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Deflation Returns with a Thunderclap
An interesting day, for sure. But a surprise? It shouldn’t have been, since even the Guvvamint’s statisticians and spinmeisters seem to have noticed that The Great Recession is back with a vengeance. Under the circumstances, anyone so stupid as to be loaded to the gills with stocks deserved the full brunt of yesterday’s devastation. The stock market’s collapse surely didn’t take us by surprise. The night before, under the headline “This Rally Is….Doomed!” we’d disseminated the following alert to subscribers: “The strong bounce off yesterday’s apparently oversold low is a fraud, and it is doomed, so we’ll have a very strong incentive to short every… rally target we can find…” We’d also made the following declaration in commentary published here yesterday: “Lest any of our own readers be shrouded by the fog of the Mainstream Media’s coverage of the financial markets and global economy, we’ll state for the record that the technical evidence is overwhelming that the Mother of All Bear Rallies begun in March of 2009 is over.”
If we sound pleased that the market appears, finally, to be having a massive heart attack, it’s because stocks for too long have been the captive of quasi-criminal forces that could charitably be described as pond scum. The good news is that when the Dow is trading 10,000 points lower in a few years, no longer doing the bidding of high-frequency traders, mountebanks, thimble-riggers, Murphy men and arse bandits, that will set the stage for a true bull market that will run for a generation. At that point, with “money” no longer available interest-free and in practically unlimited quantities for rampant speculation, stocks will rise once again on their individual merits, savings will have a purpose, and capital will seek out its most productive uses. We hope we’re around when all of this comes to pass, as it eventually will.
What About Gold?
Meanwhile, the implosion of stocks that seems under way raises the question of whether deflation has finally overwhelmed the central banks’ prodigious but increasingly desperate efforts to resuscitate the economy. We think the answer is yes and that deflation will rule for the foreseeable future, asphyxiating not only the economy but nearly all investable assets. A related question is whether gold and silver have made their final top. Although this is certainly possible, we strongly doubt it, since billions of people in this world have yet to understand that the paper money in their wallets, as well as the digital money in their bank accounts, is fundamentally worthless. When this epiphany finally hits it will trigger a hyperinflation that could send bullion prices soaring to perhaps unimagined heights. In the meantime, hard cash, intrinsically worthless though it be, actually will be king in the absence of easy credit. Credit will be available in theory, but at usurious real rates and only with adequate collateral. Just what will pass muster as “adequate” collateral is a question still to be answered, but assets that qualify are certain to be far less valuable than real estate that’s already been hocked a dozen times over. Whatever happens, Rick’s Picks will continue to track gold and silver diligently, since forecasting bullion correctly is something that we absolutely must get right. You can follow our forecasts, which are updated round-the-clock, by taking a free trial subscription to Rick’s Picks. It will also give you access to the 24/7 chat room, to detailed trading “touts,” and to impromptu online trading-strategy sessions like the one held (and recorded: Staying Ahead of the Crash) yesterday.
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Thank you for all this good information, it was very useful for me. Calculator CASCO
How will you know hyperinflation has started or will start? Failed bond markets.
If old debt cant be rolled over then it cashes out. Then it leaves that organization. You will end up with a bunch of printed paper no one wants. Thats hyperinflation.
Reduceing credit is deflation, that can lead to abandonment of the paper.
So far the only way i see that the US can enter hyperinflation is if it stops issueing new debt.
So look for that.
Thats how i see things so far, and so far no one has stopped issueing new debt. Yet.
Otherwise is just debasement and double digit inflation untill a new credit cycle begins.
BBQ
The real canaries in the coal mine are the vendors of gold and silver. When the price of gold and silver moves so fast that the vendors have to close up shop because they can't price it or locate supply, then the collapse has begun. Soon after, the vendors of other real assets, like farmers, won't sell their wares and will hold out for a higher price. Then the hunger sets in and people will start to reject the currency.
The vendors of PMs have their fingers on the pulse of the economy. When they shutter their window, the end is nigh.
Wait until the GDP
posts a negative number
for 2011..
there will be no denying deflation then ...
Lobby Debt Deal Fail
http://www.presstv.ir/detail/192462.html
'US debt deal epic financial blunder'
The best Congress Money can Buy!
Does NOT! Represent "We the People"!
War and whispers of war. The churn is stirring doubts in all who participate or watch, the cyclone of forces gathers strength awaiting a breakout moment.
War and rumors of war. The currencies tied together collapse in a race to devaluate to pay back debt with cheaper money printed in ever larger quantities til their is no value at all.
War and dreams of war. When all maligned nations shall seek to right their wrongs, to claim the wealth denied by defaulted debts. An end to unemployment at the barrel of a gun. The struggle for treasure and territories continues.
Same as it ever was, same as it ever was.
We are destined to repeat the errors of our fathers, only magnified by technology and hubris, we destroy more faster.
Invest in bullets, literally and metaphorically. You can't go wrong with stupid, it is rampant in the world.
Go Away back to your own website.
<---- blow me
I don't see any contradictions between deflation and (hyper)inflation. When hundreds of trillions of dollars pledged as collateral and it practically work as money a few trillions urgently created by central banks won't even make a dent. Those worthless derivatives have to disappear first and that will be hugely deflationary. Meanwhile dilution of the unit wil be inflationary. However, reaching the hyperinflationary rate will be a political decision. As long as "our rulers" are see more advantage keeping the current system afloat hyperinflation will not happen. Then the end will be fast and furious. Since they are not a homogen group, even if the chairsatan seems to be supreme, their infight and its results are hardly predictable.
One note for those who forgot: the motifs and incentives behind hyperinflation is always rationalized by the shortage of money, i.e., deflation. Indeed, in one of the most penetrant example of hypeinflation, the record holder of them all, the 1946 Hungarian hyperinflation was characterized by nominations 10^22 and still the value of all that paper combined was less than 1/10000th of the the value before the hyperinflationary period. From $10,000,000,000 to around $700,000.
I also expect the separation of value of hard cash, even if it is paper, and digital currency. You can already see this effects due to taxation or creditcard fees but this will be much more visible. Similar split was on show, though due to different immediate cause, with the currency Ruble during the fall of the communist Eastern European Block. One convertible ruble was worth up to thousands of "field rubles". Similarly, access/availability thus the market what will set the rate. This effect will be swept away by printing high denominations though. And that will be the point where hyperinflation starts. Don't forget, right now your unit still can by a hamburger.
I nominate both Bush and Obama for the new $1Billion note
Most of money supply is in the form of asset valuations.
As we saw yesterday, credit instruments became worthless and everyone ran to "cash."
As the trillions of dollars of derivatives, bonds, homes and other assets plummet that removes equity and money from the system. Margin calls, inability to borrow off of homes etc.
Hyperinflation, see Japan, is impossible in a deflation. Its not the opposite, and the dollar value may go down related to other currencies but the is a NET loss of dollars folks. Not a net positive.
Credit= dollars and vice versa. The dollar is a credit, and credit is plummeting and the last resort credit is dollars and treasuries.
Gold, however is a reserve currency- and the best currency as we saw yesterday as the Swiss dumped francs willy nilly
Powerful arguments by Cocoa, but even though dollars=credit, and credit=dollars is true, and the destruction of credit equals a shrinkage in the money supply, this all only holds true if faith in that dollar continues, because, after all, it is only paper.
The problem with the deflationist position is that it ignores that fiat paper inhabits a make believe world backed by nothing. As Taleb would put it, fiat paper exists in the world of Extremistan, where anything at all can happen. Therefore, saying that the unwinding of credit throughout the economy is inherently deflationary, although true, ignores that the Fed can create localized inflation for the benefit of the banks' trading desks, and destroy the currency by destroying our faith in it as money.
The heart of the deflationist argument is that you can't destroy a currency during a deflationary spiral. Clearly, that isn't true. If they said overall, you can't have more inflation than deflation, I might agree. However, money today is just paper, and if money goes to zero, all arguments of what can or can't happen go out the window. It is dishonest to say the dollar is merely dropping vis a vis other currencies. All fiat is dropping vs real assets. Unfortunately, in the world of Extremistan, anything CAN happen. The USD will lose credibility and the system will crash before deflation is complete.
Unlike Japan, this isn't a nation of savers willing to fund the game out to 200% debt to GDP. Although the USD is a reserve currency that can monitize its debt, that isn't the same thing as having real bond purchasers like in Japan. They will continue to print and ensure the banks get to spend that cash first, so they don't feel any inflationary pain. They will continue to print because it gets the USG out from under its obligations. Finally, they will continue to print because the game of manipulating markets, gambling on equities, slowly acquiring gold, and kicking the can down the road sets the banks up to survive the transition to the new currency system.
the inflation deflation thing is pretty simple.
inflation in real things, that we need.
deflation in nonsense imaginary paper wealth and everything that requires leverage (debt) to buy it.
food & energy way up, houses & boats way down
HyperStagFlation Biyatch.
I'm gonna take a nice nap now.
Enjoy.
I love the hyperinflation vs deflation debate. Everyone lines up on one side or the other and lobs arrows at each other's theories.
They can be looked at as the same thing in a fiat world.
Deflation is the cause, hyperinflation is the effect.
When debt is issued with interest, you have to continually increase new debt to pay for the old interest. If not, you have default and that debt (money) is destroyed. The higher the leverage, the worse the destruction, and it builds upon itself (the waterfall).
They are two sides of the same coin. Deflation is the disease, and hyperinflation is the currency crisis that ensues due to the cure being worse than the disease.
pods
Yes, when debt levels become unsustainable, the only alternative left is to inflate. But inflating helps the debtor and hurts the creditor. The important key to understanding this is the government is the debtor and wants to inflate, and the banks are the creditor and don't want inflation. Inasmuch as the banks and government are cooperating, where do their interests coincide? That tells you what is really happening and where this is going. The USG and the banks' self interests coincide if we do the following:
Bail out the banks, not the economy
Buy time so the banks can call in loans and credit
Inflate like no tomorrow, but ensure that the banks get those inflated dollars first so they can run out and use it before inflationary effects are felt, thereby ensuring they benefit from inflation
Change the rules of banking so they can operate as if they are solvent when they are not.
Tip off the banks' trading desks to interventions in currency, equities, and commodities markets so they win all their bets (100% winning days during the quarter are not possible without inside help)
Slowly acquire gold and other hard assets like farm land while kicking the can down the road, because you know the game plan is to hyperinflate.
Is this starting to sound familiar? The government can't have deflation because the government can't pay its debts and obligations. The banks can't allow inflation because that would reduce the value of their loans and let the debtors off the hook. Everything they are doing has been to make inflation more patatable to the banks. A fast hyperinflation doesn't benefit the banks (it would kill them), but a slow strangulation of the little guy through inflation does. That's why it is happening this way. That's why gold and silver will continue marching slowly, and TPTB will continue to draw this out as long as possible. The slower the inflation, the more they can prepare for the haircut the creditor takes during a hyperinflation.
I also expect them to try to cheat their way out of the effects of their self created inflation and announce special rules for the conversion of mortgages into the new currency. They won't of course, do this for their own debt (treasuries).
The banks want inflation, as they get access to the newly created credit first.
Besides, the banks are up to their necks in cheap debt, and their poor gambles will be less expensive, as inflation takes its toll.
True, that came later in my argument. You are dead on.
A pretty good description of the real world, SW, since everything you've mentioned is observably happening. Your use of the word "try" in the final paragraph would seem to acknowledge that indenturing homeowners in the midst of a Depression may not fly politically.
Oil reached to $150 on last commodity swing. Today we see $100 and feel pain. Is this not due to overall inflation that was NOT present in prior run up? The money supply has grown. Inflation is possible with slow growth. Stagflation. Hyperinflation occurs when confidence is lost.
The REAL printer Commith soon!
Confidence.
Contagion.
End Game.
The previous oil spike was very short lived, a few days or a couple of weeks if I remember. The current rise above $100 is more like a plateau. It's been there for many months steadily grinding up profit margins and discretionary income.
Ha haha, so now Ackerman is now a hyperinflationist!
How times change, is that a 'bullish' or 'bearish' indicator? Who knows?
I don't but what I have figured out is a world dependent upon a vital yet declining physical resource (among others) cannot inflate beyond the point where the input costs short-circuit economic activity.
You can see this now by going to crude prices @ the Energy Information Agency and seeing that the last six months crude prices have been at an economy- lacerating + $100 per barrel.
The crying sound you hear isn't stock traders but the little dying businesses out there that need $30 oil to profit. That's most of America, folks!
Because of fuel costs, most of the same folks don't have any coin in their wallets, they don't have credit, either.
What will come will be deleveraging. It's long overdue. What happens in deleveraging is debts are paid ... money is destroyed in the process. The Fed cannot keep up with coin destruction and the result is a cash shortage. We aren't there yet: the establishment is doing everything in its power to forestall deleveraging as it has done for 30 years.
No more. The deleveraging is not begun. It's happening in Europe first: outside of Norway and Denmark the rest of the EU has to borrow to buy petroleum. Right now, the EU is tapped out. It's products don't pay for themselves. Countries like Greece and Portugal are on their way to becoming automobile free agrarian states. Don't worry, Spain and Italy are in the energy cross-hairs.
USA? Soon, grasshopper, very soon.
Ha-ha, indeed. You've apparently missed the finer nuances of whatever it is that I "am," Steve. For your sake, I hope that doesn't mean you're fully vested in Lira's and Jim Willie's certitudes. As for me, I'm comfortable with not being quite so certain as they about how things will play out. A hyperinflation seems inevitable on the epiphany of the dollar's worthlessness, but in the meantime -- and I mean, for the next couple of years -- deflation seems likely to dominate fiscally, financially and in investables.
So you are long Euro's here right ?
because there will be more "money destruction" in Europe ?
In theory, the euro minus the PIIGS = Niewe D-mark.
If the PIIGS somehow repay enough of their euro-denominated debts, w/ tight euro monetary policy the euro would look good. Unfortunately, the whole enterprise hangs in the balance and there may be no euro at all -- for snippy political reasons.
Zero-growth in Europe means disintegration and more flight to CHF and gold (or sterling or US treasuries/dollar) rather than flight to euro or euro-denominated debt.
This is just dumb policy for the EU not having a product (European debt) that somewhere, someday, some persons will want to buy. There are no economic reasons why the EU can't get their shit together and manage their debts. I can go on and on but you get the idea ...
Rick- I thought you joined gonzo liras bandwagon, what happened? Lol
The funny thing is, I agree with most of what Lira has written -- much as he would probably agree with me. Same goes for Jim Willie. Personally, though, I prefer to avoid them both.
Although this may appear to be blowing my own horn, I still believe that one of the simpler (and possibly better) explanations of inflation versus deflation can be found here:
http://www.bullnotbull.com/archive/graham-1.html
I DIDN'T read the article on inflation or deflation because I don't have to. You can have inflation in only certain asset classes for the same reason you can have rallies in secular bear markets or vice versa. When equities and bonds are both low in return investors look for other resources. For God's sake even banks and universities are buying commodites now. I know I'm gonna catch grief for this, but two things are causing commodity demand now and that is China and Speculators. When China rolls over in a year we will see what the speculators do won't we? Believe it or not IT'S DEFLATION ! It is the opposite of the 70s and early 80s. Then the corporations were at a disadvantage to employees and we had wage inflation. Now the corporations have the advantage and we have deflation. Read "The Age of Greed" Corporations started trying to find a way around taxes and regulation in the early 80s and they succeeded. We are seeing the result of that now. If you want to zoom out and look at taxation and regulation then go back to: 1929(low regualtion)...1969(high regulation/taxation)...2008(low regulation/taxation) This applies to producers including financial producers. Capital gains taxation was low in 1929 and 2008. The incomes of the top 1% were highest in 1929 and 2004. A ninth grader could figure it out.
El Viejo seems to be saying that deflation is inescapable, which is true, unless you are willing to destroy the currency.
He also seems to be saying that TPTB are powerless to create inflation except in certain markets. I pretty much agree with that too. We have a hugely inflated equity and commodities markets that have been ramped by Fed/USG policy and they want to crash.
My conclusion is that this has benefitted the banks and screwed everyone else, so it must be an intentional campaign that benefits the only two parties that matter, the USG and the banks. They are debasing the dollar, and creating targeted inflation in the markets they are trading, thereby digging themselves out. They are also acquiring gold, because they know this campaign will lead to a destruction of the currency and a haircut on the loans they carry on their balance sheets. There's a reason they don't want to lend, even to solvent borrowers. They know what is coming.
The Deflationists are right but that won't matter because the process will not be allowed to run its course. Deflation is here and operating regardless of Fed created inflation, but the more important point is Fed created inflation is here too, and it is an intentional campaign to make the banks solvent and positioned for the crash, and it will destroy the USD long before deflation runs its course. Deflation is only inescapable if you refuse to drive the currency into the ground. Not only are they doing so, it is their only option.
The USD is going to zero as slowly as these villains can manage it. That is the only way out for both parties that matter, the USG and the banks.
GMAK,
I read your hyperinflation vs deflation analysis and I like it. I am still in the inflation camp for a few reasons.
The argument comes down to the fact that we have reached an unsustainable point in the economy. Either we allow credit to contract and save the USD (deflation) or we inflate our way out of our debts and destroy the USD.
You rightly point out that banks would not want to see their loans destroyed through inflation, but deflation is clearly unacceptable too because a strengthening of the dollar would make the outstanding soverign debt and entitlement obligations unpayable. The only path out of this predicament seems to be the one they are taking, injecting liquidity into the banks and creating inflation, but enabling those financial institutions to be the beneficiaries of inflation because that is where the money enters the system. Clearly, they have changed the banking rules to allow them to manipulate their reserves and balance sheets, and clearly those banks are gambling that money as never before, and to great results.
There won't be deflation because they have chosen the middle path. They are creating inflation, while changing the rules of banking to allow the beneficiaries of this new liquidity (the banks) to gamble their way to solvency. Sure, the banks will take a hit on their loans, but haven't they taken every step possible to reduce their exposure during the inflation/gambling stage? That's why they won't loan out money, even to people who are solvent, because they know the end game is hyperinflation. They are also moving into assets like gold, which shows that their long term strategy is definitely not deflation.
After four years of this craziness, anyone still convinced that deflation will win the day and the USD will survive is beyond convincing. All of Prechter's adherents who shun PMs and are crowded into Treasuries are about to learn a very hard lesson.
I agree, but Prechter's adherents, to the extent they are in Treasurys, will have learned little in the last week. For your interest, my forecast for the September T-Bond calls for 143^11 if and when it gets past a current (Hidden Pivot) target of 135^13. For comparison, a TY-Bond price of 142 in 2008 equated to yields of 2.51%.
Translation:
Come on Rick, this isn't an article, it's an advertisement. If we don't have anything to say today, we can not say it in less than 500 words.
Deflation: The markets went up in Weimar Germany. They will not stop printing, thereby destroying the currency and making deflation irrelevant.
If you can stifle the theatrical yawn for a moment, I'd suggest skimming Fergusson's "The Day Money Died," since it will help you to at least get 1921-23 Weimar right.
Outta here...
True, my appologies. Nothing useful comes from being a smart ass.
I didn't read Fergusson's book, but I listened to it, and I believe the title was "When Money Dies" :-)
Anyway, this was an interesting thread
Thanks
FOFOA from Deflation or Hyperinflation?
********************************************************
I want to apologize in advance for the length of this post, but I have to be thorough if I want to have any chance of winning Rick Ackerman over to the hyperinflation/Freegold side. And I think there is a chance. While deflation and inflation are practically polar opposites, deflation and hyperinflation look almost identical on the surface, with the main difference being the wheelbarrows of worthless cash. As I wrote in 2009 in The Waterfall Effect:
There is a quote I like that comes from Le Metropole Cafe. It goes, "we will have deflation in everything we own, and inflation in everything we use". This is partly true. It is true during the run up to the rubber band snapping. It is true until we hit the waterfall. At that point I have my own version of the quote. "We will have hyperDEflation in everything measured against real money, GOLD, and we will have hyperINflation in everything measured against paper dollars."
My latest post on this subject was called Big Gap in Understanding Weakens Deflationist Argument in response to Rick Ackerman's "Big Gap in Logic Weakens Hyperinflation Argument". Rick also received responses from Jim Willie and Gonzalo Lira. Last week, with regard to Lira and Willie, Rick reported to his readers in "Rick's Picks":
I’ve concluded there is little to gain arguing on the one hand with a guy who turns rabid whenever someone contradicts him, even in a friendly way; and on the other, with a preening narcissist who comes to argumentation in the same state of sexual arousal that Jeffrey Dahmer must have experienced hovering over the fresh corpses of teenage boys. These guys are bad news, as lacking in civility and manners as buzzards in a scrum, and you’d do well to avoid them both. You might try tuning instead to the hyperinflation arguments of Steve Saville, Peter Schiff and a few others who seem less concerned with trouncing, slicing and dicing opponents than with presenting facts that might better prepare you for the financial crisis ahead. The very best of them, in my opinion, is FOFOA blogspot, where the essays are erudite, the discussion elevated and the arguments as knowledgeable as any you will find on the web.
I would first like to thank Rick Ackerman, and to also acknowledge his perspicacity in this particular regard. And because he has demonstrated such a discerning acumen in his preference for hyperinflationists (among other things), I will try, once again, to help him see the way...
*******************************************************
Rick's response:
Hyperinflation vs. Deflation: I Concede
FOFOA blogspot has taken pains to lay out the most cogent, exquisitely nuanced and, ultimately, persuasive argument for hyperinflation that I have read to date...
ZH needs more FOFOA!
and when we hear "deflation"
we scratch our heads and think
the falling value of our house
is headed for the sink
http://thepeakoilpoet.blogspot.com/2011/07/flations.html
Funny, how 'markets going down' is associated with 'deflation' by the deflationists. Wrong. In the next 1.5 years we will have 2,400 billion fresh new dollars being spent by the US government, the money supply is rising and not falling.
What is "funny" about the notion that a 500-point decline in the Dow is deflationary? And just how much is "2,400 billion fresh new dollars" in comparison to a still-imploding derivatives bubble with a notional value estimated (by the BIS) at around $800 trillion?
The government borrows from capital markets and the Fed facilitates the transaction. The government spends that which previously existed in the form of debtmoney demanded by consumers of which roughly 52 trillion accounting units consist. FRN's are manufactured to meet demand of bank depositors, there is no magic machine that will get all the debtors off the hook to satisfy the get rich quick scheme mentality, although Benny promised it and you chose to feast upon the lie. The design is to strangle the supply of slave credits, likely through energy supply constraints, whether real or manufactured, resulting in default of obligations and return of assets to the ones you love to hate.
LOL. After doubling the national debt in the last three years, the FED buying nearly 100% of treasuries, and you're talking about "deflation". Come back and see us in a couple weeks Rick.
See my note above concerning the size of the derivatives bubble, every penny of which is yet-to-be-actualized deflation. It is far more than could ever be politically monetized, especially since the collapse of the dollar and the world's financial markets seems ordained to occur in an instant (i.e., a global flash-crash). I agree with the hyperinflationists only by way of acknowledging that the dollar's intrinsic worthlessness must eventually be reckoned and accounted for. But the actual event will occur with a tectonic shift in mass psychology, not via something the Fed will do -- or even could do. In the end, gold hoarders may find themselves challenged to convert bullion at $50k/oz into, oh, Canadian farm land.
You may be right about the difficulty in converting gold to other stuff, but I'd rather take my chances with something I can hold in my hand, vs. a dying currency. I am of the opinion that one of these QEs could be the trigger forcing the reckoning you and we speak of. I think we can all agree though that the problem is not QE, but a broken, nonproductive economy and political system. That makes all this possible. As it did in Argentina, Zimbabwe, etc..
In my opinion, inflation-vs-deflation is determined by the net creation of credit, the amount being created by central banks minus the amount being destroyed by defaults. You can't look at only how much debt is being issued by the government/Fed. The Fed is attempting a balancing act. It doesn't want to swing net creation/destruction too far one way or the other.