Friday, 12 December 2008

Deflation has become inevitable

For a while now I have been on the fence on the inflation/deflation issue – whether the massive monetisation of bad debts by central banks and governments will lead to rapidly escalating inflation as currencies are debased or, alternatively, lead to deflation as bad debts and illiquidity undermine all commercial and financial activity in the economy. I’m now coming down on the side of deflation for a very simple reason: there is no longer any incentive to save or invest, and so debt and investment cannot increase much beyond current bloated levels.

In Lombard Street, Bagehot’s seminal tome on fractional reserve central banking, Bagehot advises any central bank facing a simultaneous credit crisis and currency crisis to raise interest rates. By raising rates they will ensure that foreign creditors remain incentivised to maintain the general level of credit available while the central bank resolves the local liquidity crisis through liquidation of failed banks and temporary liquidity support of stressed banks.

The very opposite policies have been pursued by central banks in the US, Europe and UK since the beginning of the sub-prime crisis in August 2007. They have cut policy rates drastically, and as the crisis escalated and spread, the yield on government debt has dropped to negative territory. Meanwhile they have shielded those responsible for the creation of record levels of bad debt from any regulatory accountability, relaxed transparency of accounts, and provided massive taxpayer-funded financial infusions to prevent failure and liquidation.

While in the short term these policies have expediency and the maintenance of market “confidence” on their side, in the longer term these policies must undermine any confidence a rational and objective saver or investor might have that savings or investment in the US, EU or UK will be fairly remunerated at an above-inflation rate, or that savings and investments will be protected by effective oversight and regulation from the sorts of executive debasement and outright misappropriation and fraud that are beginning to colour our perceptions of the past decade.

Anyone sitting on a pile of cash now is unlikely to want to either (a) place it in a bank, or (b) invest it in the stock market. As a result, the implosion of the financial and real economy must continue no matter how big the central bank’s aspirations for its balance sheet or the treasury’s aspirations for its deficit.

If US, EU and UK had substantial domestic savings to fund their banks (as in Japan in 1990), then perhaps the consequences would not be so imminently disastrous. Lacking sufficient domestic savings, however, their actions will likely make foreign creditors in Japan, China, the Gulf and elsewhere question whether it is worthwhile to keep pumping scarce savings into such flawed and reckless economies.

During the reckless boom years, savings collapsed in bubble economies as retail and commercial and financial actors alike chased speculative yields with greater and greater leverage. During the reckless bust years, savings will collapse further as retail and commercial and financial actors chase safety by hoarding their meagre remaining assets from further erosion by refusing to lend at negative returns and refusing to finance failed corporate and investment models that only enrich poltically-connected management and intermediaries.

The determination to avoid any accountability for failed banks, failed business models, failed regulatory systems and failed academic rationales for all the above invites anyone with spare cash – an increasingly select crowd – to withhold it from further depredations. It is this instinct, more than confidence in the government, which is driving so many to seek the temporary safety of short-dated government securities.

The result of discouraging domestic and foreign creditors and investors must be inevitable deflation as debt levels become increasingly hard to finance and ultimately contract. Irresponsible central banks and governments can try to bail out the failed banks, businesses and municipalities at the centre of every popped bubble, but the bubble economies are ever more certain to deflate with each bailout. Each bailout further undermines the market discipline which is bedrock to a saver or investor’s decision to part with hard-earned cash by trusting it to the intermediation of the management of a bank or business.

It’s this simple: I won’t invest in a country that bails out failure and punishes savers. I won’t invest in the US or UK until they change course and protect savers and investors, ensuring a reasonably predictable positive return. In the EU, I will be very selective, preferring those conservative states like Germany that never embraced the worst excesses, although sadly still have fall out from individual banks' stupidity in buying into foreign excess. I will know when it is safe to reinvest when policy interest rates, bank/intermediary oversight and accounting standards give me confidence I am better protected than the corporate or financial elite.

While it may take the Asian and the Gulf State investors longer to embrace my analysis, I have no doubt that they too will eventually conclude that parting with their savings under the terms now on offer will only deepen their losses. They would be better off keeping the money at home, investing locally under local laws and vigilance, and letting the US and UK implode.

The argument against this has always been that with trillions already invested in the US during the deficit years, the Chinese and Gulf States would suffer even more horrible losses from a collapse of the western economies. This is accurate, but not complete, as it ignores the relative value of cash investment at the top and bottom of a bursting bubble. Once the collapse has bottomed out, so long as a globalised economy survives, there will be even better opportunities for those with savings to invest selectively in businesses with clearer prospects and more certain profitability under regulatory frameworks which have been restored to a proper balance of investor protection and intermediary oversight.

Right now survival of businesses in the West depends largely on political pull and access to regulatory forbearance and central bank or treasury finance. The market has failed, and officialdom is collaborating in perpetuating that failure.

Should the western economies implode in deflation, however, there will be new opportunities to return to market-based policies that reward effective, efficient management and punish corrupt, debased management. Until that happens, those that invest will continue to lose money. Once deflation is exhausted, then those that invest can expect to make and retain profits again.

I think it took me so long to feel confident about predicting deflation because the floating currency system under dollar hegemony and Bretton Woods II distorts the workings of both inflation and deflation. Despite the US being the epicentre of all the failed debts, failed securitisations, failed credit derivatives, failed rating agencies, failed banking businesses, failed corporate governance, failed accounting standards, failed capital adequacy models, and failed regulatory forbearance, the US dollar has recently strengthened as deflation globalised. The US exported inflation in the boom years, and now exports deflation in the bust years.

Since spring 2008, as US investment banks sold off assets, imposed margin calls, and used access to unsegregated wholesale assets in custody in the rest of the world to upstream liquidity to their US-based parents and affiliates, the dollar has strengthened relative to other currencies. The media reports this as a “flight to quality”, but it is more like a last looting of the surrounding countryside before dangerous brigands hole up in their hilltop fortress. The brigands appear temporarily wealthy compared to the peons left stripped and penniless and facing winter. When the brigands have eaten all the stolen grain and livestock, however, they will have no means to replenish except to use force to raid the countryside again. The peons can always hunt, forage, farm and carefully husband a surplus to gradually increase their wealth. If the brigands raid too thoroughly or too regularly, the peons have no incentive to grow crops or keep herds (negative savings returns) and everyone starves (deflation).

In the meanwhile, the peons just might wise up, hide any surplus more securely and organise mutual defense against further attacks to ensure that their peon children prosper and the brigands die off. That would be the end of Bretton Woods II, and the rise of China, India, the Gulf and other productive and/or resource rich states which invest surplus in domestic productivity and regional growth.

I reread my piece on Fisher’s Theory of Debt Deflation in Great Depressions the other day. One of the more confusing aspects is his assertion that the dollar “swells” as debt deflation takes hold. What he meant, of course, is that deflation increases the quantity of assets and the likely investment return each dollar purchases as deflation wrings debt and misallocation of capital out of the economy.

It is now clear to me that policy makers in the West are determined to apply every available resource to underpinning failure, misallocation and executive excess. As this discourages the honest saver from parting with cash, policy makers are ensuring that deflation will wreak its havoc on the financial and real economies of the world. Only when that deflation has played out and rational policies that reward market-based management and returns are restored will it be worthwhile to invest again. In the meanwhile, any wealth saved securely from state seizure will "swell" to buy more assets in future - a key aspect of deflation and a key means of restoring the control of the economy into the hands of more farsighted savers and investors.

I have quoted Mr John Mill before, but it bears repeating: ““Panics do not destroy capital; they merely reveal the extent to which it has been destroyed by its betrayal into hopelessly unproductive works.” The extent to which capital has been betrayed in the past quarter century under Bretton Woods II, bank deregulation and the Basle Capital Adequacy Accords is unrivalled in the history of fiat banking. The bankers, lawmakers, regulators and academics who collaborated in the betrayal still hold power, like the well-armed brigands in the fortress, and their continued collaboration to prevent accountability must inevitably discourage honest savers from risking further loss. Even so, it is the savers/peons who hold the ultimate power as they can starve the brigands.

Some day soon savers will revolt at financing further depredations. They will refuse to buy even government securities, gagging at the quantities of issue forced upon them under terms of only negative return. When that final massive bubble bursts, deflation will follow its harsh corrective course and clean out deficit-financed “unproductive works”.

When that happens, if reason is restored in markets with effective oversight, I might consider investing again, very selectively, in whatever productive works might then be on offer and only when secure in realising - and retaining - a positive yield.


Apologies for not posting last Friday.

Writing for this blog has been a great experience, forcing me to refine my views about current events and the principles which should underpin financial market interactions and supervision. In parallel, I have been forced to re-evaluate whether I should commit to sorting out some of the practical aspects of the future of banking in the global economy. Writing takes a lot of time and passion, and these are limited commodities for any of us.

I have accepted a full time executive position which will take all of my time and passion going forward in 2009, so the blogging has to be suspended at year end. The job will enable me to put into practice the principles I’ve illuminated here, hopefully mitigating some of the impacts of financial instability. I’ll still lurk, and maybe comment on Professor Roubini’s thread from time to time.

Wish me luck!


mst10 said...

You can't stop now - this is the best 'big picture' economics blog out there. I greatly look forward to your posts. How about 1/month ?

Anonymous said...

my hat off to you fine sir :)

Max & Emma said...

I'm dismayed that you are unble to continue this fine blog but wish you much good fortune in your future role.

shtove said...

Goooood luck! - even you will need it!

I thought you were going a bit Oliver-Stone-conspiracy-theory a few weeks ago, but this is an excellent post.

deflated said...

Oh dear oh dear. I had begun to rely on your posts to help me think things through clearly. I shall really miss you. The only other writers out there who I trust are Mish Shedlock and Bennet Sedacca (Minyanville) and they obviously have an American perspective. I have not found anyone else with your insight and a British point of view. Apart from personal and family assets I have a shared fiduciary responsibility for a 7 figure sterling sum which we "saved" from disaster at an early stage but I am fast running out of ideas about what to do next. Your posts have helped me think strategically.

I echo the plea for a monthly post.

Do you have any suggestions of where else one might look for a commentary with a British perspective?

Lewis said...

Thank you. London Banker, for the clarity and honesty of your analysis. I do hope Messrs Darling, Bernanke and Paulson have been reading you. Please continue to comment as you find time and passion!

FutureThoughts said...

A pity you are "leaving". it's really a great blog. 1 post per month would be highly appreciated!
all the best for your future!

Allow me one question before you leave:

Living in Germany, we obviously rely on the EUR. This is admittedly a concern, given the financial situation of member states such as Ireland or Greece, just to mention 2 of the more concering ones. What happens if the EUR breaks apart?

I have no faith in the USD, and GBP or CHF are under great pressure by the relative size of their banking systems compared to their respective GDPs (and the dependence of their GDPs on the banks).

Not having faith in "normal" currencies one could flee into Gold as the ultimate "save haven".
However, is this still wise in a deflationary scenario?

Looking forward to your opinion.

Anonymous said...

I wonder if he cannot blog because of a new non-disclosure agreements?

Anonymous said...

LB, thank you and Godspeed.
But please do contribute, here or there, as regularly as possible.

I would not presume to ask you or anybone to time the turn, but would be most interested in what assets you prepare for a reflationary change of scene. This to be in a transformed world, no doubt.

Stay in touch.


VoiceFromTheWilderness said...

I've only recently discovered your blog, and like the other posters, am saddened that you plan to stop posting. You seem to strike a great balance between real world insight and apocalyptic madness -- in other words too many of the bloggers, some alrealdy mentioned, who seem to see what's really going on, are also too wedded to their own dire predictions, or pet theories to be truly reliable voices.

I might add: anywhere you are an executive I'd look quite favorably on as a place of employment

PitchPole said...

Oh come on!!! I just found your blog this summer - wonderful stuff and now you're packing it in??

Thank you for the great posts. Please continue if at all possible!!

cheryl said...

Your writing and insights are extraordinary -- among the best found on the web. You will be sorely missed.

However, I hope that if and when events warrant it, you will write the occasional post.

Please know that you will be missed. Best wishes for success in your new endeavor.

Anonymous said...

Really too bad, yours is one of the most well thought out and insightful posts. Especially since this is a bank crisis, in my opinion, a bankers opinion is very helpful to understand the situation we face.

Best of luck


locust said...

Congratulations and best of luck in the new year.

g said...

Allow me to add my best wishes. Your blog has given me great pleasure because of your easy writing style and clear, dispassionate opinions.

It now seems that the easy writing style may have been easier to read than to write, so many thanks for the effort you must have put into it.

No doubt led by your example,the other joy of this site is the civility and apparent decency of the other posters. That too will be missed.

Good Luck!

tb said...

Gosh, far too much adulation.

Still, I'll miss you too.

Anonymous said...

Best wishes. I will miss your unusual non US centric view of the world.

One thing that your post doesn't answer is where are you parking your funds until you are convinced to reinvest?

b said...

Thanks and good luck!

I hope you'll find time to drop in and still give a piece of wisdom, even a tiny one, once a while.

Thanks again.

b said...

Thanks and good luck!

I hope you'll find time to drop in and still give a piece of wisdom, even a tiny one, once a while.

Thanks again.

CrocodileChuck said...


THANK YOU! Your writing is edifying, articulate, with a moral center. In your new position, perhaps you can find some occasional time to post....

Go forward!


Kuchenjunkie said...

Sadly I discovered your blog no more than a few months ago. But after reading only a few of your posts, your blog became my favourite one.

I would appreciate it very much, if you could find some time to do a post per month.

In any case I would like to thank you Sir for running this blog and letting me participate in your insights.

Best of luck!

Paul said...

Follow your heart LB

You called it the way you saw it in your worldly wiseness and made a difference

You now choose to direct your wiseness to make a difference in another way


Nath said...

I am really sorry this blog has to stop. Does someone know another economic blog as interesting as this one?

Concerning the crises caused by our banking system, debt-deflation, and the critic of our fractionnal reserve systeme, I advsise all of you to read Maurice Allais, A French nobel prize of economy. He advocated all his life that we should put an end to the fractionnal reserve system to have an efficient and just free market. The current events prove that he was right. In 1998, he said about our debt-money system "what must happen will happen" i.e a collapse. I do not know if its works are translated in English.

Irving Fisher debt delation has been mentionned many times. However, irivng Fisher "100% Money" has to be read also, it gives us the path to be followed to avoid a global collapse as we endured in the 30's.
Change our banking system into a 100% reserve system and there is no risk of harsh deflation, no risk of bubble. Read "100% Money" and you will realize that this revolution is not that hard to carry out.

Knute Rife said...

First, concerning your comments.

The part about the peons sounds like you've been watching Seven Samurai or its progeny. I think we're seeing another collapse of a global economic system and replacement by local economic systems. The catch is that no previous global system has been so ubiquitous or so at the expense of local systems. We'll see what's left for local systems to rise from. That's why I've been saying for some time that I'm not investing in gold, I'm investing in dirt and lead.

As for foreign investors finally shifting away from the US, I think the operative signal is, when will investors be willing to admit that sunk costs are sunk? That rule of accounting is contrary to human nature. Every casino counts on the human aversion to walking away and not throwing good money after bad. Very few casinos go broke counting on that aspect of human nature. And right now the US is the biggest casino ever.

Second, concerning your revelation, "Good night sweet prince, and may...", wait, I don't want to use that. OK, "So long, and thanks for all the fish." Don't be a stranger.

Paolo B said...

And sorry for all of us that have been reading your fine writing.
As an European in America I must thank you for your enlightening posts that explained very well the current and future situation. I refer to that as the Armageddon of Grasshoppers (but will hurt Ants too).
Hope to read some more in the future even if you stop this blog.

Anonymous said...

I add my thanks and best wishes. I hope you can see your way clear to at least leaving the blog dormant rather than killing it off, so that, time permitting, you can make occasional comment on events as they unfold. Have a great break and a good 09; hope the job is all you expect.

Glenn Condell

Anonymous said...

good article and informative. i like the low gasoline prices !

Maria said...

NO!!! I forbid you to go! You make too much common sense to just pack your bags and leave us hanging. DO YOU HEAR ME??? I WILL SPANK YOU!


kilgores said...

All good things must come to an end, I suppose. Thanks, LB. Hope you'll continue, as you have in the past, to take time to respond to questions posed directly to you on Dr. Roubini's blog. Best of luck in your new position, and in making it through 2009 relatively intact! :-)


Juan said...


Another way to understand it without reliance on a theory of debt deflation:
What is a Crisis of Overproduction

Please note that such crises are not geographically bounded but uneven and combined at a world scale. Note as well that they are inherent to a system which own progress necessarily undermines until 'permanent crisis management' becomes a systemic necessity even though this also undermines what is thought to be saved.

Good Luck Señor

Dan said...

I respectfully disagree. The fed is currently creating the deflation. You need to look at the feds balance sheet. You will see that they haven't monetized yet. They have borrowed a trillion from the treasury and 600B from member banks. This has pulled 1.6T out of the system exacerbating the deflation we are experiencing right now. Soon, they will run out of options and have to fire up the printing presses to pay back the treasury and monetize the system. I consider this the setup trade for the insiders. All prices have collapsed and can now be snapped up for bargain. You will soon see inflation pop again by the middle of next year and the dollar and bond markets collapse. If you have cash, there are some very amazing opportunities available. However, I am not talking about the US markets, but the foreign infrastructure and resource plays.

Dr. Crow said...

Best of luck to you, LB. You've been a godsend in these troubled times. I'm hoping you can spare some time to post either here or at RGE Monitor in future. Until then, I'll read your archived posts for solace. Thanks a bazillion!

Jesse said...

Best of luck on getting a job.

"I’m now coming down on the side of deflation for a very simple reason: there is no longer any incentive to save or invest, and so debt and investment cannot increase much beyond current bloated levels."

This is the notion that in order to increase the money supply there has to be 'new borrowing' financed by savings. I would have to wonder where you have been for the last six months. It is simply not true.

Bernanke and crew has given 3 trillion to the banks with pledges of 5 trillion more. There is more than sufficient debt on the horizon as well coming from the amazing cocktail of Keynesianism and Monetarism that the Fed is serving up.

So far they have been taking care to drain as they go along. But at some point you are right, non-US people will tire of financing the free lunch, and the underpinnings of the dollar will vaporize.

So, deflation in prices yes, in aggregate domestic demand.

But in a fiat regime, as opposed to the gold standard Irving Fisher was working within, the money supply is much more of a 'policy decision' than the normal mind can allow, hence the creation of endless 'rules' about why the Fed cannot do this, and why the money supply can't grow because of that.

The only limitation I have seen thus far is that they prefer to give loads of money to people who shower before they go to work, and little or nothing to those who shower after working a full day.

Anonymous said...

Absolutely the most sound column on the present conditions and likely future events I have read.

And now it will end? That is unfortunate.


Taichiseal said...

Just want to thank you for sharing your wisdom and thoughts all this time. Best of luck in the new job.

Roga said...


darkcloud said...

thanks, LB.

we will miss your insights and analyses immensely.

good luck and best regards - - dc

RB said...


is that it's a PLANNED collapse of
America's - of the West's -
financial underpinnings; for a
certain purpose, which I explain
in my report on Col. Archibald
Robert's pamphlet, "The Anatomy of
a Revolution":

Planned Destruction of America


Anonymous said...

Deflation, hyper-inflation are all caused by using unbacked paper money. The US was bound to fall once we allowed private entities (Federal Reserve) to control our money. The zionist Federal Reserve and fiat money are yet another infringement on our rights by the gov't. Add it to the ever-growing list of violations:
They violate the 1st Amendment by opening mail, caging demonstrators and banning books like America Deceived (book) from Amazon, Wikipedia and Facebook.
They violate the 2nd Amendment by confiscating guns during Katrina.
They violate the 4th Amendment by conducting warrant-less wiretaps.
They violate the 5th and 6th Amendment by suspending habeas corpus.
They violate the 8th Amendment by torturing at Gitmo.
They violate the entire Constitution by starting illegal wars without declaration.
Impeach them all (both parties) and save this great country.

Bron said...

I understand the time it takes to write, can you not at least just keep us going with some bullet points from time to time? You will be sorely missed.

Doot said...

excuse my ignorance please.
"Anyone sitting on a pile of cash now is unlikely to want to either (a) place it in a bank, or (b) invest it in the stock market."
Where am I supposed to keep a pile of cash if not in a bank? Under the bed?

Anonymous said...

Congratulations, Thank You and Good Luck!

We will miss your insights.

Antti K.

Anonymous said...

Hi LB,

Read all your posts with great interest and enjoyed your well-tempered views from inside the banking industry. Look forward to your comments in the future regardless of how they arrive.

About today's topic: I’m now coming down on the side of deflation for a very simple reason: there is no longer any incentive to save or invest, and so debt and investment cannot increase much beyond current bloated levels.

I think we all agree that today's monetary policies will lead to deflation, but will we arrive there via the low road of creeping deflation or will we get there over the hyper-inflation high road? And how long is each of these roads? And when we reach our destination, how long will we be there?

Anonymous said...

Sorry, but I have afeeling you do not understand the cause of events, but get fixed on a moment and try to derive from that.
For example, since about 1950 there was no deflation in US, which exactly tells about the process on hands being under control. Many more. ... deflation - Ha! slight deflation will make assets in US and UK attractive to the same capital moved away,.. too many sithgs to account for if you do not see the process control. The danger is different and much harder, but in absolutely different area. Sorry you do not see it.
Sergey Gavryushenko

Sebastian Weetabix said...

Perhaps you could post once per month? Your many followers out here are going to miss your thought provoking comments.

Paolo B said...

Joseph Stiglitz point of view is well resumed in an article on the last magazine I was expecting to find it:

CCz said...

Goood luck!

And Thank you very much for your help!

Anonymous said...

Dear Mr Banker,
Thank you for your fine contribution to our effort to comprehend and navigate through this miasma. Our understanding will be all the poorer for your absence.

Every best wish

James (NZ)

Michael Shedlock said...

I’m now coming down on the side of deflation for a very simple reason: there is no longer any incentive to save or invest, and so debt and investment cannot increase much beyond current bloated levels.......

It is now clear to me that policy makers in the West are determined to apply every available resource to underpinning failure, misallocation and executive excess. As this discourages the honest saver from parting with cash, policy makers are ensuring that deflation will wreak its havoc on the financial and real economies of the world.

Those two paragraphs seem contradictory. I vote for the second because people will indeed save (pay down debts) and decrease consumption. Others will default, also wiping out debt.

Peak credit has arrived.

Humpty Dumpty On Inflation


t said...

Keep it real, LB

Anonymous said...

good luck on the inside, it's not too early to start thinking about the solutions and be proven right by events so that your answers fit the current situation. I'll leave this dangling too... the informal economy exploys 60% of the labour force in developing countries

Anonymous said...

I love this blog. I hope you'll reconsider giving it up entirely. In any case, good luck with your new job. I hope you'll leave the site up so I can read the earlier posts.

Smoove T said...

Congratulations and best of luck to you LB!!
You will be missed!

JLC said...

Thank you for sharing your valuable wisdom, insight, and experience. Please check in every now and then. Best of luck.

Anonymous said...

God bless in your future endeavors, LB.

I agree with you that countries that attempt to shield business failures from consequences should be penalized for it by demanding a higher risk-adjusted expected return. Bailout Nations need a higher hurdle rate.

But I don't think you successfully linked Bailout Nation to cutting interest rates. Lower overnight interest rates benefits those who borrow from the Fed the most, to be sure, but to the extent it is passed on to other borrowers, they have access to capital at lower rates that before. Consider U.S. Small Business Administration loans, which are tied to the Prime Rate, which is Fed Funds + 3%. Or Home Equity Lines of Credit (for those who still have home equity) at Prime or Prime -0.25%.

Some people complain that lowering the Fed Funds rate is a "blunt tool" that doesn't really provide a "focused stimulus" to get to the exact problem areas. If bailing out failed business models like AIG, Bear Stearns or the auto makers is the archetype for a "focused stimulus," give me the "blunt tool" that benefits everyone in the short- and intermediate-term: low rates.

We can argue about the long-term effect at the next Presidential election campaign. That's as far as any politician or Fed official can think anyway...

Anonymous said...

Anon from 13 December 2008 21:44 here again. One other point:

Bagehot's Lombard Street is a great instruction manual for currencies negotiable for gold and for countries with debts denominated in foreign currencies. The U.S. is neither. Furthermore, as you note, the dollar has rallied during the worst of this crisis, not sold off, suggesting U.S. counterparties (or U.S. investors with capital invested in foreign countries) remain more confident in the dollar than, say, the IKR, Hungarian forint, or even (dare I say it?) the GBP.

Anonymous said...


Many thanks for a wonderful blog -- my number one favourite. I agree with many others that it would be great to see a monthly blog, even a bullet point list.

Best of luck in your new role.


Anonymous said...

LB, I appreciate your compositional skills. In a wired world replete with error, this is truly an achievement. Of course, the analysis is good too, but it seems (as my beer-addled contribution shows) that good writing is in shorter supply. Do carry on, wherever that may be.


London Banker said...

@ Mish
I take issue with your view that paying down debts and reducing consumption are equivalent to saving. They are not. Saving requires a surplus over consumption that is retained for investment.

Reducing consumption by reducing borrowing does nothing to increase savings, it merely contributes to deleveraging of the economy. This is essential in a deflation, but not enough by itself to generate a savings surplus. And as production falls with the economic contraction, generating and retaining real savings becomes an ever greater challenge.

My point was that those few frugal souls that have bothered to retain a surplus over consumption and thereby generate savings over time are being discouraged from placing that savings in the hands of banks, brokers and even state treasuries by the negative returns now offered and the rampant corruption of the system evidenced by the extralegal and illegal actions so many feel free to take - including the US Treasury and Federal Reserve. The lawlessness and lack of accountability or transparency - in both private and public sectors - discourage me as much as the negative savings rate. And so whether it is in the mattress, spread as small deposits at multiple banks, or even in gold, I will be content to preserve my meagre capital rather than trust it to any of the traditional offerings intermediated by the crew currently in change of the banks, brokers and governments.

@ All
Many thanks for your good wishes.

It would not be fair to my employer to risk any embarassment from my continued blogging, particularly as I have been critical of policies followed just about everywhere at some point. I am unlikely to stop being critical, so I have to stop writing.

I expect to make a real difference in both policies and outcomes through my efforts in my new position, and that will be my priority in 2009.

I'll be keeping the blog here up, and will transfer the early diaries from RGE that weren't posted here over in the next few days. That should give us an interesting basis for evaluating how my early criticisms and predictions have fared, as well as providing a bit more leisure reading for those interested.

Lona said...

Good Luck and thanks for sharing.

Deflated said...

Heavens, this just makes it worse. Here we have the beginning of an open debate between LB and Mish - two of the best economic thinkers on the planet - and one of the debaters is dropping out.

Has anyone got any positive ideas about where those of us who are trying to understand this mess can go? I suggest we keep this comments page running for a week or two (if LB agrees) and put up our suggestions about who is worth reading. Most of the economics blogs are written by people who fit Charles Munger's description of the man with a hammer - to whom every problem looks like a nail. The gold bugs are the worst offenders. LB and Mish aren't like them. Who else is worth reading? Mauldin? Weiss?

idiotsavant said...

Finally, a London Banker who isn't glib!

I just discovered your blog today, and am already as sad as everyone else who laments the premature end of your blogging days. Your writing has certainly helped us to put the pieces together.

I've always wondered how you bankers truly operate, and as I read I grow increasingly nauseous because you clearly are painfully correct.

When you're back in the belly of the beast things will certainly get even more bizarre and infinitely more bloggable. But, after all, "loose lips sink ships" so your silence is commendable.

I've often been saddened by the fact that the "rabble" continually accuse the "overlords" of being evil sub-human fools. While many policies may have that net effect, your wisdom and generosity shows that some on "the inside" are insightful, decent people who very much care about doing the right thing.

The system is fundamentally flawed and too easily manipulated, but the system also involves very many good people- both those within it and those effected by it. I look forward to the day when the voices of these "better angels" are respected and acted upon.

In the meantime, Bush rode in on Enron and rides out with an even bigger bang. Exporting inflation, deflation, and violence- obviously what is jettisoned invariably washes back on your own shores. Apparently they believe that with this little trick of financial engineering the clock can be turned back to the era of American hegemony, and held there forever.

For better or for worse, such acts clearly mark the end of empire, and as they frantically pull levers and push buttons, because the long-term effects are unknowable, they're unwittingly hastening the demise of Amero-centric globalization. Without sounding naive, I'd like to think that policymakers will eventually have no choice but to do the right thing- that which truly makes the world a better place. Either that, or we battle/grind our way back to the stone age...

While your new employers wouldn't look too kindly on blogging, writing a book is still quite respectable, and we eagerly await yours!

"The End of History"

Best of luck, Mr. LB.

MauiBrad said...

London Banker,

It has been refreshingly revealing reading your insights. Will miss that, but thank you for leaving the blog up so we can review it from time to time in the coming year.

Regarding deflation, clearly we are in that now and you present a compelling case for continued deflation until the system becomes honest and openly worthwhile for savers and investors...'all else being equal.'

But, I think the above comment to yours is also relevant, "Dan said...The fed is currently creating the deflation. You need to look at the feds balance sheet. You will see that they haven't monetized yet...You will soon see inflation pop again by the middle of next year and the dollar and bond markets collapse..."

I think you are somewhat correct but that Dan is also correct and that the timing he mentions may not be too far off.

Aloha, Brad

CityUnslicker said...

LB - I will miss your insightful posts. There are not many of us that comment on the State of the UK.

One area you miss though is predicting the end of the deflation. You hint at it with the brigans metaphor.

it seems to me that deflation is happening so rapidly that this phase may not last more than a year and then the switch to inflation will be rapid.

I would welcome your comments, on my blog, email or wherever. Should you ever wish, I appreciate guest posts on my blog too.

acrumb said...

By the way, in a recent posting Karl Denninger referred to Kondratiev and Greenspan.
Amongst the links to other article is this one:

Ralph said...

To badly paraphrase Richard Curtis and Ben Elton's wonderful character Captain Darling, spoken shortly before his death.

"Wrote an entry in my diary on the way over here. Simply said, Bugger".

Good luck.

Anonymous said...

another name... not quite so popular, but it's the person who woke me up, and i have profited immensely from said awakening:

Prechter. said...

Somehow it seems significant that the fast capitulation to the global Deflation thesis, which has unfolded over 5 short months, should reach its apex right as the US FED signals QE and Monetization. Because in an Austrian sense, we are now inflating big time.

Agreed, whether this transmits and gains velocity is the current question. I just find it notable that the case for Deflation is now clearly the consensus.

chicilus said...

why didn't i discover your blog earlier? any occasional post will be greatly appreciated.

Michael Shedlock said...

@ Mish
I take issue with your view that paying down debts and reducing consumption are equivalent to saving. They are not. Saving requires a surplus over consumption that is retained for investment.

My point was that those few frugal souls that have bothered to retain a surplus over consumption and thereby generate savings over time are being discouraged from placing that savings in the hands of banks, brokers and even state treasuries by the negative returns now offered and the rampant corruption of the system evidenced by the extralegal and illegal actions so many feel free to take - including the US Treasury and Federal Reserve. The lawlessness and lack of accountability or transparency - in both private and public sectors - discourage me as much as the negative savings rate. ...

London Banker - I think we are in violent agreement. Your point is very well taken.

I simply am using a different definition of saving than you are. Unless there is agreement on terms there can be no debate. Using your definition, I agree with you.

I was using the official definition which is wages - spending = saving.

Actually the definition is slightly more complicated but in essence that is it.

In Austrian economic terms savings = production - what is consumed of production

E.g. an apple grower produces 10 bushels of apples and consumes 3 bushels. Savings = 7 bushels.

Those bushels might go bad so the grower sells them for gold and that gold is the savings.

Going one step further, the grower pays down a debt with some of that gold, the savings was still 7 bushels as that is what was left over "saved" from the production of 10 bushels of apples.


GG said...

Sorry Londonbanker - you took too long to come down on the wrong side, as as it will be apparent to you in hindsight. The current rise in dollar value is a complete head-fake, triggered by liquidations creating dollar demand and also US banks buying bonds. And I wonder, if we are in a "deflation", why is my food not getting any cheaper?

We are so used to thinking in terms of a fiat unit of money, i.e., the dollar, that I think everybody in the deflation camp is making the same mistake. Deflation will occur in terms of real money, i.e., gold NOT dollar/fiat money. What will occur in terms of the dollar will be massive inflation. You are underestimating/disregarding the role of the government. If the banks are not lending, it is not beyond the govt. to give money directly to a clamoring populace. Case in point is Obama's stimulus plan, to be financed by printing money. Also, the fed is monetizing everything in sight right now - from credit card bills to mortgages - there is no way that this tsunami of monetization will not cause cause extreme inflation. Deflation in terms of the dollar can only occur in the absence of the Fed - period.

People can't/won't keep their money in the mattress forever, simple reason being that they can't eat money or use it to cover themselves. This will initially bid up the price of things of daily necessities, i.e., food, commodities, etc. As more and more fiat money buys less and less real stuff, the prices will be bid up even more resulting in a an inflationary spiral that will seep into everything including stocks and real estate, but remember, this will be just a nominal increase as everything will fall in REAL terms (i.e., in terms of Gold).

GG said...

I would say "Inflation has become inevitable". In fact, this false deflationary "scare" is setting the stage for the inflationary nightmare up ahead. Also, NYT has been carrying deflation-sounding articles recently - in my book this is a very positive sign that the deflation "bubble" is about to pop.

Drake said...


Thank you for the wonderful work you have done here and Godspeed in your new career.

You will be sorely missed. But truly, a person of such clear vision and evident decency as you, definitely is needed in influential positions as we head towards the dark abyss of this crises. Your wisdom will be missed here, but if you can serve the greater good in your new job better than writing a blog, run with it.

All the best, thanks

Anonymous said...

It’s proper that site is down: the more hiding places he/she points to you, those who needs to hide few millions (not more), the less is left for him/her or their business.
You do not discuss the solutions, no causes. Most “developed” countries are printing much more money than needed, and cut the base money stand on: production by globalizing very fast. And the same elements move the capital out without a $ or EU paid back in taxes or tariffs. And the same are looking for a place to hide the leftovers (few millions each) and cut the base even more…. Sounds like a rat hole seeking site.
Maybe that’s why the “leader” left. Good for him/her. It's normal.

Sergey Gavryushenko

Anonymous said...

It will end in hyperinflation, and it will be here within 12 months.

Anonymous said...

Then you should go out and buy as many houses as you can with the smallest downpayment you can obtain. Real estate does really well in inflation and even better in hyperinflation. Have you done that already before it is too late/

Prime Rate said...

If deflation sets in it will be short lived; nothing to worry about. At the end of 2009 and into Q1 2010, the change from disinflation to inflation will be dramatic, and that's what we should be worried about.

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