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Chris Martenson Interviews Mike Shedlock, Discusses Deflation, The Fed, Gold And Other Subjects
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Submitted by Chris Martenson
Straight Talk with Mike Shedlock (aka "Mish")
Our inaugural Straight Talk contributor is Mike Shedlock, author of Mish's Global Economic Trend Analysis,
one of the most visited and respected economic blogs on the Web. Mish
is an outspoken deflationist and outlines his rationale for being so in
his answers to our questions. He is also a registered investment advisor
representative for SitkaPacific Capital Management.
1. You’ve gone from mainframe computer programming analyst (in 2005)
to being one of the most widely-read econobloggers in the world today.
To what extent do you attribute your competitive advantage to holding a
non-traditional background vs. the more ‘classically’ trained analysts
and commentators?
Mish: It certainly helps not having a background in economics as taught by academia today. Nearly everyone in academia is a Keynesian or Monetarist.
It is safe to say that Krugman is the high priest of the Keynesians. In
current academia, Greg Mankiw is arguably the high priest of the
Monetarists. If we include the Fed, then the Monetarist high priest is
without a doubt Ben Bernanke, whose background just happens to be
academia, as opposed to any real world experience.
I find it amusing to see the battles between the two camps when they are
both wrong about their proposed solutions. The only thing they are ever
right about is when they attack each other.
In contrast, I had some very good teachers with non-academic backgrounds
in self-taught Austrian economics. One of them is a friend for going on
10 years. I refer to him on my blog by his initials "HB". He has done a
couple guest blogs on my site under the name "Trotsky".
Those posts are Misconceptions about Gold and Why does fiat money seemingly work?
"HB" now has his own blog under yet another pen name, Pater Tenebrarum. The Blog is called Acting Man, with a perspective of Austrian economics.
I also need to thank Barry Ritholtz at the Big Picture Blog for early on
promoting my work, Todd Harrison at Minyanville, and of course
Calculated Risk who actually created the first template for my blog.
Interestingly, Barry, CR, and I have been 1-2-3 (in various orders) in terms of page counts according to Traffic Rankings for individual, non-corporate sponsored blogs.
Marc Faber has influenced me a lot and I consider his book Tomorrow's Gold to be required reading. Marc is also a friend even though we disagree on the inflation/deflation debate.
There are two other must-read books and the electronic versions come at the great deflationary price of zero.
Both of those are by Murray Rothbard, with thanks also to the Mises Institute for making them available at no cost.
In addition, I have certainly learned a lot from John Hussman who writes
a great column every week, and more recently from David Rosenberg who
writes a great column nearly every day.
Certainly Bloomberg is a great source of information and to pick a
single Bloomberg author it would be Caroline Baum. Baum's mentor happens
to be economist Paul Kasriel who also has taught me a lot. So has
Australian economist Steve Keen.
Thanks go to an Austrian-minded friend who simply prefers to be known as "BC".
I also need to thank Krugman and others I violently disagree with. It
helps clarify my thinking debating those I disagree with, even if they
never respond.
Finally, I get a lot of interesting stories and commentary from my
readers. Those readers are real people, doctors, business owners,
scientists, and technology wizards, most of whom operate in the real
world, and thus have more street smarts and common sense than anyone on
the Fed.
Looking at my answer now that I have typed it out, my competitive edge
is to do one hell of a lot of reading, thinking, and typing, day in and
day out, even weekends. I entertain all points of view, even if it seems
like I don't in my finished posts.
2.
Many of our readers have subscribed to Chris' position that the economy
must be increasingly interpreted through two other lenses; energy and
other environmental resources. Can you comment on the Three E's?
Mish: I am a firm believer in peak oil. I don't know how anyone can deny it.
Given peak oil, and given the demand from China for oil and other commodities, the world is on a crash course of demand that cannot be filled.
China is growing at 8-10% a year (assuming you believe the stats). Can
China keep growing at that rate forever? For even 10 more years? What
about India? Brazil?
Either we get some serious energy breakthroughs, China slows, or the
standard of living drops in the US, UK, and Europe. Well China does not
want to slow, and the US and Europe are fighting hard to maintain a
standard of living that is not sustainable.
Historically these situations end up with war. That is an observation, not a prediction.
Something has to give, perhaps many things, but all of the people who
think China will soon be the number one economy in the world and that
China's growth is sustainable, better start thinking about the
implications of what I just typed above.
3. You’re a vocal deflationist. What do you see as the most convincing data points (the top 1-3) for your position and why?
Mish: Before we can discuss inflation and deflation it
is imperative to define the terms. Not everyone will agree with my
definitions, not even those who claim to be followers of Austrian
economic theory. Yet my definitions have a solid theoretical and
practical foundation.
Inflation and Deflation Definitions
Inflation is an expansion of money and credit, with credit marked to
market. Deflation is a contraction of money supply and credit with
credit marked to market.
The "marked to market" bit is my own addition. I use it because it
explains a lot of things that are happening. Indeed, the entire
definition is predictive of things that will happen. For example, if
credit contracts and there is demand to hold money, treasury rates are
going to drop.
Contrast that with a definition that says rising prices constitute inflation. What will treasury rates do?
It was easy to see the housing bubble would collapse and in turn credit
would plunge and writeoffs would soar. That was the basis for my
prediction that interest rates across the entire yield curve would make
all-time lows.
When I made that call, oil was near $140, and nearly everyone thought I
was nuts. But it happened. Recently we made new lows in 2- and 5-year
treasuries and credit continues to contract.
Bernanke and various Fed members talk about preventing deflation, but that talk is always in terms of the CPI.
However, it is impossible to measure prices of consumer goods accurately
enough, housing prices are not in the CPI (I think they should be), but
most importantly, we are in a fiat credit-based economy.
In a credit-based system, where credit dwarfs money supply, it is
foolish to look at inflation through the myopic eyes of either prices or
monetary inflation alone. Sure, the Fed can print, but if there is no
demand for credit, what does $1T or even $10T of excess reserves do? The
answer is nothing other than to make the Fed's exit problem down the
road a nightmare.
Money Multiplier Theory is Wrong
It is important to understand that widely believed money multiplier
theory (the Fed prints and the money makes its way into the economy 10
times over) is wrong.
The reality is credit expansion comes first, reserves come second. I
discussed this at length, using some charts from Steve Keen, in Fiat World Mathematical Model
Yet, talk is all the rage "just wait till all those reserves come
pouring into the economy, it will cause hyperinflation". I have to laugh
because the thinking is ass backwards.
What Really Happened?
- Greenspan lowered interest rates fueling housing speculation and a credit bubble.
- The housing/credit bubble burst.
- Credit plunged as did credit marked to market.
- In the wake of plunging credit the Fed stepped in to provide reserves for banks.
- Consumer psychology changed and there is no demand for credit so
it sits there as so called "excess reserves", earning slight interest
for banks to help them cover losses still to come from foreclosures,
credit card losses, and commercial real estate losses.
Looked at in this fashion there are not really excess reserves at all.
Please see Fictional Reserve Lending And The Myth Of Excess Reserves for further rebuttal to the notion that monetary printing will soon have the inflation genie flying out of the bottle.
2009 Recovery
Credit continued to contract in 2009 but the stock market soared. This
happened because the corporate bond market freed up, which in turn gave a
new lease on life to hundreds of corporation otherwise headed for
bankruptcy.
In response, value of debt "marked to market" on the balance sheets of
banks went from pennies on the dollar to full value. Credit did not
expand but credit marked-to-market sure did, even if it is impossible to
say precisely how much.
Thus my model suggests 2007 to February 2009 were periods of
deflation, March 2009 to May 2010 were periods of inflation, and now we
are likely back in deflation but it is hard to say given institutions do
not mark assets to market. Extend and pretend is massive.
Looking ahead, my model suggests we go in and out of deflation for a
number of years, just as Japan did, without the economy ever picking up
any steam.
4. Your position has called for a deflation first but then a
probable transition over to inflation at some point. We won’t hold you
to this, but what triggers do you see for this shift and, again with
great latitude, when might this happen?
Mish: With fiat currencies, the probability of
inflation approaches 100% given a long enough timeframe. However, we
need to fix numerous structural issues, write off enough bad debts, and
get to the bottom in housing before there is a serious chance of
sustained inflation.
I am not calling for consumer prices to collapse (except in unneeded
junk), but that could conceivably happen. By the way, because energy and
food prices have been sticky compared to housing, we hear the statement
all the time, "we have inflation in things we need and deflation in
things we want."
No we don't. The statement is inaccurate because it defines inflation in
terms of prices. With a proper definition one does not have inflation
and deflation at the same time.
Critical Player is Congress, Not the Fed
The longer the Fed and Congress fight deflation, the longer it will take
to play out. It could take 2 years or 10. The attitude of the next
Congress, and the Congress and President after that will be crucial.
I believe the next congress will throw around fewer stimuli than the
current one. I could be wrong. But 2 years will not seal the fate. There
will be a presidential election in another two years.
Will we get a Chris Christie or another Obama? That is an undecided factor very much in play.
The critical point of this discussion is everyone's misguided focus on
the Fed. The Fed arguably has a role, but Congress is a far bigger
player than the Fed in determining the length of the path we take.
Interestingly, Bernanke, a Monetarist, recently chastised Congress over budget issues. This likely has Krugman going bananas.
5. In your own or in others’ forecasts of how the future will play out,
do you think that the difficult-to-predict Human Crowd Psychology factor
is underrepresented? If so, what could be done to better incorporate
it?
Mish: Few understand the deflationary impacts of the
entire gamut of trends that is playing out, or the stress those trends
place on families.
I discussed this recently in Inflation Targeting Proposal an Exercise in Blazing Stupidity; Fed Fools Itself
Demographic Pendulum in Motion
It is futile to fight changing social trends, but that has not stopped
the Fed with reckless proposals on top of reckless proposals. Please see
Inflation Targeting Proposal an Exercise in Blazing Stupidity; Fed Fools Itself for more details.
As I stated in June of 2008, we are now on the back side of peak consumption and Peak Credit. Regardless of what Bernanke of the Fed does, the demographic pendulum is in motion. There is no going back.
That the Fed cannot change attitudes is at the very heart of the
deflation argument. Japan certainly tried and failed, Bernanke will fail
as well.
The Fed can provide liquidity but it cannot not determine where it goes, or if it goes anywhere at all.
The important point here is the pendulum has just barely moved from peak
risk taking to risk aversions. With that in mind, and given the Fed and
Congressional propensity to fight a battle that cannot be won, it will
be years before the pendulum gets to the other side.
Asymmetric Pendulum
I have not mentioned this before but the pendulum is actually
asymmetric, at least in terms of time, not necessarily price or
attitude.
We spend far more time in inflation and risk taking than deflation and
risk avoidance. Moreover the cycle swing takes so long time wise from
one end to the other, that by the time we get to peak risk taking, most
do not even think deflation is possible.
Everyone thinks deflation is impossible, much the same way everyone
thought housing prices would rise forever. There were wrong about
housing and they are wrong about deflation.
6. How the heck do you find the time to write so much? Our members
are amazed by the output on your blog and by the fact that they’ve
received personal answers to questions they’ve emailed you.
Mish: I certainly love what I am doing. I also believe I
am helping people. I have stacks of emails to prove that point, mainly
in regards to getting people out of housing, out of the stock market on
time, into gold, and not betting against treasuries.
To be sure, I get some hate mail, mostly in regards to my stance on
public unions, but that volume is small compared to everything else. I
can get as many as 300 emails a day, and I try to answer any pleas for
help. I have spent as long as 2 hours answering calls for help, even
when I cannot possibly get anything out of it.
If someone sends me a link to an article I use, they may only get a one
word response of "thanks". If I get a question, I try to answer. I
certainly appreciate when some thoughtful people send me a link or a
comment and say "no response needed".
Many days I am reading and writing for 15 hours. I can spend 3 hours
just answering emails from readers and clients. On weekends, in the
summer, I can spend as little as 2-4 hours, but 3 minimum is more like
it.
I am often laughing my head off over things I write. So I am having fun.
Bear in mind my role at Sitka Pacific
is advisory, client services, and general manager type functions. Those
are part of the 15 hours mentioned. I do not trade. Fortunately I have a
fantastic partner who shares the same risk management and customer
first attitudes. We have grown from about $15 million assets under
management to about $75 million under management in the last few years.
That is small by Wall Street standards, but I expect to double or
triple that in a few years, the right way, by putting client interests
first.
7. Which assets do you see as being the being the ‘most hated by the
most people’? Which are ‘most beloved’? In your opinion, are these
perceptions well-deserved and if not, what opportunities do they
represent?
Mish: Certainly US treasuries are universally despised. People were shorting 10 year notes at 4%. Yikes!
However, after this rally it is hard to be super-bullish on them now.
Bullish yes, super-bullish, no. I would advise not shorting them.
I do not think the gold story is fully understood yet. It may not be
hated, but it is not loved like technology or housing was. Thus I think
more will come from gold but it will not necessarily be from here. We
can easily have a sharp correction first.
The one thing not despised but universally ignored is Japanese equities.
For a long-term hold perspective, I like Japan. Apathy is a great
setup. Otherwise, there is precious little to like about anything.
This market, including corporate bonds, is way over-loved. Sentiment is
extreme, and earnings expectations will not happen. The market can keep
going up, but the risk-reward setup is horrendous.
8. If you knew that the purchasing power of your existing assets and
income would disappear one year from today, what would you invest in
during the coming year to prepare?
Mish: The question left out a critical aspect of "how"
assets would "disappear". For example, equity and housing assets might
crash because of deflation, or theoretically the dollar could fall to
zero in hyperinflation. How one would best profit would be quite
different.
In regards to hyperinflation, the odds are minuscule. First we need to define the term.
Hyperinflation is a complete loss of faith in currency. Some think this
will happen out of the blue, others think the Fed will print and print
and print. Let's look at a few examples.
Zimbabwe Hyperinflation
In the case of Zimbabwe, a loss of faith in currency occurred before the
printing occurred. The Weimar Republic is a different story.
In Zimbabwe, the Mugabe government initiated a "land reform" program
intended to correct the inequitable land distribution created by
colonial rule. Ultimately, Mugabe's attempt to bail out the poor at the
expense of the wealthy is what triggered capital flight and loss of
faith of the currency.
His reforms not only caused a flight of capital and human capital (the
wealthy), they also led to sanctions by the US and Europe. In response,
Mugabe turned on the printing presses but the loss of faith in the
currency had already occurred.
Weimar Hyperinflation
In Weimar Germany, printing for war reparations kicked off hyperinflation.
War reparations were a political event. So was the invasion of Germany to enforce payment of those reparations.
Argentina Hyperinflation
Argentina based its currency on the US dollar, a political mistake. When
Argentina could no longer hold the peg, its currency collapsed.
Hyperinflation is a Political Event
The commonality between Zimbabwe, Weimar, and Argentina is they are both
political events. In Zimbabwe a political event triggered capital
flight, in Weimar a political event started massive printing, and in
Argentina everything collapsed when a foolish peg could not be
sustained.
In each case, a collapse of faith in currency (hyperinflation) led
governments to massive printing campaigns, not the other way around.
US Comparison
The US compares to Zimbabwe how?
The US compares to Argentina how?
Is anyone going to force the US into war reparations?
The idea that we are going to wake up one day and suddenly out of the
blue face hyperinflation may be theoretically possible but it is
extremely unlikely in practice.
Moreover, and it is important to keep coming back to this point, we are
in credit-based system. The Fed is not going to cause hyperinflation by
printing.
Besides, the Fed cannot give money away. And as I have pointed out,
Bernanke is even chastising Congress about fiscal spending. The Fed
would not give away money even if it could!
Sure, the Fed can provide liquidity, but it cannot force businesses or
consumers to borrow. Yet people tell me the Fed will cause
hyperinflation. It does not add up.
Congress can give money away, but the next Congress will look a lot
different than this Congress. I discussed the political and some
economic consequences of that reality in Obamacare Career Ending Votes; Republican Chance to Win Senate; Expect House Blowout; Stimulus Appetite Greatly Diminished
Here is one more point about hyperinflation. If the US dollar goes,
every fiat currency on the planet will follow. The idea that
hyperinflation will hit the US alone is preposterous. The Euro, the Yen,
the Pound would all go up in flames at the same time.
The way to protect against that situation is to have gold. Holding gold
also works against the other extreme, deflation, on the basis that gold
is money.
Gold does not do well in all circumstances, however. Gold did very
poorly from 1980 to 2000, a period of ordinary inflation. There is no
guaranteed play anywhere.
9. What's the question we should have asked, but didn't? What's your answer?
Mish: I guess it would be: "Does your crystal ball have a forecast for the stock market? For Gold? The US Dollar?"
Let's start with gold. I see articles everyday by some prominent
people saying things like "I know gold is going to ... whatever".
The thing is, they don't know and neither do I. Only a charlatan or a
fool can make such a claim. Of course the fools and charlatans may be
right, but it is not because they "know" anything.
One thing I do know is that I don't know things of that nature. That
puts me ahead of all those who claim to know the unknowable.
Probabilities
I prefer to look at things in terms of probabilities. It is highly
likely the Fed embarks on Quantitative Easing. That should be good for
gold, but short term that QE may easily be priced in.
Moreover, the Fed may go slower than what the market thinks.
Thus, there could be a huge "sell the news" event in both gold and the
stock market on the QE announcement, no matter what that announcement
is.
Should that happen, given that gold is in a long-term bull market, and
given that Bernanke will likely go back to the QE well, I expect buying
the next big dip in gold would be a higher probability event than buying
a 10% correction in the stock market.
There is a lot going for gold, but it is by no means a "sure thing".
Is the Equities Bottom In?
Many people claim the "Bottom is In"?
Is it? How can they know? I am not even sure if the bottom is likely in.
Look at the half-dozen 50% or greater rallies in the Nikkei over the
course of two decades, all taken back and then some.
How many "knew" that would not happen. How many in the US "knew" that housing prices could not possibly collapse.
I am quite sure that stocks are richly priced, but that sure does not mean stocks cannot rally further from here.
We are in a credit bust scenario with enormous deflationary pressures,
even if outright deflation is not sustained. As such, the risk in
equities is a lot higher than most think.
Faith Bubble
There is a lot of confidence in the Fed's ability to produce inflation.
Indeed, I think there is a bubble of confidence in the Fed's ability to
produce inflation.
Should that bubble burst, equities can collapse far faster than most think possible.
Risk Management
Hyperinflation is theoretically possible, but highly unlikely in
practice for reasons stated above. But what if Prechter is right?
Actually I think the grand-supercycle collapse he is calling for is also
highly unlikely, although it too is certainly possible.
Is worry over such extremes or attempts to profit from such extremes at this stage a waste of energy? I think so.
Unless you are a day-trader, it is important to be aware of such possibilities, while focusing on the more likely probabilities.
The bottom may be in, but a test of 850 or even the 700-800 area of the
S&P sure seems likely enough. How many are prepared for that?
Anti-dollar sentiment is once again extreme. It is quite similar to the
extreme anti-Euro sentiment a few months back. Look at what happened.
Are we setup for another reversal?
How many are prepared for the market to go sideways for 5 years or
longer, as earnings catch up with valuations. This happened in the 70's
and there is absolutely no reason it cannot happen again.
Sadly, most aren't prepared for those scenarios, just as they were
unprepared for the collapse we saw in housing and the collapse we saw in
global equities.
Some questions to ponder are: Do you really want to be long after this
runup? How long? What are appropriate hedges? What happens if the dollar
rises? Is it possible, if not likely to get a reasonably strong move up
in the US dollar here?
The important point is not whether or not you agree with my
probabilities; the key point is to be thinking about risk management and
opportunities. It is far easier to make up for lost opportunities than
lost cash.
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The proper definition is not what people feel in their wallets, nor is it what keeps them up at night. Seems to me some people concentrate more on the definition of what we are experiencing than the actual symptoms.
By jamming his terms together, he starts with a false premise. He somehow thinks that there is just one class of good, when there are really two (at least). Some would call them things you need, and things you don't. I call them "real goods" and "credit goods". Real goods, which include commodities and monetary metals, are going up relentlessly. Credit goods, which include big electronics, doo-dads, cars, and houses, are falling relentlessly.
By jamming these two together, you could say that we have either inflation or deflation according to his definition, but that definition glosses over a major trend if it is applied. That is that credit goods can only fall to zero, but real goods can rise to any nominal price level. As such, his definition of deflation attempts to weight these two totally separate types of goods, which is not possible (it's an apples and oranges comparison, and a dynamic one at that). The combining of the two terms provides a temporary cover for rising real goods. Instead of having a chart for credit goods that is trending down towards zero, and another chart for real goods trending up into the sky somewhere, you have a single chart with a flat or slightly declining line, but one that will quickly take on the form of the real goods line one credit goods approach zero.
Without that distinction between credit goods and real goods, one must resort to calling those assets that are rising, and have been rising constantly for a decade "bubbles", and stop analysis there. If you look just a little deeper than that, you can see the effect of your false premise, because you can't have an "everything" bubble. A financial system can't really support more than a couple of bubbles at a time, yet here we are with "bubbles" in gold, silver, iron, corn, cotton, wheat, energy, etc.
Yes, what tmosley said. What is so hard to understand about it? The fact that Mr. Shedlock doesn't mention this, or will not, speaks far too loudly about his motives. I've read far too much econ crap, and wonder how much of it is paid for by persons unethical or psycopathic.
One of the problems with the bi-flation theory is that it is a temporary phenomenon, moreso than inflation or deflation. I think a lot of the deflation/inflation debate takes place with what happens after simple bi-flation... In other words, the positions are not mutually exclusive, just different stages on the timeline.
I personally think that deleveraging will ultimately conquer bi-flation and lead to outright deflation... my guess is that the available money supply will be insufficient to sustain commodity/necessity prices and that these will seccumb to downward price pressure, like everything else.
In short, bi-flation is a certainty and we need to look no further than the for sale sign in our front yard and the local wal-mart to get both sides of the story... however, that's like saying the sky is blue.... yep, so what.
The regime of irredeemable currency causes confusion about what "money" is. So, the yardstick used to measure inflation/deflation leads to wrong conclusions. Currency-thingies are not money. This has been irrefutably proven by Ben Bernanke himself, through his action of creating currency-thingies out of thin air and using them to buy things. Since one of the features of "money" is its function as a store of value, and since it is apparent to any mirror-fogging person that physical value cannot be created out of thin air, the amount of said creation notwithstanding, then irredeemable currency cannot be money. Period. If this were not true, we could all just print up a billion for each of us and no one would ever have to work again.
Gold, OTOH, is money. And all things are deflating wrt gold (aren't they?), some just more than others. We don't need to create new terms like "biflation" to explain this.
Some people think the sky isn't blue. Mainly deflationists.
Don't bet on the money supply falling. The helicopters are running as we speak, but they are far from capacity.
The money supply already has been falling... it will continue to do so because the appetite for additional debt (either by lending institutions or the end user) has waned. This was exactly what Mish was talking about...
Ben might be able to drop some money from helicopters before causing us to lose faith in the currency, but he cannot force people to take on more debt. The top is in.
Further, you have an incredible amount of deflationists who are also hyperinflationists (e.g. Hugh Hendry... myself included). You have to get rid of the notion that the concepts of deflation and inflation exist in perpetuity... they're just expressions of guesses at different portions of the timeline.
For example, what keeps ben up at night according to el-erian? Inflationists presume that deflation would occur without intervention... In that case, you may consider us all deflationists. But, both deflation and inflation lead to the same conclusion in our case, hyperinflation. Either intervention is impotent and/or not attempted and deflationary pressures cause us to eventually default on our international creditors, given our debt overhang is vastly more than our future productive capacity in the timespan necessary to repay the debt (the hyperinflation created by a treasury collapse is often talked about by gonzalo lira). Or, Congress->the FED keeps its foot in the gas and we "lose faith" in the currency due to incessant printing (either leading to some crazy dumping of the currency and/or a treasury collapse). We're all hyperinflationists... some just wear different colored lenses and talk about different points on the timeline.
I agree with you broadly, but the money supply hasn't really been falling all that much. You've got to go to Shadowstats to see any real decline in M3 (http://www.shadowstats.com/alternate_data/money-supply-charts)
Neither M1 nor M2 are negative, and M1 was only just barely negative as it hovered around zero from 2006-2007. Credit destruction only started outpacing (official) money printing at the beginning of this year, and it is headed back towards zero. I am of the opinion that once it hits zero again, hyperinflation will begin in earnest.
What you have left out of your comments regarding M1 and M2 are VELOCITY of money.
What Mish was pointing out when he said consumer sentiment has changed and the Fed can do nothing to correct a change in public perception. In addition, a great deal of the public are maxed out on credit.
In summation, those that the banks would like to lend, people and business that have avoided poor credit histories, to are the same people/businesses that avoided indebtedness all along.
The quantity of various Ms means nothing if few want to borrow.
You don't have to borrow for the velocity of money to explode. I have very nearly zero debt, outside of student loans, yet I get rid of dollars like they are infested with ebola. I handle only enough to pay my bills, and to keep as a small amount of dry powder. Everything else goes straight into PMs or useful goods. If everyone were like me, or hell, it 20% of the people were like me, the dollar would be over by now, and PMs would be circulating as money again.
everyone does get rid of all their dollars to buy shit all the time and in excess of what we can pay for... been going on for a long time... more than 20% already do this (less the PM part of course).
You are describing the two primary components of the aggregate credit money system, but are addressing the effects, rather than the causes. Just flip the relationship between supply & price and you're golden.
Credit is driven by expectations (animal spirits), whereas money is subject to control (hence, monetarism). Ben is desperately attempting to re-engage the former by utilizing the mechanics of the latter. With a little 'green-shoots' propaganda, (failed) Keynesian fiscal stimulus, and the PPT, they've basically shot their wad trying to convince the public to resume leveraging.
The effect we see is prices - Ben's actions (causes) in radically increasing base money are driving non-credit prices in commodities upwards. But the People are like deer when danger is afoot - everyone is alert & cautious, with only the foolish voluntarily signing up for more debt, while most are either defaulting/paying off (causes), hence credit leveraged prices are falling (effects).
You are right, I was using the definition of inflation/deflation that references prices rather than money supply, which was sloppy on my part.
If credit is driven by animal spirits, then the Fed is full of necromancers. They have propped up the credit markets through purchases of MBS and other debt. This has stopped a lot of credit from being destroyed as it would be in a healthy market. The propping of so much debt, and the likelihood of continued props is another point in favor of the (hyper)inflationist argument.
build many straw men?
So can I include gold and oil under credit goods since I can take positions on them in my margin account?
What gold can you buy on margin? Only paper gold, fool.
Oil is certainly not a credit good. Only speculators buy on margin. End users pay cash. Same with physical gold.
so according to you, credit availability plays no role in determining the value of oil or gold. You were asleep during
2008?
you apparently believe the Fed has unlimited powers. wrong. Any increase in the price of oil will send the real economy into a tail spin. inflation is in fact highly deflationary.
I didn't say anything of the kind. I said that gold is going up because people pay cash for it, and there is a LOT of cash floating around.
Credit affects gold in the short term through debt instruments (fraud factories) like GLD. Once the fraud is revealed, that influence will disappear in a flash that will make Hiroshima look like a mouse fart.
Also, you seem to forget the fact that there are lots of people who don't live in America, but that have lots of dollars, or hold lots of dollar denominated assets. Your deflation won't last very long as the Fed continues down the path of monetization, and people and governments who own treasuries see that.
The oil price run up to $147 is an excellent example of the point you are making.
When the Fed provides lots of slosh money it will seek returns greater than those on offer by securities, treasuries.
Where does it go? Into commodities.
Gold is not a commodity and it's rise is not to be confused with the rise in general commodities. Gold is rising because soverigns, corporations and individuals are seeking a refuge, or insurance, against ever devaluing fiat currencies.
Housing is not a "doodad." We all must live somewhere. Certainly, we can live in a modest home or even an apartment but there must be a minimum housing stock to provide homes for the populace.
Your personal home is not really an investment (as they have been treated recently) but neither is it a good we can do without and thus houses will not go to "zero." They certainly can go lower from here (and may) but when prices come in line with rents, investors, willing to deal with the hassles of owning rental property, can make a reasonable return on investment if they manage it properly.
While I own gold and other commodities, they will not necessarily go up always, any more than houses will go down to zero. Commodities can be overpriced at times, even if the long-term trend is up due to limited supply or increasing scarcity. People can cut back on their consumption of any commodity (oil and food included) although there is a minimum consumption level that is determined by the size of the population.
World population may not continue to rise for many more years, especially if the developed world cuts back significantly on foreign aid. Even the UN projects (at the low end of their population estimates) that world population could peak in less than 30 years and start to decrease. If this happens, what happens to demand for commodities, especially if advanced countries are becoming less affluent at the same time?
Nothing goes up in price forever because it eventually gets too expensive and demand decreases. In the near term, precious metals and commodities seem like a good bet, but that is all it is. Precious metals could become essentially worthless as an investment tomorrow for most Americans if it's ownership was made illegal (as it was for the first third of my life). If the economic decline of the US (or oil price increases) cause gasoline to become too costly, significant changes in lifestyle could result in sharp drops in consumption which should affect the price of oil. Between 1941 and 1942, gasoline consumption dropped 20%, the following year, it dropped by the same percentage (that's about 36% in two years!). This was the result of war and rationing, but economic factors could have a big impact also if necessities start to claim a bigger portion of income.
In short, don't get too wedded to any world view. The world changes constantly. Your view has to change with it.
No-one has to own their home.
And yes, houses, can, do, and have gone to zero many, many times, most recently in Detroit, and most famously in Berlin during the Weimar Republic. Housing prices stayed about the same throughout most of the hyperinflation, which meant in real terms rent went to zero, as did home prices. Sure, the quality of the housing went down the toilet, as no-one could afford to keep their rental properties up, but there was certainly no shortage of housing during that time.
And who said anything about prices going up forever? Prices will go up until the dollar is abandoned. That's all there is to it. Population has nothing to do with it. This process won't take more than a couple of years once it gets started, and probably won't even take six months, as the crash will be so great that no-one will try to even keep the pretense of using the dollar.
Saying that PM's could become worthless is naive at best. Are drugs worthless? That's your answer right there.
You seem to be under the mistaken assumption that I think things are always going to be like this. I don't know where you got that idea, but it's not a very observant one.
Mish has also been wrong for 10 years straight on gold/silver. Great track record, Mish!
trade QE 'funny money' and credit for physical gold. then "oops!" default. gold up, dollar goes up and everyone 'cept banks, int'l corps, and big gov wins... fuck them, anyway. deflation comes, governments (like china peg) screwed, the american people are happy with the resulting purchasing power, the consumer roars back, the machine gets running again, banks have their guaranteed bailouts.
oh, and the TAXPAYER? pfft, taxpayers and voters fail anyway; so used to bending over they dont even squeal like a pig anymore when they TAKE it.
And smart Americans were right for years on housing -- and then they weren't.
Macro-Economic trend analysis and market-timing are different animals entirely.
ps: Mish was not bearish on gold, fyi.
+100
How many Americans own gold? When you have teachers and postal workers talking about their gold investments, then perhaps it's time to switch, but not before.
I have been reading Mish daily for many years. He certainly had nothing good to say about gold until about 2-3 months ago, when he suddenly made some positive comments about gold.
Mish usually links prior comments about his stance. Interestingly, with gold he did not, because he had no past comments on gold to link to.
The wife and I had a big laugh when suddenly his discussion of gold began. BTW, regardless of Mish's recent positive comments about gold, a person should always have the right to change their mind based on new evidence, imo.
What is with the revisionist history on Mish and gold? As I recall, Mish was max bullish for years on gold and has only tempered his bullish enthusiasm more recently.
Sure he is positive on gold.
http://neithercorp.us/npress/?p=172
And why would the stimulus, QE and loose money go into gold instead of back into real estate, stocks or bonds (where it truly went)? There are far more shills in RE than anywhere but stocks, govt and insurance.
If all the bailout money went to gold it would have gone up 100 times since 2008.
Same reason everyone should be cautious, going all gold is an act of pure stupidity. Grabbing gold, PHYSCIAL gold, in 2007-2008 was a good time. Right now there are far too many crowing on the benefit of owning the physical asset.
For the folks metting on about the cost of goods rising in terms of real goods like food. that one is easy. Food has been artificially kept low as possible for a very, very, very long time with the help of the assholes in the IMF to help keep food prices in the gutter along with commodities traders. It's only now that more than one player requires the same amount of food to feed way more players on the field. And that is how supply and demand works.
Also the fact most multinationals are getting their asses handed to them in many pieces of their companies, so if you had the option to fix prices around food to recoup losses in your other businesses, you probably would end up doing that.
"Right now there are far too many crowing on the benefit of owning the physical asset."
Define 'far too many' please.
Thousands, even hundreds of thousands, out of billions, even if those thousands crow loudly, does not 'far too many' make.
Regards
Have to agree even the people that listen to me now and don't call me crazy still have yet to purchase any Au or Ag. People are talking a good game now but are still not on the court.
Links please. I have been reading Mish for years so I am definitely am calling you on this one.
I read Mish all the time. Good to see he doesn't hate gold that much anymore. Now, if we can only get old KD to stop hating gold.
One step @ a time. It appears Karl now embraces most of the accusations of organized government & industry criminal involvement that led to so many being booted off his board. In fact, Denninger has become such a flame thrower that his commentary section is now much more militant than ZH. I'm sure many are considering re-logging, but he's so volatile you never know if he'll turn again. Still, it makes great reading - it's a pity ZH has mellowed out as it has become more popular.
The ZH commentary section is Militant? How about petulant?
Definitions of petulant on the Web:
wordnetweb.princeton.edu/perl/webwn
en.wikipedia.org/wiki/Petulant
en.wiktionary.org/wiki/petulant
Petulant; Amen to that..
it's a pity ZH has mellowed out as it has become more popular.
Its funny how blogging has become such a big business
It hasn't mellowed. It's just been diluted by the tourists, psyops (corporate and/or governmental) black operatives and the rapidly growing numbers of streakers/trolls.
B9, many self-promoting publicity seekers are volatile.
How has it mellowed out?
10. Do you believe prices in the precious metals market are being manipulated?
Mish: uuuhhh.........hummmm........aarrggg......pfffff....
For some people, to believe that malicious and manipulative conspiracies actually exist and are regularly acted upon would require a complete and utter revamping of their world view.
So much easier to dismiss then as silly and wrong headed and remain safely hidden with the covers over your head. Here's hoping he likes the smell of his own odorific emanations because it can get pretty stuffy under there after a few days.
Silly, wrong, and kooky, don't forget kooky.
I asked Mish to publicly apologize yesterday about GATA (who he has ridiculed for years) after Chilton came forward with the truth. It seems people have a hard time understanding the depth and the level of corruption that exists in the bullion banks like JPM. They are the biggest crooks to ever walk the Earth.
+1
For Mish, Denninger, et al, to accept that our financial system is run by a bunch of crooks would be a life altering event.
They might end up in a treatment facility for those with unalterable world views.
Jung famously said that fear of change is next to fear of death on the scale of human fears.
Mish is a dogmatic defensive child but I still read him just to keep myself honest and to see if there's some argument "inflationists" have missed. So far...not really.
I stopped reading Mish a long time ago. One-trick pony; "Japan! Japan!"
The Fed is not going to cause hyperinflation by printing. Besides, the Fed cannot give money away. And as I have pointed out, Bernanke is even chastising Congress about fiscal spending. The Fed would not give away money even if it could!
Except they already have; they printed it up and used it to "buy" MBS and Treasuries. In other words, they legally counterfeited and got something for nothing. Or, is the something they got in fact really just nothing at all? Oooops, that would be hyperinflation, wouldn't it? How can, or better yet, why would Mish make the statement above that the "Fed is not going to cause hyperinflation by printing"? I'd like to see him justify that, except he'd just reply "Japan! Japan!"
Martenson interviewing Shedlock is like Jon Stewart interviewing Obama.
Yes.., a real hardball interview that would be!
The Fed got nothing for nothing...except that the debt remains and the taxpayers are on the hook for it.
Hyperinflation can certainly happen. A loss of faith in the currency by the people is all it takes...not extrodinary printing...the printing comes after the loss of confidence.
I think MISH is an important read for inflationists. always need to hear the other side. besides, 80% of MISH's posts are unique perspective politics and ground-level anecdotes -- this is rare, imo - anf deserves a daily read.
further, as a "margin compressionist", I need to hear both sides: risk asset appreciation and lack of end demand/pricing power...
I concluded some time ago that Shedlock was a mole.
Oh come on. I think he is wrong about the deflationary thing and its just defending his business, but his blog is a good read if you ignore that part. Sometimes he comes with good stories.
I wonder why Mish always ignores that new money comes into the economy as credit (as he says) AND through monetization of government debt, maybe adding the Federal Reserve buying non-bank assets direclty (something that it has never done, but there are rumors about). By focusing only on credit and ignoring monetization I think he fails to realize how quick inflation is going to come. Its not going to be 3 to 5 years.
I think his argument is that credit contraction dwarfs any monetization by several magnitudes.
I happen to agree with him on that front and think deflation is the correct call.
My disagreement is that Mish sometimes treats hyperinflation as a monetary phenomenon (although not so much in the interview above), when I think it is clear that it is not. I agree with him that the Fed is not going to create hyperinflation, but it also seems to me that, once some level of trust in the authority/capability of a government is fractured, you can move from deflation to hyperinflation extremely quickly.
Yes, but monetization drives expectation for higher prices, therefore it does more than only the pure number comparation.
We are in the verge right now. If the government does nothing a deflationary contraction will happen (it should have happened in 2008). If the government intervenes prices will go up (the economy will not recovery, just prices) and people will start to think about borrowing more, and it will snowball. Its one way or the other, there is no middle ground.
Now think, what is in the interest of the government and the banking system? Deflation will make the banks even more broke than they are now, and will bankrupt the government because it wont be able to pay the debt. Inflation is in their interest. Now, what do you think it will happen?
The only trouble they have is that if they overdo it now, they risk that the snowball ends up in hyper-inflation (I dont think the chances of this are small).
The prisoner's dilema necessitates the conservative call. In this case, that's an attempt at austerity -> less printing. The risk of hyperinflationary collapse is too strong and they cannot maintain control in such a scenario. Further, the longer the controlled demolition is extended, the longer the looting gets to continue.
The goal of the FED has nothing to do with the banking industry or any limited liability entities. The goal of the FED is to promote an atmosphere whereby the principal actors of the fraud on the american people can recover the spoils of the fraud, by any means possible. To a large extent, this means the universally despised "bonuses", but also spills over into every other aspect of the economy. The longer the FED stays in existence (control), the longer the principal actors have to get risk off the table by converting money from the ether into hard assets. This is the present goal. The switch is not ready to be flipped yet... too many important people with their asses hanging out. However, we're not too far from it. The FED and the banking industry will be beheaded and delivered to the populace on a platter... however, the lion's share of the principal actors will be forgotten and their ill-obtained gains utilized post collapse to begin control anew. The entities are just another line of defense for the principal actors...
Also, the FED acts at the behest of CONgress, which is about to get a nasty "no printing" shake-up. Too many people make the mistake of separating the two... they are one in the same at this juncture... the FED is not going to unilaterally print... especially not with congress holding the cards as to whether the FED's employees get brought on a myriad of charges/investigated.
No further comments here, because ALL is SPOT ON!!
all i know is ive seen some real J6P's , house wives, tattoo artists, youngish professionals, baby boomer grannies, and of course your regular 60-ish tin foil hatties buying PM's. threw me off guard that the walkin/ cash section had a line...never experienced that before...
Where? I have yet to see that.
I fished for my wish and is wasn't for mish.
Mish doesn't look very hard for inflation, does he?
http://finviz.com/futures_performance.ashx?v=15
Food Inflation Rising as Cooking Oil Poised to Catch Grain Gains
"Cooking oils, left behind in this year’s surge in agriculture prices, are poised to catch up with grains as record demand cuts stockpiles by the most in 17 years.
Inventories of soybean oil and palm oil, used by Nestle SA and Unilever and in everything from Hellmann’s mayonnaise to Snickers candy bars, will drop 12 percent in the coming year as China and India increase consumption 11 percent, U.S. Department of Agriculture data show. Food prices climbed in September to the highest level since the crisis in 2008 that sparked riots from Haiti to Egypt, the United Nations says. "
http://www.bloomberg.com/news/2010-10-31/food-inflation-rising-as-cookin..."
Mish still doesn't get it.He would have been saying the same thing in 1920's Germany,"you can't force people to borrow".
Excellent article. Makes perfect sense like most things Mish writes. Everyone one gets calls wrong with particular financial instruments. That is why you cut your losers fast. Continually getting the Macro picture correct is the impressive part.
Mish recommended going long gold at $900.00 way back when.
Don't know what his recommendations were from that point on.
We were not in a global economy in the 1920's with the ability to import goods for much cheaper. Hence wages had to rise since it was all domestically correlated. This compares nothing to Germany's situation. Different world my friend.
I'm an economist and Mish is one of my favorite economic commentators even though he is not an economist.
One of the few areas where I disagree with Mish is on the "inflation" debate. I think he was one of the few that made the right call on monetary deflation for the present, but he never has given a good answer for what will happen to price inflation in a few years (I'm not saying he is wrong just his story is not complete).
Also, don't forget microeconomist who do not fit into either Keynesian or Monetarist camps and when they do make predictions about macro are more careful and more consistent with Austrians.
FINALLY --
"The critical point of this discussion is everyone's misguided focus on the Fed. The Fed arguably has a role, but Congress is a far bigger player than the Fed in determining the length of the path we take."
Shhh. They don't want to hear that.
Nice interview.
One of the issues missing in these inflation/deflation debates is the massive fraud in the MBS market and what could happen politically when the public more fully understands what has happened. His point about how hyper-inflation occurred in Zimbabwe with their "land reform" proposal is a case in point. Is it possible that fraudclosuregate could be a potential mechanism for hyper inflation?
If money is loaned into existence vis a vie credit/loan then it stands to reason that paying off that loan is the mechanism for the removal of money from the system.
As I understand it, the payment of a mortgage loan is both principle and interest. The principle is a ledger entry which essentially removes the credit from circulation. The interest payment is the profit booked to the banks side of the ledger and remains in the economy, potentially distributed to the bank's shareholders (yeah, right).
The point I'm coming too is what happens when a borrower defaults (assuming in this argument that the borrower is never forced to repay the loan)? The credit/money created from the borrower's loan does not get repaid and is stranded in the economy without a mechanism to remove it. Currently the bank's are selling these loans at par to the FED or Fannie/Freddie (US gov't). The banks are made whole but are not lending these funds into the economy so there is no inflationary aspect that I see from these sales to the FED.
What isn't talked about much is what happens in the economy as a function of the widespread defaults (assuming for a moment that the borrowers are not held to a repayment in the future).
It seems to me that people who default (and still hold jobs) now have more discretionary money in their monthly budget, same is true for the folks not paying their mortgages for the 2-3 years that it takes to foreclose.
If fraudclosuregate results in a widespread debt default, forgiveness or reduction of the principle owed on those loans, the same thing occurs. More credit money is stranded in the economy, potentially A LOT MORE.
Ignoring for a second what the political and foreign fallout would be from a widespread debt forgiveness/default on the financial instruments held in every nook and cranny of the financial world, couldn't this possibly start ramping up velocity and be reflected in rapidly rising prices?
Is debt defaulting ultimately inflationary?
Is debt defaulting ultimately inflationary?
No.
Further, you ask whether deleveraging is inflationary based upon an increase of money stranded in the system. However, you do not explain how additional money was created and entered the system. In other words, as far as the creation of non-credit money is concerned, in your scenario, that creation is at best neutral, not net positive (inflationary).
In addition, given the non-credit money supply makes up ~5% of the the total money supply, to ignore what happens when credit contracts in your scenario is... fairly startling. Needless to say, and what Mish points out, the contraction in credit is more than enough to... well, cause deflation... if not being the definition thereof.
The inflationist argument is that deflation is ultimately inflationary when you factor in monetary/fiscal response, policy, and objective... in other words, it entails the presumption that deflation occurs or, at least, is substantially so likely that it causes a knee jerk policy response.
Also, debt foregiveness does not account for the decrease in value of the assets that were secured/paid for by the debt. What happens to the difference between the loan amount and the market value of the assets? Where did the loss go? The only difference in a scenario of massive debt foregiveness is who picks up the tab for the loss...
I wasn't attempting to try and game which force was going to prevail but whether the actual act of default tended to be inflationary.
If we agree that non-credit money is approx 5% then I'm not sure the relevance of how it came into existence? Anyway, if defaulting loans strand credit money in the economy (and I'm asking, not telling) then the non-credit money supply is growing from the act of default.
I agree with you and Mish on the definition of deflation/inflation. My point, and only point, is that a person truly defaulting on debt does not cause deflation using Mish's definition. The money loaned into existence still resides in the economy, it didn't disappear when the loan blew up. Credit, by whatever definition you are using for "credit", may or may not have been destroyed.
The apparent result of all of that appears to leave more money in the hands of the former debtor to spend (by not servicing debt) into the economy even though credit appears to have shrunk due to the default.
I'm not sure why you introduced the asset valuation into the discussion of inflation/deflation?
The point of my question wasn't to debate inflation/deflation but to try to assess the mechanics of a default and how it affected overall money supply aggregates. To me it appears that it COULD be inflationary for the reasons stated above.
My understanding of why a credit contraction is deflationary, in general, is because there is less or no new money to pay the interest charges on the principle that was previously loaned into existence thus reducing money supply that the economy normally uses to expand. This leads to a hoarding of money to pay loans, etc.
That deflationary scenario is premised on the current loans outstanding being serviced, as opposed to defaulted on, during the credit contraction.
If the debtors (en mass, for whatever reason)stop paying their debts during a credit contraction then I think it may be useful for us to see how that impacts the premise that credit contractions are deflationary, OK?
I'm a student here, not a professor and so my statements are open for discussion and are not being presented as factual. What are your thoughts on the idea that someone defaulting may actually have more money to spend into the economy, asset devaluation issues aside?
Here's the problem with the thesis, the act of default does not expand the money supply. In other words, when the debtor received the loan, that was when the money was created. The act of default does not create any additional money (by definition, the default is on money already loaned/created).
By discharging debts and not requiring deficiency judgments or by allowing debtors to stay for free in their residences despite default, then the degree of impact on the money supply is questionable, but the discretionary income of the debtor may be increased. As a result, in our case, there might be more price stability than would otherwise occur. Or, in any practical sense, people keep buying ipads. Needless to say, an increase in discretionary income without an increase in the money supply is not an inflationary event either.
Again, when the loan is defaulted upon, the act is, at best, money supply neutral... thereby making inflation (an increase in the money supply) impossible.
I guess I can go with that assessment.
Here's another thought to go with that though, would the same money supply (neutral inflation) with an increasing amount of that supply unhindered by principle/interest payments to banks per the above scenario increase the velocity of money and cause price inflation thus acting like money supply inflation?
There has to be SOME impact on the economy with more money available to the debtors (taken on a large enough scale), doesn't there?
It's theoretically possible, but largely determined by the degree of debt overhang. Unfortunately, despite strategic/forced default/squatting, the american consumer is still tapped out. Also, the "all things equal" part of the equation is not cooperating very well given any increase in discretionary income is likely swiftly followed with a loss of income altogether via job loss or rolling off unemployment or other decrease in the economy. In other words, in our case, the debt overhang is so large, that the potential marginal increase in discretionary income generated from a lack of note payments is of no or very temporary avail. In other words, the loss (debt destruction) must have been taken by some party, that party likely playing a systemic role in the economy, thus offsetting any gains in discretionary income through further deleveraging/wealth destruction/job loss.
In short, yes there may be an impact on the economy, however we have to determine what the net impact will be in our present environment given counterveiling forces. My guess is that marginal increases in discretionary spending only go to prop up the economy at previous/lower levels until such time as they are usurped by further deflationary forces.
This is why the FED has embarked on a journey to reflate the credit bubble... without it, we're fucked. Needless to say, it is an exercise to find perpetual motion and will end the same.
I guess we both mostly agree with what's going on, future FED action/debt jubilee/or fraudclosuregate action notwithstanding.
The system is going down regardless and I've prepped for that for several years, not that it'll necessarily matter. Thanks for the banter and good luck
Mish is like a broken record pointing to the data that confirms his position but denying the existance of the data that contradicts his position. Chris should have asked Mish to explain the recent price moves of food and energy.
I must admit that Mish has some very good points-certainly enough to keep me wondering how this plays out. I certainly pause to read his views to temper my prospective, whereas someone like Krugman I just delete. It can be quite a quandry to try to figure things out. I just tell my brothers to simply try to get out of debt, don't work too hard-it will be taxed away, don't save too much, because it will be confiscated either by inflation, change in tax law, means testing entitlements, etc, stay healthy by going to the gym, eating right, some reasonable preparation in case of some rough patches whether food or service supply disruptions and go fishing instead of worrying about the markets etc.
But the paradox of all this money and deflation is brought to mind from my trip to Antarctica 7 years ago. Antarctica has more fresh water (money) than anyplace on earth, but it is frozen and not likely to be unleashed for quite some time (despite global warming claims), and for holding so much water , it remains one of the driest places on earth- the economic equivalent of very low money velocity, decreased lending, borrowing etc.
+10
Heh, so the antarctic is like our planet's elites: just waiting for the heat to get turned up on the rest of the world so that they can flood us with the fiat currency they've been hoarding in a frozen block, and cover everything with their names.
I am beginning to doubt this less and less. Don't we have a choice, though?
The fraud-bubble era of 2001-2008 was a time when lots of people were loaned money that they will never pay back. Their promises to pay were sold as assets (such as MBS). Those assets now have little to no value, even if the powers-that-be insist on pretending that they do.
It all comes down to this: if the people who are holding those bad assets are forced to eat their losses, then demand falls and we end up with lower prices generally (often called 'deflation' by people who are not Mish). However, if the government and/or Fed finds a way to replace those bad assets with newly printed or borrowed dollars, then the dollars they produce will be worth less, because the assets that the new dollars replaced had little/no value behind them.
Of course, people who hold good assets would not be eager to trade their good assets for bad assets, nor would they be eager to trade good assets for the new dollars that circulate in place of the bad assets. So in this scenario, supply constricts and we end up with generally higher prices (often called 'inflation' by people who are not Mish).
Anyone know what's happening to gold right now? Bought some Maples yesterday. Crap should have waited!!
You have everyone worried that QE2 is either going to be sold on the news, or we get a watered-down QE2.
I'm actually new to investing. don't know much, just a punk kid who reads alot. my dad's all about the stock market. Not me, i cashed out and found this awesome site, and ever since have been slowly buying PMs. Cheers!
If you are a long-term investor I would not be too worried about the price going down in the short-term. With the dollar so incredibly oversold we may see some equity and commodity weakness for a while. The great thing about physical gold is you can store somewhere and be less likely to make an emotional sale like you may with an equity.
Not too put too fine of a point on it, but the dollar has been 'outrageously oversold' for a couple of months now.
IMO, RSI isn't always the best bottom/top indicator. And technicals aside, we all know how weak the fundamentals are for most if not all fiat currencies; so the only thing left for tweaking, really, is "MOPE" (Jim Sinclair's acronym).
But yeah, the PM's are solid money, both literally and figuratively. Go figure.
The Dollar may be forming a base and also appears to be finding support on a larger symmetrical triangle trend line. The key for me right now is the Euro and the last few months of rallying now is running out of steam. As you point out gold and silver will do well regardless since a falling Dollar or Euro ultimately leads to more precious metals demand.
Me too. Inflation, deflation - whatever. Gold is real money, and this paper stuff is what....? The psychology of the populace is the essential thing: whether or not the electronic printing of money actually flows throughout the economy or just sits as reserves - takes a back seat to what people perceive is happening. The news is filled with stories about how the banks are awash in billions. And as the printing continues, the real goods of the commodity sector is going up as investors realize its the last safe haven left. Real money must store value, and the greenback doesn't do it anymore - devaluation is in earnest. What do you think the shelf-life of this paper is?
Portugal- EUR Down = USD UP = Gold Down
Shhhh.....the CPI doesn't include food and energy.
The first rule about inflation, you must understand the definition. The second rule about inflation, YOU MUST UNDERSTAND THE DEFINITION
Rising commodity prices with high unemployment and low wages is not inflation. That is what's stagflation. Big difference.
I find the number here disagreeing with Mish interesting. So many counter with their own pet theories but how are you doing in the actual markets? Mish and the firm he works for have made money throughout this crisis. Can you say the same thing?
Ah but you point at rising prices, right after he explains that rising prices are not the proper measure of inflation and deflation. What part of econ 101 did you people miss? Prices change due to supply and demand issues too, even if the money supply is 100% stable. Is that "inflation"? If you call that inflation, your definition is so broad as to be worthless, just like so many opinions in the religion of economics.
Grains are up? What part of grain shortages in Australia, Russia, and the US did you miss? Energy prices are up? What part of peak oil do you fail to understand? Oil production has gone from 84.5 million barrels per day in 2004 to 86 million barrels per day in 2008 to 2010. In that time period oil prices rose from $35 per barrel to over $147, back down to $38 and now back into the low $80s. Those are price swings of several hundred percent for more than half a decade yet supply has failed to increase. What exactly do you then expect prices to do when supply can not increase but demand is growing, particularly in places like China? (Note: China's oil consumption has increased by over 5 mbpd over the last 6 years. If supply only increased 1.5 mbpd where did that other 3.5mpbd come from? Hint - they outbid someone else, economics 101, no "inflation" necessary.)
Yet these price increases are trotted out as "inflation" just the way BendOver Bernanke wants you to believe. Brain washed, you take his definition and defend it even as you decry him and the entity which he represents. The Fed has spent decades rooting out the original definition of inflation/deflation - an increase/decrease in the supply of money (defined as cash and credit) - precisely because that definition points directly at the Federal Reserve as the primary culprit in all financial problems. Remove the definition and the proles (you) can't figure out crap.
And rather than questioning this politicized definition, most of you here defend that definition, thus making the Fed's task of continued debt slavery even easier.
Amazing. Simply amazing.
+100
As debt defaults (deflation) it wipes out both the paper wealth and the future physical wealth it represents. Thus the remaining paper and physical wealth remain in balance. If we now print more paper prices of the remaining physical wealth can increase, especially for those non-discretionary things like food and energy. So we can have deflation and rising prices. Now layer into this demand exceeding supply (a.k.a. peak oil) and you can have extreme price increases in a deflationary environment.
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"..Yet, talk is all the rage "just wait till all those reserves come pouring into the economy, it will cause hyperinflation". I have to laugh because the thinking is ass backwards".
Heh, what if it is "all the rage" to use the conjured ifiat to ipurchase aapl ishares? I would have to ilaugh...
Also, I would like a timeline on when 'Mark to skypie' is going to end, because for the connected (aka TBTF, who are all the more 'too bigger' these days) I am guessing that event isn't showing up on any horizon yet; for you and me however...
So, it becomes a bet between which comes first: Mark to market that decimates the TBTF's and the world's elites (likely?) as well as many countries' economies, loss of faith in the USD as a reserve currency, or currency devaluation war leading to an international loss of faith in fiat currencies in general.
In the first case above where the elites decide to destroy their own wealth <snort!> there will be some serious deflation in fiat currencies as everyone scrambles to pay debts denominated in them , but ultimately it can (will) be combatted by international printing presses that can (will) all go, surreptitiously if deemed necessary, from zero to infinity in under 10s (inflation), which must eventually result in one of the last two. The last two cases: real money (not debt) undergoes the 'deflation', in that most everyone realizes they don't have any, and increases in nominal value compared to its fiat wannabe's exponentially; anyone care to hazard any guesses on the element(s) that might make up that currency?
Step right up folks!
Warmest Regards
PS. One other option, which is seeming more and more likely, Prestidigitation:
IE The TBTF somehow manage to convince you that it is a good idea for them to offload all or most of their toxic crap onto the taxpayer just before they force their puppets (your politicians) to mark it to market, which causes a manufactured, temporary, but egregious deflationary event; decimating economies. There will likely be no massive printing in this scenario, because that would be a default that would devalue the wads of fiat currency you have given the TBTF without requiring any accountability. Then, with all the free (for those who can afford it, very expensive for those who cannot) fiat money they have stashed in reserves thanks to your ongoing generous bailouts/negative lending rates they buy up anything left of value that hasn't already been bled dry by what is left of the middle class.
PHYSICAL ownership of precious metals will still perform well in this last scenario (indeed in any of the cases I've outlined) because even though they may decrease in nominal terms as measured in fiat currencies, the amount of actual 'stuff' that you need to survive that you will be able to receive in exchange for them will likely increase at an even greater rate...
Of course, you could always resist this like Iceland or the French instead of sitting around squeezing blackheads and just taking it over and over again.
This look familiar Mr.Shedlock? Someone here (I apologize for forgetting your moniker) once suggested you might be a 'gatekeeper' of sorts. I am beginning to wonder if that is possible myself.
"Then, with all the free . . . fiat money they have stashed in reserves . . . they buy up anything left of value that hasn't already been bled dry by what is left of the middle class."
Those bankers are smart shoppers. And they see a huge going-out-of-business sale on the horizon.
Can you say 'Carpetbagging.'
Sure. I knew you could.
I like Martenson, but Mish is an asshole.
Absolutely, and by far the *keyie-est couple of sentences of the whole interview:
"Thus my model suggests 2007 to February 2009 were periods of deflation, March 2009 to May 2010 were periods of inflation, and now we are likely back in deflation but it is hard to say given institutions do not mark assets to market. Extend and pretend is massive."
(emphasis mine)
Translation: You had your bout of deflation boys. Then we had inflation. Even Mish says so. Now, thanks to mark to skypie: who knows? Certainly not Mike Shedlock; once again it depends entirely on what scenario will maximize the blagging of any wealth you have left. Get ready!
Regards
*tip o'the hat to TD
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