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The Gutman Moment

| 16 Comments

In the classic noir film The Maltese Falcon, there's a scene that contains what I've always called "The Gutman Moment." Kasper Gutman aka "the Fat Man", the unsavory but well-heeled Sidney Greenstreet character, tells the protagonist

"Yes, but this is real coin of the realm. With one of these you can buy ten of talk."

I'll avoid spoiling the movie by telling why he says that, but its relevance to current events is as follows: Tim Oren has pointed out that

Since extensions of credit are de facto expansions of the money supply, we need to keep in mind that deleveraging the $11 trillion or so mortgage market, not to speak of the all of the derivatives based on it, could have a notable deflationary monetary effect. Just one more thing for the Fed to think about while considering the effects of acquiring all that bad paper, and perhaps tarnishing the sovereign debt to do so.

"A notable deflationary effect." From the big glitch in commercial paper, in the short term at least, and from other credit "unwinding" in the longer term.

Are we already seeing that in the price of oil? Is the ten dollars of talk turning into one dollar of real coin of the realm? Is this a Gutman Moment?

And is that all bad?

16 Comments

Deflation? Wasn't that LAST decade's boogeyman ? Not that I necessarily disagree with Tim Oren; I wonder if the deleveraging effect will actually be big enough to be an actual deflationary force, or if it will be small enough to simply suppress the inflation that has been "baked in" to the system over the last few years via commodity price runups.

(And I think the statute of limitations for spoilers has just about run out on The Maltese Falcon, 67 years after its release. Or maybe Moveable Type has spoiler tags?)

[I clean up link, hokay? And school kids who haven't yet seen the move might be reading...that sort of thing. It really is a significant moment when he says that. I'll look for the spoiler tag option, too, though.--NM]

Mea culpa, URL mishap... any nearby marshals available for cleanup?

I think most of the downturn in oil and rise in the value of the dollar, at this point has to do with an expected world downturn, a need to settle dollar contracts and a general flight to the dollar that goes on when the preceding come into place. So, in a sense, this is a Gutman moment, albeit a rather small one, so far.

When you talk about the deleveraging of the Mortgage pyramid, complete with their derivatives other derivative markets, etc., etc. and so forth and so on, we could be heading for a major Gutman moment.

The government seems to be trying to inflate its way out of the present crisis, with guarantees and purchases. I think this is a dangerous path, but maybe the only one they have open. I still don't feel we have any idea of how pervasive leveraged securities and derivatives are throughout the financial system and the corporate world, so it is very hard to see where we are going.

I doubt that many people felt that part of the bailout would be for the Treasury to take equity positions in banks and essentially forcing them to take the deal that the Feds were offering.

It seems to me, either way, the major Gutman moment is yet to come, no matter which party comes to power.

The volatility we have seen in the market over the past few months and especially what we saw yesterday and today, is not encouraging. Until the market settles down, confidence will be paper thin and even a minor event can spook it.

Our treasury in in the process of pumping out over a trillion dollars. Deflation? How is inflation not going to be the other shoe in this crisis?

It sort of seems to me that if the rescue money largely stays put, propping up bad paper, but commercial credit stays skittish, we might see mostly what looks like deflation, depending on where we look. If people cash out after the rescue, the rescue money shows up as fungible stuff the government has to print; and yeah that's gonna be inflationary. If people can't cash out 'cause (relatively) nobody's buying... well, that's gonna drive prices down, nie?

Overall I wonder if commodities and essentials might drop in price. If you're poor but able to save, your dollars might be worth more n months later for the things you need. Other stuff might go the other way.

But there are contributors here who are a lot more diligent and experienced than I, so I asked. And I'm still asking. :)

#4 from Mark Buehner at 10:48 pm on Oct 14, 2008

Deflation

A trillion dollars does nothing to help paying debts that add up to tens even hundreds of trillions of dollars of leveraged debt. no money flows through the system. Those that have it sit on it. This s what we are afraid uf in the credit crisis. All of a sudden cash become king. If you don't have it then you are in bad shape.

The reason that they want to get the credit markets unfrozen is because the economy does not operate on cash it operates on credit.

Want to buy my house or a car and you cannot get credit, you have to come up with the cash. Cash rules. My million dollar house can no longer be paid off with a 360 month schedule of mortgage payments. How much is it worth? How much cash can someone come up with?

The threat of deflation is very real and it is what everyone is terrified about. No credit, no payroll, no work, etc. not a pretty spiral.

We are in bad shape. The Feds are having to force banks to give credit. I would think that the banks got the idea yesterday and I think they could at the very least, read between the lines. This is a partial nationalization and it wouldn't take them long to figure out what was coming if they didn't comply.

[Corrected at request of author. --NM]

So think locally, not globally. Checking accounts and e-pay are not going away. Probably credit cards are not going away. Tabs for regulars at local shops? Might tighten up.

Looks like a boom market for getting to know neighbors, co-ops, credit unions and labor swap/barter markets.

But what do I know? :D

I wrote the quoted bit because I saw a lot of worrying about inflationary impacts, and few people thinking about the implications of deleveraging a very large part of the economy and credit market. In the event that the bailout and other band-aids being applied fail, it's a very plausible scenario. I think Nort and TOC pretty much outlined the logic -just call it 'monetary constipation'.

Could go the other way. The trillion or so in funny money being passed out could flow all the way through the system. China and Saudi may decide they don't like being handed an unstable currency and put up prices. The last time I lived through it, it was called 'stagflation'.

If you think about it, the most unlikely scenario is monetary stability. Consider what has to happen for that to be the outcome: Treasury and the Fed have to somehow closely balance the deflationary forces of deleveraging with the amount of liquidity they are injecting, in the presence of demand and employment drops caused by a recession of unknown severity, and with their primary goal being to fix the 'constipation'. That doesn't seem too likely to work.

Paraphrasing Heinlein: "Hundred-dollar hamburgers, even barter-only hamburgers, are only an inconvenience as long as there is plenty of hamburger."

And no, he was not being overly sunny when he said that. Flip it: If there gets to not be plenty of hamburger, then it's not only an inconvenience.

TOC also reminds me of something a small-businessman of my acquaintance once earnestly told me, his version of "Cash is King". It helps if you imagine Quentin Tarantino delivering this line.

Cash is more valuable than my mother.
[beat]
Understand me. Not your mother. My mother.

#8 from Tim Oren at 4:11 am on Oct 15, 2008

I also think that stagflation is a definite possibility, but the difference from the mid 70s is the Real Estate market. Real estate was an inflationary hedge then. I am not sure whether the same can be said now because of prevalence ARMS, Home Equity/Home Improvement loans and the housing mess in general.

Any thoughts?

Paraphrasing Heinlein: "Hundred-dollar hamburgers, even barter-only hamburgers, are only an inconvenience as long as there is plenty of hamburger."

Out of curiousity, was that the pre-WWII Socialist Heinlein or the later radical libertarian Heinlein ?

I'm curious to know how commodities will respond in the next month or so. Oil is currently down around $77/bbl, precious metals are up (of course), and various food and feed prices seem to have been trending down. It's a mixed bag as far as inflation indicators go; it's a bit hard to predict how the combination of price inflation and monetary inflation factors will turn up as "total" inflation.

Out of curiousity, was that the pre-WWII Socialist Heinlein or the later radical libertarian Heinlein?

Well, he was writing a gloss in 1965-6 on something he'd originally gotten published in 1950 as a speculative, but not fiction, article... If you're going to be doctrinaire abut the linked mindreading timeline, it was post WWII.

I'd say he was at some point on that journey. (Easy out for me.)

Here's more of the context from his amended article for 1966, "Where To?":

I must hedge number thirteen; the "cent" I meant was scaled by the 1950 dollar. But our currency has been going through a long steady inflation, and no nation in history has ever gone as far as we have along this route without reaching the explosive phase of inflation. Ten-dollar hamburgers? Brother, we are headed for the hundred-dollar hamburger -- for the barter-only hamburger. But this is only an inconvenience rather than a disaster as long as there is plenty of hamburger.

#12 from The Unbeliever at 3:58 pm on Oct 15, 2008

I'm curious to know how commodities will respond in the next month or so. Oil is currently down around $77/bbl, precious metals are up (of course), and various food and feed prices seem to have been trending down. It's a mixed bag as far as inflation indicators go; it's a bit hard to predict how the combination of price inflation and monetary inflation factors will turn up as "total" inflation.

I do not see industrial commodities going any where but down until the change in government in the U.S. I doubt that anyone is going to make any serious commitments until that and the lunacy we are now experiencing n the credit markets eases. Slow downs will depress the price of oil and things like copper and such feeling the same effects.

The drop in retail prices doesn't look good for commodities of any kind. Except maybe precious metals.

One thing about precious metals. Not many people foresaw the partial nationalization of the banking industry, which, if we play out the worst scenario, could become close to total, if the industry does not respond after the capital inflows.

It makes me nervous about precious metals. It was illegal for Americans to own gold from the early thirties to 1968, I believe. It would be used in industry and in ornamentation, but the price was set and very strictly controlled at $35.00 per ounce. If you think this is no longer a possibility, fine.

But a few months ago, some companies were "to big to fail". A few weeks ago, we all would have thought that the government purchasing a quarter of a trillion dollars in Preferred Shares in a variety of banks and peing paid a 5% interest in the investment would have been unthinkable. But, not as unthinkable that the 5% rate would be seen as a bargain as compared with the deals that Warren Buffet was striking with Financial Institutions like GE and Goldman Sachs.

What is happening now seems to be like a Lewis and Clark expedition into unexplored territory. Anyone calling the market at this point is like calling the sex of a single child in the womb. If you are right you can say I told you so and if not, no one will remember.

I doubt that everyone has come clean yet. Until they do, I doubt that anyone can tell where we are going. Sooner or later everyone across corporate America and the world will and, if things don't get better, the Government can be pretty coercive.

[OT, deleted. --NM]

[OT, deleted. --NM]

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