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2010: Inflation Or Deflation?

Tyler Durden's picture


With every deep-thinking pundit looking out at 2010 and predicting this
and that, the irony is that virtually all investment decisions will be
derivatives of one simple outcome: do we have inflation or deflation.
Numerous opinions have been set forth recently, each of which
presenting more convincing and detailed theses on why [stag/hyper]
[deflation/inflation] will be the dominant theme in the year to come,
accompanied by pretty charts and convoluted diagrams. And while one can
write books on all the political, economic and financial aspects that
will determine either outcome, we have decided to avoid that, and
instead would like to remind readers of a little-read paper by Brait
Capital Management
, published in August of 2009, which conceptualizes
all the key themes in the inflation vs deflation debate.

Who will be right? With only a few hours in 2009 left, the new [de/in]flationary reality will be upon us shortly, and the answer to the question will become very apparent rather soon.



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Thu, 12/31/2009 - 14:51 | Link to Comment wang
wang's picture

does this apply to Chumbawamba's comment earlier this week

TSA subpoenas bloggers, demands names of sources

Thu, 12/31/2009 - 15:33 | Link to Comment Zombie Investor
Zombie Investor's picture

The government can't be bothered when given a lead on someone wanting blow something up, but swarm the homes of bloggers with no delay.

Thu, 12/31/2009 - 16:37 | Link to Comment cougar_w
cougar_w's picture

"Never waste a good crisis."

Fri, 01/01/2010 - 07:08 | Link to Comment Anonymous
Thu, 12/31/2009 - 14:50 | Link to Comment trav777
trav777's picture

Continuing contractive forces in credit origination, slack taken up by governments.

CBs are lenders of only resort, and govs are borrowers of first, last, and only resort.

The financial backstop money will eventually find its way into the economy.  GMAC makes loans, FNM buys shit mortgages, US eats losses, Fed buys USTs.

Thu, 12/31/2009 - 15:44 | Link to Comment Paul E. Math
Paul E. Math's picture

I concur. 

The words 'inflation' and 'deflation' are used with different meanings by different people and should just be discarded.

Bottom line, fiat currency is being debased by Central Bank printing of currency units through their now-firmly-established t-bill laundering system.

Thu, 12/31/2009 - 16:27 | Link to Comment Oracle of Kypseli
Oracle of Kypseli's picture

There is inflation and deflation and will both accelerate in opposite directions.

Things that you do not need will be getting cheaper. (Luxury goods, boats etc.)

Things that you need to survive will be getting more expensive. Energy, food, transportation etc.)

Now you know what to do and not do.

1. Wait to buy house, boat, used Porsche

2. Now start buying gold, oil, natural gas, non-perishable foodstuffs, bicycles, Vespas and guns & ammunition if you live in cities.





Thu, 12/31/2009 - 16:38 | Link to Comment louisash
louisash's picture

Bingo.  This is a silly debate as both are currently happening just as you described and the evidence is all around us.

Thu, 12/31/2009 - 16:46 | Link to Comment cougar_w
cougar_w's picture

This is an extremely important point.

People, get a clue or prepare to fade away.

Thu, 12/31/2009 - 16:53 | Link to Comment Dont Taze Me Bro
Dont Taze Me Bro's picture

Good point Kypseli!


Thu, 12/31/2009 - 16:59 | Link to Comment Bill - Yes That Bill
Bill - Yes That Bill's picture

Things that you do not need will be getting cheaper. (Luxury goods, boats etc.)

Things that you need to survive will be getting more expensive. Energy, food, transportation etc.)


Right on target.

Now start buying gold, oil, natural gas, non-perishable foodstuffs, bicycles, Vespas and guns & ammunition if you live in cities.

Agreed on the guns and ammo.

As to the gold... it all depends upon just how fascistic the Obama administration backed by Dems in Congress get.

Where exactly is a "safe zone" from a U.S. government which decides the American People no longer should have access to such?

Surely we're ALL aware of recent... er... loosening of Swiss bank security standards in response to U.S. government pressure.

What's the average American to do, anyway, even with "solid" gold investments. Let's forget the games our government could play with "the system" in terms of electronic accounts, instead let's assume you have actual physical gold. What are you going to do, carry your fortune in a backpack and do a reverse Haitian/Cuban refugee deal trying to escape to a country where you'd get proper value for the stuff?

As to "normal" investment strategies... maybe I'm just paranoid, but if government can impose "Windfall Profits Taxes" upon companies and the truly wealthy, isn't the next logical step going after the "windfall" investment profits "Joe Middle Class" should "Joe" happen to triple his investment in commodities in six months?

(I said "Joe," not Hillary; cattle future profits will be safe.)

Anyway... 'nuff rambling (for now!).


Thu, 12/31/2009 - 17:25 | Link to Comment Anonymous
Thu, 12/31/2009 - 22:05 | Link to Comment dark pools of soros
dark pools of soros's picture

exactly - knowing how to purify water will be the best defense and other essential tasks...  just a few guns and shotguns to keep the drug addicts away

Thu, 12/31/2009 - 22:17 | Link to Comment Anonymous
Fri, 01/01/2010 - 14:10 | Link to Comment impending doom
impending doom's picture

He means the hundeds of thousands of unemployed soldiers, police, etc. Highly trained and severely underpaid. What do you think they'll do in a nation-wide Katrina-style event?

Fri, 01/01/2010 - 15:57 | Link to Comment dark pools of soros
dark pools of soros's picture

very true and the organizational powers of churches, etc will show why they are always the foundation of societies.  whether its the church of sponge bob or whatever it gives people that 'us vs them' mentality more than race, since within those races the battle of belief first gets defined

Fri, 01/01/2010 - 20:55 | Link to Comment Fish Gone Bad
Fish Gone Bad's picture

While I agree that out of work police and soldiers could really be a mess to deal with in a nationwide Katrina type event, I honestly doubt it will come to pass.  When credit collapsed last year ([1][id]=MULT), things looked pretty scary.  But now it is apparent that money will be borrowed until the cows come home, with apparently little consequences.  I am thinking that there will be patches and pockets of society that will now just rot and fester for an extended period of time.  Think of it as Tijuanas popping up next to San Diegos.  Worse yet though, it might be Juarez and El Paso cropping up everywhere.

Thu, 12/31/2009 - 19:53 | Link to Comment docj
docj's picture

Spot-on.  Deflation in stuff you want but don't need, serious inflation in stuff you need.

MREs keep for a good long time.  Mac-n-Cheese, pasta, canned chilli and stew too.  Might help if you lived near a farm or two, also.

Fri, 01/01/2010 - 08:45 | Link to Comment Anonymous
Thu, 12/31/2009 - 22:44 | Link to Comment Mad About Ewe
Mad About Ewe's picture

I've been pulling my hair out over this one.  Finally someone gets it.  From a purely academic standpoint, I can see why one would expect there to be broad deflation.  That's were it ends. 

My families living/work situation is such that our work prepares our meals for us most of the year- we work at a college.  We shop for groceries two times a year- in the summer and in the winter.  This means that I'm not constantly back and forth to the super market all year.  We just started heading back to buy our groceries for the winter break.  

Deflation- not in my neck-of-the-woods.  The woman at the checkout might as well of grabbed me by the collar, jawed me with a roll of quarters, and shook me down for every thing I had.  To top things off, I stopped at the convenience store on the way home to gas up and buy some beer.  I got pumped at the pump and bent over the counter for my beer as well.  The beer I like used to be $10.99 per case, now its $13.99.  At this rate I'm going to have to take a parttime job to support my drinking, driving, and eating habbits.

Point being, I know for a fact that my usual, and litteral, basket of goods is going UP not down in price.  My personal CPI is up around 20% from say two years ago.  10% per annum sounds about right.  If you compound that out over another decade, kitty litter is going to cost as much as beluga caviar.

This is why it kills me to listen to people who come at things from a rabidly deflationist standpoint.  I just can't see the cost of living going down.  More importantly I haven't seen the cost of living decrease in any signifigant way in the aftermath of one greatest deflationay episodes in history.  It seems BSB has done a great job of maintaining price stability.  Prices seem to be stabily rising every year.  Good luck America.

Fri, 01/01/2010 - 13:40 | Link to Comment Anonymous
Fri, 01/01/2010 - 17:39 | Link to Comment Anonymous
Fri, 01/01/2010 - 21:23 | Link to Comment Anonymous
Sat, 01/02/2010 - 11:07 | Link to Comment Mad About Ewe
Mad About Ewe's picture

I read an article once that was quite interesting.  A journalist interview Zimbabwean citizens and asked them what they wish they had done differently, how they have suffered and, in hindsight, how they could have lessened their suffering or prospered in an inflationary/hyperinflationary environment.  To my great shame I never saved the article.  The one thing that stayed with me from the article is what one woman said about paying off her mortgage.  She said that she wished she hadn’t paid off her mortgage in advance.  Her family saw times getting tough and they paid down their debt.  In retrospect she wished that they had just waited for the mortgage to be inflated away.  I wish I had that article still. 


The hyper inflation in Zimbabwe is so third-world’ish.  I’m sure BB and co. will be able to smooth things over with slick accounting, impressive sounding jargon, and dictatorial degrees such as “I’m king of the world.  No one can stop me.”

Thu, 12/31/2009 - 14:51 | Link to Comment etrader
etrader's picture

Still looks deflationary out there.

Thu, 12/31/2009 - 17:05 | Link to Comment Anonymous
Thu, 12/31/2009 - 14:57 | Link to Comment FreakuentFlyer
FreakuentFlyer's picture

i call heads!

Thu, 12/31/2009 - 14:58 | Link to Comment Anonymous
Thu, 12/31/2009 - 17:18 | Link to Comment Bill - Yes That Bill
Bill - Yes That Bill's picture

My definition of "inflation" is when in general living standards are declining in "day to day lifestyle" terms for the average American.

Prior to Katrina and the initial oil price spikes a pound of deli ham was $3.99

At what I'd consider the height of the oil drop/spike/drop/spike cycle awhile back you'd find deli ham routinely going for $7.99/$8.99 lb.

Back last year (or early this year - I'm blanking on the details) when oil went back down into the $30's and stayed within the $30-$60 range for some time consumer food prices pretty much across the board started retreating.

Right now I can often find cheap deli ham on sale for $3.99 lb., however, when they put the better quality stuff (Boar's Head) "on sale" for $6.99 the sale sign usually indicates (claims) that this price is "half price."

In other words... what I see coming with the next fuel price spikes (summer at the latest) is food inflation spikes - Boar's Head ham going for $10 lb. or more, roast beef for $15 lb.

(I'm using the "deli" analogy because it's something most folks are familiar with.)

What I'm saying is that if you're used to $150/wk in "pocket money" you're going to need $200 to keep to the same "lifestyle" standard. If you spend $200 on weekend "entertainment" you'll need to spend $300 to get the same bang.

Will the home once tagged at $695,000 which went down to $400,000 and is presently reaccessed at $420,000 go down to $350,000 or even $250,000 at some point if and when the shit really hits the fan with real estate? Sure. Maybe. And is this "deflation?" Sure. But unless you're in the market for a new home... (*SHRUG*)... these big ticket "rare" purchases don't really impact your day to day standard of living.

Gas. Food. Movie tickets. Tolls. Taxes. Up, up and away, baby! That's what I see coming.


Fri, 01/01/2010 - 16:43 | Link to Comment dark pools of soros
dark pools of soros's picture

check the small delis - i am finding that the main grocery marts are driving up the prices but local small delis seem to keep the prices down

Thu, 12/31/2009 - 15:01 | Link to Comment DoChenRollingBearing
DoChenRollingBearing's picture

2010 is going to be a rough year, I will need a lot to drink.

My call is deflation first, then a bounce to inflation with a risk of hyperinflation.  This is a commonly held viewpoint though, so could be very wrong.

Thu, 12/31/2009 - 16:06 | Link to Comment Pat Hand
Pat Hand's picture

I think you are right.  Therefore, based on my track record, you are probably wrong.

Thu, 12/31/2009 - 15:04 | Link to Comment bugs_
bugs_'s picture

Lossflation.  Bluesflation.  Worryflation.

Default and save the dollar or kick the can

off the cliff into the abyss.

Thu, 12/31/2009 - 15:08 | Link to Comment Anonymous
Thu, 12/31/2009 - 15:47 | Link to Comment bugs_
bugs_'s picture

Deathflation and Taxflation.

Thu, 12/31/2009 - 17:00 | Link to Comment Anonymous
Thu, 12/31/2009 - 23:11 | Link to Comment MsCreant
MsCreant's picture

That was asphyxiation and strangulation.

Thu, 12/31/2009 - 15:08 | Link to Comment Anonymous
Thu, 12/31/2009 - 15:16 | Link to Comment carbonmutant
carbonmutant's picture

Denver Post says Colorado is the first state to lower Minimum Wage since it was adopted in 1938.

Sounds pretty deflationary to me...

Thu, 12/31/2009 - 15:49 | Link to Comment wang
wang's picture

excellent link

Thu, 12/31/2009 - 16:02 | Link to Comment faustian bargain
faustian bargain's picture

sounds pretty high-unemploymenty to me.

Thu, 12/31/2009 - 16:58 | Link to Comment cougar_w
cougar_w's picture

High unemployment causes deflation.

Deflation causes additional job losses.

That's why it's called a "death spiral" and that is why the Fed will MOVE MOUNTAINS to stop it.

Thu, 12/31/2009 - 19:12 | Link to Comment SimpleSimon
SimpleSimon's picture

Deflation is a "death spiral' only in a fiat money, fractional reserve banking system.  By itself, deflation is not bad since it brings price equilibirum and establishes a economic foundation for the next growth spurt.  But that requires a 'hard money' model. 

Thu, 12/31/2009 - 23:15 | Link to Comment TheGoodDoctor
TheGoodDoctor's picture

Yes, where art thou, oh free market economy?

Thu, 12/31/2009 - 15:21 | Link to Comment Anonymous
Thu, 12/31/2009 - 15:23 | Link to Comment Anonymous
Thu, 12/31/2009 - 16:59 | Link to Comment MsCreant
MsCreant's picture


I am willing to bet it is even worse than this. There is no plan to "inflate" or "deflate." The just watch what we do and react on the fly, trying for equilibrium. There is no guessing. The probably have bots that can search the net, see where the discourse/market activity is leaning, and make calls based on a macro view none of us have access to.

I know, that is sooooo tin foil hat. But why couldn't it happen? They have bots that crawl the web to gague trends. Why not gague markets and blog activity?

Thu, 12/31/2009 - 20:36 | Link to Comment WaterWings
WaterWings's picture

Why else would the NSA build a technofortress on an Army base in Utah?

This is an interesting rabbit hole as well; I'm sure you've seen this site before: 



Fri, 01/01/2010 - 19:50 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture


I sent my $25 donation to and received my 2 DVDs full of very interesting "stuff." I suggest you could waste $25 on worse things and you might wish to donate there as well as Zero Hedge.

Thu, 12/31/2009 - 15:25 | Link to Comment Anonymous
Thu, 12/31/2009 - 15:27 | Link to Comment Anonymous
Thu, 12/31/2009 - 15:37 | Link to Comment Anonymous
Thu, 12/31/2009 - 17:03 | Link to Comment cougar_w
cougar_w's picture

[sounds like somebody knows]

Information asymmetry is a bitch, huh?

Thu, 12/31/2009 - 15:46 | Link to Comment Sancho Ponzi
Sancho Ponzi's picture

There's so much slack in the world economy that inflation is unlikely. What will prove interesting is whether the Fed can keep mortgage and UST interest rates low, for if they lose that battle, things get f'ugly in a hurry.

Thu, 12/31/2009 - 15:57 | Link to Comment Anonymous
Thu, 12/31/2009 - 15:58 | Link to Comment Anonymous
Thu, 12/31/2009 - 15:59 | Link to Comment Zina
Zina's picture

Stagflation is what will prevail in 2010. Like in the 70's. Anemic growth, double digit unemployment (but less than 12%), and high inflation (but not hyper-) with annual inflation rate bellow 15%. And it will last until 2014 or beyond. Maybe we can see some dirty punks in the streets, like 1977.

Thu, 12/31/2009 - 16:03 | Link to Comment Anonymous
Thu, 12/31/2009 - 17:05 | Link to Comment cougar_w
cougar_w's picture

Wait. Where are they on the Mattress (OMG) Portfolio?

Thu, 12/31/2009 - 22:45 | Link to Comment Anonymous
Thu, 12/31/2009 - 16:03 | Link to Comment Anonymous
Thu, 12/31/2009 - 16:03 | Link to Comment Oso
Oso's picture

short-sighted europeans.  Inflation for lithuanians in energy prices...


"Lithuania to shut its only nuclear power station "

Thu, 12/31/2009 - 16:10 | Link to Comment wang
wang's picture

ECRI's Achuthan Interview on U.S. Economic Outlook


(take special note of the person conducting the interview - CNBS quality )

Thu, 12/31/2009 - 16:14 | Link to Comment JuicyTheAnimal
JuicyTheAnimal's picture

Well, this year my wealth got deflated and the greedy fuckers who caused this, their wealth got inflated.  I expect more of the same next year.  The only good part is that I don't have much left to loose.  Just here to watch the show. 

Thu, 12/31/2009 - 16:16 | Link to Comment wang
wang's picture

update on the guy from the Detroit flight who said there was some funny stuff going on at passport control etc (they really need to change the photo they use when they run a story on him unless that too is part of the conspiracy)

Thu, 12/31/2009 - 16:44 | Link to Comment Screwball
Screwball's picture

Thanks for the link.  Interesting stuff.  It makes you wonder what the hell is really going on.

Thu, 12/31/2009 - 17:18 | Link to Comment cougar_w
cougar_w's picture

I'm not even a tin-foil-hatter but I'll venture it has to do with:

"Get this stupid fucker on the plane however you have to and it works out best if he doesn't accomplish anything at all other than make a scene."

Why? Because that outcome serves the needs of almost every single player moving across this particular stage. They'll have installed 150 full-body scanners in Amsterdam, and I'll wager they have 15,000 others deployed before the end of 2010 everywhere else. So who likes the sound of that? It's not just the guys making the boxen I can promise you that.

Anybody flies from here forward is an idiot, and time will prove me right.

Thu, 12/31/2009 - 17:33 | Link to Comment Anonymous
Thu, 12/31/2009 - 17:38 | Link to Comment cougar_w
cougar_w's picture

Just to elaborate, google "security theater" to understand what I am talking about. The parties that benefit directly from security theater (talking up fear and security without actually securing anything) include: merchants of security systems, proponents of domestic surveillance, fear-mongering MSM, terrorists, communications companies, government bureaucrats, plutocrats of all species, and demagogues.

No one of those playerz needed to be the one who pushed the buttons and pulled the strings. But they all benefit materially when the buttons get pushed and the strings are pulled, and are not above setting up existing security systems to fail to provide actual security so that additional "measures" of a kind previously deemed unpopular or expensive or unConstitutional will not only become acceptable to the public but will actually be demanded by the public.

We will put our own necks in the noose and thank the hangman before all is said and done.


Thu, 12/31/2009 - 19:33 | Link to Comment Tethys
Tethys's picture

"...but if he does manage to accomplish something big, well that's all good too.  Get the people to rally around their 'leaders', divert attention away from current legislation / the economy.  Make it clear that this is why they need to give up more rights. Get 'em all fired up and channel that anger away from the powers that be. 

Oh, and another 'crisis' to take advantage of."

I think you have hit the nail on the head.  Unfortunately.

Thu, 12/31/2009 - 17:16 | Link to Comment MsCreant
MsCreant's picture

Maybe if they don't arrest the Orange Indian they can, you know, interrogate and kinda disappear the guy. Take him to one of those torture friendly countries.

Heck of a story, thanks for the post.

Thu, 12/31/2009 - 18:38 | Link to Comment ozziindaus
ozziindaus's picture

Thanks Wang, this link threw my off the entire topic. Anyway I saw a similar report of FOX2 Detroit about a guy witnessing the same thing in Amsterdam airport except that the Indian guy (not described a dressed in orange) assisted the terrorist (more like a stooge) through security after he couldn't produce a passport. I believe these plots are not motivated by money or pushing security products. They can only have a higher order agenda made possible by an intercontinental government cooperation.

If people are confused about the inflation/deflation argument, wait till they find out their own government is conspiring against them.

Thu, 12/31/2009 - 23:26 | Link to Comment Selah
Selah's picture

How about buying 50 tickets at 10 different airports.

Everyone brings an assortment of strange, yet legal, items in their carry on baggage. One a  brick; another some chain-link fence, someone has 30 electric razors, another 10 pounds of bubble gum.. etc.. use your imagination...

Everyone has spinkled some gunpowder in their socks.

All those flights will not depart on time due to the backlog of passengers trying to get through the "examination line". Yet nothing illegal or dangerous has taken place. And bizzare new laws will be enacted to prevent such a future "terrorist act".

And it is "terrorism". People do not have to be killed to spread fear and disrupt the daily lives of the masses.

I won't even get into the idea of detonating a device inside an x-ray machine... That would pretty much put an end to air traffic within the Former United States of America.



Thu, 12/31/2009 - 16:26 | Link to Comment no cnbc cretin
no cnbc cretin's picture

Seems to me it will be deflation. But, it also seems that "hyper-inflation" is possible, but would cause deflation to occur as well.

Thu, 12/31/2009 - 16:30 | Link to Comment Cursive
Cursive's picture

Too much excess production capacity.  Falling incomes.  Aging American population.  Deleveraging will continue.  It's deflation.

Thu, 12/31/2009 - 16:33 | Link to Comment Anonymous
Thu, 12/31/2009 - 16:33 | Link to Comment Anonymous
Fri, 01/01/2010 - 12:53 | Link to Comment boooyaaaah
boooyaaaah's picture

So true

And deflation requires (defined by) a reduction in wages, which is political suicide, and anathema to Unions.

But inflation gives an imaginary increase which tastes good for a moment

But, the debt based system is unsustainable, that is why we are here. So can the answer be that we maintain the present system?

Thu, 12/31/2009 - 16:40 | Link to Comment jimmyjames
jimmyjames's picture

Deflation--simply because the most powerful of all market forces are in play--that being sentiment-which has shifted from borrow and spend--to hoard and tighten--

Both--Bond and Hendry are wrong about gold--

Hendry says sell because of deflation and Bond says buy because of inflation--

Totally ass backwards--jmo

Thu, 12/31/2009 - 16:46 | Link to Comment Cow
Cow's picture

S&P 500 Index was just falling like a rock and someone purchased 1.2 billion shares.  could someone more familiar tell me how common this occurrence is?

Thu, 12/31/2009 - 17:00 | Link to Comment I need more cowbell
I need more cowbell's picture

Well someone or ones sold those shares also.

I will say this last half hour was like someone shouted "FIRE" and the exits be crowded.

Thu, 12/31/2009 - 17:15 | Link to Comment Oso
Oso's picture

market-on-close buy orders.

Thu, 12/31/2009 - 17:31 | Link to Comment Anonymous
Thu, 12/31/2009 - 18:03 | Link to Comment carbonmutant
carbonmutant's picture

The bottom line here is that the WH spindoctors have to be working madly to find someone or some group to blame the outcome on. Either that or we start glassifying parts of the Middle East as a distraction..

Thu, 12/31/2009 - 19:01 | Link to Comment Anonymous
Thu, 12/31/2009 - 20:18 | Link to Comment Anonymous
Thu, 12/31/2009 - 20:21 | Link to Comment Anonymous
Thu, 12/31/2009 - 20:23 | Link to Comment Anonymous
Thu, 12/31/2009 - 21:12 | Link to Comment Anonymous
Thu, 12/31/2009 - 21:28 | Link to Comment rapier
rapier's picture

Policy makers will continue to favor increasing asset prices and corporate profits because investors are seen as the heros of economics. For 30 years as incomes have skewed to the investor class more and more money has been poured into seeking returns on ever declining cash flow profits. Since this is not acceptable inflation of assets became the number one goal of policy makers. 

Since the panic incomes of workers in the US has taken a quantum step lower and for every dollar government has given to wage earners to fill the income gap 6 dollars has been devoted to propping asset prices. Cash flow profits shrink relative to money invested to profit from it. Still ever larger percentage of all money remains in the financial sphere to give investors the returns God has said they have a right to. This will continue until it doesn't. Can social cohesion be mantained with a doubling of those in poverty and stagnent middle class incomes. Yes.It will take some serious repression eventually but America is up to it.


Fri, 01/01/2010 - 01:33 | Link to Comment David449420
David449420's picture

Unfortunately rapier, America is Not up to it, America is DOWN to it.  The American economy is going to be Bitch Slapped in Q1/3 2010.  Protect yourself and your family. 

Fri, 01/01/2010 - 01:07 | Link to Comment Assetman
Assetman's picture

The Brait argruments are useful to the extent that lays out what is likely to be (un)successful in 3 different scenarios.

That's about as far as it goes.

No one has the magical crystal ball here, folks.  About the only thing we know with relative certainty is that the American standard of living is going to fall in 2010.

The real question for curious minds (and investors) is to how this will most likely occur.

The key theme, in my mind, is that debt deflation will be the constant force that will dictate where the battle will be fought. 

Our authorities have somewhat successfully combatted debt deflation by allocating resources in very inefficient ways.  Moreover, our authorities are only shifting the debt burden and rolling it over in duration-- not eradicating it.  The result so far is government induced GDP growth on no employment gains and wage deflation in many areas.  In other words-- they haven't solved a damn thing.  But they can pat themselves on the back on avoiding calamity in 2008.

Still, debt deflation isn't gone in 2010.  I'm sure it will still be fought inefficiently, as government just can't get the hell out of the way.  The difference in 2010, however, is that Ben Bernanke isn't making loans right and left and creating emergency fiscal policy.  Well, until it's really "needed".

No, it appears that the Executive and Legislative branches have the controls to f*ck this thing up in an even more collosal way-- they've already laid the groundwork for it (by Treasury "blank-checking" FMN and FRE, and Bwany Frank "blank-checking" TBTF in the Financial Reform Bill).

Risk is already being mispriced due to goverment intervention, and that may not change in 2010.  But combine already immense Treasury funding needs with even greater deficit spending, and a dangerous situation if a lack of demand causes interest rates to spike.

I don't think the latter will happen, but international events (i.e., China retrenchment) may force that hand.  Debt servicing in this country is a very risky issue in the US without aggregate income growth, and we're making down payments on growth that may not exist. 

The outcomes if growth is not sustained longer term is either (a) dollar devaluation (i.e., fiat currency deflation) or (b) intense asset deflation.

I hope we don't go that far.  In fact, my hope is that TPTB are smart enough to know the dangerous end games and will cycle through deflation and reflation, so that debts can be retired while attempts are made to restart economic growth.  Unfortunately, I see government wanting to take too much control and misallocating resources even more than in 2009.

Fri, 01/01/2010 - 09:01 | Link to Comment Wheatman
Wheatman's picture

Deflation in everything priced in wheat.

Fri, 01/01/2010 - 10:15 | Link to Comment Kreditanstalt
Kreditanstalt's picture

Yes, rated awesome!  Great analysis.

We CAN have price inflation in selected areas even as we go through the "Hugh Hendry" bout of deflation.  As the article points out, excess slushy money is NOT going into legitimate (and currently economically POINTLESS) lending to homeowners or businesses.  It seems to be going into speculation in commodities, precious metals, company stocks, currency plays and so on, and now increasingly less into anything consumer or interest rate-sensitive.

For this reason I don't see much more upside to SPG, WRI, SKT or MAC...

It's a casino.  A desperate chasing of returns.  A playground (for some with the HFT ability)...a speculative arena.  But not investment.  There's no real economic rationale to be lending to businesses or, god forbid HOMEOWNERS...or expanding capacity now.

I can't see this stopping even if stimulus dries up somewhat.  If things get appreciably worse, in fact, governments will go nuts trying to INCREASE stimulus in various ways, as the article says.  It looks like 2010 will see rangebound trading through the first half with corrections no more than 10% (or less!). But real speculative targets - commodities, precious metals, agriculture, producing industry - will increasingly outperform paper junk, and that's my bet.

We're morphing from daytraders to more-or-less buy-and-holders in those sectors. This has a ways to go yet...



Fri, 01/01/2010 - 11:19 | Link to Comment Madcow
Madcow's picture

Deflation. Maybe hyper-deflation. Unless we see massive debt and tax relief (won't happen).

Asset prices are headed back to pre-1980 levels, and there's nothing the Fed can do about it. Actually, i think that's what they WANT. Hyperinflation would destroy the currency and put the Fed out of business. Deflation lifts the dollar and allows the banks to foreclose on assets at pennies on the dollar. 

My prediction for 2010:  Look for Obama to come on television - maybe during American Idol - with a quick announcement:

"Sorry folks, but all that money you've been investing in your 401Ks, IRAs, pension funds, mutual funds, stocks, bonds, real estate funds, and insurance policies is GONE.  You got tricked fair and square, and now its time to move on."

Now back to your regularly scheduled programming.




Fri, 01/01/2010 - 11:44 | Link to Comment boooyaaaah
boooyaaaah's picture

Is this inflation or deflation?


Rev 6:5-6

5 When the Lamb opened the third seal, I heard the third living creature say, "Come!" I looked, and there before me was a black horse! Its rider was holding a pair of scales in his hand. 6 Then I heard what sounded like a voice among the four living creatures, saying, "A quart of wheat for a day's wages, and three quarts of barley for a day's wages, and do not damage the oil and the wine!"

Fri, 01/01/2010 - 12:45 | Link to Comment Eclipse
Eclipse's picture

Our firm struggled with this Inflation vs Deflation concept.  Our initial conclusion was that things we need get expensive, things we don't need OR are tied to debt deflate. Then we had a "Eureka" moment.

The problem is that we are all programed to think in Dollars. If we create tons of new dollars, you can have a phenomenon where PRICES go up, but that does not push up VALUES. So...Inflation or Deflation? The answer is simple: In terms of Dollars it can be both. In terms of Gold Bullion, it's ALL Deflation.

Fri, 01/01/2010 - 16:17 | Link to Comment Anonymous
Sat, 01/02/2010 - 02:00 | Link to Comment Silver Bullet
Silver Bullet's picture


Fri, 01/01/2010 - 16:41 | Link to Comment Spitzer
Spitzer's picture

These guys are not Austrian economists so I don't really get their speal.

Contrary to common belief, hyperinflation does not arise from too much bank lending. The sole cause of hyperinflation is always too much government spending. The pattern is as follows.

The government spends more money than it is receiving in taxes, which forces it to borrow. As these deficits grow, they eventually exceed the market’s capacity or willingness to lend money to the government. Invariably, the central bank steps in and provides the government with the money it needs by creating it – as the saying goes – ‘out of thin air’, or what governments today call “quantitative easing”. 

Sat, 01/02/2010 - 15:43 | Link to Comment Carl Marks
Carl Marks's picture

aka counterfeiting

Fri, 01/01/2010 - 17:55 | Link to Comment Anonymous
Fri, 01/01/2010 - 20:01 | Link to Comment Anonymous
Fri, 01/01/2010 - 20:12 | Link to Comment Anonymous
Sat, 01/02/2010 - 02:19 | Link to Comment Anonymous
Sat, 01/02/2010 - 03:52 | Link to Comment mchawe
mchawe's picture

I know this is simplistic, but all Western Governments and their respective CB's uppermost interest is rescuing the Rothschild banks.

Declining real estate is extremely damaging to those banks who hold under water MBSs off their balance sheets.

Real Estate prices must be reversed from down to up. That is policy.

So Zirp and QE will continue until that happens and all those MBSs are back in the black.

So I say the deflationists will be trumped.

This theory may not hold water if GS and JPM are in good shape. But nobody really knows. I suspect that if their balance sheet displayed the truth, they would be seen to be in terrible shape ! Banks such as BAC and C are clearly that way.

You will get competitive devaluations for the same reason. There are a bunch of European Banks holding toxic instruments that must regain value.

The banks won't care if they are valued in devalued dollars.

Tue, 01/05/2010 - 05:21 | Link to Comment Anonymous
Wed, 01/06/2010 - 00:48 | Link to Comment Yophat
Yophat's picture

Everybody (individual, and local, state, and federal governments)is trying to borrow....most aren't having a lot of luck.  Karl Denninger has done a great job tracking the tipping point in the total debt.

It is most evident in the states scrambling to meet spending obligations.  My passion of late has been following and analyzing the rapid increase in state unemployment borrowing.  Info at the blog if you are interested....

Sat, 01/30/2010 - 15:20 | Link to Comment Anonymous
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