about 'flation (In- vs. De-), but selective quotation can make the same expert give evidence for both sides.

Here it looks as though Dr Marc Faber is expecting inflation:

Dr Marc Faber has argued that even in the United States, where property prices are in decline, in an environment of high inflation he would rather own a US$1 million home than hold the same amount of cash or bonds, because the house would better preserve value.

... but here, its extreme opposite:

The view Marc is putting forward is the opposite one - that deflation will be the clear winner, dragging the whole world economy into a slump, with lower prices for commodities as well as stocks and property...

...In a real downturn, the United States (and other developed nations) would stop importing so much oil...and so much merchandise from China, which would have the consequence of reducing energy consumption by China too. Result: lower energy prices and a worldwide recession...maybe even the worst worldwide depression in history.

I think the giveaway in the first, is in the qualifying phrase "in an environment of high inflation". All I've read so far about Marc Faber indicates that his real position is represented by the second.

In my (amateur?) view, we're heading for a bust, and unless it can be avoided (which would be wonderful news), then the sooner, the better. Ideally, it would have happened in 2000 - in fact, it did, but we then got the reckless monetary reflation of 2003-2007.

Why soon? Because the longer it goes on, the more the transfer of productive capacity to the Far East, so that when recovery comes, we in the West won't be equipped to restart.

Empathy test - infallible

Off topic