Daily: More on Ray Dalio and debt deflation

I wrote a blurb about Ray Dalio yesterday afternoon based on his talk at the Council on Foreign Relations. And I always enjoy Ray Dalio’s perspective because the macro framework he uses is based on debt and credit stocks across business cycles as well as on demand flow within business cycles. In the past week, we have stressed this dichotomy between debt stock and credit flow through four separate posts

  1. The Efficacy of the FOMC’s Zero Interest Rate Policy
  2. How central banks contributed to the financial crisis
  3. William White on Ultra Easy Monetary Policy and the Law of Unintended Consequences
  4. The Fed, the interest income channel and net interest margins
The point time and again has been that the analysts who got it right before the financial crisis were the ones who understood that debt and credit matter, particularly when interest rates hit the zero lower bound. The credit accelerator from leverage was a key component of the growth we experienced over the last quarter century. And with credit growth decelerating, it will mean a long period of stagnation or worse, depending on the policy mix.
What Dalio seems to stress is that the process of debt deflation is accelerated by austerity and writedowns as solutions to a needed deleveraging. This leads to economic collapse and potentially leads to social and systemic collapse as well. The balance comes from ‘money printing’ in Dalio’s view, i.e. in attempts t attenuate the deflationary trend by reflationary impulses. In Dalio’s view getting the mix right is key to preventing systemic collapse.
I agree with Dalio’s framing by-in-large but I think that the question is mostly about allocating ownership of real resources using money. When credit has surged out of control, it means nothing about the real resources in human and physical capital to which a society has access. One society could have identical resources to a second but triple the credit to income ratios. And so, in actual fact the two economies are capable of identical production trajectories if one can manage the debt trajectories. The real resources are the same, the allocation of ownership is not. The problem we run into during a leveraging and subsequent deleveraging is about how to re-allocate ownership of real resources when the income stream those resources throw off is not sufficient to service the debt allocated to it s ownership. That’s not a resource problem, but a debt or an ownership problem. And it gets solved by divvying up the real resources between creditors and debtors through default, austerity and ‘money printing’.

Bridgewater’s Dalio Is Bullish on Gold

““Gold is primarily an alternative to fiat currency and a storehold [sic] of wealth,” Dalio writes in a letter to investors obtained by Business Insider. “The main advantage that gold has over other currencies is that it can’t be printed.”

“real interest rates are likely to remain very low and below real growth rates, as a means of combating deleveraging and improving debt sustainability,” Dalio writes.

“As such, deleveragings strongly favor shifts from financial assets into gold and other tangible assets.””

Dalio Warns Of Near-Term Deflation, ‘Lost Decade’ in Southern Europe – Focus on Funds – Barrons.com

““If anyone is going to be forced out, it’s more likely that the Germans will be forced out,” Bloomberg quotes Dalio as saying. “Southern Europeans have the votes that control the monetary policy. You let them vote, they will vote to print money.”

About that global slowdown: Deflation is again a near-term risk because of deleveraging, “

United States

Southern whites troubled by Romney’s wealth, religion | Reuters

“Sheryl Harris, a voluble 52-year-old with a Virginia drawl, voted twice for George W. Bush. Raised Baptist, she is convinced — despite all evidence to the contrary — that President Barack Obama, a practicing Christian, is Muslim.

So in this year’s presidential election, will she support Mitt Romney? Not a chance.”

Whistleblower Is Key to New York Tax Probe on Buyout Firms – WSJ.com

“The ongoing probe is examining whether partners at private-equity firms changed management fees into investment income to delay and pay less taxes—or avoid taxes altogether. Some private-equity firms use so-called management-fee conversions, while other firms avoid them.

If Mr. Schneiderman files a lawsuit and wins, defendants could be liable for damages of as much as three times the taxes owed. It isn’t clear when he will decide whether or not to proceed with a lawsuit.

At least two other whistleblower claims related to management-fee conversions have been filed with the Internal Revenue Service, which has the authority to pay whistleblowers up to 30% of proceeds collected in large cases. Such whistleblower cases usually take four to seven years to resolve.”

S&P says outlook for AIG ratings is negative after U.S. share sale | Reuters

“S&P said AIG’s earnings compared to its obligations are relatively weak for a company with its rating, which makes a downgrade more likely over the next six to 24 months.”

Household Income Falls Again – WSJ.com

“The median U.S. household income—the statistical middle—was to $50,054 in 2011, down 1.5% from 2010, adjusted for inflation, according to the Census bureau’s annual snapshot of U.S. income and living standards.

The report covers the second full year of the economy recovery and captures, in dollar terms, just how much ground the middle class has lost during the deep 2007-2009 recession and an expansion that remains anemic. Last year marked the fourth consecutive decline in median income, and on an inflation-adjusted basis, remains well below the 1999 peak of $54,932.”

How Much Did The Government Make On AIG, Anyway? « Dealbreaker   

Footnote to Financial Crisis: More People Shun the Bank – WSJ.com

“This population that has left banks, or uses their services infrequently, makes up 28.3% of America’s households, the agency says. That is a slight increase from the 25.6% who fit into those categories in 2009.

Green Dot, the largest prepaid debit card provider, was initially created in 1999 to give plastic to teens who wanted to shop online. Instead, it ended up attracting mainly adult customers with bad credit who couldn’t qualify for regular cards. Buoyed by an exclusive relationship with Wal-Mart Stores Inc., the number of active cards in circulation has grown to about 4.4 million, making Green Dot the largest prepaid debit-card company in the U.S.”

US and Israel in open feud over Iran – FT.com

“Feuding between the US and Israel burst into the open when Benjamin Netanyahu, Israel’s prime minister, sharply criticised recent US statements about Iran while the White House said President Barack Obama would not meet Mr Netanyahu in the US this month.”

Democrats See Arizona Gain as Backlash Drives Hispanic Voters – Bloomberg

“Erika Rodriguez registered to vote when she turned 18 this summer, motivated by Arizona anti- immigration laws she says could hurt her undocumented family members.
Now Rodriguez, a U.S.-born community college student, spends her weekends going door-to-door with other volunteers in Latino neighborhoods in Phoenix — part of a push by Democrats, the Obama campaign and non-profit groups statewide that fueled a 51 percent surge in Hispanic voter registration since 2008, according to the Arizona Democratic Party, and may permanently alter the state’s political climate.”

Consumer credit falls unexpectedly in July | Reuters

“Consumer credit fell in July for the first time in nearly a year as Americans reduced credit card debt, a worrisome sign for an economy that has struggled to create jobs.”

‘Deep Subprime’ Auto Loans Losing Stigma, Attracting Investors – Real Time Economics – WSJ

“As default rates have steadied, the subprime-auto-loan industry has earned the good graces of investors seeking returns over the near-zero rates on safer assets. Demand for J.D. Byrider’s issue was strong enough to prompt dealer RBS Securities to lower yields and likely helped the dealership secure additional financing in the following months, Mr. Brunner said.

“The ability to finance start-up [dealer] franchisees has improved dramatically over the summer,” Mr. Brunner said. Also, “a number of existing franchisees have banks competing for their business again.””

CNBC: kid gloves for bankers, boxing gloves for bank critics : CJR

“Interviews with Barofsky, Spitzer, and Krugman underscore the network’s capture”



BBC News – Dutch vent frustrations at euro

“”Over my dead body,” is what the SP’s leader, Emile Roemer, answered when asked if the Netherlands should pay fines to the EU in Brussels for missing targets on cutting spending. It greatly helped his popularity in the opinion polls.

That is because the Netherlands is battling with pension reform and rising healthcare costs, all issues which are being driven by a pledge to meet EU budget targets.

What makes those planned cuts particularly galling for many Dutch people is they come as the Dutch are being asked to foot the bailout bill for southern European neighbours such as Greece and Spain.”

Porsches and police cars rust in Greek government scrapyard – in pictures | Business | guardian.co.uk

“efforts to consign ODDY itself to the scrapheap, along with its loss-making payroll costs, show just how hard it is for the Greek government to satisfy foreign creditors’ demands that it shut down dozens of state agencies to save money”

Economist Sinn Rattles Merkel Laboring to Save Euro – Businessweek

Soros Sees Threat of Bubble in Berlin’s Housing Market – Businessweek

““You have a serious danger of a housing bubble developing in Berlin,” he said at a panel discussion yesterday in the German capital. “It has a lot to do with the flight of capital and negative real interest rates.””

El 57% de los españoles considera que la adopción del euro ha sido negativa – ABC.es 

57% of Spaniards believe the euro has been negative for Spain while 27% want to return to the Peseta. The longer the agony in Spain goes on, the higher these numbers will get. Interestingly polls were taken in other countries and 26% of Germans, 19% of French and 21% of Italians want their old currencies back. In the UK 89% say the euro would be negative for them and 84% of Swedes say this.

Irish Borrowing costs fall to 2010 levels after German court ruling on rescue fund – Irish, Business – Independent.ie

“IRELAND’S cost of borrowing fell to less than 5.5pc for the first time since August 2010 today after the German constitutional court gave a green light for the country to ratify the eurozone’s new rescue fund and budget pact.”

FT Alphaville » Are UK companies hoarding labour?

“It is, as Shaw notes, as if companies are hoarding labour on the off-chance that the economy experiences an upturn. (Though, it has to be said, very much on a temporary and part-time contract basis.)”

German High Court OKs Permanent Bailout Fund with Reservations – SPIEGEL ONLINE

“The court ordered that ratification can only be completed if it is ensured under international law that Germany’s current maximum liability of €190 billion ($245 billion) can only be increased with the approval of the German representative in the ESM board, court President Andreas Vosskuhle said. “(No) provision of this treaty may be interpreted in a way that establishes higher payment obligations for the Federal Republic of Germany without the agreement of the German representative,” the court states.”

Why Germany Should Lead or Leave by George Soros – Project Syndicate

“The debtors are bound to reject a two-tier Europe sooner or later. If the euro breaks up in disarray, the common market and the EU will be destroyed, leaving Europe worse off than it was when the effort to unite it began, owing to a legacy of mutual mistrust and hostility. The later the breakup, the worse the ultimate outcome. So it is time to consider alternatives that until recently would have been inconceivable.”

Merkel Wants to Keep Greece in the Euro Zone – SPIEGEL ONLINE

“Angela Merkel has made a surprising U-turn in her policy on Greece. The German chancellor now wants to stop Athens from leaving the euro zone at all costs — even if it means massaging the figures in the upcoming troika report. For the German leader, it is essential to avoid the consequences of a Grexit before national elections next year.”



Samsung, Apple Amass 4G Patents for Legal Battle – WSJ.com 

“”It’s highly likely that Samsung will use its stronger position in LTE technology to continue to fight against Apple in the ongoing litigation,” said Kim Hyoung-sik, an analyst at Taurus Investment & Securities.”

Apple Drops iPhone 4S Price To $99 And Will Give Away The iPhone 4 For Free | TechCrunch

This trend in Apple’s sales strategy is designed to keep share. But will it cannibalise sales and lead to lower margins. That is what I believe will happen

The Consumerist » Is There Anything Special About The iPhone 5?

“It’s been almost a year since Apple unveiled the iPhone 4S, with some significant upgrades like Siri voice recognition and both CDMA and GSM compatibility. So today the company announced the latest iteration of the iPhone, but would the iPhone 5 have enough new bells and whistles to make 4S users take a hammer to their old phones in disgust?”

Amazon’s new $199 tablet gets tepid reviews | Reuters

“Amazon.com Inc’s latest $199 tablet computer got tepid reviews from some closely watched gadget reviewers, a potential hiccup for the world’s largest Internet retailer as it tries to grab a bigger share of one of the hottest technology sectors this holiday season.”

The Chosun Ilbo (English Edition): Daily News from Korea – Apple Acquires Stack of LTE Patents

“Apple has acquired a large number of patents related to the fourth-generation LTE mobile technology in order to prepare for possible legal disputes with archrival Samsung. 

The Korean electronics giant, which recently lost to Apple in a patent suit at the Northern District Court of California, seems to have been planning to strike back using its patented LTE technologies. 

LTE standard patents registered with the European Telecommunications Standards Institute show that Apple had no LTE patents last year but has now acquired 318 patents or 4.9 percent of total LTE patents to rank among the top 10 patent holders, the Korea Intellectual Property Office said Monday. “

U.S. judge: HTC patents likely valid in Apple suit | Apple – CNET News

“If Apple is found to have infringed HTC’s patents, that could lead to a U.S. import ban on the iPad and iPhone 5, or give HTC enough ammunition to push for a settlement with Apple, which has its own patent claims filed against the Taiwanese smartphone maker.”

The New Kindle Fire HD Is Better but It Isn’t the Greatest Tablet – WSJ.com

“The Fire HD isn’t as polished, fluid or versatile as the iPad. It offers only a fraction of the third-party apps available on either the iPad or the Nexus 7 (and other standard Android tablets). I found that after prolonged use, the Fire HD showed signs of latency—apps and content displayed delays in launching. This latency disappeared after a reboot.

The Fire HD also assaults users with ads occupying the entire screen every time they start or resume using it.”

Twitter Told to Produce Protestor’s Posts or Face Fine – Bloomberg

“The outcome is significant throughout the U.S. as law enforcement becomes more aggressive in seeking information about what people do and say on the Internet, the American Civil Liberties Union said in a May 31 court filing.”

Do Our Gadgets Really Threaten Planes? – WSJ.com

“The odds that all 78 of the passengers who travel on an average-size U.S. domestic flight have properly turned off their phones are infinitesimal: less than one in 100 quadrillion, by our rough calculation. If personal electronics are really as dangerous as the FAA rules suggest, navigation and communication would be disrupted every day on domestic flights. But we don’t see that.”

Philips Set to Cut Another 2,200 Jobs – WSJ.com

“The Dutch electronics maker will cut a further 2,200 jobs as part of efforts to save an extra €300 million ($382.7 million) in overhead costs by the end of 2014. The move raises Philips’s cost-saving target to €1.1 billion, after it announced 4,500 cuts as part of a €800 million plan last year. “

Other Links

The Consumerist » Paying The Bartender With The Credit Card You Just Stole From Him Will Get You No Beer

“According to Miami Beach police, the man broke into a car in a parking garage on Monday night and came away with a stolen credit card. In his quest to grab a cold one, he walked into a bar soon after and handed over the card to pay for his beer. That’s when the bartender noticed, oh, hey, that’s my own darn name on the card.”

BBC News – India’s manufacturing flat in July

“A year ago, output grew at 3.7% in July.

The downturn has come against a backdrop of high interest rates to try to curb a 7% inflation rate and a lack of demand from crisis-hit Europe.”

South Africa miners blockade Anglo American Platinum mine | Business | guardian.co.uk

“Labour unrest sweeping across South Africa’s platinum sector has hit Anglo American Platinum, with striking miners blockading roads leading to shafts belonging to the world’s top producer, police said.”

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