Today I will argue that the standard measures by which we assess our economic health no longer apply to our current situation. The most common terms “Inflation” & “Deflation” are based on the general price level of goods and services. Inflation is the increase in price, thus limiting the purchase power of your money. Deflation is the decrease in price, and increase in purchasing power. My argument is that the general price level of goods and services is temporarily not price-able, and the purchasing power of all currencies is unknown due to due to the lack of transparency of overall credit and debt at all levels of the economy (from Countries and Governments through companies and households) due to known and unknown variables and their known and unknown ripple effects. The broad systemic risk of commingled good/toxic assets in the globally interconnected financial world has now limited the ability to accurately measure factual and fictional wealth based on fusion of such infinite variables of destruction. In addition, the unknown levels of wealth creation, extraction and destruction, coupled with actual consumption leave us with a decreasing denominator in relation to the increasing nominator of debt.
As we teeter on the edge of an economic abyss, pricing goods like an automobile becomes impossible. The factory says it cost $18,000 to produce. The retailer said it costs $25,000 to move. The buyer, based on the current status of the market, their employment, and the availability of credit will be willing to pay between $0 – $25,000 for the automobile. This is obvious and has always been the case, but unlike past situations, when the person walked out without buying the car, there was the assumption that someone else will walk in and buy it. That pricing mechanism is based on the fact that there will be a buyer to finance the cars production, and their purchase would fall somewhere between that $18,000 – $25,000 range. Depending on the strength or severity of the economy, that price level (inflation/deflation) would be found. That is not the case anymore! In the current environment, there are many more cases where there is no bid at all. The new price model needs to include $0 – $25,000
For that same reason, hedge commodities are sitting on a plateau where they could either fall off the cliff, or shoot to the sky. Oil sits at $40-45 with the risk of dropping to the $20’s and the risk of rocketing to $200 a barrel. Gold sits at $900, with a $2,000+ ceiling and a sub $500 basement. Milk and Orange Juice may be $4, or they may be $20? At the same time, the purchasers of all goods and services are sitting on the brink of having an income, house and various other assets or having nothing at all except existing debt obligations.
With that said, how do you price a CDO? How do you price GM? How do you price the USD? How do you price a house? How do you price a car? How do you price eggs?
At the moment, we have economic history pricing goods and services since there is no transparency, confidence or consistency to attain current supply/demand price. Without these factors secured, all you have is a risky wager that borders on being an extremely explosive or implosive bet that could play itself out in a couple of days time. That kind of volatility leaves us stabbing at prices that are nothing better then guesses based on dogmatic review rather then the actual consumer’s current reality. Those kinds of shocks don’t bring about the price discovery that supply and demand in a capitalist market would accurately set.
Evaporflation, Vaporflation and Condenflation occur when natural economic factors like inflation and deflation meet with such an immense artificial force, that direction of price and purchase power become temporarily unattainable. They can be immeasurable due to the ambiguity of the calculating factor of: time of creation, synthetic composition, velocity and size.
Evaporflation – is the disappearance of debt, or increase of credit to bring about a net debt reduction. (Disappearing debt also brings about the destruction of credit creation) It occurs as there is an increase in the difference between overall credit/cash/liquidity in relation to the overall debt obligations at a rate where the difference grows at a perpetual rate of motion. Through debt reductions and credit infusions, the pressure on the economic system can be vented in a manipulated fashion. If obstructed or without a large enough release valve, Evaporflation will lead to Vaporflation.
Vaporflation – is the rapid disappearance of debt, or increase of credit to bring about a net debt reduction. It is hyper inflationary and hyper deflationary. It can easily lead to combustion during the venting process and if not contained would lead to a complete meltdown / collapse.
The difference between Evaporflation and Vaporflation is the level at which the debt outpaces the credit. If debt outpaces credit beyond the sustainable levels of vaporflation, we will reach combustion (collapse). We have seen some of the early bailout packages (venting) combust. Bear Stearns, Lehman, and the first $350billion from Bush/Paulson bailout are samples of combustion during the venting process. Recapitalization, cannibalism, and self preservation absorbed all available liquidity, thus vaporizing institutions or programs that had nowhere to sit when the music stopped.
Whenever there is a large decrease in overall wealth being met with less then needed reduction of overall debt obligations, no reduction of debt obligations, or an increase in debt obligations in relation to the overall credit/cash/liquidity it would lead to either evaporflation or vaporflation rather inflation or deflation. This is why we have not seen any favorable direction in inflation or deflation. The reason for this anomaly is due to the fact that the lead up to the crisis was also misdiagnosed. What preceded this was a phenomenon called: Condenflation.
Condenflation – Is the self propulsion or positive feedback loop of credit creation through debt, where un-vented credit does not accurately reflect the actual inflation/hyperinflation of the credit cycle, due to the offsetting (real) long term debt. This can be and was attained through fractional reserve banking, leverage and unregulated markets meeting with the giant pools of liquidity and the circular loop of alchemy that led to more credit creation without yet another venting of inflation. The recycling of fractional reserves and leverage went well beyond their intended safe levels as the ratio of risk became immeasurable, and small shocks could lead to systemic risk due to cross pollinating and counterparty risk.
Ill transparent markets acted like a pressure cooker. Liquidity/credit became trapped (unable to inflate) in a system that was not letting the vapor escape. The gradual release of this pressure would’ve deflated overheated markets (that were severely understating the short term credit/gain, and long term loss/debt) where an equilibrium of loss and gain could have been attained (and thus contained.) …but instead, a collusive cycle between Financial, Political, and Media outlets was born for short tem profit. The short term upside became so easily attainable for the malfeasant, that the downside risks falsely appeared to be non existent. The trap itself, became self propelling through manipulation, greed, and misguided confidence. The false sense of confidence permeated every country, market, and home where the expectation of gains bordered on entitlement, and created a temporary self fulfilling loop.
On the upswing, the liquidity in the markets pressure cooker had gone well beyond the boiling point. Real inflation was being severely understated as it did not weigh the short term credit versus long term debt properly. Redemptions, consumption, poor investment decisions, excess and larceny started to finally extract the credit (liquidity/liquid) from the pressure cooker. (The release of pressure was never properly reflected in the inflationary upswing so disinflation did not occur in the release.) When the markets pressure cooker reached what appeared to be a saturation point, (equilibrium) it was too late to realize that this was not the actual case. The unrealized exit of liquidity, coupled with the growing wave of debt obligations led to the immediate downside pressure of evaporflation (which was happening on the surface) and vaporflation (which was occurred beneath the surface). This pressure needed a release valve. Subprime became that escape!
Within the “pressure cooker” analogy, the size of the pressure cooker has grown (debt), and there is less liquid (credit) in the pot. The pressure (the actual “pressure” is “the market” i.e. supply/demand, inflation/deflation, etc…) continues to build at an accelerating rate as there was less “liquid” in the pressure cooker, and the pressure cooker’s surface area continued to grow (which lead to a point beyond boiling) The stimulus plans, rate cuts, TARP, etc have added little bits of liquid to the pot, keeping us from vaporflation, but leave us in the current unique phase of evaporflation. The attempt to saturate the market, and reach equilibrium will be better achieved when a larger batch of liquid is poured in, and the size of the pot is reduced.
With that said, the size and scale of artificial economic forces that we have created, was overlooked and underestimated which has left the price discovery mechanism flawed. …thus technically (and in reality), leaving the natural forces of inflation and deflation directionless as their driving forces (the price of goods and services, and purchase power) are inaccurate.
The rest is present history.
All the best, Miss America
p.s. Ironic… in true scientific form, the “solid” that housing has always been through sub prime (sublimation) has vaporized that solid to a gas!
p.p.s. Back when I started working on this theory in July and August, I had already concluded that bailouts would be a forgone conclusion. In addition, I sighted the future FASB mark to market adjustments that would take place, along with netting CDS (pair offs) for debt write downs, the flight to USD (which was at 70% value against the base basket) and the principal reduction plan. (which has been partly enacted) Attached is the post: By Miss America on 2008-08-08 16:26:31
“The whole debt forgiveness thing is part of my Evapor-flation theory. (Sorry to keep beating people over the head with this) Likewise, I threw this together rather quick, so it’s not my best work. Today’s situation is unique. People try to draw historic parallels that don’t have true comparable variables. You’ve got: · Inflation Camps · Deflation Camps · Stagflation Camps · Reflation Camps · Disinflation Camps · Hyperinflation Camps · Stagnation Camps
Within these camps, you have people that follow: · Keynesian · Austrian · NeoClassic · ACME theory.
None of it is invalid. …in fact, it’s all valid. .but no theory or camp, can account for the seen and unseen variable that now confront us. It will be a combination of many “flations” that we see, rooted from the base worldwide currency.
What we have today is unique for new reasons: · The base currency that rules the land is the USD (which is ground zero for the problem) · The debt ratio has gained a perpetual self fulfilling momentum · The flight to safety is also the USD (through the US Gov’t) · The flight to commodities is all priced in USD! · The US Markets (through Counterparty Risk) have created the ultimate safety net · The USD markets have become Globalized and so interwoven with every country · that their downward spiral affects EVERYONE! (this list goes on quite longer.)
..but yet, the population grows. ..and needs more food ..more shelter ..more jobs ..and more credit ..and more debt
..but what if the debt today is already too big???
You eliminate it. Poof! You shall see. The FASB has already started working this magic. By allowing corporations to write down their debts on level 3 assets, you are seeing the back door to this “disappearing man in the box” routine. (The FASB has allowed this as the counterbalance to writing down their assets on level 3 assets. BUT IT’S NOT!!! .and that’s the beauty.) In much the same way, as these corporations take back auction rate bonds back onto their books, they will also mark up, their write down of overall debt.
Eventually, in round robin fashion, you will see the off balance sheet debt being paired off against other counterparty debt to eliminate overall debt. Debt will evaporate. It has already started. It is the only answer for a debt that can’t be paid. Sorta like Chapter 11, it’s a restructuring that’s going on.
This, along with many other smaller factors are where I come to my Evapor-flation call! (years from now, you can say you heard it here first)
Personally, instead of these stimulus plans that will help mask this evaporation (by adding money to replace evaporated money) I’d rather see some sort of public write down of debt. (Something like: an across the board 10% principal reduction of all home loans. This puts extra money in the consumer’s pockets on a monthly basis. This enables them to make more payment on mortgages, and pay more taxes, which trickles up to the government. .whom can then use that additional cash flow to keep bailing out the TPTB that made the bad loans in the first place. Where we’re at now, the Gov’t is going to keep bailing out the corporation regardless. so why not start at the bottom, and trickle up.)”