ottimo articolo sulla crisi imo

[Laetitia]

Talk of impending inflation has been everywhere - CNBC, in the print media, on the internet and on Seeking Alpha. But in the past months, there has also been discussion of deflation. Do we know what is going on? Is there no clear direction for the economy?

Each of the above questions has the same answer: Yes, we are getting an understanding of what is going on, but, also yes, we don’t have a road map for where we are going. I call the nexus of this conundrum, “The Banker’s Dilemma”.

The Fed and the U.S. Treasury have increased the money supply dramatically, printing money and infusing capital into financial institutions. The Fed has announced the intention of utilizing “quantitative easing” which involves buying debt, both private and treasury, in as great a quantity as is necessary to provide adequate bank reserves against future degradation of debt assets, plus provide money that can be lent out by the banks to ease the credit squeeze. The big unknown so far is: How much is necessary?

The counterparties to the Fed trades in “quantitative easing” are the banks. When the Fed buys debt from banks, the price of the debt is driven higher (higher demand), lowering the interest paid. This diminishes the return the banks can receive if they acquire more similar debt with the money received from the Fed and, therefore, should encourage the banks to make new loans to obtain higher interest income. The low rates on treasuries could reduce the profit margin of banks to near zero (or below).

The Dilemma

So the banker’s dilemma is a choice between two paths:

1. Hang on to treasuries held in reserve against future failures in the remaining tangled web of debt from the past several years; OR
2. Increase lending to improve margins and retain (or regain) profitability.

The risk with choice one is negative profitability, but retained solvency. Of course, negative profitability can eventually produce insolvency. However, banks can lose money for many quarters and remain solvent if they have sufficient reserves.

The risk with choice two is insolvency. Of course, the bank may achieve operating profitability, but if reserves become insufficient it will be closed by regulators.

The banker may not have been prudent in acquiring the mountain of debt that now weighs down his balance sheet. But now, with new-found wisdom, he recognizes a lack of appetite for risk and a desire for survival.

The banker, chasten by his previous frivolity, is now taking the steps necessary to ensure solvency. There will be plenty of time later to pursue higher profitability again. In the event of deflation, the banker is secure because his reserves will increase in value. In a subsequent article (The Banker’s Choice), I will discuss how the banks appear to be using their reserves.

The Velocity of Money

An important factor that the banker is affecting when increasing reserves rather than making loans is the velocity of money.

Deflation as a monetary phenomenon can be considered a decrease in the nominal value of all transactions. In other words, if all transactions in one period of time have a nominal value of $100 and the same transactions in a later period of time have a value of $80, there has been a 20% deflation between the two time periods.

Milton Friedman made popular (created?) the following equation:

nT = V M

where nT represents the nominal value of aggregate transaction, V is the velocity of money and M is the quantity of money in circulation. In the simplest view, velocity can be considered a multiplier representing the number of times a dollar is exchanged between parties (each exchange is a transaction) in a specified time period.

Going back to our simple 20% inflation example, that can occur with no change in the amount of money in circulation if V increases by 20%. Or that can occur with a 20% increase in the money in circulation if the velocity of money is not changed. In practice, both V and M change and the new product of V times M is 20% higher to produce 20% inflation.

What has happened in the past couple of decades, and accelerated in the last few years? There has been a steady increase in M, but the big change was in V. The velocity of money involved in creating a humongous pile of financial paper became very large, allowing the inflation of a huge bubble of credit. Why didn't this show up as inflation? Only because we do not measure inflation by following the prices of such things as stocks, highly leveraged debt obligations, credit default swaps, etc.

True, the cost of houses also increased in price and that is included in inflation measurements, but that was only a small factor in the list of measured factors. So we saw only moderate inflation (as measured and reported) over the past decade. The real inflation was in an area of commerce (finance) not measured and reported.

So now we come to 2008. The value of V has collapsed dramatically, and the nominal value of aggregate transactions has fallen in step. There has been massive deflation in financial assets because V has become so small. If you print enough money to double M (the currency in circulation) and V falls by 75%, the value of aggregate transactions falls by 50%, or the economy suffers a 50% deflation.

The Race is On

Now the race is on. Can we print money faster than velocity slows? If we can, deflation can be slowed, then stopped and, finally, reinflation started. If we don't print money fast enough deflation is not stopped. Persistent deflation is self-feeding and can become entrenched in the economy. Everyone holds tight to every dollar because it will buy more tomorrow than today. Consumption dries up. Investment in new facilities dries up. Deflation freezes out growth and economic contraction spirals downward.

In the preceding paragraph, I discussed what happens if we lose the money printing race. What happens if we win? All of a sudden a point comes when the product of V times M starts to increase. If we could identify that point and stop printing money in a timely manner, the growth in aggregate transactions (V times M) might continue to grow in a moderate way and inflation coming out of the deflationary period could then be controlled without drastic actions such as very high interest rates. The problem is, it is unlikely that the proper point in time to slow down or stop the printing of new money will be recognized. The most likely result is the deflationary period is followed by a period of above normal inflation.

The choice of policy makers is to risk a deflationary spiral into another Great Depression or risk the over production of money and accompanying inflation down the road. Our policy makers have chosen to risk the future inflation rather than the economic death spiral.

To conclude, the government can print vast amounts of money and we can remain in deflation if the money is kept in a warehouse (bank balance sheets) and not on the street (used in exchange for goods and services). Eventually, though, one of two things must happen:

1. Deflation persists until all economic activity grinds to a halt and people live at a subsistence level (think hunter-gatherer). OR
2. Money starts coming out of the warehouse, deflation stops and the risk of inflation returns.

As of right now, individuals and corporations are cutting back on spending and investment. This contributes to a lower velocity. If most of the money created by the TARP and Fed actions remains in bank reserves, there is little increase in the VM product. If this continues for some time, we will move further toward outcome 1, above.

http://seekingalpha.com/article/1124...le_lb_articles

[ramirez]

Leggo (ergo sum )! Quindi ho capito (meglio letto) che combattere
la deflazione è DIFFICILISSIMO.
Eppure sono sicuro che si tratta solo di uso di..fantasia
o come si dice in questi giorni a proposito di Bernanke e la Fed
'unortodox'. La gente non vuol spendere attendendo tempi migliori?
ed io gli tasso i depositi !!!!!!!!!

[Laetitia]

da sottolineare come secondo queste osservazioni
che condivido
con questi livelli di massa monetaria in circolazione
appena consumatori/investitori ritrovano
fiducia nell'economia reale, riduzione del risk/recession aversion,
con conseguente incremento di "velocity of money" a livelli
anche minimi ma non di stagnazione come oggi
il pericolo di inflazione elevata è concreto

e questa volta visto la crisi finanziaria che stiamo vivendo
e sperando che la lezione sia servita, come credo

non sarà un'inflazione cartacea ma reale