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Guest Post: Taking On The Fed - What The Deflationists Are Missing

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What the Deflationists Are Missing
by David Galland, Managing Editor, The Casey Report

An interesting article by Ambrose Evans-Pritchard came my way the other day. It’s worth a read, if for no other reason than that he paints an appropriately dark picture of the current state of the U.S. economy. You can read it here.

While I very much share Mr. Evans-Pritchard’s view that the global economy is far from out of the woods, our views diverge in that he sees devastating deflation speeding our way down the tunnel. Casey Research readers of any duration know that we see devastating inflation. 

While we could both be right, with deflation first and inflation later, I’m not so convinced.
For starters, there is already a massive inflation operation being run by the Fed, evidenced in a historic spike in the monetary base over the last two years. 

And the Obama administration is far from done.

The Democrats’ reinvigorated focus on jobs – the single most important factor in this November’s elections – will soon translate into a flurry of new initiatives designed to put people back to work, most of it funded at taxpayer expense.

To believe in the deflationary case would seem to require believing that Obama and his minions are ready to forgo any further political aspirations by collectively putting their feet up on their desks for the balance of their sole term at the apex of global power.

Given Obama’s meteoric rise to power – evidence that he possesses a certain drive and competence in the game of politics – that seems highly unlikely. And so it seems safe to assume we’ll soon witness aredoubling of his efforts to keep interest rates down… to make it easy and cheap for strapped consumers and businesses to keep borrowing… and to otherwise flood the economy with money.  

In a deflation, the value of the money increases – which is actually a pretty desirable thing, if you ask me. Inflation, by contrast, means that pretty much everything you own in the local currency steadily loses value – forcing investors into a perpetual game of catch-up. It’s hard for me to calculate how the government can dramatically increase the money supply and yet have each of the currency units become increasingly more valuable over a sustained period of time.

Arguing against that point, Evans-Pritchard makes the case that the U.S. government is making much the same mistakes that were made in the first part of the Great Depression, i.e., being overly tight with the money. And that the velocity of money is falling.

There are a couple of key differences between now and then, however. First, the Fed didn’t actually know what the money supply was back then. They literally had no monitoring tools in place, mostly because no one thought it was important enough to track. Second, they didn’t have fiat monetary powers. Today, neither of those factors apply.  

Everyone knows what the money supply of the U.S. is and watches it keenly. Including our foreign creditors. And so it is not surprising to see the Fed publicly talking about tightening up a bit. But it’s just talk at this point.  

With the economy continuing to struggle, the only reasonable assumption that can be made is that the Fed – in cahoots with the entirely politicized Treasury – will keep shoveling money onto the economic embers, and continue to do so until economic activity again flares up.

That will, of course, require increasing the quantity of money that actually makes it into the economy – but that should be child’s play for Team Obama – with direct hiring and spending, continuing to buy mortgages and other loans to suppress interest rates, forgiving the bad debts of banks, or changing accounting rules so that banks can postpone reckoning day. And that’s just for starters, all of it packaged nicely in the name of the public good.

And once the money starts to flow, there will be a pick-up in economic activity, which will beget yet more money moving around. At first, this money will be a palliative for the economic worries, but then comes the inflation – a small trade-off, the politicians will decide, if it buys them enough of a recovery to make it through the November elections and get the president the second term you know he so strongly desires.

There is something else that I think the deflationists are missing, and that has to do with confidence in the currency. If the U.S.’s many creditors come to agree with our point of view – that the dollar is being led to the altar as a sacrificial lamb to political expediency – then they’ll further reduce their purchases of our Treasuries and start trading their dollars for stronger currencies and tangible assets, including precious metals.

At that point, interest rates will have to begin rising to attract new buyers. As you can see in the chart of long-term Treasury bond rates, a significant move off recent lows has already occurred, and rates are looking poised for a breakout to the upside.

Of course, the higher those rates ratchet, the more it will cost the U.S. government to carry its massive debt. While rising rates will continue to drive demand to the short end, suppressing those rates, in time the sheer quantity of paper that will have to be rolled over, and the rising tide of inflation, assures that short-term rates will have to rise too.

At that point, the train begins to leave the track.

As the train wreck approaches, the government is going to have to find creative new ways to fund its social contract with impatient voters. Perhaps, for instance, pegging everyday fines and assessments to the amount of income a person makes. Executed brashly, such policies might even allow the government to charge a person of means, say, $290,000 for a speeding violation.

I know what you’re thinking: C’mon, let’s be realistic – that could never happen. Think again…

Europe slapping rich with massive traffic fines

By FRANK JORDANS

The Associated Press

Sunday, January 10, 2010; 11:30 AM

GENEVA -- European countries are increasingly pegging speeding fines to income as a way to punish wealthy scofflaws who would otherwise ignore tickets.

Advocates say a $290,000 (euro203,180.83) speeding ticket slapped on a millionaire Ferrari driver in Switzerland was a fair and well-deserved example of the trend.

Germany, France, Austria and the Nordic countries also issue punishments based on a person's wealth. In Germany the maximum fine can be as much as $16 million compared to only $1 million in Switzerland. Only Finland regularly hands out similarly hefty fines to speeding drivers, with the current record believed to be a euro170,000 (then about $190,000) ticket in 2004.

The Swiss court appeared to set a world record when it levied the fine in November on a man identified in the Swiss media only as "Roland S." Judges in the eastern canton of St. Gallen described him as a "traffic thug" in their verdict, which only recently came to light.

"As far as we're concerned this is very good," Sabine Jurisch, a road safety campaigner with the Swiss group Road Cross.

Full story here. 

Or maybe the government will force you to convert some or all of your IRA or 401(k) into Treasuries, perhaps packaged up in an annuity. You’d be given the choice of making the switch or making a withdrawal and paying all outstanding taxes at that point. This is something that Doug Casey has warned about for several years now. 

The seeds of that possibility may be headed for the soil: the following article from BusinessWeek reveals that the Treasury is now looking very hard at the trillions in retirement accounts and trying to figure out new ways to “help” the owners of those accounts.

In my view, what’s important in this little dissertation can be summed up as follows:

  1. The current administration and its congressional allies have powerful political motives to soak the economic soil with fresh dollars. The Christmas Eve announcement that the Treasury is removing the $400 billion cap on losses it will cover for Freddie and Fannie is a classic example of how far they are willing to go to keep the money moving.
  2. Unlike the Great Depression, the U.S. is now on a fiat money system – which is purpose-built for the current scenario. Open the taps, and if that doesn’t work, open them even wider. Failing to do so would be political suicide, and Obama and his team are just not into the idea of serving a single term.
  3. Given the size of foreign holdings of U.S. dollars, the nation is faced with a “rock and a hard place” situation, where a sharp loss in confidence on the part of our creditors would likely lead to a currency crisis that drives the value of the dollar quickly lower, at the same time that it drives interest rates higher.

    Something will have to give. We think that something will ultimately be the U.S. dollar, as it’s politically more acceptable to have a failing dollar than a smoking hole where the economy used to be.

    Before this thing is over, I would not be surprised to see a new currency regime adopted that introduces exchange controls and a different category of dollar to be issued for the purpose of paying back foreign creditors. Such a dual-track currency system is nothing new but has been used by desperate regimes numerous times throughout history.

Forecasting the future is actually impossible, as there are just too many variables. But that doesn’t mean that we can’t step back and make certain logical assumptions about the policies the politicians are most likely to deploy in their efforts to retain power.

In the case of today’s world, the only politically logical decision will be to keep on spending until that spending itself becomes a pressing problem, at which point the politicians will turn their attention to “solving” the newest in a long list of problems they have created.

At which point they will no doubt find some creative way to blame the inflation on speculators, profiteers, and the free market.

 

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Sat, 01/16/2010 - 15:16 | 195983 Shiznit Diggity
Shiznit Diggity's picture

In a similar vein, the latest from Van Hoisington and Lacy Hunt:

http://www.hoisingtonmgt.com/pdf/HIM2009Q4NP.pdf

Sun, 01/17/2010 - 08:47 | 196430 Crime of the Century
Crime of the Century's picture

+1 - a much better offering than Galland's essay. I generally like Casey's outfit, but sometimes it is rolleyes city over there. There is a massive paper (electron) fire burning in the background, and currency crisis hyperinflationists should pay attention to what is, instead of jumping ahead to where they are positioned. It's like they're playing checkers on a chess board (with a nod to The Wire).

Sat, 01/16/2010 - 15:18 | 195987 Chopshop
Chopshop's picture

major, major boo. 

this cannot be called "research".

this is a college essay and a C minus at that.

Sat, 01/16/2010 - 16:30 | 196040 Anonymous
Anonymous's picture

Agreed. Assumptions of economic outcomes based on assumptions are nothing more than ones own opinion.

What we do have is concrete evidence of deflation.

Seems so many are wishing for hyperinflation based on simply looking at money supply and ignoring credit losses on asset devaluations or velocity of money.

I'd give this article an F.

Sat, 01/16/2010 - 23:43 | 196292 Anonymous
Anonymous's picture

I agree with your point, ignoring credit losses AND asset devaluations. By comparison the increase in money supply is a drop in the bucket.

Sun, 01/17/2010 - 07:45 | 196423 jeff montanye
jeff montanye's picture

my question is, given that the most similar historical period to the current is the early '30's and during that far more deflationary time (banks failing and deposits disappearing instead of being insured, unemployment at 20% and no unemployment insurance or food stamps, etc.) the price of gold rose, the share prices of gold miners quintupled, government bond yields rose (sidney homer, a history of interest rates) and stocks declined.  so what investment tips are we to draw from the deflationary hypothesis?

Sat, 01/16/2010 - 16:52 | 196060 Zro
Zro's picture

Seriously. I stopped reading after this: "In a deflation, the value of the money increases which is actually a pretty desirable thing, if you ask me."

Worthless research, if you ask me.

Sat, 01/16/2010 - 18:39 | 196122 DoChenRollingBearing
DoChenRollingBearing's picture

I won't give it an F, nor can I predict the future any better than almost anyone else.

I do think that the deflationists are likely right in the short term.  MUCH more money has been lost (value as assets) than has been printed or guaranteed into the system.  CRE and other looming problems seem to me to be bigger than the amount of money they can force into the system to be spent and/or borrowed for now.

But, a determined inflation policy can always win in the end.  If they REALLY WANT to print FRNs of $1000 (Bernanke would be a good choice) and then FRNs of $10,000 (Obama could get this one), well that would get everyone to spend the paper as fast as possible: more money supply * faster velocity = hyperinflation.

Sat, 01/16/2010 - 19:14 | 196143 dnarby
dnarby's picture

From what I have read, it seems like deflation first, then inflation, then currency crisis, then "hit the reset button".

Sat, 01/16/2010 - 20:07 | 196169 Chopshop
Chopshop's picture

such is what i'm intellectually married to as well, dnarby.

prefix a few uber(s) of varying Grand Supercycle degree in there and i'll sign it for it.

Sat, 01/16/2010 - 20:16 | 196177 WaterWings
WaterWings's picture

Hopefully you're not married married. Going long on Colombians pays excellent dividends. From what I've heard:

http://www.youtube.com/watch?v=booKP974B0k

Sat, 01/16/2010 - 22:59 | 196272 john_connor
john_connor's picture

More money supply does not necessarily mean faster velocity.  For velocity to increase, banks have to start lending and there has to be willing, credit worthy borrowers.

Without money velocity, you could still have selective hyperinflation in imported commodities if other countries lost confidence in the dollar.

Other than that, the US could cause hyperinflation if it printed its OWN money, not FRN's, and handed it out.  Of course they wouldn't do that because the banking cartel owns the government and currency must be issued thru their counterfeiting operation.

Sun, 01/17/2010 - 12:00 | 196540 Anonymous
Anonymous's picture

Any loss of confidence in the dollar that causes a significant drop will be immediately felt by export dependent countries, which in turn stabilizes the exchange rate. This is my 'race to the bottom' thesis, and gold is the only thing capable of measuring the falling value of fiat currencies worldwide. If the dollar drops too low it will be the rest of the world that suffers more than we do. This can be seen in the recent larger drop in GDP among exporters like Japan compared to consumers like the U.S. China is a price taker, not a price maker, because they have massive overcapacity for world demand that doesn't exist.

Sun, 01/17/2010 - 13:14 | 196605 john_connor
john_connor's picture

Agree.  My contention is that gold's price will actually fall initially, but it will fall less than everything else.  At some point, gold's *price* will stabilize and at that point it will be as *valuable* as ever.

BTW, Japan's default is not matter of if, it is a matter of when. 

Sun, 01/17/2010 - 22:11 | 196922 Anonymous
Anonymous's picture

Japan's default is a black swan that is going to hit investors like a ton of bricks (or should I say gold bars). Demand for the only real risk-free asset, gold, will go astronomical after Japan defaults.

Sat, 01/16/2010 - 19:22 | 196148 Eternal Student
Eternal Student's picture

Well said. I have noticed that the unuseful articles usually don't define what they mean by "inflation" or "deflation". Instead, they sort of assume everyone knows what they are talking about. And usually, they get the meaningful definitions wrong.

The rest of the article seems to strive to justify the implicit definitions without really illuminating anything. And unfortunately, like most inflationists, he completely left out what's been going on in the credit/debt side of things, which makes his view of the money supply nearly insignificant.

Until he gets those basics right, the author is going to be as shocked by what happens in the future as he probably was in September 2008. And as people were in October 1929.

 

 

Sun, 01/17/2010 - 07:51 | 196425 jeff montanye
jeff montanye's picture

october 1929 already happened in 2008.  that was the end of the credit cycle.  if we are anywhere in there, we are nearing march of 1930.

Sun, 01/17/2010 - 14:36 | 196667 Eternal Student
Eternal Student's picture

Unfortunately, the credit cycle appears alive and well, for the right people. The total amount of derivatives has increased this past year, and still stands at over $600 Trillion. IMHO, 2008 was just a wake up call.

Sat, 01/16/2010 - 23:59 | 196303 Anonymous
Anonymous's picture

If by "research" you mean that wonderful stuff that the Banks did before handing out sub-prime loans or the wondrous models created for underwriting the commercial loans you are right. This only comes into the bracket of thoughtful rumination. Hmm no MBA would submit this as a college essay.......no spreadsheets, no power point. No NO Wisdom is not "research" what a world!!

Sat, 01/16/2010 - 15:40 | 196005 DavidC
DavidC's picture

"Unlike the Great Depression, the U.S. is now on a fiat money system – which is purpose-built for the current scenario. Open the taps, and if that doesn’t work, open them even wider. Failing to do so would be political suicide..."

Yup, and continuing with HISTORIC low (Fed) interest rates and pumping HISTORIC high currency (not money) into the system is ECONOMIC suicide. It will not work.

I've read Ambrose Evans-Pritchard's piece and agreed with it. Now, the eternal optimists may say that people like him (and me, I guess) are naysayers, doom merchants and eternal pessimists. Perhaps, just perhaps, we're the ADULTS who are looking at this all unfolding from a REALISTIC (apologies for the continuing use of capital letters) viewpoint who can see (albeit from a more empirical standpoint) how this is all unfolding.

Look at the chart of the Dow since 1900 - there is NO reason to assume that we will NOT have a fall, exponential growth (particularly that we witnessed in the 1990s) cannot continue indefinitely, and we're still very much at the top of the range following that last 10 months' correction - or should I say nascent recovery?

I used to work with a very intelligent person who used to comment on things in a world-weary way (and with extremely funny humour!). I lost count of the number of people who told him not be so pessimistic - he was nearly always right.

DavidC

Sun, 01/17/2010 - 12:25 | 196561 BobPaulson
BobPaulson's picture

Does your friend who is always right have a blog? Please post URL, could use a nice combination of humour and accurate predictions.

Sat, 01/16/2010 - 15:59 | 196013 Anonymous
Anonymous's picture

Expanding the monetary base is one thing......but where is that "money" going? If it's simply going into a huge black hole of bad bank debt then it is unlikely to have an "inflationary" impact.

Just look at Japan to see what mass monetary "inflation" delivers. The global economy is in a period of severe deflation and with the financial economy ripped to shreds I cannot see how inflation will manifest in a destructive manner.

If a deflationary environment spells the end of the financialisation of economies then that may be a blessing in disguise. This really is a battle between the financial institutions and the real economy. Whilst the former have all the power the latter have maths on their side.

No amount of monetary magic can defeat the inexorable collapse of the corrupt money system.

Sat, 01/16/2010 - 17:25 | 196082 Anonymous
Anonymous's picture

I agree, but if they start dropping bundles of fresh notes from helicopters then all bets are off. I think the Japanese govt left fresh bundles of notes in back alleys but you know how the Japanese are, the notes were returned to the lost and found. Does the American govt own that many choppers?

Sun, 01/17/2010 - 10:59 | 196494 Nout Wellink
Nout Wellink's picture

When they start the helicopter money action, they are already too late and deflation has kicked in.

Sat, 01/16/2010 - 18:18 | 196113 Anonymous
Anonymous's picture

Precisely

Sat, 01/16/2010 - 23:00 | 196273 Anonymous
Anonymous's picture

nicely said

Sat, 01/16/2010 - 15:59 | 196014 Anonymous
Anonymous's picture

Well now....

TD....What about THIS....

The numbers for cumulative debt available ....and supposed
counted equity....in 2007 was far higher in 2006/7 than today....

Does anyone have the actuals/guesstimates ?

It is a fair estimate that 40/70s .....would be what is currently available....

Which means this....

Cumulative means it does not matter how the numbers add up....as long as the numbers are broadly distributed throughout the system....

So what is the number of additional FIAT cumulative sums that could be printed away in order to make sum back to 70/70s....?

This may mean that an additional $10 Trillion plus sum of new snaps.....may still not make deflation go away...because the cumulative would be 50/70s....

Money flow is money flow....there are just different types....

There is SUSTAINABLE money flow....and NONSUSTAINABLE money flow....

Govt. impositions = NONSUSTAINABLE

Innovation/progress = REAL.....SUSTAINABLE

And money spent on UNSUSTAINABLE when there was a choice to restructure taxes and other moves that would have created SUSTAINABLE instead....

Is where current policies are in error....

Please comment on cumulative valuations before and after ....in relation to perhaps giving the govt. some ideas on creating better days ahead....

Sat, 01/16/2010 - 18:20 | 196115 delacroix
delacroix's picture

how about deflation, with a simultaneus currency crisis, lose lose situation

Sat, 01/16/2010 - 16:05 | 196020 Anonymous
Anonymous's picture

Weren't you guys on the "INFLATION!" story back in 2007?

Dead and buried. Admit when you're wrong.

Housing is 40% of the consumption basket. Certainly you dont think there is any housing inflation? Services are another 40%. With sky-high unemployment... you dont really think there is service/wage inflation?

Even if oil and other commodities go up 50% from here (still mainly below highs) isnt that just a natural market price phenomenon that helps push more resource investment into mining or farming and conservation tech?

I act think commodities go down from here. Oil is $60 asset. Gold is $600. Ten years from now. But even if I'm wrong and oil is $150, Gold is $2000/oz... if housing is lower and services lower. Its not really inflation, right?

Sat, 01/16/2010 - 16:09 | 196022 strike for retu...
strike for return to reality's picture

Starting a war with China would allow the US to cancel all obligations to China.

On the downside, pretty much everything is made in China, so you'd better win pretty quickly and be able to restart all those factories in time for the next Christmas.

Question: Would Obama fly to an aircraft carrier in jumpsuit with a codpiece to proclam victory about 2% (measured in time) into the war?

Sun, 01/17/2010 - 15:14 | 196693 strike for retu...
strike for return to reality's picture

War would also have an advantage for China.  As a result of the one child policy and bias towards male children, China has a surplus of males seeking a mate.  A war would fix this problem.

 

From the American perspective, the war machine doesn't really care whether the US wins a war or not with one caveat, the parasite must not kill the host.  (Drawn out wars (Vietnam, Irag, Afghanistan) sell more hardware provided that the US survives the war.)  However, a war with China is in no way winable. The American policy is only to attack countries without a viable airforce or navy or nukes.

Sat, 01/16/2010 - 16:13 | 196025 john_connor
john_connor's picture

Wake me up when the 3 month T-bill is not basically zero.  A roughly 0% 3 mo. T-bill, my friend, is cash running for the hills.

There are no willing borrowers, or at least not enough to even make a dent in recreating the leverage that existed prior to the crunch. 

Job creation?  Please.  They are making up numbers of "jobs saved."

http://www.washingtonexaminer.com/maps/Bogus-jobs-created-or-saved-by-the-Stimulus.html

 

Sat, 01/16/2010 - 16:09 | 196026 tom a taxpayer
tom a taxpayer's picture

The tragedy is that the U.S. and world are teetering on a precipice so dark and so deep we can not see if it is inflation hell, deflation hell, or some other hell.  Good arguments and evidence can be made for all these hells. The Mismanagers of the Universe (Goldman Sachs, Wall Street, Fed, Treasury, Congress) concocted a witches brew that poisoned the well of U.S. and world financial systems, markets, and economies.  

The diabolic nature of the poisoning is that it is so dark and deep and convoluted that is can not be definitively diagnosed.  No one, not even the witches of Wall Street, knows whether the patient will die of deflation, hyper-inflation, or some other hellish disease.

Sat, 01/16/2010 - 16:26 | 196034 strike for retu...
strike for return to reality's picture

Nobody knows to which hell the US is headed.  Merely that it will be hell.

Perhaps this is what is meant by "change" wrt Obama.  By doing exactly the same things as the Cheney Administration, Obama guarantees that there will be a substantial future change (from status quo to hell).  "Hope" will be kept alive until the threshold is crossed, and there it will be abandoned.

To think, a simple rewind in time to October 2008 or so, and neatly packaged bankruptcies of Goldman Sachs, JPM, Citibank, etc... along with a relatively short-lived recession (financial services industry is diminished to be replaced by some new industry, maybe even a useful one).  Oh for the days when we could just wish for a decent recession instead of trying to guess which hell is our due.

I need to stop writing now.  I've found some work repaving a driveway in Greenwich, CT.

Sat, 01/16/2010 - 17:26 | 196085 Anonymous
Anonymous's picture

Could we just have a come to Jesus moment where every employee / ex-employee of Goldman Sachs, JPM, Citi, and the various other ex-Masters of the Universe (AIG, BSC, LEH, etc..) who ever earned more than $500,000 per year (we'll use CPI numbers for earlier years) is sent to one of the prison camps that Halliburton built for the Dept of Homeland Security. Release will be conditioned upon, oh I don't know, how about when the inmates an Guantanamo decide that Wall Street has suffered as much as the people of Afghanistan, Iraq, East Timor, Vietnam, Cambodia, Palestine, Pakistan, etc...

Sat, 01/16/2010 - 18:43 | 196125 DoChenRollingBearing
DoChenRollingBearing's picture

We got the Change.

We got no Hope.

Sun, 01/17/2010 - 13:21 | 196612 WaterWings
WaterWings's picture

+1

We "changed" a coked-up puppet for a narcissistic pinocchio. Still no hope.

Sat, 01/16/2010 - 22:19 | 196243 anynonmous
anynonmous's picture

 tom a taxpayer or is it TS Eliot better still Edgar Allan Poe, whatever, a great post

"Ulalume"

"We are the Hollowmen"

Sat, 01/16/2010 - 23:05 | 196274 Anonymous
Anonymous's picture

The Casey article itself reaffirms my own opinion -- deflation now. You need to survive deflation before you can even thing about hyperinflation.

Sat, 01/16/2010 - 23:06 | 196275 Anonymous
Anonymous's picture

"think" too

Sat, 01/16/2010 - 16:23 | 196033 Cursive
Cursive's picture

Everyone knows what the money supply of the U.S. is and watches it keenly. 

FAIL.  There is a large debate about what constitues the money supply.  Most notably, the Austrian school says that credit should be included in the money supply metrics.  The official government measures of the money supply show growth, but with credit contracting, I and others believe that the money supply is contracting.  A lot.  Though he's not the author of this "research", Evans-Pritchard makes an excellent point about the slowdown in the velocity of money.  Print all you want, if people don't spend it, it effectively doesn't exist.

Secondly, we don't have a fiat currency.  A fiat currency will imply that it is backed by nothing.  In reality, the Federal Reserve Act has given us a debt-money system.  Our money is backed by federal debt.  That is the problem here and it's why we cannot move forward.  We would be better off with a strictly fiat currency so that we wouldn't be debt slaves to the bankers.  For those who would say that the federal debt is not tangible, I invite you to argue with the bond market.

 

Sat, 01/16/2010 - 17:07 | 196070 APC
APC's picture

Money is created out of credit, and destroyed when the credit is paid down, or defaulted upon.  If everyone repaid their loans, there would be no money in circulation.  A contraction of available credit is a contraction in the money supply.  Deflation by definition.

I seem to remember that 2 trillion $ of credit lines had been cut in 2008/9.  Could be wrong about the number, but that would require a whole hell of alot of printing to induce inflation, assuming you had the means to get the cash into circulation. 

Sat, 01/16/2010 - 18:27 | 196117 delacroix
delacroix's picture

the core problem, is debt service. without anymore debt, an interest rate rise, could end our ability, to service existing debt, and tax revenues, are in decline. the game is over, now we are just going through the motions.

Sat, 01/16/2010 - 19:17 | 196145 Zexe
Zexe's picture

when credit is defaulted upon money isn't destroyed, those money are still circulating, only that it eats at bank's capital which curtails it's future lending capacity.

 

Otherwise nicely said.

Sat, 01/16/2010 - 19:58 | 196162 APC
APC's picture

Quite right.  Thank you.

Sat, 01/16/2010 - 19:50 | 196160 Anonymous
Anonymous's picture

This is exactly correct, well said

There is vastly more debt/credit out there (which cannot be repaid) than the government could ever counteract. America is choking on debt, and they are trying to fix it by getting people to take on more debt. It cannot work that way.

We saw a lot of debt deflation in 08, but there's plenty more to come.

Sun, 01/17/2010 - 23:11 | 196951 Anonymous
Anonymous's picture

So your saying the best way to solve a massive debt problem is not ramping up more debt?? Crap. Someone call Obama and let him know.

P.S. He might not be happy with the news. Actually, he probably won't care. Nothing is going to stop a good liberal agenda.

Sat, 01/16/2010 - 22:59 | 196271 Cursive
Cursive's picture

If everyone repaid their loans, there would be no money in circulation.

This is true under our current debt-money system.  It is not true under, for example, a commodity-based system such as gold or a strictly fiat system.  Money does not have to be debt.  In fact, it shouldn't be debt.  Debt is poison that bankers produce and force on societies.

Sun, 01/17/2010 - 03:52 | 196392 Nout Wellink
Nout Wellink's picture

+1

And note that credit is not money. The world is choking on credit and doesn't want more. The Fed presumes it did the right thing to avoid deflation and therefore we will get it. My pick: a huge deflationary collapse starting with the first large sovereign debt, followed by panicking central banks trying to hyperinflate their way out.

Sun, 01/17/2010 - 22:00 | 196917 Anonymous
Anonymous's picture

"And note that credit is not money."

I agree. The problem I have is that in this system some parties can create effectively unlimited amounts of credit at no cost to themselves and then use it to compete with money for real resources. Those who are competing with real money are bound to lose.

Sat, 01/16/2010 - 16:26 | 196036 Anonymous
Anonymous's picture

So hyperinflation is minutes away again?

Sat, 01/16/2010 - 18:45 | 196126 DoChenRollingBearing
DoChenRollingBearing's picture

If your lead delivery vehicle were aimed at me, my best guess is deflation now, turn the corner to inflation in, say, 18 months.  That inflation could be very ugly.

Sat, 01/16/2010 - 23:16 | 196281 Anonymous
Anonymous's picture

Ugly inflation won't matter unless you survive the deflation.

Sat, 01/16/2010 - 16:27 | 196037 junkyard dog
junkyard dog's picture

There is one aspect of the economy that many people experience that is not a topic of any post. That is, there is nothing worth buying. I am pretty much your average dumb ass dog. Not the prettiest thing to look at but a hell of a lot better looking than that waterdog asshole. At the beginning of 2008, I secured a home equity line of credit of $ 140,000 from BofA to make some improvements to my home. The rate was adjustable, 3.5% above prime; I borrowed $ 20,000, interest only payments. The loan officer  jerked himself off while I signed my life away to be a slave to interest rates. Then a funny thing happened; the prime interest rate went down to .25%. I now have a $140,000 line of credit at 3.75%.

There is nothing in this country worth buying at this time. Not a fucking thing. There are millions of us in this situation. Now I know you gold bugs think buy gold you crotch sniffing flea bag. But, why buy gold now if it is not going to go above $ 1,500 until 2013? Real estate is only good for shitting on right now.

Obama and his ass fucking puppets can flood the country with all the FRN they want. There is still nothing worth buying.

I refuse to invest in the stock market until I can piss on an electric fence and not feel the pain of my dick burning off.

Deflation, reflation, inflation, masturbation, what the fuck does it matter. You do not need cash if all there is to buy is trash.

 

 

 

Sat, 01/16/2010 - 16:36 | 196044 Anonymous
Anonymous's picture

All of 2008 was a watershed event: 100 year old institutions going broke, economy stalling, bank runs, bank failures, yet Gold didn't head to the stratosphere like it should have.

Buy gold? Why? We've just seen evidence of the economy on the brink of collapsing in 2008 and what did Gold do?
Nothing IMO.

Sun, 01/17/2010 - 03:55 | 196393 Nout Wellink
Nout Wellink's picture

That is because in deflation ALL assets - including gold - are going down.

Sun, 01/17/2010 - 08:23 | 196428 jeff montanye
jeff montanye's picture

but it didn't happen in 1930-1935.  official gold went from 22 to 35 and gold miners quintupled or something.  there was significant inflation from 1980 to 2002 and gold lost nearly 80% of its value.  there is more here than is meeting most of the eyes on this website, mine included.

 

Sun, 01/17/2010 - 11:06 | 196496 Nout Wellink
Nout Wellink's picture

At that time the price of gold was fixed.

Sat, 01/16/2010 - 16:51 | 196059 Cindy_Dies_In_T...
Cindy_Dies_In_The_End's picture

Junkyard--you are my hero.

 

Just try using that line of credit and se how fast they yank it though.

Sat, 01/16/2010 - 17:37 | 196092 Anonymous
Anonymous's picture

So... stocks had a pretty good 9 months (up 70%), HY credit bonds (up 50-100%), commodities (up 50%) and even foreclosed properties in FLA (up 100%).

But according to you -- "there is nothing worth buying".

Hmm... when do you re-think your approach? Another 30%?

Mon, 01/18/2010 - 15:29 | 197485 Anonymous
Anonymous's picture

And what were the valuations on all of those things? Fuck you, if you can't look at a balance sheet and see as plain as day what I company's assets and liabilities are, then you can't purchase its equity or its debt, just because it went up didn't mean it was worth buying. Hindsight is 20/20 you dumbshit. No individual investor pulled the trigger in March of last year, oh and guess what if they did and were still holding on the whole way through, they are STILL DOWN. Piss off!

Sat, 01/16/2010 - 18:50 | 196127 DoChenRollingBearing
DoChenRollingBearing's picture

Junkyard, that is a great observation that there is nothing worth buying out there.  I have all the stuff I need.  Hardly ANYBODY I know wants to buy anything, hire anybody, buy stocks, or borrow money.

Still, even if delation is the winner over the next few months, buying GOLD (silver or platinum) seems mighty good insurance to me.

Sat, 01/16/2010 - 20:11 | 196163 delacroix
delacroix's picture

I bought a small chinese generator for $99, you can get a 50 cc scooter, for $650, or a bicycle for under$75  there are a lot of products that will appreciate in value, when our access to them is impaired. I plan on buying a truckload of woodstoves soon. then solar panels. I saw a air compressor, like the one I bought 5 years ago, (still working fine) for $99. we will not be able to produce these kinds of things, at these prices. the venezuelans have it right, get real assets, with your paper, before the purchasing power is halved.all the conventional safe havens, are manipulated, to force tribute to  TPTB  you can get a 22 cal rifle, for under $200, ammo is cheap, they're accurate, rabbits, do taste like chicken, but the ability to put down a  threatening feral animal, well worth the price. many people abandon pets, when things get bleak. you can't keep chickens, if you can't protect them. gardening tools a must

Sat, 01/16/2010 - 23:33 | 196290 Anonymous
Anonymous's picture

I have a number of warehouses throughout the country filled with toilet paper and whiskey. I think it is valuable to buy these products now as I expect them to be the new currency after the deflation.

Why buy gold now when you can buy it later at a price about 50% lower than today's price?

Short everything except toilet papter and whiskey.

Sun, 01/17/2010 - 00:08 | 196306 Anonymous
Anonymous's picture

Stick to the whiskey. Toilet Paper may have serious rival - Uncle Ben is building a huge paper facility.

Sun, 01/17/2010 - 11:29 | 196512 Anonymous
Anonymous's picture

LOL--Sad, but true. That might be the only thing our trash cash is good for, and a fitting end. Wish they had Bernanke's picture on them, so we could give him the respect he deserves...

Sun, 01/17/2010 - 13:23 | 196615 WaterWings
WaterWings's picture

I love watching "anony" groups pat each other on the back.

Sun, 01/17/2010 - 00:12 | 196310 Anonymous
Anonymous's picture

HMM do Stick to whiskey - better bet. Toilet paper may have serious oversupply from Ben and Tim paper Inc production plan.

Sun, 01/17/2010 - 08:59 | 196434 Crime of the Century
Crime of the Century's picture

Why buy gold now when you can buy it later at a price about 50% lower than today's price?

Because there is a real possibility you might only be able to get gold derivitives, while CBs scarf up the physical out there. Then all you will have is a piece of paper saying "Gold, bitches!"

Sun, 01/17/2010 - 11:40 | 196516 trav7777
trav7777's picture

At a paper price 50% below here you will be unable to buy any physical.

There are those of us who were buying in 2008 and can tell you what the retail supply looked like during the meat of the worst deflation since GD1, when the paper price plunged to the 700s.

It was so bad that we were trying to figure out how to take delivery on COMEX contracts to get physical.  That route has been foreclosed now. 

Sun, 01/17/2010 - 11:57 | 196534 msjimmied
msjimmied's picture

Heck, just get one of those japanese toilet seats that will wash and dry your fannie. Save that warehouse space for something that will keep you alive.

Sun, 01/17/2010 - 00:30 | 196324 DoChenRollingBearing
DoChenRollingBearing's picture

I stand corrected, delacroix and anon.  There are indeed many items that could be much more valuable later on if TSHTF.

I am considering storage of dental floss, rare-earth metals, booze, pills, locking pocket knives, etc.  Small items of high value.

Sat, 01/16/2010 - 19:02 | 196135 WaterWings
WaterWings's picture

Funny post.

And I urge you to include economic collapse in whatever economic models you are using. I mean, that would remove the need for models I suppose, so what I'm really saying is the not only do you need PMs, but you also need other tangibles for barter. Oh, and a gun. And a safe place to hide.

With all that cash and interest only payments you are in an enviable position for the time being. If we have any disruptions in our fragile system your cash might become worthless or inaccessible - but this goes without saying around these parts.

Sat, 01/16/2010 - 23:42 | 196291 Anonymous
Anonymous's picture

Green notes will not become worthless until the government calls them in. In the short term, the value of "money" will increase. You may lose access to your bank account, however, so it would be wise to convert some money to green backs and put them in a drawer for use later.

I don't believe PMs will be of much use in the coming deflation, but that's just me. As I noted in earlier comments, I have converted my "money" into toilet paper and whiskey as I think these will be the new money.

Short everything except toilet paper and whiskey.

Sat, 01/16/2010 - 19:45 | 196157 lawrence1
lawrence1's picture

How about farmland?  A wealthy investor I know who has made money all over the world believes that US farmland is one of the best values in the world at this time.  Who said gold is not moving higher to 2013, not anybody I have read. A ten year record of gains suggests sometning important is behind that and nothing has changed.  $ 1,500 gold by the end of this year, I would guess.  Study gold-silver before you knock it.  Or how about guns and ammunition ... may have good use and would probably have good reslale or trade value. 

Sun, 01/17/2010 - 11:45 | 196519 trav7777
trav7777's picture

Guns & ammo?  Ludicrous.

We make those things here.  Stock up on imports that depend upon a stronger dollar and continuing trade deficits.

Locally-produced items won't suffer from unavailability and guns and ammo are in short supply NOWHERE.

Trading ammo?  For what?  The only people who'd "need" ammo are the ones who are paranoid.  Guns and ammo can be had relatively easily in Argentina today.  Consumer electronics and Nikes?  Not so much. 

People should *really* travel to a country that has had a recent default or inflation problem (latin america) and see what is for sale and what is not.

Sun, 01/17/2010 - 13:33 | 196623 WaterWings
WaterWings's picture

Useful barter items, like TP, Pb, baked beanz, and firearms are still very liquid because of FRNs. Once the King of Counterfeit's (aka The United States Federal Reserve Bank of New York) fiat currency returns to its true value (zero) the liquidity of useful commodities will turn into concrete until the die-off phase of economic collapse is relatively complete; varying by the fortitude of local, self-reliant communities. 

Sat, 01/16/2010 - 19:45 | 196158 lawrence1
lawrence1's picture

How about farmland?  A wealthy investor I know who has made money all over the world believes that US farmland is one of the best values in the world at this time.  Who said gold is not moving higher to 2013, not anybody I have read. A ten year record of gains suggests sometning important is behind that and nothing has changed.  $ 1,500 gold by the end of this year, I would guess.  Study gold-silver before you knock it.  Or how about guns and ammunition ... may have good use and would probably have good reslale or trade value. 

Sat, 01/16/2010 - 20:05 | 196165 dark pools of soros
dark pools of soros's picture

Tesla is making a sweet Sedan available in 2012... get your downpayment in now..

 

or you can stock up on fine arts and enjoy wonderful inspiration while you shield yourself from the darkness outside...

Sat, 01/16/2010 - 20:17 | 196178 Tethys
Tethys's picture

Too funny.  I was just thinking the same thing.  Went out recently to look at the latest model year for my car (which has served me exceedingly well over the last 12 years but is, like myself, starting to show it's age).  I was astounded by the poor quality of the 2010 version.  Cheap plastic everywhere, poor workmanship, and unseemly design overall.  Totally unlike what they were making just 12 years ago.

McMansions?  3D- TV's? Tablet computers?  Who needs them? Don't even get me started on what passes for entertainment today.

Fortunately, the one good thing to come out of realizing the scope and likelihood of impending doom (inflation, deflation, stagflation, f*ckflation or whatever):  a much greater appreciation for those I care about, a roof overhead, and simple things like walks in nature with sane companionship.

 

Sun, 01/17/2010 - 00:32 | 196325 Anonymous
Anonymous's picture

Take a few grand and buy some long term storage food and an AR-15 + 5,000 rounds of .223 Think of it as an insurance policy against the general madness of crowds.

Mon, 01/18/2010 - 15:23 | 197479 Anonymous
Anonymous's picture

A+, I've been saying this to people for a very long time. A decade in fact. When I was in college, my classmates would say get a credit card, buy worthless shit, and pay it off, so you can build credit. My response, what the hell do I need good credit for if I don't intend to buy anything? Their response, because that's how it works...

Fucking morons! Every last one of them, buy something you don't need and make sure to overpay (interest payments) so you can afford to buy more crap you don't need. And we think we're so fucking smart, a ten year old could tell you that you're a dumbass for pursuing such worthless path.

Sat, 01/16/2010 - 16:43 | 196050 Anonymous
Anonymous's picture

It's not true that during the Great Depression central bank was passive. They pumped money like hell but have failed. Japan pumped like two hells and failed. The whole world is pumping now even more, but that will fail also. Monetarists got the cause and consequence the wrong way. When trade improves and economy grows money is "moving" faster to enable that. Not the other way. Trade leads - money follows.

Sat, 01/16/2010 - 16:48 | 196053 Anonymous
Anonymous's picture

Ron Paul Powerful Speech - A Call for Revolution?

Slavery sold as liberty. Socialism to save capitalism. A psychotic nation. Exuberant taxation. Epidemic of cronyism. 700 military basis all over the world. Tortures of 21st century. We have forgatten what made America great. Revolutionary changes are needed and forseen. Is Ron Paul the ONLY honest man in American's politics??

http://tinyurl.com/yj4wr3w

Sun, 01/17/2010 - 00:36 | 196327 Anonymous
Anonymous's picture

YES

Sun, 01/17/2010 - 03:45 | 196390 Anonymous
Anonymous's picture

Right on. The guy really is an oracle, I've come to believe, and this speech cements it. He could, however, like Yoda, use the assistance of a Samurai, or, better yet, a ronin or 2. I thought we might've had that in Alan Grayson, or Wal$treetPro2, but alas. It must be one bitch of a battle.

On the other hand, I was most impressed with and pleasantly surprised by Mr. deCarbonnel's latest. The young man has stepped up his game a notch since, anhhh, 10 months ago. The revelation about his great grandfather having a hand in the inception of the Fed, and then forcefully reneging, is simply Shakespearean.

He also tosses in--free of charge--a you tube link to some British sitcom that is UNBELIEVABLY pertinent.

And oh, yes. He also distinguishes between ludicrous and credible conspiracy theories. That topic's been on my mind's fourth burner for way too long.

http://www.marketskeptics.com/2010/01/preview-of-next-major-article.html

Sun, 01/17/2010 - 04:12 | 196399 Anonymous
Anonymous's picture

I think so--if you're only counting Reps. and Sens. There are characters, however, powerful ones, born from Article III of the Constitution, who are beginning to see the light. Judge Rakoff is one. There will be others.

When one of these seriously goes off, it is Katy bar the Door. But who knows? What I do know is this...

Something's gonna give, one way or the other. An Article III judge is one of many factors in the mix. Who knows if it's gonna be a food shortage, a COMEX default, hell, even a tossed NFL playoff game. But something's gonna give.

My labor is on the physical.

Sat, 01/16/2010 - 16:49 | 196055 APC
APC's picture

We are in a deleveraging mode.  Either the debt will be paid down, or defaulted.  Either way, its deflationary.  Inflation?  Perhaps, but not until after a very painful deflation.

Sat, 01/16/2010 - 16:51 | 196058 colonial
colonial's picture

I have never understood the inflation/deflation debate.  Deflation scares the ever loving shit out of the Fed, Wall Street and the ruling politicos of either party.  Therefore, the folks who have brought you all these fiscal and monetary gimmicks to support the current system will continue to advance policies that are by definition inflationary because the alternative/deflation is the ultimate removal of the "punch-bowl."  Anyone who does not plan for the inevitable nasty inflationary cycle is a fool. 

I'm not smart enough to know when it will come but it will come.  And no matter what the Fed/Bernanke says he much prefers the devil he knows to the devil he fears. 

Sat, 01/16/2010 - 23:50 | 196295 Anonymous
Anonymous's picture

Fine, prepare all you want for the coming inflation. That means more wealth for me when the value of your assets approach zero. Short everything.

Mon, 01/18/2010 - 13:18 | 197294 Bad Lieutenant
Bad Lieutenant's picture

You miss the point that the end game of deflation is hyperinflation as people abandon fiat.  The original poster clearly identifies that it's just a matter of timing, and if you pretend that you're going to hold onto fiat and time asset purchases, then you may make out or you may miss the train (a risk not worth taking in many people's view).

Sat, 01/16/2010 - 17:00 | 196065 Anonymous
Anonymous's picture

I think you can have both inflation and deflation. For the last 10-20 years we had an economy with selective inflation, in all areas sensitive to credit. It was erroneously called "wealth building", but this is what it was, selective inflation. There was not that much inflation, though, in a price of sausage. All of this was a reflection of two trends: financialization of the economy gave private banks (aided by the FED) the license to print counterfeit money in a form of leveraged credit, which caused selective inflation (think housing prices,education). Systematic trashing of labor caused subdued inflation in the price of sausage. Credit partially replaced lost wages, but equity withdrawal could not produce sustained inflationary pressure in the aforementioned price of sausage. Finally, we reached a broad insolvency crisis. Now we have renewed inflation in commodities and financial assets, as the monopoly money injected by the FED has to go somewhere. Little inflationary pressure elsewhere, as there is no social force that would spread the money around, except at the sustinence level. This is the major issue that weimar republic types are missing. Labor has been crushed. Large concentrations of militant industrial workers are gone, except perhaps in transportation. Workers are subdued and isolated, working clerical, desk jobs in small groups, generally mistrustful of unions anyway. There is no social force that can inject substantial quantities of money into the economy. For these reasons, it is a downward spiral, though perhaps it will reach some plateau, at least for some time.

An article linked by one of the commenters above is actually quite telling. It shows labor participation rates. They were dropping precipitously, but note that they are still much higher today than in the 50s- 60s. Think, women entering labor force, partly compensating for lower wages. A graphic illustration of the predicament of labor.

Sat, 01/16/2010 - 23:53 | 196298 Anonymous
Anonymous's picture

your comment is long and boring.

Sun, 01/17/2010 - 10:56 | 196490 Anonymous
Anonymous's picture

I suppose, it is not about ammo, shooting rabits, and heading for the hills.

Sat, 01/16/2010 - 17:06 | 196068 Anonymous
Anonymous's picture

Why the Fed Likes Independence

Geithner claims that they had to take politically unpopular actions to save the economy from collapse. Half of that is right - it was politically unpopular, but it is extremely premature at best, to claim the economy has been saved. It was just reported that the economy shed 85,000 more jobs in December. Unemployment stands at 10 percent officially, and 22 percent according to more traditional calculations. It is hard to argue that this sort of government waste has done anything but harm to our economy. Raiding Main Street to bail out Wall Street is a foolish idea. Main Street productivity and the strength of the dollar is the bedrock of the economy. You cannot gut this foundation without eventually toppling everything else. This is what too many policy makers either don't understand or refuse to face. Or even worse, perhaps they do understand, but don't care!

In any case, this revelation makes precisely my point about the need for Fed transparency. This claim that the Fed should have "independence" is a canard. They very much enjoy their comfortable pattern of bailing out friends and devaluing the currency with no oversight and no accountability. Geithner specifically asked officials at AIG not to disclose to the SEC or to the public particulars about this special deal for his friends. We only know these details now because AIG was eventually forthcoming when Congress demanded some answers.

http://tinyurl.com/y8d96tc

Sat, 01/16/2010 - 17:10 | 196071 bugs_
bugs_'s picture

Deflation scares them all.  Wall Street, DC,

and Bejing.  Give deflation a chance!

Sat, 01/16/2010 - 17:23 | 196081 Anonymous
Anonymous's picture

I love to read Zero hedge and the different points of view here; however, this article is completely bogus. I'm sorry. Just someone with a political agenda/bias finding mini points to fit their view.

I understand tail risks, but this is far beyond "tail risks".

1) The monetary base graph. Sure, it looks pretty and a lot of people like to flaunt it these days, but it's completely useless to put such a graph up and not explain to people what is really happening. How about posting the bank reserves graph from the St. Louis Fed? You would see a better picture of the situation. The fact is that the increase in the monetary base is mostly offset by a huge increase in bank reserves.

Complete analysis next time? Instead of cherry-picking what fits the desired view.

2) "In a deflation, the value of the money increases – which is actually a pretty desirable thing, if you ask me."

Sounds great huh? But you forget that deflation comes as a package with some other quite unattractive elements. For starters, people expect prices to keep falling and avoid consumption. This creates a downward spiral that generates numerous problems for businesses. Not so fun anymore.

3)"There is something else that I think the deflationists are missing, and that has to do with confidence in the currency ... then they’ll further reduce their purchases of our Treasuries and start trading their dollars for stronger currencies and tangible assets, including precious metals."

Stronger currencies? I hope you're not talking about the Euro with all its possible Eastern European defaults and what not. The Pound? Have you looked at their debt-to-GBP ratio (especially if you're complaining about U.S. debt levels)? The Australian dollar? Do you know that size of their economy? Gold? I don't think we're going to be buying candy at the corner store with gold anytime soon (as much as you may want to believe it).

Other countries can't bailout on the U.S. They have massive dollar holdings AND...AND the U.S. demand is the strongest in the world. The China, Brazil, Australia, etc. demand comes from end-user demand in places like the U.S. and Europe. Don't forget that.

And for countries such as China, you may forget that China doesn't buy dollars just because of its pretty green color. It pegs its currency to the U.S. dollar and in order to do that they need to accumulate dollar reserves. Now, if you believe China is going to change their business model from night to day, help yourself.

4) "Or maybe the government will force you to convert some or all of your IRA or 401(k) into Treasuries, perhaps packaged up in an annuity"

Can we get some real advice/analysis here? I have my own imagination to think up of stupid yet unlikely things that could happen. Maybe pigs will fly too as the U.S. debt increases?

5)"... where a sharp loss in confidence on the part of our creditors would likely lead to a currency crisis that drives the value of the dollar quickly lower, at the same time that it drives interest rates higher."

Do you know that a dollar crisis means that all other currencies would appreciate through the roof?

Japan, Brazil, Switzerland, Canada all start to cry when the dollar is depreciating. Some of them indirectly manipulate currency markets OR are willing to step in if necessary.

And then you have China and other Asian countries that peg to the dollar or peg to the Chinese Yuan.

Moral of the story: I don't think our creditors, which are pretty much these countries, are going to let such a thing happen. As a result, yes, they will continue to buy our treasuries and support the dollar in other manners.

How are China, Japan, Brazil, Australia, Petroleum countries (pretty much all export-driven countries) going to flourish with a collapsed dollar? Help me out on this one.

Who's going to buy most of the crap?

Wow, this was quite a long comment. Can I write a guest post too ??? rrosa.hamilton@gmail.com

:p

Sun, 01/17/2010 - 01:15 | 196342 Orly
Orly's picture

Altogether correct.  Looking at the crosses to the greenback, we are bouncing around historical lows because the stock markets are whetting risk appetite and the commodity markets are beginning to waver with over-liquidity.  Soon, these things will stop...maybe in as soon as a matter of weeks.

When risk-aversion once again becomes the desired position du jour and those riskier markets sell off, the main direction of liquid money is going to be into USD and US Treasuries.  The dollar will sky-rocket relative to most other currencies.

The Swiss Franc is cruising for a bruising, that's for sure.  The yen, after rising further on risk fears, turns extremely weak on an outlook that the Japanese economy will soon buckle under its own weight.  The Euro gets crushed against nearly everything.

Clue: the Euro has already turned the worm and is headed for major losses.

Long live the US Dollar!  Long live the King!

Sun, 01/17/2010 - 08:37 | 196429 jeff montanye
jeff montanye's picture

you couldn't buy candy at the corner store with gold in 1930 but it was going up just the same.  you couldn't buy it in 1965 but it was going up just the same, even as the stock and bond markets were beginning their greatest fifteen year bear market (inflation adjusted) in u.s. history.  try harder if you want a guest post.

Sun, 01/17/2010 - 09:07 | 196435 Crime of the Century
Crime of the Century's picture

Nice that you semi-identified yourself, but wouldn't it be better to just register? Anyone who takes the time to articulate their thoughts such as you deserves to not be sock-puppeted by thousands should the conversation take off.     /$.02

Sun, 01/17/2010 - 23:18 | 196957 Anonymous
Anonymous's picture

So registering with an anonymous name like Crime of the Century is revealing or relevant?? Man up -- use your real name and maybe email address if you feel so strongly about it.

Mon, 01/18/2010 - 06:42 | 197060 Anonymous
Anonymous's picture

Please don't write a guest post. You seem oblivious to almost every relevant point in the above article.

Mon, 01/18/2010 - 15:41 | 197505 Anonymous
Anonymous's picture

Take a look again at #4, its already happened in Japan, it will happen here as well. Probably should have happened long ago, retirement funds in equities in the boom and bust of Fed's bubble blowing will find you holding nothing but your principle (if you're lucky) on the day of your retirement. German's found this out long ago and they hold debt. "Equity! That shit's for the birds!"

Sat, 01/16/2010 - 17:39 | 196093 Anonymous
Anonymous's picture

Look, the bottom line is we've had 30 years of unprecedented credit expansion. That, of course, also means debt expansion as debt is money in our system. This is a result of the dismantling of our industrial base (the equivalent of quitting our "national job") and subsequently having to survive off credit + savings. Savings went down...credit went up.

The present system simply cannot handle any more debt obligations. The average American is indebted up to his eyeballs. Defaulting on a debt does not necessarily mean the newly created money is out of the system. For example:

Joe sixpack borrows 140k from bank X to remodel his home. 140k of new money is created out of nothing. Accounting equation is satisfied, 140k liability and 140k loan asset. Joe sixpack gives a check to Joe twelvepack (home re modeler) who puts his 140k check into bank Y. Bank X transfers the money to bank Y. Bank Y now has the potential to lend out 1.4 million or so.

If Joe sixpack defaults on his 140k loan, bank X will have to write off that asset, thus money supply contracting right? deflation? yes....as long as bank Y cannot find any borrowers for their potential 1.4 million of excess reserves.

As it is, borrowing by the private sector is shrinking big time is it not? That would be the rational approach from the citizenry. As long as banks can't find new borrowers, new money is not being created (on that level) and is not making it into the real economy. Deflation...

BUT, as we pointed out earlier, we had the mother of all inflationary booms for the past 30 years (Soros super bubble). Any time you have an inflationary boom, you will have a deflationary bust.

As Tyler pointed out, the dumbass politicians simply won't let that healthy and direly needed bust to happen....thus the floodgates for inflation will be opened as wide as possible.

They know the money simply isn't getting out to the people via the banks. We always hear "well we just have to get the banks lending again!". That simply won't happen. Any rational bank would NOT lend to a overly indebted, increasingly unemployed/underemployed populace.

It's only a matter of time until the government just goes around the banking system and starts injecting cash directly to the people, for our own good of course.

Once the banking system is circumvented.....look for the inflation.....

Sat, 01/16/2010 - 20:09 | 196170 dark pools of soros
dark pools of soros's picture

"Once the banking system is circumvented.....look for the inflation...."

THAT is something worth hanging your hat on

Sat, 01/16/2010 - 20:58 | 196202 Slash
Slash's picture

well they can't force the public to take loans. Look for similar bush-style "stimulus" in the form of directly mailed checks or something....

 

Sure it's true the politicans are bought by the banks, but the scumbags know we can still vote them out of a job. As things continue to deteriorate, the politicians will start acting out of self preserverance in response to rising populist anger. The banks won't truly be hurt of course, but the politicians will have a stronger burning fire under their ass's to do something other than just give banks trillions of dollars and hope they lend it out.

Sat, 01/16/2010 - 23:10 | 196277 Anonymous
Anonymous's picture

They will just give bundles of fresh notes to their friends and family. Thus bypassing the banks and creating inflation. Money for notthing and your cheques for free.

Sun, 01/17/2010 - 00:00 | 196304 Anonymous
Anonymous's picture

Stimulas checks? Remember those?

Your approach may be tried, but not before deflation ravages the net worth of all americans. I agree with earlier suggestions -- short everything.

Sun, 01/17/2010 - 09:12 | 196436 Crime of the Century
Crime of the Century's picture

It's the Progressive Populist™ way! Whereas Boosh turned on the hose and sprayed everyone, look for a more "targeted" system going forward.

Sat, 01/16/2010 - 22:52 | 196268 trav7777
trav7777's picture

I have to say no, no no.

QE was intended to get the inflation into the hands of the IMPORTANT PEOPLE.

Look, the companies that crashed hardest in the 2008 deflation were the most levered, the banks.

Good god, GS was days away from collapse, THAT is important to the elites.  GS is one of their playground appliances.  Without GS, how in hell would elite parasites make money!?!?!

People sitting around with cash in a mattress, the ULTIMATE littleguys, were doing the best in deflation while the richest were on the verge of having their private Disneylands taken away.

THAT is why the inflation went to the banks and we see no velocity out here in the real world.  WE are not a concern!  If WE default, they do not care.  If WE die, they are unconcerned.  If GS dies, now THAT is critical and must be acted on with the full weight of the gov't and all resources it can muster.

Sun, 01/17/2010 - 00:55 | 196335 Slash
Slash's picture

lol remember when someone stole some of GS's code for trading or whatever and it almost turned into a matter of national security. what a joke.....

Sun, 01/17/2010 - 01:19 | 196345 Orly
Orly's picture

Let's ask Sergey.

Sun, 01/17/2010 - 09:16 | 196441 Crime of the Century
Crime of the Century's picture

Look man... unscrupulous people could use that code for front running and other hijinx. We need to keep it in the hands of God's Workers™. (I am going to wear out that Alt0153 this a.m.!) 

Sat, 01/16/2010 - 17:48 | 196100 Anonymous
Anonymous's picture

Another poster declared there is nothing to buy. He did not explain why gold will not reach $1,500 until 2013. If the market is allowed to function free of interference it could top that level some time this year.

The feds will do what they can to prevent that from happening, of course. The proposed policy of forcefully converting all 401k/IRA accounts into treasuries/annuities is telling. They want to lock down as much cash as possible, seeing a growing trend of using IRAs to buy gold coins, led by a doctor running for Congress.

It is a battle between market forces and governmental power. By next year the question may no longer be what to buy, but whether you still have the freedom to buy anything other than what the government wants you to buy.

Sat, 01/16/2010 - 20:17 | 196179 WaterWings
WaterWings's picture

+1

Pray for a crack-up boom before then.

Sun, 01/17/2010 - 00:18 | 196315 Anonymous
Anonymous's picture

Its a battle between the economic/financial system and deflation.

Expect a run on the financial system, probably sooner rather than later.

Sun, 01/17/2010 - 09:23 | 196443 Crime of the Century
Crime of the Century's picture

All such assumptions of gold prices being deflation depressed ride on the premise that COMEX (and GLD) are not stressed, and operate fully above board. I am not so deluded. I also believe we have only seen the opening act of CB buying.

Sat, 01/16/2010 - 17:49 | 196101 zenon
zenon's picture

Arguing against that point, Evans-Pritchard makes the case that the U.S. government is making much the same mistakes that were made in the first part of the Great Depression, i.e., being overly tight with the money. And that the velocity of money is falling.

There are a couple of key differences between now and then, however. First, the Fed didn’t actually know what the money supply was back then. They literally had no monitoring tools in place, mostly because no one thought it was important enough to track. Second, they didn’t have fiat monetary powers. Today, neither of those factors apply.

 

I disagree. The prime difference between now and then is that now they did not allow 1 $ of bank deposits to be lost as a result of bank failures. During the 30's money supply shrank by something like 25% as a result of failing banks.

The deflationists are right when they say that the monetary base is not circulating in the wider economy due to the lack of bank lending. However, the government has "made whole" all the money created during the credit orgy of  the last 30 years.  It has also clearly shown that it is on course to increase this money supply with more stimulus spending. Common sense says that they will continue to pump the economy until they hit an obstacle. What could this obstacle be? Well the most straightforward is a puke in the bond markets resulting in yields shooting up. Given that they would meet this with a ramping-up of the printing press, sensitive commodities (and probably the dollar) would react accordingly.

So until we see real breakdown in bonds (we came close but if we go convincly below 115.00 on T-bonds that would qualify) with a parabolic rise in Au, Ag, etc., expect more pumping from the Freasury. Following that, there is a danger of a deflationary collapse as the PTB in the US decide to excercise their power by turning off the supply of Federal Reserve Notes.

Sat, 01/16/2010 - 18:27 | 196118 Anonymous
Anonymous's picture

Aside from the bond market imposing "yield dicipline" upon the Treasury, there is another potential reason the FED and Treasury may not be able to execute on their goal to inflate out of the debt crisis. That is a hard turn in the social mood that handcuffs the Treserve for political and self preservation reasons. For example, the congressional hearings on AIG, whose dragnet now has caught not just the moraleless Geithner but also Hank/Ben and the biggest criminal inside trader of them all, Friedman (who bought a ton of GS stock from Winks at the bottom with direct knowledge of the AIG bailout and all other TBTF discussions). If something breaks during testimony or a smoking gun email surfaces implicating any individual personally, then all other participants may begin to risk manage their own careers and personal "exit strategies" and sidestep the increasingly unpopular moves to bankrupt the Treasury via spending or nuke the dollar via QE. Furthmore, the mid-term elections will trash congressmen who voted for the TARP and other bailouts making major additional allocations of taxpayer future liabilities to the absurd fical bonfire uncertain, and perhaps even dead, until post election. Then, post the election, the fired up shiny badge new congressmen who won on the principle of fiscal restraint, will vote down new spending addtions to the bonfire. While all of this plus "audit the Fed" continues to grind down the speed at which the G can bankrupt itself, Deflation could really go on a landgrab. Dimming social mood may inhibit inflationary firepower thus giving Deflation its chance. Thus Deflation defeats Inflation. Of course post the Deflationary unwinding, hyperinflation will rage.

PC

Sat, 01/16/2010 - 22:48 | 196266 trav7777
trav7777's picture

Deflation is what SHOULD happen.

It would be worst on the gov't malefactors, the bankers, the "elites," and all the rest of the crooks who live as leverage parasites.

Real producers can continue to produce real things.

Sat, 01/16/2010 - 23:47 | 196294 Anonymous
Anonymous's picture

And there really is a tooth fairy too, right?

Sun, 01/17/2010 - 08:48 | 196431 jeff montanye
jeff montanye's picture

exactly.  if one thinks the populist rage to come will express itself as deficit reduction (outside of a reaction to an already extant extreme currency crisis/bond market collapse that tanks the real economy badly) we are talking tooth fairy.

Sun, 01/17/2010 - 10:45 | 196482 jeff montanye
jeff montanye's picture

exactly.  if one thinks the populist rage to come will express itself as deficit reduction (outside of a reaction to an already extant extreme currency crisis/bond market collapse that tanks the real economy badly) we are talking tooth fairy.

Sat, 01/16/2010 - 18:21 | 196116 Anonymous
Anonymous's picture

The title of that piece is the standard cliche of the inflationists. Its always the deflationists that are "missing" something. Yet it always seems its the inflationists that are proven wrong.

So, who's missing what?

Sat, 01/16/2010 - 18:31 | 196119 Hammer59
Hammer59's picture

Our financial system has all the hallmarks of a structure in Haiti---building codes ignored. A precipice dark and deep, indeed! Unfortunately, the rest of the world followed our lead---population explosion, a lust for an ever increasing standard of living and conspicuos consumption.

Obama et al have squandered their oppurtunity to change anything by empoying the same monsters who exacerbated the problems in the first place, and thus has sealed our collective fate.

Nothing worth buying, to be sure!  Even if gold were to reach $5,0000./oz...who could afford to buy it from you? Nice to see the free world falling all over itself to help poor, corrupt Haiti though. There, just like here, the real victims are the working class people, enslaved by the corrupt people in power.

Speculators, profiteers and free market proponents are cut from the same cloth as the politicians. May God help us all.

Sat, 01/16/2010 - 18:54 | 196130 DoChenRollingBearing
DoChenRollingBearing's picture

+1

Many at the bottom here will suffer because of the rot at the top of our system.  Just like Haiti.

Still, everyone should have some gold or silver stashed away.

Where are Gordon and the Chumba?  Help me out guys!

Sat, 01/16/2010 - 19:15 | 196144 WaterWings
WaterWings's picture

Even if gold were to reach $5,0000./oz...who could afford to buy it from you?

Once it takes 50,000 FRNs to purchase gold you won't want to sell it anyway. FRNs are for suckers. When the Fed can no longer hide the systemic cracks behind the Green Curtain you wouldn't be considered unwise to find a safe place to hide until things calm down a little bit. Then, and only then! will you reveal you have gold to exchange for whatever tangibles, or otherwise, you desire. 

Speculators, profiteers and free market proponents are cut from the same cloth as the politicians.

Woah, buddy. Step away from the keyboard. Law-abiding entrepreneurs have little interest in public office - there would be less time to be a producer and efficiently organize resources for a profit, which is the reward and motivation to achieve. The free market is simply the least amount of control on legal human choices to exchange goods - nobody has to buy what the entrepreneur is legally selling.   

Hammer, I think I can see that sickle behind your back. Nice red shoes!  

Sat, 01/16/2010 - 20:11 | 196175 dark pools of soros
dark pools of soros's picture

it would be easier to move them to Pompeii and rebuild than to bother hammering one nail in that Haiti dump

Sat, 01/16/2010 - 21:58 | 196238 WaterWings
WaterWings's picture

You know, that made me think about it. Hopefully without glaring insensitivity I would propose that as a good idea in a twisted way. Italian and French are 90% phonetically compatible and last time I checked tele-commute rehab programs have abysmal success rates.

A change of scenery just might be the ticket! "Welcome to the United Slaves of America. Papers please."

Sat, 01/16/2010 - 22:46 | 196265 trav7777
trav7777's picture

why do you think anyone would exchange gold for paper or that somehow this is a prerequisite?

Gold is a real thing to be exchanged for other real things.  In a REAL economy.

Synthetic economies are what we have, where we exchange paper promises to pay promises plus interest on promises in the future for real things.  It's a collective delusion.

Sat, 01/16/2010 - 18:40 | 196123 Youri Carma
Youri Carma's picture

My theory is Deflation -> Inflation -> Deflation again

DEFLATION STARTED 01/16/09

INFLATION IS STARTING JANUARY 2010

Sat, 01/16/2010 - 21:04 | 196204 Anonymous
Anonymous's picture

-2% -> +4% -> -2% ???

... running for my bunker!

Sat, 01/16/2010 - 18:58 | 196132 phaesed
phaesed's picture

All I wonder is why haven't I ever seen an article on Zero Hedge stating "Inflationists - Here's why they're wrong".

 

Of course, I doubt we ever will.

Sat, 01/16/2010 - 20:24 | 196182 Anonymous
Anonymous's picture

Terrible. Once again zerohedge proves the value of the website is as a messageboard, and not reality.

Sat, 01/16/2010 - 20:28 | 196183 delacroix
delacroix's picture

deflation, destroys the asset value, of the wealthy, while increasing the purchasing power, of the common people. therefore TPTB  will do everything in their power, to cause inflation, at the risk, of hyperinflation, or a currency crisis. at this point, they are starting to sweat. it looked like it would work on paper, but the real world, has dimension, beyond paper. low and behold, they are not the smartest guys in the room.

Sat, 01/16/2010 - 21:08 | 196208 Anonymous
Anonymous's picture

deflation = benefits large cash holders, and people with fixed incomes (pensioner, govt workers, union employees).

deflation = benefits anyone who keeps a job, as "prices and wages are inflexible in a downward direction". So companies lay off 10% of employees, bc remaining employees make 10% more in 'real' dollars.

inflation = benefits debtors and asset holders and risk-takers.

deflation and a debt/deflation cycle is the driver of events like the great depression. it is generally desirable to avoid this.

Sat, 01/16/2010 - 22:44 | 196264 trav7777
trav7777's picture

yes!

Deflation also kills the levered.  The rich get to participate in leverage rackets to make money.

That's how all the "banks" got nearly destroyed by one minor bout of deflation in 2008.

All the people sitting atop the PE funds, the CREITs, the HBs, the corps, the banks, all of them, all these "wealthy" people are dependent upon inflation to not get wiped out.

That's why the "printing" has gone to THESE PEOPLE! They were the ones most in danger.  The little people, so what if they lose their house, right?  It'd be FAR WORSE if the elites lost Goldman Sachs or any of their other playground appliances.

Sun, 01/17/2010 - 23:37 | 196971 Anonymous
Anonymous's picture

There is no question inflation is best for the government ("taxation without legislation" - they love it). So they will go to great lengths to avoid deflation and risk inflation. You just have to decide whether you think they are bold enough to do what they have to do to create inflation. "Bold" because the deflationary forces are strong and will take an extraordinary amount of inflationary forces to overcome.

Sat, 01/16/2010 - 20:53 | 196199 Anonymous
Anonymous's picture

Of course you can both be right, and in liquidation,which is the process we are undergoing, you both WILL be right. As government withdraws from the society, collapse in income leads to collapse in demand. That brings down prices (except--for a while--in areas, such as gasoline, where cartels are selling to captive markets: the American worker). There's your deflation.

Next supply chain collapse begins. That is well under way in transportation, it has gone on to agriculture, and will next go to utilities.

Then you have inflation (with some episodes of Currency Race to the Bottom along the way). It's just that the inflation you have is Austria 1919 inflation--you know, when the society collapses. Stay tuned!!

Mon, 01/18/2010 - 15:53 | 197530 Anonymous
Anonymous's picture

"As government withdraws from society..." yeah because anyone alive has seen this phenomenon take place. Once the government is in, they are in it to win it, they don't ever leave.

Sat, 01/16/2010 - 21:21 | 196216 saturno_v
saturno_v's picture

The velocity of money concept is fallacious.

Read Murray Rothbard

Sun, 01/17/2010 - 01:30 | 196351 Orly
Orly's picture

Hugh Hendry says that the decline money velocity and credit contraction are far greater than any money the Treaserve can throw at it.

Under those circumstances, deflation is inevitable.  Then, if the Fed can and will indeed sponge money back out of the system before it gets into the real economy, then it could theoretically be the best of both worlds.

Sat, 01/16/2010 - 21:10 | 196206 saturno_v
saturno_v's picture

 

Few things the deflationists do not get it for some reasons.

 

 1) Prices will not go down in perpetuity..at some point business shrink their productive capacity and actually may increase prices to make up for less volume..it's already happening folks, all around.

 

2) In an initial deflationary environment (deflation is a natural course of action during an economic correction) you lose productive capacity (see #1) because businesses shut down, reorganize, etc... When the monetary pumping finally push things too far, you cannot ramp up production as fast as printing money.

 

3) Even in an hyperinflationary environment some goods and items actually decrease in price in real terms...look at luxury goods in Zimbabwe, Argentina, Brazil, etc...

 

4) Deflationistas assume that money can reach the hands of people only through credit....so if banks do not lend and people do not want to borrow the money supply cannot increase....absolutely not true, remember the Government/Fed has monopoly power over the money supply, they can decide to give the money to the citizens directly...they can do pretty much whatever they want folks...it's already happening with all the various unemployment extension benefits programs, income support schemes, etc....expect even more of that in the future....remember, money going into the pockets of idle (non productive) individuals. The Fed has already contemplated extending loans directly to the public. And remember, if you offer to people money at zero interest long enough, eventually they will get the money (look at banks and financial institutions playing at the stock market casino with money borrowed at 0%) Another assumption in the deflation camp (linked to the lack of credit) is that you cannot have hyperinflation with such high unemployment rate...well look at Zimbabwe with 80% unemployment rate or Argentina...

 

5) Japan actually never went negative on the CPI. In a fiat currency system a determined government can always create inflation...look at the CPI in the 1930s after we suspended gold convertibility...it went immediately positive.

 

6) We already have very high inflation in the equity market...

 

7) Inflation can take the form of reduced service, shrinking quantities, product substitutions and fees everywhere

 

8) How you explain oil at over $80 per barrel in a contracting economic environment??

 

9) Deflationists do not include in their "model" the potential refusal, at some point, to buy our sovereign debt from foreign investors which will force our hand...they do not contemplate the loss of confidence in the currency, the famous "crack-up" boom, essential prelude to hyperinflation. Many deflationists consider themselves Austrians....well it is a contradiction because Austrians do not believe fiat currency has any intrinsic value, so assuming that in time of great economic distress people will take refuge into their fiat papers as store of values does not make sense from an Austrian perspective. Remember, the best outcome from the Fed to hope for in this environment is a period of relatively high inflation to wipe out a good chunk of debt, they will gun for it and they may well overshoot.

 

10) Some of the recent little sign of significant inflation in my little personal world:

 

- The salad bar at my grocery store went suddenly from 6.99/lb to 9.99/lb

 

- My favourite French mini baguette shrank in size - Decreased service level in some of the restaurants I go (less personnel even in busy evenings) and smaller portions (that is a good thing, but let's not digress...)

 

- My local McDonalds now charge if you want extra dipping sauce. - Product substitutions everywhere...pesto sauce now blended with spinach paste, less quality chocolate on shelves, cakes and pies now filled with flavored whipping cream instead of custard, etc..

 

- My mechanic increased its service price and waste product handling fees - Christmas 2008 was way better than 2009 for deals in the items I'm interested in (electronics and sporting goods) not very good deals at all in the last holiday.

 

Remember that the really detrimental long term effects of the Fed funny monopoly money and the Wall Street casino is the loss of productivity improvement and innovation capabilities. Brains and capital were not longer deployed for real sustainable production activity, we had no industrial policy (contrary to Germany or Japan), the allure of getting rich at the baccarat table was irresistible....why you should squeeze your brain and spend capital trying to figure out better future energy sources, improve the quality and functionality of industrial products when you can make it like a bandit in few years of shuffling paper around?

Two of the most glorified (by the specialized press) activities in the last 20 years were either getting rich quick with new companies requiring very little initial capital investment (the Venture Capital model) or sucking up value and rent seeking from existing enterprises with no regards to the future viability of the firm (the Private Equity model).

And we were able to do it under the nose of the world because we have been running on the coattails of our past reputation (an America which no longer exists), the reserve currency status and the protection money we have been able to extract in exchange for our military backing. The reason I laugh at people screaming about the China bubble is that at least the Chinese are building the infrastructure we take for granted...there will be many bridges to nowhere that's for sure but at least some of that money will go into productivity enhancement investments. Will they have corrections (including serious ones) along the way? Of course they will, nothing goes up or down in a straight line.

Sat, 01/16/2010 - 21:35 | 196222 APC
APC's picture

You seem to be confusing price increases/decreases (cpi) with inflation/deflation.  Not the same thing.  You can have price decreases during a normal inflationary period (ie computers, which were much more expensive back say 10 years ago than they are now) or you can see the price of essentials (food for instance) rise during a deflationary period.

My understanding is that inflation and deflation have to do with the supply of money chasing available goods and services.  When the going is good, jobs are created, credit expands, increasing the supply of money in the community, hence inflation.  During a downturn, jobs are destroyed, credit contracts, decreasing the money supply, hence deflation.

Someone, correct me if I'm wrong.

Sat, 01/16/2010 - 22:05 | 196245 saturno_v
saturno_v's picture

 

I'm not confusing the 2 things at all.

 

Inflation is the increase in the supply of money and credit in an economy. You may or may not have consumer price increase....it depends where "the river" goes.

Right now the inflation created by the Fed/Government is going (through financial intermediaries which benefit from the monetary bonanza) into out of this world stock market evaluation (equity price increase), government debt, commodities, oil.

This is affecting many consumer prices (anything related to oil and food)

During a downturn jobs are destroyed and production capacity is reduced. If new money created ends up in the hands of consumer they will bid up prices. Unemployment is not a barrier to high inflation (just ask the Zimbabweans or the Argentinians).

Nothing prevents the government to give money to citizens directly through various programs (it's already happening) and "make work" activities ...it is not set in stone that money has to reach consumers only through credits...and if you lower enough the cost of money (and relax lending standards) for the final consumer, the will borrow if the alternative is starving.

So we have very high inflation right now...at the moment it's just going into stock, commodities, oil and government/corporate bonds...it has not yet push the turbo button, money has not yeat reached the hands of consumer.

Two things can push us over the edge:

 

1) More direct transfer money and work programs act as catalyst (money end up in the pocket of consumers)

 

2) Foreign investors refuse to buy our debt, interest rates skyrocket and government is politically forced to do more and more of #1 igniting the inflation bomb.

Sun, 01/17/2010 - 09:10 | 196438 APC
APC's picture

So we have very high inflation right now...at the moment it's just going into stock, commodities, oil and government/corporate bonds...

Well, my understanding was  that bailout money was going into shoring up woefully inadequate reserves and not getting into circulation via lending, be it private or small business.  Money parked hardly seems inflationary.

...it has not yet push the turbo button, money has not yeat reached the hands of consumer.

Right, and what I was suggesting was that once it had, if indeed it does (which is not a given at this point) then, and only then could it be inflationary.

So, rather than have "very high inflation right now", seems to me we have mild deflation, for now.

Sun, 01/17/2010 - 16:47 | 196750 saturno_v
saturno_v's picture

 

"Well, my understanding was  that bailout money was going into shoring up woefully inadequate reserves and not getting into circulation via lending, be it private or small business.  Money parked hardly seems inflationary."

The bailout money is not doing that..it is going into the pockets of bankers as "bonus" (they will be spent eventually) and into the stock market rigged casino and commodities.

 

Inflationary indeed.

Sun, 01/17/2010 - 18:44 | 196835 Zexe
Zexe's picture

you nail it man, if only people could spend some time and think....and about those government hand-outs, are you people sure americans are going to spend it? I think in the current environment they are more likely to save it...so there you have deflation...

The tide is turning, nothing can grow exponentially forever, like there's no stock growing up unabated forever, money supply cannot grow forever without some kind of a pullback...and now when americans are choling in debt is the time for money supply to contract....are you actually thinking people willl borrow themselves out of this mess created by borrowing itself??? I strongly doubt it.

Mon, 01/18/2010 - 17:36 | 197670 WaterWings
WaterWings's picture

Which is probably why it will be on RFID'd ration cards with an expiration date. Spend it or lose it.

Mon, 01/18/2010 - 16:02 | 197548 Anonymous
Anonymous's picture

Hey dumbshit, zimbabwea issued debt in another currency, that's where their hyperinflation came from, had nothing to do with employment you are correct about that, but citing it to your benefit without explaining it is pointless. When the US issues debt in another currency, you're correct we will see hyperinflation, but until then you won't.

Oh and don't forget, to have inflation, the price increase has to be perpetual. Otherwise, it is a one time rise in the price level which after all factors of production and consumption have been exhausted, it will either become the new price, decline in price, or increase in price. So, you can't look at todays prices and scream inflation, you have to look at them over time. $80 oil may seem high, but it just came from $140, but I suppose you didn't consider that.

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