Confusion Reigns: A Crisis-Driven Global Rush to Dollar Liquidity Is Not Deflation
October 23rd, 2008Highly recommended reading.
Via: iTulip:
In the crisis stage of a debt deflation, defined by Fisher and Minsky as a reduction in debt financing, credit and money market panic causes banks to stop lending and borrowing from each other, pay off existing loans to shore up their balance sheets, and build reserves against expected future losses. This creates a short term spike in demand for the currency in which the debt is denominated, in the current case dollars. To the uninitiated, this looks like monetary deflation. A strengthening currency and falling interest rates also characterizes monetary deflation. That can in time produce commodity price deflation, so the confusion is understandable. But don’t be fooled.
Research Credit: DAVID100
Posted in Economy | Top Of Page
Great piece, thanks for highlighting it!
BTW, Malcolm McDowell’s eyeballs are just freaking me out a little.
I’m interested at what the net-settlement rate ends up being in the derivatives markets, that is the ratio to the total size of the market that ends up being transferred being parties, or in other words, the amount that isn’t canceled out by parties taking both losses and gains. With Lehman, it’s reported to be about 2% (only 6 billion out of a few hundred), so if that rate stays true for the whole market, that’s a rather orderly unwinding, and the 25 trillion or so could be made up for in a new asset bubble (which is what Janszen has called for in the past).
I suspect it’ll be as orderly an unwinding as Power wants it to be, and then a bit more disorderly than that.