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The Deflation Bogeyman
Based on the comments and emails I'm receiving lately, it appears more and more people are hopping on the deflation bandwagon. These correspondences have exposed to me an obvious misunderstanding of basic facts. While I suppose I am an "inflationist", I'm the first to admit that deflationists have some valid arguments to support their claims. But at the end of the day, their arguments are flawed; I just don't see deflation as a realistic threat moving forward.
There is a constant tug of war between deflation and inflation that hinges on factors such as money supply, credit, interest rates, and inflation expectations. While these variables push inflation in either direction, there is undoubtedly one variable that swings the odds decisively in either direction, and that is the dollar. There can be no sustainable deflationary trend with a falling dollar any more than there can be an inflationary trend with a rising dollar.
So let's get one thing out of the way. Deflationists are saying that the dollar will rise in value, and based on some of the doomsday asset collapse projections I'm hearing, quite dramatically. Now if this isn't already ridiculous to you, I'll examine some of the factors that will make a sustainable rise in the dollar unlikely. To do this, we must explore the last great deflationary period in the U.S, the Great Depression.
Most people think of the Great Depression as one continuous deflationary collapse- but it wasn't. Broadly speaking, we can break down the Great Depression into 3 stages: 1929-1932, 1933-1937, and 1938-1941. The key period is 1933-1937, for this is when we saw the initial inflationary effects of going off the gold standard.
Below I will present some things to take away from the Great Depression. These factors are critical to understanding why a deflationary collapse is unlikely to occur based on present-day conditions.
Agrarian-Based Society
During the Great Depression, farmers accounted for nearly half of labor. The maturation of the American economy from an agrarian to industrial economy created a staggering level of unemployment, which was deflationary. The Dust Bowl of 1933 obviously exacerbated the problem and put pressure on wages.
However, from 1933-1936, the second phase of the Great Depression, unemployment declined from 25% to 11%. Spending power reappeared, as evidenced by a spike in real final sales. Deflation? I don't think so.
Mass Defaults in Europe/Gold Standard
The 1930's were characterized by mass defaults across Europe stemming from a sovereign debt crisis. Defaults were directly correlated to debt to GDP ratios and the percentage rise in budget deficits in preceding years.
The psyche of Europeans was obviously scarred due to world wars, revolutions, and constant conflicts. As soon as sovereign nations started to default, capital sought safety. The U.S. was one of the few countries that remained on a gold standard, so capital flooded into the U.S. dollar, which for all intents and purposes was as good as gold. So the rise in European defaults activated a temporary flood into the U.S. dollar (aka gold) in 1930-1931, which created the sensation of deflation in America. In effect, the deflationary trend was accelerated by the concentration of capital in U.S. dollars.
1933-1937 Deflation?
As soon as FDR was inaugurated he took us off the gold standard, which immediately devalued the dollar and sparked an inflationary trend. This created a spike in asset values that was most notable in stocks. There was some semblance of a recovery, but it was short-lived because of flawed government intervention. But that's a story for another day.
Anyway, how many deflationists will tell you that CPI rose from 1933-1937? I'm guessing none. But sure, go ahead and listen to the deflationists who take a chart of the Dow in 1931 and plot it against a 2010 chart and predict a stock market collapse. Absolutely. Utterly. Ridiculous.
After collapsing in the early stages of the Great Depression, GDP exploded for the duration of the Great Depression. Now obviously this occurred because of massive government spending. But a good forecaster must account for government intervention; otherwise their analysis is seriously flawed. The fact remains that the government won't idly stand by if there is a massive deflationary episode in the U.S.
Debt Destruction
Deflationists constantly conflate debt destruction with deflation while forgetting one tiny fact: The government has a technology called the printing press. A determined government can easily fight deflation. We already got a glimpse of how the government can counteract the forces of deflation by handing out free money in the form of homebuyer tax credits. The spike in sales of homes spurred by tax credits confirms that you can manipulate behavior by giving out free money. This proves beyond a doubt that a determined government can create price distortions.
The most important point I am going to make is this: The coming inflation will result from a loss of confidence in government. A massive deflationary collapse can only occur if: a) our Federal government resorts to full-scale austerity measures (unlikely); b) Americans hoard dollars (unlikely); and c) there is a rise in the value in the dollar that evidences a rise in confidence in government (impossible).
I urge you to consider the aforementioned arguments and stop listening to deflationists. I will add the caveat that there will be huge moves in the dollar in both directions. In other words, we can experience temporary bouts of deflation. But to predict a drawn-out deflationary collapse is just ludicrous. A 90% decline in stocks is ludicrous. So is a 90% drop in real estate. The odds are heavily tilted against those things happening for the reasons I outlined above. The only real threat is inflation- about this I am sure.
From Expected Returns.
- advertisements -
http://maxkeiser.com/
.
On the Edge with Gerald Celente – 20 August 2010
August 21st, 2010it's all a farce to cover, tarp, a crime. the greatest theft
of treasury sovereignty in the history of the world.
it is not economics, it is a political power grab. the
instrument and weapon is the mind, your mind, and
it's relationship with other minds and exchanges of
value and what you will accept as legitimate and
worthy of your attention.
all the fraud and only b. madoff went to jail. absurd
is the word.
.
?
it's the savings and loan scam gone derivative and global.
fiction for money. money backed by lies and torture
and stupidity. and some say this will not deflate?
oh boy, oh my, we are truly fucked. and the scam
continues as some would like to game this nightmare
and bleed it for what it's worth, which is nothing.
i have noticed the new world order is just crime
and chaos for the masses. oh joy.
yea, lost decades of starvation and idiocy await.
party like it's 2099!
"subterranean homesick blues" said it all.
.
Subterranean Homesick Blues
Johnny’s in the basement
Mixing up the medicine
I’m on the pavement
Thinking about the government
The man in the trench coat
Badge out, laid off
Says he’s got a bad cough
Wants to get it paid off
Look out kid
It’s somethin’ you did
God knows when
But you’re doin’ it again
You better duck down the alley way
Lookin’ for a new friend
The man in the coon-skin cap
By the big pen
Wants eleven dollar bills
You only got ten
Maggie comes fleet foot
Face full of black soot
Talkin’ that the heat put
Plants in the bed but
The phone’s tapped anyway
Maggie says that many say
They must bust in early May
Orders from the D.A.
Look out kid
Don’t matter what you did
Walk on your tiptoes
Don’t try “No-Doz”
Better stay away from those
That carry around a fire hose
Keep a clean nose
Watch the plain clothes
You don’t need a weatherman
To know which way the wind blows
Get sick, get well
Hang around a ink well
Ring bell, hard to tell
If anything is goin’ to sell
Try hard, get barred
Get back, write braille
Get jailed, jump bail
Join the army, if you fail
Look out kid
You’re gonna get hit
But users, cheaters
Six-time losers
Hang around the theaters
Girl by the whirlpool
Lookin’ for a new fool
Don’t follow leaders
Watch the parkin’ meters
Ah get born, keep warm
Short pants, romance, learn to dance
Get dressed, get blessed
Try to be a success
Please her, please him, buy gifts
Don’t steal, don’t lift
Twenty years of schoolin’
And they put you on the day shift
Look out kid
They keep it all hid
Better jump down a manhole
Light yourself a candle
Don’t wear sandals
Try to avoid the scandals
Don’t wanna be a bum
You better chew gum
The pump don’t work
’Cause the vandals took the handles
.
dylan, bob.
.
"my baby thinks she's french" joe ely.
.
what does max keiser have to say about this mess?
Velocity of money is the key. When people see the value of paper currency erode by 50% a day they will spend it as fast as they can. Velocity will zoom and asset inflation will go exponential, look at South America in the eighties that is the minimum we will see. So, make a list and when massive inflation starts go out and leverage yourself. Buy anything you may need in the near future.
Falling house prices is not deflation, its a necessary adjustment after a housing bubble. At the moment inflation is not evident due to falling money velocity but thats all psychology. My view is velocity will come when foreign holders dump the dollars, remember 50% of USD is held abroad and that money has been outside of the U.S. economy for years as CB reserves and other uses. At some point BB printing has to have an massive inflationary impact even if its a bit delayed.
Weimar Germany was the same way, at first money printing had little impact but a shift in psychology and an increase in money velocity changed that in a matter of weeks
You've obviously read Parrson's book... and are spot on. Anyone who thinks that we are in for a deflationary spiral needs to understand that the Fed won't allow this. Also, by then a default of the USD will induce inflation. This will reduce the real value of US denominated debt.
The dollar is a crappy currency, except for all the others. Stupidity and corruption elsewhere make us the safe harbor. Go figure.
Collapsing real estate and falling real energy costs (nat gas and coal mostly) are powerful deflationary forces. They are trumped by the fact that government is out of control at all levels; federal, state, and local.
We are at the beginning of a low grade civil war between the productive and parasite sectors. That means inflation..., probably the least of your worries.
Cheers.
What a silly article. There is nothing the govt can to make people SPEND money which causes more money to chase fewer goods which is the definition of inflation. With no job, or job at reduced wages how do you spend up to inflationary levels.
All the govt can do is keep making insolvent banks solvent with feloneous cash infusions. They cant make people spend. The only web-bot could be right is if Ben literally dropped trillions of USD from helicopters all over the country. then that would make everyone as 'rich' as the bankers, and indeed would wipe them out. There is no velocity without spending, no spending without jobs or borrowing, neither of which exist, so no inflation.
Collapse of confidence in USD would make imported goods much more expensive, but again without jobs or available real credit that will be paid back, why would banks loan?
What we have here is stagflation of the worst sort: deflation of capital goods due to lack of credit and debt implosion, inflation of goods needed to live due to level of imports and fall in purchasing power of USD, and a stock market dancing a jig on all the printed money. Only the bankers get richer.
You're missing the fact that the likely onset of the collapse will come from the OUTSIDE (global monitarism). You're stuck in pre 2008 microecononic thinking... inside of a closed economy. When the Chinese decide to dump USD debt because they believe that the outcome will be more to their favor, we are cooked.
You also need to consider that we have a Western way of thinking... zero sum game. Read the works of Sun Tzu and you'll see that cutting of your arm if it kills your enemy is a viable approach.
We need to be wary not of Ben's helicopeters, but those from the outside...
Corporations in the Fortune 500 class are dictatorhips.
Labels anymore are losing their defining characteristics.
We have a republic in the U.S. but yet a few oligarchs who are unelected run the country, nullify the vote, and operate as a shadow government.
We have 50% tax rates which approach socialistic levels but the means of production are privately owned, but the owners also own the government.
We are desperately in need of new linguistics in order to have any hope of communicating with each other since our words are gradually losing their ability to make ourselves understood.
I have decided that we haven't even seen any inflation/deflation to date, other than that produced by demand pull/push and speculation. The extremes will not occur until a country collapses, which I think will be somewhere in the EU. Actually, if I was a betting man, I'd place my chips on Spain. Then we'll start the inflation/deflation cycles.
Go to page 25 here -- http://libertarianpapers.org/articles/2009/lp-1-32.pdf -- to read about the coming "HyperDepression." Even better, read the entire essay to find out what has gotten us here, why it has done so, and what is to be done about it.
Hey, if you cut out 1929-1933, you can see that deflation is basically impossible!
I need to write a ZeroHedge post arguing that falling stock markets are clearly impossible if you consider only the periods 1933-1966, 1982-2000, and 2003-2007.
OK... but what if sovereign currencies are not showing deflation because we are abandoning our respective currencies for something else? In this case then, deflation would be evidenced by a rise in the purchasing power of this something else... right?
http://guidoromero.wordpress.com/2010/08/07/are-we-comfortable-holding-o...
Evidence of declining asset prices (manifestation of deflation) on page 6 and 7 here:
http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID3585763
y is that its mostly inflation vs. deflation?? y not stagflation...you should read this...since i believe understanding all the camps, is good before u get yourself into one side....
http://boombustblog.com/reggie-middleton/2010/08/13/the-spectre-of-stagf...
The author leaves out energy (as per usual) and consequently has an incomplete argument.
The (very large) increase in energy costs from 1999 has allocated capital and money flows away from demand. In other words, money spent on fuel wasn't handed out as wages or business profits. What has been taking place over these past ten years has been an energy crisis intermediated by debt. Even if all the debt vanishes tomorrow and gold becomes the 'new money' there will be an ongoing and endless energy- driven contraction all across the world's consumption- based economies.
Sorry, that's the way it is. Don't believe me just watch energy prices. People are too poor to bid up the price of fuel. At some point it will be too low to support the production of replacement sources.
Easy these days to forget about our energy predicament. The financial and energy problems convergence is going to be a lot of fun...
Great discussion(s) folks. Regardless of how terms are defined, we are in for a ride!
Just bought 45 silver American Eagles and they make for a great soporific.
Those who say inflation is impossible because there's "no credit" forget one simple thing: credit to the government. If the government runs a 10% deficit, and credit to the private sector neither shrinks nor grows, that's an inflationary credit expansion. We've been avoiding inflation because of private-sector de-leveraging, which otherwise would have caused deflation.
I think a lot of people have been conditioned by the QE1 experience into believing that any amount of base money expansion by the Fed will inevitably result merely in an accumulation of cash in banks' reserves accounts. QE1 coincided with a scramble among banks to build up their cash positions.
In a QE2 scenario, it's easy to imagine the continued expansion of credit to the government not being balanced by any similarly large-scale private-sector de-leveraging and scrambling for cash. That would mean a lesser portion of the newly created cash going into reserves accounts, and a greater portion going into credit and broad money expansion. I see a QE2 of $100 billion a month of Treasury purchases leading to stagflation, potentially going up into double digits.
There's also the possibility the Fed could lower or eliminate the interest paid on reserves, which would be similarly inflationary.
http://keynesianfailure.wordpress.com/2010/08/13/qe2-the-overblown-herohorror-stories-and-the-mediocre-reality/
Fire and Ice
Some say the world will end in fire,
Some say in ice.
From what I've tasted of desire
I hold with those who favor fire.
But if it had to perish twice,
I think I know enough of hate
To say that for destruction ice
Is also great
And would suffice.
Robert Frost
What happened in QE1 is that the Fed purchased a lot of debt securities from the
banks and paid for them by incrementing the account totals in the accounts that
the banks maintain in the regional Fed banks. So no money has actually been
printed yet. Actual printing might happen if banks started withdrawing money from
their Fed accounts and loaning it out. But at present, banks don't seem inclined
to do this because (1) not many people want to borrow and (2) the interest rate
that the Fed is paying on excess reserves is fairly attractive compared to what
is being offered in the market. So banks are currently happy just to leave the
money in their Fed accounts and pocket the interest. It isn't clear whether or not
this is what the Fed intended, but since the Fed instituted the practice of paying
interest on excess reserves about the same time QE1 started, perhaps it is
what they intended. As long as the proceeds of QE1 sit around gathering interest
in the banks' Fed accounts, it will not be competing with existing dollars for
purchases and will not cause inflation.
If the Fed really wanted to cause inflation, it could start purchasing debt from the
US government directly. The government would quickly use this money to pay
government workers (and nonworkers), who would immediately start buying things
with it and drive up prices. As soon as this became apparent, interest rates would
rise and the government would be forced to pay a lot more interest on its massive
debt.
If the Fed's primary goal is now to maintain low interest rates in order to
support the massive amount of new borrowing needed for our huge deficits,
then inflation may be a while in coming. Eventually, there will certainly be inflation
but it may not happen until some external event (like a sovereign default) causes
people to become reluctant to loan to the US and forces T-bill interest rates to rise.
Granted this can spin out in deflation (falling prices) or in inflation (rising prices) or in hyperinflation (loss of confidence in the currency/awareness that the currency is a confidence game). The FED can make any of the three scenarios come to pass, no? In fact, the FED since 1913 has caused the economy to cycle thru the first two many times. It is the way the bankers rob the peasentry, just like Jefferson said many years ago - first lend/inflate, then tighten the money supply/deflate to make them pay back with harder and harder to get dollars, then take their assets when they can no longer pay. Then start lending again.
Remember, the FED is not a government agency, it is a private bank.
So the bankers can cause a deep deflation if they choose. The politicians want inflation, but the FED doesn't have to give it to them.
So here we are trying to figure our way thru this, while the bankers have done this drill dozens of times. My reasoning is that hyperinflation kills their golden goose and busts their no-lose game - why would they do that, other than if the plan now is to go to a one-world currency/political system? It seems to me the FED takes the nation into GD2 if they deem it is the only way to avoid repudiation of the currency.
So the pondering here, IMHO, is who is truely in ultimate control, the FED/bankers or the politicians. Hank Paulson's performance 2 years ago seems to me to be more for the purpose of publicly establishing the (new?) pecking order more than for the purpose of getting $700b for the Wall Street bankers. So my bet is with the FED; a slow, grinding, controlled, foot-on-the-throat deflation (accompanied by much blather to the contrary, ala Greenspan always fighting inflation with words while pumping inflation out the back door), and then another round of debt pumping. That has to be their plan. Then the question is - can they pull off another cycle?
i think you have it !
free electron!
those waskaly deflationists
If you listen the Ben (the buffon) bernanke we never had inflation. Of course he will always talk deflation. he even talks it when there is clearly inflation. the idea that prices should always rise, even after a pop of a big asset bubble is stupid). it is the default of the fed because such a po9licy always insures banksters are bailed out.
Make bad loans, econony suffers from bursting of bubble, talk the evils of deflation, give out free money, reflate bubble. rinse and repete.
when you start to understand how "inflation" targeting rigs the system it gets worse. As a society we have accepted certain dogma's that appear not to have validity.
The deflation bogey, but ignore asset price bubbles. How do you think they got around to this policy. the jopb of the federal reserve is to bail out bankers. they managed top get this policy accepted by using bogus economic thought.
may I suggest everyone read the stiglitz piece in the ft today. he makes a very good point about the stupidity of the assumption modern economics is based on.
Inflation vs. deflation is pointless. BOTH are happening in unison, inflation in commodities and deflation in asset prices.
Those that are asset debt burdened need inflation to pay back with increasingly devalued dollars over time, which means theoretically paying back less than the original agreed upon value of the asset due to inflation. But deflation works the opposite.... the stagnant flow of dollars and reduction in asset prices means the debt ridden person is paying off an over priced asset with more dollars. Financial suicide.
I'm convinced that deflation has to take hold to straighten out this economy. For 2 years I've been hearing the gold stories about how it will get to $5K per ounce, yet what I see in assets today is deflation.
www.theterroristswhodestroyedthemarkets.com
http://research.stlouisfed.org/fred2/series/MZMV?cid=32242
Debt and velocity are inversely proportional. Kind of pokes a giant fucking gash in that argument, eh?
The reality of the situation is deflation is inevitable. The political gridlock to prevent further QE by proxy is already baked in. This is obvious to anyone with half a fucking brain cell. Deflation is necessary for M&A consolidation. Cash is king. Think this through for a sec. The Federal Reserve = the power center. Cash = the power mechanism. Why would the endgame be a crisis of confidence in their own power mechanism? Why would they intentionally shoot themselves in the foot? Now consider what happens when they decide to haircut the bonds and securities on it's books. The Fed Balance Sheet = The Money Supply. Funny coincidence, that China has been cutting way the hell back on their bond book? Who's boosting that bond book? The bond axe is going to happen across the industrialized board. USD, EUR, JPY, AUD, CHF, it's all getting a big, giant, fucking axe in total currency in circulation. And yes, the truly wealthy/powerful, they'll be standing above the ashes, ready to pick up the pieces and reshape it. They can handle a big ass hit to their nominal holdings, because of the gigantic gains in relative value.
....because if the FED allows deflation, it will cause the biggest debtor of all to default.
In which case, good bye dollar, good bye power.
Very interesting chart. But how are you measuring "debt" when you say it's inversely related to velocity?
when the pigs can no longer issue further govbmit debt; then they will raise interest rates and force austerity by essentially not paying their bills to anyone not part of their US corporation (state of Illinois already in this mode)
All revenues will go to the police apparatus and the bond holders; and yes this will devolve overnight into mad max.
although I'm a gold bug, I can see a scenario where an once won't buy a loaf of bread; so line up a food/security supply chain before interest rates go higher and you are on your own
there seems to be a lot of confusion between depression and deflation which are two separate phenomenon and inflation and currency debasement and the closely related issue of purchasing power.
i suggest that you define your terms carefully before prognosticating.
it would also behoove one to understand the money locked up in the federal reserve supposedly owned by banks but in reality lent to the fed to fund qe....
once you have figured out this rube goldberg / road runner - coyote contraption you will understand 1/2 of what you need to know about soviet style centrally planned economics.
My guess:
1: China and other nations stops rolling over our debt which causes massive increase in price of imported goods.
2: PTB here ship much USA wheat and corn overseas to regain reserve currency status but this causes food prices to soar.
3: Food riots spook PTB here. Helicopter Ben's air force takes to the sky and showers money on peasants instead of handing it to banks.
4: Hyperinflation.
5: Jhonny Bravo sells huge gold stock he secretly bought up in 2010 and has his mug carved on Mt. Rushmore.
Four year time frame for this prediction.
As much as I hate it, it seems we're joined at the hip to China. They' don't buy our debt because they think it's a good investment; they buy it to manage their currency. OK, they can overweight the euro in their so-called basket, but only by so much, because the entire EU (not just the eurozone) doesn't import from China all that more than we do.
If there is no inflation why is this Vanguard fund VIPSX (/govt inflation indexed bonds) going through the roof? http://chart.finance.yahoo.com/c/5b/v/vipsx?lang=en-US®ion=US
All US government bonds are going up now as people are fearful of the proverbial "double dip": http://finance.yahoo.com/echarts?s=TLT+Interactive#chart3:symbol=tlt;range=1y;indicator=volume;charttype=candlestick;crosshair=on;ohlcvalues=0;logscale=off;source=undefined
I agree with the article, and would like to add point:
The deflationist argument often points out all the “debt destruction” and “wealth destruction” that occurred in the past few years. They somehow equate debt defaults and asset valuations with a reduction in the money supply. That is patently wrong.
Just because money was created via the issuance of debt, if said debt is later defaulted, it does not mean that money is destroyed. The borrower of that debt spent it, it’s in the system, if they bought a house, the vendor or developer now has the money – it doesn’t matter what happened post-sale, the debt may have been written off, but the money the debt created continues to exist.
The same logic applies to a falling equity market. For every seller there is a buyer. Price is determined by the most recent exchange. If Joe sells Bob his APPLE shares for $1 a share, the market values my APPLE shares at $1, using that metric billions in market valuation are reported as “destroyed”, and deflationists mistakenly label that deflation, but the number of shares in this case has not changed, and Joe has Bob $ and Bob now has Joe’s shares – no NET change.
Then deflationists point as the reduction in the pace of M-whatever money as evidence of deflation. Again, a slowing in the creation of money is not deflation, it is a reduced rate of Inflation!
All the gazillions of dollars that have been created over the years are still sloshing around in the economy. Perhaps a few FRN’s have been burnt or eaten by pets over the years, but barring a one-sided accounting entry at the FED, money is never destroyed.
"Just because money was created via the issuance of debt, if said debt is later defaulted, it does not mean that money is destroyed. The borrower of that debt spent it, it’s in the system, if they bought a house, the vendor or developer now has the money – it doesn’t matter what happened post-sale, the debt may have been written off, but the money the debt created continues to exist."
Huh? You might want to brush up on the concept of fractional-reserve banking. And then brush up some more...
the existence of amounts of money matters less than the
system of distribution/circulation. if it does not circulate
systemically it then only services segments of
society. large amounts service the psychology of those
that make determinations based on large amounts.
ie. some have 1 billion but need to have 2 billion?
so the money is in the "economy" (mind) but
what has happened to the system of distribution?
and the rate of return on large amounts, that is
the sweet spot in the dream contemporary.
money for nothing and all that..(risk,hehe). reminds me of .....
.
http://www.youtube.com/watch?v=12cbF8FXadQ
.
and money is regularly destroyed or perhaps
just recognized for what it is, nothing but a
promise made by a gambler to satisfy a debt,
but the recipient of the payout is never rightful
and is politically determined.
i was wondering on this incomprehensible inflation/deflation issue ...
is this really an economic consideration or is it
just economic jargon veiling a grand theft of
sovereignty and political power, as it appears.?
.
You assume we are in 1933. I think we are halfway through 1930.
I know everyone is so much smarter, now, and things will be different this time - but I tend to think human behavior in regard to the proverbial horse race between greed and fear has not changed, nor will it, ever. It just takes about 80 years for everyone to die off that went through that shit.
You are correct, end of 1930. Most do not even know we are in a depression yet. Our grandparents did not figure it out until the end of 1931.
The writer of this article does not mention velocity as the most powerful of the inputs. When people start to hoard their dollars for fear of not being able to feed their families paper stocks, bonds and other holdings will plummet in value and the dollar will rise out of demand. This is happening now as people cash in retirement accounts to make ends meet, yet the velocity of the dollars is dropping. The new $100 bill to be issued in Feb, 2011 is to try to track people that have pulled their money from the system already. And will probably be used to speed up the velocity of the $ some way. But a 90% drop in stocks and bonds is highly likely in the next year. The flash crash was the beginning of such a drop, but someone pulled the plug on the computers and shut down an exchange! It won't matter you cannot push on a string, or predict human nature.
Then, and only then, if the helicopters drop dollars, they will have to spend them fast so they do not loose their value overnight, e.g. Argentina and most of S. America in the 80's. Velocity will create the feared pre WW II inflation that we all fear. (By the way savers do not fear deflation and the US should not either.) As that inflation peaks we cash in the gold.
One final item. The Government may create jobs? Why do you think we created a bogus Dept. of Homeland Security? How about the two-war jobs program we have had for 9 years? There are a million plus troops and mercenaries that need to be brought home and a logistics line that extends half way around the world needs to be shut down. Add those people to the unemployment rolls! Good idea, but remember they know how to use guns and have no qualms doing so, just for money.
Inflationists who seem to think the Fed will inflate us out of this mess, forget the main reason they will not. Inflation will cause interest rates to skyrocket. The US can only service its debt with unrealistically low rates. If rates go to 10-15%, the US govt will go from unofficially bankrupt to officially bankrupt overnight. Nothing can be worse for the US (or world) economy than a US govt that can't borrow.
Actually, in a deflationary scenario the USG debt becomes automatically unserviceable (not enough cash inflows coming in), which means default, which means USD is toast, which means hyperinflation (faith in the currency is lost).
Wait a NY minute! The limit of the yield curve is 0% on all durations of debt-which is what is happening now. You only need cash flow to service interest since you can roll over the higher yielding maturing bonds and actually lower your interest rate expense. No market for the bonds? No problem you buy them youself (like we're doing right now by creating funds out of thin air). Japan's been doing this for over two decades and they seem to functioning just fine. As another astute commenter said, deflation will happen regardless of what the government tries to do about it-just look at Japan and its futile attempts to inflate assets. Of course, their energy and food prices have been increasing but this has nothing to do with asset deflation/debt deleverging which is what deflation is all about.
I just wish someone on the inflationist side actually knew how inflation and deflation actually manifest themselves.
Add: and then they'd know that deflation can't be prevented.
deflation is the contraction of money and credit. They have been contracting for more than a year.
The so called printing press is very small to the credit contraction taking place. The net contraction will continue for
at least the next five years.
I pray (to a god I don't believe in) everyday that we have five years.
I feel we have two, if we are awfully lucky.
I really, really, hope you are right.
First off, this is a thoughtful and well constructed piece...
The central issue is whether the Fed wants to risk losing global reserve currency status by countering deflationary forces with that nifty little piece of technology you call a printing press. I would fathom to guess if the USD were devalued enough there would be very adverse political and economic implications if our currency loses that global reserve status (think crude oil).
How far would our power brokers go down that road? I really don't know. But of they do, I could envision some pretty interesting black swan events in conjunction with it (global currency, invented war, etc.).
Oil will omly be traded in USD. Just ask Saddam.
Thank you for your reply.
I think there's a real possibility that the US enters a currency crisis, and in doing so they may take the miliary option in the name of "protecting essential assets".
If backing up transgressions via a miliary options becomes the case... why not just default against creditor nations and dare China to make the next move?