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Demand for Stuff and Positive Interest Rates

February 5, 2016

Demand for Stuff and Positive Interest Rates

by Lushfun

Watched Hugh Henry and he brought up certain things in regard to demand and China. Theoretically if we could globally push up wage rates for labor and overall labor force participation rates for a time, some suppressed demand would come back to drive the stagnation and perhaps push growth a bit. The problem is debt constraints globally will not allow asset price adjustment for the economy to clear. Liquidation in the words of Mellon


“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate… It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people “


is what we need. Housing and overpriced capital asset equipment today simply does not clear the market, because banks would lose money if they were auctioned off. There is no urgency to reclaim capital since interest rates allow gradual amortization of unused property or sale at prices higher than it would otherwise claim.


Getting back to the wage rates and stimulation via pushing these up for the wage inflation spiral to take some sort of push to unwind that “suppressed” demand. Nobody wants to loose purchasing power, not the banks, not the public at large, not the government that gets to redistribute it. The only way this could occur is if a large enough ‘gulp’ of stagnation was on the horizon and fear of loosing control forced the issue at hand. Ergo essentially budget supported push to employ slack laborforce people, while similarly providing incentive for asset clearance at a faster rate from bank balance sheets.


Thus far the only thing I see is the increase of the Fed Funds rate to 1% or more. Simply to push through that inefficiently deployed capital will either clear at lower levels or be destroyed. Banks will have their margins pressed down or they liquidate and re-deploy capital into more productive assets. Whichever, they prefer while external capital is invited to participate in the process to magnify the pressure while smoothing over the system. I sense the biggest asset lenders which were the car wholesaling creditors are in the similar situation.


It is interesting that “guaranteed income schemes” from Switzerland to Finland are coming forward, yet how they would ever be funded? constant debasement of currency from those whom have to those whom have not? I don’t think that would work on a global scale. My sense it is far more likely for debts to essentially be ‘nullified’ both government and otherwise and budgets having work or financing works that keeps people busy while re-distributes more income into the system. Thus giving it some multiplier effect by pushing it through the system. Wondering how the nullification of said debt would work on a global scale.


Theoretically if the Eurozone breaks up a forced conversion of Euro denominated bonds could be a trigger for something like this. Imagine Italy going back to the lira, while issuing a law that demands all lira debt is      1-to-1 converted to the Euro, otherwise it is unenforceable under Italian law and within Italy. Similar things for France, Spain, Portugal, Greece, etc. All of these countries would instantly de-value most of their debt and currency at same time. Productive capacity would give their purchasing power more weight while the debt burden declines.


An even more interesting idea would be if the Eurozone breaks with every participant leaving. In the end the Euro would be a currency backed by nothing and the reverse could occur every country would translate depositors in their countries to the new currency 1 for 1 but the debt would remain in Euros that would eventually be manipulated into worthlessness. This is more ambitious but kind of interesting.


Be well dear reader and have good thoughts.


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