Facing the Future – Mitigating a Liquidity Crunch
- This topic has 19 replies, 10 voices, and was last updated 10 years, 5 months ago by
.
-
Posts
-
Lewis Wickes Hine Indianapolis Market 1908 Despite the media talking up optimism and recovery, people are not seeing the supposed good news playing ou
[See the full post at: Facing the Future – Mitigating a Liquidity Crunch]There is always talk of deflation but if inflation happens then we have a totally different outcome and if one prepares for only deflation but then we have massive inflation…that puts someone in jeopardy. I don’t think we can underestimate the governments ability to manipulate currencies to keep status quo going on. I am not saying it is a fair system it is just one that wants to keep the system going for as long as it can at all cost. Ted
Governments cannot outrun deflation, It’s a psychological phenomenon – the loss of confidence in the value credit instruments – and it can happen very quickly. No government can outprint deflation. It is not inflation we face. We have already had the inflation during our period of credit hyper-expansion. Credit expansions are always followed be deflation.
Nicole – I just scanned the article; will give it a proper read tonight. Just wanted to comment that you look lovely in your picture. Good for you for being able to drop carbs. I’ll be right behind you. Thanks.
Can we actually say that governments can’t create inflation? My fear is that even though you have been spot on so far can it be possible that you are too invested in a “deflationary” outcome and miss seeing some other possible scenario that could happen. It seems like when talking about people’s behaviors we have no idea what the outcome will be. Why can’t we have Wiemar republic type inflation? Ted
Can’t imagine the tonnage of new “Stamp Scrip” dropped from aircraft onto Cities and Farms when the slightest whiff of deflation is in the air. Free C-Notes for all.
https://cla.calpoly.edu/~lcall/50_million_marks.jpgWhy could the Central Banks not deposit $10k in everyone ‘s bank account with a key stroke or better yet insist on 10ks worth of debt repayment. If you are debt free, good luck to you. QE for the masses if you will. (or $100k) This would be a POWERFUL tool for the mitigation of a liquidity crunch.
History is cited throughout this article but ‘Cenrtal Banks’ have always sacrificed the currency to keep ponzi going? Why would they not today?
Nicole, I’m not sure about the example of the Worgl scrip. Could such a currency have a similar effect in a market town during the next major recession/depression, do you think? Will the contraction of the global economy and global financial system have an impact on the efficacy of such a local currency? Would the combined effects of financial meltdown, resource scarcity, collapsing delivery systems and, possibly, climate change not severely constrain what is possible with local currencies?
Some of the other (current) examples are, perhaps, a bit more relevant but they are operating within a global environment that, presumably, will be very different from what we will face in the future. I just can’t figure out if any local currency started now will continue to operate smoothly in the future that is facing us. The examples were/are a response to the situation of the time; why is it necessary to get any going now before they are strictly needed, especially as we may not be able to predict the infrastructure that will be available to support any particular local currency.
Of course instability (to put it mildly) in the larger system will constrain what is possible with a local currency. All they can offer is the potential to improve matters over what they would otherwise have been. Resource constraints and skills shortages will still be limiting factors.
Local currencies that already operate in relatively good times are making a difference today in terms of advance preparation. For instance, one of the examples in our DVD is of the Hands currency in Golden Bay, New Zealand, which has been going for 25 years. When funding for adult education was cut nationally, Golden bay continued to run theirs on local currency. This is a way to directly address skills shortage, as well as to build very useful community cohesion in the process.
NJ Parkin, in theory central banks could do that, as Steve Keen suggests. I just don’t think they will. Bailouts are never for the masses. Even if they did allow some debt to be written down, asset prices still have much further to fall. People given mortgage relief will just find themselves in negative equity again when that happens. Central banks would have to keep providing debt relief over many years and I can’t see that happening. Deflation can happen very quickly as confidence in debt instruments is lost, and therefore asset values can fall sharply as well. Financial asset values are the most vulnerable to drastic repricing, but even real assets are set to fall substantially, just over a longer period of time.
“History is cited throughout this article but ‘Cenrtal Banks’ have always sacrificed the currency to keep ponzi going? Why would they not today?”
And to add, there is a difference between then (The Great Depression)) and now. In the GD, the dollar was money, backed by PM’s and Semi PM’s, against which it could be devalued. Today the dollar itself is nothing but credit. The Fed is/will continue to purchase debt with debt (dollars) until their FRN notes are rejected. How will a rejection of a currency be deflationary?
There isn’t much precedent in history relating to a completely unbacked centrally controlled credit currency, sans Wiemar, Zimbabwe Venezuela, Argentina et al.
Also, where is “smart money” selling anything but dollars? Seems to me, a lot of players are trading Fiat for Real Estate (including farm land), Equities, Commodities and other real things, not the other way around. Are the nominal appreciations in these entities all created by “dumb money?”
If this is all a matter of stoking velocity, is it not foolish to think the owner and creator of Fantasy Promissory Notes doesn’t possess the tools to move decimal points as far to the right as it wishes? As it always has? Or is a cup of coffee still a nickel in your city?
And to think I remember all the “Deflationary Depression” talk of the 70’s, when a house cost $10k and gas was 40 cents a gallon. Sell, sell, sell was the mantra. Those who did were taken to the cleaners.
Not saying a Deflation isn’t in the cards, just that it won’t come until the absolute collapse of the currency, in a vain attempt to save ass. (Unless one can show me a Nation State destroyed by Hyper Deflation?)
Deflation would also mean the loss of control of TPTB. We must ask ourselves, do these power brokers really want to just step back and let it all go? If so, why are they doing this?… https://www.amazon.com/Currency-Wars-Making-Global-Crisis/dp/1591845564
“Deflation can happen very quickly as confidence in debt instruments is lost, and therefore asset values can fall sharply as well.”
And inflation can happen very quickly as confidence in the premiere debt instrument, the dollar, is lost.
There’s no risk of loss of confidence in the dollar any time soon. Eventually yes, but years away. People will seek dollars to pay down dollar denominated debt, and on a flight to safety into the reserve currency. The dollar has a sharp upward move ahead of it. Inflation is not a risk at all, unless you live in somewhere like Greece where the combined risks of sovereign debt default and currency reissue change the picture. There is still deflation, but the gap between deflation and loss of confidence in their new currency (once it comes to that) could be really short. The gap in countries like the US, UK etc will be years long.
Nicole, recently the FED has said it will keep interest rates low for the next 3 or 4 years. Does it have the ability to do this? With the dollar as the reserve currency it seems that they will for some time. Ted
@ njparkin says:
“Why could the Central Banks not deposit $10k in everyone ‘s bank account with a key stroke or better yet insist on 10ks worth of debt repayment.”
Central banks are collateral constrained, that is, they cannot lend without accepting collateral in equal- or greater amounts. The CB’s always lend, they never offer gifts and indeed cannot without destroying themselves (they have no capital structure).
Central banks cannot create ‘new money’ and in fact do not do so. Central banks cannot cause inflation by themselves. This is the unending big lie of libertarians and so-called Austrian ‘economists’. The private sector creates all new money by making unsecured loans. As it is, the increase of unsecured loans = ‘economic growth’. Unsecured loans ARE inflation, not the cause of it.
Central banks making unsecured loans = system run as there is no lender of last resort.
Hyperinflation is not out of the question. Hyperinflation is not the increase in ordinary inflation but a currency phenomenon: the US holds +$7 trillion in insured deposits but only -$500 billion in cash currency (there is more overseas). In the event of a major bank shutdown and/or ‘holiday’ there will be massive demand for currency … rather than bank wire transfers from one insolvent bank to others. Excess leverage would be the cause of the holiday or the run caused by the central bank making unsecured loans. Because governments can never under such circumstances keep up with the demand for paper bills the temptation is for them to offer bills in extremely large denominations: in other words, instead of the bank offering 1,000 hundred dollar bills to a depositor, he is given a single $100,000 bill. As these circulate: the floor becomes the ceiling and the $100k bill is replaced by the $1,000,000 bill and $10,000,000 bill. Remember, bank depositors are unsecured lenders to their own banks: it is the banks rather than their creditors who would demand the large-denominations. Keep in mind, one of the characteristics of hyperinflation is the apparent ‘demand’ for currency even as larger and larger notational amounts keep circulating.
Among other things, hyperinflation = cynical tactic on the part of the establishment to keep banks open and public distracted with the need to ‘chase’ their own funds.
Demurrage money: no place has used it for a long period, there has also been little- or no use in a place where an effort is made to evade the demurrage cost. That would be done by ‘leasing’ the money at a rate higher than the stamp fee which is simply another form of lending at interest. Banks in Austria could not do this as the worgl were held outside of them: this has to be a reason why the experiment ended: no one was willing to lend the worgl @ interest or pay the higher cost incurred by borrowing.
The demise of the worgl is unclear as it has been buried under an assumption: crushed by the Austrian central bank. It is possible that worgl succeeded due to circumstances unique to the time and place including payments in schillings to the town from both remittances and from the capital. There are other interesting aspects including seigniorage gains to the issuer and currency worth gained because of holders failing to redeem their funds in schillings. It is not clear whether the worgl would have functioned without the demurrage feature (making it easier to lend). See:
Comment on the Wörgl Experiment with Community Currency and Demurrage
Local currencies: it is the need for items outside of the locality which unravels local currencies which are just that. The discounting of ‘bank tender’ in the 19th century US free-banking era is what put an end to it. Boston bank dollars were not useful in Philadelphia or Savannah, Georgia except at punitive discounts. After awhile, the businesses demanded a real ‘national money’ that could be exchanged without a fee for time and distance.
The decline of the dollar = the decline of US petroleum imports exchanged for (false) promises. I entertain myself by imagining Americans trying to live without their precious cars … it is going to be almighty entertaining.
“in other words, instead of the bank offering 1,000 hundred dollar bills to a depositor, he is given a single $100,000 bill.”
If I recall correctly (from Manias, Panics, and Crashes), this is the exact opposite of what normally happens during a bank run. The bank doesn’t give the depositor a single $100,000 bill, they $100 to each depositor out at a time… in pennies. They count out the pennies as slow as possible. People waiting in line often get fed up and go home.
Do you have an history example of your version actually happening?
Some runs the bank offered pennies (USA during the Great Depression) some bank runs the bank offered $1,000,000,000,000 bills (Zimbabwe during their Great Financial Crisis).
There are all kinds of bank runs: the Chinese buying houses in Detroit is a bank run (out of Chinese banks), so are Japanese companies buying multi-billion dollar US companies (a run out of yen). Indians buying gold is a run out of rupees … as well as Indian banks. If the loans held by banks are large (deposits) and redemption demand is severe and instantaneous, the banks run out of ‘money’ (GFC in US such as Wachovia bank or Lehman Brothers). Of course multi-billion dollar electronic transfers from one bank to another does not require the printing of bills and is not considered to be hyper-inflationary it nevertheless is a run.
In both instances, the bankers hope that the panic ends before their funds ‘run low’ and the bank must close. Both are incentives for other depositors to remove their funds even more quickly before the pennies or billion-dollar bills run out. You are right about one thing: the singular characteristic of both and other instances is the time pressure on both depositors and bankers: for the depositors to gain their funds as quickly and surely as possible and for the bankers to evade that demand … one way or the other.
A better question is whether it is possible to have hyperinflation with electronic money, I’m not sure I can shed much light on that …
“A better question is whether it is possible to have hyperinflation with electronic money”
I’ve been wondering about the liquidity crunch that Nicole has spoken and written about and whether electronic money will cause that to play out differently than in the 1930s. Will cash actually be in short supply when debit cards obviate the need for cash? Any thoughts on that, Nicole? Anyone?
Pretty sure Nicole or Illargi has written about receding levels of trust.
Say you had 3 people who wanted to buy a pig from you, 1 had cash; 1 had a check; 1 had a debit card. Which would you prefer?
OK, good to see you focussing on local currency solutions and I believe that the key now is scale and critical mass with systems that include the four local economic players: individuals, businesses, voluntary groups and local government. The one to watch here is the city of Nantes in northern France, launching the first local government backed mutual credit system in the world: https://www.sonantes.fr/
For a broad survey of current local currencies working at scale see the book I co-authored in 2012 with Margrit Kennedy and Bernard Lietaer “People Money – The Promise of Regional Currencies”: https://www.triarchypress.net/people-money.html
And my sole authored book (2013) “Local Money – What Difference Does It Make?”:
https://www.triarchypress.net/local-money.htmlHere is a Prezi I put together for the first conference on the Good Economy in Croatia, March 2014: https://prezi.com/byn39kcf9s2g/local-money/
And a 12 minute clip of me talking about local currencies on Croatian tv in March 2014:
(12th to 27th minute) https://www.hrt.hr/enz/na-rubu-znanosti/244954/The point is that local currencies are NEVER an end in themselves and you have to get many things right for them to work well: design, governance, management and cost recovery to name a few.
In fact, more important than the currency itself is the co-creation of a local MAP of underused resources and unmet needs by local economic players. First create the map, then a currency and not the other way round. Then we might see more local systems surviving to become truly sustain-able.
- You must be logged in to reply to this topic.
Sorry, the comment form is closed at this time.