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Deep Deflationary Thoughts From Van Hoisington Of Wasatch Funds
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Hyper-inflation is a currency event, not an economic one. Yes there is deflation right now, but if the currency becomes worthless, then hyper-inflation comes quickly!
To be more precise, inflation and deflation are monetary issues. And yes, inflation will happen, but not for years.
The inflationists all fail to recognize the significance of debt. Or even to understand what it is. That's why they've all been so stunningly wrong this past year, and will be for years to come.
Once the debt is gone, then you'll see inflation. But not before.
I couldn't agree with you more.
Deflation now, and if there is any sort of a recovery, inflation later.
In other words, we are between a rock and hard place with no really good options.
Bull honky, the US will not endup with Japanese type yields because 1) consumers won't be saving (rather than deleveraging) like the Japanese anytime soon 2) US has population growth 3) The Japanese are probably more risk averse than in the US.
I'm so sick of the Japan gloom mongers.
Hmmm. -1
Americans as a whole (and this is measurable) haven't Japanese qualities to contain a severe contraction and merely enjoy a flatline economy.
Americans haven't the financial discipline to save en masse for extended periods. American population growth is driven by immigration both legal and illegal. That growth assures a exploitable underclass of poorly educated but highly motivated demi-slaves. Americans are foolhardy in their risk assumptions, no longer are they taking well-measured chances to create real goods but are speculating.
Their government, which should act like a parent or referee--intervening when necessary, regulating, and admonishing in instance of fraud, has actively conspired against the governed. They have necessitated rampant speculation in order for the generationally wage-bound middle class to even dream of preserving purchasing power or feathering a nest for retirement.
Finally Americans lack a cohesive ethical and moral base. Some years ago, the USA crowed of sending its best and brightest to design, engineer, market, and distribute to saturation level paper pledges of economic productivity.
We see now that these pledges were just nuanced with yield enticements while all along they were replete with fraud. The best and brightest unrestrained by gov't or by conscience sold them at profit, shorted them to profit, and now foist them upon the public balance sheet for further taxpayer value stripping.
America has lived up to none of its high-minded platitudes. It is lazy, ethically corrupt, exploitative, short-sighted, and dependent on quick-fix interventions. Its manufacturing base gone, its capital markets polluted and refused in contempt by the world, its social safety nets rife with deadbeats, its financial apparatus moves only on subterfuge and dishonest palliatives.
You can only hope it will only be as bad as Japan.
Saving behavior and prudence aren't cultural. They are based on interest rates, which the Fed kept too low too long in the states.
The US will save because the only alternative is to pay down debt or be evicted. Mean reversion is a lot of history.
Regarding not living up to the platitudes... in complete agreement.
We have been and will continue to be in a currency event. I believe one of the points that can extracted from this very good synopsis of our current crisis is that inflation is present within the current deflation (depression). The mal-attempt to reflate the economy is not possible. We have passed the point of no return. This is a paradigm shift that cannot be quantified because of the global scale of the crisis never seen or imagined. Any attempt to inflate will only push the equilibrium the blow-off of overcapacity seeks further to the south.
Chance the Gardner
It is just amazing how many fiat currencies died by deflation. I can hardly count them all.
The inflation has already occurred. Just look at the Fed balance sheet. All that is saving us is the excess bank reserves.
yep, and those excess bank reserves are about to flood the market because they are on such financially sound footing? good call.
think through why those reserves are where they are. The world is a logical place and various entities act in their own best interests.
It does not take a genius to see that those excess reserves are there to provide a bid for US Treasuries.
And I am no genius.
The money supply has already been inflated. The only thing preventing price inflation are excess bank reserves.
Anon, I urge you to go back through the archives of Zero Hedge and educate yourself. If you'd like to learn more, please visit Karl Denninger over at Market Ticker.
Money isn't just cash on hand... When you pay with a credit card, you're spending money, but you aren't using paper or coin. Your bank has a number on a ledger and adds your transaction to your outstanding balance. There are no dollars there.
Fractional reserve banking only requires a small portion of bank deposits to be in actual cash in the bank; the rest are just numbers in a ledger. For every dollar of actual cash, the bank loans out nearly 10 times that amount as ledger entries.
Over the past year, we've seen a massive destruction of credit (money) to the tune of 60 trillion or so dollars. Banks are no longer extending credit or are reducing credit outstanding, which further reduces the effective money supply. All of that credit helped push prices of real estate, commodities and equities to hyper-inflated values. You paid too much for your plasma TV, your house and your education because most of us used money we hadn't earned yet to do so. As credit becomes easier to access, prices soar.
The banks are hoarding cash. Why do you think that is? Maybe it's because they know that if the "toxic assets" on their books ever have to be marked to their actual values, they'll be grossly undercapitalized and immediately in default.
Benny and Timmy can't print enough dollars to fill the giant abyss created by the bursting of the real estate bubble. Sure, the dollars they have printed have gone to prop up house, commodity and equities prices. But the real fun will begin when the deflationary effects of the bursting bubble can no longer be held up with their schemes and scams.
We are in the beginning stages of a deflationary collapse. The powers that be have assured that it will be as protracted and painful as possible. Anyone who thinks otherwise is just trying not to scare themselves.
The engine is running full tilt with no oil. It is not a matter of if it will seize, but when. When the average American realizes that the FDIC can't backstop their deposits and is itself bankrupt; that cash is actually VERY scarce and that the whole system is broken, it will be too late to get their money out of the bank.
We're in for a wild ride. Get in, sit down, shut up and hang on!
Anon, I urge you to go back through the archives of Zero Hedge and educate yourself. If you'd like to learn more, please visit Karl Denninger over at Market Ticker.
Money isn't just cash on hand... When you pay with a credit card, you're spending money, but you aren't using paper or coin. Your bank has a number on a ledger and adds your transaction to your outstanding balance. There are no dollars there.
Fractional reserve banking only requires a small portion of bank deposits to be in actual cash in the bank; the rest are just numbers in a ledger. For every dollar of actual cash, the bank loans out nearly 10 times that amount as ledger entries.
Over the past year, we've seen a massive destruction of credit (money) to the tune of 60 trillion or so dollars. Banks are no longer extending credit or are reducing credit outstanding, which further reduces the effective money supply. All of that credit helped push prices of real estate, commodities and equities to hyper-inflated values. You paid too much for your plasma TV, your house and your education because most of us used money we hadn't earned yet to do so. As credit becomes easier to access, prices soar.
The banks are hoarding cash. Why do you think that is? Maybe it's because they know that if the "toxic assets" on their books ever have to be marked to their actual values, they'll be grossly undercapitalized and immediately in default.
Benny and Timmy can't print enough dollars to fill the giant abyss created by the bursting of the real estate bubble. Sure, the dollars they have printed have gone to prop up house, commodity and equities prices. But the real fun will begin when the deflationary effects of the bursting bubble can no longer be held up with their schemes and scams.
We are in the beginning stages of a deflationary collapse. The powers that be have assured that it will be as protracted and painful as possible. Anyone who thinks otherwise is just trying not to scare themselves.
The engine is running full tilt with no oil. It is not a matter of if it will seize, but when. When the average American realizes that the FDIC can't backstop their deposits and is itself bankrupt; that cash is actually VERY scarce and that the whole system is broken, it will be too late to get their money out of the bank.
We're in for a wild ride. Get in, sit down, shut up and hang on!
I'm still not sure what happens after this wild ride (which I anticipate will happen pretty fast). The only thing I can imagine after that dollar spike is the dollar immediately becoming worthless. And at that point, we've got a 'division by zero' error...I don't know if that's hyperinflation or hyperdeflation, or just hyper.
ok...there's a fundamental lack of understanding here.
Our currency is based on DEBT. Debt is a claim against the future by the present.
If the future holds growth, you can pay the debt back. If it does not, you cannot. It's really as simple as that. If you take the simplest debt, borrow $1000 at 10% interest for one year. You either come up with $1100 at the end of the next year or you default. Simple shit. If your lender looks at someone with terminal cancer given 6 weeks to live, how freakin likely is the loan to be repaid?
The US's currency is a debt instrument...it has sanctity in the aggregate only so long as we can repay our debts, i.e., continue to grow.
Everybody still seems to act like this is a blip or a hiccup and that growth will just resume any day now. That the only thing holding us back is a bunch of paper. Sorry, the real finite limits of growth are what we are smacking up against here. Anything based upon or needing growth is specious as a fundamental proposition at this point.
This is larger than the US...it's an existential crisis for debt in the aggregate, for the growth model. This is the REASON we are in a currency crisis. It's a crisis because a collective realization has emerged from the fog that the future CANNOT pay off today's debts. The entire edifice is in functional default.
Well said.
The 'limits of growth' are being attenuated by the debt situation. It's not just that the cancer patient has only 6 weeks to live and can't repay the loan; it's also that the lender is secretly spiking the patient's IV drip with plutonium.
Trav- Well put.
consensus says a weak Dollar is good for US balance of payments... it stimulate exports! ... but exports of what?
the HUGE daily cost of imported oil in ever cheaper dollars overwhelms any trade balance advantages of sending cheaper swimming pool skimmers and RVs overseas to laughing Asians and Euros.
A few US manufacturers who miraculously make good quality products like:
Boeing
Apple
Caterpillar
outsource much of their manufacturing overseas, assembling some of it here, reluctantly. Most of the fortune 500 companies have outsourced since the genesis of the global economy with "profits" to prove it.
When the US actually makes quality goods at home and exports it, like the Germans and Japanese (who have extremely strong currencies and strong export balances showing not only it can be done, but the way its done) then we will compete in the international marketplace with a stable economy and get our mojo back.
until then with the Powers that Be, more stupid fiscal stimulus and more stupid wars which are nothing really but heartless, cruel, futile, stupid fiscal stimulus.
What is a currency event?
How does a currency event affect the price of electronics, which are in freefall? How does a currency event affect the price of houses, which are in freefall, and are 30% of the CPI.
You can imagine all the inflation you like, but unless you go down your street and find houses with prices spiking 20% per year, you will not see it anywhere that matters.
Inflation folks and gold folks who bet on inflation MUST face up to housing prices. Don't ignore them. Address them. Find a way for falling housing prices to equate to gold driving inflation and you have a rationale.
Not until.
Hoisington Holes?
I looked at the June 2009 FED report. Total on-balance sheet assets = around $2T. Obviously, off-balance sheet stuff is not listed in the report. Also, not given are unfunded liabilities on an accrual basis for things like Medicare. So I am not really sure were the report gets its numbers, but its not from this FED report.
Once again we see GDP as an indication of our ability to address debt. No, GDP does not pay debt, Net tax revenues pay debt. Maybe around $2T total in 2010.
Actually, the FED has managed to stabilize real estate prices somewhat. So we are no longer in collapse mode, especially in Q3.
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At the end of the report, Hoisington recommends investment in Long term Treasuries after presenting data that the US will probably not be able to repay its debts without inflating the currency.
What? So you want me to purchase and hold a bond, which will most likely be debased to zero before it pays off?
I am sorry but I do not agree with the strategy.
Mark Beck
USD rally coming ...
http://www.zerohedge.com/forum/market-outlook-0
There may be deflation in the short run, but the US cannot pay its future debts without inflating the currency. Period. Therefore, instead of timing when the dollar makes its last push, then timing the final peek, I will be watching my long-term account fall, buying in the dips and waiting for the inflation to begin.
I also don't think the "deflationists" factor in who is running the printing press, or the effect major deflation will have to the system. I find it much more likely that Ben will inflate the US out of any deflation concerns.
Deflation is a train... Bernanke is driving a Pinto down the tracks. Just because he wants to stop the deflationary collapse doesn't mean he can. The bond market will put a stop to his and the U.S. government's spending spree long before he inflates us out of this.
If you owned a note (Treasuries) on someone's debt, and they started trying to print their way out of their obligations, what would you do? Allow them to continue, or stop buying their newly printed trash in order to preserve your value?
There are two ways out of this; a sovereign default by the United States or we take our medicine and purge the bad debts and companies from the system. One way or the other, inflation isn't part of that equation.