Mish Shedlock – Fiat World Mathematical Model

Mish Shedlock has written a most elegant post entitled Fiat World Mathematical Model.

This article should be read in full.
The intro –

In a fiat world, money is printed into existence by the central bank – in the United States the Fed. Given there is nothing backing up this money, it is inherently worthless. However, one can think of as real. It was printed (even if only electronically), therefore it exists.

In addition to the previously mentioned money supply, fractional reserve lending allows credit to be extended by banks and financial institutions on top of that inherently worthless money. Indeed, banks and financial institutions have leveraged credit to base money at ratios of 30-1, 50-1 or even higher.

It’s pretty amazing if you think about it: Credit is extended with 30-50 times leverage on inherently worthless paper.

As an Australian I love Mish for honouring Steve Keen of the University of Western Sydney.

There are a lot of points worth noting but I have selected the points that affect me every day.

Finally, it is important to consider the role of attitudes going forward. Attitudes affect the willingness of consumers to take on debt and banks to extend it.

Attitudes

Boomers are heading into retirement. A significant portion of their retirement plan (home prices) has already been wiped out. Another portion of boomer retirement plans is being wiped out in the stock market crash. Toy accumulation is out. Fears of insufficient saving is in.
Boomers will be traveling and spending less than they planned.
A secular shift to frugality and risk aversion in all age groups has begun. Signs are everywhere.
The lend to securitize model at banks is dead. So are toggle bonds where debt is paid back with more debt, and a myriad of other financial wizardry schemes.
Children who have seen their parents wiped out in bankruptcy or foreclosed on are going to have a completely different attitude towards debt than their reckless parents did.

Expect to see more frugality from parents and their children alike.

Because Mish lives in the real world consider what he raises at the end of his post.

Global Stimulus Kicker

There is yet another kicker to this model. And that kicker is the Eurozone, the UK, Japan, and essentially every county on the planet is all attempting some sort of stimulus plan or other. This is bound to cause a major distortion at some point, as no country has anything remotely close to an exit strategy for this. What kind of distortion and when cannot be certain because we are indeed in uncharted territory, worldwide.

Political Will vs. Consumer Psychology

What happens next depends somewhat on the political will of the central banks and politicians. However, it depends more on the psychology of the borrowers. If consumers and businesses refuse to spend and instead pay back debts (or default on them along with rising unemployment), the picture simply is not inflationary, at least to any significant decree.

The credit bubble that just popped exceeded that preceding the great depression, not just in the US but worldwide. Thus, it is unrealistic to expect the deflationary bust to be anything other than the biggest bust in history. Those looking for hyperinflation or even strong inflation in light of the above, are simply looking at the wrong model.

At some point the market value of credit will start expanding again, but that is likely further down the road, and weaker in scope than most think.

If there was a people’s choice category for the Nobel Prize for Economics I would nominate and vote for Mish Shedlock for his contributions to the understanding of the complexities of economics in the real world.

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The power of awareness is your life preserver.

Robert Phoenix always writes good stuff  but some posts are excellent

On the  miracle on the Hudson.

Four what?

Four What? (A poem)

Forty years of occupation
Four years of qassams
6400 rockets
1400 dead Palestinians
400 dead children, many under Four years
40 dead Israelis
48 dead Hamas fighters

四 – si

All at a cost of Four billion dollars
to buy Israel four more years.

 

 

Gaza graveyard

Gaza graveyard

It seemed possibly by a quirk of my memory that all the statistics related to the tragedy of Gaza to have some conection to the number Four. Four in Chinese popular culture is related to death.

Crank Theories

“Everybody should espouse three or four crank theories for the pure pleasure of having something harmless to cranky about. And when a theory of this sort proves to be correct, it is a true moment for celebration.”

The Thurb Revolution, by Alexei Panshin 1968.
(A thoroughly good read.) The book is available as an e-book as a part of the combined trilogy “New Celebrations” see Electric Story .

New Ce;ebrations

New Ce;ebrations

For information on Alexei Panshin Welcome to the Abyss . Alexei Panshin is better known for “Rite of Passage”.

Power

“Power consists of four components, which are in order of importance, Will, Timeliness, Skill and Strength, weighted so that in that order, it is 4+3+2+1= 10, which is the Whole. ” Tiresio Rael “The Morphodite” by M A Foster.