Coffin Corner

There’s a nasty little portion of the flight envelope for a high-flying jet airplane known as the coffin corner, where the indicated air speed is low due to the thin air but the Mach number simultaneously high. Any slower and the plane stalls, any faster and airflow exceeds the speed of sound, with the resulting shock wave causing a “Mach tuck,” pointing the nose down abruptly. Bad stuff happens fast at th…

  1. Scott R

    Wow am I lost.

  2. Scott R

    ….and the fact that such informed people can differ so much in their analysis confirms the suspicion that even our best minds are flying blind, fundamentally puzzled as to the proper course of action. Uncertainty, therefore, is winning the day, which ain’t good.

  3. George Savage

    I’m getting closer to the edge of my own economic flight envelope, so forgive me for avoiding all of the monetary M’s from here on.

    The government is creating money like there’s no tomorrow — and it may be right, but that’s a self-fulfilling activity — while private money is contracting as banks reduce lending. Right now, on balance, contraction is winning the day, which risks deflation and ruin. If our Keynesians-in-Chief “win” by reflating against slack private sector demand, inflation will result, cranking interest rates, raising debt carrying costs on all of that debt, at some point causing investors to lose confidence in US government creditworthiness, raising interest rates faster: The Mach tuck path to ruin.

    Not a risk worth taking.

  4. Michael Labeit

    I’m personally not alarmed by price deflation. In fact I think its necessary.

    The artificial economic boom we experienced between the previous recession (Dotcom 00-01) and the latest recession was caused by excessive credit expansion perpetrated by Mr. Greenspan. In order to “save” the economy from the Dotcom recession, Greenspan and the Fed severely cut interest rates and kept them low for a while. As a result, the quantity of credit demanded by businesses increased (who passes up cheap credit).

    The problem with Fed credit is that its not supported by actual savings. Instead, the Fed expands credit by purchasing Treasury debt instruments using checks it simply writes at its New York branch. So if the Fed wants $10 million in debt, it simply adds $10 million to its balance sheet.

    What this does is that it fuels an economic boom unsupported by real savings; such booms encourage businesses to purchase credit to finance undertakings that bid up factor prices and end up producing goods for a consumer demand that does not exist. When the unprofitability of these business ventures is realized, price deflation becomes necessary to reduce factor prices to real market levels.

  5. Busy System Admin

    I love your analogy. I sadly have to say I expect the Mach tuck outcome, and have for several years.

    The housing bubble was obvious to anyone paying attention. After that bubble burst, the only bubble left to seriously inflate was sovereign debt. Caught between a rock and a hard place, politicians have chosen the path of least disruption– “just keep the plane flying smoothly, whatever it takes.”

    Unfortunately, and this is where the analogy breaks down, the longer they fly in still air, the harder the crash. Gravity is a better analogy. Our economy is addicted to growth, so much so that we’ve found ways to artificially pump up growth beyond what it should naturally be. Once we got addicted to that level of growth, we do anything and everything to keep it going, even at the expense of future growth. The more we grow at an artificially high rate, the harder we will eventually fall.

  6. Michael Labeit

    You are correct in that if we wanted to increase spending, normally interest rates would rise. Increased spending requires increasing the demand for credit. Interest rates represent the price of credit. As the demand for credit increases, interest rates rise.

    However, this depends upon who we get credit from. The real purpose of the Fed was and still is to provide artificially cheap credit, i.e., credit that carries with it an interest rate lower than the market rate. Worst comes to worst, the Fed may try to monetize the debt, i.e., pay it off by “printing” it.

  7. George Savage
    Michael Labeit: I’m personally not alarmed by price deflation. In fact I think its necessary.

    May. 27 at 8:43pm

    I’m with you in principle, Michael, but the speed of the adjustment in price levels is critically important to a “soft landing,” as both economists and pilots are fond of saying. The problem with rapid deflation is that debt becomes more expensive in real terms as prices and wages decline; not a happy situation. If you’ll indulge another aviation analogy: we run the risk of a graveyard spiral as deflation forces prices and wages down, loan defaults increase, the economy contracts and more deflation results.

    My main points are that we need sound money, sane fiscal policy, and a return to private sector-friendly policies in order to get out of this mess.

  8. Michael Labeit

    I think when it comes to both economics and aviation, evolution is preferable to revolution. For example, I’d like to abolish the welfare state, but it would be haphazard to have the abolition occur abruptly, say, tomorrow.

    Is rapid price deflation an actual concern? I figured that, with the Fed Funds rate as low as it has been, price inflation was the thing to be frightened of.

    If the money supply = the monetary base(the money multiplier) and its true that the money supply is falling, then surely its not falling because the monetary base is falling, since the monetary base falls when the Fed engages in open market selling and its currently is not doing that. The Fed only engages in open market selling when it wants to increase the Fed Funds rate, and Bernanke hasn’t given any indication that the board intends on increasing that rate.

    So, therefore, if the money supply is falling, then it must be falling because the money multiplier is falling. If the multiplier is falling, then multiple deposit expansion must be falling as well.

  9. Duane Oyen

    I skimmed the initial post too quickly, and looked in vain for hints on how to prevent punt runbacks, then I looked for in formation on the bankruptcy of Dave’s 18 wheeler tractor manufacturer. Turns out I was wrong on both counts- Mack Truck is still with us.

    Two things, though. 1) I agree with Michael about the need for housing prices to find their true value level after the inflationary speculative bubble- but I think that he is conflating sector price rationalization with deflation. Deflation in the broad economic sense is economy-wide, not sector-confined, and often becomes as psychological in nature/origin as a bubble. We do not want deflation- nohow, no time. We are, however, OK with bubble-pop adjustments. (see below for #2; another victim of the 200 word limit)

  10. Duane Oyen

    2) I think that we also need to watch one other thing regarding money supply. There was a reference to the fact that the fed is printing, and the banks are not lending.

    It seems to me that there is a rather logical explanation for the fact that the banks are not lending, and it flows directly from the housing prices issue. Suppose a bank has a big portfolio of less-than-blue chip mortgages (maybe even in George’s bubbled California). It is seeing mortgage defaults and also expects further housing value write-downs. They are required to maintain minimum reserves- I think that they are holding money so that they can take the write-offs without having to go raise more capital. It would be irresponsible for them to lend out cash needed when they have strong reason to believe that there are latent balance sheet adjustments there. Apart from the “finance Obama’s empty spending coffers” issue, the Fed is trying to fill that investment gap with money and reverse titrate at the best time; the issue will be whether they can reasonably predict when the write-downs are about done and pull money back out at the right time.

  11. Michael Labeit

    Oh no, I want price deflation, i.e., an economy-wide fall in prices. The reason why is because the Fed’s credit expansion bids up the prices of capital goods in general, since the cheap credit encourages entrepreneurs to acquire it and use it to acquire capital goods with which to embark upon business undertakings. The cheap credit causes an increase in the demand for capital goods, increasing the prices of capital goods as a whole.

  12. George Savage

    Michael Labeit: Oh no, I want price deflation, i.e., an economy-wide fall in prices. May 28 at 12:45pm

    Michael, I have to side with Duane on this one. Resetting housing prices post-bubble? Of course. But a general price deflation? No. Not with high debt levels and Obamanomics’ boot on the neck of the productive sector. If you’re interested, Asian Development Bank economist Douglas Brooks has an interesting policy brief on the topic.

    Given today’s policy mix, the deflationary scenario seems low probability. The inflationary alternative strikes me as far more likely. Either is bad news.

  13. Michael Labeit

    As I argued, Fed credit expansion causes illegitimate, general increases in capital goods and gives rise to unprofitable business undertakings. The market recessionary process is a necessary one because it is a cleansing process; it eliminates the unprofitable business ventures created by the Fed’s credit expansion. So yes, price deflation is tough on businesses, but its particularly tough on businesses supported by Fed credit expansion, i.e., those that do not satisfactorily satisfy consumer demand. Many businesses should not be in business – Fed credit expansion keeps them in business. Recessions rightfully allocate resources away from such businesses toward those that truly satisfy consumer demand. Defaults, bankruptcies, and layoffs are all part of the necessary cleansing process.

  14. Michael Labeit

    …illegitimate increases in the prices of capital goods, that is.

  15. Michael Shaw

    This “Housing Bubble” business can be traced back to the Community Reinvestment Act passed by Congress during the Carter Administration. Access to credit became a civil right in the United States while it remained a privilige in Canada. U.S. banks were forced by law to provide mortgages to unqualified borrowers who put little or no downpayment on their homes while Canadian banks could still insist that borrowers have an adequate income and a substantial downpayment before provding a mortgage. What transpired was a thirty year Ponzi scheme where mortgage defaults were not a problem because forclosed homes could be resold for inflated prices financed by more easy credit. When the bubble burst in 2008 many banks failed and many homeowners are in forclosure or find themselves owing more than the value of their homes. This did not happen in Canada because, oddly enough, free market principles still apply in the somewhat more socialist Dominion of Canada. The Coffin Corner analogy is a good one and, lest I am accused of schadenfreude, know that if the US economy stalls or goes into a Mach tuck it will take Canada down too.

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