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Albert Edwards Predicts Deflation Followed By Double-Digit Inflation As "Governments Opt To Default, And Monetization Is Policy Lever of First Resort"
As if we needed any more confirmation that deflationary pressures continue to prevail and to swamp the broader economy, here is SocGen's Albert Edwards with his most recent (and humorous: we had no clue that the "UK?s ONS statistical office has just decided to throw canned fizzy drinks out of the UK?s CPI basket and replace them with small bottles of mineral water") menu prescriptions for the near- to mid-term future.
First an appetizer, here is a look at US consumer leverage trends. Yes, good point: what leverage?
Last week?s Flow of Funds report from the Fed showed that US total credit continued to disappear down the plughole, despite the government?s best efforts to inflate us back to prosperity (see chart below). The current recovery, based in very large part on the end of de-stocking, simply cannot be sustained while credit is disappearing at this debilitating dehydrating rate.
The recently released Q4 Flow of Funds data allowed economists to get a full view of the 2009 data. It was ugly. Most shockingly, the household sector shrank its borrowing for the seventh quarter in a row – with minimal signs of any abatement to the process. Combined with continued rapid balance sheet shrinkage in both the corporate and financial sectors, total domestic debt contracted for the fourth quarter in a row (see front page chart). Now, we might be getting used to such news, but it is always worth remembering that, prior to the global meltdown, even one quarter of total domestic debt shrinkage was like seeing a black swan with some pink dots thrown in for good measure.
Some statistical observations: while the process of deleveraging is on the right path, it has a long path to go. Just compare household debt between the lofty dot com days and today.
With nominal GDP actually managing to inch up some 0.8% in the year to Q4 2009, the economy managed its first baby step along the long and winding road to normality, with US debt dipping under 350% of GDP (see chart below). Household leverage has returned to 94% from its peak of 96% in both 2007 and 2008. But consider this: at the peak of the Nasdaq bubble, household leverage was just shy of 70%. There is a very, very long way to go.
The entre: Japenese "Ice-Age" Melange.
Many clients ask how we will know when the deleveraging process is over or whether there is a ?right? debt/income ratio. We will know when the deleveraging process has ended when we see an end to the unprecedented pace of decline in bank lending (see chart below). This process took three years in the early 1990s. Expect at least a decade of Japan-like Ice-Age pain.
Desert: Sovereign Debt Flambe.
Ultimately, as my colleague Dylan Grice writes, I think we head back to double-digit inflation rates as governments opt to default. I certainly again expect to see CPI inflation above 25% in the UK and indeed in most developed nations in my lifetime ? I have happy memories of the three-day week and doing my homework by candlelight. In the near term, however, the deflationary quicksand will suck us ever lower until we suffocate. A key driver for underlying inflation remains unit labour costs. While unit labour costs decline at an unprecedented rate, they are sucking us inevitably into a Fisherian, debt-deflation spiral. Only then will we see how far policymakers are willing to go to debauch the currency. Last year saw them cross the Rubicon. Monetisation is now the policy lever of first resort.
In summary, the menu for the next 5 years: Hyperdeflation followed by rampant inflation, with a smattering of stagflation thrown in for good measure. Served chilled. Enjoy.
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I think we head back to double-digit inflation rates as governments opt to default.
I can't begin to tell you how refreshing it is to see inflation acknowledged in the financial media as just exactly what it is: default.
+1
An inflationary environment where debt defaults at every level are rampant.
Could anyone possibly imagine a better scenario for the Gold price?
Unfortunately the powers that be still retain the ability to manipulate the Gold market. Until they are defeated, there will not be any significant or sudden rise in Gold. Gold will rise only when they want it to rise or they loose control. Not before.
Why is this so bad? It means an extended buying opportunity at artificially low prices. If you're looking at gold for wealth preservation, this is a great thing.
You're directing your comment to the wrong person. I replied to the person above me, who said......
"Could anyone possibly imagine a better scenario for the Gold price?"
I took his comment to mean he was looking for Gold to go up in price. I may have been wrong in my assumption but I was only saying that the price of Gold would stay low until the Fed looses control. I was not saying the price of Gold staying low was bad.
Amen Max! Accept the gift from the G*ds!! Buy this shit up at these prices!!
Agreed, unfortunately Edwards is seen to be on the lunatic fringe of the economist profession (I would disagree) - be sure to clip any report in the mainstream media that refers to this form of default. BTW did you see Stiglitz versus Hendrie where he couldnt accept that the US would default, failing to grasp that monetizing debt and pumping inflation was defacto default. Shocking
"unfortunately Edwards is seen to be on the lunatic fringe of the economist profession"
Precisely why I like to hear what he has to say and look forward to it.
The "mainstream" (Nobel Laureates and most quoted by the mainstream media tool-a-thon) Got completely blindsided by the events of the last two years and they don't have much of a clue what's coming either. Then there is Ben...............
"BTW did you see Stiglitz versus Hendrie where he couldnt accept that the US would default, failing to grasp that monetizing debt and pumping inflation was defacto default. Shocking"
It's worse than shocking! He cannot envision repudiation by the World's biggest debtor with the World's most powerful military! Why on earth would the U.S. settle for enacting a tarrif when they can accomplish the same trade objective by repudiating debt held by China with the added bonus of a trillion dollar debt reduction!
If I were China, I would want gobs of those Euro denominated credit default swaps on the U.S. as trade tensions rise!
+1. Not sure it will be limited to double digits with $122,000,000,000,000.00 in debt and unfunded, looted, off balance sheet obligations. Zimbabwe USA.
Bought a "One hundred Trillion dollar" Zimbabwe
bank note yesterday and have posted it below the monitor,
just as a reminder of things to come.....
A loaf of bread, at the time this note was introduced in early 09, cost 300 billion dollars!
I bought the same thing last weekend; I call it a work of "art". The note would buy an egg.
I have four "workers" in a shed out back that generate zim$2-3 Trillion each day. I should be a quadrillionaire by year end. If I don't eat all my investment proceeds.
I wonder if there's a mother of all carry trade profit to be made holding Zimbabwe trillions with a view to converting back into US dollars in a few years?
In a few years they will be at par...
I have happy memories of the three-day week and doing my homework by candlelight
LOL and I miss the cold war as well
Rogoff notes that, unlike sovereign debt defaults, defaulting on domestic debts is affiliated with very high inflation rates.
The stock markets low voume computer ramping has done nothing to incite confidence in investors.
In truth, the only real buying (covering) has been the covering done by ETF funds that are short (daily ETF's like Direxion funds must cover each day). These funds, with their leverage (often up to 4X) are being used by the market as proxy buyers to "ramp up the market". Thus, the end of day buying sprees (attributed to the PPT).
IN truth, the PPT is simply a ponzi scheme on steroids that was put into place by the streets introduction of leveraged ETF's (that feed the into the buying by purchasing on the long side, and covering by the short side). Notice the multiple leveraged ETF's introduced by the ex- Goldmanites since 2008. There is no market. There is simply illusion. It is a game of 3 card monte'...........a magic trick. A trick financed and paid for by the feeding of the leveraged ETF's.
Hey, now THERE is a good explanation for market ramp-ups on down days. I hadn't thought about that before.
Interesting observation.
And continuing that thought, since all leveraged ETFs have a date with $0 due to so-called "tracking error", any money fed into the ETFs is swallowed, digested and shat out into the underlying securities' market caps.
What do you think of SRS? What will be its fate as 2X inverse of the US real estate index?
Perhaps one of the few ETFs that is actually more toxic than the underlying.
Thinkorswim has neat feature where you can graph the sum of two+ securities prices over time. Pick any two leveraged ETFs that are supposed to mirror one another and try it... like DIG + DUG, for instance. Now that's a trendline if ever there was one. Short both and enjoy. (note: if the market rips in a sustained kind of way, you'll get FUBAR bigtime - see spike in SRS - but note what happened as soon as the market started waffling...)
Agreed, but my thinking is that when the CRE weight is layered on the GSE burden, cracks in the RE market will drive SRS up. I figure a 50% retracement back to the March 09 high is reasonable. I do not feel the same way about URE. Nor do I believe that SRS knocking on 270 again is reasonable, but anything is possible, just not probable.
RE and CRE have been cracking for a good long time now. To get a 12x move up in SRS would require an epic spanking in CRE. A slow death in RE is not going to help you.
For SRS to make any sort of swing trade, you'd need a sustained move in the underlying with no waffling or retracement by the underlying along the way. Highly improbable. Leveraged ETFs compound daily gains, but bleed out at the first sign of "normal" market activity (some days up, some days down).
Plus, you'd effectively be betting against continued monetization and backstopping in the face of a cataclysmic move in the market; also highly improbable in the reality we live in vs the one we long for here on ZH.
So, long story short, leveraged ETFs, perhaps this one in particular, have a negative "trader's edge", if you will. They are mathematically unsound. No go.
Thanks for your input. We'll see what happens over the next 6 months.
Totally agree. SRS is heavily weighted with SPG. As long as the REITS are not compromised by CRE whole loan failures--think banks, not consumers, SRS goes nowhere.
+ !!
weird things going on in the multiverse....that was the first time I did a +!, and there you are, doing the same (I had not seen your post)
RC.....+!!!
+! I dig that. So are you saying the PPT is such (ETFs)? or, to paraphrase, 'the ETFs are acting as players on the same team'. Clarification would be awesome.
Cash is king, gold is God.
+1
Then again i am a literally a trillionaire. Seriously, i have well over 100 trillion dollars in cash right here in my hand. The currency is from Zimbabwe, its good, right? Right? Umm, hello? Hello?
No? Hmmm... Maybe those gold bars were a smart investment after all.
Thanks for reminding about them. I just bought one on Ebay in mint condition for $3.99.
The market never lies... 100 trillion turned to $3.99 FRN. Personally I think my 100 trillion dollar note will be a better investment than $3.99 in some bank or piggy bank or what have you.
And guns and a small squad of people trained to use them when TSHTF and people realize you have it.
Am I wrong to think that the best thing for Greek citizens is to just "walk away" from their debt?
No need to walk away. Apparently they can just continue to issue new debt to cover obligations not met by actual income (including interest on the current debt presumably). The appears to be no end to this game - short on cash? just issue some new debt, somebody somewhere will buy it for the 'yield'. Default will never happen because there's infinite buying capacity. Nothing has been learned in the past few years.
I agree with your statement and that's what will probably continue to happen but...
Lets say you owe more money then you could ever pay back, even if you sell everything you own. I.E. you are worth less than zero. Wouldn't a clean slate always be better then a negative net worth.
It seems to me that whether we are talking about Greece or homeowners, the best thing for them is to just start back at zero.
The problem (intended I believe) with every solution so far is that we are just pushing those in over their heads into a form of indentured servitude.
And once you show someone there is no way to avoid years of fruitless effort, their efforts become less and less productive.
Greece is not better served by issuing new debt, only older creditors are better served (Ponzi?)
You just described the modern-day US worker to a tee.
Just stepping into your conversation, but I kind of agree with you.
I figure a default will be the lesson about risk that is really necessary to some of these big money groups that love to throw their money at anything and assume no/little risk of losing it. It will cut down on lending and speculation, but austerity will be hitting no matter what. All that happens is the big money groups take the haircut also, but that is only an opinion and we all have those.
You're so old school. Worth less than zero only matters if your lender gives a rat's ass about it. Why go back to zero when the cost of expanding and servicing the debt is virtually nothing? Just take the free money for as long as you can. Besides, going back to zero would immediately crash the Ponzi, which will definitely result in no more cheap debt. Why'd the Greeks want to work hard when they can live high off the hog on the dole?
That's the kind of world we're in. Get with the program.
A rolling loan gathers no loss?
dig it.
thread music, so we can all do our "homework" by "candlelight".
http://www.youtube.com/watch?v=WOzhbj1BVOU
brilliant
Albert "Broken Clock" Edwards. This guy has predicted 8 out of the last 3 depressions. Rosie, Edwards, Janjuah, Roubini. They really enjoy your wasting your time!
I don't think any of those guys were around to predict the 1893 depression. I could be wrong though.
http://www.itulip.com/kapoomtheory.htm
I don't think countries can devalue their currency as freely as they could in the past when credit markets were far more simple than they are today. If i recall correctly if a currency is devalued such that its exchange rate falls lower than minimum exchange rate written in a derivatives contract of said countries debt such a development constitutes as an "event". Also the aforementioned exchange rate is set against a basket of currencies in which the said currency does not participate. So; default via inflation or hyperinflation can not occur unless everyone disregard the subsequent events which would happen in the derivatives market, and which would be potentially far more reaching than a simple default via bat-shit-printing. But i may be wrong.
Cheeky you know more about derivative than I, so what happens if the Chinese option is taken. The Chinese option being we declare them null as they have done recently.
It simple really; the implosion of US economy due to its import oriented nature. China doesn't give a shit, cause it knows it has the west in a strong, cheap manufacturing, grip. Also, US is far more open as an economy and far more transparent than China is, so while Chinese will have to deal with only a handful counterparties the US would have to deal with the whole world mainly because of the underlying dollar pricing.
Fuck China.
The problem is pretty basically that the maturity of the mercantilism in the east has caused the complete destruction of all productive jobs in the west.
So, we all must play mercantilist games now.
Bull-fucking-shit mang.
The rise of China has nothing to do with China itself, but with Corporate Mentality of Reagan Administration, Wall Streets seek for massive profits, Congressional stupidity etc etc. It was not the Chinese who took jobs away it was The Corporation which took them away so it could have higher margins, better returns and better executive bonuses. It is not as mysterious or as complex as it might seem. Greed, simple animalistic, uncontrollable greed, lack of general empathy and pursuit for excessive over-abundance of the very few.
+1000. Totally agree!
You could be referring to both corporations, and government.
Pick your poison. Two sides of the same coin.
Wait wait wait, so who is it that controls China's currency peg again? American corporations?
It's not as simple as just "greed". Currency pegs (and by necessity, fiat money) fuck with Ricardo's Comparative Advantage. This is government intervention that's screwed up the free market's mechanism for balancing selfish interests against each other. In fact there IS no balancing mechanism because money is no longer a commodity. The CCP is certainly the asshole in this but the US Gov't is the idiot that thought it could finance infinite consumption with leverage. Corporations exploit opportunity, we cannot expect them to do otherwise and thus we must be exceedingly careful when allowing governments to create such opportunities.
There are new junkers here since your haitus. Ignore them. We who have been here for a long while are very grateful you are back. And I happen to agree with you now, more than ever.
We really need to place a limit on the number of junks each account
can post per month. 5 would be good, would force people to make wise use of their junks. More than a few excellent posts are getting junked now. Also, when an original post disappears, the responses
no longer make any sense in some cases
I couldn't agree with you more on this one Cheeky. The greatest tell is that the phrase "greed is good" came out in the US just as China started its mercantilist trend.
Typical American. Blame everyone but himself for the mistakes resulting from his own unfettered greed.
You're right...nobody in China is greedy.
moron
You'd better be a Cancuck saying this or else I'll bet a grain of gold that your nation's Implode-O-Meter is in the red too, kettle.
Part of the problem is that more or less all the developed economies are joining the devaluation race - so the exchangerate against which the nominal is measured is going down in purchasing power maybe - but not necessarily significantly as compared to the exchange rate of other countries currencies.
Ditto. Thats why i described the underlying mechanics. But it has to be a joint effort, but thats not a problem imho since EUR covers app. 25 countries, GBP is linked to them via Joint European Marketplace, Yuan is pegged to the $, AUD is linked to Chinese economy in a massive way. The only one which brings disturbance to the Force is CAD which rose the most in the past 3 years if i'm not mistaken. Real is also on the upswing since Brasil is strong as shit. The rest doesn't matter.
Hey Cheeky, what's your opinion on the HKD? In particular, their linked exchange rate with USD. The reason I ask is that I could not understand why HK haven't switched to Reminbi, it's mind boggling, am I missing something here?
Because its one of the most traded currencies in the world, and much of the trade is and has been done by pricing goods and services in HKD. Also exchange rate could not have been fixed such that every party or counterparty would not experience any loss once the switch happens. Also, it is good for multi tier capital markets and multiple IPOs of Chinese and other corporations. Plus HKD and HK capital markets are much more open to outsiders than are the Chinese and Reminbi. Also HK wanted to preserve as much autonomy as it could once it passed into Chinese hands.
" ... HKD and HK capital markets are much more open to outsiders than are the Chinese and Reminbi." Very important insight. For years, this has been one of the primary reason that drives hot money flow into HK's real estate and capital markets. Having said that, I still couldn't grasp the idea of linking HKD to USD going forward 5-10 years. HK exchange fund USD reserve is massive, looking ahead there's got to be certain actions / changes in monetary policy. Question is, (when) will China step in? Pearl-of-the-East is an intriguing case.
I dont think anything will change in the near future in China-Hong Kong relationship, simply because Hong Kong provides much needed indirect capital inflow that the Mainland China can not attract due to various reasons such as its closed nature, wild-west capitalism, corruption, lack of goodwill etc etc. Hong Kongs status will remain unchanged as long as the Mainland China benefits from it. And since HKD is pegged to the US, the same as Reminbi (but not at the same exchange rate) it is indirectly pegged to the Reminbi itself, and that makes the mutual cooperation between China and HK much easier. Look at the issue is if you were looking into dual class stock structure of, let's say GOOG. While class B stock is much more liquid and can be traded and bought more easily (i.e. Hong Kong), class A stock lacks in liquidity, but compensate said lack in more significance when it actually comes to decision making and actual ownership (i.e. China)
" ... provides much needed indirect capital inflow that the Mainland China can not attract due to various reasons ..." Bang on, government's control of flow-of-fund, Mainland carries a tremendous leverage by utilizing Hong Kong to attract foreign capital.
" ... it is indirectly pegged to the Reminbi itself ..." True; what would happen during bottom of the 9th, if Reminbi officially leaves USD peg ...
Overall an insightful discussion Cheeky, thank you
His analysis of our current deflation is certainly right on. The government can't possibly print enough money to account for the increase in money supply that occurred as a result lending and fractional reserve banking. The key to growth is lending and you won't have lending with declining asset values.
You don't get consumer leveraging when half literate credit officers look at wage and employment prospects and decide that in concert with still inflated asset values the prospects for repayment/capital gain look gloomy.
Meanwhile Gensler is over in Europe defending the CDS market (call it the OTC derivatives market) as critical to the economy.
Exactly my point...but why would banks lend against declining asset values? If you owned a bank you wouldn't either. It's much better business to borrow at the window for 0% interest and put it in Treasuries. It's a no-brainer!
CDS are critical. People don't understand them.
They are not insurance policies, they are the foundation of synthetic debt
Liquidity trap!
Bingo.
FED has infinite capacity and will continue to buy up any and all debt.
The PIGS, the STUPIDS what ever fucking acronym you can come up with.
Illinois, California, N.Y. they will buy it all, baby, and then some.
Why default when you have infinte buying capacity?
You missed the point. Infinite buying capacity means infinite currency printing and infinite inflation. THAT is a form of default, and an insidious one at that.
Consumers must continue to delever.
What is worth borrowing money to go and DO in the US right now?
Soon, the Hollywood Futures Index.
The Fed, and the real Feds, are scrambling like scared rats in a maze, desperately seeking some exit/solution to their economic/imperialistic debauchery. But there's a lean, hungry cat waiting at every final turn. The rats have until Fall 2010 to get their wills in order.
What nonsense! Elections, HA! They don't matter...the Fed is in control. American Democracy is a sham!
Really? Don't bullshit me brother. Are you saying... do you mean to tell me... that EVERYTHING that I was taught, from kindergarten through graduate school is a sack of bullshit?
Say it ain't so! Say it ain't so.
Can anyone offer me a line of blue pill to snort? Needin' a fix here.
god i enjoy this
Sound like we’re definitely due for lot of ‘flation of one kind or another!!!!!
Thas right. Guvflation! Lots of guvvvvflation...
Look at the domestic debt chart as a ratio of GDP - It skyrocketed during and after the Reagan years.
There has been little or no productive capacity installed in those years - in fact I believe it has dramatically declined.
I am not blaming Ronnie he really did not know or wanted to know what was going on - those years were a complete sham
Is there any Reagan Democrats or even any false Republicans left willing to defend such debauchery.
Yep, since that time we've had big asset bubbles inflating our prosperity, while our manufacturing base diminished. We can't return to recent levels of prosperity without either another bubble or regrowth of a more "nuts and bolts" type economy.
By 2007, we had taken the number of people who can work in finance, real estate, consulting and the like to its limit. Those jobs aren't coming back in a hurry. Result is persistent unemployment, with laid off blue collar workers being joined by more of the skilled and educated middle class than in past recessions.
We can either build up another bullshit bubble, to bring back the legions of hollow white-collar jobs like "mortgage broker". Or we can bring back manufacturing jobs (good luck.)
Or we can warehouse people with rapidly depreciating fiat money - my God what is going to happen to the majority of the workforce - is there any engineers left?
"Or we can warehouse people with rapidly depreciating fiat money - my God what is going to happen to the majority of the workforce - is there any engineers left?"
Is there any english teachers left? ;)
I'm an engineer, for now. But I've seen them collect their personals over the past 12 years and it makes me sick. China, India, Malaysia.
A feudal society awaits without the chivalry thingy - the new knights of this brave new world will hire dog soldiers to do their dirty work - they will avoid combat at all costs.
Yes, there are.
I am in IT and have to compete with H1Bs who lie and fudge their resumes. Mine is accurate, theirs...well, they say they can do EVERYTHING.
And, what's more, you come on here, TF, any "savvy" forum and all the people tell me that the Indians will work 2x as hard as me and they're technically better to go with it.
And, management "believes" this. The real-world? If I had to put together a skunk works with the best guys I've worked with over the years, all but one would be an american.
But that doesn't matter to a manager who gets a bonus off of cost-cutting. They figure they can put 3 cheap indians on it and win a war of attrition with a software problem.
There are plenty of engineers; but the average mortgage lender outearned one of my best friends (a Jap) who is a ME working at Kawasaki. Compared to the public sector? LOL...GS9 secretaries at the FBI can outearn him.
Real wages in the private sector stagnated while the public sector kept getting their 4 or 5% raises...rule of 72 in effect.
Point taken, I have been having this conversation over and over since QE I started, and you are not the first to call this to my attention.
But your argument is semantic and unhelpful.
1. Inflation does not equal default.
ex. Say I had some CC debt in the Volker days and I put money into a CD earning 20% interest and then used that money to pay off my CC debt. Would that be the same as a default?
Paying the debt off in inflated money does not equal default.
Default simply means failure to pay, and paying in inflated money is not a failure to pay.
2. Infinite buying capacity does not equal infinite inflation because money has to reach the economy for it to be inflationary.
The velocity of money has to increase. Ben is using that printed money to stock banks and buy debt. Neither of the two is inflationary because the money never reaches the real economy.
Ben is also using that new paper to buy stocks, and this is the one place we are seeing the printing becoming inflationary.
But in terms of printing to buy debt, I don't see it ever becoming inflationary.
The only reason interest rates need to rise is to attract "hot money" but why raise rates when Ben is in the fucking kitchen cooking up "hot money" all day.
No need to raise rates, no need to default and no source of inflation when the piles of printed money are absorbed by monstrous piles of debt.
As Roy said:
Bingo!
no source of inflation when the piles of printed money are absorbed by monstrous piles of debt.
Balderdash, and dangerous balderdash at that, but also some of the most often-repeated balderdash on the internet. Do the piles of printed money have value? If they do, where did that value come from? If they don't how can they cancel debt? Are they even money?
If their value came from their association with already-existing piles of money, doesn't their creation dilute all already-existing money? Do you really expect to get away with that?
Ben is using that printed money to stock banks and buy debt. Neither of the two is inflationary because the money never reaches the real economy.
Wrong on at least two counts. Creating "money" out of thin air, if the new "money" has value by association with then-existing "money", must dilute all then-existing money. If it doesn't, then we can merely create enough new money to makes us all rich, and no one ever has to work again. Which is it? Second, are you implying that people aren't using their now more highly valued bank stocks as collateral for loans, and isn't that a vehicle for this new money hitting the "real" economy?
Paying the debt off in inflated money does not equal default.
Then why is counterfeiting illegal?
Let me guess, Wharton? Wharton should be turned into the first FEMA camp, and everyone who ever graduated from there should be interned there. Forever.
+$23,700,000,000,000 in stolen currency. And it exists. The question is, is that currency in the United States? I don't think so. Is it in a friendly ally? I think so.
JR it is late, but i really admirer your mind
;-)
Do most of them even know who was John Blunt or the Sword Blade Bank? I doubt that something like Balen's "The King the Crook and The Gambler" would ever be required reading, hence the non-sense and moral hazards; they are so self-impressed with their loftiness that they would never understand the utter BS they espouse; better to have a community college Econ 101 student with a little common sense. By the way, I think we have reached a parallel with the South Sea Company's fourth issuance of stock at this phase and I think Long was right - the total implosion of the world credit system is just two-four years out. The liquidity trap/negative feedback loop will never go away but always be lurking, morphing and boiling up under the surface of the dog and pony show.
** Edited for Content **
Could you please post the .pdf? I would like to read the whole report. Many thanks in advance.
Nothing really new here. Monetization is essentially a hidden tax, the only option without imposing explicit tax increase, but is only viable if the currency survives in terms of maintaining real worth (whats left of it).
Debasement is the only real option open for politicians and the FED. I fear they will play politics to the bitter end. One only has to look at the president's budget proposal to realize that the FED will not be able to rely on fiscal responsibility, and will have no choice but to buy our debt in increasing amounts.
---------
Some other points:
As we have talked about before on ZH the historical use of GDP is not relevant to our current situation. As it is skewed by governement intervention. Current GDP comparison to historical trends is not accurate.
Inflation in monetary terms has already occured. It is baked into the cake. The question is what actions will the FED take next? Obviously, we must contiue to monitor the entitlement increases (health care bill) and the black hole known as the GSEs.
Another point is if Albert really believes in the double digit threat, what steps will he take for himself and his clients? So what is his strategy?
Mark Beck
MB,
You bring up an interesting point. If the newly printed money is going to banks to offset losses hidden in various places on and off their balance sheets, dosn't this mean the money is really going into a black hole, never to reach the real economy and thus any inflation has already been realized? (Matter collides with antimatter?)
GEIHTNER NEEDS TO GO TO PRISON!
Thank you.
Spell his name correctly. It's Phucknut.
ahh yes, thanks, thought it was "Fuckingdouchenozzle",ehh...
Exactly
Meanwhile our infrastructure and everything we use to create wealth is destroyed also helping drive the physical economic deflation. (meanwhile the chart shows the inflation and hyperinflation potential). It's inflation and deflation. Physcial economic contraction as well as monetary contraction but you can also have as been shown physical economic contraction and monetary inflation. Fraudulent debt goes up, our physical economy goes down. Economy crashes sending us into monetary deflation, again more physical economy contraction. Keep printing until the cows come home and hyperinflation sets in. Meanwhile the whole time our actual economy will just wither before us, as if the past 40 years haven't shown us already, now we can watch the rest come down in a few...days..weeks...months...years?
Fixed exchange rates. (obviously it's a treaty. If certain currencies for whatever reason - good - bad - indifferent, need to be changed to reflect reality, you use diplomacy to change the treaty and reset the rate)
That's where the author errs. He says all or nothing can't happen (fixed or floated) but something in between needs to be done.
Yes. Fixed Exchange rate is the normal, and when things need to be altered in five or ten years, or when needed should something arrise, you do that.
It's, by definition, not entirely fixed, but definitely not a game floating rate. But IT IS fixed as a general rule. Thus fixed exchange rates are needed. The author's position against fixed exchange rates are semantics. He doesn't realize that a functioning fixed exchange rates occasionally needs to be changed.
But in a floating exchange rate, the game can always be rigged. Any move a country can do can be compensated by exchange and interest rates, not to mention its other numerous pitfalls.
LaRouche has the plan. The premises it's built off of are the only ones that will work.
Banco Santander and the Brazillian/Spain bubble is important to watch, it may be the catalyst downward of course coupled with the great mortgage market we assume will await us first trading day in April.
Without the gift of the brazillian carry trade working for the Queen, how broke would her inter-alpha banks be? 30 percent return and they still can't stem the lossess. Uh oh.
Good Luck
Bingo...here's how the inflation trade plays out.
It's called protectionism.
They will weaken the dollar that way or drive up import costs, which has a similar effect.
YES, the real economy can crater in inflation. In fact, this is most often the case. Inflation in the monetary base and velocity are NOT a problem so long as real production keeps pace.
That won't happen in the US. Our real economy will continue to crater until nationalism rises and with it protectionist trade policies. The finger of blame gets pointed at the exporters who really HAVE "stolen" all the jobs. At that point, you see the price inflation that is incipient and the pronounced effort to weaken the dollar.
Those are far too many 'flations for me.
Kindly serve your 'flations in smaller rations.
Deflation .. hmmm .. and to think that when the word 'deflation' was brought up by other economic bloggers, the ZH posters (so called knowledgeable people) caned those comments as rubbish.
Wonder whether they could re-assess their comments and make belated apologies for foot in mouth??
Yes I know, I doubt it too!
I'm still amazed that the inflationista/deflationista discussion has managed to obscure the truth, lying in plain sight. The reason why the pundits can't agree is because BOTH are correct! Perhaps the shocking, dismal realization that the answer is WORSE than either extreme had ever imagined: a double whammy of massive proportion, a perfect storm I call "The Frankenstein Economy". And it's all there already for the world to see: simultaneous inflation with deflation and in ALL the wrong places.
First deflation: glad to be preaching to the choir here. Real personal incomes have deflated in real terms compared with the 1970s! That's why "productivity" measures are soaring. Not becasue people are producing more. As Albert Edwards puts it, Unit Labor Costs are deflating. Everyone must understand that this has resulted directly from supply-side economic policies starting with the religious fervor of Ronnie Reagan (details to be revealed in future posts). And along with wage deflation has come real estate deflation once the enabling credit bubble was burst. And finally wwe are now into the second decade of what I call "employment deflation": we never replaced the jobs lost in 2000-2002 with the expansion of 2002-7. In this cycle, the economy will need to add 4-500K jobs per month to break even over 7 years (including natural population growth). As per the joint testimony by Geithner, Romer and Orszag to the House Appropriations Committee reported today, they expect 100,000 per month in 2010, and only 250,000 by 2012! This means they don't anticipate a full employment recovery let alone that the economy stands a chance of adding jobs. Yikes!
Inflation: despite self-serving Fed propaganda that there's "no inflation", it is the general consensus that the cost of living an doing business is rising strikingly. The numbers are misleading, I contend. because there is SIMULTANEOUS DEFLATION. Nobody denies (and numbers show) energy inflation, as well as food and raw materials inflation. Can anyone deny that healthcare, insurance, transportation, education, consumer interest and taxes have risen? And they'll go a lot further too. This you can attribute in the short term to Ben's reflationary Fed policy. They misjudged the deflation, not taking into account that the forces were there not for a couple of years but for over 30. They also still believe in inflation as a substitute for real growth in an import dependent, deficit economy. No chance they ever considered real restructuring to position us for long term growth.
Can there possibly be a worse case scenario for the consumer? Already many pundits have given up hope for a consumer led recovery and a re calling it a business-led one (code for no recovery at all). Can it possibly be worse for small business? With input costs on the rise and a constrained consumer and consumer credit at 12-18% there's little to be cheerful about. It doesn't help that there's absolutely no vision of growth coming from the leadership.
+1
I always enjoy your comments
Very nice assessment. Wage deflation will continue on all levels as U/E forces people to take lower paying jobs. Services such as electricians, etc. will deflate as competition for the people that can't afford them forces them to cut prices to survive.
There cannot be a worse situation for the consumer. How it sickens me when CNBC gets excited about oil rallying. In February 1999 when it bottomed, at $11-$12 bucks a barrel, the likes of Merrill, etc thought the next target was $9. When it hit $40 a barrel it was freak out time and a BAD THING. Now, it's just a great thing for the market when energy stocks are leading the way! Idiots.
Doubleplus good, Caviar Emptor!
A nice reward for reading every comment.
Also, props to whomever is responsible for the reduction in troll population.
I can't say I would have rather had an anti-Reagan or more Jimmy Carter in the 80's (although we're getting that now!) but you're more or less correct about the end result: prices on crap you don't need -most consumer products- have gone down while prices on things you do need (or can't avoid) have gone way up. There are some exceptions...food is still stupid cheap for instance.
Also, unit labor costs have deflated in part because of illegal and semi-legal immigration. What kid/young adult in the 70's and 80's didn't wash dishes, deliver newspapers, mow lawns and paint houses? More recently, politicians and "persons of quality" openly declare that those kinds of less glamorous, non-offshoreable jobs are beneath the dignity of themselves and their kids. Instead for the last decade kids get in one of their family's three, leased SUVs with their dad and go down to the local 7-11 to rent another human being for a day.
The resulting "productivity" gains fostered an explosion of consumption made worse by an accompanying explosion in easy credit. As a result there is now less of a real economy, less savings and a less of a work ethic to fall back on. Plus, PLUS! the public sector which grew along with temporarily juiced tax revenues has not slimmed down in the face of tougher times: those newer employees stay on the rolls, those benefits stay defined and the taxpayer stays on the hook.
For those who have not yet realized that the US Financial Assets are completely and totally worthless artifacts of a massive failed criminal enterprise - here in an excerpt from Valukas' investigation of the collapse of Lehman Bros:
“…at a minimum, the NY Fed helped perpetuate a fraud on investors and counterparties. This pattern further suggests the Fed, which by its charter is tasked to promote the safety and soundness of the banking system, instead, via its collusion with Lehman management, operated to protect particular actors to the detriment of the public at large.
Folks - there is no way the US financial economy can recover from this. Its like a 44 magnum right in the chest. Now, even the kids on the short bus can see that the US Government is totally corrupt. Intellectually, morally, and financially bankrupt.
EVENTUALLY, the USA will recover. But the "financial assets" accumulated by the baby boom generations won't be making the trip.
Will there be a revolution; will strong men begin to stand; will they begin finally to throw down their gauntlets? Tonight, one man has: Denninger!
A Very Serious Warning to Nancy Pelosi: http://market-ticker.denninger.net/
Denninger hits another home run. sure wish
I could express myself like that.
OMG..Douchinger is warning another politician.
ROTFLMAO.
Wake me up when Douchinger actually flies a plane into the IRS. So far, it's been all talk
CFTC has had a "fire in the basement" and won't reopen until 22 March.
http://www.cftc.gov/
CFTC’s New York Regional Office will be Closed Until Monday, March 22, 2010, Due to a Fire in the Basement.
A fire in the basement...fitting. This so they can party and sacrifice in comfort, as HELL is their domain. Oh, and also do their homework.
What ? No airplane?
Hmmm, thats strange. I thought that they would at least wait until *after* the GATA presentation, that way there weren't any loose ends that they needed to burn later.
The terms inflation and deflation no longer suit our era. Those are for free market capitalist systems, and free market was killed by the government with its unprecedented bailout policy.
It's a redistribution of wealth from the powerless to the powerful, pure and simple. The powerless are seeing their wages decline and cost of living go up, while the powerful are enjoying free money to gamble -- win they keep profits, lose they get bailed out by taxpayers. This is worse than feudalism.
Why no talk here about Stagflation?
I have a hard time seeing long term deflation. My can of progresso soup isn't going lower than $2.49.
Inflation is the obvious but doesn't seem on the horizon with high unemployment.
Thanks for posting this Madcow.
I see this report going down in history.
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