This page has been archived and commenting is disabled.
The Deflation vs Hyperinflation Debate On Steroids, Or Mish vs Gonzalo Lira In The Octagon
A recent guest post by Gonzalo Lira on Zero Hedge, providing a theoretical framework for the arrival of hyperinflation, went viral, generating over 75k views and over 1,000 comments, further confirming that the biggest and most confounding debate in all of finance is what will the final outcome of the Fed's market manipulative actions be: deflation, inflation or, and not really comparable, hyperinflation (which is a distinctly different phenomenon from either of the above). The post infuriated some hard core deflationists who continue to refuse to acknowledge the possibility that in its attempt to inspire inflation at all costs, the Fed may just push beyond the tipping point of monetary imprudence away from mere target 2-3% inflation, and create an outright debasement of the world's reserve currency. One among these was none other than Mish himself, who a week ago recorded a podcast on Global Edge with Eric Townsend and Michael Hampton (link here), in which his conclusion was that Hyperinflation is the endgame, "so it is unlikely." Of course, the very premise of this statement argues that even in a monetary collapse the Fed will retain control over the flow of money, which of course is unlikely, and thus makes us very skeptical that such a simplistic and solipsistic argument is enough to resolve the debate. Since one of the items covered in the Mish podcast was Lira's argument, it was only fair that Gonzalo himself should be heard.
So a few days ago Global Edge ran a follow up podcast with just Gonzalo Lira, in which the Chilean was given the opportunity to defend himself and to further validate his argument. In a very lively and heated discussion, which teaches the amateurs at CNBC just how one should run a financial debate, Lira and host Hamtpon agree that hyperinflation may play out differently than
many expect. Among the questions probed are whether property will be a good investment in a
hyperinflation scenario, and what may happen to all other key asset classes once the Fed finally loses control of everything. Still, the best outcome would be to give Lira and Mish a one to one venue in which the two can battle it out: surely it would have no actual impact as the deflationists and hyperinflationists of the world tend to be among some of the most dogmatic individuals in the world, but it sure makes for much more entertaining theater than watching those idiots in Congress pretend they are in control of the financial destruction currently going on in America.
45 minutes of excellent financial debate follow after the jump (and the original Mish interview can be found here).
- 30215 reads
- Printer-friendly version
- Send to friend
- advertisements -


tmosley
"The natural state of free men is peace."
Hahaha. ever speak with an Anthropologist?
What percentage of your lifetime have you spent at war? At any given moment are you more likely to be mowing your lawn or mowing down advancing troops with machine gun fire?
I think we have a big one coming up and that may skew your numbers, sure hope I am wrong though. Nucs did slow things down a bit though.
Yes, war may be coming. But how does that prove that war is man's natural state?
The World Series is coming. So is Christmas. They are big, exciting events but they do not characterize the natural state of existence.
You think you're free? I disagree. We are all slaves of the state, and have been for nearly 100 years. It is thus natural that the US has been in a near constant state of war for the same time period. It's easy throw away lives when they are not your own. Free men can not be compelled to take such actions against their will.
That's a pretty narrow view of "war".
Why exaggerate? If one speaks of war, then speak of war. Surely you don't refer to all acts of affection as "fucking." Why then would you refer to minor forms of social tension as "war?"
"Anthropology's basic concerns are "What defines Homo sapiens?", "Who are the ancestors of modern Homo sapiens?", "What are humans' physical traits?", "How do humans behave?", "Why are there variations and differences among different groups of humans?", "How has the evolutionary past of Homo sapiens influenced its social organization and culture?" and so forth."
wiki
History books make it seem like man is constantly at war. But historians report history like journalists report air traffic. All the successful takeoffs and landings are not reported on the news - just the tragedies. All the people who live their entire lives without slaughtering another human being are nonexistent in history books.
Excellent point.
rewrite, redistribute and give it a generation.
"The natural state of man is war, not peace..."
I, on the contrary, have experienced that much more natural for a man is cooperation, even among the ones who dont like eachother much, or when cultural and other differences leave them only this small field of common interest that they currently work on.
so, geo, what's your point? ;-) - Ned
geopol
Is there a Battlestar Galactics weekend?
It has happened before, it will happen again, kind of rings a bell.
Spot on. In Zen Buddhism, "time" does not even exist, it is merely a creation of our human thinking minds. Merely conditions, manifestations, and so on. Constant transformation, but if the input ingredients (thoughts, memes, habits of mind and action etc.) are not consciously changed, then we get what you stated, as we are.
Take responsibility for your own "space" people......
At the top of the tech bubble in 2000 you had half the world saying "It's different this time" and stocks will go higher vs The other half that were saying "This will end badly". Watch out below.
qualcomm, bitchez
pets.com, bitchez
Dr Koop.com ...o bitchez.
The 2010 equivalent: GOLD BITCHEZ!!
Oh my gosh hes baaaaaaaaack. Sha-zam
lets see.....
Gold-10 year bull market
treasuries-23 year bull market
hmmmmmm
Stocks: 30 year bull market.
Dollars: 97 year bear market.
Cretin.
You spelled raccoon wrong.
You spelled jonny wrong.
m-o-o-n-b-e-a-m, that spells johnny...
Johnny said the stock market would close down on Friday but it didn't. That's because his predictions always come true and he always admits when he is wrong.
I haven't had a single loosing trade since I started posting on the internet....
"The 2010 equivalent: GOLD BITCHEZ!!"
He's sneaky, too - lol
buried canned ham in the backyard Bitchez!
I am a repressed show off and exhibitionist, Hulk. Does that make me a "buried canned ham?"
Maybe, but we can definitely "fix" that repression thing...DCRB, a round of Absinthe at this table por favor!
.
.
My Italian Xenta is long GONE! I have had to settle for the ersatz stuff imported from France, which actually is not bad.
Yes, Professor Msc, do be careful with the Absinthe, it can make you crazy... Even bearings can get looped and rolled on it...
"hyperinflation (which is a distinctly different phenomenon from either of the above)"
No it's not, hyperinflation is inflation is deflation is hyperdeflation.
Perfect symmetry.
Whether hyperinflation results as the endgame or not, the original destruction on the economy results from the collapse of the credit driven money supply, which is by definition deflationary. In the end from a real world perspective, unless Da Goobermint starts handing out Free Money to the consumer as it does to Banksters, prices cannot spiral up past a certain point because people will be too quickly bankrupted. Its possible at some point Da Goobermint will start handing out Free Money to J6P, but so far that doesnt appear to be in the near future.
RE
Mish destroys his own case starting at about 21:00 when he starts listing all the measures the Fed has undertaken, and all the giant fiscal U.S. deficits, which haven't had any impact on credit growth. Then he says hyperinflationists "aren't even talking about that". Yes we are. In fact, all of the things you list are exactly why there will be a currency collapse: everything they have done is for naught, the economy continues to sag, and along with it, tax revenues. Constantly sagging tax revenues create increased demand for social (deficit) spending while decreasing the Treasury's tax take, and the deficits continue to balloon as interest payments rise steadily. When the credit markets realize the U.S. situation is untenable, the Fed (as Mish also points out) continues to balloon its balance sheet, destroying once and for all the value of the currency, which is backed by the toxic holdings of the central bank. Poof.
Mish kicked me off his blog years ago for insistently asking him how the U.S. would continue to make debt payments in the event of a persistent deflation. That is the one thing HE never addresses. Ever.
I'm confused about the argument. Surely deflation is happening, we are in the deflation spiral and there is no way out (until we have spaceflight or some other unforeseen new bubble.) If they have to print to pay the interest on the bonds, we'll eventually have hyperinflation. I think it might be that simple.
Is their argument that we will have deflation to death with no hyperinflation event? What happens if the government defaults? Is that considered hyperinflation?
The hyper-deflation argument is that the Federal Government will default, meaning bondholders will not get back the dollars they were promised (US Treasury bond principal and dividends). Think GM bondholders (they were screwed), or Greece sovereign bondholders (they also are screwed). This means fewer dollars would exist, and there is a (dramatically) decreased future expectation of dollars that would exist.
Further, defaulting also means Social Security, Medicare/Medicaid, government payroll, and other checks won't go out. Fewer dollars would exist.
The question is whether the Feds would merely get so desperate for one last "hurrah" that they would "print" their way out (nobody would buy their bonds, so it would be raw printing), or otherwise perform some kind of currency "dilution" (e.g., retire 1x old money for 20x new money).
If they print, hyper-inflation. If they don't, hyper-deflation (and a lot of pissed people that won't get checks). You will absolutely get one of those, and possibly both.
Either is truly possible. In fact, because the Federal Reserve isn't a part of the US Government, it's even possible for the dollar to survive the dissolving of the US Federal Government. In contrast, the US Treasury could simply print-and-issue Greenbacks overnight, and the dollar would instantly be worth nothing.
It's a crap shoot, but both arguments are truly legitimate.
Ask Iceland what happened to their currency-thingies when they defaulted. Kronor down 40%.
How did Comrade Roosevelt fight deflation? By devaluing USD by 70%, overnight, by decree.
How's that for a crap shoot?
That's true, and a good point, which is why I ultimately think we'll have hyperinflation.
However, nobody wants to settle transactions with Kronor. Nobody outside Iceland wanted them.
The US dynamics are a little different: When the national Iceland government dissolved, it was replaced with another national government. When the US Federal Government dissolves, the sovereign states will still exist, and they could (theoretically) still settle transactions across state lines with dollars.
Another good point. I don't have a counter-argument, except for the possibility that everybody knows it won't work. (Yes, devaluing is more likely than not.)
In contrast, it's somewhat a question of the breakup of the Soviet Union: They *did* break up. Could the US Federal Government seize IRAs and 401Ks like Argentina did in 2001? I'm not sure they could without real bloodshed. It's possible they don't try that.
Obama hates his job, he doesn't like being there, he has no idea what he's doing, I doubt he'll run again, and IMHO he'd be "just fine" going down in history as the *LAST* president of the United States. Like Gorbachev, it's *possible* upon a failed US Treasury auction and economic implosion that the US Federal Government merely dissolves. Remember, we don't even have a US Federal Budget this year, the bond auctions are a total joke, and the Federal Government is increasingly a huge dysfunctional mess *now* (in part because we have no Executive, and we won't get one, since the first three successors are absolutely incapable). Further, the states will actually *demand* the Federal Government relinquish control when Iowa is told it needs to subsidize $500K/year pensions in California (the states will applaud the dissolving of the Federal Government because their power would grow).
The only thing keeping the US Federal Government in place was the "free" money it gifted the states through growing deficits. When it can no longer grow deficits, the states will suddenly decide they don't need a Federal Government (and I personally agree with that decision).
Unlike the Icelandic Kronor, in the short term, it's a little different with the $dollar. I wouldn't want Euros before I wouldn't want the $dollar, and people are going to need to settle transactions with *something*. The Federal Reserve won't disappear merely because the US Federal Government is gone. In fact, the Fed will be stronger than ever at that point (in the short term, until groups of States figure out how to create a currency to rival the $dollar). And, it's not guaranteed the states could pull that off: If foreign countries won't take the new Regional currencies, the states are stuck with the $dollar.
IMHO, the Euro was supposed to evolve into the Single World Currency. If the US Federal Government dissolves, it's almost a no-brainer for the IMF to make a move to implode the Euro and have unilateral print control for the $dollar as the Single World Currency. (With no US Federal Government, the Federal Reserve operates without a charter and is free to do whatever it wants.)
The Euro will out last the dollar.They both have 2 ways of dealing with gold. The Fed has the dollar with a gold fighting paper machine and the ECB has the Euro where they mark their gold holdings to market every month.
As the dollar/paper gold collapses, the gains are automatically built into the Euro because it marks their gold holdings to market.
It's certainly possible the Euro outlasts the dollar. I understand your points, and they are interesting. However, IMHO, it's a 60/40 that the dollar outlasts the Euro:
The current shift is unthinkably large. People don't want to hear that Japan (both as a culture, and as a Nation) will be gone in a few decades. But, it will.
Math and game theory suggests the Euro was an interesting flirtation destined to fail (same as OPEC). That's my "saving grace" against the "nightmare scenario" of the Fed/IMF taking over the world currency (it's the same problem). However, in the short run, we are merely on a very large chess board, and politicians and central planners *love* the crisis because it increases their probability for establishing empires. (When people act out of fear, it means they did not act out of logic/reasoning.)
All your points are true but in a world with fiat currencies, the Euro can print as much as the Fed. Until there is a run on fiat, both fiats will still have value until they don't.
When the fiat run happens, the gold gains are transfered to the Euro and not the dollar.
mikla,
"Could the US Federal Government seize IRAs and 401Ks like Argentina did in 2001? I'm not sure they could without real bloodshed. It's possible they don't try that."
I posted this 2x's yesterday, there is a meeting (led by John Kerry, on Sept 14-15th, to discuss this very issue,about your/my IRA's,and 401k plans).
Trial balloon...............you know if dipshit is heading the panel, it will not turn out well.
I'm *very* interested in this.
We all know they absolutely *want* to seize IRAs and 401Ks, and they *know* they are at the end-of-the-line (they desperately need to grab anything they can).
However, the Wimpmasters won't even touch "The Third Rail" (Social Security), which the Supremes ruled was a mere welfare program (no citizen is actually entitled to anything, no matter what was paid in). Grabbing IRAs and 401Ks is *far* more severe: There is no legal rationalization to grab private property in this manner, and Granny really would get out the shotgun for that. (I'm talking actual violence.) You'd see immediate calls for impeachment, states would seriously offer resolutions to leave the Union, etc.
"National Healthcare" is a piddly "little" thing compared with Federal seizure of private assets without precedent. Yes, I'm sure it is *really* on the table. However, I'm also sure they are calculating the possibility of getting away with it (in a very physical sense, in addition to the political sense).
They won't "SEIZE" it--they'll offer up a deal (Automatic IRA) and tax the dogshit out of alternatives.
Yes, it will be unpopular. And they didn't "touch" Social Security--except they did. They keep increasing the retirement age. And they get away with it.
The average American can't even spell economics, and wouldn't know what the expression Weimar Germany means if he heard it. When Uncle Sugar takes his retirement plan BUT PROMISES TO GUARANTEE A 20% RETURN...Joe Sixpack will high-five his brother until their hands bleed.
So yeah, it'll be unpopular with a lot of Americans who aren't stupid. But are you willing to gamble your retirement 401-K or IRA on the fact the socialists are worried about getting re-elected?
I agree they will try any obfuscation to rationalize their actions, and fiddle with the rules like automated "opt-in" contributions from which you must manually "opt-out". However, they need access to the *existing* money -- there's not enough *new* money being deducted from paychecks.
There's no precedence by which the US Federal Government can change *your* asset allocation, nor seize *your* retirement assets. To do what you suggest, they would need to take the money directly, and/or encourage you to give them your money by removing the tax protections of the retirement account itself (that would be a bloody mess that would melt the market in a day).
So, yes, we agree they are looking at options. I just don't see how they could grab the existing, and divert it to Treasuries, without a bloody war.
People agreed to give their money to the Federal Government for the Ponzi scheme known as Social Security.
I respect your opinion and admire your posts--I suppose we just disagree on the willingness of Americans to think they can get something for nothing from the government. My opinion is: most of them will go for this.
hey D O S zapper, changed pictures, is that your family?
ok, let's think through this "default" scenario; same thing Douchinger claims and I got kicked off his forum for asking the same questions as the guy above- how the fuck does the USG make its debt payments in deflation.
If the US defaults, where the fuck does the dollar go? Defaulting nations don't see their currencies go UP in value...everyone FLEES them. This is why the Euro-based debt crisis saw the Euro FLED for CHF, JPY, and USD.
There's no endgame here other than a worthless FRN...people need to get their heads around that. It's really as simple as a point of recognition that the debts the money is based on WILL NOT pay off. All debts must be discounted to realize a contractionary future and the FRN is ultimately a debt.
If the FRN zone starts defaulting left and right, treasuries, denominated in dollars, are worthless. US Paper, FF&C gov't paper, worthless. But the FRN/dollar is going to be worthFUL? This is oxymoronic. The Treasury IS the FRN IS the debt that would be defaulted on.
If they really do default on Treasuries, people, c'mon...wtf is the FRN's bank's asset sheet backed by? Seriously...this is easy shit and I fail to understand why Mish can't get it.
If the USG defaults, the Fed implodes, the FRN with it and the US will have to remonetize around hard currency for a time or seriously gird for war, just like the USSR faced when it hit its wall.
(see my comment above to SWRichmond, as background to my comment here)
My *hope* is that when US Treasury bonds are worthless (which they *will* become worthless), that FRNs are *also* worthless.
However, my personal "nightmare" scenario is that the Federal Reserve will continue to operate without a charter by the US Congress, but instead, under the IMF to become the Single World Currency. The IMF would actively implode the Euro to force dollar adoption throughout Europe (remember, Germany and numerous other European nations already started issuing sovereign bonds denominated in dollars).
If you think the Federal Reserve is bad now (and it is), just wait until it's printed offshore by an institution that has no pretense to be accountable to any nation.
Now *that* is a nightmare. But, in that scenario, the dollar survives, and all international transactions worldwide will be forced into settlement through dollars. And, due to the massive deflationary unwind/credit collapse (still gotta work through sovereign defaults, pension defaults, municipal defaults, bond market dislocation, and $1.4Q in derivitives collapse), yes, there would be fewer dollars (tons of screwed investors holding worthless government bonds and empty claims on non-existent counter-parties), so the dollar would have greater value.
Then comes the "best part": The Fed/IMF would have *all* the power, since they would start their own Marshall Plan to print-and-gift to the new fledgling governments, acquiring influence, "as a sign of good faith" since the world would be dying for any form of credit (which no one would otherwise have).
We can only *pray* the Federal Reserve dies when the US Federal Government dies.
I understand your nightmare scenario but I believe it requires "the center to hold", and I don't think it will. Who would back the Fed? What force does the Fed have that it can bring to bear against an aroused populace, or even against a small percentage of the populace?
IMO the Soviet Union was able to continue as long as they were able to hold the center. They did this by keeping a critical mass of apparatchiks in their corner by keeping them in relative comfort, and as long as they could muster sufficient threats against the opposition. For the U.S. case, I think you are talking about an actual coup, not merely the de facto one we have now. The population is too aroused now to stand for that. I remain confident (hopeful?) that sufficient elements of the U.S. military would not stand for it, either.
The IMF. We only need ONE of the following:
The Fed won't need a standing army. It's an economic war. The Fed has clear title to *lots* of assets, including toxic crap, but that's fine because it was all "free" to the Fed anyway.
If either (1) or (2) happens, the Fed can merely "wait" until Greece is so desperate for oil that Greece somehow goes-and-gets some dollars so it can buy some imports. The Fed will "in a sign of good faith" even gift Greece enough dollars to import a few years worth of oil. Then, the Greece economy will run on dollars (who would want those New Drachmas anyway, if you can't buy oil with them?)
This is different: The Soviet Union couldn't "corner the world market" on currency. The Fed *already* has the world reserve currency, and if "free'd" from the US Congress, with the proper backing, it could actually corner the world currency market.
What if you wanted a Single World Currency? What would you do? Simple:
If I were the Fed and wanted to be King, then I would do exactly what's going on now: Destroy the Euro, back foreign nations with dollars and get them to issue their sovereign bonds denominated in dollars, and then collapse the US Federal Government.
This is consistent with what the Fed is doing: The $700B bailout went Taxpayer=>AIG=>Foreign Governments. The Fed has been spending $Trillions buying Greece sovereign bonds and performing currency swaps with foreign central banks. Foreign nations are issuing sovereign debt in dollars (IMHO at the prompting, promises, and backing of the Fed). And, the ECB can't print like the Fed can, so the same tools don't exist to "defend" one monetary system against the other.
Remember: The Fed is directly monetizing *every single* US Treasury auction. They could annihilate the US Federal government in a *day* in a hyper-deflationary event by merely not bidding on the next set of bonds.
Yes, in a SINGLE DAY. Game over: Fed 1, US Government 0.
The US Federal Government response would then be to announce the issuing of Greenbacks, and the abandonment of the dollar. However, I'm unconvinced that will work, since the US Federal Government serves no real purpose to the US States when the US Federal Government doesn't have the ability to deficit spend by attracting foreign capital (which it would not, because there is none, and the Fed would have already left the building).
Is the Fed viewed internationally as a benevolent, trustworthy entity that is capable of the necessary goodwill or is the global population also duped into the United States Federal Reserve bs which would therefore limit their effectiveness?
IMHO, that's not the way to phrase it.
No, the Fed is not viewed as "benevolent" nor "trustworthy", but nor is any government.
People hate their governments, but live under them, because of perceived lack of alternatives. People hate their politicians, and do not trust them, but continue to elect them because of the promise of more "free" stuff.
The Fed could make such a move and "come out on top" merely because it vanquished perceived less-desirable alternatives.
People don't "trust" the Pimp nor Crack Dealer they just met on the street, but still do business with them, because they think they will get what they want in the short term.
LOL.
The Fed refuses to bid...the tanks roll up Liberty.
US Gov't by KO.
Paper bows to the gun. You overestimate the power of jew confetti.
The gov't and banks have merged; they are a symbiotic thing now. Without the power of the gov't, the Tribe at the top has no power to compel anyone to do anything. All the banks have is paper; the sovereign has the arms and boots.
We agree Government and the banks have merged. They are partners in crime (literally).
However, you assert the Fed is subordinate to the Government, and specifically the Executive Branch. NO.
I assert:
Here's the "Acid Test":
Who, again, did you think was in charge?
What was a scenario by which the Executive or Legislative Branches could do anything to make the Fed nervous?
Agreed 100%
Prolonged deflation will make government debt unpayable. The government will print FRNs rather than default. Heck - it didn't even let Fannie and Freddie, AIG, GM or even Lehman default (they covered $89bn of Lehmans derivative positions).
They have a pattern of non-defaulting. Which means currency debasement is the only option.
The real issue is how long will deflation last before a tipping point is reached and Lira's starting conditions for hyperinflation are activated?
That's easy! Until we (we the people) run out of money and lose our assets.
pan-the-ist
Read the primers at Automatic Earth. They have advocated Deflation for a while now.
will do.
Right, but how long can we persist in a deleveraging->deflationaryenvironment? Does the whole of outstanding credit have to contract all at once? When I asked Gonzalo to put a time frame on his hypothesis so as to make it falsifiable, he replied possibly before the end of this year, but certainly 2011... I think that's a vastly quicker timeline than virtually anyone else is thinking... obviously, myself included.
I just think most people are arguing to argue... the end is hyperinflationary depression.... period, end of story. The only argument to be had is when this occurs... Either we can't make our payments because of an inability to tax production sufficiently or we print enough so as to startle the herd... the end is the same. The hyperinflation through bi-flation route will be vastly quicker than the attempt at austerity/liquidation route... I'm thinking we're opting for the latter, which is why my time horizon is longer...
Timing is a fool's errand.
The hyperinflation through bi-flation route will be vastly quicker than the attempt at austerity/liquidation route... I'm thinking we're opting for the latter, which is why my time horizon is longer...
I think you're correct. The republicans will take the house in 2010, cut the deficit in half all the way down to $800 Billion or so, and declare themselves to be fiscally conservative and having put the U.S. back on track. The game will go on for a few more years. Then, someone will remember that, just a few years ago, a $400 Billion deficit was considered untenable.
The problem with Obama is that he doesn't know how to spend a trillion dollars. He gives money to the poor and down-trodden, who, in turn, just buy crack and Kentucky Fried Chicken. Most likely, Obama's poor understanding of economics is due to his ethnicity and the fact that he's a communist. Glenn Beck has many flow charts that have proven this.
The Republican administration before Obama was far more fiscally prudent (as always). Taxes for the wealthy were cut, while government spending soared into the cosmos. On the surface, that may seem irresponsible, but it's a proven recipe for success.
The lesson is simple: If you want to juice the economy into prosperity, you need to create an unnecessary war and turn the US into a fascist state by funneling money to Wall Street. Then, at the same time, cut taxes. Sure, the national debt will double (~$6T --> ~$12T, 02-09) and the US will morph into a war-mongering plutocracy, but the US will be on the road to prosperity and you can always mop up the unintended consequences later. Besides, if that experiment fails, the clean-up burden will land on a different administration. With a little spin, you can always make it look like their fault.
It's a win/win scenario. War and fascism, when coupled with tax cuts, lead to prosperity. If not, it's not your fault. You don't need to be a rocket surgeon to figure it out.
Vote Republican 2012. Return the "White" House to it's rightful owners!
junked you, owing to what seems an attempt at disparagment-by-association
Oh please RNR, spare us. Sit down.
Personally, I find my comments the most fascinating on this forum.
I normally get paid a lot of money for my ideas. The fact that I give them to you for free is a testament to my generosity and charitable nature.
Since you are a Republican, I can only assume that you don't know what "charitable" means, so please refer to Dictionary.com for clarification before you respond.
Of course you do, dear
I'm glad you are so charitable with other people's money. Tell me, when you donate money without a gun pointed at your head, who do you give it to? The government, or a private charity?
Also, Republicans and Democrats are the same, just like Christians and Muslims. You think you're different because you differ on some inconsequential detail, and you're at each other's throats over those inconsequential details, even while your policies are damn near exactly the same.
The only answer to that question is the US cuts spending to the bone. A very painful option indeed. But then again, considering the US has painted itself into the corner of only being able to service its debt with artificially, ludicrously low interest rates, all options are painful.
Of course, you can always take the Bernanke approach and argue that a persistent inflation is impossible because he's got a helicopter. Personally, i think the helicopter thing is an empty threat. The Fed would be burnt to the ground by a mob if the US ever experienced hyperinflation.
..."The only answer to that question is the US cuts spending to the bone."....
Maybe a huge pullback in our military spending perhaps?
Our budget for this year is close to 700 Billion.
Can't cut the gubbermint spending, as tax revenues will drop further (i.e. unemployable ex - employee's). Viscious circle it is.
Cut Mil. spending? Same thing happens, only your taxes go up. And BTW - 700 Billion is only the amount they admit to.
Exactly. How many service jobs are tied to the military. How much of the economy is tied to the MIC? If you term all of those jobs then the deflation spiral increases velocity and we're done. This is why austerity won't work.
No one disputes the deflationary spiral from a spending cut and it's inevitable conclusion (hyperinflationary depression). Again, the question is how long can we persist (or more importantly, how much more of the carcass can be looted) before our demise? The sole path to the longest lifespan, given our present predicament, is an attempt at austerity... and, if for no other reason, that is what we will try.
How is the fed govt cutting spending deflationary?
I dispute the first half of your first sentence.
With the lion's share of the economy dependent on governmental retirement payments, insurance payments, payroll, farming subsidies, etc., a pullback in government spending = additional job loss = continued credit contraction through default or the fear of default. Deleveraging ultimately leads to deflation as that defaulted/shunned money is destroyed... whether it's housing, cars, student loans, CRE, farms, you name it. Although some may argue currency is not destroyed in this process, they're willfully overlooking the composition and weight of the money supply... 95%+ being debt.
At this juncture, government spending is the only thing holding this mess from falling into the abyss. If the spiral is deep enough, it will lead to hyperinflationary depression through outright default when the taxable base is insufficient to cover our credit obligations.
obviously this is incredibly general...
Every dollar not spent is de facto left in the real economy by virtue of not being taxed in the first place. So people on the govt dole would have to go be productive and get paid for doing something rather than nothing.
The money doesn't get thrown into a furnace and get destroyed--it goes back to someone who gave it up to Uncle Sugar in first place.
What production? We're 70% services based... we change our metrics to measure the bullshit economy we're left with... we're just doing each other's laundry.
2 things: (1) what happens when I take out a loan for $500k for my modest california house, the housing market tanks, I give the bank the keys, they sell it for $150k and have no further recourse against me? Where did the difference go? What happens when everyone else does the same at the same time?; (2) what happens when banks refuse to lend as no credit worthy borrowers wish to borrow and uncertainty is rampant in the market? When everyone deleverages and repays/defaults on the notes, the money just sits in the banks... regardless of whether the money is still in existence, what is the effect? What if the bank itself is insolvent and has a deficiency with its creditor(s)?
The money supply is contracting and will continue to contract... but we're getting mixed signals because of a contemporaneous currency crisis.
Also, there are more people than productive jobs to man and capacity to sustain them... this is what mako calls the liquidation of nonperforming assets... in the growth cycle, the earth has been captured by man and most all growth squeezed... we're just realizing this fact.
well you know what i was told the other day. i was raising the question to a gentlemen, about the planes being used, fighting this crazy forest fire, called fourmile canyon. some say quite old and outdated have been sent in to fight it. this man said our newer better fire fighting planes were sent to iraq. that is curious, to me. why would america send our best fire fighting planes over seas?
So they could water our crop of heroin in Afghanistan in case of drought ...
+1!
So they could be destroyed and we would have to make new ones.
Living in the area, while the Fourmile Canyon fire has destroyed the most homes in a Colorado forest fire, it is relatively insignificant compared to the Hayman fire of 2002, as an example, which burned through three counties.
There's miles and miles of burned land around my parents' land. Luckily, they still live about five miles away from the Hayman's burn area.
johnny B, G O O D
Mish kicked me off his blog years ago for insistently asking him how the U.S. would continue to make debt payments in the event of a persistent deflation. That is the one thing HE never addresses. Ever.
Yeah SWR, that is weird. It is an excellent question, even though we all know the answer.
In fact, answered, it's a pretty succinct rebuttal to Mishflation all around.
Mish is what I imagine a scholarly post-Copernican prelate to be like as he desperately tried to concoct a working mathematical model of the universe with the Earth sitting dead centre while everything else spins around it. Naturally, the result would be ridiculously convoluted and could only function, tenuously, so long as everyone accepted its cherry-picked criteria for defining the terms involved. Meanwhile the planets, Earth included, would defiantly continue to orbit the Sun.
Regards
you've described the global warming crowd!!
I have wanted to say that to mish for so long. Thanks.
Mish haters are out of fashion. Like Marla's Sat. night spin. Out of fashion. No need for the trance, they are already hypnotized...
Heh np Spitzer. Don't hold that back on my account.
Regards
Why would anyone junk you RE?
Where ya been hiding?
Hows your health these days?
I ain't holding my breath on free money.
But since I am a Federal employee, I would not get any no matter how bad things get.
The deflationist island has less people on it so the higher the chance that you'll be voted off the island.
The inflationist island is so crowded that the probability of being voted off is low on the other hand the island might tip over.
Thats all bullshit.
The term "bubbles, inflationist, deflationist, contrarian, sentiment" et al have only become popular since the US dollar lost its ability to produce non price inflationary gains.
Fundamental Austrian school calls will rule, no matter what the "sentiment" is, what the "bubble" is what the "contrarian play" is.
First of all, these kinds of topics are hopelessly myopic. Taken from a broader perspective, one should consider what other available markets exist for potential securitization. The US & Europe served a useful purpose during a particular period in history, one that was centered around high-growth, oil driven industrialization & consumption.
The power-elite who control the global debt-based money system have no intention of going down with the ship. Their model of debt generated usury secured by real productive assets works in all environments, simply scaled appropriately for any given level of economic output.
They have already extracted almost all possible wealth out of the West. Why would they destroy any remaining core value simply due to hyper-inflation? The upside has been maximised; now is time to literally 'drop the bomb' by informing debt peons that they are being foreclosed.
The Fed, playing its part perfectly in its role as providing suitable cover, talks a good game about 'saving the system'. However, deflation is the real name of the game; witness the GOP platform of attacking public sector finances. A two-fer: induce deflation at the local level, and destroy the bulwark of Democratic support in both welfare roles and public service unions.
Observe & watch the global game being played - the US occupies only a small section. Who's next that will provide a fresh new opportunity for massive securitization? Hint: China & India. The US & Europe will be left to reap the inheritence of allowing (actually, being forced to allow) 3rd world immigration to work its eventual demographic magic as they slowly sink beneath the seas.
What all the deflationists fail to acknowledge..... that in a fiat monetary system, deflation is a choice, & is not etched into stone.
The US government with its fiat currency can, with the stroke of a computer key,.... print enough money to wipe out the debt.
This is why we will have an inflation problem and then we will have a currency crisis soon after.
Not under the current mechanism of issuing marked up cash thru the Fed as it will just end up in excess reserves. If gov printed and rebated directly to people, yes. The currency crisis will occur anyway on a relative basis because the central bank model is broken. Whether it results in US hyperinflation is up to the people and demand side of the equation, or up to the government and their ability to change the current rules of the game.
..."Not under the current mechanism of issuing marked up cash thru the Fed as it will just end up in excess reserves. If gov printed and rebated directly to people, yes."...
Tax rebate
A massive tax rebate on the order of 100K per working American. Chances of that happening: nil.
The name of the game is an attempt at a controlled demolition, not reflation of the credit bubble... easier to move the chess pieces around... however, fast or slow, the end is the same. The power vacuum will be filled.
I more or less agree.
Why not? 100K is nothing when its just a click of the computer key. If this can stop the boat from sinking, why not.
Then they can just restart the debt machine, as inflation picks up money would pour back into real estate ect....
I am not sure the US has anywhere near the capacity to issue direct 100K rebates, either politically or otherwise, without blowing treasury issuance out of the water or, more importantly, completely obliterating its cash flow float every month via T-bills.
Anyway, this is a boring argument, similar to arguing whether it is raining hard.
Yes it is boring, just as banking is so simple it repels the mind ...
Who could have thought the answer to the deflation problem could be so simple.
Here is another bone to chew on ...
If China switches from buying dollars to some other currency, one of two things must happen. Either the recipient country buys dollars to keep its currency from surging, in which case the US gets the money anyway, or the US trade deficit will be transferred to the recipient country, which will cause trade tensions with China....
The T-Bill market is a bitch.
You both have it totally wrong.
The Euro fell from 1.5 to 1.2 (inflation) before any money was ever printed, before that bailout was even announced
WTF are you talking about? Relative exchange rates do not define inflation. If Europe and US engaged in two way trade in isolation, a move like that might matter
yes they do. commodities where going up in Euros.
the discussion was about a hyperinflationary event, not relative commodity price increases in europe during a short time frame. Plus if you entertain that conversation then it would also depend on what was the realtive trade of said commodities, both internal vs. external and where externally if external. You are wrong. Phucking moron.
You're one of the few that understand the carefully planned end game that's being played out. Is there any way we can know when 'They' start moving their ill gotten gains off shore and convert their Dollars into Swiss Francs or Israeli sheckels?
They wouldn't want to move money in a deflationary game. They would own everything because you wouldn't have any money. Prices drop, but not until after you lose your job. It is suffocation friend. How long can you hold your breath?
ECB/BIS will out-live the Fed. The Euro was designed to
Spectacular post B9K9. They'll park the box on the doorstep of our grandchildren... and our grandchildren will open it, despite our warnings and tales of pain and despair. (Presuming the growth model of the world is not in its twilight and this is the last robbery).
All of the political headwinds in this country are deflationary. The FED has to keep uncertainty in the market... it does this by directly purchasing items to coincide with technical indicators as well as spewing bullshit through its figure heads. It has painted itself in a corner and the only possible way to continue rolling over treasuries is to drive the herd into a quality instrument... in order for a treasury to retain its "quality", we have to stop creating credit... while austerity is being implemented, their veil may be lifted to the extent government is peeled back, they have more time to plan, and to top it all off, we keep giving them chances to take capital and move it for safe keeping.
This is all part of the grand cycle of capitalists shaking off the collective bargaining of their peons. The money industry is simply our drug of choice. And we have not the discipline to control ourselves. People calling for an end to the FED will wake up to find their asses sore and their backs whipped. The power vacuum gets filled by someone... and we lack courage, discipline, and objectivity. This has been written in stone for decades.
The quality instrument is physical PMs.
"They'll park the box on the doorstep of our grandchildren"
The coming of age US generation is almost 50% non-white. They will not work their tails off to pay off rich whitie/gringo debt holders. Expect revolution…
Demographics! Thank you DR for bringing that up.
It is often said that demographics is destiny.
You are correct: the coming generations will NOT work their butts off just to pay down debt that we, alas, ran up for a "better lifestyle".
This 54 yr old whitie/gringo ain't waitin' around to NOT get paid (SS, Medicare, etc.), I am buying Gold and building our business in Peru all the while trying to shore up our family's finances so that our kid (better yet: grandchildren later on) gets as much as possible (that is, we have as little as possible stolen by .gov and the banksters).
Your provisions for your descendants is what causes them to open the box... Eventually grandpa's yarns of how they never bathed, worked in the same clothes, sewed holes shut, ate canned foods in the winter, didn't know where meals would come from, couldn't get medical help, had creditors chasing them, watching people starve and die, watching people claw at each others' eyes for a penny, will all fall on know it all, deaf ears... the ears of your descendants.
Ultimately, your children will seccumb to the alluring credit system to ensure their children never have to see the horrors they did/heard about. We haven't the discipline to avoid it... like dangling a seal in front of a shark.
Eventually, one (or more) of the world killing technologies we create will not be able to be managed upon collapse.... and we will not be reborn into temporary wisdom.
You ever heard of the Third Reich? The Fourth one is the answer to your question. They can try to foreclose but they will not like it.
The same players tried foreclosure on Germany and the producers told them to go fuck their jew confetti. They got hyperinflation then war.
Foreclose on the West? What remaining safe harbor does the Tribe have...Mars? There's nowhere left to run to.
Let me just state a maxim: paper bows to the gun.
I'm assuming you are collecting junk because of your "jew confetti" comment.
I don't know what's worse. The comment or the pussies that don't say anything.
I don't think trav7777 is being anti-semitic. The statement "...told them to go fuck their jew confetti" sums up the historically documented attitude of most Germans who were actively deflecting blame abroad and gathering steam for resurgent German Nationalism. Obviously, these very negative feelings were exploited by Hitler... and the rest is history.
It is a little know fact that Hitler was one of the people that was being foreclosed upon.
Make a movie about that Mr.Schpealburg.
I'm starting to see this site with different eyes.
it was not my doing that the same cousins were the bankers in Germany during the weimar period...it's just yet another financial catastrophe caused by the same banking tribe.
Hitler...let's see here...fascist, warmongering economy. Fuck, well that just about sums the US up in a nutshell. Or the UK for most of its imperial history with the same clan "financing" it through the Bank of England.
There are those expecting us to engage in a global war momentarily, and some in the AIPAC/neocon wing salivating for such a thing. How is this different really from Hitler? Oh yeah, the whole jew holocaust thing; that makes Stalin's 20 million not as bad as Hitler's 10 million.
But at some point, in the synagogues across the US, those upon whose shoulders the zyklon B will fall simply MUST stand up to the banking and media usurers and say enough is enough. I know tribers who are not made men, engineers and whatnot, and within their own circles there is already the recognition that the PR of this crisis, as expressed by the dominant Street demographic - nevermind the monolithicity of the Fed board or something - looks simply awful, and they worry if it all comes apart that fingers will be pointed and history will repeat.
"Amerika JudenRein?"
Not going to happen.
B9K9
China then India. I think the Chinese population age wise peaks around 2050 while the Indians still retain a greater young to old ratio.
China also has no form of social security and their healthcare is brutal. And B9K9 is worried about securitization leading China to the promise land in the next few years. Let me see their population consume all that overcapacity. They are a communist country built on theft (reverse engineering) & lies just like the rest in the dustbin of time.
But as far as China's population ...
China's one-child policy, probably the most audacious exercise in social engineering the world has ever seen, could be up for review, as Beijing policymakers worry about the effects of a population ageing fast, with insufficient numbers of youngsters to support them.
http://www.independent.co.uk/news/world/asia/china-rethinks-its-controve...
Gully, DR
Both of you have mentioned demographics, which IMO is a rich field of useful information that I do not see enough of here at ZH.
I am no expert in demography. But, once in awhile I read truly astonishing articles that can help show the way, show what may happen in the more distant future.
Demography-wise, things do not look too good for the West or even China.
On the other hand, things are looking up for Peru!
You guys are crazy...didn't you watch that Bartlett youtube series?
Growth is not the answer...we can't continue this cancer strategy right off the cliff.
"new opportunity for massive securitization?"
Except that the US has failed to financialize China, even after a decade of bowing to Chinese demands. Remember the deal? The US would let China have jobs/industries that previously went to US citizens in exchange for access to China’s internal financial markets. Hasn’t happened-instead the Mandarins told GS, JPM, etc to fuck off and are keeping the banking usury all to themselves.
"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final total catastrophe of the currency involved."
GOT THAT? the dollar will COLLAPSE. It is an absolute certainty. There shouldn't even be any debate anymore.
The DEFLATIONISTS already lost!
Collapse doesn't require hyperinflation. All it takes is enough inflation to bring short rates up a few percentage points. Once that happens we're back in the thick of full-on deleveraging, and pretty quickly a decision has to be made between public debt default and hyperinflation. I'm pretty sure it will be default. That doesn't make me a deflationist.
http://keynesianfailure.wordpress.com/2010/09/10/delayed-deleveraging-meets-the-keynesian-endpoint/
What do you think happens to the buying power of your currency-thingies if your sovereign debt is defaulted? OMFG....
Um, no. You are seriously mistaken. The Deflationists (and especially the Debt Deflationists) have been correct about the housing bubble, the stock market crash of 2008 and that Bernake's QE of last Summer wasn't going to spark inflation. The Inflationists were loudly yelling that it would last year, and only started shutting up around September 2009 when it was apparent that they were once again wrong.
You'd think that would be a clue, but no. Once again, in June, they started off again saying that the dollar was in danger of collapse soon, some of them even predicting it would happen this September. Well, that prediction seems wrong again. And for the same reasons. They don't take into account the full impact of a collapse in Credit, nor the impact of the currencies of the other nations which are in a weaker state than the US.
A collapse in the money supply (and that especially includes credit) is deflationary, not inflationary. And is not to be confused with a collapse in the dollar.
The dollar will collapse at some point; all fiat currencies do. And that will probably happen within the next 10 years, and probably sooner.
But right now, it's the collapse in the money+credit supply that we're looking at, and is the biggest threat. That is simply deflationary, and not inflationary.
The Inflationists were loudly yelling that it would last year, and only started shutting up around September 2009 when it was apparent that they were once again wrong.
Oh yes, the inflationists were so wrong. I mean look at all the leading indicators: Au,Ag, oil, food prices, CPI using pre-1980 calculations... er, ok wait; mb don't look at that. Most of it is just stuff everyone needs for day to day living, price increases in those areas over the last two years don't indicate there might be any 'inflation' going on. No indeed, only M3 as defined by a died-in-the-wool deflatorist (the US gov't hasn't provided stats for M3 since 2006) can quantify the world's money supply, and by my reckoning: man, is it ever shrinking. Credit is contracting, don'tcha know! And can you believe that real estate is falling yet in New Jersey?! I know some say the whole property market thing was in a decades long NINJA/sub-prime loan induced bubble and this is merely a natural correction, but hey, that's just talk trying to dupe you into perceiving that you are actually spending more to get less when in surreality the DXY (secretly) is reaching new daily highs in Wonderland, or Oz, or whatever fantasmic country above the clouds your imploding head inhabits.
/sarky-off
True Money Supply certainly hasn't deflated. And just because your country's plutocrats don't show you all the 'printing' that has-been/is-yet going on, doesn't mean it isn't happening. Try to keep in mind that even 800 thousand-billion-quadrillion in fiat debt outstanding doesn't amount to a fart in the wind for a printing press that can do zero to infinity in under ten seconds. IE, all that toxic crap your gov't has on its books will likely be paid out for a dollar on every dollar owed (at least).
Cue the lamentation of your Grandkids right on down to their great-great-great Grandkids.
Regards
Nice rant. I'm sure there's a point in there somewhere, but when you start off with confusing the basics, like the difference between price inflation and monetary inflation, whatever points you're trying to make will always end up confused as well.
Ehrm,
<cough>
"...indicate..."
"...indicators:"
So why didn't the Euro rise(deflation) when Greece was on the cusp of default ?
Why did the Euro start inflating even before the bailout was anounced ?
You're trying to use price as a measure of inflation or deflation. Sorry, that just leads to less clear views of what's going on. Price is a by-product of the monetary phenomena, not the other way around.
No, you have it backwards.
The Euro fell(inflated) before the EU bailout was even anounced.
Remeber everyone said the Euro was going to ZERO ? (hyperinflation)
Why was that ? because the EU was going to print tons of money ? NO, the confidence in the currency was being questioned
Again, you're using price as a metric for your definition.
Price is the manifestation of the relative value placed on goods by economic actors. Everything is valued against something else. Price is all that really matters.
Not if you want to see what's happening overall. If you're a day-trader, sure. But that's useless if you want to see the big picture.
The point being that price(s) are a by-product of many factors, one of which is the money supply. Inflation or deflation are a monetary phenomena. Thinking in terms of just prices doesn't give you an idea of what's going on in the global sense. And that's where the future lies.
Rename yourself to "Eternal Stupid."
ok?
Because who the FUCK CARES what the goddamned metrics are on some freaking piece of paper?
WE CARE about prices and manifestations of these metrics in the REAL WORLD.
Who gives a shit if the euro is "deflating" in monetarist terms (a bogus doctrine) if the relative value of the currency is cratering?
Deflationists can't even figure out wtf it is they even think they believe and they just sit and worship Friedman's shit. He was wrong; his entire Chicago School was WRONG.
Uhh, Trav, the mainstream economists don't consider debt/credit to be relevant. That's the whole point, and why the debt deflationists are outside of the mainstream. And why they've been so accurate. Before you go calling people names, you might want to become just a tad familiar with what you're talking about.
The dollar is backed by the full faith and CREDIT(tax revenue) of the US government.
that should answer your question
Until the tax revolts get into full swing.
Unless you interpret in terms of purchasing power.
If the dollar collapses, global trade, which runs on BWII, will collapse also. Please take into consideration how much autarky the US is prepared for. How do we buy oil in a currency that no one wants? Got war?
Couldn't you have deflation and hyperinflation at the same time? I don't see why not.