Inflation and deflation 3: Obama stimulus plan

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Language: en

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I finished the last video
touching on the stimulus plan

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and whether it's going
to be big enough and

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what its intent was.

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But I was a little handwavy
about things like savings and

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GDP and I thought it would
actually be good to get a

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little bit more particular.

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This isn't just me
making up things.

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So a good place to start
is just to think

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about disposable income.

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And people talk about it without
ever giving you a good

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definition.

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It's important to understand
what disposable income is.

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So this box right here is GDP,
so it's all the goods and

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services, essentially all the
income, that we produce.

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The disposable income is
essentially the amount that

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ends up in the hands
of people.

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So the U.S. GDP, I don't know
what the exact number is, it's

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on the order of I think
$15 trillion.

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And so some of that money
goes to taxes.

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I don't know.

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Let's say $3 trillion
ends up in taxes.

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And these are round numbers,
but it gives you a sense of

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the make-up.

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Then maybe about another
$1 trillion is saved by

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businesses.

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So let's say that I'm Microsoft
and I make a billion

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dollars a share.

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Microsoft makes a lot more
than that, but I make a

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billion dollars.

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And I just keep it in a bank
account owned by Microsoft.

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I don't give it to
my employees.

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I don't dividend it out
to the shareholders.

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I just keep that.

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So corporate savings,
let's say, is

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another trillion dollars.

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These are roundabout numbers.

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And then everything
left over is,

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essentially, disposable income.

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I'm making some simplifications
there, but

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everything left over is
disposable income.

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And the idea is, what is in the
hands of households after

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paying their taxes:
disposable income.

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That check that you get after
your taxes and everything else

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that is taken out of your
paycheck, that money, that is

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disposable income to you.

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So the interesting thing is
where this disposable income

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has been going over the
last many, many years.

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So this right here, this
chart, is a plot of the

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percentage of disposable income
saved since 1960.

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I got this off the Bloomberg
terminal again.

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And just so you get a good
reference point, let me draw

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the line for 10%.

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Because I kind of view that
as a reference point.

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That's 10% personal savings.

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Actually, you could go back even
further than this, and

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you can see from the 1960s all
the way until the early `80s,

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the go-go `80s, people were
saving about 10% of their

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disposable income.

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Of what they got on that
paycheck after paying taxes,

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they were keeping about 10% of
it, putting it in the bank.

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And, of course, that would later
be used for investment

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and things like that.

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But then starting in the early
`80s, right around, let's see,

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about 1984, you see that people
started saving less and

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less money.

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All the way to the extreme
circumstance, to 2007, where,

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on average, people didn't
save money.

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Where maybe I saved $5, but
someone else borrowed $5.

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So on average, we didn't
save money.

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Actually we went slightly
negative.

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And all of this, and this is
kind of my claim-- and it can

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be borne out if you look at
other charts in terms of the

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amount of credit we took on-- is
because we took on credit.

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I guess there's two things
you could talk about.

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We took on credit and we started
having what I call

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perceived savings, right?

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If I buy a share of IBM a lot
of people say, oh, I saved I

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saved my money, I'm invested
in the stock market.

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But when I bought a share of
IBM, unless that dollar I paid

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for the share goes to IBM to
build new factories-- And

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that's very seldom time.

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Most of the time, that dollar I
gave to buy that IBM share,

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just goes to a guy who
sold an IBM share.

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So there's no net investment.

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It's only investment, it's only
savings, when that dollar

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actually goes to invest in some
way, build a new factory

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or build a new product
or something.

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So I think you had more and more
people thinking that they

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were saving when they weren't.

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Maybe thinking that they were
saving, as their home equity

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in their house grew, or
as their stock market

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portfolio went up.

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But there wasn't actual
aggregate savings going on.

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In fact, if anything, they were
borrowing against those

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things, especially
home equity.

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And the average savings rate
went down and down and down.

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So now we're here in 2007, and
maybe you could say 2008,

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where this is the capacity.

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We should probably talk about
world capacity, because so

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much of what we consume really
does come from overseas, but

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this is the capacity serving the
U.S. And let's say, going

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into 2007, this was demand.

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Supply and demand was, let's
say, pretty evenly matched.

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If you go to that top up here,
you see that we were at 80%

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utilization, which
isn't crazy.

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So if anything, you could say
that demand was maybe right

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around here.

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But that's a good level.

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You want to be at around
80% utilization.

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That's the rate at which you
don't have hyperinflation, but

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you're utilizing things
quite well.

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Now all of a sudden, the credit
crisis hit and all this

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credit disappears.

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And I'd make the argument that
the only thing that enabled us

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to not save this money,
is more and more

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access to cheap credit.

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Every time we went through a
recession, from the mid `80s,

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onwards, the government
solution was to

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make financing easier.

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The Fed would lower
interest rates.

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We would pump more and
more money into

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Fannie and Freddie Mac.

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We would lower standards
on what it

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took to get a mortgage.

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We would create incentives
for securitization.

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We would look the other way when
Bear Stearns is creating

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collateralized debt obligations,
or AIG is writing

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credit default swaps.

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And all of that enabled
financing.

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Until we get to this point right
here, where everything

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starts blowing up.

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So you essentially have
forced savings.

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When people can't borrow
anymore, the savings rate has

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to go to 10% because most of
this is just from people

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taking on more credit.

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There were a group of people
who were probably already

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always saving at 10% of their
disposable income.

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But there's another group of
people who were more than

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offsetting that by
taking credit.

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Now that the credit crisis hits,
you're going to see the

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savings rate-- and you already
see it with this blip right

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there-- the savings rate is
going to go back up to 10% of

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disposable income.

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Now if the savings rate goes
back to 10% of disposable

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income, that amount of money,
that 10% of disposable income,

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this gap, is 10% of disposable
income that cannot be used for

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consumption.

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And let's think about how large
of an amount that is.

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Right now, the U.S. disposable
income, if I were to draw

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disposable income-- this number
right here, I just

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looked it up-- it's around $10.7
trillion, let's say $11

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trillion for roundabout.

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So this 10% of disposable income
that we're talking

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about, this gap between the
normal environment, the

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environment that was enabled
from super-easy credit, that's

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10% of disposable income.

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10% of $11 trillion is $1.1
trillion per year of demand

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that will go away.

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That's per year.

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So all of a sudden, you're going
to have a gap where this

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was the demand before
and now the demand's

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going to drop to here.

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And all of this $1.1 trillion
of demand is going to

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disappear, because credit
is now not available.

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And then you do get a situation
where you might hit

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a low capacity utilization.

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Unfortunately, the capacity
utilization numbers don't go

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back to the Great Depression,
and we could probably get a

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sense of, at what point
does a deflationary

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spiral really get triggered.

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But because that $1.1 trillion
in demand disappears, you're

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going to see this orange line
just drop lower and lower in

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terms of capacity utilization.

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And that's going to
drive prices down.

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And what Obama and the Fed and
everyone else is trying to do,

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is to try to make up this gap.

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Now, everyone else can't
borrow money.

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Companies can't borrow money.

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Homeowners can't borrow money.

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But the government can borrow
money, because people are

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willing to finance it.

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At the bare minimum, the Fed's
willing to finance the

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government.

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And so the government wants to
come in and take up the slack

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with this demand and
spend the money

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themselves with the stimulus.

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Now we just talked about, what's
the magnitude of this

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demand shock?

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It's $1.1 trillion per year.

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While the stimulus plan
is on the order

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of a trillion dollars.

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And that trillion dollars isn't
per year, although I

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have a vague feeling that we
will see more of them coming

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down the pipeline.

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This stimulus plan that just
passed is expected to be spent

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over the next few years.

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So in terms of demand created
over the next few years, it's

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going to be several hundred
billion per year.

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So it's not going to be anywhere
near large enough to

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make up for this demand shock.

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So we're still going to have
low capacity utilization.

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So the people who argue that
these stimulus plans are going

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to create hyperinflation, I
disagree with that, at least

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in the near term, because in
the near term it's nowhere

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near large enough to really
soak up all of the extra

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capacity we have
in the system.

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And if anything, it's going to
soak up different capacity.

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So the stimulus plan might
create inflationary-like

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conditions in certain markets
where the stimulus plan is

00:09:06.430 --> 00:09:07.150
really focused.

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But in other areas, where you
used to have demand, but the

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stimulus plan doesn't touch,
like $50 spatulas from

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Williams Sonoma or granite
countertops, that area is

00:09:17.380 --> 00:09:18.860
going to continue to
see deflation.

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And I would say net-net, since
this thing this is actually so

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small, even though we're talking
about trillion dollars

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relative to the amount of demand
destroyed per year,

00:09:29.450 --> 00:09:31.950
we'll probably still
have deflation.

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And, for anyone who's paying
close attention to it, and I

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am because I care about these
things, the best thing to keep

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a lookout for, to know when to
start running to gold maybe or

00:09:43.350 --> 00:09:45.700
being super-worried about
inflation, is if you see this

00:09:45.700 --> 00:09:50.020
utilization number creeping back
up into the 80% range.

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At least over the last 40 years,
that's been the best

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leading indicator to
say when are we

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going to have inflation.

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And for all those goldbugs out
there, who insist that all of

00:10:00.160 --> 00:10:02.930
the hyperinflation or the
potential hyperinflation is

00:10:02.930 --> 00:10:06.120
caused by our not being on the
gold standard, I just want to

00:10:06.120 --> 00:10:10.170
point out that you can very
easily have-- we went off of

00:10:10.170 --> 00:10:13.020
Bretton Woods and completely
went to a fiat currency in

00:10:13.020 --> 00:10:18.240
'73, that right around here.

00:10:18.240 --> 00:10:21.740
But our worst inflation bouts
were actually while we were on

00:10:21.740 --> 00:10:23.540
the gold standard.

00:10:23.540 --> 00:10:26.490
And that's because we had very
high capacity utilization.

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This is the war period.

00:10:27.370 --> 00:10:28.750
What happens during a war?

00:10:28.750 --> 00:10:30.700
You run your factories
all-out.

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You run your farms all-out
to feed the troops.

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The factories, instead of
building cars, build planes.

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Everyone was working.

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Wages go up.

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Everything goes up and
you have inflation.

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A lot of people say, oh, the
war was the solution to the

00:10:43.460 --> 00:10:43.870
Great Depression.

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And it is true in that it got
us out of that negative

00:10:48.260 --> 00:10:50.000
deflationary spiral
that I talked

00:10:50.000 --> 00:10:51.140
about in the last video.

00:10:51.140 --> 00:10:52.690
And it did it by creating an

00:10:52.690 --> 00:10:54.700
unbelievable amount of inflation.

00:10:54.700 --> 00:10:57.780
And then after the war, you
could argue what allowed-- I

00:10:57.780 --> 00:11:01.480
don't have GDP here, but the
U.S. GDP really did do well in

00:11:01.480 --> 00:11:04.650
the postwar period-- it wasn't
the war per se, although the

00:11:04.650 --> 00:11:08.920
war kind of did take us out of
the deflationary spiral.

00:11:08.920 --> 00:11:11.740
So after the war, you had
all of this capacity,

00:11:11.740 --> 00:11:13.260
after World War II.

00:11:13.260 --> 00:11:15.270
So you had all this capacity
that was being used up by the

00:11:15.270 --> 00:11:16.720
war, and then, all of the
sudden, the war ends.

00:11:16.720 --> 00:11:18.150
And you're like, well, we don't
have to build planes

00:11:18.150 --> 00:11:20.650
anymore, we don't have to feed
the troops anymore, and now we

00:11:20.650 --> 00:11:22.850
have all these unemployed troops
who come back home.

00:11:22.850 --> 00:11:24.540
What are we going
to do with them?

00:11:24.540 --> 00:11:27.160
You'd say maybe, capacity
utilization would come back

00:11:27.160 --> 00:11:28.280
down there.

00:11:28.280 --> 00:11:31.210
But what a lot of people don't
talk about is, the rest of the

00:11:31.210 --> 00:11:35.220
industrial world's capacity
was blown to smithereens.

00:11:35.220 --> 00:11:38.960
At that point in time, the U.S.
was a smaller part of GDP

00:11:38.960 --> 00:11:41.990
and the other major players
were Germany,

00:11:41.990 --> 00:11:44.335
Western Europe and Japan.

00:11:46.910 --> 00:11:49.750
In the U.S., we didn't have
any factories bombed.

00:11:49.750 --> 00:11:52.100
The entire war took place
in these areas.

00:11:52.100 --> 00:11:55.040
And whenever people go on
bombing raids, the ideal thing

00:11:55.040 --> 00:11:56.830
that they want to bomb
is factories.

00:11:56.830 --> 00:11:59.200
So what you had in the postwar
period, is you had all of

00:11:59.200 --> 00:12:02.520
these countries that had their
capacity blown to smithereens.

00:12:02.520 --> 00:12:05.500
The U.S. was essentially the
only person left with any

00:12:05.500 --> 00:12:08.240
capacity, and so all the demand
from the rest of the

00:12:08.240 --> 00:12:10.750
world picked up the slack
in the U.S. capacity.

00:12:10.750 --> 00:12:13.430
And that's why, even though
there was a demand shock in

00:12:13.430 --> 00:12:17.230
the U.S. after that, you also
had a supply shock from the

00:12:17.230 --> 00:12:20.015
war where you had all of this
capacity that was blown to

00:12:20.015 --> 00:12:21.130
smithereens.

00:12:21.130 --> 00:12:23.590
In this situation that we
are in now, we have a

00:12:23.590 --> 00:12:26.100
major demand shock.

00:12:26.100 --> 00:12:29.610
Financing just disappears and
the savings rate's going to

00:12:29.610 --> 00:12:33.160
skyrocket because people
can't borrow anymore.

00:12:33.160 --> 00:12:35.620
But there's no counteracting
supply shock.

00:12:35.620 --> 00:12:40.160
Supply of factories making
widgets and all the rest is

00:12:40.160 --> 00:12:40.910
staying the same.

00:12:40.910 --> 00:12:43.510
So the Obama administration is
trying to create a stimulus to

00:12:43.510 --> 00:12:46.630
sop some of this up, but it's
not going to be enough.

00:12:46.630 --> 00:12:48.810
And my only fear is, with all
the printing money and all

00:12:48.810 --> 00:12:53.340
that goes, once we do get
back to the 80% capacity

00:12:53.340 --> 00:12:56.380
utilization, once we do go back
here, how quickly they

00:12:56.380 --> 00:12:59.650
can unwind all of this printing
press money and all

00:12:59.650 --> 00:13:00.390
of the stimulus plan.

00:13:00.390 --> 00:13:01.470
Because that's going
to be the key.

00:13:01.470 --> 00:13:04.880
Because, if we do get to 80%
capacity utilization or we

00:13:04.880 --> 00:13:07.730
start pushing up there, and we
continue to run the printing

00:13:07.730 --> 00:13:09.830
press-- because that's what,
essentially, government's

00:13:09.830 --> 00:13:12.150
incentive is to do, because they
always feel better when

00:13:12.150 --> 00:13:15.420
we're flush with money-- then,
and only then, you might see a

00:13:15.420 --> 00:13:16.620
hyperinflation scenario.

00:13:16.620 --> 00:13:19.550
But I don't see that at least
for the next few years.


Inflation, deflation, and capacity utilization 2

WEBVTT
Kind: captions
Language: en

00:00:01.180 --> 00:00:04.820
In the last video I spoke a
bunch about the determining

00:00:04.820 --> 00:00:08.590
factor on whether we have
inflation or deflation.

00:00:08.590 --> 00:00:10.860
It isn't so much the money
supply, although the money

00:00:10.860 --> 00:00:14.450
supply will have an effect,
it's really capacity

00:00:14.450 --> 00:00:15.350
utilization.

00:00:15.350 --> 00:00:17.740
Capacity utilization is
driven by demand.

00:00:17.740 --> 00:00:20.550
And I made that distinction
because-- I gave that example

00:00:20.550 --> 00:00:23.100
of the island, where you could
have a very small money

00:00:23.100 --> 00:00:26.990
supply, for example, one
seashell, but if the velocity

00:00:26.990 --> 00:00:30.270
is really high, then people are
expressing that demand.

00:00:30.270 --> 00:00:32.409
And you'll have very high
utilization of all of the

00:00:32.409 --> 00:00:35.360
capacity in the island and you
might have inflation, even

00:00:35.360 --> 00:00:37.640
though the money supply
is one seashell.

00:00:37.640 --> 00:00:39.990
On the other hand, let's say, we
found a bunch of seashells,

00:00:39.990 --> 00:00:42.920
but everyone stops transacting,
so the velocity

00:00:42.920 --> 00:00:44.430
were to slow down a bunch.

00:00:44.430 --> 00:00:47.960
So in that case, even though the
money supply is huge, or a

00:00:47.960 --> 00:00:51.060
lot larger than it was, people
aren't expressing demand.

00:00:51.060 --> 00:00:53.550
So demand will be a lot
lower than capacity.

00:00:53.550 --> 00:00:58.610
As we showed in the cupcakes
economics video, when you have

00:00:58.610 --> 00:01:02.400
a lot of unused capacity, it's
everyone's incentive to try to

00:01:02.400 --> 00:01:05.190
sell that extra unit and
they all lower prices.

00:01:05.190 --> 00:01:07.440
So you can have an increased
money supply but, if the

00:01:07.440 --> 00:01:09.970
velocity slows down or if
demand is slowing down--

00:01:09.970 --> 00:01:12.270
because that's what's causing
the velocity to slow down--

00:01:12.270 --> 00:01:16.850
then you could still have a
deflationary situation.

00:01:16.850 --> 00:01:19.350
Actually, we touched on the
chart where we showed that

00:01:19.350 --> 00:01:25.030
every major inflationary bout
was actually stimulated, or

00:01:25.030 --> 00:01:28.705
was actually preceded, by a
pretty big upturn in capacity

00:01:28.705 --> 00:01:29.670
utilization.

00:01:29.670 --> 00:01:32.180
And the inflation really started
going once capacity

00:01:32.180 --> 00:01:34.430
utilization got into
the 80% range.

00:01:34.430 --> 00:01:38.300
You could imagine that if, on
average, the world is running

00:01:38.300 --> 00:01:40.610
at 80% that means that some
people are running at 70%,

00:01:40.610 --> 00:01:42.940
some people are running
at 90%, 95%.

00:01:42.940 --> 00:01:45.690
And those people who are running
at 95%, those are the

00:01:45.690 --> 00:01:48.780
people who say, gee, instead of
trying to run at 96%, 97%,

00:01:48.780 --> 00:01:51.970
98% utilization, why don't I
just raise price and not have

00:01:51.970 --> 00:01:53.700
to worry about producing
that extra unit?

00:01:53.700 --> 00:01:56.720
And obviously their inputs go
into other people's; their

00:01:56.720 --> 00:01:58.320
outputs go into other
people's inputs.

00:01:58.320 --> 00:02:01.580
And then you get a generalized
price inflation.

00:02:01.580 --> 00:02:04.390
Now with that said, actually, I
want to make another point.

00:02:04.390 --> 00:02:06.400
In the early `70s-- everyone
always talks

00:02:06.400 --> 00:02:08.620
about the oil shock.

00:02:08.620 --> 00:02:11.390
In 1973 you had the
Yom Kippur War.

00:02:11.390 --> 00:02:14.790
We resupplied Israel, and then
you had all the OPEC countries

00:02:14.790 --> 00:02:18.160
that essentially stopped selling
oil to the U.S. and a

00:02:18.160 --> 00:02:19.340
lot of other western nations.

00:02:19.340 --> 00:02:21.350
And people say, you know, oil
prices shot through the roof

00:02:21.350 --> 00:02:23.860
and that's what drove inflation,
that supply shock.

00:02:23.860 --> 00:02:29.050
That probably contributed
to it, but 1973 is

00:02:29.050 --> 00:02:30.140
right around there.

00:02:30.140 --> 00:02:33.440
So if you actually look at this
chart, we're already kind

00:02:33.440 --> 00:02:35.730
of on an inflationary
spectrum.

00:02:35.730 --> 00:02:37.800
The generalized prices were
already increasing.

00:02:37.800 --> 00:02:40.640
And capacity utilization had
really preceded that.

00:02:40.640 --> 00:02:43.300
That probably just added
fuel to the flame.

00:02:43.300 --> 00:02:45.950
With that said, the question
that everyone's wondering

00:02:45.950 --> 00:02:48.620
about is, what's going
to happen now?

00:02:48.620 --> 00:02:54.080
So before the current financial
crisis, we had a

00:02:54.080 --> 00:02:55.330
certain amount of capacity.

00:03:00.600 --> 00:03:02.660
Let's say this is everything,
this is the U.S. output.

00:03:08.250 --> 00:03:10.860
Let's say this is
U.S. GDP, right?

00:03:10.860 --> 00:03:12.930
GDP is just output.

00:03:12.930 --> 00:03:15.960
So in a normal developed
environment, so that you go

00:03:15.960 --> 00:03:18.810
back into the `60s-- and I
should probably get the

00:03:18.810 --> 00:03:20.990
Bloomberg chart on this too,
because it's pretty

00:03:20.990 --> 00:03:31.750
interesting-- about 60% of our
GDP was on consumption.

00:03:31.750 --> 00:03:33.980
And consumption always
isn't a bad thing.

00:03:36.570 --> 00:03:38.420
Consumption isn't always
a bad thing.

00:03:38.420 --> 00:03:40.430
It's actually what
we use to have a

00:03:40.430 --> 00:03:41.730
good standard of living.

00:03:41.730 --> 00:03:44.390
If I have a nice sofa, and a TV
set, and I go on vacations,

00:03:44.390 --> 00:03:45.090
that's consumption.

00:03:45.090 --> 00:03:47.050
But it improves our standard of
living and the goal of all

00:03:47.050 --> 00:03:49.040
countries is really
to improve that

00:03:49.040 --> 00:03:50.430
average standard of living.

00:03:50.430 --> 00:03:54.040
But the remainder is savings.

00:03:54.040 --> 00:03:58.440
In a traditionally responsible,
developed nation

00:03:58.440 --> 00:04:02.200
you save 40%, maybe 30% to
40%, depending on whether

00:04:02.200 --> 00:04:04.540
you're Japan or whether
you're Western Europe.

00:04:04.540 --> 00:04:08.410
Now what savings turns into, is
essentially new investment

00:04:08.410 --> 00:04:09.700
to raise your ouput.

00:04:09.700 --> 00:04:13.690
So this savings is what allows
you to increase your output in

00:04:13.690 --> 00:04:14.940
the next year.

00:04:22.670 --> 00:04:24.450
If you don't save even a little
bit, your output will

00:04:24.450 --> 00:04:27.600
actually decrease, because no
one will invest in factories

00:04:27.600 --> 00:04:31.550
and the factories will get old
and the roads will stop being

00:04:31.550 --> 00:04:35.310
usable and all the rest.
Whenever someone's investing,

00:04:35.310 --> 00:04:36.660
that's someone else's savings.

00:04:36.660 --> 00:04:38.940
And it's very important to
realize that investment and

00:04:38.940 --> 00:04:41.230
savings are really two sides
of the same coin.

00:04:41.230 --> 00:04:43.020
If no one's saving, then
there's no money for

00:04:43.020 --> 00:04:43.780
investment.

00:04:43.780 --> 00:04:45.610
But just going back to this
example, when people are

00:04:45.610 --> 00:04:48.480
saving that's what not only
maintains output, but actually

00:04:48.480 --> 00:04:51.120
increases total output.

00:04:51.120 --> 00:04:54.120
So this would be in the next
year or the next decade.

00:04:54.120 --> 00:04:59.370
And then, when we consume 60%
of this, we're consuming 60%

00:04:59.370 --> 00:05:01.430
of a larger number and our
standard of living will go up.

00:05:01.430 --> 00:05:05.210
And this is a very sustainable
and good situation.

00:05:05.210 --> 00:05:09.320
What happened, unfortunately,
really since the early `80s,

00:05:09.320 --> 00:05:12.690
is that we had a constant
expansion of credit.

00:05:12.690 --> 00:05:15.690
We started lending more and
more money to everyone and

00:05:15.690 --> 00:05:17.150
other countries started
lending more and

00:05:17.150 --> 00:05:18.150
more money to us.

00:05:18.150 --> 00:05:21.990
And most of that got expressed
in more and more consumption.

00:05:21.990 --> 00:05:32.940
So if you look at U.S.
output-- This is GDP.

00:05:32.940 --> 00:05:37.550
If you actually go to 2007, the
average American consumed

00:05:37.550 --> 00:05:39.120
more than we produced.

00:05:39.120 --> 00:05:42.230
We had a negative savings.

00:05:42.230 --> 00:05:44.610
If I were to draw that,
it looks like this.

00:05:47.590 --> 00:05:53.020
In 2007, consumption was larger
than our total output.

00:05:56.800 --> 00:06:00.620
So the question is, how
did this happen?

00:06:00.620 --> 00:06:02.030
Everyone talks about money
and currencies.

00:06:02.030 --> 00:06:05.030
Essentially we borrowed output
from other people.

00:06:05.030 --> 00:06:09.270
When we borrow money from the
Chinese, which we use to buy

00:06:09.270 --> 00:06:12.860
their goods, we're essentially
just borrowing

00:06:12.860 --> 00:06:13.630
their output, right?

00:06:13.630 --> 00:06:15.170
We're borrowing their goods.

00:06:15.170 --> 00:06:18.590
So when we give them a dollar
bill, that's a promise that,

00:06:18.590 --> 00:06:21.330
in the future, they could use
that dollar bill to come back

00:06:21.330 --> 00:06:23.040
and use some of our output.

00:06:23.040 --> 00:06:25.330
But over the course of the last
several decades, we were

00:06:25.330 --> 00:06:26.830
just borrowing other
people's output.

00:06:26.830 --> 00:06:28.370
And we became net debtors.

00:06:28.370 --> 00:06:30.060
So when your consumption is
actually larger than your

00:06:30.060 --> 00:06:32.630
output, you immediately start
to realize that this isn't a

00:06:32.630 --> 00:06:34.340
sustainable situation
for too long.

00:06:34.340 --> 00:06:36.470
And maybe we borrowed a little
bit more money and, actually

00:06:36.470 --> 00:06:39.770
it did turn out that way, that
we borrowed some people's

00:06:39.770 --> 00:06:43.320
output even more to fuel some
of our investment as well.

00:06:43.320 --> 00:06:45.860
It's not like no investment
was going on for

00:06:45.860 --> 00:06:47.790
the last 20, 30 years.

00:06:47.790 --> 00:06:48.700
We had a lot of investment.

00:06:48.700 --> 00:06:52.080
But essentially, the consumption
and investment was

00:06:52.080 --> 00:06:55.200
being financed by other
people's output.

00:06:55.200 --> 00:06:58.440
And, of course, when you have
consumption touching up

00:06:58.440 --> 00:07:00.940
against-- you're fully utilized,
that makes it even

00:07:00.940 --> 00:07:02.870
more an incentive to invest.
So all of these people were

00:07:02.870 --> 00:07:05.320
willing to invest in the U.S.

00:07:05.320 --> 00:07:08.650
What happened now is, you
realize that a lot of the

00:07:08.650 --> 00:07:12.230
financing or a lot of the debt
that was being taken on, it

00:07:12.230 --> 00:07:15.270
was being facilitated by
people's homes and home equity

00:07:15.270 --> 00:07:16.820
loans but people really
aren't good for it.

00:07:16.820 --> 00:07:20.430
And now all of a sudden, the
banks dried up, liquidity is

00:07:20.430 --> 00:07:22.110
gone, people can't borrow
money, and you

00:07:22.110 --> 00:07:23.920
have a demand shock.

00:07:23.920 --> 00:07:26.630
So what you have is a situation
where a considerable

00:07:26.630 --> 00:07:30.030
amount of this consumption, and
actually a considerable

00:07:30.030 --> 00:07:33.570
amount of that investment that
was being fueled by financing,

00:07:33.570 --> 00:07:35.580
disappears.

00:07:35.580 --> 00:07:37.820
And now that we're in a global
world, we really should think

00:07:37.820 --> 00:07:38.760
about global output.

00:07:38.760 --> 00:07:40.300
But it doesn't matter,
we could talk

00:07:40.300 --> 00:07:41.490
about just U.S. output.

00:07:41.490 --> 00:07:44.910
But now that this demand has
disappeared-- if this is U.S.

00:07:44.910 --> 00:07:48.180
output and let's say, this is
output that we were taking

00:07:48.180 --> 00:07:50.380
from China or Japan or wherever
else-- and our

00:07:50.380 --> 00:07:54.570
consumption has now
fallen down here.

00:07:54.570 --> 00:07:56.420
And it's not because, all of a
sudden, people became prudent.

00:07:56.420 --> 00:07:58.360
It's because people aren't
willing to lend them, to go to

00:07:58.360 --> 00:08:01.870
Williams-Sonoma and buy a $50
spatula or whatever else.

00:08:01.870 --> 00:08:04.200
They just can't get another
credit card loan or a home

00:08:04.200 --> 00:08:05.060
equity loan.

00:08:05.060 --> 00:08:07.840
So you have the situation
now, where you have low

00:08:07.840 --> 00:08:08.740
utilization.

00:08:08.740 --> 00:08:10.780
And this comes back
to what we talked

00:08:10.780 --> 00:08:11.970
about in the last video.

00:08:11.970 --> 00:08:14.280
That when you have low
utilization, it's everyone's

00:08:14.280 --> 00:08:16.150
incentive to lower prices.

00:08:16.150 --> 00:08:17.700
When you have a bunch
of vacant houses,

00:08:17.700 --> 00:08:18.890
people lower rents.

00:08:18.890 --> 00:08:21.150
When the car factories are
empty, people lower the price

00:08:21.150 --> 00:08:22.230
of car factories.

00:08:22.230 --> 00:08:26.620
When people are underutilized,
wages go down.

00:08:26.620 --> 00:08:30.610
You see this shock, more
recently, right here.

00:08:30.610 --> 00:08:34.480
As we said in the last video,
the orange line is U.S.

00:08:34.480 --> 00:08:35.960
capacity utilization.

00:08:35.960 --> 00:08:40.610
And it dropped from about
the 80% range.

00:08:40.610 --> 00:08:42.870
If it had gone up here, I would
have started getting

00:08:42.870 --> 00:08:44.620
worried about hyperinflation.

00:08:44.620 --> 00:08:48.500
But, you see, right around
summer of 2007 it dropped off

00:08:48.500 --> 00:08:50.870
of a cliff and it's down
here someplace.

00:08:50.870 --> 00:08:53.230
Now you see a little bit later,
inflation dropped.

00:08:53.230 --> 00:08:55.860
So that dynamic that we've been
talking about, capacity

00:08:55.860 --> 00:08:58.280
utilization falling off, because
we essentially had a

00:08:58.280 --> 00:08:59.310
demand shock.

00:08:59.310 --> 00:09:02.550
And then that's led to
a decrease in prices.

00:09:02.550 --> 00:09:06.110
So the question is, everything
that the Treasury is doing,

00:09:06.110 --> 00:09:08.870
and the Fed is printing money,
and Obama spending a

00:09:08.870 --> 00:09:10.300
trillion-dollar stimulus,
is that

00:09:10.300 --> 00:09:12.300
going to lead to inflation?

00:09:12.300 --> 00:09:16.110
My answer is, just watch the
capacity utilization numbers.

00:09:16.110 --> 00:09:19.200
And, just you know, the stimulus
plan, the whole idea

00:09:19.200 --> 00:09:24.350
about it is, the government
doesn't want us to enter into

00:09:24.350 --> 00:09:25.340
a deflationary spiral.

00:09:25.340 --> 00:09:27.650
If consumption drops like this,
we have all of this

00:09:27.650 --> 00:09:30.170
capacity and prices go down.

00:09:30.170 --> 00:09:32.540
If prices go down a little
bit, it doesn't affect

00:09:32.540 --> 00:09:33.710
people's behavior
in aggregate.

00:09:33.710 --> 00:09:36.310
But if people start having
expectations that wages will

00:09:36.310 --> 00:09:40.130
go down, that prices will go
down then, they all go into

00:09:40.130 --> 00:09:43.580
panic mode and they
stop spending.

00:09:43.580 --> 00:09:50.500
Let's say they stop spending,
then utilization goes down

00:09:50.500 --> 00:09:54.430
even more, then unemployment
goes up even more, and this

00:09:54.430 --> 00:09:56.580
also makes fear go
up even more.

00:09:56.580 --> 00:09:59.890
Unemployment going up and fear
going up makes people stop

00:09:59.890 --> 00:10:01.010
spending even more.

00:10:01.010 --> 00:10:04.950
And this is that deflationary
cycle that all the economists

00:10:04.950 --> 00:10:07.070
and all of the government
officials are afraid of.

00:10:07.070 --> 00:10:11.250
You saw that during the
Great Depression.

00:10:11.250 --> 00:10:13.380
Let me draw a zero point
to show you where.

00:10:21.450 --> 00:10:22.700
That is zero.

00:10:25.090 --> 00:10:26.710
That's the dividing
line between

00:10:26.710 --> 00:10:27.940
inflation and deflation.

00:10:27.940 --> 00:10:30.500
You see we've had a couple
of bouts of deflation.

00:10:30.500 --> 00:10:32.740
And they normally aren't good
times in the world.

00:10:32.740 --> 00:10:35.260
This is the Great Depression
right here.

00:10:35.260 --> 00:10:38.950
This is post World War I, and
the Great Depression actually

00:10:38.950 --> 00:10:42.640
lasted all the way until-- we
entered the war in the late

00:10:42.640 --> 00:10:46.350
`30s-- right about
here to here.

00:10:46.350 --> 00:10:47.880
We had a little bit
of inflation.

00:10:47.880 --> 00:10:50.400
You had the first wave of the
New Deal stimulating some

00:10:50.400 --> 00:10:52.780
spending, but it really never
got us to any significant

00:10:52.780 --> 00:10:53.540
level of inflation.

00:10:53.540 --> 00:10:55.690
Just so you have a sense, I
would consider anything above

00:10:55.690 --> 00:10:58.390
5% inflation as really,
really bad.

00:10:58.390 --> 00:11:00.980
And let me draw a line there.

00:11:00.980 --> 00:11:03.260
So that's the 5%
inflation mark.

00:11:03.260 --> 00:11:07.340
So we really didn't get above 5%
inflation until you end up

00:11:07.340 --> 00:11:11.110
with World War I, and then you
have the postwar period, we're

00:11:11.110 --> 00:11:14.120
under Bretton Woods, and then
in the `70s we had, as I

00:11:14.120 --> 00:11:18.640
talked about before, the oil
shock and all of the rest. The

00:11:18.640 --> 00:11:19.220
rest is history.

00:11:19.220 --> 00:11:23.430
But as you see, the deflationary
periods are

00:11:23.430 --> 00:11:25.960
things that government officials
want to avoid

00:11:25.960 --> 00:11:26.970
altogether.

00:11:26.970 --> 00:11:30.350
So the idea of the stimulus is
for the government to borrow

00:11:30.350 --> 00:11:32.640
money, because no-one
else can.

00:11:32.640 --> 00:11:36.580
And they can essentially fill
up the gap where the

00:11:36.580 --> 00:11:38.680
consumers left off.

00:11:38.680 --> 00:11:40.020
Now the question is, are
they going to fill

00:11:40.020 --> 00:11:41.440
up enough of a gap?

00:11:41.440 --> 00:11:44.290
Actually I realize that I'm
running out of time again.

00:11:44.290 --> 00:11:46.920
I don't like to make these
videos too long, so I'll talk

00:11:46.920 --> 00:11:49.200
about that in the next video.


Inflation, deflation, and capacity utilization

WEBVTT
Kind: captions
Language: en

00:00:00.720 --> 00:00:03.950
With all the talk of the
deficits that we're entering,

00:00:03.950 --> 00:00:06.710
and the stimulus bill, and all
the money that's being spent

00:00:06.710 --> 00:00:11.960
on the bank bailouts, and
potentially the auto bailouts,

00:00:11.960 --> 00:00:14.380
the question that everyone's
asking: Is this going to lead

00:00:14.380 --> 00:00:15.540
to inflation?

00:00:15.540 --> 00:00:17.880
And that is what I hope to
address in this video.

00:00:17.880 --> 00:00:19.310
And I guess a good starting
point is,

00:00:19.310 --> 00:00:21.390
well, what is inflation?

00:00:21.390 --> 00:00:24.610
It's a general increase in the
prices of goods and services.

00:00:24.610 --> 00:00:27.270
So they actually measure it
by-- they take a basket of

00:00:27.270 --> 00:00:31.980
goods and services and they see
how those prices compare

00:00:31.980 --> 00:00:32.910
to a reference year.

00:00:32.910 --> 00:00:36.540
And if those prices go up by 3%,
they might use a consumer

00:00:36.540 --> 00:00:37.250
price index.

00:00:37.250 --> 00:00:39.290
They'll say inflation
increased by 3%.

00:00:39.290 --> 00:00:41.320
So that's what's inflation.

00:00:41.320 --> 00:00:44.170
And the opposite of inflation,
if things actually get

00:00:44.170 --> 00:00:47.610
cheaper, is deflation.

00:00:47.610 --> 00:00:53.660
If one year 10 megabytes of RAM
costs x dollars, and then

00:00:53.660 --> 00:00:55.910
the next year, it costs a little
bit less, it's actually

00:00:55.910 --> 00:00:59.330
a deflationary process, at
least in that market.

00:00:59.330 --> 00:01:01.260
So without the those definitions
out of the way,

00:01:01.260 --> 00:01:03.650
let's talk a little bit
about what causes it.

00:01:03.650 --> 00:01:06.050
A couple of days ago, I made
these videos on cupcake

00:01:06.050 --> 00:01:09.990
economics, where I talked about
what happens when the

00:01:09.990 --> 00:01:13.180
cupcake factories have high
utilization or low

00:01:13.180 --> 00:01:13.810
utilization.

00:01:13.810 --> 00:01:15.950
What might happen with prices?

00:01:15.950 --> 00:01:17.570
And the reason why I did that
is because I really want to

00:01:17.570 --> 00:01:22.130
make it very clear that it
really is utilization of

00:01:22.130 --> 00:01:26.380
factories or of people
that drive prices.

00:01:26.380 --> 00:01:29.720
Let's say this is all the
capacity that I have. When I

00:01:29.720 --> 00:01:32.190
talk about capacity in this
video, I'm speaking in very

00:01:32.190 --> 00:01:34.840
general terms. It's all of the
goods and services that we

00:01:34.840 --> 00:01:35.250
could produce.

00:01:35.250 --> 00:01:38.090
We could just talk about labor
capacity, and then

00:01:38.090 --> 00:01:42.460
unemployment rate is a measure
of what is essentially not

00:01:42.460 --> 00:01:43.320
being utilized.

00:01:43.320 --> 00:01:49.180
But this is just our capacity,
our productive capacity.

00:01:49.180 --> 00:01:52.940
And in those cupcake economics
videos, I showed that if the

00:01:52.940 --> 00:01:56.260
demand is pushing up against
capacity-- let me do demand in

00:01:56.260 --> 00:01:57.400
a different color.

00:01:57.400 --> 00:02:00.110
If demand is really close
to capacity-- and I know

00:02:00.110 --> 00:02:02.090
everything I draw kind of looks
like balance sheets, but

00:02:02.090 --> 00:02:04.150
this isn't intended to
be a balance sheet.

00:02:04.150 --> 00:02:06.440
This is intended just to show
you that demand is pushing up

00:02:06.440 --> 00:02:07.120
against capacity.

00:02:07.120 --> 00:02:09.789
So in this situation, let's
say, this is capacity.

00:02:09.789 --> 00:02:13.410
If demand is at 90% of capacity,
then the people with

00:02:13.410 --> 00:02:16.340
the capacity might say, gee,
instead of trying to just try

00:02:16.340 --> 00:02:19.360
to sell that extra unit-- this
is demand-- instead of just

00:02:19.360 --> 00:02:22.160
trying to sell that extra unit
and have to worry about all

00:02:22.160 --> 00:02:24.880
the raw materials and have to
work for that extra unit, why

00:02:24.880 --> 00:02:28.670
don't I just raise
prices, right?

00:02:28.670 --> 00:02:40.030
So high utilization of capacity,
it leads to prices

00:02:40.030 --> 00:02:40.880
increasing.

00:02:40.880 --> 00:02:44.050
And this isn't some kind of
fancy macroeconomic principal;

00:02:44.050 --> 00:02:46.370
it's true if you're running
a lemonade stand.

00:02:46.370 --> 00:02:50.410
If all of a sudden, you're
starting to sell 95% of your

00:02:50.410 --> 00:02:53.360
lemonade, you'll probably say,
hey, maybe it's worth it if I

00:02:53.360 --> 00:02:54.400
raise the price.

00:02:54.400 --> 00:02:56.860
On the other hand, low
utilization-- let me pick

00:02:56.860 --> 00:03:08.500
another color --will lead
the prices dropping.

00:03:08.500 --> 00:03:11.770
And you go back to your lemonade
stand, and you say,

00:03:11.770 --> 00:03:15.990
wow, if I'm only selling 20% of
the lemonade that I make,

00:03:15.990 --> 00:03:20.810
maybe my problem is that my
lemonade's too expensive.

00:03:20.810 --> 00:03:23.020
And frankly, if there was a
bunch of lemonade stands,

00:03:23.020 --> 00:03:24.750
everyone is trying to
sell their capacity.

00:03:24.750 --> 00:03:26.180
So just to compete
with each other,

00:03:26.180 --> 00:03:27.720
they'll all lower prices.

00:03:27.720 --> 00:03:29.480
Actually, I'll throw another
thing in here that's a little

00:03:29.480 --> 00:03:32.670
unrelated to inflation, but high
utilization makes prices

00:03:32.670 --> 00:03:35.060
go up and it also makes
people want to add

00:03:35.060 --> 00:03:36.320
more capacity, right?

00:03:36.320 --> 00:03:37.820
So also investment goes up.

00:03:37.820 --> 00:03:39.630
Both of those things do add more
capacity, but we won't

00:03:39.630 --> 00:03:41.410
worry about that right now.

00:03:41.410 --> 00:03:43.670
So if you accept that-- and
I think it's a reasonable

00:03:43.670 --> 00:03:47.660
argument, because it's really
based on common sense things

00:03:47.660 --> 00:03:50.920
--then I think you'll buy the
argument that, if you have

00:03:50.920 --> 00:03:56.150
very low utilization, it's
difficult to have inflation.

00:03:56.150 --> 00:03:58.900
And, likewise, if you have very
high utilization, it's

00:03:58.900 --> 00:04:00.180
hard to avoid inflation.

00:04:00.180 --> 00:04:03.420
And to kind of hit the point
home, actually, I took our

00:04:03.420 --> 00:04:08.070
company's Bloomberg terminal
and copied and pasted these

00:04:08.070 --> 00:04:09.010
charts here.

00:04:09.010 --> 00:04:11.550
And the orange-- and I know you
can't see it that well on

00:04:11.550 --> 00:04:14.860
YouTube , so I'll try to make
it clear in my drawing, I'll

00:04:14.860 --> 00:04:18.360
do it the same color, --this
orange shows capacity

00:04:18.360 --> 00:04:21.700
utilization, and the starting
date right here, I

00:04:21.700 --> 00:04:25.210
think it was 1967.

00:04:25.210 --> 00:04:29.410
This is 1969, actually December
31, 1969, so this is

00:04:29.410 --> 00:04:33.880
1970, beginning of 1970, this
is beginning of 1980,

00:04:33.880 --> 00:04:37.690
beginning of 1990,
this is 2000.

00:04:37.690 --> 00:04:40.910
This orange line represents
capacity utilization.

00:04:40.910 --> 00:04:46.950
So up here this is 90%
utilization and then down here

00:04:46.950 --> 00:04:49.910
this is 70% utilization.

00:04:49.910 --> 00:04:55.610
So if we look here, in the late
60's, we have very high

00:04:55.610 --> 00:04:56.610
utilization.

00:04:56.610 --> 00:04:59.330
Arguably because of the Vietnam
War, we had factories

00:04:59.330 --> 00:05:03.130
running at capacity to build
bombs and Agent Orange and God

00:05:03.130 --> 00:05:04.530
knows what else.

00:05:04.530 --> 00:05:07.220
And then utilization
went down.

00:05:07.220 --> 00:05:09.640
We could talk a lot about the
history, but, in general, the

00:05:09.640 --> 00:05:12.250
interesting thing-- well,
actually, before I go into

00:05:12.250 --> 00:05:14.520
what happened, let's think about
what this white line is.

00:05:14.520 --> 00:05:16.050
So the orange line
is utilization.

00:05:16.050 --> 00:05:18.330
Up here we had like
90% utilization.

00:05:18.330 --> 00:05:24.130
Very recently, this was like
2007, we had 80%, and very

00:05:24.130 --> 00:05:27.400
recently, utilization has
dropped off, which essentially

00:05:27.400 --> 00:05:31.540
just means we're not running
our factories at full tilt.

00:05:31.540 --> 00:05:34.390
This white line is
year-over-year inflation

00:05:34.390 --> 00:05:36.570
growth, and let me
do that in white.

00:05:36.570 --> 00:05:38.190
This is year-over-year
inflation growth.

00:05:38.190 --> 00:05:41.020
Actually, let me draw a zero
line, so you can separate

00:05:41.020 --> 00:05:43.520
inflation from deflation.

00:05:43.520 --> 00:05:51.450
Let me see, zero inflation
is right over here.

00:05:51.450 --> 00:05:52.400
That's zero inflation.

00:05:52.400 --> 00:05:54.250
And you see, in the time series
that I've done, we've

00:05:54.250 --> 00:05:57.515
never had zero inflation,
although we have had periods

00:05:57.515 --> 00:06:00.120
of a very high inflation.

00:06:00.120 --> 00:06:03.010
But the interesting thing, just
falling into the cupcake

00:06:03.010 --> 00:06:05.350
economics and this whole
notion of capacity

00:06:05.350 --> 00:06:10.200
utilization, is that
inflationary periods are

00:06:10.200 --> 00:06:14.240
always preceded, at least all
the data I have, by increases

00:06:14.240 --> 00:06:16.550
in capacity utilization.

00:06:16.550 --> 00:06:23.730
So you could view this as the
beginning of a pretty

00:06:23.730 --> 00:06:25.970
significant uptick
in prices, right?

00:06:25.970 --> 00:06:29.455
And notice, it was preceded
by an uptick in capacity

00:06:29.455 --> 00:06:30.550
utilization.

00:06:30.550 --> 00:06:32.930
So, if you saw right here, wow,
capacity utilization is

00:06:32.930 --> 00:06:35.360
starting to go up-- and
actually, another interesting

00:06:35.360 --> 00:06:38.040
thing is to see what threshold
of utilization starts to

00:06:38.040 --> 00:06:40.110
trigger inflation.

00:06:40.110 --> 00:06:42.350
So over here, you say, OK, when
inflation really started

00:06:42.350 --> 00:06:46.580
turning around, we were at
a capacity utilization of

00:06:46.580 --> 00:06:50.590
roughly 83%, 84% right there.

00:06:50.590 --> 00:06:52.520
And then, if you look at the
next period where inflation

00:06:52.520 --> 00:06:54.800
really started to hit-- you can
either pick that point or

00:06:54.800 --> 00:06:57.360
that point --where was
capacity utilization?

00:06:57.360 --> 00:06:59.750
It was around that same level
that was right there.

00:06:59.750 --> 00:07:00.850
It was above 80.

00:07:00.850 --> 00:07:02.650
This was about 82%.

00:07:02.650 --> 00:07:04.990
And we could pick every
period before that.

00:07:08.090 --> 00:07:10.270
Well, since then, inflation
really hasn't

00:07:10.270 --> 00:07:11.580
been a major problem.

00:07:11.580 --> 00:07:14.710
These are our two major bouts
of inflation, in the early

00:07:14.710 --> 00:07:18.880
70's and in the early 80's,
and those were when we had

00:07:18.880 --> 00:07:23.810
extremely high capacity
utilization.

00:07:23.810 --> 00:07:25.990
So the point I want to make here
is capacity utilization

00:07:25.990 --> 00:07:27.700
really is the driver
of inflation.

00:07:27.700 --> 00:07:29.260
You actually could find it
the other way around.

00:07:29.260 --> 00:07:32.330
So this white line here, you
don't see it because the

00:07:32.330 --> 00:07:35.640
orange line-- actually, I
realize that I'm showing you

00:07:35.640 --> 00:07:36.890
off of the screen.

00:07:39.200 --> 00:07:43.420
Let me actually reduce my
window, so I can show you.

00:07:43.420 --> 00:07:46.530
So this is more recent, where
we see that capacity

00:07:46.530 --> 00:07:47.880
utilization started
falling off.

00:07:47.880 --> 00:07:50.490
I think this is in the
summer of 2007.

00:07:50.490 --> 00:07:54.160
And you don't see it there
because it's overwritten, but

00:07:54.160 --> 00:07:56.320
the inflation line has also
dropped considerably.

00:07:56.320 --> 00:07:57.570
It comes down to here.

00:07:57.570 --> 00:08:01.010
But notice once again, although
here it's pretty

00:08:01.010 --> 00:08:04.980
close, but utilization dropped
off a couple of quarters

00:08:04.980 --> 00:08:06.300
before inflation dropped off.

00:08:06.300 --> 00:08:08.770
And that's why I always wonder
why the Federal Reserve Board

00:08:08.770 --> 00:08:11.410
of Governors, they always talk
about different inflation

00:08:11.410 --> 00:08:13.350
indicators and what to do about
interest rates, when you

00:08:13.350 --> 00:08:15.730
do have a pretty good indicator,
and that's capacity

00:08:15.730 --> 00:08:17.170
utilization.

00:08:17.170 --> 00:08:19.680
The next question that everyone
has is, OK fine, Sal.

00:08:19.680 --> 00:08:22.080
Capacity utilization
drives inflation.

00:08:22.080 --> 00:08:23.360
We can all buy that.

00:08:23.360 --> 00:08:27.660
But clearly, what's going on
right now is just a wholesale

00:08:27.660 --> 00:08:28.730
printing of money.

00:08:28.730 --> 00:08:32.150
And won't the wholesale printing
of money drive demand

00:08:32.150 --> 00:08:35.234
to go up, and then we'll
have very high capacity

00:08:35.234 --> 00:08:38.289
utilization, and then we'll
have inflation or even

00:08:38.289 --> 00:08:40.020
hyper-inflation?

00:08:40.020 --> 00:08:42.890
And my argument there is that's
normally the case.

00:08:42.890 --> 00:08:48.360
Normally, if you increase the
money supply, if the money

00:08:48.360 --> 00:08:52.700
supply goes up, that should
increase demand.

00:08:52.700 --> 00:08:54.990
But there's a subtle, and it's
almost a philosophical point,

00:08:54.990 --> 00:08:58.750
but it's an important one, to
realize: Money just allows you

00:08:58.750 --> 00:09:01.350
to express demand.

00:09:01.350 --> 00:09:04.720
Let's say I really, really want
to buy a Rolls Royce, I

00:09:04.720 --> 00:09:05.870
just don't have the money.

00:09:05.870 --> 00:09:10.160
If someone gave me $200,000 into
my pocket, then I could

00:09:10.160 --> 00:09:13.520
express that demand to
buy the Rolls Royce.

00:09:13.520 --> 00:09:15.850
On the other hand, let's say,
I have everything I need.

00:09:15.850 --> 00:09:20.330
I'm happy with my Honda and my
two-bedroom apartment, and

00:09:20.330 --> 00:09:23.490
someone gave me $200,000.

00:09:23.490 --> 00:09:26.050
So they've increased, at
least, my money supply.

00:09:26.050 --> 00:09:28.380
Will that increase the demand
for the Rolls Royce?

00:09:28.380 --> 00:09:29.160
No.

00:09:29.160 --> 00:09:31.810
I have money to express the
demand, but I won't do it,

00:09:31.810 --> 00:09:33.560
because I don't think
it's necessary.

00:09:33.560 --> 00:09:35.980
So you can make that same
analogy in the economy as a

00:09:35.980 --> 00:09:40.790
whole, where you can imagine
an island where, let's say,

00:09:40.790 --> 00:09:43.210
there's five of us or three of
us, because I don't want to

00:09:43.210 --> 00:09:45.770
draw five people.

00:09:45.770 --> 00:09:49.350
And between us, we use seashells
as a currency.

00:09:49.350 --> 00:09:50.520
And we're very confident.

00:09:50.520 --> 00:09:57.560
And maybe I'm the builder, and
this guy's the fisherman, and

00:09:57.560 --> 00:10:00.100
she's the farmer.

00:10:00.100 --> 00:10:03.440
Let's say in one year I use a
seashell to get some fish.

00:10:03.440 --> 00:10:06.500
And then he uses that seashell
to buy some crops.

00:10:06.500 --> 00:10:09.200
Then she uses that seashell
to buy a house.

00:10:09.200 --> 00:10:10.970
And I use that seashell again
to buy more fish.

00:10:10.970 --> 00:10:14.130
You can see that one seashell,
even though my money supply on

00:10:14.130 --> 00:10:18.090
that island is one seashell,
it can transact many

00:10:18.090 --> 00:10:19.600
times in that year.

00:10:19.600 --> 00:10:23.550
So the velocity in this
example is very high.

00:10:23.550 --> 00:10:27.030
So you notice that my expression
of demand happens

00:10:27.030 --> 00:10:29.780
in these actual transactions.

00:10:29.780 --> 00:10:33.230
I'll do a classic money
supply equation soon.

00:10:33.230 --> 00:10:35.600
But you could imagine another
reality, where, for some

00:10:35.600 --> 00:10:39.190
reason, I stop trusting
this guy.

00:10:39.190 --> 00:10:41.290
I've become very cautious, and
I say, well, you know what?

00:10:41.290 --> 00:10:44.910
I don't want to give him my
seashell, because I'm not sure

00:10:44.910 --> 00:10:47.180
if I'm going to get that
seashell back again to do

00:10:47.180 --> 00:10:48.230
something else.

00:10:48.230 --> 00:10:51.800
So you can imagine a reality
where the central bank of our

00:10:51.800 --> 00:10:54.560
island, all of a sudden, they
find hundreds of seashells.

00:10:54.560 --> 00:10:56.940
And they put seashells in
everyone's pockets so we're

00:10:56.940 --> 00:10:59.480
all full of seashells.

00:10:59.480 --> 00:11:02.850
But all of us have lost so
much confidence in the

00:11:02.850 --> 00:11:06.140
economy, or are so unsure over
whether other people are going

00:11:06.140 --> 00:11:08.640
to use my goods and services,
that I don't want to use their

00:11:08.640 --> 00:11:09.720
goods and services.

00:11:09.720 --> 00:11:12.130
So we all just start
hoarding seashells.

00:11:12.130 --> 00:11:14.710
So this is a situation where
the money supply could

00:11:14.710 --> 00:11:17.510
actually increase pretty
substantially, but since no

00:11:17.510 --> 00:11:20.260
one wants to express it through
demand, it's not going

00:11:20.260 --> 00:11:21.980
to increase utilization.

00:11:21.980 --> 00:11:25.870
And so in the situation that
we're in right now, if you're

00:11:25.870 --> 00:11:28.310
wondering about whether you're
going to see inflation or

00:11:28.310 --> 00:11:32.600
deflation, my argument is look
at capacity utilization.

00:11:32.600 --> 00:11:36.350
People can point to
the money supply.

00:11:36.350 --> 00:11:38.880
This is a classic money
supply equation.

00:11:38.880 --> 00:11:43.290
The money supply times the
velocity of money-- that's how

00:11:43.290 --> 00:11:47.260
often the actual dollars switch
hands --is equal to the

00:11:47.260 --> 00:11:51.670
price of the average price of
goods times the total quantity

00:11:51.670 --> 00:11:53.420
of goods and services we have.

00:11:53.420 --> 00:11:58.440
So most people say, wow, if the
money supply increases,

00:11:58.440 --> 00:12:00.350
then won't prices increase?

00:12:00.350 --> 00:12:03.300
Well, that would be true if you
assume that velocity and

00:12:03.300 --> 00:12:04.890
quantity are constant.

00:12:04.890 --> 00:12:07.430
But we're saying that whenever
you have major shocks and

00:12:07.430 --> 00:12:10.290
people lose confidence, this
velocity can slow down

00:12:10.290 --> 00:12:12.260
considerably, especially when
things like financial

00:12:12.260 --> 00:12:14.990
intermediaries start hoarding
money and people start putting

00:12:14.990 --> 00:12:16.110
money into their mattresses.

00:12:16.110 --> 00:12:18.720
In fact, oftentimes, people
don't even consider things

00:12:18.720 --> 00:12:20.150
that aren't being transacted
money.

00:12:20.150 --> 00:12:22.280
For example, those commemorative
coins that they

00:12:22.280 --> 00:12:23.550
sell on TV.

00:12:23.550 --> 00:12:25.710
They're not considered part of
the money supply, because

00:12:25.710 --> 00:12:27.580
people don't use
them as money.

00:12:27.580 --> 00:12:28.520
Anyway, I'm all out of time.

00:12:28.520 --> 00:12:31.380
I'll continue this discussion
in the next video.


Geithner 5: A better solution

WEBVTT
Kind: captions
Language: en

00:00:00.870 --> 00:00:03.020
In the last couple of videos,
I've been dumping on the

00:00:03.020 --> 00:00:04.700
Geithner Plan.

00:00:04.700 --> 00:00:07.710
Arguably showing that if right
now the market is willing to

00:00:07.710 --> 00:00:12.080
rationally pay $30 for a
security, even with the free

00:00:12.080 --> 00:00:14.670
put option that the government's
willing to give,

00:00:14.670 --> 00:00:17.900
at most a rational investor who
was willing to pay $30 is

00:00:17.900 --> 00:00:21.400
now maybe willing to
pay $40 to $50.

00:00:21.400 --> 00:00:24.960
And that still won't meet the
hurdle that the banks need in

00:00:24.960 --> 00:00:26.650
order to clear these assets
off their books.

00:00:26.650 --> 00:00:28.820
Because, we've done it in a
bunch of videos even when I

00:00:28.820 --> 00:00:31.555
did the videos on the first
bailout, the TARP plan, that

00:00:31.555 --> 00:00:35.100
if they sell them for less than
$60, that's the number

00:00:35.100 --> 00:00:39.020
you hear in a lot of the popular
press, that the banks

00:00:39.020 --> 00:00:40.100
will essentially be insolvent.

00:00:40.100 --> 00:00:42.470
So they're not even willing
to sell for less than $60.

00:00:42.470 --> 00:00:45.770
So if this is the case then
the plan won't work.

00:00:45.770 --> 00:00:46.270
Right.

00:00:46.270 --> 00:00:48.116
It just won't work.

00:00:48.116 --> 00:00:50.260
It won't work.

00:00:50.260 --> 00:00:52.280
Now, there's the other scenario
where, let's say we

00:00:52.280 --> 00:00:54.470
do see a bunch of trades
where they are going

00:00:54.470 --> 00:00:56.300
for $60, $70, $80.

00:00:56.300 --> 00:00:58.730
And based on some of the
arguments I've given in the

00:00:58.730 --> 00:01:01.590
previous video, I'd say well,
the only rational person

00:01:01.590 --> 00:01:06.780
willing to pay $60-plus would
be the banks themselves by

00:01:06.780 --> 00:01:09.320
creating some type of off
balance sheet investor.

00:01:09.320 --> 00:01:10.730
There's tons of ways
they've done this.

00:01:10.730 --> 00:01:12.960
I've gotten some letters where
people said how can a bank

00:01:12.960 --> 00:01:13.930
sell to themselves?

00:01:13.930 --> 00:01:17.190
Well, you can give a
non-recourse loan to a hedge

00:01:17.190 --> 00:01:19.280
fund that you just created
and that hedge fund

00:01:19.280 --> 00:01:20.450
then invests in them.

00:01:20.450 --> 00:01:25.200
And to somehow have an audit
trail, almost every hedge fund

00:01:25.200 --> 00:01:27.840
in the world has some
relationship with one of these

00:01:27.840 --> 00:01:28.470
major banks.

00:01:28.470 --> 00:01:31.920
So it would be almost impossible
to disassociate the

00:01:31.920 --> 00:01:35.730
private investors from the major
banks that are trying to

00:01:35.730 --> 00:01:36.890
offload these assets.

00:01:36.890 --> 00:01:39.840
So I would argue that this
probably is the case.

00:01:39.840 --> 00:01:43.300
But in this video I like to give
Geithner and maybe even

00:01:43.300 --> 00:01:46.850
the plan a bit of a break, and
give some credence to one of

00:01:46.850 --> 00:01:49.140
the arguments that they make.

00:01:49.140 --> 00:01:53.800
Right now, because of all of
these assets going sour all at

00:01:53.800 --> 00:01:57.150
once, you have all of these
forced sellers, right?

00:01:57.150 --> 00:01:59.350
You have all of these banks and
they're all facing these

00:01:59.350 --> 00:02:00.000
liquidity issues.

00:02:00.000 --> 00:02:07.290
So you have this huge amount of
supply of these securities.

00:02:07.290 --> 00:02:11.110
And right now since all of the
natural buyers are distressed,

00:02:11.110 --> 00:02:13.590
all of these banks are forcing
to sell, all the hedge funds

00:02:13.590 --> 00:02:16.480
who used to own these things,
they're all going bust. And

00:02:16.480 --> 00:02:17.640
they're facing redemptions.

00:02:17.640 --> 00:02:19.260
And their investors want
their money back.

00:02:19.260 --> 00:02:22.090
So the actual demand for these
securities, the actual pool of

00:02:22.090 --> 00:02:23.890
money going after
is very small.

00:02:23.890 --> 00:02:27.240
So the demand is very small.

00:02:27.240 --> 00:02:29.820
And they're saying this is the
reason why you have this

00:02:29.820 --> 00:02:30.780
market disconnect.

00:02:30.780 --> 00:02:33.970
This is the reason why people
are only willing to pay $30,

00:02:33.970 --> 00:02:35.990
because you have this
illiquidity.

00:02:35.990 --> 00:02:39.850
You have all of these forced
sellers and you have very few

00:02:39.850 --> 00:02:41.660
buyers left in the market.

00:02:41.660 --> 00:02:43.850
And the few buyers that are left
in the market are able to

00:02:43.850 --> 00:02:45.290
get things at fire
sale prices.

00:02:45.290 --> 00:02:47.480
That's the argument that we've
heard time and time again

00:02:47.480 --> 00:02:50.530
about how $30 isn't
the real price.

00:02:50.530 --> 00:02:54.780
That anyone who actually looked
at what's in these,

00:02:54.780 --> 00:02:56.820
what have unfortunately been
called toxic securities,

00:02:56.820 --> 00:02:57.870
probably because that's
what they are.

00:02:57.870 --> 00:03:00.450
But anyone who looks at one of
these securities and really

00:03:00.450 --> 00:03:02.370
looks inside of them will
realize that these are worth

00:03:02.370 --> 00:03:03.630
way more than $30.

00:03:03.630 --> 00:03:05.250
That they're yielding a lot.

00:03:05.250 --> 00:03:07.080
That there will be some defaults
but maybe they're

00:03:07.080 --> 00:03:11.120
really only worth $80 or $70
or $0.70 on the dollar.

00:03:11.120 --> 00:03:14.140
My argument, if is really the
case, what the government

00:03:14.140 --> 00:03:17.350
should do instead of giving
free put options to hedge

00:03:17.350 --> 00:03:20.220
funds to essentially subsidize
the assets from banks.

00:03:20.220 --> 00:03:22.590
Or, even worse, allowing the
banks to do kind of that

00:03:22.590 --> 00:03:24.550
scheme that I talk about in the
second video where they

00:03:24.550 --> 00:03:26.470
can buy things from themselves
and offload

00:03:26.470 --> 00:03:27.670
things on the taxpayer.

00:03:27.670 --> 00:03:30.350
What the government should
do is really increase the

00:03:30.350 --> 00:03:33.290
transparency on these securities
so that this pool

00:03:33.290 --> 00:03:34.710
of buyers becomes larger.

00:03:34.710 --> 00:03:36.610
Right now these securities,
these are either

00:03:36.610 --> 00:03:39.190
collateralized debt obligations
or mortgage backed

00:03:39.190 --> 00:03:39.860
securities.

00:03:39.860 --> 00:03:41.830
They're bonds of some kind.

00:03:41.830 --> 00:03:44.820
And the pool of people who can
buy bonds is not a large one.

00:03:44.820 --> 00:03:47.100
It's essentially a bunch of
professional investors, most

00:03:47.100 --> 00:03:49.510
of whom have blown up in
this credit debacle.

00:03:52.790 --> 00:03:54.780
Let me draw a little
balance sheet.

00:03:54.780 --> 00:03:57.430
You take those toxic assets,
let's say this is a random

00:03:57.430 --> 00:03:59.920
bank's balance sheet.

00:03:59.920 --> 00:04:03.090
That's its assets, liabilities,
equity.

00:04:03.090 --> 00:04:07.080
And it has one of these toxic
assets sitting on it.

00:04:07.080 --> 00:04:07.320
Right.

00:04:07.320 --> 00:04:08.910
This is a toxic asset.

00:04:08.910 --> 00:04:12.570
What you do is you take the
toxic assets, stick them in a

00:04:12.570 --> 00:04:18.180
company-- this is some
corporation-- so then the

00:04:18.180 --> 00:04:20.440
toxic assets go there.

00:04:20.440 --> 00:04:22.280
That's the assets.

00:04:22.280 --> 00:04:24.670
And the corporation will just
have a bunch of shares.

00:04:24.670 --> 00:04:27.370
If all the toxic assets came
from this bank, give these

00:04:27.370 --> 00:04:29.300
shares back to the bank.

00:04:29.300 --> 00:04:31.610
And notice this isn't any
sketchy accounting.

00:04:31.610 --> 00:04:34.370
The banks still have the assets
on their balance sheet,

00:04:34.370 --> 00:04:36.300
but instead of having the assets
directly they have the

00:04:36.300 --> 00:04:38.030
shares in this company.

00:04:38.030 --> 00:04:40.510
And the whole reason I'm doing
this is and you can then take

00:04:40.510 --> 00:04:43.660
this company and float it on
a traditional exchange.

00:04:43.660 --> 00:04:45.790
I mean we're talking about the
government, The U.S. Treasury.

00:04:45.790 --> 00:04:49.680
They could force this thing to
be listed on the New York

00:04:49.680 --> 00:04:50.790
Stock Exchange.

00:04:50.790 --> 00:04:55.400
So just by doing that, that
significantly increases the

00:04:55.400 --> 00:04:58.610
pool of investors who could
invest in it, right?

00:04:58.610 --> 00:05:00.510
Right now the only people who
could invest in it are people

00:05:00.510 --> 00:05:02.350
who are essentially
bond investors.

00:05:02.350 --> 00:05:04.980
And it's not a trivial matter
to start investing in bonds.

00:05:04.980 --> 00:05:07.610
You have to invest in $1,000
increments at minimum.

00:05:07.610 --> 00:05:09.790
Usually it's much larger
block sizes.

00:05:09.790 --> 00:05:11.520
And some of these are
collateralized debt

00:05:11.520 --> 00:05:12.230
obligations.

00:05:12.230 --> 00:05:16.660
They're just hard to invest
in even if you wanted to.

00:05:16.660 --> 00:05:17.860
Now, the second problem.

00:05:17.860 --> 00:05:21.450
That would solve just the pool
of people who could invest. So

00:05:21.450 --> 00:05:23.190
that'll make it a
little larger.

00:05:23.190 --> 00:05:26.600
But the second problem, this is
frankly the bigger problem

00:05:26.600 --> 00:05:29.490
with these assets, is that
there's no transparency.

00:05:29.490 --> 00:05:32.630
No-one knows what's in
these toxic assets.

00:05:32.630 --> 00:05:33.350
Right?

00:05:33.350 --> 00:05:36.710
The problem that happened over
this last real estate boom is,

00:05:36.710 --> 00:05:39.430
not only did they give loans to
people that they shouldn't

00:05:39.430 --> 00:05:41.960
have given loans to, but they
sliced and diced them.

00:05:41.960 --> 00:05:44.540
And I've done this in a bunch
of the videos in the past.

00:05:44.540 --> 00:05:48.090
They'll take a bunch of
mortgages, they'll take

00:05:48.090 --> 00:05:52.170
millions of mortgages, put them
in a corporate structure.

00:05:52.170 --> 00:05:55.680
And then they slice and dice
them into different tranches.

00:05:55.680 --> 00:05:57.220
And I explained this in the
collateralized debt

00:05:57.220 --> 00:05:57.700
obligations.

00:05:57.700 --> 00:06:00.520
Where this tranche gets paid off
first, this tranche gets

00:06:00.520 --> 00:06:03.580
paid off second, and this
tranche gets paid off last. So

00:06:03.580 --> 00:06:06.830
any losses on this, this group
takes it first. And for the

00:06:06.830 --> 00:06:10.200
most part these are the
toxic securities.

00:06:10.200 --> 00:06:13.570
But some of these have
also gone toxic.

00:06:13.570 --> 00:06:16.570
The problem with these things is
that the way that they sold

00:06:16.570 --> 00:06:20.110
them is that they went to
Moody's or S&P and they said,

00:06:20.110 --> 00:06:21.920
hey, Moody's, give us
a rating on these

00:06:21.920 --> 00:06:22.910
securities right here.

00:06:22.910 --> 00:06:25.080
And Moody's would say oh that's
a AAA-- and, well they

00:06:25.080 --> 00:06:26.250
wouldn't call that AAA,
but they would

00:06:26.250 --> 00:06:27.900
say that's a B security.

00:06:27.900 --> 00:06:29.750
And we just took Moody's
word for it

00:06:29.750 --> 00:06:30.800
that that's a B security.

00:06:30.800 --> 00:06:33.550
Or that this right here
is a AAA security.

00:06:33.550 --> 00:06:36.280
And everyone now knows that the
only reason why Moody's

00:06:36.280 --> 00:06:38.660
gave the rubber stamp on it is
because the same people who

00:06:38.660 --> 00:06:41.400
were structuring these things
and making all the money off

00:06:41.400 --> 00:06:42.500
of these things were
the same people

00:06:42.500 --> 00:06:44.860
who were paying Moody's.

00:06:44.860 --> 00:06:45.970
So what we need to do is

00:06:45.970 --> 00:06:48.480
disintermediate the rating agencies.

00:06:48.480 --> 00:06:50.130
So the government, not only
should it create these

00:06:50.130 --> 00:06:53.210
corporations so that you could
essentially buy these assets

00:06:53.210 --> 00:06:55.570
without being a bond trader, you
can just buy them on any

00:06:55.570 --> 00:06:59.260
exchange, what the government
should do is hire a big team.

00:06:59.260 --> 00:07:01.980
And we're talking about billions
or trillions of

00:07:01.980 --> 00:07:05.300
dollars here, so to hire a team
that essentially puts up

00:07:05.300 --> 00:07:07.900
a website and lets us know
what's in each of these

00:07:07.900 --> 00:07:08.390
securities.

00:07:08.390 --> 00:07:10.760
So let's say that this company
that I just created, its

00:07:10.760 --> 00:07:14.590
sticker symbol is ABCD.

00:07:14.590 --> 00:07:19.880
So what we can do is we can go
to a website, type in ABCD,

00:07:19.880 --> 00:07:23.470
and it'll tell me exactly what
is in that toxic security.

00:07:23.470 --> 00:07:26.450
I know a lot of people who are
professional investors who are

00:07:26.450 --> 00:07:29.320
in a position, if they wanted
to, to pull the trigger and

00:07:29.320 --> 00:07:30.980
even buy them in their
current form.

00:07:30.980 --> 00:07:32.930
And they're afraid to because
they don't know what's in

00:07:32.930 --> 00:07:33.850
these toxic securities.

00:07:33.850 --> 00:07:37.700
They don't know whether they're
completely fraudulent,

00:07:37.700 --> 00:07:39.180
only somewhat fraudulent.

00:07:39.180 --> 00:07:41.180
To some degree it's even hard
to tell where a lot of the

00:07:41.180 --> 00:07:42.980
assets are sitting, in which
of the tranches.

00:07:42.980 --> 00:07:45.270
So what the government should
do is just make these as

00:07:45.270 --> 00:07:46.730
transparent as possible.

00:07:46.730 --> 00:07:50.510
They should have a map of the
United States and they should

00:07:50.510 --> 00:07:54.280
say this security is for houses
that are in upstate New

00:07:54.280 --> 00:07:57.190
York and in Florida,
and its 30% upstate

00:07:57.190 --> 00:07:59.790
New York and X% Florida.

00:07:59.790 --> 00:08:03.510
It should have charts that tell
me what percentage is

00:08:03.510 --> 00:08:04.340
defaulting.

00:08:04.340 --> 00:08:07.020
So I as an investor maybe
I can extrapolate

00:08:07.020 --> 00:08:08.440
things, I can do models.

00:08:08.440 --> 00:08:12.530
But the crux of the issue here
is that instead of having some

00:08:12.530 --> 00:08:16.030
opaque 800-page document that
only a few people have access

00:08:16.030 --> 00:08:19.300
to and once they decide to parse
through that thing they

00:08:19.300 --> 00:08:22.790
have to go to their local bond
trader and invest in it that

00:08:22.790 --> 00:08:26.610
way, what you do is you put it
into a company, list that

00:08:26.610 --> 00:08:30.740
company on the NYSE, and then
make it completely transparent

00:08:30.740 --> 00:08:33.890
what's in that toxic security so
that anybody watching this

00:08:33.890 --> 00:08:38.200
video can say, you know what, I
think this thing is actually

00:08:38.200 --> 00:08:40.880
worth $0.40 on the dollar,
not $0.30 on the dollar.

00:08:40.880 --> 00:08:42.610
And you won't have to commit
millions of dollars.

00:08:42.610 --> 00:08:46.570
You could just go buy 1,000
shares for $400.

00:08:46.570 --> 00:08:49.000
It wouldn't be a major
up-front investment.

00:08:49.000 --> 00:08:50.960
And if they did this,
this would solve

00:08:50.960 --> 00:08:52.670
the liquidity problem.

00:08:52.670 --> 00:08:54.210
This would solve the
liquidity problem.

00:08:54.210 --> 00:08:57.310
This pool of buyers would then
become much, much larger.

00:08:57.310 --> 00:08:59.130
And then the government wouldn't
be able to make this

00:08:59.130 --> 00:09:00.690
argument, and the banks wouldn't
be able to make this

00:09:00.690 --> 00:09:04.220
argument that somehow that these
are distressed sales.

00:09:04.220 --> 00:09:07.240
That these $30 sales are way
below the actual value.

00:09:07.240 --> 00:09:09.630
Because you would have a
lot of people with real

00:09:09.630 --> 00:09:13.670
information, with real access
to actually trading them,

00:09:13.670 --> 00:09:15.500
being able to price
these securities.

00:09:15.500 --> 00:09:19.220
And then when you're forced to
do a mark to market -- First

00:09:19.220 --> 00:09:23.060
of all since each of these
shares in this security will

00:09:23.060 --> 00:09:24.760
be trading on the New York Stock
Exchange, you'll much

00:09:24.760 --> 00:09:25.990
more volume of the
transactions.

00:09:25.990 --> 00:09:27.750
You'll have continuous
trading.

00:09:27.750 --> 00:09:30.200
And then the mark to market that
you'll be forced to do on

00:09:30.200 --> 00:09:34.110
these, essentially shares now,
but it's the same thing right?

00:09:34.110 --> 00:09:36.180
It's shares in your
toxic asset.

00:09:36.180 --> 00:09:38.100
But the mark to market on
those will be much more

00:09:38.100 --> 00:09:40.250
accurate because you'll have
much more volumne.

00:09:40.250 --> 00:09:43.630
You'll have much better market
information as far as what

00:09:43.630 --> 00:09:45.180
they're worth.

00:09:45.180 --> 00:09:47.670
And then frankly if it turns out
that these things really

00:09:47.670 --> 00:09:51.230
are worth $30, then we can let
the banks fail and move on

00:09:51.230 --> 00:09:52.750
with our lives.

00:09:52.750 --> 00:09:55.360
And I've argued you could
arguably start new banks or do

00:09:55.360 --> 00:09:56.270
something else.

00:09:56.270 --> 00:09:59.450
But we won't be kind of playing
this charade of what

00:09:59.450 --> 00:10:00.490
are these assets worth?

00:10:00.490 --> 00:10:02.550
Wait, maybe we should
subsidize the banks.

00:10:02.550 --> 00:10:05.450
Maybe we should be writing
free put options to hedge

00:10:05.450 --> 00:10:07.320
funds and making
it all opaque.

00:10:07.320 --> 00:10:09.790
The solution is just expose
everything to sunshine.

00:10:09.790 --> 00:10:12.730
And then let the market price
really reflect a true reality.

00:10:12.730 --> 00:10:15.500
And if that reality is that
these banks are bankrupt, well

00:10:15.500 --> 00:10:17.410
then, you let them
go bankrupt.