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> -----Original Message-----
> From: Timothy Morge [mailto:tmorge@xxxxxxxxxxxxxxx]
> Subject: Re: DEFLATION CRISIS... myth exposed
>
> >
> Bruce:
>
<<SNIP>>
> Now, your statement about deflation being simple to end...I was
> trained as an economist at the University of Chicago. In fact, while there
> in their joint degree program in the late 1970's, I paid for my schooling
by
> doing research for the BLS. In theory, deflation can indeed be cured
simply > by printing lots of extra money. But you speak about it as if the
economy
> will react and turn on a dime. It isn't that simple and it doesn't work
that > way. No matter what you read.
>
Tim, I've always enjoyed your posts, this one is no exception. When I
claimed that deflation was a "non-issue," that was certainly only my humble
opinion. However, in all these messages about economics, I give specific
evidence to justify my opinion. When I stated that the BLS was not
back-adjusting the data, that's statistical fact. When I said the
percentage of outstanding stock bought on margin has been decreasing (in an
earlier post), that's a statistical fact as well. If you and other readers
choose to draw a different conclusion from the evidence, that's perfectly
fine with me, and I'm more than happy to hear dissenting opinions.
In the "credentials" department, you and Dr. Samuelson have certainly got me
beat, hands down. All I have to my name is an eight-year-old BA in
Economics & Political Science from Duke, which is no Chicago or MIT
(Samuelson's current home) when it comes to economics (although our
basketball team could beat the crap out of your teams combined :)). I also
don't see a Nobel Prize coming my way anytime soon either. Since I'm
out-manned and out-gunned, I'll just point out a couple of things for you to
consider.
In your response you said: "but you speak about it (monetary expansion) as
if the economy will react and turn on a dime. It isn't that simple and it
doesn't work that way. No matter what you read." You didn't give me any
specific evidence to support this claim, but in hindsight, I realize I
didn't give you any to support my belief that this policy could work
"easily" either. Here's just one piece, among many.
When the stock market crashed in 1987, many people predicted another
depression such as the one after 1929. I even know people who withdrew
every penny they had in their savings accounts because they were sure there
was going to be another run on the banks (you probably know some too).
Right after the crash, however, Greenspan immediately injected an enormous
amount of money into the financial system to provide liquidity. Because of
this, there was no depression, no recession (until 3+ years later, and had
nothing to do with the stock market), and the banking system came through
the crash just fine. The only thing the '87 crash did was expose our
government's terrible policies concerning real estate, depositor's
insurance, and Savings & Loan institutions, which later lead to the S&L
crisis.
The Fed's reaction to the 1987 crash is therefore a pretty good piece of
evidence that the FOMC has become adept at knowing when to inject money into
the system, and how much. Furthermore, the positive effect this injection
had was almost IMMEDIATE. Does this gaurantee success in the future? No,
but as a trader would say, "I like the trend."
> I gave a speech at a dinner in Princeton, NJ about seven years
> ago, and Dr Paul
> Samuelson was also speaking. And during his speech, he described the great
> difficulty they had trying to get the economy to respond to ANY
> type of fiscal
> stimulus, as well as the printing of huge amounts of 'dollars.'
> His statements
> boil down to one phrase: At some point, deflation is almost impossible to
> turn--It's like pushing on a piece of limp string. The economy
> just doesn't
> respond. He was on the shadow open market committee during the 1930's...
>
I respect Samuelson very much, I even had a copy of his infamous "Economics"
textbook on my shelf until my dog decided to eat it (maybe that's a sign of
a new paradigm...). I'm not sure what time period he was referring to when
he made that statement, but he certainly wasn't talking about the 1930's.
After the stock market crash in 1929, the FOMC didn't expand the money
supply, if anything, they contracted it (depending on which measurement of
money you use). A simple chart of the money supply during the thirties will
prove that to be true. We now know this was one of the primary causes of
the depression.
In no way is this an attack on Samuelson, he didn't have the benefit of
hindsight that we have now. Furthermore, we both know the FOMC did not have
the flexibility back then that it does today. For instance, in the thirties
the US was on the gold standard, and supporting the value of the dollar
relative to gold back then virtually mandated a tight monetary policy.
I certainly do agree with Samuelson on his "at some point" remark about
deflation. If we really were spiraling towards deflation, then I would
agree the odds of a "100% effective" monetary injection would diminish. But
when you take into account that the CPI numbers are exaggerating the
"descent," I just don't think the current situation qualifies for
Samuelson's threshold. It's much easier to stop a train going 5 MPH than
one going 50.
<<SNIP>>
> You've presented some interesting views, but unfortunately,
> you've presented
> them as if they are fact and written in stone. They may be your
> views. They may
> be right or wrong. But in many of the things you have written
> about here, the
> way things unfold will not be dictated by anyone's opinion. And
> that's why there
> is a market place.
>
Just as you go long or short depending on what the market tells you, I
change my opinions based on the best information I receive. If someone
gives me compelling evidence that my opinion is wrong, I'm more than happy
to change my tune.
Couldn't agree with you more about markets, but the way I see it, the goal
is to analyze the known economic evidence in the marketplace and derive a
logical conclusion from it. When the facts begin to disavow the theory,
it's time to change the theory (just like historical backtesting). Let me
leave you with one last thought to ponder.
Suppose I had been at the lecture 7 years ago where you and Samuelson spoke.
Afterwards, I approached Dr. Samuelson and asked him about the Phillips
curve, and what level the US unemployment rate could fall to before
inflation would begin to appear (the so-called "NAIRU"). I'll bet you his
answer would've been "between 5.5 and 6 percent." This is the number
Americans were told in the media for years and years. Well, we've been
below the 5.5% unemployment level for over a year now, and here you and I
are debating DEFLATION, not inflation!
Let's face it Tim, a lot of the economic models and theories you learned in
the early seventies and I learned in the late eighties just aren't working.
Believe me, I take no pleasure in this because I have an entire bookshelf
full of books that are rapidly becoming useless. But then again, change
represents an opportunity to traders, especially when you realize the change
before the masses... It's time for some new thinking (in my humble opinion,
of course :)).
Regards,
Bruce
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