Dynamic Duos (Fed Trump), Debt Deflation, Laughable Steel Ideas

Mish

Let's explore the "Dynamic Duo" effect of Trump plus the Fed, starting with an absurd thesis about steel.

The Trump administration and EU officials complain about the "overproduction" of steel.

A 2016 Economist article goes one step further. The Economist attempts to explain Why the world has too much steel.

Think about the silliness of that idea. It should take about one second.

If we truly had too much steel, people would pay to get rid of the stuff!

By definition, no one would want it. You could not give it away. You would have to pay to get rid of it.

What Should We Do?

Nothing.

Since US manufacturers that use steel outnumber producers by a vast margin, we should be happy for the cheap supply until there is a genuine national security risk, assuming that is even possible, which I highly doubt.

Similarly, if China wants to give us free solar panels or free cars we should take them.

China won't. It can't. It would soon go bankrupt if it tried.

Meanwhile, if China is indeed giving the us solar panels, steel, or anything else below cost, it is to the benefit of US and the detriment of China.

Amazon vs Mom and Pop

The debate about China is similar to the debate about Amazon.

Big box retail stores struggle to compete against Amazon.

So what?

That's called progress. More goods, faster deliveries, and cheaper prices is progress.

Standards of livings rise, by definition, when more goods are available at cheaper prices.

Dynamic Duo

  • The Fed seeks inflation in a technologically-deflationary world.
  • Team Trump tariffs are a loaded gun fired not at China but at the US.

Never have we seen so much howling over things that are actually beneficial.

Meanwhile, the Fed's foolish attempt to produce price inflation in a deflationary world has done nothing but create another bubble that will bring on deflation when it pops.

Debt Deflation Setup

Those who understand debt dynamics and what inflation really is also understand that Inflation is in the Rear-View Mirror.

Here's my definition of inflation: An increase in money supply and credit, with credit marked to market.

Deflation is the opposite: A decrease in money supply and credit, with credit marked to market.

When credit expands there is inflation.

When credit contracts (think defaults, bankruptcies, mortgage walk-away events), debt deflation occurs.

In debt deflation, zombie corporations that cannot get financing go out of business. Banks become capital impaired because they have made loans based on assets (businesses, malls, etc), that are no longer worth the loan amount.

Such events are far more important than small or even modest-sized price movements. But accompanying debt deflation, one should expect a falloff in demand.

Consumers prices are likely to go into reverse, but that is not a necessity by my definition.

Another round of debt deflation is a given when we have absurdities like this: NY Fed President Proposes "Paying" Bankers With Long-Term Debt.

Mike "Mish" Shedlock

Comments (12)
No. 1-12
abend237-04
abend237-04

I continue to believe there's nothing in our ivory tower, PhD Standard Fed's world view that couldn't be fixed with six month's responsibility for a major product line with their career(s) on the line. Unilateral, arbitrary price increases in today's global market are met with near-instantaneous discovery and market share loss. A two percent annual price increase is a laughably obsolete notion conjured up by a social club congress: 'Here, Fed, make this damned economic uncertainty go away; it's taking too much time away from fundraising for the next election. And fix unemployment too.' Dual mandate, you got it; where do we sign?'

Rayner-Hilles
Rayner-Hilles

God that is facile. There is always too much of any commodity when the entity concerned is in the business of making and selling that commodity.

You know they gave out The Economist magazines to my economics class back in high school. Few of the students actually read them, but I did. I remember thinking at the time that these articles were off with their daffy & suspiciously neat-and-tidy style of argument. The Economist whole world view does strike me as an examination authors fantasy:

"Examine the macro-economic effects of overproduction of steel."
Prescribed Answer: "Well a rise in the supply of steel causes a drop in the price as it intercepts with the demand curve, as well as making the country concerned extra-competitive in the global steel market and thus blah blah blah blah Keynesian effect on expansion of aggregate demand boost GDP la la la la"

I got a D in economics in the end. Was very disappointed lol.

Runner Dan
Runner Dan

Allow me to [correct] the following paragraph:
“In debt deflation, zombie corporations that cannot get financing [or lack proper political representation] go out of business. Banks become [temporarily] capital impaired because they have made loans based on assets (businesses, malls, etc), that are no longer worth the loan amount. [In lieu of bankruptcy or borrowing from savers at a fair market rate, the Fed swaps their garbage assets for cash].”

jivefive99
jivefive99

Id feel better about all this near-free stuff (steel, solar, cars, whatever) if, at the same time, the average American didnt find it necessary to use debt to keep up with the Joneses. There was a time when all this debt wasnt necessary, and real jobs of the 1950s and 1960s existed. Our path should indeed be backward. Tariffs and trade protections seem quaint, but that is how every other country grew their middle class -- ourselves included.

tedr01
tedr01

I wonder how many of you experts are actually in the commodity business? I am and my company produces metallurgical coal, used to make steel. It would not be the worst thing to give our domestic steel producers a break, even for a little while, and have a short term tariff on foreign steel which would allow for the proper economic incentives to build a few new integrated steel mills here in the good ole U.S.A. It is worth a try. You never know until you try.

tedr01
tedr01
(deleted message)

Try building a skyscraper with carbon fibers and get back to me on how that works out. Recycled steel has a few uses but not as many as the green lobby would like you to believe. Virgin steel and steel products will be needed for a long time to come.

tedr01
tedr01

Maybe one day it can. Who knows.

Carl_R
Carl_R

"Too much" is not an absolute amount'; it is relative to price. Thus, you might have too much steel (i.e. more than can be sold) at one price, but not enough if the price falls by half. It does not mean that the price needs to go below zero, only that the price will fall from where it is.

Stuki
Stuki

Economically, there simply cannot exist such a thing as an “overcapacity” to produce a good. It makes no more sense than someone being too wealthy. Or too healthy. The whole idea is nothing but baloney from the get go.

Economically, the only sensible meaning of “there exists an overcapacity for steel production,” is that said steel production capacity has been built at the expense of something else. Hence that there exist an under capacity to produce something else; and the cause is all the resources that has been plowed into increasing the capacity to produce steel. In that case, it is the lack of capacity to produce something else that is valuable, that is the problem. Not the supposed “overcapacity” to produce steel.

Think of someone who has spent so much effort improving hos cardiovascular health, that he throws his back out from lifting a grocery bag, due to lack of strength. The problem is never that his heart is too healthy. But rather that all the effort put into improving it, has taken up so much of his limited resources, that he has been forced to neglect producing another good, muscular strength.

The proper diagnosis of such a state, is that it is one in which malinvestment has taken place. Which, aside from just sheer bad luck, is always and everywhere due to economic signals, by way of prices, having been either distorted, or disregarded on purpose. Both of, for which the solution is simply for third parties to get out of the way and stop having opinions about what others should and should not do. Letting producers and consumers (in both cases, both existing and potential), adjust as they please, until resource utilization is again balanced to produce the maximum utility for every actor. Hence maximum utility for society at large, as this is simply shorthand for a simple sum of the utility of it’s constituent individual actors.

Ambrose_Bierce
Ambrose_Bierce

Debt deflation makes more sense, when there is more supply than demand (thinking credit right now) there is another way. Suppose interest rates are rising not because of demand for credit, but because the value or worthiness of that credit is being called into question. Rates rise because credit is worthless, and credit is worth LESS because there is more supply than demand. Simple solution of course is that marking credit to market makes it more dear, and the system adjusts itself. The problem with that is ADDING more credit to the system only makes the problem worse, its a qualitative problem. Markets are betting that rates are going to rise and economic activity slows and the central banks will respond by turning on the credit spigot again. However as you get closer to the extremes the supply demand curve is not a very good measure. By example look at the charts of Fed rates, each iteration takes us further down to zero (tolerance) rates, the market can only stand zero interest rates.

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