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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).
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I guess it depends on your perspective, the CRB looks different charted on a weekly basis over several years, factoring in, ADX, TRIX & MACD. It's all too much for my pea-sized brain.
I don't understand the arrogance of both sides. A sure sign that someone hasn't thought through the possibilities is when they can pick a side with certainty. As many have said, we have definite evidence of deflation, along with certain evidence of inflation. I think Andy Xie said it best when we described how "stimulus" floats downstream - it's why emerging market countries are inflationary and western economies are deflationary on balance. What we don't know is the choices that will be made at the government level.
We have some ideas on how the government will try to create inflation but we don't know if they'll be successful given the difficulty of getting money into consumer's hands. I've been wrestling with this question for eight years. I've looked at it from every angle I can imagine and I've been left with the conclusion it can go either way.
"....A sure sign that someone hasn't thought through the possibilities is when they can pick a side with certainty...."
Uncertainty is a luxury that only the Fed can afford. And what's worse than not thinking is not listening...
There is empirical evidence of deflation as well as inflation, perhaps not the standard bureaucratic, well credentialed metrics that we so dogmatically cling to with bated breath such as CPI, PPI, how about the rating agencies....?
Well, okay....... I must confess, I do agree with both Mish and Señor Lira, both premises a valid, and Xie, is correct that stimulus floats downstream along with you know what else..... My point being that a hyper inflationary event can evolve and is much more likely to evolve from a deflationary event than from an inflationary event. We are seeing that transition occur right now as we speak. It's too late to create aggregate demand and that would be counter productive at this stage, that was the "green shoots" bull shit that we were talking about nine months ago. Now we're talking about an economy that's at the apex of a "dead cat bounce" with no politically viable options available to our esteemed politicians. This is the greatest danger to national security.
I see a very high probability of an organically driven hyper inflationary environment in a deflationary context and I will trade accordingly...
Best regards,
Econolicious
Good point and yet people tell me all the time there is absolutely no uncertainty in even larger decisions. MMGW if you listen to its advocates is completely and totally proven there can be no argument, what a joke.
While it’s fun to blog about the Armageddon extremes of deflation/inflation I think Andy Xie is most predictive of the future:
“Inflation, not deflation, will dominate the global economy. The deflation scare causes the central banks in the developed economies to sustain a loose monetary policy. It will fuel inflation in emerging economies. Through trade, currency markets, and ultimately inflation expectations, inflation will hit developed economies.”
http://english.caing.com/2010-08-16/100171139.html
As long as MNC expand and trade into the 3rd world, there will be need for dollars.
ZIRP has stimulated developing countries that will eventually import inflation back to the developed countries i.e oil.
Stagflation is the future of the US along with high unemployment.
The only thing that will collapse the dollar is a collapse in world trade.
Hyperunconfidence.
When that becomes widely used, remember - I was the first.
++
O K frankO i give it up for you. you get a star to put on top of your economics book.
if you listened to it; the guy is spot on; sell gold; go cash; wait. wait. wait.
i lived in japan in the 90s; deflation is coming; it will be great. if you're making money.
No - Japan has run to the end of the rope. We have little to no rope to start with.
BTW, when commenting on a two man debate (with links to each), lauding the opinions of "the guy" is pretty moronic.
I continue to make the case for Biflation.
I believe that this strange situation is precisely what nobody expected and is therefore itself a black swan because the Fed and economists have no ready tools to deal with it.
One way to conceptualize biflation is separate domestic and external components of the economy.
Domestically we're concerned with a deflationary post-bubble paradigm. Asset prices rose to unsustainable levels in relation to buying power compounded by excessive credit. We also have a mature, post-capitalist economic structure where employment and wages are on a deflationary trajectory that has persisted through 3 decades of business cycles.
Externally we're concerned with inflationary forces. US trading partners hold huge dollar surpluses and the ability to demand higher interest payments for further debt. There's also global competition for resources and the high cost of our military expenditures and foreign policy.
I believe that BOTH deflation and inflation will persist within the US economy for the foreseeable future. When both exist simultaneously, a modest amount of each is all that is required to crater middle class buying power and domestic business margins.
I think the international aspect of the money supply debate has been vastly underdiscussed. There is a lot of US bias on ZH, but one has to remember that the Fed policies have huge effects overseas as well. When US prints, China has to print as well, otherwise they cannot keep the RMB low. So effectively Fed drives Asia inflation. Look at what is happening in small open economies without capital controls nearby China: Singapore, Hong Kong, Australia. Massive property valuation increases and gross overvaluations. It is going to be a combination of price inflation and property valuation declines coming. Fed borrows money, US consumers spend, China exports, BOC prints money to keep the RMB tight with the USD, Hong Kong has to keep interest rates at record low sending properties booming.
http://www.economist.com/node/16542826
The assumptions of a lot of economists is that there are no currency pegs and there is only one central bank. With that kind of assumption they can always say that yeah we are going to "stimulate the national economy". That is a theoretical discussion which seems more like convenient assumptions that can fit an academic article but wouldn't guide a practitioner. What actually happens is that these reserves (from one central bank) trickle away and are spent in low-cost countries and hoarded in other open economies in which there is more faith in limited sane government (HK, SG, Swiss).
To put a military base in a foreign country is effectively dropping money from soldiers onto the local economy, yes, this is absolutely inflationary. Same thing with building up massive wealth reserves in the gulf, where is the oil money coming from, hmm, well, inflated dollars, perhaps? So where did the Dubai investment money come from? A pattern emerges. Fed policies create booms and busts all around the world, these malinvestments are spread way way beyond US shores. Sure one could say, all the real estate and fixed assets created to "catch up with" the increase in money supply are well spent, but I would beg to differ. Do the ordinary people in Dubai really need a monster tower, well of course, they do not. That type of concrete and steel edifice has no practical value beyond being an ego-boost for "investors" that were just lucky to sit on a pile of natural resources and let them flow for dollars, which could hardly be called a contribution to mankind.
It is a truly massive global scheme. They can talk about national inflation rate etc whatever, but the fact is that if you are going to make any sense of what is really happening in the international economy you have to look at property markets in open economies and reserves.
Any analysis of inflation, deflation and money supply without an international perspective is completely flawed and not worth paying attention to.
On top of that we have a bunch of policymakers that are scrambling to "cool the market", but they do not understand why it got hot in the first place and nevermind did not think about putting some type of built-in check and balance to the monetary base explosion in the first place. But it is a tough case overall. If all countries in the world agree to sell their fiat currency when there is another country printing their own fiat, the one that starts printing first and most furiously is going to hoard all fixed assets internationally, ultimately.
Stories are common in HK where mainland buyers leave luxury properties empty, even entire floors in new HK developments have few or no inhabitants, because they are so-called investment properties. At the same time, there are families cramming into low-cost housing with more than one person per room, in the same territory. Now then those are good signs of gross malinvestment and resource mis-allocation. You play the debt and asset game well, you win. You work hard for hourly pay, you loose.
I like your hypothesis. it certainly holds true of late.
Tyler, it's time to reach out to Lew Rockwell. He has presented both opinions and was a great friend to Murray Rothbard. I'm sure he will respond. Give him the audience.
Stop, Stop . You're both right Certs is a refreshing deflationary mint in the short term, yet with long lasting inflationary flavor in the long term, especially in commodities like sugar.
If we hadn't given up on the mint, we might not be in this mess now.
Gimme silver, gimme gold.
This paper crap is gettin' old.
I just want that PM glint
Not green paper from the government.
Your a poet and you don't even know it,
but you investing style does: longfellow on gold and silver
http://www.youtube.com/watch?v=xVJ6JR4OeiU
Sammy Hagar was wailin' about it soon after Nixon slammed the window...
"500... must be a peach of a hand"
For all the HI folks above who think the USD will collapse first, tell us where you are allocated - for your TOTAL net worth as a %.
Note, I don't mean an idea - "Hey I think silver is good". I mean "50% of everything I own is in silver".
Where you are invested as a % of ALL of your net worth - especially how much is USD dominated.
Maybe the mute one (formerly of Bear - now "retired" in CA) can go first.
Based on that, let's see what talks the talk and walks the walk.
Hopefully, we can still be friends (as one of my relatives was alledgely quoted as saying).
http://www.youtube.com/watch?v=fnwvZcb9EEM
45% gold bullion
45% silver bullion
All FRNs converted to same as they come in.
Did someone already point out that LS might be Chumba?
Can't be. He doesn't have "I am Chumbawumba" tattooed on his ass.
Besides, I liked Chumba, this guy -- not so much.
.
Is it so hard to understand that we are clearly in deflation? When one looks at things from the aspect of the price of gold(silver, also, though easier to view through gold) against the things people need then we are clearly in a state of (near)perpetual deflation.
Looking at inflation, as a function of the dollar, is arbitrary. Us hyperinflationistas and our deflationist brethren arguing about the future path of asset values is like a Lutheran and Catholic arguing about the holy trinity. We both agree upon the same principles, yet merely disagree on a few fine details(which we both staunchly cling to).
In our current state, to be a deflationist is to be a hyperinflationist, and vice versa. It seems like we are just taking it the next baby step that a desperate government will do what it must to retain power. Our bureaucracy is so intense that I don't think any person or group even has the means to reign it in anymore. It functions in some ways like that of a corporation, except whereas a corporation's only goal is to maximize profits, by any legal means necessary. A bureaucracy's only goal is to maximize their power over the system they have been anointed to control, by any means necessary(legality not necessarily an issue).
We have been programed from some of our earliest memories about how important the government is to our safety and happiness. Much like religion attempts to make some of our earliest memories in their holy image.
I can't help but think I am currently living in the zenith of our mass consumer society. I never thought I would be able to look back at The Matrix as having so many vague parallels to our current society. Some days I truly wish I could go back into my blind devotion to the system.
Some days I wish I hadn't taken the red pill.
So you're saying they are the same thing?
I said that near the start of the comments & got junked.
Governments and religion function by constantly repeating the same message enough times for one to believe them. Maybe we have to employ the same strategy.
What a buffoon. If you can't detect the subtle changes that are proclaimed to be "the same message we've always had", then you are indeed the target audience. Well played.
Timing is everything, ideas grow like flowers sometimes the rain and sun are optimal too early, the flower comes up and the late frost gets it, so sad...
this has been the most excellent thread
Are all these worries supposed to mean something? Of course not. The Fed will do everything in it's power to pump the markets. That's all you need to know. Everything else is Bear traps.
I think we get worst of botgh worlds
deflation in assets ie stocks,property but a curreny collpase as well against essenetials like food a dn energy
I wish mish woukd stop talking about just the money supply, whether the money supply goes up is irrelevant when prices rise
You know, I wish hyper-inflationists and advocates of currency collapse to gainsay their commodities book would stop for one minute and take a look at the discount rate. People ignore it, because they say its manipulated by the Fed.
http://stockcharts.com/h-sc/ui?s=$IRX&p=W&b=5&g=0&id=p19892911321&a=191058127&listNum=2
Oh yes? You have a very low discount rate just about everywhere, these too are manipulated by the Fed? So they conveniently ignore an important determining factor, because this does not fit with their little hyperinflation scenario.
Secondly, borrowing short and lending long ended when the yield curve steepened. That is over since a long time. Sure, there's cheap money, but that has not resulted in any sort of gain when adjusted for inflation, even gold is said to be trailing inflation somewhat. But everything else has fallen behind gold. This too is an important fact. But its more convenient to say that the laws of supply and demand no longer take precedence.
What Gonzalo is talking about has already come about since the Nasdaq crash. Been and gone. What's next? A run on corporate bonds, not sovereign debt, and major problems with municipal bonds. What happened during the depression when this occurred?
No tax cuts for the rich, meaning the banks having received trillions in taxpayer dollars and hoarding them don't get off the hook for jealously guarding those dollars, and municipalities are defaulting as we speak. When did this occur last? Not the 1970's.
http://www.flickr.com/photos/11747277@N07/4846479116/sizes/l/in/photostr...
(In 1938 when they say: "Treasury Is Paid To Borrow" actually means is paid to lend.)
[deflation in assets ie stocks,property but a curreny collpase as well against essenetials like food a dn energy]
I figure if there is a currency collapse people wont be wanting to be holding dollars. They will be buying whatever asset they can to preserve some value.
Perhaps this is too simple for me,having previously heard/seen a similar bunfight between PeterSchiff and Mish on the inflation/deflation argument it is a rehash of similar arguments.
Now Mish is a very clever bloke but as Schiff and now Lira have pointed out,the crux is when the Fed becomes the last person holding the parcel when the music stops.They will be buying treasuries with freshly printed money to prevent interest rates rising..Then as prices go completely ballistic and food becomes unaffordable even to those on benefits,this is where the final stage of intervention by politicians ensures the complete collapse in the currency and the total loss of everyones life savings,pension etc.Faced with rioting mobs,looting and calls for more money to be printed to help feed the people,do you think politicians will say no or will they take the easy option of printing ever larger quantities of worthless paper?
Lira even alludes to this in his previous piece where he descibes how he thinks it will all break down.
This is what Mish fails to or even refuses to recognise,that in the face of total anarchy and a collapse in the buying power of the currency,politicians will print more thereby reducing its buying power further.Think that is so crazy it can't happen?Well what is the current governments solution to the problem of an overdebted,overleveraged economy completely reliant on consumption from borrowed money?Answer - more debt!!!
The clincher for me though were the chilling words of Bernanke in his now famous helicopter speech when asked if he feared deflation "......no,we have a printing press..."
He has come right out and told people what he is going to do and yet there are still people that don't think it will happen - unbelievable.
Exactly.
Hyperinflation or very severe deflation rusult in a similar outcome, The collapse of the economy,
The only difference is time, hyperinflation could collapse the state within weeks where deflation could take years and benifit cash savers for a while untill law and order and the economy collapses.
I am in the camp non of the two things will happen, The globalist elite cant steel money if law and order and the economy are broken the wheels need to keep turning so to speak to keep their wealth and steal more, In order to take over the world debt is the tool of choice,
The forces of the globalist elite are so powerfull I am certain we wont ever see in the US hyperinflation or severe deflation to bust the country unless the global elite desire it for a powergrab but since the US is centre ground I cant see this as desirable,
I dont underestimate the power of the boyz and inflation of 5% or a bit higher will paper over the cracks as time passes so a bit of stagflation is what I expect over the next decade or two with a few bouts above and below target inflation in the mix,
The boyz may foul up and the wheels come off, In this unlikly outcome all bets are off but deflation should be the boyz prefered outcome but who knows I dont so I will keep an eye on things.
Silver putas!
http://upload.wikimedia.org/wikipedia/commons/1/1f/2006_AESilver_Proof_R...
¡Olé!
GL
How simple can it get ?
Assume the total economy is in a box....
Previous economy:
Credit = 50
Cash = 50
Highest price possible ? = 100
..........................................
Economy now....
Credit = 20
Cash = 35
Highest price possible ? = 55
Inflation > 100
Deflation < 100
Today < 55
..............................................
Counterfeiting....reduces...dilutes 55
This is where the trick question is...although devaluing....is inflationary in that more currency is required...although true valuation is declining....
Accounting fraud....reduces...dilutes confidence....
...........................................
Maximum values cannot be achieved where confidence is lacking....
Things I know to a level of 99% confidence:
1. Peak oil has passed.
2. Due to this, industrial civilization will decline and dissipate over the next 50-100 years.
3. World production will decline every year for the rest of our lives.
4. The standard of living and life expectancy of the global population will be declining for the rest of our lives.
5. Debt can not be serviced in the face of declining production.
6. The debt backed dollar can not survive.
Therefore:
Devaluation and/or hyperinflation is coming and/or world war is coming. Commodities will be responsible. While I don't think it's a good idea, I think the only scenario where the U.S. dollar survives past 5-10 years is for the U.S. to win another world war, and essentially wipe out its creditors.
"I think the only scenario where the U.S. dollar survives past 5-10 years is for the U.S. to win another world war, and essentially wipe out its creditors."
Now that is a fascinating perspective. I hadn't thought of that in that light.
Poster in Clemons Library, University of Virginia
"Just because you are the best available, that doesn't mean you are any good."
Don't trade much forex, and I don't even believe in macroeconomics, so I should tread lightly here, but I think many of us have been making the same mistake. It's easy to conflate currency with store of value. The dollar is a very strong fiat currency. It's crap as a store of value.
Will you gladly spend gold, farm land, or shot gun shells to buy groceries if you have some geen fiat in your pocket? Of course not. Those things are stores of value, with real intrinsic worth, but we all need some liquidity, and therefore, some fiat crappola.
Here's the rub. You can't really compare gold with currency, for the same reason you can't compare dogs with cats. Mkkby is on target above, when he points out that the dollar will be the last fiat to fall, not the first. Doesn't mean they won't all collapse in a week, but what are the odds?
You have to remember what shit cans and dens of corruption most other countries are. France is a nice place, but bribes and special deals are taken for granted there. Our landlord in Paris, already teaching at the Ecole Militaire, refused to believe he couldn't bribe his way into a short term appointment to West Point. The fact that he and I would both have been arrested for suggesting such a thing never occured to him. Honesty is invisible these idiots. They simply don't believe it exists.
Only the Swiss have a viable currency at this point, and that's only because they are money launderers and pimps to the world. I mean no disrespect. I love their safe, clean, and efficient country, and amorality is a great quality in a pimp. Think of Switzerland as the world's pawn shop, that's pretty close, but that game can end on any odd Tuesday afternoon when the music stops.
So what's my point? The dollar is stronger than most people think, relative to other fiats, which is the only sane comparison. The ponzi won't die that way, so deflation remains very strong.
Second point - Ben is desparate for inflation, but he's out of ammunition. He would love to use fanny and freddie as piggy banks, but he can't find a way to do that without going straight to jail. The fraud would be far too obvious. Even the fed gets clocked by the market sooner or later. Someday we'll get inflation, and on a long enough time line...
Amen brother
I think Mish is beginning to see the light....this is from one of his posts for today ("Sunday Funnies for 2010-09-12 - Worthless Dollar")
"Given enough time, all fiat currencies go to zero (relative to some starting point). 2% inflation a year is enough to do it. This should not be confused with hyperinflation, a complete loss of faith in currency."
Finally Mr. Shedlock is slowly moving toward the hyperinflationist camp, admitting the possibility of such event....and openly recognizes the very big difference between inflation ahd hyperinflation...
http://globaleconomicanalysis.blogspot.com/2010/09/sunday-funnies-2010-09-12-worthless.html
mishkin, stiglitz, krugman, greenspan, bernanke make me consider that hilter may have been right about everything after all.
Right. So I'm guessing you then disagree with von Mises, Rand, Rothbard, Chomsky, Finklestein, as well.
As if that wouldn't be bad enough, imagine what it must be like to not be able to laugh at the Marx Brothers.
But I have seen you use Google results in other threads.
I don't follow. I agree with your previous post and just wanted to expand upon your point.
In any case, peace!
Sorry, that was a misunderstanding then on my part. I have seen too many comments on this site about people who want me dead, even though I am in no way involved in any of the things they despise me for.
I thought you were dismissing my rebuttal as people who have not contributed anything, much like the "jew Hollywood" that gets picked apart. My defense was that if you want to exterminate the Jews again, you will also lose many important good things. Google, founded by two Jews, was an example.
CIAoogle, huh?
anyway, how about we just exterminate the bankers?
It'd be wise of the non-made tribers to get out ahead of this and take out the trash in their clan before they get taken out with it
Wasn't it Mish who missed out on a 70% rally in the SPY off the March 2009 lows?
yeah and he is bearish on canada because of the housing bubble but the housing bubble in canada is the result of the bond bubble in the US. Royal Bank of Canada is a Fed primary dealer, Marc Carney is from Goldman sachs.
These guys both need to read some FOFOA. The point which Lira just couldn't ever quite seem to eloquate clearly was a very simple one. Hyperinflation is a psychological event, not a monetary one. In other words, it is a collapse in confidence in ALREADY EXISTING money. Value is subjective - as the subjective value of the dollar decreases (higher money veolocity), the dollar's value in relationship to goods and services falls dramatically. This in turn causes the cost of funding government to go exponential, to which government responds by creating new money to fund itself and pay it's workers. So the actual increase in the amount of money is a RESPONSE to a collapse in the subjective value of ALREADY EXISTING dollars.
We are just waiting for a trigger - there are loads of them.
Your right.
Like I have said before(this even confuses some inflationists) Ben Bernanke printed money in 08 to bailout the banks to temporarily stop hyperinflation.
When I visited Brazil in the late 1980's their inflation rate was around 2,000% annually and the USD was traded on the black market as it was great store of value. Each of the 3 trips there, they had issued a new currency and the old ones I kept in my 'travel' wallet were useless. And the locals in Brazil were prohibited from holding USD, they could only have bank accounts in local currency; thus forced into being a player in the stupid hyperinflation game. If hyperinflation hits here, I can only think of the 'last man standing' currency, PMs.
And although I believe commodities will be the next 'run to' safe haven for value, I haven't yet figured out how to store oil barrels and cotton bales for future trading/exchange; and I'm certainly not going to carrying 'certs for exchange' for those commodities anymore I would hold GLD certs (I just don't believe in paper anything). UNLESS, China or Russia come out with a PM backed/partially backed currency.
Maybe the new Brazilian Cruzado, Cruzero, whatever, will work - funny how those tables have turned; Brazil now a strong economy and the US looking like Brazil of the 1980's.
I'm certainly not going to carrying 'certs for exchange'
If the cost of toothpaste rises to $10,000 per tube, certs might be a perfectly reasonable medium of exchange.
Sorry about that. Your post was very informative.
Right! - certs, gum, smokes, & TP, the only paper worth having! - All in exchange for a big Yap Stone
http://www.antoranz.net/CURIOSA/ZBIOR3/C0310/10en-QZC08007_Yap.HTM
Interesting article. That last bit about the Bank of Hawaii is a real kicker.
Hyperinflation? Are you kidding me, Lira is far from the mark. Not even worth commenting any further...
Lira is far from the mark.
Let me be franc, but pound for pound, euro funny guy.
:-)
The Deflationist are right...
They just got store of wealth wrong... when the Dollar loses the perception of a store of Wealth, hyperinflation follows. Deflationist assume that the Dollar has a constant "Store of wealth"
It is Deflation against Gold (Silver, Oil and other stores of wealth) and (hyper)inflation in Dollar terms.
Unless the Dollars psychological "store of wealth" function is restored/maintained, as it was in 1981 with 20% interest rates, hyperinflation is now inevitable in Dollar terms. I just can't see how they can do it with 200 Trillion plus liabilities....
My guess is that TPTB are scrambling a transition to another "money" that they can use to keep the scam going...
It is all a confidence game...
Gold and Silver Beaches......
As this article points out, in the Economic Blogosphere the debate is no longer about whether the monetary system will or will not collapse, but rather what the mechanism of that collapse will be. Specifically, what the various Pundits all are focused on is whether we will have hyper-inflation or hyper-deflation or some obscure variant of the two occurring simultaneously. Here I will pitch in my devalued 2 cents on this topic.
The Chilean econo-blogger Gonzalo Lira comes down on the side of hyper-inflation, citing his experience and understanding of the various currency crises which hit South American countries over the past few decades, going back as far as the 1970s. I can actually cite personal experience with hyper-inflation prior to that, in Brazil of the 1960s. On the other hand, Stoneleigh of Automatic Earth and her partner Ilargi make the best case I have read to date for an unstoppable deflation caused by credit collapse of an overburdened world economy swimming in irredeemable debt. Reading through Antal Fekete’s Gold Bug spin, you get the same idea. Mish comes to the same deflationary conclusions, but his reasoning is specious and he is otherwise a complete idiot so I discount his analysis. To be sure, I find Stoneleigh’s case the most compelling one overall, and I consider it fairly obvious that Deflation as evidenced by credit collapse is the driving force behind the monetary system failure. However, that still doesn’t answer the question of whether we will have an “end game” where the loss of faith in the US Dollar will cause people to en masse try to rid themselves of what worthless toilet paper they have in a mad rush to buy anything still left available to buy. That basically is the case Gonzalo Lira makes, predicated on the assumption that the Fed has already printed enough toilet paper to cause prices to skyrocket to the moon once faith has been lost in this currency.
The fundamental difference between the collapse of the Dollar and that of all prior Fiat currencies going back at least as far as Weimar is its status as World Reserve Currency. Whether it was the Deutch Marks of that era, Brazilian Cruzeiros of the 1960s or Argentinian Pesos circa 2001, once the faith was lost in those currencies, folks with large amounts of money jump ship earliest, and convert to currencies that are retaining value. It might be Swiss Francs or US Dollars or Japanese Yen depending on the particular time period or event, but in all cases there WAS some still functioning Fiat money to convert to, if you converted early enough. After a fairly short period of hyper-inflation though, it might take 1M Cruzeiros to buy a Dollar, so if you didn’t get out of Cruzeiros soon enough you were SOL.
So the question is, once the mega-rich lose faith in the Dollar, exactly WHICH currency will they all flock to? Currently over in Europe, the Illuminati are all running to Swiss Francs from Euros, since the Swiss are such marvelous Banksters and so Honest and Polite too. LOL. This of course is causing the Swiss CB a LOT of problems, because it is artificially over-valuing that currency. Face it, Switzerland is a tiny country with few people and no Oil. They really have very little upon which to collateralize the value of their debt money, mainly they are invested in Eastern European loans that are currently headed South in a big hurry. Are the Swiss going to Repo Romania and sell it off to the Chinese? The Swiss appear Wealthy on paper, but its all based on Mark to Make Believe assets they will NEVER be able to collect on.
Evacuating to Yen is just as stupid as evacuating to Francs. The Japanese economy has been in a Zombie state for nearing 20 years now; they have a massive debt overhang and huge unfunded liabilities in an aging population. Flock to Renminby, aka Chinese Yuan? This is a Joke. The Chinese totally manipulate their currency and artificially peg its value, and moreover they already have nasty inflation problems. Who is going to convert Dollars to Renminby, even assuming you could get the Chinese to accept more Dollars for their worthless Toilet Paper?
So, bottom line here is that in the situation of a Dollar Collapse, there really is no other paper currency for the Illuminati to flock to as a means to preserve wealth, which leaves only commodities and real estate, aka “hard assets”. The main Historical Commodity here which functioned as the traditional store of Wealth is of course GOLD. And yes you do see a steady rise in the nominal value of Gold as measured in Fiat money as Illuminati and some Sovereign Wealth Funds buy up what they can of the shiny yellow metal, not to mention of course the HUGE cadre of Gold Bugs frequenting the pages of Zero Hedge scurrying after a few more Kruggerands. LOL. However, with most of the 200,000 Tonnes of the stuff ever mined up in the hands of a VERY few people, its not going to work too well as a currency medium. Enough of the stuff isn’t circulating to serve as currency in a population of more than 6B worldwide. Even if you happen to have a nice pile of possessible Gold in your basement safe, once you have a global trade collapse exactly how many Twinkies you will be able to get for a Kruggerand depends entirely on how many Twinkies are available in your local area to buy. If someone in your area has some surplus Twinkies and covets some Gold, this person may sell you some Twinkies. However, this person will also be faced with MANY people with no Gold who need a Twinkie and the distinct possibility that said people will only offer Lead in return, coming very fast out of a Steel Cylinder. LOL. So unless said Twinkie holder has his own Private Army, he would be much better off handing over his surplus Twinkies to the Lead Holders than the Gold Holders. This of course seriously devalues Gold with respect to Lead as propelled by Gunpowder. LOL.
Real Estate as a means to preserve wealth in the face of loss in faith of the local currency is also very problematic. We already can see how rapidly RE prices are falling here, despite the continuing efforts of Da Goobermint to prop up those values. RE has a TREMENDOUS liability attached, which is of course PROPERTY TAX. As commerce grinds down to a virtual halt, Goobermints will be forced to raise these taxes, since of course in order to raise money you have to tax people that actually HAVE money, and that would be the few remaining property holders. So unless you are a TBTF Bank that actually IS Da Goobermint, you can’t preserve your wealth by buying RE, since it will just then be confiscated via the Property Tax. TBTF Banks will likely be able to hold property without being taxed on it, since they will buy the legislation necessary to effect that.
So, to return to the original question here, how does the End Game play itself out? My best guess is that you will have Hyper-inflationary events occur in various currencies, but not the Dollar first. Really, the Euro looks most likely for mass evacuation and loss of confidence first at least in the West, but Renminby or Yen could beat it out on the Eastern front. Despite their huge savings and trade imbalance, the Chinese economy is so mal-invested and their resource and population problems so extreme that this House of Cards could collapse at any moment. Japan has even worse population problems by density on their tiny plot of land not to mention the demographic issues, so at some point the Yen will collapse here as well.
Whichever is the FIRST major currency to collapse, the rest of the remaining ones will benefit from that in the short term. On the assumption the first one to collapse will be the Euro, the Dollar is likely to be the major beneficiary of that as Illuminati holding Euro will all be bidding against each other to buy Dollars with rapidly devaluing Euros, thus supporting the value of the Dollar despite endless QE by Helicopter Ben. The FSofA still has the most dominant Military, which makes it a decent bet in the currency collapse lottery. The Chinese Military is pretty good too, but their closed Economic loop totally controlled by their Central Goobermint makes it a bad place to invest money, at least if you are not Han Chinese with a Great Uncle in the Central Committee. When push comes to shove, the Chinese will Nationalize any foreign investments at the drop of a hat (or Nuke) of course.
Of course, any individual collapse of these major currencies starts a Daisy Chain of collapse in the others, so any effect of raising their value is temporary. One after the other will collapse in similar fashion, with the likelihood at the moment being that the Dollar is the last Fiat left standing, at which point it also will collapse. This is the nature of the kind of Cascade Failure we are witnessing, and which has been in effect in earnest since Bear Stearns collapsed (my personal Wake Up call that started my blogging), although in fact it began long before that with the S&L debacle, Enron and in fact of the BKs of SA economies back in the 70s which the TBTF Banks mostly moved off balance sheet. The House of Cards that is Global Finance has been in collapse mode since the FSofA became a net Oil Importer back in the Nixon era, when the Gold Window was slammed shut on France. The imbalances have been shuttled around the Globe and Ponzi Finance has swept this under the rug for 30+ years, but the inability to produce enough energy to maintain Global growth has been persistently undermining the capital base. Most of the pain has been taken by the less developed countries by shifting the burden onto them and raping them for resources. Once Global Peak Oil was reached (sometime in the last 2-3 years), there no longer was a way to shift around the debt to disguise the contraction.
It does remain possible that the Dollar will collapse before some of the other currencies or assets including Gold, however in this scenario you would get a virtually simultaneous collapse of ALL the rest of the currencies. Simply put, since the Dollar serves as Measure for all the rest of the currencies AND Gold, once the Dollar collapses there is no currency means by which to measure the value of anything else. That is the nature of a Reserve currency. On a worldwide basis, if/when this occurs, if there is no plausible replacement of valuation for the Dollar on which everyone can agree (and that is NOT going to happen ex post facto without full scale war), trade must revert to Pure Barter. On a local level inside Nation States (or perhaps regionally) currencies may be issued to facilitate internal trade (assuming Da Goobermints can hold together),but its unlikely that one Nation State would hold the currency or debt of another one in paper form. That trust gets destroyed in this collapse, which as I wrote so long ago on the pages of PeakOil.com amounts to the Greatest Bonfire of Paper Wealth in All of Recorded History.
From the point of view of the Illuminati, they are focused on trying to create some new fiat structure of money which will supplant the Dollar as World Reserve Currency BEFORE the Dollar goes completely worthless. You can see the machinations in progress both with the BRIC countries as well as the move toward SDRs as international currency. Simultaneously, the Cap and Trade Energy taxation being bandied about by the UN is a means to establish a base of value and create money based on energy valuation. None of these systems can really work long term, since they remain entirely based on the concept of Growth and Return on Investment. That is no longer the world we actually live in, at least for the foreseeable future we will be living in a CONTRACTING world, not a GROWING one on an economic level. The world population may grow a while longer on inertia, but not much longer once supply lines begin to fail and trade grinds downward. At some point here in the not too distant future these two mutually exclusive trend lines will cross, and then whole populations around the globe will be at least decimated by famine, if not completely exterminated. Exactly how far down the population will go remains to be seen, but my best guess is a 90% reduction in population over the next Century. This would bring down World Population to around 600M, around the population at the time of the Black Plague. If we are lucky, we may only get 25% reduction, as predicted in Revelation. Unlucky in this Lottery, we will face Extinction as a species.
The only possible Game Changer somewhere along the way would be a major discovery of means to extract the kind of energy we did for the last century out of Oil. This might be possible out of Fusion reactors, but I doubt it. I don’t think Thorium breeders can do the trick either. In both cases ancillary liabilities make it unlikely that you can extract the energy without causing irreparable harm to the environment, and besides we just cannot get there fast enough to overcome the dislocation which will result from the failure of the Oil conduit. Energy starvation will destroy global human population long before its possible to implement any alternative energy plan fast enough to keep pace with the death and destruction.
In the end, Inflation or Deflation is not really important as the vector for collapse of this civilization. In the short term, one of these two destructive monetary phenomena will instigate global conflict, which itself will go a long way toward further destruction of the capital base of the planet. In the longer term, energy starvation will undermine the complex industrial societies which fed on the cheap energy of the early days of Oil exploitation. Our survival as a species will depend wholly upon the ability of individual communities to survive the coming storm by being locally self-sufficient and by being of sufficient size and/or remote enough location to self-protect. Very few places will meet these criteria, but hopefully a few will. I think you will find those places in small valleys and remote islands very far from the centers of current world population. These Valleys will have good water supply and good natural resources of arable land and access to fecund fishery, along with a low population density. Some will be surrounded by Ocean, others will be surrounded by Mountains. Really BIG Mountains. The Great Wall that God Built. Needless to say (though I will anyhow), I practice what I preach and live in such a community about as far out from the center of human population as you can GET and still have a connection to the Internet. The Matanuska-Susitna River Valley of Alaska, population around 60K in an area larger than all of Connecticut. Surrounding that valley, a vast territory with virtually NO population in an area more than twice the size of Texas. The Last Great Frontier. There are some other good places as well, Kiwi Land in NZ is pretty good, some spots on the coast of British Columbia featuring good hydro power have possibilities, Iceland despite their currency collapse has a good fishery and geothermal power and then of course there is always Tristan de Cunha, Edinburgh of the Seven Seas, the most Remote Island on the face of the Earth. No Mountains there, but a huge expanse of Ocean for protection. A bigger Moat you cannot get than the one surrounding Tristan de Cunha. Pick the one that suits you best and RUN AWAY now, RUN AWAY fast. Because really, if you live in or near the big cities you are just a Zombie now, or your children will be. The Walking Dead, just you don’t know it. Yet.
RE
Good read, Thank you. I was agreeing with everything then when it came it population catastrophe, I am blank.
Deflation or inflation; the monetary phenomenon fallacy.
Guys, my name is Darius. Last school attended, Hass, UC Berkeley. Bringing you more confusion , I have to stop your debate, right in the tracks. Neither Mish nor Gonzalo seems to be right. I blog as JOKER (even writing before this famous movie) on most popular polish blog run by a veteran, highly regarded analyst Mr. Piotr Kuczynski. For 3 years, I try to explain to my Polish audience the macroeconomic aspects that govern the economy, during our current crisis. Using only psychological aspects and behaviors present, I was able to pinpoint all major crashes with almost 24 hrs precision. Using www.goldmoney.com account, I bought 3 tons of silver at the absolute bottom price in 2008. Actually, sometimes I think that the uptrend in silver was of my own making. Currently, my company www.bullionbank is busy building one of largest mints in the world with target of 10 mln coins and bars per month. Manufacturing coins/bars with weights from 1 gram to 100Oz. All this, in my native city of Gdynia, Poland
Being an avid reader of Zero hedge, having been registered long time ago, it is my time to respond.
First of all, I will start with simplified definitions:
-Deflation, the monetary phenomenon where prices deflate in gold terms. Deflation is mostly the derivative, of below the market, value of gold.
-Inflation, the monetary phenomenon where prices inflate in Fiat terms. In old times, there was no definition of inflation; we have had the term of currency depreciation.
Derivative, price function in relation to gold as money. Fiat, bonds are gold derivatives.
Deflation vs. Inflation debate simply does not make any sense to me. Actually, we can have both deflation and inflation. The term biflation fits here perfectly. Looking at Nikkei from 1990, in gold, shows us true face of deflation. On the other hand, looking at wages of some professions in USA shows true face of Fiat inflation. Here, my favorite blogger Mish has bunch of articles on this subject.
Asset deflation is the derivative of gold price suppression. Deflation CANNOT be avoided. Mish is right.
Inflation is the derivative of Fiat destruction, so Gonzalo is right here.
We will have deflation as long as we cannot achieve gold price discovery. For example, deflation might end when Dow to Gold ration will be close to 1:1, or even lower. Dow might be 50 000 points and gold $50 000, or Dow 3 000 and gold $3 000. It does not matter; all this will be VERY painful.
Summing up:
-Deflation can be measured in gold terms
-inflation (or hyperinflation) can be measured in Fiat terms.
-We have 2 non compatible, concurrent and parallel, outcompeting measurements of value.
Best regards to all readers. Mish, Tyler, Kudos to Globaledge radio.
Darius (vel Joker)
http://www.youtube.com/watch?v=HqcbgSpHMFs
Hi Darius
I can agree that we now have both deflation and inflation in different sectors (asset classes) but what do you recommend as a course of action? Do you think it's going to be as apocalyptic as Rogue Economist describes above? Even if I could trade an old VW clunker for a nice piece of Real Estate (as Mr. Lira's Uncle did in Chile 1973 HyperInflation period), staying here in Metropolis may not be the thing to do. I may be wrong, but I don't think there has ever been a time when both inflation/hyperinflation and deflation existed at the same time in any economic crises in the past - thus looking at Japan or our own historical booms/busts is Not going to be a good roadmap this time around. We have not a chart, compass, or stars to navigate by!
I love this saying: "You don't have to be faster than a bear - you only have to be faster than the slowest camper" because I'm just a wee bit faster than the slowest camper, but I'm always on the lookout for ideas on how to run faster.
Thanks in advance for any light you can shed further on this.
oh H I darius. obviously i am kathy. R U married? like your dialect.
really, like your shade of lipstick. does it come off easily? i mean if you kissed someone, would it get all over their who who?
genius Darius. (but I know shit)
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Debating the Flat Earth Society about Hyperinflation
http://globaleconomicanalysis.blogspot.com/2010/09/debating-flat-earth-society-about.html
Mish
You have my permission to post that in entireity on your site.
Would Tyler send me an email? I would like to discuss some things offline.
Mish
Posting from Outlook sure causes a mess
Trying again ...
Debating the Flat Earth Society about Hyperinflation
http://globaleconomicanalysis.blogspot.com/2010/09/debating-flat-earth-society-about.html
Mish
Mish responds: http://globaleconomicanalysis.blogspot.com/2010/09/debating-flat-earth-s...
Updated DOW weekly chart:
http://stockmarket618.wordpress.com
Gonzalo, it's saturday and you're everywhere. I've seen you on 3 financial sites since the debate. Way to go! Time for a book or tour or somethin.
Thank u, i found this for a long time.
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