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Deflation is coming
Deflation is coming
www.southofwallstreet.com
In going thru old research I found a note from Dave Rosenberg in March of '08, where he discusses Bernanke's decisions on rate cuts and points to his speech from 2002 on deflation as a road map for his options. At the time, cutting the Fed Funds rate was 'the answer' that rallied markets and substantiated the Fed's ability to maintain confidence in financial markets. We all know how that ended.
Rosenberg from 3/18/08 at ML:
We believe that Fed Chairman Bernanke is now fully in charge of the FOMC and he likely does not want to take a chance of disappointing the still very fragile financial markets. More importantly he understands that we are simultaneously facing a credit crisis, deepening housing market meltdown, and an unfolding economic recession. (Sounds a lot like today, doesn't it?)
He goes on to question what Bernanke can do if rate cuts don't work:
Since the last rate cut, the Dow is down more than 500 points and
BBB corporate spreads have widened out an extra 50 basis points. Financial
conditions are actually tightening. So don’t think for a second that Bernanke does not have something up his sleeve – we think the press statement is going to be very key. What other aggressive action can the central bank possibly take?
Today Big Ben sits in a similar, but more nuclear situation. In this 2002 speech he suggests the ability to buy foreign debt:
The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt, as well as domestic government debt. Potentially, this class of assets offers huge scope for Fed operations, as the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt
We aren't far away from that being our last option, are we? It will be a sad day if we start buying foreign wallpaper. Here's the point of my note - if you look at where we are today, markets are becoming more fragile - requiring more 'solutions.' At the end of the day bad debt can't be subsidized by facilities or coordination. Debt has to be destroyed, which will cause levered market participants to fail and ripples to spread. Its not doom and gloom BS - its the only way capital markets become healthy again. Think of it as a backed up drain that all the Drano (liquidity) in the world can't unclog. You've got to cut the bad pieces of the pipe out, which may cause you to tear up the whole bathroom - causing your wife (or husband.. or mistress) to bitch and moan, but you eventually rebuild and move on to the next crisis. That was pretty lame... sorry.
Bernanke continues in his address on why the Japanese couldn't fight deflation:
The claim that deflation can be ended by sufficiently strong action has no doubt led you to wonder, if that is the case, why has Japan not ended its deflation? The Japanese situation is a complex one that I cannot fully discuss today. I will just make two brief, general points.
First, as you know, Japan's economy faces some significant barriers to growth besides deflation, including massive financial problems in the banking and corporate sectors and a large overhang of government debt. Plausibly, private-sector financial problems have muted the effects of the monetary policies that have been tried in Japan, even as the heavy overhang of government debt has made Japanese policymakers more reluctant to use aggressive fiscal policies (for evidence see, for example, Posen, 1998). Fortunately, the U.S. economy does not share these problems, at least not to anything like the same degree, suggesting that anti-deflationary monetary and fiscal policies would be more potent here than they have been in Japan.
Well, it looks like things have changed from 2002, we aren't much different now from where Japan was. The US now has a large overhang of government debt and massive financial problems in the banking and corporate sectors muting the effects of monetary policies (ZERO HOUR).
Deflation appears unavoidable. I'm renting assets until we see the painful - but necessary bust to rectify imbalances in liabilities. So, with today's news about increasing liquidity via swap lines - I can't help but sense that Central banks see something developing that guys who stare at blinking screens don't.
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DavosSherman says:
"You CAN NOT HAVE DEFLATION WITH THESE FUCKING MORONS PRINTING LIKE THERE IS NO TOMORROW"
If debt is destroyed (defaulted, restructured) faster than Central Banks create it does that not cause deflation. A point argued by Steve Keen, Robert Prechter and others.
The amount of outstanding debt in the world, sovereign, corporate, private is around $75 Triilion. Bernanke has so far brought in to being around $3 Trillion, this hardly makes a dent in solving the problem.
Bullshit, pure and simple.
And the reason that it is bullshit is because DEBT IS NOT MONEY!
And no, I am not going to try to explain, for the 13,832nd time, why debt is not money. Suffice it to say that anyone who believes otherwise is profoundly ignorant, not only of monetary theory but of monetary history itself. The fact that there has NEVER, not once, ever been a deflation under a fiat monetary regime should tell you something --- particularly inasmuch as numerous fiat currency regimes have experienced literally hundreds of high inflations, hyperinflations, or currency collapses just in the last century.
Please take your absurd deflationary fearmongering and shove it up your ass.
"And no, I am not going to try to explain, for the 13,832nd time, why debt is not money."
May I try?
The difference is simple- Debt is borrowed into circulation at interest, money is placed (spent) into circulation without interest owed.
So, the two are easily defined by one word- interest! Both can be used as purchasing media.
Debt can only be retired through either a bankruptcy or by paying it off with money. When either happens it is removed from circulation.
All of our currency (dollars) are borrowed into circulation at interest and therefore all of our dollars are debt. Our coin (even though they are counterfeit made to look like silver but not) are money as they are spent into circulation with no interest owed.
This was not always the case. When I was a kid, Federal Reserve Notes (FRN's, green seal), U.S. Treasury Notes (red seal) and Sliver Certificates circulated together. FRN's were (are) debt, U.S. Notes and Silver Certificates were money. I don't recall anyone making the distinction even back then. All we now have for currency is FRN debt.
Probably the biggest error that we allowed to happen was the failure to distinguish between money and debt as both are denominated as dollars $$$. This failure over several generations has directly led into the debt trap we find ourselves in today.
1. Since our currency is debt (and coin is no recognized as money) our debts can never be paid off.
2. If gold was priced in coin (even though it has no intrinsic value) it would easily be over FRN 700,000.
3. According to US code gold and silver coins have been legally (not lawfully) demonitized.
4. I cannot find legalization in the US Code for the use of FRN's as a legal purchasing media.
As to the inflation/deflation argument. In the last depression the removal of about 1/3 of the "money" in circulation (primarily through bankruptcies) was the proximate cause. An excuse was needed to provide "cover" for the govt to borrow debt into circulation to make up for this, ergo WW2. Will it be any different this time?Purchasing media can only create inflation if brought into circulation by loaning. Right now no one is borrowing and the banks arn't lending- OOPS.
However if the general population realizes that our "money" is really debt what then?
Thank you!
Glad to see somebody else gets it. Fiat is Fiat. Period. Can I borrow a couple trillion Zimbabwe dollars? LOL
Robert Prechter sucks the big one. Anybody who listens to him for the past three years is not a intelligent open-minded person.
Prechter lives in his bubble of a Ponzi Scam that you can read anywhere on the net for free.
And they are all wrong. Not all debt ($75 trillion) is defaulting, and Bernanke's newly created money can be levered 20X. The hole not only will be plugged but it will overflow.
Money is digital. Bernake can create more money than that being destroyed just using his iphone. And he will.
Actually he cannot. That is the funny thing.
Sure the FED can create reserves out of thin air. But all that has to be BORROWED into the economy.
pods
Wrong. The US govt can inject vertical money directly into the economy. They do not have to borrow it.
So where does the Federal gov get the money it is injecting? How much is in the treasury's account at the FED which it would miraculously release?
If any non counterparty secured funds (debt backed) were released it would trigger immediate hyperinflation.
pods
Taraxias is a typical inflationist. He knows just enough economic and monetary theory to get him half way to understanding, but not enough to understand the end game.
The flaw in your argument is that in a dynamic system, a resonance and instability state will develop that will blow up the inflation argument, we are not Zimbabwe, they should have the highest standard of liviing in the planet given all the printing they have done. AMR just went bankrupt with OIL at $99, think of how many buisnesses would fail when oil prices spike much higher due to inflation, in my books, a collapsing economy triggers deflation no matter how much QE the FED does........law of diminishing returns, they 've been diminishing since 1913, and they have practically blown their wad to be effective any more.....
AMR voluntarily went backrupt to break their high-cost-structure union contracts.
I take no side in the inflation-deflation argument, other than I think we will get both, with de coming first and then in.
<I think we will get both, with de coming first and then in>
Yes and No. Hyperinflation will come first and then Central Banks will lose a control leading to political & civil unrest together with a deflation. One way or another but the situation will be resolved.
Unfortunately taraxias, you reasoning skills equate with your looks. TPTB are attempting to raise asset prices, not the cost of getting by. They will acknowledge that their plan to print is not working soon enough.
You think these f**kers are going to admit they've been wrong for a decade? In public?
Not a chance. That's been one of the problems. The SHTF in 2008 and it's still the same w**kers running the show. Even now saying the same things. How can they possibly stand up and say 'We're idiots'?
Know your tranche and don't get too uppity.
take it a step futher--- I'll sell my products for $100 bills but won't touch a $1000 bill with a ten foot pole. Ditto for 10K and 100K and 1M bills -- just hundreds only or smaller-- the can't print enough just "hunderds" to satisfy the "bottom line" . Zeros will disapear-- Deflation--
When will my check arrive in the mail?
You don't get one unless your a upper member of the Banking Cartel managed by Goldman Sachs.
They rule the world. I really hope your smart enough to understand the premise of this article is pure bullshit.
They have no plans on defaulting on U.S. Debt to Bond Holders. They should let the bond holders die, but they won't.
Until I actually see it, I won't believe it.
I agree, wholeheartedly!
The 'money printing' myth depends on the uninterrupted flow of funds from Treasury/central bank to individual consumers. The actual transmission mechanism does not allow this.
The flow of funds proceeds through the same banks that are having 'solvency issues'. Their needs are met first, before any funds find their way into circulation.
Funds now are credited to banks who shift the credit to accounts they have with the Fed. The banks' customers never see any money.
It's not just banks Bogarting the cash:, corporations do the same thing, parking cash by way of their banks at the Fed. Excess funds are credited to accounts in tax havens overseas.
All of this is beside the point: the false narrative is that the problems we face are caused by too- high labor costs rather than too-high fuel costs.
ZH conditioned its readers to believe in money->hyperinflation myth and now they are confused. Cognitive dissonance. How do recessions come about? Because people want money not goods. Was there hyperinflation during the Great Depression? I haven't heard, yet banks failed by the hundreds. Learn MMT guys, maybe you will get it. Otherwise you have a task to explain the 20 years of nonexistent hyperinflation in Japan, LOL, good luck.
May be you haven't heard. The guy with the beard said "we caused it", meaning they didn't print enough.
That's the difference between the 30's depression and this one. The guy who controls the money supply now will not blink an eye in opening the money spiggots wide open.
You'll be paying $10 for a loaf of bread soon but deflationists will still be singing the same song. Wake the fuck up.
No. You wake up. Walk through your logic and take it out an additional step. Ok. Loaves of bread are $10.
And then?
Where's your wage-price spiral coming from?
Please tell me about your magical inflationary scenario which has no wage price spiral.
Where do you get demand exceeding supply when unemployment is rising, wages are falling and we have a global surplus of productive capacity?
We had inflation. It ended. All inflationary bubbles collapse. Amazing that you can preach the whole "you can't solve a debt bubble with more debt" line, and still believe in inflation. See the logical disconnect?
Rising input costs + declining demand = margin compression.
Margin compression obliterates the overhang in productive capacity.
There's no overheating in that scenario.
De - flation
I must tip my cap....
Peak oil is deflationary....
Back then(and in Zimbabwe) they had to pay for paper and ink to print it - now we can just hit a few keys on a keyboard.
You mean to tell us that you honestly believe a college professor controls the money spigots?
That's sad.
"as well as domestic government debt."
Uh... define "domestic government debt"
California and Illinois are domestc and they are governments, so are they in on this too?
There are so many differences between the Japanese system and the US you might as well compare Russia to Argentina. Some of the major differences between the US and Japan such as Japan being run by bureaucrats, the Yen not being the world's reserve currency, different demographics, Japan having a foriegn reserve surplus etc etc and the biggie - Japan is a severely managed economy and is close to being a totalitarian state - and unless the US gets to that point, and it seems to be heading in that direction - there is no reason to believe that economically things will play out even close to similar.
As most know on here, as opposed to being "conditioned", whether you end up with hyperinflation or deflation is just a matter of policy choice.
Under the crony captilism system in which we live, the oligarchs would stand to lose more assets, money and POWER in severe, prolonged deflation; thus any deflation which occurs will be short lived followed always by massive monetization of debt.
The system needs some severe deflation before it resets, but the oligarchs are scared of that, thus it will be put off as long as possible through the printing press. That is the "truth" that most of us here have learned at ZH and other sources.
Did not the inflation in the 1920s and deflation of the 1930s end up in debauched currencies, the fall of the GB pound, the then-backed-in-gold 5 pound note reserve currency? Didn't the US $ go from $20 in gold to $35 to the ounce after FDR's nationalization of gold coinage? Homestake Mines went to a $1000 a share...
Whether you are standing on the brake or the gas pedal when you go over the cliff, the value of your vehicle is the same at the bottom of the crash- scrap!
Debt busts can turn into hyperinflation or depressionary deflations, they are sides of the same coin, degrees of the thermometer measuring the fever. Malaria is an alternation between fever and chills, both are manifestations of the same disease. Our disease is constant, low-level currency devaluation, the fever is hyperinflation and the chills are depression and recessions.
Get beyond the symptoms, adding a blanket or icing the patient to effect a cure and attack the causing vector. The germ, the bug, the bacteria. Gold is the "magic bullet" for the paper currency disease, like draining the swamp. It innoculates the holder from fever or chills and kills the disease-causing bacteria, fiat currency. It really is that simple. History shows it over and over and over.
Start with Gibbon's Rise and Fall if you have the time, if not, start with Henry Hazlett or Harry Browne or Chas. P. Kindelberger. Get a fact and get a clue. Gold has gone from $35 an oz. to over $1700. What don't you understand? Don't wait much longer to get a secure insurance position in the barbarous relic. Any New World Order, One Currency will be defined worldwide in relation to its value in gold ounces. It has always been so defined.
If you hold fiat currency valued by some central bank, YOU are the bag holder.
Don't be that person.
Good luck and smart planning for you and your family in what is coming:
it won't be cute or friendly in any dimension.