Stock futures freeze as tumble worsens ["We are in a panic mode, I don't know how else to....]

Reuters ^

[lentulusgracchus]

But it probably seems like the safest alternative between monetary inflation and credit deflation. As it becomes clearer that it isn't working, I expect monetary inflation to be the tool of choice (it's the only other tool they have).

The guys at Minyanville came to the same conclusion in a thinkpiece article last January (archived on that site). They too guessed inflation would be the chosen poison, but in fact what the Fed and Treasury did was deflationary, because they moved to boost the dollar from around 71 in April to where it is now (closed at 86 today, up over one full point).

Supposedly this move was undertaken at the behest of the ECB and other central banks holding dollar reserves (so I read elsewhere), who'd eaten it to the extent of 37% inflation over three years or so. But the dollar's deflation was what nailed gold and oil and started the commodities knockdown.

[palmer]

Looking at M2:

it seems likely that the spring commodity bubble was caused and/or exacerbated by the Fed panic over Bear. I think any bubble that gets that high that quickly (for a good idea of the distortion, look at soybeans:

To me that's just mindless speculation. The reaction once the bubble pops is partly a traditional flight to US dollars but I don't see anything in the first chart that would point to intentional deflation.

[Freedom_Is_Not_Free]

Yes, we are in for a nice era of protracted pain. I’m grateful that I look to be positioned to ride it out in modest comfort. I really feel sorry for those who are going to lose everything or who will be out of work for years. The service economy had a lot of expendable jobs and I mean A LOT, as you well know.

I think unemployment is going to go much higher than anyone expects. A lot higher. I don’t have a fundamental reason for that conclusion. It is just a gut feeling that the service sector has too many disposable jobs that come from un-necessary luxuries we won’t be buying in a severe downturn. Your wife can do the haircutting. Who’s going to get $20 automatic car washes. Who needs frivolous hobbies. People losing their jobs don’t need dog walkers.

We have so many unnecessary services we use when times are good, I have to believe that people will go without many of those services in a bad recession and those people will go jobless, reducing consumption more, hurting GDP and adding to layoffs. Viscous circle.

If you don’t actually produce something, or provide a necessary, recession-resistant service, you should be in real fear of losing your job. At least a laundry service will provide something you need — clean clothing. Some will start washing at home, while others wont. But who is going to need a $5 cup of fancy coffee when the SHTF. I think whole expendable industries are going away.

I think the government is going to be stunned and blindsided at how high unemployment gets in this recession when consumers pull back and quit buying all the crap and quit indulging in all the marginal and frivolous services we take for granted in a booming economy. A lot of recession-resistant jobs are gone, replaced by a lot of disposable jobs that are going to disintegrate when consumers cut to the bone and focus only on the essentials.

I swear, I think unemployment is going to go MUCH higher than anyone in the government now realizes. Just a hunch, not a theory I can back up.

[Freedom_Is_Not_Free]

Printing one's way out of deflation is a very inexact science...

Statement of the year!

Obviously new lending is not the answer because in the long run it will just lead to the next crisis. But it probably seems like the safest alternative between monetary inflation and credit deflation. As it becomes clearer that it isn't working, I expect monetary inflation to be the tool of choice (it's the only other tool they have).

It is clear to me it isn't working.

Fiscally speaking, there is another choice which is govt borrowing to prop up markets and push credit. That works pretty well in this deflationary scenario, but it will be at the expense of our national credit rating.

It seems this has been the chosen method until recently. They are beginning to print, but it took a while and borrowing seemed to be the preferred method. Help me learn. Is swapping Treasuries for toxic garbage considered borrowing or printing? Since there is nothing backing up the Treasury issues to sell to raise money, isn't this just printing, or is this borrowing, since T-bill purchases are loans that must be repaid? The distinction isn't obvious to me.

[palmer]

swapping Treasuries for toxic garbage considered borrowing or printing?

Procrastinating. The idea behind those loans is to keep the financial system from breaking down too quickly. If swapping the junk for T-Bills helps a bank meet collateral requirements and prevent an early redemption by bondholders, it is a decent way to postpone the inevitable. But insolvency can't be postponed forever.

The Fed prints the money (or has the mint under Treasury print it) to buy the T-Bills to loan them out. Back at the beginning of the year the Fed had 800B in T-Bills to loan out. By the summer they were 1/2 gone. I don't know whether they will print to get more or use the Treasury's borrowings and it might not have mattered before now.

But the Fed is also buying now, not just lending T-Bills. They decided to buy commercial paper from money market funds so the money market funds could meet redemptions. This is probably printing although they could be using part of the 700B. Ironically their purchases have meant that T-Bills got a little less desirable (financial entities would rather have the cash). That "success" meant that the previous crowd that traded T-Bills for junk saw their balance sheets drop a bit.

[Freedom_Is_Not_Free]

Thank you. This is complicated stuff and I appreciate your help in muddling through it. I always thought T-bills were pretty simple. WRONG! Bonds are an entire art and science unto themselves.