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

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 (14)
No. 1-14
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].”

thimk
thimk

The article could have said their exists an over capacity in steel production. If countries wish to subsidize their industry for National security well so be it. Other possible demand reducing factors are maybe increase use of recycling, and substitute products such as plastics and carbon fiber . The US based NUCOR steel company uses new technology and scrap steel as input and makes money.