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Guest Post: The Future - Deflation
Submitted by James Perry.
Everyone speaking about inflation these days. Many seeing it in mostly in commodity prices and the insane printing of money. Yet with oil heading steadily back to the range from last summer, there is no bottom anywhere for home prices. Also, banks can hoard up all the cash they want: nobody wants it. Consumer are firmly retrenching into thrift mode, and cutting up credit cards or simply maxing out and not paying them. To say inflation is guaranteed in light of trillions and trillions of consumer wealth destroyed, is very shortsighted. (link here)
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I think a deflationary shock is possible, but I suspect it will be met with a massive response from the authorities that will utimately lead to a huge inflation. The penalty will be the dollar, it will be significantly devalued in my opinion.
Good to see the new site up and running. Thanks to the ZH team for all the excellent posts and analysis on the blog previously. Long may it continue on this site.
mdtrader.
http://seekingalpha.com/user/315325/instablog
Deflation HAS been met with a massive response...every single time it's happened. That's why the dollar has been losing purchasing power for decades.
I think a deflationary shock is possible, but I suspect it will be met with a massive response from the authorities that will utimately lead to a huge inflation. The penalty will be the dollar, it will be significantly devalued in my opinion.
Good to see the new site up and running. Thanks to the ZH team for all the excellent posts and analysis on the blog previously. Long may it continue on this site.
mdtrader.
http://seekingalpha.com/user/315325/instablog
Looks like the filthy greedy rich are inflating their bank accounts while everyone else's assets are deflating.
The Paradox of Thrift myth is one of my favorite Keynesian garbage concepts. If all of these consumers are cutting back, where does the money go? Right into their savings accounts where they sit on it. The bank takes the money and loans out on the reserves.
Nevermind that Hayek destroyed the paradox in the 1930s, the quotation on money and money substitutes needs to be further questioned. For derivatives to be considered money they must at least have the appearance of being able to be used as a medium of exchange. Without pretending to know the answer, are derivative contracts (probably needs to be disaggregated) used a medium of exchange?
So that explains the FDIC PSAs to keep people from making deposits in the Bank Of Sealy.
Keep in mind that when the government computes the savings rate, "savings" also includes debt paybacks. Economically speaking, the calculation is disposable income minus personal consumption.
That said, last week's personal income figures are still important because they highlight the public's unwillingness to borrow and spend.
In the "The Future: Deflation" section, there are arguably two more reasons one should consider for why the monetary bottleneck exists.
First, the lack of purchasing power due to the gradual loss of worker bargaining power. Without significant wage increases, purchasing power -- and thus aggregate demand -- cannot and will not be able to mop up the excess capacity.
What's worse, given today's globalized economy, the wage increases must occur both domesticaly AND abroad. Developing nations such as China and India need a national income policy to help drive domestic demand through higher wages -- demand for both international goods as well as goods they make at home.
Second, the futile attempt to replace the exponential growth of private credit with the linear growth of public sovereign credit. We know this to be the case based on the increase in the broad money supply as measured by M3 over the past several years.
Hyman Minsky, like Hayek, also observed that money is created whenever credit is issued, and that money is destroyed when debts are not paid back. This simple insight crushes the (in)famous myth that the central bank is the sole controller of a nation’s money supply. While the Federal Reserve may command a monopoly over the printing of sovereign credit, it does not command a monopoly on the creation of TOTAL credit in the economy. Governments worldwide gave up on trying to control private sector credit when they bought into the merits of financial deregulation.
What we have now, thanks to both continued credit contraction and rising mortgage defaults, is the destruction of money at a rate much faster than the Fed can replace.
thanks for sharing
Americans hate the Japanese lost decades comparison, but I think that it is headed exactly the same way. The Japanese banks stopped lending and stayed that way until 2002/3 when Koizumi forced the cleaning up of their balance sheets. Today, US banks have no incentives to lend, happily sitting on 3% net interest margins, abetted and fostered by the Fed and other central banks. No credit to the consumers and even businesses means no credit cards and limited new working capital lines. Coupled with high unemployment rate, the only way for the tapped-out consumers would be the stock market. Voila the reason why the US government and indeed around the world, the securities markets are being manipulated to create an alternative avenue to print money. If they succeed, the world will escape the Japanese lost decades. If not, deflation will prevail and down the spiral we go.
The US is not Japan...think Dollar, Military, Nuk's, Finance / Global Banking...and world consumer.
The Million Dollar Question: Is America dominance [relative terms] what it was say 8yrs ago - or, did the "creidit bubble" / CapX bubble mask the reality of a post dot com decline in USA relative relavance - can the US "charge" the world to subsidize a relativly greater "wealth" / resource claim?
You know the apx of Dot com marked: Fed Budget Surplus, the first time post Nixon the US minted GOLD coins for sale [and changed owner laws], the greater world res banks dumped Gold in favor of the US Treasury [b/c it paid interest and GOLD did "nothing"].... This is a vote of confidence in USA Productivity and Global dominance.
Post Dot Com the last 9 years marked by Offshoring High Tech US Jobs - USA Companies booking profits in the form of "savings" on employment costs - the Fed Res. thinking all this offshore "was great" - b/c it was "productivity" - and rates could remain low - combined with Derivatives and off sheet transactions - the real Leaverage exploded [and US exported inflation arround the world] - US workers had no problem with Job loss - as the Capital [Real Propoerty] Bubble exploded in the US with even "better" profit - or, just buying stock, or flipping your home, etc, etc, etc,.
The party ended when Leverage could no longer be originated in the PVT sector -b/c Exchange Rates [Short Dollar Momentum] was moving against "all those Fed booked productivity gains" - hence, I Rates hit 5% on the 10 [alomst] - game over - as you look down at falling collateral values and a spiraling of Deflation that would be implied...
At the end of the day - its not just a story of miss-alocation / the demise of a nuclear nation and the beacon of Free World Democracy - it's the "value" the world puts on "safety", stability and protection of Life itself.
I hope "we the people" have been able to spread wealth arround - as such life is valued more then the expected consequence of conflict.
Inflation - long term - with lower Cap asset values and higher consumable cost. and a US tax code that re-calibates - shifting to Income from Cap Gains as the main stay.
Truth is - the world is trying to "re value" America - what is it worth? What is Political Stabiltiy worth? I think we export that....